FCC Releases Connect America Fund Order, Reforms USF/ICC for Broadband
Attachments
Federal Communications Commission
FCC 11-161
Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of)
)
Connect America Fund
)
WC Docket No. 10-90
)
A National Broadband Plan for Our Future
)
GN Docket No. 09-51
)
Establishing Just and Reasonable Rates for Local
)
WC Docket No. 07-135
Exchange Carriers
)
)
High-Cost Universal Service Support
)
WC Docket No. 05-337
)
Developing an Unified Intercarrier Compensation
)
CC Docket No. 01-92
Regime
)
)
Federal-State Joint Board on Universal Service
)
CC Docket No. 96-45
)
Lifeline and Link-Up
)
WC Docket No. 03-109
)
Universal Service Reform – Mobility Fund
)
WT Docket No. 10-208
REPORT AND ORDER AND FURTHER NOTICE OF PROPOSED RULEMAKING
Adopted: October 27, 2011
Released: November 18, 2011
Comment Date on Sections XVII.A-K: January 18, 2012
Reply Comment Date on Sections XVII.A-K: February 17, 2012
Comment Date on Sections XVII.L-R: February 24, 2012
Reply Comment Date on Sections XVII.L-R: March 30, 2012
statements; Commissioner McDowell approving in part, concurring in part and issuing a statement.
TABLE OF CONTENTS
HeadingParagraph #
I.
INTRODUCTION ................................................................................................................................1
II.
EXECUTIVE SUMMARY.................................................................................................................17
A.Universal Service Reform...................................................................................................................17
B.Intercarrier Compensation Reform .....................................................................................................33
III. ADOPTION OF A NEW PRINCIPLE FOR UNIVERSAL SERVICE .............................................43
IV. GOALS ...............................................................................................................................................46
V. LEGAL AUTHORITY .......................................................................................................................60
VI. PUBLIC INTEREST OBLIGATIONS...............................................................................................74
A.Voice Service ......................................................................................................................................76
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B.Broadband Service ..............................................................................................................................861.
Broadband Performance Metrics.................................................................................................90
2.
Measuring and Reporting Broadband .......................................................................................109
3.
Reasonably Comparable Rates for Broadband Service.............................................................113
VII. ESTABLISHING THE CONNECT AMERICA FUND ..................................................................115
A.Overview...........................................................................................................................................115
B.The Budget........................................................................................................................................121
C.Providing Support in Areas Served by Price Cap Carriers ...............................................................127
1.
Immediate Steps To Begin Rationalizing Support Levels For Price Cap Carriers ...................128
2.
New Framework for Ongoing Support in Price Cap Territories...............................................156
D.Universal Service Support for Rate-of-Return Carriers....................................................................194
1.
Overview...................................................................................................................................194
2.
Public Interest Obligations of Rate-of-Return Carriers.............................................................205
3.
Limits on Reimbursable Capital and Operating Costs ..............................................................210
4.
Corporate Operations Expense..................................................................................................227
5.
Reducing High Cost Loop Support for Artificially Low End-User Rates ................................234
6.
Safety Net Additive...................................................................................................................248
7.
Local Switching Support...........................................................................................................253
8.
Other High-Cost Rule Changes.................................................................................................258
9.
Limits on Total per Line High-Cost Support ............................................................................272
10. Elimination of Support in Areas with 100 Percent Overlap......................................................280
11. Impact of These Reforms on Rate-of-Return Carriers and the Communities They Serve........285
E. Rationalizing Support for Mobility...................................................................................................295
1.
Mobility Fund Phase I...............................................................................................................301
2.
Service to Tribal Lands .............................................................................................................479
3.
Mobility Fund Phase II..............................................................................................................493
4.
Eliminating the Identical Support Rule.....................................................................................498
5.
Transition of Competitive ETC Support to CAF ......................................................................512
F. Connect America Fund in Remote Areas..........................................................................................533
G.Petitions for Waiver ..........................................................................................................................539
H.Enforcing the Budget for Universal Service .....................................................................................545
1.
Creating New Flexibility To Manage Fluctuations in Demand ................................................547
2.
Setting Quarterly Demand to Meet the $4.5 Billion Budget.....................................................557
3.
Drawing Down the Corr Wireless Reserve Account ................................................................564
VIII.ACCOUNTABILITY AND OVERSIGHT ......................................................................................568
A.Uniform Framework for ETC Oversight...........................................................................................569
1.
Need for Uniform Standards for Accountability and Oversight ...............................................570
2.
Reporting Requirements............................................................................................................576
3.
Annual Section 254(e) Certifications........................................................................................607
B.Consequences for Non-Compliance with Program Rules.................................................................615
C.Record Retention...............................................................................................................................619
D.USAC Oversight Process ..................................................................................................................622
E. Access to Cost and Revenue Data.....................................................................................................630
IX. ADDITIONAL ISSUES....................................................................................................................636
A.Tribal Engagement ............................................................................................................................636
B.Interstate Rate of Return Prescription ...............................................................................................638
1.
Represcription ...........................................................................................................................639
2.
Procedural Requirements ..........................................................................................................641
C.Pending Matters ................................................................................................................................646
D.Deletion of Obsolete Universal Service Rules and Conforming Changes to Existing Rules ...........647
X. OVERVIEW OF INTERCARRIER COMPENSATION .................................................................648
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XI. MEASURES TO ADDRESS ARBITRAGE ....................................................................................656A.Rules To Reduce Access Stimulation ...............................................................................................656
1.
Background ...............................................................................................................................661
2.
Discussion .................................................................................................................................662
B.Phantom Traffic ................................................................................................................................702
1.
Background ...............................................................................................................................707
2.
Revised Call Signaling Rules....................................................................................................710
3.
Prohibition of Altering or Stripping Call Information ..............................................................719
4.
Exceptions.................................................................................................................................721
5.
Signaling / Billing Record Requirements..................................................................................724
XII. COMPREHENSIVE INTERCARRIER COMPENSATION REFORM..........................................736
A.Bill-and-Keep as the End Point for Reform......................................................................................740
1.
Bill-and-Keep Best Advances the Goals of Reform .................................................................741
2.
Legal Authority .........................................................................................................................760
3.
Other Proposals Considered......................................................................................................782
B.Federal/State Roles in Implementing Bill-and-Keep ........................................................................788
C.Transition ..........................................................................................................................................798
1.
Authority To Specify the Transition .........................................................................................809
2.
Implementation Issues...............................................................................................................811
3.
Other Rate Elements .................................................................................................................817
4.
Suspension or Modification Under Section 251(f)(2)...............................................................822
5.
The Duty To Negotiate Interconnection Agreements ...............................................................825
XIII.RECOVERY MECHANISM............................................................................................................847
A.Introduction.......................................................................................................................................847
B.Summary ...........................................................................................................................................850
C.Policy Approach to Recovery ...........................................................................................................854
D.Carriers Eligible To Participate in the Recovery Mechanism...........................................................862
E. Determining Eligible Recovery.........................................................................................................867
1.
Establishing the Price Cap Baseline..........................................................................................868
2.
Calculating Eligible Recovery for Price Cap Incumbent LECs ................................................879
3.
Calculating Eligible Recovery for Rate-of-Return Incumbent LECs .......................................891
F. Recovering Eligible Recovery ..........................................................................................................905
1.
End User Recovery ...................................................................................................................906
2.
CAF Recovery...........................................................................................................................921
3.
Monitoring Compliance with Recovery Mechanism ................................................................921
G.Requests for Additional Support.......................................................................................................924
XIV.
INTERCARRIER COMPENSATION FOR VOIP TRAFFIC .................................................933
A.Background .......................................................................................................................................936
B.Widespread Uncertainty and Disagreement Regarding Intercarrier Compensation for VoIP Traffic
937
C.Prospective Intercarrier Compensation Obligations for VoIP-PSTN Traffic ...................................940
1.
Scope of VoIP-PSTN Traffic ....................................................................................................940
2.
Intercarrier Compensation Charges for VoIP-PSTN Traffic ....................................................943
XV. INTERCARRIER COMPENSATION FOR WIRELESS TRAFFIC...............................................976
A.Introduction.......................................................................................................................................976
B.Background .......................................................................................................................................980
C.LEC-CMRS Non-Access Traffic ......................................................................................................988
D.IntraMTA Rule................................................................................................................................1003
XVI.
INTERCONNECTION ...........................................................................................................1009
XVII.
FURTHER NOTICE OF PROPOSED RULEMAKING........................................................1028
A.Broadband Public Interest Obligations ...........................................................................................1028
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1.Measuring Broadband Service ................................................................................................1028
2.
Reasonably Comparable Voice and Broadband Services .......................................................1028
3.
Additional Requirements ........................................................................................................1028
B.Connect America Fund for Rate-of-Return Carriers.......................................................................1031
C.Interstate Rate of Return Represcription.........................................................................................1045
D.Eliminating Support for Areas with an Unsubsidized Competitor..................................................1061
E. Limits on Reimbursable Capital and Operating Costs for Rate-of-Return Carriers .......................1081
F. ETC Service Obligations.................................................................................................................1089
G.Ensuring Accountability..................................................................................................................1121
H.Annual Reporting Requirements for Mobile Service Providers .....................................................1121
I. Mobility Fund Phase II....................................................................................................................1121
1.
Overall Design ........................................................................................................................1122
2.
Framework for Support Under Competitive Bidding Proposal...............................................1123
3.
Auction Process Framework ...................................................................................................1152
4.
Tribal Issues ............................................................................................................................1165
5.
Accountability and Oversight .................................................................................................1173
6.
Economic Model-Based Process.............................................................................................1174
J. Competitive Process in Price Cap Territories Where the Incumbent Declines to Make a State-Level
Commitment........................................................................................................................................1190
1.
Overall Design of the Competitive Bidding Process ..............................................................1190
2.
Framework for Awarding Support Under Competitive Bidding.............................................1191
3.
Auction Process Framework ...................................................................................................1208
4.
Tribal Issues ............................................................................................................................1219
5.
Accountability and Oversight .................................................................................................1220
6.
Areas that Do Not Receive Support ........................................................................................1222
K.Remote Areas Fund.........................................................................................................................1223
1.
Program Structure ...................................................................................................................1225
2.
General Implementation Issues ...............................................................................................1229
3.
Portable Consumer Subsidy Issues .........................................................................................1255
4.
Auction Approaches................................................................................................................1276
5.
Competitive Evaluation Approach..........................................................................................1290
6.
Other Issues.............................................................................................................................1291
L. Introduction to Intercarrier Compensation......................................................................................1296
M.
Transitioning All Rate Elements to Bill-and-Keep .................................................................1297
N.Bill-and-Keep Implementation........................................................................................................1315
O.Reform of End User Charges and CAF ICC Support .....................................................................1326
P. IP-to-IP Interconnection Issues .......................................................................................................1335
1.
Background and Overview......................................................................................................1336
2.
Scope of Traffic Exchange Covered By an IP-to-IP Interconnection Policy Framework ......1344
3.
Good Faith Negotiations for IP-to-IP Interconnection............................................................1348
4.
IP-to-IP Interconnection Policy Frameworks..........................................................................1359
Q.Further Call Signaling Rules for VoIP............................................................................................1399
R.New Intercarrier Compensation Rules ............................................................................................1403
XVIII.
DELEGATION TO REVISE RULES ....................................................................................1404
XIX.
SEVERABILITY ....................................................................................................................1405
XX. PROCEDURAL MATTERS ..........................................................................................................1406
A.Filing Requirements........................................................................................................................1406
B.Paperwork Reduction Act Analysis ................................................................................................1407
C.Congressional Review Act..............................................................................................................1409
D.Final Regulatory Flexibility Analysis .............................................................................................1410
E. Initial Regulatory Flexibility Analysis............................................................................................1411
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XXI.ORDERING CLAUSES .........................................................................................................1412
APPENDIX A — Final Rules
APPENDIX B — Proposed Rules
APPENDIX C — Explanation of Methodology for Modifications to Corporate Operations Expense
Formulae
APPENDIX D — Puerto Rico Telephone Company Petition for Reconsideration
APPENDIX E — Verizon Wireless Petition for reconsideration of the Wireline Competition Bureau’s
April 1, 2011Guidance letter to USAC
APPENDIX F — Petitions for reconsideration of the Corr Wireless Order
APPENDIX G — Rural Association Proposed Rule Changes for USF Reform
APPENDIX H — Modeling Limits on Reimbursable Operating and Capital Costs
APPENDIX I — Estimated Consumer Benefits of Intercarrier Compensation Reform
APPENDIX J — ICC Transformation NPRM Commenters and Reply Commenters
APPENDIX K — USF/ICC Transformation NPRM Section XV Commenters and Reply Commenters
APPENDIX L — Mobility Fund NPRM and Mobility Fund Tribal Public Notice Commenters and Reply
Commenters
APPENDIX M — August 3, 2011 Public Notice Commenters and Reply Commenters
APPENDIX N — Illustrative Form of Letter of Credit
APPENDIX O — Final Regulatory Flexibility Analysis
APPENDIX P — Initial Regulatory Flexibility Analysis
I.
INTRODUCTION
1.Today the Commission comprehensively reforms and modernizes the universal service
and intercarrier compensation systems to ensure that robust, affordable voice and broadband service, both
fixed and mobile, are available to Americans throughout the nation. We adopt fiscally responsible,
accountable, incentive-based policies to transition these outdated systems to the Connect America Fund,
ensuring fairness for consumers and addressing the communications infrastructure challenges of today
and tomorrow. We use measured but firm glide paths to provide industry with certainty and sufficient
time to adapt to a changed regulatory landscape, and establish a framework to distribute universal service
funding in the most efficient and technologically neutral manner possible, through market-based
mechanisms such as competitive bidding.
2.
One of the Commission’s central missions is to make “available … to all the people of
the United States … a rapid, efficient, Nation-wide, and world-wide wire and radio communication
service with adequate facilities at reasonable charges.”1 For decades, the Commission and the states have
administered a complex system of explicit and implicit subsidies to support voice connectivity to our
most expensive to serve, most rural, and insular communities. Networks that provide only voice service,
however, are no longer adequate for the country’s communication needs.
3.
Fixed and mobile broadband have become crucial to our nation’s economic growth,
global competitiveness, and civic life.2 Businesses need broadband to attract customers and employees,
job-seekers need broadband to find jobs and training, and children need broadband to get a world-class
education. Broadband also helps lower the costs and improve the quality of health care, and enables
people with disabilities and Americans of all income levels to participate more fully in society.
Community anchor institutions, including schools and libraries, cannot achieve their critical purposes
without access to robust broadband. Broadband-enabled jobs are critical to our nation’s economic
1 47 U.S.C. § 151.
2 See generally Federal Communications Commission, Connecting America: The National Broadband Plan (rel.
Mar. 16, 2010), at xi (National Broadband Plan).
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recovery and long-term economic health, particularly in small towns, rural and insular areas, and Triballands.
4.
But too many Americans today do not have access to modern networks that support
broadband. Approximately 18 million Americans live in areas where there is no access to robust fixed
broadband networks.3 And millions of Americans live, work, or travel in areas without access to
advanced mobile services. There are unserved areas in every state of the nation and its territories, and in
many of these areas there is little reason to believe that Congress’s desire “to ensure that all people of the
United States have access to broadband capability”4 will be met any time soon with current policies.
5.
The universal service challenge of our time is to ensure that all Americans are served by
networks that support high-speed Internet access—in addition to basic voice service—where they live,
work, and travel. Consistent with that challenge, extending and accelerating fixed and mobile broadband
deployment has been one of the Commission’s top priorities over the past few years. We have taken a
series of significant steps to better enable the private sector to deploy broadband facilities to all
Americans. The Commission has provided the tools to promote both wired and wireless solutions by
offering new opportunities to access and use spectrum,5 removing barriers to infrastructure investment,6
and developing better and more complete broadband and spectrum data.7 Today’s Order focuses on
costly-to-serve communities where even with our actions to lower barriers to investment nationwide,
private sector economics still do not add up, and therefore the immediate prospect for stand-alone private
sector action is limited. We build on the Rural Utilities Service’s (RUS’s) Broadband Initiatives Program
(BIP) and the National Telecommunications and Information Administration’s (NTIA’s) Broadband
Technology Opportunities Program (BTOP),8 through which Congress appropriated over $7 billion in
3 See National Broadband Map, available at http://www.broadbandmap.gov. Based on data as of December 2010,
there are an estimated 18.8 million Americans that lacked access to terrestrial fixed broadband services with a
maximum advertised download speed of at least 3 Mbps and a maximum advertised upload speed of at least 768
kbps. For these purposes, terrestrial fixed broadband technologies include xDSL, other copper, cable modem, fiber
to the end user, fixed wireless, whether licensed or unlicensed, and electric power line.
4 American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115, 516, § 6001(k)(2)(D),
(Recovery Act).
5 See, e.g., Unlicensed Operation in the TV Broadcast Bands, ET Docket Nos. 04-186, 02-380, Second
Memorandum Opinion and Order, 25 FCC Rcd 18661 (2010); Amendment of Part 27 of the Commission’s Rules To
Govern the Operation of Wireless Communications Services in the 2.3 GHz Band, WT Docket No. 07-293, IB
Docket No. 95-91, GN Docket No. 90-357, RM-8610, Report and Order, 25 FCC Rcd 11710 (2010) (removing
technical impediments to mobile broadband for Wireless Communications Service at 2.3 GHz, freeing up 25 MHz
of spectrum).
6 See Implementation of Section 224 of the Act, A National Broadband Plan for Our Future, WC Docket No. 07-
245, GN Docket No. 09-51, Report and Order and Order on Reconsideration, 26 FCC Rcd 5240 (rel. Apr. 7, 2011);
The FCC’s Broadband Acceleration Initiative; Reducing Regulatory Barriers To Spur Broadband Buildout, Public
Notice, 2011 WL 466770 (Feb. 9, 2011) (available at
http://www.fcc.gov/Daily_Releases/Daily_Business/2011/db0209/DOC-304571A2.pdf).
7 See Measuring Broadband America, A Report on Consumer Wireline Broadband Performance in the U.S., FCC’s
Office of Engineering and Technology and Consumer and Governmental Affairs Bureau, 2011 WL 3343075 (Aug.
2, 2011) (Measuring Broadband America Report); Modernizing the FCC Form 477 Data Program, WC Docket
Nos. 11-10, 07-38, 08-190, 10-132, Notice of Proposed Rulemaking, 26 FCC Rcd 1508 (2011) (Modernizing Form
477 NPRM); Press Release, Commission Announces “Beta” Launch of Spectrum Dashboard (Mar. 17, 2010)
(available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-296942A1.doc).
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grants and loans to expand broadband deployment and adoption in unserved and underserved areas. Wealso build on federal and state universal service programs that have supported networks in rural America
for many years.
6.
Our existing universal service and intercarrier compensation systems are based on
decades-old assumptions that fail to reflect today’s networks, the evolving nature of communications
services, or the current competitive landscape. As a result, these systems are ill equipped to address the
universal service challenges raised by broadband, mobility, and the transition to Internet Protocol (IP)
networks.
7.
With respect to broadband, the component of the Universal Service Fund (USF) that
supports telecommunications service in high-cost areas has grown from $2.6 billion in 2001 to a projected
$4.5 billion in 2011, but recipients lack any obligations or accountability for advancing broadband-
capable infrastructure. We also lack sufficient mechanisms to ensure all Commission-funded broadband
investments are prudent and efficient, including the means to target investment only to areas that require
public support to build broadband. Due in part to these problems, a “rural-rural” divide persists in
broadband access—some parts of rural America are connected to state-of-the-art broadband, while other
parts of rural America have no broadband access, because the existing program fails to direct money to all
parts of rural America where it is needed.
8.
Similarly, the Fund supports some mobile providers, but only based on cost
characteristics and locations of wireline providers. As a result, the universal service high-cost program
provides approximately $1 billion in annual support to wireless carriers, yet there remain areas of the
country where people live, work, and travel that lack even basic mobile voice coverage, and many more
areas that lack mobile broadband coverage. We need dedicated mechanisms to support mobility and close
these gaps in mobile coverage, and we must rationalize the way that funding is provided to ensure that it
is cost-effective and targeted to areas of need.
9.
The intercarrier compensation (ICC) system is similarly outdated, designed for an era of
separate long-distance companies and high per-minute charges, and established long before competition
emerged among telephone companies, cable companies, and wireless providers for bundles of local and
long distance phone service and other services. Over time, ICC has become riddled with inefficiencies
and opportunities for wasteful arbitrage. And the system is eroding rapidly as consumers increasingly
shift from traditional telephone service to substitutes including Voice over Internet Protocol (VoIP),
wireless, texting, and email. As a result, companies’ ICC revenues have become dangerously unstable,
impeding investment, while costly disputes and arbitrage schemes have proliferated. The existing system,
based on minutes rather than megabytes, is also fundamentally in tension with and a deterrent to
deployment of IP networks. The system creates competitive distortions because traditional phone
companies receive implicit subsidies from competitors for voice service, while wireless and other
companies largely compete without the benefit of such subsidies. Most concerning, the current ICC
system is unfair for consumers, with hundreds of millions of Americans paying more on their wireless
and long distance bills than they should in the form of hidden, inefficient charges. We need a more
incentive-based, market-driven approach that can reduce arbitrage and competitive distortions by phasing
down byzantine per-minute and geography-based charges. And we need to provide more certainty and
predictability regarding revenues to enable carriers to invest in modern, IP networks.
(Continued from previous page)
8 See USDA Rural Development—UTP Broadband Initiatives Program Main,
http://www.rurdev.usda.gov/utp_bip.html; NTIA, BROADBAND TECHNOLOGY OPPORTUNITIES PROGRAM,
EXPANDING BROADBAND ACCESS AND ADOPTION IN COMMUNITIES ACROSS AMERICA, OVERVIEW OF GRANT
AWARDS (2010) (available at http://www.ntia.doc.gov/reports/2010/NTIA_Report_on_BTOP_12142010.pdf).
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10.Under these circumstances, modernizing USF and ICC from supporting just voice
service to supporting voice and broadband, both fixed and mobile, through IP networks is required by
statute. The Communications Act directs the Commission to preserve and advance universal service:
“Access to advanced telecommunications and information services should be provided in all regions of
the Nation.”9 It is the Commission’s statutory obligation to maintain the USF consistent with that
mandate and to continue to support the nation’s telecommunications infrastructure in rural, insular, and
high-cost areas. The statute also requires the Commission to update our mechanisms to reflect changes in
the telecommunications market. Indeed, Congress explicitly defined universal service as “an evolving
level of telecommunications services . . . taking into account advances in telecommunications and
information technologies and services.”10 More recently, Congress required the Commission to report
annually on the state of broadband availability, and to develop the National Broadband Plan, “to ensure
that all people of the United States have access to broadband capability.”11
11.
Upon the release of the National Broadband Plan last year, the Commission said in its
Joint Statement on Broadband, “[USF] and [ICC] should be comprehensively reformed to increase
accountability and efficiency, encourage targeted investment in broadband infrastructure, and emphasize
the importance of broadband to the future of these programs.”12 Consistent with the Joint Statement and
the Broadband Plan, we proposed in the USF/ICC Transformation NPRM to be guided in the USF-ICC
reform process by the following four principles, rooted in the Communications Act:13
§
Modernize USF and ICC for Broadband. Modernize and refocus USF and ICC to make
affordable broadband available to all Americans and accelerate the transition from circuit-
switched to IP networks, with voice ultimately one of many applications running over fixed and
mobile broadband networks. Unserved communities across the nation cannot continue to be left
behind.
§
Fiscal Responsibility. Control the size of USF as it transitions to support broadband, including by
reducing waste and inefficiency. We recognize that American consumers and businesses
ultimately pay for USF, and that if it grows too large this contribution burden may undermine the
benefits of the program by discouraging adoption of communications services.
§
Accountability. Require accountability from companies receiving support to ensure that public
investments are used wisely to deliver intended results. Government must also be accountable for
the administration of USF, including through clear goals and performance metrics for the
program.
§
Incentive-Based Policies. Transition to incentive-based policies that encourage technologies and
services that maximize the value of scarce program resources and the benefits to all consumers.
9 47 U.S.C. § 254(b)(2).
10 Id. § 254(c)(1).
11 Recovery Act, 123 Stat. at 516.
12 Joint Statement on Broadband, GN Docket No. 10-66, Joint Statement on Broadband, 25 FCC Rcd 3420, 3421
(2010).
13 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; WC Docket Nos. 10-90, 07-135,
05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51, Notice of Proposed Rulemaking and Further
Notice of Proposed Rulemaking, 26 FCC Rcd 4554, 4560-61 (2011) (USF/ICC Transformation NPRM).
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We have also sought to phase in reform with measured but certain transitions, so companies affected byreform have time to adapt to changing circumstances.
12.
There has been enormous interest in and public participation in our data-driven reform
process.14 We have received over 2,700 comments, reply comments, and ex parte filings totaling over
26,000 pages, including hundreds of financial filings from telephone companies of all sizes, including
numerous small carriers that operate in the most rural parts of the nation. We have held over 400
meetings with a broad cross-section of industry and consumer advocates. We held three open, public
workshops, and engaged with other federal, state, Tribal, and local officials throughout the process. We
are appreciative of the efforts of many parties, including the State Members of the Federal-State Universal
Service Joint Board, to propose comprehensive solutions to the challenging problems of our current
system.
13.
The reforms we adopt today build on the input of all stakeholders, including Tribal
leaders, states, territories, consumer advocates, incumbent and competitive telecommunications providers,
cable companies, wireless providers (including wireless Internet service providers – WISPs), satellite
providers, community anchor institutions, and other technology companies. We have taken a holistic
view of the entire record, and have adopted—though often with modifications designed to better serve the
public interest—a number of elements from various stakeholder proposals.
14.
Our actions today will benefit consumers. In rural communities throughout the country
our reforms will expand broadband and mobility significantly, providing access to critical employment,
public safety, educational, and health care opportunities to millions of Americans for the first time. It has
been more than a decade since the Commission has comprehensively updated its USF and ICC rules.
Those prior efforts helped usher in significant reductions in long distance rates and the proliferation of
innovative new offerings, such as all-distance and flat-priced wireless calling plans, with substantial
consumer benefits. We expect that today’s ICC actions will have similar pro-consumer, pro-innovation
results, providing over $1.5 billion annually in benefits for wireless and all long-distance customers.
These benefits may take many forms, including cost savings, more robust wireless service, and more
innovative IP-based communications offerings. Given these effects, we project that the average consumer
benefits of our reforms outweigh any costs by at least 3 to 1 -- and of course, by much more for the
million of consumers that will get broadband for the first time. Eliminating implicit subsidies also helps
level the competitive playing field by allowing consumers to more accurately compare service offerings
from telephone companies, cable companies, and wireless providers. In addition, we adopt a number of
safeguards to protect consumers during the reform process, placing clear limits on end-user charges and
putting USF on a firm budget to help stabilize the contribution burden on consumers.
15.
We recognize that USF and ICC are both hybrid state-federal systems, and it is critical
to our reforms’ success that states remain key partners even as these programs evolve and traditional roles
shift. Over the years, we have engaged in ongoing dialogue with state commissions on a host of issues,
including universal service. We recognize the statutory role that Congress created for state commissions
with respect to eligible telecommunications carrier designations, and we do not disturb that framework.
We know that states share our interest in extending voice and broadband service, both fixed and mobile,
14 The comment cycle for the USF/ICC Transformation NPRM was at least 30 days for each section, and the NPRM
was available for ex parte comment from its release on February 9, 2011 until the Sunshine period began on October
21, 2011. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4554; FCC To Hold Open Commission Meeting
Thursday, October 27, 2011, Public Notice (rel. Oct. 20, 2011). Stakeholders thus had ample time to participate in
this proceeding, notwithstanding the claims of some parties. See, e.g., Letter from Jerry Petrowski, Wisconsin State
Representative, to Hon. Julius Genachowski, Chairman, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109; CC
Docket Nos. 01-32, 96-45; GN Docket No. 09-51 (filed Oct. 18, 2011).
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where it is lacking, to better meet the needs of their consumers.15 Therefore, we do not seek to modify theexisting authority of states to establish and monitor carrier of last resort (COLR) obligations. We will
continue to rely upon states to help us determine whether universal service support is being used for its
intended purposes, including by monitoring compliance with the new public interest obligations described
in this Order. We also recognize that federal and state regulators must reconsider how legacy regulatory
obligations should evolve as service providers accelerate their transition from the Public Switched
Telephone Network (PSTN) to an all IP world.
16.
We believe that the framework adopted today provides all stakeholders with a clear path
forward as the Commission transitions its voice support mechanisms to expressly include broadband and
mobility, from the PSTN to IP, and toward market-based policies, such as competitive bidding. We will
closely monitor the progress made and stand ready to adjust the framework as necessary to protect
consumers, expand broadband access and opportunities, eliminate new arbitrage or inefficient behavior,
ensure USF stays within our budget, and continue our transition to IP communications in a competitive
and technologically neutral manner.
II.
EXECUTIVE SUMMARY
A.
Universal Service Reform
17.Principles and Goals. We begin by adopting support for broadband-capable networks
as an express universal service principle under section 254(b) of the Communications Act, and, for the
first time, we set specific performance goals for the high-cost component of the USF that we are
reforming today, to ensure these reforms are achieving their intended purposes. The goals are: (1)
preserve and advance universal availability of voice service; (2) ensure universal availability of modern
networks capable of providing voice and broadband service to homes, businesses, and community anchor
institutions; (3) ensure universal availability of modern networks capable of providing advanced mobile
voice and broadband service; (4) ensure that rates for broadband services and rates for voice services are
reasonably comparable in all regions of the nation; and (5) minimize the universal service contribution
burden on consumers and businesses.
18.
Budget. We establish, also for the first time, a firm and comprehensive budget for the
high-cost programs within USF.16 The annual funding target is set at no more than $4.5 billion over the
next six years, the same level as the high-cost program for Fiscal Year 2011, with an automatic review
trigger if the budget is threatened to be exceeded. This will provide for more predictable funding for
carriers and will protect consumers and businesses that ultimately pay for the fund through fees on their
communications bills. We are today taking important steps to control costs and improve accountability in
USF, and our estimates of the funding necessary for components of the Connect America Fund (CAF)
and legacy high-cost mechanisms represent our predictive judgment as to how best to allocate limited
resources at this time. We anticipate that we may revisit and adjust accordingly the appropriate size of
each of these programs by the end of the six-year period, based on market developments, efficiencies
realized, and further evaluation of the effect of these programs in achieving our goals.
15 See High-Cost Universal Service Support, Federal-State Joint Board on Universal Service, WC Docket No. 05-
337, CC Docket No. 96-45, Recommended Decision 22 FCC Rcd 20477 (Fed.-State Jt. Bd., rel. Nov. 20, 2007).
16 While we recognize that over time several of our existing support mechanisms will be phased down and
eliminated, for purposes of this budget, the term “high-cost” includes all support mechanisms in place as of the date
of this Order, specifically, high-cost loop support, safety net support, safety valve support, local switching support,
interstate common line support, high cost model support, and interstate access support, as well as the new Connect
America Fund, which includes funding to support and advance networks that provide voice and broadband services,
both fixed and mobile, and funding provided in conjunction with the recovery mechanism adopted as part of
intercarrier compensation reform.
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19.Public Interest Obligations. While continuing to require that all eligible
telecommunications carriers (ETCs) offer voice services, we now require that they also offer broadband
services. We update the definition of voice services for universal service purposes, and decline to disrupt
any state carrier of last resort obligations that may exist. We also establish specific and robust broadband
performance requirements for funding recipients.
20.
Connect America Fund. We create the Connect America Fund, which will ultimately
replace all existing high-cost support mechanisms. The CAF will help make broadband available to
homes, businesses, and community anchor institutions in areas that do not, or would not otherwise, have
broadband, including mobile voice and broadband networks in areas that do not, or would not otherwise,
have mobile service, and broadband in the most remote areas of the nation. The CAF will also help
facilitate our ICC reforms. The CAF will rely on incentive-based, market-driven policies, including
competitive bidding, to distribute universal service funds as efficiently and effectively as possible.
21.
Price Cap Territories. More than 83 percent of the approximately 18 million Americans
that lack access to residential fixed broadband at or above the Commission’s broadband speed benchmark
live in areas served by price cap carriers—Bell Operating Companies and other large and mid-sized
carriers. In these areas, the CAF will introduce targeted, efficient support for broadband in two phases.
22.
Phase I. To spur immediate broadband buildout, we will provide additional funding for
price cap carriers to extend robust, scalable broadband to hundreds of thousands of unserved Americans
beginning in early 2012. To enable this deployment, all existing legacy high-cost support to price cap
carriers will be frozen, and an additional $300 million in CAF funding will be made available. Frozen
support will be immediately subject to the goal of achieving universal availability of voice and
broadband, and subject to obligations to build and operate broadband-capable networks in areas unserved
by an unsubsidized competitor over time. Any carrier electing to receive the additional support will be
required to deploy broadband and offer service that satisfies our new public interest obligations to an
unserved location for every $775 in incremental support. Specifically, carriers that elect to receive this
additional support must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps
upstream,17 with latency suitable for real-time applications and services such as VoIP, and with monthly
usage capacity reasonably comparable to that of residential terrestrial fixed broadband offerings in urban
areas. In addition, to ensure fairness for consumers across the country who pay into USF, we reduce
existing support levels in any areas where a price cap company charges artificially low end-user voice
rates.
23.
Phase II. The next phase of the CAF will use a combination of a forward-looking
broadband cost model and competitive bidding to efficiently support deployment of networks providing
both voice and broadband service for five years. We expect that the CAF will expand broadband
availability to millions more unserved Americans.
24.
We direct the Wireline Competition Bureau to undertake a public process to determine
the specific design and operation of the cost model to be used for this purpose, with stakeholders
encouraged to participate in that process. The model will be used to establish the efficient amount of
support required to extend and sustain robust, scalable broadband in high-cost areas. In each state, each
incumbent price cap carrier will be asked to undertake a “state-level commitment” to provide affordable
broadband to all high-cost locations in its service territory in that state, excluding extremely high cost
areas as determined by the model. Importantly, the CAF will only provide support in those areas where a
federal subsidy is necessary to ensure the build-out and operation of broadband networks. The CAF will
not provide support in areas where unsubsidized competitors are providing broadband that meets our
17 Upon a showing that the specified support amount is inadequate to enable build out of broadband with actual
upstream speeds of at least 1 Mbps to the required number of locations, a carrier may request a waiver.
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definition. Carriers accepting the state-level commitment will be obligated to meet rigorous broadbandservice requirements—with interim build-out requirements in three years and final requirements in five
years—and will receive CAF funding, in an amount calculated by the model, over a five-year period, with
significant financial consequences in the event of non- or under-performance. We anticipate that CAF
obligations will keep pace as services in urban areas evolve, and we will ensure that CAF-funded services
remain reasonably comparable to urban broadband services over time. After the five-year period, the
Commission will use competitive bidding to distribute any universal service support needed in those
areas.
25.
In areas where the incumbent declines the state-level commitment, we will use
competitive bidding to distribute support in a way that maximizes the extent of robust, scalable broadband
service subject to an overall budget. In the Further Notice of Proposed Rulemaking (FNPRM) that
accompanies today’s Order, we propose a structure and operational details for the competitive bidding
mechanism, in which any broadband provider that has been designated as an ETC for the relevant area
may participate. The second phase of the CAF will distribute a total of up to $1.8 billion annually in
support for areas with no unsubsidized broadband competitor. We expect that the model and competitive
bidding mechanism will be adopted by December 2012, and disbursements will ramp up in 2013 and
continue through 2017.
26.
Rate-of-Return Reforms. Although they serve less than five percent of access lines in the
U.S., smaller rate-of-return carriers operate in many of the country’s most difficult and expensive areas to
serve. Rate-of-return carriers’ total support from the high-cost fund is approaching $2 billion annually.
We reform our rules for rate-of-return companies in order to support continued broadband investment
while increasing accountability and incentives for efficient use of public resources. Rate-of-return
carriers receiving legacy universal service support, or CAF support to offset lost ICC revenues, must offer
broadband service meeting initial CAF requirements, with actual speeds of at least 4 Mbps downstream
and 1 Mbps upstream, upon their customers’ reasonable request. Recognizing the economic challenges of
extending service in the high-cost areas of the country served by rate-of-return carriers, this flexible
approach does not require rate-of-return companies to extend service to customers absent such a request.
27.
Alongside these broadband service rules, we adopt reforms to: (1) establish a framework
to limit reimbursements for excessive capital and operating expenses, which will be implemented no later
than July 1, 2012, after an additional opportunity for public comment; (2) encourage efficiencies by
extending existing corporate operations expense limits to the existing high-cost loop support and
interstate common line support mechanisms, effective January 1, 2012; (3) ensure fairness by reducing
high-cost loop support for carriers that maintain artificially low end-user voice rates, with a three-step
phase-in beginning July 1, 2012; (4) phase out the Safety Net Additive component of high-cost loop
support over time; (5) address Local Switching Support as part of comprehensive ICC reform; (6) phase
out over three years support in study areas that overlap completely with an unsubsidized facilities-based
terrestrial competitor that provides voice and fixed broadband service, beginning July 1, 2012; and (7) cap
per-line support at $250 per month, with a gradual phasedown to that cap over a three-year period
commencing July 1, 2012. In the FNPRM, we seek comment on establishing a long-term broadband-
focused CAF mechanism for rate-of-return carriers, and relatedly seek comment on reducing the interstate
rate-of-return from its current level of 11.25 percent. We expect rate-of-return carriers will receive
approximately $2 billion per year in total high-cost universal service support under our budget through
2017.
28.
CAF Mobility Fund. Concluding that mobile voice and broadband services provide
unique consumer benefits, and that promoting the universal availability of such services is a vital
component of the Commission’s universal service mission, we create the Mobility Fund, the first
universal service mechanism dedicated to ensuring availability of mobile broadband networks in areas
where a private-sector business case is lacking. Mobile broadband carriers will receive significant legacy
support during the transition to the Mobility Fund, and will have opportunities for new Mobility Fund
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dollars. The providers receiving support through the CAF Phase II competitive bidding process will alsobe eligible for the Mobility Fund, but carriers will not be allowed to receive redundant support for the
same service in the same areas. Mobility Fund recipients will be subject to public interest obligations,
including data roaming and collocation requirements.
- Phase I. We provide up to $300 million in one-time support to immediately accelerate
deployment of networks for mobile voice and broadband services in unserved areas. Mobility Fund Phase
I support will be awarded through a nationwide reverse auction, which we expect to occur in third quarter
2012. Eligible areas will include census blocks unserved today by mobile broadband services, and
carriers may not receive support for areas they have previously stated they plan to cover. The auction will
maximize coverage of unserved road miles within the budget, and winners will be required to deploy 4G
service within three years, or 3G service within two years, accelerating the migration to 4G. We also
establish a separate and complementary one-time Tribal Mobility Fund Phase I to award up to $50 million
in additional universal service funding to Tribal lands to accelerate mobile voice and broadband
availability in these remote and underserved areas.
- Phase II. To ensure universal availability of mobile broadband services, the Mobility Fund will
provide up to $500 million per year in ongoing support. The Fund will expand and sustain mobile voice
and broadband services in communities in which service would be unavailable absent federal support.
The Mobility Fund will include ongoing support for Tribal areas of up to $100 million per year as part of
the $500 million total budget. In the FNPRM we propose a structure and operational details for the
ongoing Mobility Fund, including the proper distribution methodology, eligible geographic areas and
providers, and public interest obligations. We expect to adopt the distribution mechanism for Phase II in
2012 with implementation in 2013.
29.
Identical Support Rule. In light of the new support mechanisms we adopt for mobile
broadband service and our commitment to fiscal responsibility, we eliminate the identical support rule
that determines the amount of support for mobile, as well as wireline, competitive ETCs today. We
freeze identical support per study area as of year end 2011, and phase down existing support over a five-
year period beginning on July 1, 2012. The gradual phase down we adopt, in conjunction with the new
funding provided by Mobility Fund Phase I and II, will ensure that an average of over $900 million is
provided to mobile carriers for each of the first four years of reform (through 2015). The phase down of
competitive ETC support will stop if Mobility Fund Phase II is not operational by June 30, 2014, ensuring
approximately $600 million per year in legacy support will continue to flow until the new mechanism is
operational.
30.
Remote Areas Fund. We allocate at least $100 million per year to ensure that Americans
living in the most remote areas in the nation, where the cost of deploying traditional terrestrial broadband
networks is extremely high, can obtain affordable access through alternative technology platforms,
including satellite and unlicensed wireless services.18 We propose in the FNPRM a structure and
operational details for that mechanism, including the form of support, eligible geographic areas and
providers, and public interest obligations. We expect to finalize the Remote Areas Fund in 2012 with
implementation in 2013.
31.
Reporting and Enforcement. We establish a national framework for certification and
reporting requirements for all universal service recipients to ensure that their public interest obligations
are satisfied, that state and federal regulators have the tools needed to conduct meaningful oversight, and
that public funds are expended in an efficient and effective manner. We do not disturb the existing role of
18 We note that satellite broadband providers and wireless Internet service providers (WISPs) are not confined to
participating only in this component of the CAF; they are eligible to participate in any CAF program for which they
can meet the specified performance requirements.
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states in designating ETCs and in monitoring that ETCs within their jurisdiction are using universalservice support for its intended purpose. We seek comment on whether and how we should adjust federal
obligations on ETCs in areas where legacy funding is phased down. We also adopt rules to reduce or
eliminate support if public interest obligations or other requirements are not satisfied, and seek comment
on the appropriateness of additional enforcement mechanisms.
32.
Waiver. As a safeguard to protect consumers, we provide for an explicit waiver
mechanism under which a carrier can seek relief from some or all of our reforms if the carrier can
demonstrate that the reduction in existing high-cost support would put consumers at risk of losing voice
service, with no alternative terrestrial providers available to provide voice telephony.
B.
Intercarrier Compensation Reform
33.Immediate ICC Reforms. We take immediate action to curtail wasteful arbitrage
practices, which cost carriers and ultimately consumers hundreds of millions of dollars annually:
§
Access Stimulation. We adopt rules to address the practice of access stimulation, in which
carriers artificially inflate their traffic volumes to increase ICC payments. Our revised
interstate access rules generally require competitive carriers and rate-of-return incumbent
local exchange carriers (LECs) to refile their interstate switched access tariffs at lower rates if
the following two conditions are met: (1) a LEC has a revenue sharing agreement and (2) the
LEC either has (a) a three-to-one ratio of terminating-to-originating traffic in any month or
(b) experiences more than a 100 percent increase in traffic volume in any month measured
against the same month during the previous year. These new rules are narrowly tailored to
address harmful practices while avoiding burdens on entities not engaging in access
stimulation.
§
Phantom Traffic. We adopt rules to address “phantom traffic,” i.e., calls for which
identifying information is missing or masked in ways that frustrate intercarrier billing.
Specifically, we require telecommunications carriers and providers of interconnected VoIP
service to include the calling party’s telephone number in all call signaling, and we require
intermediate carriers to pass this signaling information, unaltered, to the next provider in a
call path.
34.
Comprehensive ICC Reform. We adopt a uniform national bill-and-keep framework as
the ultimate end state for all telecommunications traffic exchanged with a LEC. Under bill-and-keep,
carriers look first to their subscribers to cover the costs of the network, then to explicit universal service
support where necessary. Bill-and-keep has worked well as a model for the wireless industry; is
consistent with and promotes deployment of IP networks; will eliminate competitive distortions between
wireline and wireless services; and best promotes our overall goals of modernizing our rules and
facilitating the transition to IP. Moreover, we reject the notion that only the calling party benefits from a
call and therefore should bear the entire cost of originating, transporting, and terminating a call. As a
result, we now abandon the calling-party-network-pays model that dominated ICC regimes of the last
century. Although we adopt bill-and-keep as a national framework, governing both inter- and intrastate
traffic, states will have a key role in determining the scope of each carrier’s financial responsibility for
purposes of bill-and-keep, and in evaluating interconnection agreements negotiated or arbitrated under the
framework in sections 251 and 252 of the Communications Act. We also address concerns expressed by
some commenters about potential fears of traffic “dumping” and seek comment in the FNPRM on
whether any additional measures are necessary in this regard.
35.
Multi-Year Transition. We focus initial reforms on reducing terminating switched access
rates, which are the principal source of arbitrage problems today. This approach will promote migration
to all-IP networks while minimizing the burden on consumers and staying within our universal service
budget. For these rates, as well as certain transport rates, we adopt a gradual, measured transition that
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will facilitate predictability and stability. First, we require carriers to cap most ICC rates as of theeffective date of this Order. To reduce the disparity between intrastate and interstate terminating end
office rates, we next require carriers to bring these rates to parity within two steps, by July 2013.
Thereafter, we require carriers to reduce their termination (and for some carriers also transport) rates to
bill-and-keep, within six years for price cap carriers and nine for rate-of-return carriers. The framework
and transition are default rules and carriers are free to negotiate alternatives that better address their
individual needs. Although the Order begins the process of reforming all ICC charges by capping all
interstate rate elements and most intrastate rate elements, the FNPRM seeks comment on the appropriate
transition and recovery for the remaining originating and transport rate elements. States will play a key
role in overseeing modifications to rates in intrastate tariffs to ensure carriers are complying with the
framework adopted in this Order and not shifting costs or otherwise seeking to gain excess recovery. The
FNPRM also seeks comment on interconnection issues likely to arise in the process of implementing a
bill-and-keep methodology for ICC.
36.
New Recovery Mechanism. We adopt a transitional recovery mechanism to mitigate the
effect of reduced intercarrier revenues on carriers and facilitate continued investment in broadband
infrastructure, while providing greater certainty and predictability going forward than the status quo.
Although carriers will first look to limited increases from their end users for recovery, we reject notions
that all recovery should be borne by consumers. Rather, we believe, consistent with past reforms, that
carriers should have the opportunity to seek partial recovery from all of their end user customers. We
permit incumbent telephone companies to charge a limited monthly Access Recovery Charge (ARC) on
wireline telephone service, with a maximum annual increase of $0.50 for consumers and small
businesses, and $1.00 per line for multi-line businesses, to partially offset ICC revenue declines. To
protect consumers, we adopt a strict ceiling that prevents carriers from assessing any ARC for any
consumer whose total monthly rate for local telephone service, inclusive of various rate-related fees, is at
or above $30. Although the maximum ARC is $0.50 per month, we expect the actual average increase
across all wireline consumers to be no more than $0.10-$0.15 a month, which translates into an expected
maximum of $1.20-$1.80 per year that the average consumer will pay.19 We anticipate that consumers
will receive more than three times that amount in benefits in the form of lower calling prices, more value
for their wireless or wireline bill, or both, as well as greater broadband availability. Furthermore, the
ARC will phase down over time as carriers’ eligible revenue decreases, and we prevent carriers from
charging any ARC on Lifeline customers or further drawing on the Lifeline program, so that ICC reform
will not raise rates at all for these low-income consumers. We also seek comment in the FNPRM about
reassessing existing subscriber line charges (SLCs), which are not otherwise implicated by this Order, to
determine whether those charges are set at appropriate levels.
37.
Likewise, although we do not adopt a rate ceiling for multi-line businesses customers, we
do adopt a cap on the combination of the ARC and the existing SLC to ensure that multi-line businesses
do not bear a disproportionate share of recovery and that their rates remain just and reasonable.
Specifically, carriers cannot charge a multi-line business customer an ARC when doing so would result in
the ARC plus the existing SLC exceeding $12.20 per line. Moreover, to further protect consumers, we
adopt measures to ensure that carriers must apportion lost revenues eligible for ICC recovery between
residential and business lines, appropriately weighting the business lines (i.e., according to the higher
maximum annual increase in the business ARC) to prevent carriers that elect not to receive ICC CAF
from recovering their entire ICC revenue loss from consumers. Carriers may receive CAF support for
any otherwise-eligible revenue not recovered by the ARC. In addition, carriers receiving CAF support to
19 The maximum theoretical ARC for customers of price cap carriers would be $2.50 after 5 years and for customers
of rate-of-return carriers would be $3 after 6 years, although we expect the average actual ARC to be less than half
of those totals.
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offset lost ICC revenues will be required to use the money to advance our goals for universal voice andbroadband.
38.
In defining how much of their lost revenues carriers will have the opportunity to recover,
we reject the notion that ICC reform should be revenue neutral. We limit carriers’ total eligible recovery
to reflect the existing downward trends on ICC revenues with declining switching costs and minutes of
use. For price cap carriers, baseline recovery amounts available to each price cap carrier will decline at
10 percent annually. Price cap carriers whose interstate rates have largely been unchanged for a decade
because they participated in the Commission’s 2000 CALLS plan will be eligible to receive 90 percent of
this baseline every year from ARCs and the CAF. In those study areas that have recently converted from
rate-of-return to price cap regulation, carriers will initially be permitted to recover the full baseline
amount to permit a more gradual transition, but we will decline to 90 percent recovery for these areas as
well after 5 years. All price cap CAF support for ICC recovery will phase out over a three-year period
beginning in the sixth year of the reform.
39.
For rate-of-return carriers, recovery will be calculated initially based on rate-of-return
carriers’ fiscal year 2011 interstate switched access revenue requirement, intrastate access revenues that
are being reformed as part of this Order, and net reciprocal compensation revenues. This baseline will
decline at five percent annually to reflect combined historical trends of an annual three percent interstate
cost and associated revenue decline, and ten percent intrastate revenue decline, while providing for true
ups to ensure CAF recovery in the event of faster-than-expected declines in demand. Both recovery
mechanisms provide carriers with significantly more revenue certainty than the status quo, enabling
carriers to reap the benefits of efficiencies and reduced switching costs, while giving providers stable
support for investment as they adjust to an IP world.
40.
Treatment of VoIP Traffic. We make clear the prospective payment obligations for VoIP
traffic exchanged in TDM between a LEC and another carrier, and adopt a transitional framework for
VoIP intercarrier compensation. We establish that default charges for “toll” VoIP-PSTN traffic will be
equal to interstate rates applicable to non-VoIP traffic, and default charges for other VoIP-PSTN traffic
will be the applicable reciprocal compensation rates. Under this framework, all carriers originating and
terminating VoIP calls will be on equal footing in their ability to obtain compensation for this traffic.
41.
CMRS-Local Exchange Carrier (LEC) Compensation. We clarify certain aspects of
CMRS-LEC compensation to reduce disputes and address existing ambiguity. We adopt bill-and-keep as
the default methodology for all non-access CMRS-LEC traffic. To provide rate-of-return LECs time to
adjust to bill-and-keep, we adopt an interim transport rule for rate-of-return carriers to specify LEC
transport obligations under the default bill-and-keep framework for non-access traffic exchanged between
these carriers. We also clarify the relationship between the compensation obligations in section 20.11 of
the Commission’s rules and the reciprocal compensation framework, thus addressing growing concerns
about arbitrage related to rates set without federal guidance. Further, in response to disputes, we make
clear that a call is considered to be originated by a CMRS provider for purposes of the intraMTA rule
only if the calling party initiating the call has done so through a CMRS provider. Finally, we affirm that
all traffic routed to or from a CMRS provider that, at the beginning of a call, originates and terminates
within the same MTA, is subject to reciprocal compensation, without exception.
42.
IP-to-IP Interconnection. We recognize the importance of interconnection to
competition and the associated consumer benefits. We anticipate that the reforms we adopt will further
promote the deployment and use of IP networks, and seek comment in the accompanying FNPRM
regarding the policy framework for IP-to-IP interconnection. We also make clear that even while our
FNPRM is pending, we expect all carriers to negotiate in good faith in response to requests for IP-to-IP
interconnection for the exchange of voice traffic.
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III.
ADOPTION OF A NEW PRINCIPLE FOR UNIVERSAL SERVICE
43.Section 254(b) of the Communications Act sets forth six “universal service principles”
and directs the Commission to “base policies for the preservation and advancement of universal service
on” these principles.20 In addition, section 254(b)(7) directs the Commission and the Federal-State Joint
Board on Universal Service to adopt “other principles” that we “determine are necessary and appropriate
for the protection of the public interest, convenience, and necessity and are consistent with” the Act.21
44.
In November 2010, the Federal-State Joint Board on Universal Service recommended
that the Commission “specifically find that universal service support should be directed where possible to
networks that provide advanced services, as well as voice services,” and adopt such a principle pursuant
to its 254(b)(7) authority.22 The Joint Board believes that this principle is consistent with section
254(b)(3) and would serve the public interest.23 We agree.24 Section 254(b)(3) provides that consumers
in rural, insular and high-cost areas should have access to “advanced telecommunications and information
services . . . that are reasonably comparable to those services provided in urban areas.”25 Section
254(b)(2) likewise provides that “Access to advanced telecommunications and information services
should be provided in all regions of the Nation.”26 Providing support for broadband networks will further
all of these goals.
45.
Accordingly, we adopt “support for advanced services” as an additional principle upon
which we will base policies for the preservation and advancement of universal service. For the reasons
discussed above, we find, per section 254(b)(7), that this new principle is “necessary and appropriate.”
Consistent with the Joint Board’s recommendation, we define this principle as: “Support for Advanced
Services – Universal service support should be directed where possible to networks that provide advanced
services, as well as voice services.”
IV.
GOALS
46.Background. Consistent with the Government Performance and Results Act of 1993
(GPRA), clear performance goals and measures for the Connect America Fund, including the Mobility
Fund, and existing high-cost support mechanisms will enable the Commission to determine not just
whether federal funding is used for the intended purposes, but whether that funding is accomplishing the
intended results—including our objectives of preserving and advancing voice, broadband, and advanced
20 47 U.S.C. § 254(b).
21 47 U.S.C. § 254(b)(7).
22 Federal-State Joint Board on Universal Service, Lifeline and Link Up, CC Docket No. 96-45, WC Docket No. 03-
109, Recommended Decision, 25 FCC Rcd 15598, 15625, para. 75 (2010). Numerous commenters supported that
recommendation. See, e.g., Massachusetts Department of Telecommunications & Cable USF/ICC Transformation
Comments at 2-6; Nebraska Public Service Commission USF/ICC Transformation Comments at 7-8; Ohio Public
Utilities Commission USF/ICC Transformation Comments at 3; Telecommunications Industry Association USF/ICC
Transformation Comments at 5.
23 Id.
24 We hereby act on a recommendation from the Joint Board 2010 Recommended Decision. We are considering the
other recommendations and expect to address other issues raised in the Joint Board 2010 Recommended Decision in
the near future.
25 47 U.S.C. § 254(b)(3).
26 47 U.S.C. § 254(b)(2).
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mobility for all Americans.27 Moreover, performance goals and measures may assist in identifying areaswhere additional action by state regulators, Tribal governments, or other entities is necessary to achieve
universal service. Performance goals and measures should also improve participant accountability.
47.
In the USF-ICC Transformation NPRM, the Commission proposed several performance
goals and measures to improve program accountability.28 While commenters generally supported the
concept of reorienting the universal service program to support broadband, we received limited comment
on the specific goals and measures we proposed in the NPRM. No commenter objected to the proposed
goals, and the Mercatus Center describes them as “excellent intermediate outcomes to measure.”29
48.
Discussion. We adopt the following performance goals for our efforts to preserve and
advance service in high cost, rural, and insular areas through the Connect America Fund and existing
support mechanisms: (1) preserve and advance universal availability of voice service; (2) ensure universal
availability of modern networks capable of providing voice and broadband service to homes, businesses,
and community anchor institutions; (3) ensure universal availability of modern networks capable of
providing mobile voice and broadband service where Americans live, work, and travel; (4) ensure that
rates are reasonably comparable in all regions of the nation, for voice as well as broadband services; and
(5) minimize the universal service contribution burden on consumers and businesses.30 We also adopt
performance measures for the first, second, and fifth of these goals, and direct the Wireline Competition
Bureau and the Wireless Telecommunications Bureau (Bureaus) to further develop other measures. We
delegate authority to the Bureaus to finalize performance measures as appropriate consistent with the
goals we adopt today.
49.
Preserve and Advance Voice Service. The first performance goal we adopt is to preserve
and advance universal availability of voice service. In doing so, we reaffirm our commitment to ensuring
that all Americans have access to voice service while recognizing that, over time, we expect that voice
service will increasingly be provided over broadband networks.31
50.
As a performance measure for this goal, we will use the telephone penetration rate,
which measures subscription to telephone service.32 The telephone penetration rate has historically been
27 The Government Performance and Results Act of 1993 established statutory requirements for federal agencies to
engage in strategic planning and performance measurement. Government Performance and Results Act of 1993,
Pub. L. No. 103-62, 107 Stat. 285 (1993). Federal agencies must develop strategic plans with long-term, outcome-
related goals and objectives, develop annual goals linked to the long-term goals, and measure progress toward the
achievement of those goals in annual performance plans and report annually on their progress in program
performance reports. See also GPRA Modernization Act of 2010, Pub. L. 111-352, 124 Stat. 3866 (2011). The
Office of Management and Budget (OMB) has built upon GPRA through its Program Assessment Rating Tool
(PART), which sets forth three types of performance measures: (1) outcome measures; (2) output measures; and (3)
efficiency measures. See Memorandum from Clay Johnson III, Deputy Director for Management, Office of
Management and Budget, to Program Associate Directors, Budget Data Request No. 04-31 (Mar. 22, 2003) (OMB
PART Guidance Memorandum).
28 USF/ICC Transformation NPRM, 26 FCC Rcd at 4697-701, paras. 479-89.
29 Mercatus USF/ICC Transformation NPRM Comments at 17; see also Kansas Commission USF/ICC
Transformation NPRM Comments at 22 (“the KCC supports these priorities”).
30 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4584, 4697-701, paras. 80, 479-89.
31 See 47 U.S.C. § 254(b); USF/ICC Transformation NPRM, 26 FCC Rcd at 4584, para. 80.
32 See Industry Analysis and Technology Division, Wireline Competition Bureau, Telephone Subscribership in the
United States at 1 (Aug. 2010) (Aug. 2010 Subscribership Report).
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used by the Commission as a proxy for network deployment33 and, as a result, will be a consistentmeasure of the universal service program’s effects. We will also continue to use the Census Bureau’s
Current Population Survey (CPS) to collect data regarding telephone penetration.34 Although CPS data
does not specifically break out wireless, VoIP, or over-the-top voice options available to consumers,35 a
better data set is not currently available. In recognition of the limitations of existing data, the
Commission is considering revising the types of data it collects,36 and we anticipate further Commission
action in this proceeding, which may provide more complete information that we can use to evaluate this
performance goal.
51.
Ensure Universal Availability of Voice and Broadband to Homes, Businesses, and
Community Anchor Institutions. The second performance goal we adopt is to ensure the universal
availability of modern networks capable of delivering broadband and voice service to homes, businesses,
and community anchor institutions.37 All Americans in all parts of the nation, including those in rural,
insular, and high-cost areas, should have access to affordable modern communications networks capable
of supporting the necessary applications that empower them to learn, work, create, and innovate.38
52.
As an outcome measure for this goal, we will use the number of residential, business,
and community anchor institution locations that newly gain access to broadband service.39 As an
efficiency measure, we will use the change in the number of homes, businesses, and community anchor
institutions passed or covered per million USF dollars spent.40 To collect data, we will use the National
Broadband Map and/or Form 477. We will also require CAF recipients to report on the number of
community anchor institutions that newly gain access to fixed broadband service as a result of CAF
support.41 Although these measures are imperfect, we believe that they are the best available to us. 42
Other options, such as the Mercatus Centers’ suggestion of using an assessment of what might have
occurred without the programs, are not administratively feasible at this time.43 But we direct the Bureaus
to revisit these measures at a later point, and to consider refinements and alternatives.
33 USF/ICC Transformation NPRM, 26 FCC Rcd at 4605, para. 146; see also Aug. 2010 Subscribership Report at 1-
2.
34 See Aug. 2010 Subscribership Report at 1.
35 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4699, para. 483.
36 See Broadband Data NPRM, 26 FCC Rcd at 1527-33, paras. 49-65.
37 We use the term “modern networks” because we expect that supported equipment and services will change over
time to keep up with technological advancements. We note that “[c]ommunity anchor institutions” as defined in the
Recovery Act include schools, libraries, medical and healthcare providers, community colleges and other institutions
of higher education, and other community support organizations and entities. See 47 U.S.C. § 1305(b)(3)(A). We
adopt that definition for purposes of these rules.
38 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4699-700, para. 485; see also 47 U.S.C. § 254(b).
39 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4699-700, para. 485.
40 See id.
41 See infra Section VII.A.2.
42 As the Mercatus Center points out, both measures fail to take into account the change in deployment that would
have occurred without the high-cost program and CAF. Mercatus USF/ICC Transformation NPRM Comments at
12-14. And as previously noted, the efficiency measure could be biased towards lower-cost areas. USF/ICC
Transformation NPRM, 26 FCC Rcd at 4699-700, para. 485.
43 Mercatus USF/ICC Transformation NPRM Comments at 12-14.
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53.Ensure Universal Availability of Mobile Voice and Broadband Where Americans Live,
Work, or Travel. The third performance goal we adopt is to ensure the universal availability of modern
networks capable of delivering mobile broadband and voice service in areas where Americans live, work,
or travel. Like the preceding parallel goal, our third performance goal is designed to help ensure that all
Americans in all parts of the nation, including those in rural, insular, and high-cost areas, have access to
affordable technologies that will empower them to learn, work, create, and innovate. But we believe that
ensuring universal advanced mobile coverage is an important goal on its own, and that we will be better
able track program performance if we measure it separately.
54.
We decline to adopt performance measures for this goal at this time but direct the
Wireless Telecommunications Bureau to develop one or more appropriate measures for this goal.
55.
Ensure Reasonably Comparable Rates for Broadband and Voice Services. The fourth
performance goal we adopt is to ensure that rates are reasonably comparable for voice as well as
broadband service, between urban and rural, insular, and high cost areas. Rates must be reasonably
comparable so that consumers in rural, insular, and high cost areas have meaningful access to these
services.44
56.
We also decline to adopt measures for this goal at this time. Although the Commission
proposed one outcome measure and asked about others in the USF/ICC Transformation NPRM,45 we
received only limited input on that proposal. The Mercatus Center agrees that “[t]he ratio of prices to
income is an intuitively sensible way of defining ‘reasonably comparable’” but cautions that, again, the
real challenge is crafting measures that distinguish how the programs affect rates apart from other
factors.46 The Bureaus may seek to further develop the record on the performance and efficiency
measures suggested by the Mercatus Center, 47 the Commission’s original proposals, and any other
measures commenters think would be appropriate. In undertaking this analysis, we direct the Bureau to
develop separate measures for (1) broadband services for homes, businesses, and community anchor
institutions; and (2) mobile services.
57.
Minimize Universal Service Contribution Burden on Consumers and Businesses. The
fifth performance goal we adopt is to minimize the overall burden of universal service contributions on
American consumers and businesses. With this performance goal, we seek to balance the various
objectives of section 254(b) of the Act, including the objective of providing support that is sufficient but
not excessive so as to not impose an excessive burden on consumers and businesses who ultimately pay to
support the Fund.48 As we have previously recognized, “if the universal service fund grows too large, it
44 See 47 U.S.C. § 254(b)(3); USF/ICC Transformation NPRM, 26 FCC Rcd at 4584, para. 80.
45 We proposed that the ratio of the rural price to rural household disposable income should be similar to the ratio in
urban areas, both for voices services and for broadband services. We also asked whether we should measure instead
the percentage of total household income devoted to these services, or the relative actual prices of these services in
rural and urban areas. USF/ICC Transformation NPRM, 26 FCC Rcd at 4700, para. 486.
46 Mercatus USF/ICC Transformation NPRM Comments at 14-15.
47 Id. at 15.
48 Contributions are assessed on the basis of a contributor’s projected collected interstate and international end-user
telecommunications revenues, based on a percentage or “contribution factor” that is calculated every quarter. See 47
C.F.R. § 54.709. A contributor may recover the costs of universal service contributions by passing an explicit
charge through to its customers. 47 CFR § 54.712(a). See Federal-State Joint Board on Universal Service, High-
Cost Universal Service Support, WC Docket No. 05-337, CC Docket No. 96-45, Order on Remand and
Memorandum Opinion and Order, 25 FCC Rcd 4072, 4088, para. 29 (2010) (Qwest II Remand Order) (explaining
that the Commission could not be a prudent guardian of the public’s resources without taking into account the costs
of universal service, alongside the benefit); Rural Cellular Ass’n, 588 F.3d at 1102; see also, e.g., Alenco, 201 F.3d
(continued…)
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will jeopardize other statutory mandates, such as ensuring affordable rates in all parts of the country, andensuring that contributions from carriers are fair and equitable.”49
58.
As a performance measure for this goal, we will divide the total inflation-adjusted
expenditures of the existing high-cost program and CAF (including the Mobility Fund) each year by the
number of American households and express the measure as a monthly dollar figure.50 This calculation
will be relatively straightforward and rely on publicly available data.51 As such, the measure will be
transparent and easily verifiable.52 By adjusting for inflation and looking at the universal service burden,
we will be able to determine whether the overall burden of universal service contribution costs is
increasing or decreasing for the typical American household.53 As an efficiency measure, the Mercatus
Center suggests comparing the estimate of economic deadweight loss associated with the contribution
mechanism to the deadweight loss associated with taxation.54 We anticipate that the Bureaus may seek
further input on this option and any others commenters believe would be appropriate.
59.
Program Review. Using the adopted goals and measures, the Commission will, as
required by GPRA, monitor the performance of our universal service program as we modernize the
current high-cost program and transition to the CAF.55 If the programs are not meeting these performance
goals, we will consider corrective actions. Likewise, to the extent that the adopted measures do not help
us assess program performance, we will revisit them as well.
V.
LEGAL AUTHORITY
60.In this section, we address our statutory authority to implement Congress’s goal of
promoting ubiquitous deployment of, and consumer access to, both traditional voice calling capabilities
and modern broadband services over fixed and mobile networks. As explained below, Congress has
authorized the Commission to support universal service in the broadband age. Section 254 grants the
Commission clear authority to support telecommunications services and to condition the receipt of
universal service support on the deployment of broadband networks, both fixed and mobile, to consumers.
Section 706 provides the Commission with independent authority to support broadband networks in order
to “accelerate the deployment of broadband capabilities” to all Americans. Recently, moreover, Congress
(Continued from previous page)
at 620–21 (concluding that the Commission properly considered the costs of universal service in reforming one part
of the high-cost support mechanism).
49 Qwest II Remand Order, 25 FCC Rcd at 4087, para. 28.
50 See USF/ICC Transformation NPRM, 263 FCC Rcd at 4700-01, para. 487. Adjustments for inflation will be
calculated using the Bureau of Labor Statistics’ Consumer Price Index Inflation Calendar. See http://
http://www.bls.gov/data/inflation_calculator.htm (last visited Sept. 9, 2011).
51 USF/ICC Transformation NPRM, 263 FCC Rcd at 4700-01, para. 487; see also Mercatus Center USF/ICC
Transformation NPRM Comments at 16 (“This is a sensible and straightforward measure of the contribution.”).
52 USF/ICC Transformation NPRM, 263 FCC Rcd at 4700-01, para. 487.
53 As a starting point, we will use the overall per-household burden of the high-cost program. In 2010, this was
$3.03 per month. See USF/ICC Transformation NPRM, 263 FCC Rcd at 4700-01, para. 487.
54 Mercatus Center USF/ICC Transformation NPRM Comments at 16.
55 If the Commission identifies an outcome as a “priority goal,” then it must review progress quarterly. Otherwise
performance must only be reviewed annually. See GPRA Modernization Act of 2010, §§ 1116, 1120-1121. Most
priority goals will be published in February 2012. Office of Management and Budget, Memorandum for Heads of
Executive Departments and Agencies, at 13 (Aug. 17, 2011), available at
http://www.whitehouse.gov/sites/default/files/omb/memoranda/2011/m11-31.pdf (last visited Oct. 31, 2011).
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has reaffirmed its strong interest in ubiquitous deployment of high speed broadband communicationsnetworks: the 2008 Farm Bill directing the Chairman to submit to Congress “a comprehensive rural
broadband strategy,” including recommendations for the rapid buildout of broadband in rural areas and
for how federal resources can “best . . . overcome obstacles that impede broadband deployment”;56 the
Broadband Data Improvement Act, to improve data collection and “promote the deployment of affordable
broadband services to all parts of the Nation”;57 and the Recovery Act, which required the Commission to
develop the National Broadband Plan to ensure that every American has “access to broadband capability
and . . . establish benchmarks for meeting that goal.”58 By exercising our statutory authority consistent
with the thrust of these provisions, we ensure that the national policy of promoting broadband deployment
and ubiquitous access to voice telephony services is fully realized.
61.
Section 254. The principle that all Americans should have access to communications
services has been at the core of the Commission’s mandate since its founding. Congress created this
Commission in 1934 for the purpose of making “available . . . to all the people of the United States . . . a
rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate
facilities at reasonable charges.”59 In the 1996 Act, Congress built upon that longstanding principle by
enacting section 254. Section 254 sets forth six principles upon which we must “base policies for the
preservation and advancement of universal service.”60 Among these principles are that “[q]uality services
should be available at just, reasonable, and affordable rates,” that “[a]ccess to advanced
telecommunications and information services should be provided in all regions of the Nation,” and that
“[c]onsumers in all regions of the Nation . . . should have access to telecommunications and
information services, including . . . advanced telecommunications and information services, that are
reasonably comparable to those services provided in urban areas” and at reasonably comparable rates.61
62.
Under section 254, we have express statutory authority to support telecommunications
services that we have designated as eligible for universal service support.62 Section 254(c)(1) of the Act
defines “[u]niveral service” as “an evolving level of telecommunications services that the Commission
shall establish periodically under this section, taking into account advances in telecommunications and
information technologies and services.” As discussed more fully below, in this Order, we adopt our
proposal to simplify how we describe the various supported services that the Commission historically has
defined in functional terms (e.g., voice grade access to the PSTN, access to emergency services) into a
single supported service designated as “voice telephony service.”63 To the extent carriers offer traditional
voice telephony services as telecommunications services over traditional circuit-switched networks, our
authority to provide support for such services is well established.
56 Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-246, § 6112, 122 Stat. 923, 1966 (2008) (2008
Farm Bill). Acting Chairman Copps transmitted the report to Congress on May 22, 2009. See Rural Broadband
Report Published in the FCC Record, GN Docket No. 09-29, Public Notice, 24 FCC Rcd 12791 (2009).
57 Broadband Data Improvement Act, Pub. L. No. 110-385, 122 Stat. 4096 (2008) (codified at 47 U.S.C. § 1301 et
seq.).
58 See American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009); 47 U.S.C.
§ 1305(k)(2).
59 47 U.S.C. § 151.
60 47 U.S.C. § 254(b).
61 47 U.S.C. § 254(b)(1)-(3).
62 47 U.S.C. § 254(c).
63 USF/ICC Transformation NPRM, 26 FCC Rcd at 4590, para. 95; see infra Section VI.A.
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63.Increasingly, however, consumers are obtaining voice services not through traditional
means but instead through interconnected VoIP providers offering service over broadband networks. As
AT&T notes, “[c]ircuit-switched networks deployed primarily for voice service are rapidly yielding to
packet-switched networks,” which offer voice as well as other types of services.”64 The data bear this out.
As we observed in the Notice, “[f]rom 2008 to 2009, interconnected VoIP subscriptions increased by 22
percent, while switched access lines decreased by 10 percent.”65 Interconnected VoIP services, among
other things, allow customers to make real-time voice calls to, and receive calls from, the PSTN, and
increasingly appear to be viewed by consumers as substitutes for traditional voice telephone services.66
Our authority to promote universal service in this context does not depend on whether interconnected
VoIP services are telecommunications services or information services under the Communications Act.67
64.
Section 254 grants the Commission the authority to support not only voice telephony
service but also the facilities over which it is offered. Section 254(e) makes clear that “[a] carrier that
receives such [universal service] support shall use that support only for the provision, maintenance, and
upgrading of facilities and services for which the support is intended.”68 By referring to “facilities” and
“services” as distinct items for which federal universal service funds may be used, we believe Congress
granted the Commission the flexibility not only to designate the types of telecommunications services for
which support would be provided, but also to encourage the deployment of the types of facilities that will
best achieve the principles set forth in section 254(b) and any other universal service principle that the
Commission may adopt under section 254(b)(7).69 For instance, under our longstanding “no barriers”
policy, we allow carriers receiving high-cost support “to invest in infrastructure capable of providing
access to advanced services” as well as supported voice services.70 That policy, we explained, furthers
64 AT&T Apr. 11, 2011 Comments at 10.
65 USF/ICC Transformation NPRM, 26 FCC Rcd at 4560, para. 8 (citing Industry Analysis and Technology
Division, Wireline Competition Bureau, Local Telephone Competition Report: Status as of December 2009, at 6
(Jan. 2011) (Jan. 2011 Local Competition Report)). From 2009 to 2010, interconnected VoIP subscriptions
increased by 22 percent (from 26 million to 32 million) and retail switched access lines decreased by 8 percent (from
127 million to 117 million). Industry Analysis and Technology Division, Wireline Competition Bureau, Local
Telephone Competition Report: Status as of December 31, 2010, at 2 (Oct. 2011) (Oct. 2011 Local Competition
Report).
66 USF/ICC Transformation NPRM, 26 FCC Rcd at 4747, para. 612; see also IP-Enabled Services, 20 FCC Rcd
10245, 10256, para. 23 (2005) (“consumers expect that VoIP services that are interconnected with the PSTN will
function in some ways like a ‘regular telephone’ service.”), pet. for review denied, Nuvio Corp. v. FCC, 473 F.3d
302 (D.C. Cir. 2006).
67 If interconnected VoIP services are telecommunications services, our authority under section 254 to define
universal service after “taking into account advances in telecommunications and information technologies and
services” enables us to include interconnected VoIP services as a type of voice telephony service entitled to federal
universal service support. And, as explained below, if interconnected VoIP services are information services, we
have authority to support the deployment of broadband networks used to provide such services.
68 47 U.S.C. § 254(e) (emphasis added).
69 In establishing the rules governing the designation and responsibilities of ETCs pursuant to section 214(e), we
have long defined the term “facilities” to mean “any physical components of the telecommunications network that
are used in the transmission or routing of the services that are designated for support.” 47 C.F.R. § 54.201(e); see
also Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776,
8813, para. 67 (1997) (Universal Service First Report and Order) (subsequent history omitted).
70 See 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
No. 96-45, CC Docket No. 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,
(continued…)
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the policy Congress set forth in section 254(b) of “ensuring access to advanced telecommunications andinformation services throughout the nation.”71 While this policy was enunciated in an Order adopting rule
changes for rural incumbent carriers, by its terms it is not limited to such carriers. The “no-barriers”
policy has applied, and will continue to apply, to all ETCs, and we codify it in our rules today. Section
254(e) thus contemplates that carriers may receive federal support to enable the deployment of broadband
facilities used to provide supported telecommunications services as well as other services.72
65.
We further conclude that our authority under section 254 allows us to go beyond the “no
barriers” policy and require carriers receiving federal universal service support to invest in modern
broadband-capable networks.73 We see nothing in section 254 that requires us simply to provide federal
funds to carriers and hope that they will use such support to deploy broadband facilities. To the contrary,
we have a “mandatory duty” to adopt universal service policies that advance the principles outlined in
section 254(b), and we have the authority to “create some inducement” to ensure that those principles are
achieved.74 Congress made clear in section 254 that the deployment of, and access to, information
services – including “advanced” information services – are important components of a robust and
successful federal universal service program.75 Furthermore, we are adopting today the recommendation
of the Federal-State Joint Board on Universal Service to establish a new universal service principle
pursuant to section 254(b)(7) that universal service support should be directed where possible to networks
that provide advanced services, as well as voice services.”76 In today’s communications environment,
achievement of these principles requires, at a minimum, that carriers receiving universal service support
invest in and deploy networks capable of providing consumers with access to modern broadband
capabilities, as well as voice telephony services. Accordingly, as explained in greater detail below, we
will exercise our authority under section 254 to require that carriers receiving support – both CAF
support, including Mobility Fund support,77 and support under our existing high-cost support mechanisms
(Continued from previous page)
16 FCC Rcd 11244, 11322, para. 200 (2001) (Rural Task Force Order) (“[U]se of support to invest in infrastructure
capable of providing access to advanced services does not violate section 254(e), which mandates that support be
used “only for the provision, maintenance, and upgrading of facilities and services for which the support is
intended.” The public switched telephone network is not a single-use network. Modern network infrastructure can
provide access not only to voice services, but also to data, graphics, video, and other services.”) (footnote reference
omitted)
71 2003 Definition of Universal Service Order, 18 FCC Rcd at 15095-96, para. 13.
72 We also note that the Commission has historically concluded that “the proper measure of cost for determining the
level of universal service support is the forward-looking economic cost of constructing and operating the network
facilities and functions used to provide the supported services,” First Report and Order, 12 FCC Rcd at 8899, para.
224, and that the record contains evidence that the forward-looking cost of deploying voice- and broadband-capable
networks today is generally not significantly higher than deploying voice-only networks, see, e.g., Letter from
Donna Epps, Verizon, to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-51 at 2-3 (filed Feb. 12, 2010)
(“Fiber networks are . . . more efficient, and more reliable than the legacy copper network. . . . [T]hey are cheaper to
maintain and have fewer potential points of failure than copper lines.”). Indeed, although we are updating the high-
cost fund to support modern voice and broadband networks, we are not increasing the overall size of the fund to do
so.
73 USF/ICC Transformation NPRM, 26 FCC Rcd at 4581, para. 71.
74 Qwest Corp. v. FCC, 258 F.3d 1191, 1200, 1204 (10th Cir. 2001) (Qwest I).
75 47 U.S.C. §§ 254(b)(2), (b)(3).
76 See infra Section III.
77 Recipients of Mobility Fund Phase One support, however, are not required to provide broadband as discussed
below. See infra Section VII.E..1.b.vi.
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– offer broadband capabilities to consumers.78 We conclude that this approach is sufficient to ensureaccess to voice and broadband services and, therefore, we do not, at this time, add broadband to the list of
supported services, as some have urged.79
66.
Section 706.80 We also have independent authority under section 706 of the
Telecommunications Act of 1996 to fund the deployment of broadband networks. In section 706,
Congress recognized the importance of ubiquitous broadband deployment to Americans’ civic, cultural,
and economic lives and, thus, instructed the Commission to “encourage the deployment on a reasonable
and timely basis of advanced telecommunications capability to all Americans.”81 Of particular
importance, Congress adopted a definition of “advanced telecommunications capability” that is not
confined to a particular technology or regulatory classification. Rather, “ ‘advanced telecommunications
capability’ is defined, without regard to any transmission media or technology, as high-speed, switched,
broadband telecommunications capability that enables users to originate and receive high-quality voice,
data, graphics, and video communications using any technology.”82 Section 706 further requires the
Commission to “determine whether advanced telecommunications capability is being deployed to all
Americans in a reasonable and timely fashion” and, if the Commission concludes that it is not, to “take
immediate action to accelerate deployment of such capability by removing barriers to infrastructure
78 Section 254(e) states that “support should be explicit and sufficient to achieve the purposes” of section 254. As
discussed below, our CAF rules satisfy this requirement. See generally infra, Section VII.
79 See, e.g., Communications Workers of America USF/ICC Transformation NPRM Comments at 5-6; National
Association of Telecommunications Officers and Advisors USF/ICC Transformation NPRM Comments at 3; State
Members USF/ICC Transformation NPRM Comments at 2; Vonage USF/ICC Transformation NPRM Comments at
6-8.
80 Commissioner McDowell does not support the view that section 706 provides the Commission with authority to
support broadband through universal service funds. Instead, Commissioner McDowell’s view is that section 706 is
very narrow in scope and is therefore unnecessary in reaching this conclusion.
81 47 U.S.C. § 1302(a). This direct mandate is consistent with numerous other statutory provisions governing the
Commission. See, e.g., 47 U.S.C. §§ 151 (instituting FCC for, among other objectives, “the purpose of regulating
interstate and foreign communication by wire and radio so as to make available, so far as possible, to all the people
of the United States . . . a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with
adequate facilities at reasonable charges”), 157 (“It shall be the policy of the United States to encourage the
provision of new technologies and services to the public.”), 230(b)(1) (“It is the policy of the United States . . . to
promote the continued development of the Internet and other interactive computer services and other interactive
media”), 257 (mandating ongoing review to identify and eliminate “market entry barriers for entrepreneurs and other
small businesses in the provision and ownership of telecommunications services and information services, or in the
provision of parts or services to providers of telecommunications services and information services,” with the goal
of promoting “the policies and purposes of this [Communications] Act favoring a diversity of media voices,
vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and
necessity”); see also Recovery Act § 6001(k)(1) (requiring the Commission to develop a National Broadband Plan
with the goal of promoting, among other things, “private sector investment, entrepreneurial activity, job creation and
economic growth”).
82 47 U.S.C. § 1302(d)(1); see also National Broadband Plan for our Future, Notice of Inquiry, 24 FCC Rcd 4342,
4309, App., para. 13 (2009) (“advanced telecommunications capability” includes broadband Internet access);
Inquiry Concerning the Deployment of Advanced Telecomms. Capability to All Americans in a Reasonable and
Timely Fashion, CC Docket No. 98-146, Report, 14 FCC Rcd 2398, 2400, para. 1 (1999) (section 706 addresses “the
deployment of broadband capability”), 2406, para. 20 (same). The Commission has observed that the phrase
“advanced telecommunications capability” in section 706 is similar to the term “advanced telecommunications and
information services” in section 254. See Rural Health Care Support Mechanism, WC Docket No. 02-60, Order, 21
FCC Rcd 11111, 11113 n.9 (2006).
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investment and by promoting competition in the telecommunications market.”83 The Commission hasfound that broadband deployment to all Americans has not been reasonable and timely84 and observed in
its most recent broadband deployment report that “too many Americans remain unable to fully participate
in our economy and society because they lack broadband.”85 This finding triggers our duty under section
706(b) to “remov[e] barriers to infrastructure investment” and “promot[e] competition in the
telecommunications market” in order to accelerate broadband deployment throughout the Nation.
67.
Providing support for broadband networks helps achieve section 706(b)’s objectives.
First, the Commission has recognized that one of the most significant barriers to investment in broadband
infrastructure is the lack of a “business case for operating a broadband network” in high-cost areas “[i]n
the absence of programs that provide additional support.”86 Extending federal support to carriers
deploying broadband networks in high-cost areas will thus eliminate a significant barrier to infrastructure
investment and accelerate broadband deployment to unserved and underserved areas of the Nation. The
deployment of broadband infrastructure to all Americans will in turn make services such as
interconnected VoIP service accessible to more Americans.
68.
Second, supporting broadband networks helps “promot[e] competition in the
telecommunications market,” particularly with respect to voice services.87 As we have long recognized,
“interconnected VoIP service ‘is increasingly used to replace analog voice service.’ ”88 Thus, we
previously explained that requiring interconnected VoIP providers to contribute to federal universal
service support mechanisms promoted competitive neutrality because it “reduces the possibility that
carriers with universal service obligations will compete directly with providers without such
obligations.”89 Just as “we do not want contribution obligations to shape decisions regarding the
technology that interconnected VoIP providers use to offer voice services to customers or to create
opportunities for regulatory arbitrage,”90 we do not want to create regulatory distinctions that serve no
universal service purpose or that unduly influence the decisions providers will make with respect to how
best to offer voice services to consumers. The “telecommunications market” – which includes
interconnected VoIP and by statutory definition is broader than just telecommunications services91 – will
83 47 U.S.C. § 1302(b) (emphasis added).
84 Sixth Broadband Deployment Report, 25 FCC Rcd at 9558, paras. 2-3; Seventh Broadband Deployment Report,
26 FCC Rcd at 8009, para. 1.
85 Seventh Broadband Deployment Report, 26 FCC Rcd at 8011, para. 4.
86 Id. at 8040, para. 66.
87 47 U.S.C. § 1302(b).
88 Universal Service Contribution Methodology, Federal-State Joint Board on Universal Service, 1998 Biennial
Regulatory Review – Streamlined Contributor Reporting Requirements Associated with Administration of
Telecommunications Relay Service, Telecommunications Services for Individuals with Hearing and Speech
Disabilities, Number Resource Optimization, Telephone Number Portability, Truth-In-Billing and Billing Format,
IP-Enabled Services, WC Docket Nos. 06-122 and 04-36, CC Docket Nos. 96-45, 98-171, 92-237, 99-200, 90-571,
95-116 98-170, Report and Order and Notice of Proposed Rulemaking, 21 FCC Rcd 7518, 7541 (2006) (VoIP USF
Order) (quoting CALEA First Report and Order, 20 FCC Rcd at 15009-10, para. 42), 21 FCC Rcd at 7541, para. 44
(quoting CALEA First Report and Order, 20 FCC Rcd at 15009-10, para. 42).
89 Id.
90 Id.
91 Compare 47 U.S.C. § 153(50) (defining “telecommunications”) with 47 U.S.C. § 153(53) (defining
“telecommunications service”).
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be more competitive, and thus will provide greater benefits to consumers, as a result of our decision tosupport broadband networks, regardless of regulatory classification.
69.
By exercising our authority under section 706 in this manner, we further Congress’s
objective of “accelerat[ing] deployment” of advanced telecommunications capability “to all
Americans.”92 Under our approach, federal support will not turn on whether interconnected VoIP
services or the underlying broadband service falls within traditional regulatory classifications under the
Communications Act. Rather, our approach focuses on accelerating broadband deployment to unserved
and underserved areas, and allows providers to make their own judgments as to how best to structure their
service offerings in order to make such deployment a reality.
70.
We disagree with commenters who assert that we lack authority under section 706(b) to
support broadband networks.93 While 706(a) imposes a general duty on the Commission to encourage
broadband deployment through the use of “price cap regulation, regulatory forbearance, measures that
promote competition in the local telecommunications market, or other regulating methods that remove
barriers to infrastructure investment,” section 706(b) is triggered by a specific finding that broadband
capability is not being “deployed to all Americans in a reasonable and timely fashion.” Upon making that
finding (which the Commission has done94), section 706(b) requires the Commission to “take immediate
action to accelerate” broadband deployment. Given the statutory structure, we read section 706(b) as
conferring on the Commission the additional authority, beyond what the Commission possesses under
section 706(a) or elsewhere in the Act, to take steps necessary to fulfill Congress’s broadband deployment
objectives. Indeed, it is hard to see what additional work section 706(b) does if it is not an independent
source of statutory authority.95
71.
We also reject the view that providing support for broadband networks under section
706(b) conflicts with section 254, which defines universal service in terms of telecommunications
services.96 Information services are not excluded from section 254 because of any policy judgment made
by Congress. To the contrary, Congress contemplated that the federal universal service program would
promote consumer access to both advanced telecommunications and advanced information services “in all
92 47 U.S.C. § 1302(b).
93 See, e.g., Cellular South Comments at 9; RTCC Comments at 12.
94 See supra para. 64.
95 The legislative history supports our conclusion that sections 706(a) and (b) are independent sources of authority.
The relevant Senate Report explained that the provisions of section 304 (the Senate analogue to section 706) are
“intended to ensure that one of the primary objectives of the [1996 Act]—to accelerate deployment of advanced
telecommunications capability—is achieved,” and stressed that these provisions are “a necessary fail-safe” to
guarantee that Congress’s objective is reached. S. Rep. No. 104-23, at 50–51 (1995). As we previously explained,
“[i]t would be odd indeed to characterize Section 706(a) as a ‘fail-safe’ that ‘ensures’ the Commission’s ability to
promote advanced services if it conferred no actual authority.” Preserving the Open Internet, 25 FCC Rcd 17905,
17970 (2010). Moreover, section 304(a) of the Senate bill would have required the Commission, upon a finding that
broadband deployment is not reasonable and timely, to “take immediate action under this section,” S. 652, § 304(b)
(1995) (emphasis added), which necessarily related back to the Commission’s authority conferred by section 304(a)
of the bill to promote broadband deployment through “price cap regulation, regulatory forbearance, measures that
promote competition in the local telecommunications market, or other regulating methods that remove barriers to
infrastructure investment.” Ultimately, however, Congress did not define the authority conferred by section 706(b)
by reference to section 706(a). Instead, Congress instructed the Commission to go beyond section 706(a) if it found
that broadband was not being deployed in the United States on a reasonable and timely basis and to “take immediate
action” to correct that failure.
96 See Cellular South USF/ICC Transformation NPRM Comments at 16-20; RTCC Apr. 18, 2011 Comments at 5.
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regions of the Nation.”97 When Congress enacted the 1996 Act, most consumers accessed the Internetthrough dial-up connections over the PSTN,98 and broadband capabilities were provided over tariffed
common carrier facilities.99 Interconnected VoIP services had only a nominal presence in the marketplace
in 1996. It was not until 2002 that the Commission first determined that one form of broadband – cable
modem service – was a single offering of an information service rather than separate offerings of
telecommunications and information services,100 and only in 2005 did the Commission conclude that
wireline broadband service should be governed by the same regulatory classification.101 Thus,
marketplace and technological developments and the Commission’s determinations that broadband
services may be offered as information services have had the effect of removing such services from the
scope of the explicit reference to “universal service” in section 254(c). Likewise, Congress did not
exclude interconnected VoIP services from the federal universal service program; indeed, there is no
reason to believe it specifically anticipated the development and growth of such services in the years
following the enactment of the 1996 Act.
72.
The principles upon which the Commission “shall base policies for the preservation and
advancement of universal service” make clear that supporting networks used to offer services that are or
may be information services for purposes of regulatory classification is consistent with Congress’s
overarching policy objectives.102 For example, section 254(b)(2)’s principle that “[a]ccess to advanced
telecommunications and information services should be provided in all regions of the Nation” dovetails
comfortably with section 706(b)’s policy that “advanced telecommunications capability [be] deployed to
all Americans in a reasonable and timely fashion.”103 Our decision to exercise authority under Section
706 does not undermine section 254’s universal service principles, but rather ensures their fulfillment. By
contrast, limiting federal support based on the regulatory classification of the services offered over
broadband networks as telecommunications services would exclude from the universal service program
providers who would otherwise be able to deploy broadband infrastructure to consumers. We see no
basis in the statute, the legislative history of the 1996 Act, or the record of this proceeding for concluding
that such a constricted outcome would promote the Congressional policy objectives underlying sections
254 and 706.
73.
Finally, we note the limited extent to which we are relying on section 706(b) in this
proceeding. Consistent with our longstanding policy of minimizing regulatory distinctions that serve no
universal service purpose, we are not adopting a separate universal service framework under section
706(b). Instead, we are relying on section 706(b) as an alternative basis to section 254 to the extent
necessary to ensure that the federal universal service program covers services and networks that could be
used to offer information services as well as telecommunications services. Carriers seeking federal
support must still comply with the same universal service rules and obligations set forth in sections 254
97 47 U.S.C. § 254(b)(2).
98 1997 Universal Service Order, 12 FCC Rcd at 8622-23, para. 83.
99 See GTE Telephone Operating Cos., 13 FCC Rcd 22466 (1998).
100 Inquiry Concerning High-Speed Access to the Internet Over Cable & Other Facilities, GN Docket No. 00-185,
CS Docket No. 02-52, Declaratory Ruling and Notice of Proposed Rulemaking, 17 FCC Rcd 4798 (2002), aff’d sub
nom. Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 978 (2005).
101 Wireline Broadband Order, 20 FCC Rcd 14853.
102 47 U.S.C. § 254(b)(2), (3).
103 Section 214(e)(1) requires services supported by the universal service mechanisms to be offered throughout a
carrier’s designated service area. This requirement, coupled with the rules we adopt in this Order, will further
promote the Commission’s goal of bringing broadband capability to “all Americans.”
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and 214, including the requirement that such providers be designated as eligible to receive support, eitherfrom state commissions or, if the provider is beyond the jurisdiction of the state commission, from this
Commission.104 In this way, we ensure that our exercise of section 706(b) authority will advance, rather
than detract from, the universal service principles established under section 254 of the Act.
VI.
PUBLIC INTEREST OBLIGATIONS
74.Universal service support is a public-private partnership to preserve and advance access
to modern communications networks. ETCs that benefit from public investment in their networks must
be subject to clearly defined obligations associated with the use of such funding. 105
75.
Consistent with the Commission’s longstanding practice, we continue to require all USF
recipients to offer voice service. In addition, as a condition of receiving support, recipients must now also
offer broadband service. In this section, we define the requirements for voice and describe in concept the
broadband service obligations that apply to all fund recipients. We defer to subsequent sections
discussion of the specific broadband requirements that apply to each of our new or reformed funding
mechanisms according to each mechanism’s particular purpose. Importantly, these reforms do not
displace existing state requirements for voice service, including state COLR obligations. We will
continue to work in partnership with the states on the future of such requirements as we consider the
future of the PSTN.
A.
Voice Service
76.Background. Pursuant to section 254 of the Act, the Commission must establish the
definition of the services that are supported by the federal universal service mechanisms. 106 In
accordance with this mandate, in 1997, the Commission defined the supported services in functional
terms as: voice grade access to the public switched network; local usage; dual tone multi-frequency
(DTMF) signaling or its functional equivalent; single-party service or its functional equivalent; access to
emergency services; access to operator services; access to interexchange service; access to directory
assistance; and toll limitation to qualifying low-income consumers.107 However, the telecommunications
marketplace has changed significantly since 1997. For example, the “distinction between local and long
distance calling is becoming irrelevant in light of flat rate service offerings that do not distinguish
between local and toll calls.”108 In light of the changes in technology and in the marketplace, the
Commission sought comment on simplifying the core functionalities of the supported services into the
overarching concept, “voice telephony service.”109
77.
Discussion. We determine that it is appropriate to describe the core functionalities of the
supported services as “voice telephony service.” Some commenters support redefining the voice
104 See 47 U.S.C. § 214(e)(1), (2), (6).
105 Throughout this Order, unless otherwise specified, the term “ETC” does not include ETCs that are designated
only for the purposes of the low income program.
106 47 U.S.C. § 254(c)(1).
107 47 C.F.R. § 54.101(a)(1)-(9); see also In the Matter of Federal State Joint Board on Universal Service Order,
Report and Order, CC Docket No. 96-45, 12 FCC Rcd 8776, 8810, para. 61 (1997) (defining supported services).
108 In the Matter of Federal State Joint Board of Lifeline and Link Up Reform and Modernization, Notice, WC
Docket No. 11-42, 26 FCC Rcd 2770, 2844, para. 242 (2011) (2011 Lifeline/Link Up NPRM).
109 USF/ICC Transformation NPRM, 26 FCC Rcd 4590, para. 96. The Commission also sought comment on
whether it should modify the definition of voice grade access to the public switched network and whether ETCs
should still be required to provide operator services and directory assistance. Id. at para. 77.
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functionalities as voice telephony services,110 while others oppose the change, arguing that the current listof functionalities remains important today, the term “voice telephony” is too vague, and such a
modification may result in a lower standard of voice service.111 Given that consumers are increasingly
obtaining voice services over broadband networks as well as over traditional circuit switched telephone
networks,112 we agree with commenters that urge the Commission to focus on the functionality offered,
not the specific technology used to provide the supported service.113
78.
The decision to classify the supported services as voice telephony should not result in a
lower standard of voice service: Many of the enumerated services are universal today, and we require
eligible providers to continue to offer those particular functionalities as part of voice telephony. Rather,
the modified definition simply shifts to a technologically neutral approach, allowing companies to
provision voice service over any platform, including the PSTN and IP networks.114 This modification will
benefit both providers (as they may invest in new infrastructure and services) and consumers (who reap
the benefits of the new technology and service offerings). Accordingly, to promote technological
neutrality while ensuring that our new approach does not result in lower quality offerings, we amend
section 54.101 of the Commission rules to specify that the functionalities of eligible voice telephony
services include voice grade access to the public switched network or its functional equivalent; minutes of
use for local service provided at no additional charge to end users;115 toll limitation to qualifying low-
income consumers; and access to the emergency services 911 and enhanced 911 services to the extent the
local government in an eligible carrier's service area has implemented 911 or enhanced 911 systems.116
110 See T-MobileUSF/ICC Transformation NPRM Comments at 7; New America Foundation, et al. USF/ICC
Transformation NPRM Comments at 10, Frontier USF/ICC Transformation NPRM Comments at 19, State
Members USF/ICC Transformation NPRM Comments at 130–31; see also Cricket 2011 Lifeline/Link Up NPRM
Comments at 15-16; FPSC 2011 Lifeline/Link Up NPRM Comments at 29.
111 Frontier USF/ICC Transformation NPRM Comments at 55-6 (“maintaining that the requirement that USF
recipients provide voice grade access to the public switched network…is essential to ensure that robust voice
services continue to be available to the American public”); Alaska 2011 Lifeline/Link Up NPRM Comments at 8-9
(arguing that the redefining or eliminating the current supported services would lead to lower standards of voice
service); Indiana 2011 Lifeline/Link Up NPRM Comments at 12 (stating that local usage and single-party service are
important functionalities); NASUCA 2011 Lifeline/Link Up NPRM Comments at 26-7 (stating that the term “voice
telephony” is unnecessarily vague); New Jersey Rate Counsel 2011 Lifeline/Link Up NPRM Comments at 24.
112 See supra at para. 63. The nine enumerated voice functionalities historically have been delivered over Time
Division Multiplexing (TDM), a method of transmitting and receiving voice signals over the PSTN.
113 Windstream USF/ICC Transformation NPRM Comments at 20.
114 In particular, we find that changes in technology and the marketplace allow for elimination of the requirements to
provide single-party service. In its comments, CWA stated that the Commission should continue to require
recipients of USF or CAF support to provide operator services and directory assistance to customers. See CWA
Comments at 2. However, while we encourage carriers to continue to offer operator services and directory
assistance, we do not mandate that ETCs provide operator services or directory assistance; we find the importance of
these services to telecommunications consumers has declined with changes in the marketplace.
115 We have never prescribed a minimum number of local access minutes, and we see no reason to do so now. We
do, however, make a non-substantive revision to clarify the intent of the rule (section 54.101). Specifically, we
replace “provided free of charge to end users” with “provided at no additional charge to end users.” When the
Commission adopted this rule, it sought to ensure that consumers would not pay additional charges for message
units on top of the rate charged for basic local service. See Federal-State Joint Board on Universal Service, CC
Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 8813, para. 67 (1997) (Universal Service First Report and
Order) (subsequent history omitted).
116 The Commission recently sought comment on ways to modernize the current voice-based 911 system to a Next
Generation 911 (NG911) system that will enable the public to send texts, photos, videos, and other data to 911 call
(continued…)
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79.Today, all ETCs, whether designated by a state commission or this Commission, are
required to offer the supported service -- voice telephony service -- throughout their designated service
area. ETCs also must provide Lifeline service throughout their designated service area. In the FNPRM,
we seek comment on modifying incumbent ETCs’ obligations to provide voice service in situations where
the incumbent’s high-cost universal service funding is eliminated, for example as a result of a competitive
bidding process in which another ETC wins universal support for an area and is subject to accompanying
voice and broadband service obligations.
80.
As a condition of receiving support, we require ETCs to offer voice telephony as a
standalone service throughout their designated service area.117 As indicated above, ETCs may use any
technology in the provision of voice telephony service.
81.
Additionally, consistent with the section 254(b) principle that “[c]onsumers in all regions
of the Nation . . . should have access to telecommunications and information services . . . that are
available at rates that are reasonably comparable to rates charged for similar services in urban areas,”118
ETCs must offer voice telephony service, including voice telephony service offered on a standalone basis,
at rates that are reasonably comparable to urban rates.119 We find that these requirements are appropriate
to help ensure that consumers have access to voice telephony service that best fits their particular
needs.120
82.
We decline to preempt state obligations regarding voice service, including COLR
obligations, at this time.121 Proponents of such preemption have failed to support their assertion that state
service obligations are inconsistent with federal rules and burden the federal universal service
mechanisms, nor have they identified any specific legacy service obligations that represent an unfunded
mandate that make it infeasible for carriers to deploy broadband in high-cost areas.122 Carriers must
therefore continue to satisfy state voice service requirements.
(Continued from previous page)
centers; ETCs will be required to comply with NG911 rules upon implementation by state and local governments.
See Facilitating the Deployment of Text-to-911 and Other Next Generation 911 Applications, Framework for Next
Generation 911 Deployment, Notice of Proposed Rulemaking; PS Docket Nos. 11-153, 10-255, Notice of Proposed
Rulemaking, FCC 11-134 (rel. Sep. 22, 2011).
117 With respect to “standalone service,” we mean that consumers must not be required to purchase any other
services (e.g., broadband) in order to purchase voice service. See California Commission USF/ICC Transformation
NPRM Comments at 10; Greenlining USF/ICC Transformation NPRM Comments at 8; Missouri Commission
USF/ICC Transformation NPRM Comments at 7; NASUCA USF/ICC Transformation NPRM Comments at 38.
118 47 U.S.C. § 254(b)(3).
119 See Qwest I, 258 F.3d at 1199-1200.
120 See AT&T USF/ICC Transformation NPRM Comments at 103 (indicating that competition will ensure that
customers have multiple options for voice service). But see Frontier USF/ICC Transformation NPRM Comments at
17-9 (stating that many Americans will have access to broadband but will not use it, so fund recipients must
continue to provide standalone voice service).
121 ABC Plan Proponents Attach. 1 at 13.
122 ABC Plan Proponents Attach. 5 at 8. See, e.g., AT&T USF/ICC Transformation NPRM Comments at 61-69, T-
Mobile USF/ICC Transformation NPRM Comments at 8, Verizon USF/ICC Transformation NPRM Reply at 44
(each opposing COLR obligations). But see Alaska Commission USF/ICC Transformation NPRM Comments at 24-
5, NARUC USF/ICC Transformation NPRM Comments at 17, South Dakota Commission USF/ICC Transformation
NPRM Reply at 11, State Members USF/ICC Transformation NPRM Comments at 136, Texas Telephone USF/ICC
Transformation NPRM Comments at 11-3.
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83.That said, we encourage states to review their respective regulations and policies in light
of the changes we adopt here today and revisit the appropriateness of maintaining those obligations for
entities that no longer receive federal high-cost universal service funding, just as we intend to explore the
necessity of maintaining ETC obligations when ETCs no longer are receiving funding. For example,
states could consider providing state support directly to the incumbent LEC to continue providing voice
service in areas where the incumbent is no longer receiving federal high-cost universal service support or,
alternatively, could shift COLR obligations from the existing incumbent to another provider who is
receiving federal or state universal service support in the future.
84.
Voice Rates. We will consider rural rates for voice service to be “reasonably
comparable” to urban voice rates under section 254(b)(3) if rural rates fall within a reasonable range of
urban rates for reasonably comparable voice service. Consistent with our existing precedent, we will
presume that a voice rate is within a reasonable range if it falls within two standard deviations above the
national average.123
85.
Because the data used to calculate the national average price for voice service is out of
date, we direct the Wireline Competition Bureau and the Wireless Telecommunications Bureau to
develop and conduct an annual survey of voice rates in order to compare urban voice rates to the rural
voice rates that ETCs will be reporting to us.124 The results of this survey will be published annually. For
purposes of conducting the survey, the Bureaus should develop a methodology to survey a representative
sample of facilities-based fixed voice service providers taking into account the relative categories of fixed
voice providers as determined in the most recent FCC Form 477 data collection. In the FNPRM, we seek
comment on whether to collect separate data on fixed and mobile voice rates and whether fixed and
mobile voice services should have different benchmarks for purposes of determining reasonable
comparability.125
B.
Broadband Service
86.As a condition of receiving federal high-cost universal service support, all ETCs,
whether designated by a state commission or the Commission,126 will be required to offer broadband
service in their supported area that meets certain basic performance requirements and to report regularly
on associated performance measures.127 ETCs must make this broadband service available at rates that
are reasonably comparable to offerings of comparable broadband services in urban areas.
87.
In developing these performance requirements, we seek to ensure that the performance of
broadband available in rural and high cost areas is “reasonably comparable” to that available in urban
123 The standard deviation is a measure of dispersion. The sample standard deviation is the square root of the sample
variance. The sample variance is calculated as the sum of the squared deviations of the individual observations in
the sample of data from the sample average divided by the total number of observations in the sample minus one. In
a normal distribution, about 68 percent of the observations lie within one standard deviation above and below the
average and about 95 percent of the observations lie within two standard deviations above and below the average.
124 See infra Sections VII.D.5, VIII.A.2.
125 See infra para. 1018.
126 As used throughout this order, the term “high-cost support” refers to all existing high-cost USF mechanisms as
well as the Connect America Fund, including the Mobility Fund Phase I, unless otherwise expressly noted.
127 Although we do not at this time require it, we expect that ETCs that offer standalone broadband service in any
portion of their service territory will also offer such service in all areas that receive CAF support. By “standalone
service,” we mean that consumers are not required to purchase any other service (e.g., voice or video service) in
order to purchase broadband service.
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areas.128 All Americans should have access to broadband that is capable of enabling the kinds of keyapplications that drive our efforts to achieve universal broadband, including education (e.g.,
distance/online learning),129 health care (e.g., remote health monitoring),130 and person-to-person
communications (e.g., VoIP or online video chat with loved ones serving overseas).131
88.
To help ensure reasonable comparability of the capabilities offered to end users, we
provide guidance in this section on benchmarks for evaluating whether particular broadband offerings
adequately afford these capabilities, in order to provide clear performance targets and ensure
accountability. Specifically, we discuss the technical characteristics of broadband offerings – speed,
latency, and capacity – that influence the capabilities afforded to users, and therefore their ability to use
broadband connections for the key purposes articulated above. We also discuss characteristics common
to the broadband buildout obligations imposed on all recipients of the CAF.
89.
In subsequent sections of the Order we provide more detailed guidance on the
requirements for technical characteristics and broadband buildout associated with specific funding
mechanisms under which particular ETCs will receive support, i.e., rate-of-return support mechanisms,
the CAF mechanisms in price cap territories, CAF ICC support, and Mobility Fund Phase I.132 In the
FNPRM, we seek comment on how the requirements we adopt here should be adjusted for the Remote
Areas Fund and Mobility Fund Phase II.
1.
Broadband Performance Metrics
90.Broadband services in the market today vary along several important dimensions. As
discussed more fully below, we focus on speed, latency, and capacity as three core characteristics that
affect what consumers can do with their broadband service, and we therefore include requirements related
to these three characteristics in defining ETCs’ broadband service obligations.133
91.
For each of these characteristics, we require that funding recipients offer service that is
reasonably comparable to comparable services offered in urban areas.134 That is, the actual download and
128 47 U.S.C. § 254(b)(3) (“Consumers in all regions of the Nation . . . should have access to . . . advanced
telecommunications and information services[] that are reasonably comparable to those services provided in urban
areas . . . .”).
129 See National Broadband Plan at 223-244.
130 See, e.g., Omnibus Broadband Initiative, Health Care Broadband in America, Early Analysis and a Path
Forward, at 5 (Aug. 2010); Center for Technology and Aging, Technologies for Remote Patient Monitoring for
Older Adults, Position Paper, at 13 (April 2010), available at http://www.techandaging.org/RPMPositionPaper.pdf
(discussing data transmission methods used for various continuous cardiac remote patient monitoring technologies).
131 See National Broadband Plan at 59.
132 See infra sections VII.C (Providing Support in Areas Served by Price Cap Carriers), VII.D (Universal Support for
Rate-of-Return Carriers), and VII.E (Rationalizing Support for Mobility).
133 See Measuring Broadband America Report at 12; see also TIA USF/ICC Transformation NPRM Comments at 9
(define broadband service by functionality rather than merely speed).
134 As discussed in the Goals section above, see supra section IV (Goals), universal advanced mobile coverage is an
important goal in its own right. By limiting reasonable comparability to “comparable services,” we are intending to
ensure that fixed broadband services in rural areas are compared with fixed broadband services in urban areas, and
similarly that mobile broadband services in rural areas are compared with mobile broadband services in urban areas.
Because fixed and mobile broadband technologies may differ in some of their capabilities, we find it appropriate to
adopt different performance benchmarks for the CAF funding mechanisms that are specifically oriented towards the
goal of universal mobility, namely, Mobility Fund Phase I and Tribal Mobility Fund Phase I. In the FNPRM, we
seek comment on how to compare mobile broadband to fixed broadband as product offerings evolve over time. See
infra paras. 1021-1024.
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upload speeds, latency, and usage limits (if any) for providers’ broadband must be reasonably comparableto the typical speeds, latency, and usage limits (if any) of comparable broadband services in urban areas.
Funding recipients may use any wireline, wireless, terrestrial, or satellite technology, or combination of
technologies, to deliver service that satisfies this requirement.135
92.
Speed. Users and providers commonly refer to the bandwidth of a broadband connection
as its “speed.” The bandwidth (speed) of a connection indicates the rate at which information can be
transmitted by that connection, typically measured in bits, kilobits (kbps), or megabits per second (Mbps).
The speed of consumers’ broadband connections affects their ability to access and utilize Internet
applications and content. To ensure that consumers are getting the full benefit of broadband, we require
funding recipients to provide broadband that meets performance metrics for actual speeds, 136 measured as
described below, rather than “advertised” or “up to” metrics.
93.
In the past two Broadband Progress Reports,137 the Commission found that the
availability of residential broadband connections that actually enable an end user to download content
from the Internet at 4 Mbps and to upload such content at 1 Mbps over the broadband provider’s network
was a reasonable benchmark for the availability of “advanced telecommunications capability,” defined by
the statute as “high-speed, switched, broadband telecommunications capability that enables users to
originate and receive high-quality voice, data, graphics, and video telecommunications using any
technology.”138 This conclusion was based on the Commission’s examination of overall Internet traffic
patterns, which revealed that consumers increasingly are using their broadband connections to view high-
quality video, and want to be able to do so while still using basic functions such as email and web
browsing.139 The evidence shows that streaming standard definition video in near real-time consumes
anywhere from 1-5 Mbps, depending on a variety of factors.140 This conclusion also was drawn from the
National Broadband Plan, which, based on an analysis of user behavior, demands this usage places on the
network, and recent experience in network evolution, recommended as a national broadband availability
target that every household in America have access to affordable broadband service offering actual
download speeds of at least 4 Mbps and actual upload speeds of at least 1 Mbps.
135 See, e.g., T-Mobile USF/ICC Transformation NPRM Comments at 8 (define broadband in technology neutral
way).
136 See ADTRAN USF/ICC Transformation NPRM Comments at 31 (four characteristics required for measuring
actual speed); Missouri Commission USF/ICC Transformation NPRM Comments at 7 (broadband provided should
be at actual speeds not advertised speeds).
137 See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the
Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act; A National Broadband
Plan for Our Future, GN Docket Nos. 09-137, 09-51, Report, 25 FCC Rcd 9556, 9559, para. 5 (2010) (2010 Sixth
Broadband Progress Report); Inquiry Concerning the Deployment of Advanced Telecommunications Capability to
All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to
Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN
Docket No. 10-159, Seventh Broadband Progress Report And Order On Reconsideration, 26 FCC Rcd 8008, 8018-
19, paras. 14-15 (2011) (2011 Seventh Broadband Progress Report).
138 47 U.S.C. § 1302(d)(1). Voice, data, graphics, and video telecommunications are the fundamental building blocks
for the key education, health care, and person-to-person communication applications discussed above.
139 2010 Sixth Broadband Progress Report, 25 FCC Rcd at 9563-64, para. 11. We continue to expect that it is not
uncommon for more than one person to make use of a single Internet connection simultaneously, particularly in
multi-member households that subscribe to a single Internet access service.
140 See Omnibus Broadband Initiative, Broadband Performance: OBI Technical Paper No. 4, at 8 (OBI, Broadband
Performance).
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94.Given the foregoing, other than for the Phase I Mobility Fund,141 we adopt an initial
minimum broadband speed benchmark for CAF recipients of 4 Mbps downstream and 1 Mbps
upstream.142 Broadband connections that meet this speed threshold will provide subscribers in rural and
high cost areas with the ability to use critical broadband applications in a manner reasonably comparable
to broadband subscribers in urban areas.143
95.
Some commenters, including DSL and mobile wireless broadband providers, observe
that the 1 Mbps upload speed requirement in particular could impose costs well in excess of the benefits
of 1 Mbps versus 768 kilobits per second (kbps) upstream.144 In general, we expect new installations to
provide speeds of at least 1 Mbps upstream. However, to the extent a CAF recipient can demonstrate that
support is insufficient to enable 1 Mbps upstream for all locations, temporary waivers of the upstream
requirement for some locations will be available. We delegate authority to the Wireline Competition
Bureau and Wireless Telecommunications Bureau to address such waiver requests. We note, however,
that we expect that those facilities that are not currently capable of providing the minimum upstream
speed will eventually be upgraded, consistent with our build-out requirements adopted below, with
scalable technology capable of meeting future speed increases.
96.
Latency. Latency is a measure of the time it takes for a packet of data to travel from one
point to another in a network. Because many communication protocols depend on an acknowledgement
that packets were received successfully, or otherwise involve transmission of data packets back and forth
along a path in the network, latency is often measured by round-trip time in milliseconds. Latency affects
a consumer’s ability to use real-time applications, including interactive voice or video communication,
over the network. We require ETCs to offer sufficiently low latency to enable use of real-time
applications, such as VoIP.145 The Commission’s broadband measurement test results showed that most
terrestrial wireline technologies could reliably provide latency of less than 100 milliseconds.146
141 See supra note 134.
142 Many commenters supported a 4 Mbps download speed. See, e.g., CWA USF/ICC Transformation NPRM
Comments at 14, 16-17; Cox USF/ICC Transformation NPRM Comments at 4-5; Frontier USF/ICC Transformation
NPRM Comments at 23; Greenlining USF/ICC Transformation NPRM Comments at 5-6; Cellular One USF/ICC
Transformation NPRM Comments at 26-27; U.S. Cellular USF/ICC Transformation NPRM Reply at 86-90
(summarizing support of TDS, RBA, CTIA, ACA, Sprint, T-Mobile, and USA Coalition for a 4 Mbps/1 Mbps speed
threshold).
143 Requiring 4 Mbps/1 Mbps to be provided to all locations, including the more distant locations on a landline
network and regardless of the served location’s position in a wireless network, implies that customers located closer
to the wireline switch or wireless tower will be capable of receiving service in excess of this minimum standard.
See, e.g., Letter from Jonathan Banks, USTelecom, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et
al., at 2 (filed Oct. 17, 2011) (discussing how shorter loop lengths could lead to some locations receiving broadband
service at 6 Mbps downstream speed and others receiving 12 Mbps downstream speed).
144 See, e.g., ADTRAN USF/ICC Transformation NPRM Comments at 28-29; AT&T USF/ICC Transformation
NPRM Comments at 94 (stating that 4 Mbps/1 Mbps would require 50 percent more support than 4 Mbps/768 kbps);
Florida Commission USF/ICC Transformation NPRM Comments at 5-6 (supporting 3 Mbps/768 kbps); T-Mobile
USF/ICC Transformation NPRM Reply at 22 (stating that 768 kbps is less costly than 1 Mbps).
145 See, e.g., ADTRAN USF/ICC Transformation NPRM Comments at 18 (describing latency’s effect on voice
communications); ITU-T, “International telephone connections and circuits – General Recommendations on the
transmission quality for an entire international telephone connection,” Recommendation G.114, May 2003.
146 Measuring Broadband America Report at 22, Chart 9 (illustrating latencies of wireline technologies tested).
Fiber-to-the-home had a latency averaging 17 milliseconds, and DSL ranged as high as approximately 75
milliseconds. We note that satellite companies contend that their services are adequate for some real-time
applications like VoIP, even with round-trip latencies of more than 100 milliseconds. Satellite Providers USF/ICC
(continued…)
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97.Capacity. Capacity is the total volume of data sent and/or received by the end user over
a period of time. It is often measured in gigabytes (GB) per month. Several broadband providers have
imposed monthly data usage limits, restricting users to a predetermined quantity of data, and these limits
typically vary between fixed and mobile services.147 The terms of service may include an overage fee if a
consumer exceeds the monthly limit. Some commenters recommended we specify a minimum usage
limit.148
98.
Although at this time we decline to adopt specific minimum capacity requirements for
CAF recipients, we emphasize that any usage limits imposed by an ETC on its USF-supported broadband
offering must be reasonably comparable to usage limits for comparable broadband offerings in urban
areas.149 In particular, ETCs whose support is predicated on offering of a fixed broadband service –
namely, all ETCs other than recipients of the Phase I Mobility Funds – must allow usage at levels
comparable to residential terrestrial fixed broadband service in urban areas.150 We define terrestrial fixed
broadband service as one that serves end users primarily at fixed endpoints using stationary equipment,
such as the modem that connects an end user’s home router, computer or other Internet access device to
the network. This term includes fixed wireless broadband services (including those offered over
unlicensed spectrum).
99.
In 2009, residential broadband users who subscribed to fixed broadband service with
speeds between 3 Mbps and 5 Mbps used, on average, 10 GB of capacity per month,151 and annual per-
user growth was between 30 and 35 percent.152 We note that AT&T’s DSL usage limit is 150 GB and its
U-Verse offering has a 250 GB limit.153 Since 2008, Comcast has had a 250 GB monthly data usage
threshold on residential accounts.154 Without endorsing or approving of these or other usage limits, we
(Continued from previous page)
Transformation NPRM Joint Reply at 8. But see Letter from John Kuykendall, on behalf of BEK Communications,
to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et al., Attach. at 15 (filed Oct. 6, 2011) (criticizing
satellite latency that cannot be improved by increased data speeds).
147 For example, as of May 2011, AT&T’s DSL offering had a 150 GB limit, and its U-verse offering had a 250 GB
limit. See “To Cap, or Not,” N.Y. Times, July 21, 2011. Since 2008, Comcast has had a 250 GB monthly data
usage threshold on residential accounts. See Comcast Announcement Regarding An Amendment to Our Acceptable
Use Policy, http://xfinity.comcast.net/terms/network/amendment/. In contrast, Verizon Wireless offers data plans
with usage limits of 2GB, 5GB, and 10GB. See, e.g., Verizon Wireless, Nationwide Single-Line Plans,
http://www.verizonwireless.com/b2c/plans/?page=single.
148 ADTRAN USF/ICC Transformation NPRM Comments at 19 (limitations on usage should be appropriate for the
service being funded, whether fixed or mobile, given the disparity in traffic volumes for each service); Public
Knowledge and Benton USF/ICC Transformation NPRM Comments at 13 (arguing capacity should match average
in urban areas).
149 We note that such service could include, for instance, use of a wireless data card if it can provide the performance
characteristics described in this section.
150 See supra para. 87 (“In developing these performance requirements, we seek to ensure that the performance of
broadband available in rural and high cost areas is “reasonably comparable” to that available in urban areas”).
151 Omnibus Broadband Initiative, The Broadband Availability Gap: OBI Technical Paper No. 1, at 112, Ex. 4-BQ
(April 2010) (OBI, Broadband Availability Gap), available at http://www.broadband.gov/plan/broadband-working-
reports-technical-papers.html.
152 OBI, Broadband Performance at 7.
153 See “To Cap, or Not,” N.Y. Times, July 21, 2011.
154 Comcast Announcement Regarding An Amendment to Our Acceptable Use Policy,
http://xfinity.comcast.net/terms/network/amendment/.
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provide guidance by noting that a usage limit significantly below these current offerings (e.g., a 10 GBmonthly data limit) would not be reasonably comparable to residential terrestrial fixed broadband in urban
areas.155 A 250 GB monthly data limit for CAF-funded fixed broadband offerings would likely be
adequate at this time because 250 GB appears to be reasonably comparable to major current urban
broadband offerings. We recognize, however, that both pricing and usage limitations change over time.
We delegate authority to the Wireline Competition Bureau and Wireless Telecommunications Bureau to
monitor urban broadband offerings, including by conducting an annual survey, in order to specify an
appropriate minimum for usage allowances, and to adjust such a minimum over time.156
100.
Similarly, for Mobility Fund Phase I, we decline to adopt a specific minimum capacity
requirement that supported providers must offer mobile broadband users.157 However, we emphasize that
any usage limits imposed by a provider on its mobile broadband offerings supported by the Mobility Fund
must be reasonably comparable to any usage limits for mobile comparable broadband offerings in urban
areas.
101.
Areas with No Terrestrial Backhaul. Recognizing that satellite backhaul may limit the
performance of broadband networks as compared to terrestrial backhaul, we relax the broadband public
interest obligation for carriers providing fixed broadband that are compelled to use satellite backhaul
facilities.158 The Regulatory Commission of Alaska reports that “for many areas of Alaska, satellite links
may be the only viable option to deploy broadband.”159 Carriers seeking relaxed public interest
obligations because they lack the ability to obtain terrestrial backhaul—either fiber, microwave, or other
technology—and are therefore compelled to rely exclusively on satellite backhaul in their study area,
must certify annually that no terrestrial backhaul options exist, and that they are unable to satisfy the
broadband public interest obligations adopted above due to the limited functionality of the available
satellite backhaul facilities.160 Any such funding recipients must offer broadband service speeds of at
least 1 Mbps downstream and 256 kbps upstream within the supported area served by satellite middle-
mile facilities.161 Latency and capacity requirements discussed above will not apply to this subset of
providers. Buildout obligations – which are dependent on the mechanism by which a carrier receives
155 We note that this should not be interpreted to mean that the Commission intends to regulate usage limits.
156 We expect that the Bureaus will conduct this survey in conjunction with the pricing survey we direct the Bureaus
to conduct below. See supra para. 114 (delegating to the Bureaus the authority to conduct an annual survey of urban
broadband rates).
157 See supra para. 87 (“In developing these performance requirements, we seek to ensure that the performance of
broadband available in rural and high cost areas is “reasonably comparable” to that available in urban areas”).
158 ACS USF/ICC Transformation NPRM Comments at 11 (“Even if the modest speeds of 4 Mbps down/1 Mbps up
are adopted by the FCC as target throughput speeds, substantial construction of terrestrial facilities and expansion of
satellite capacity will be needed to create the backhaul capability that will be necessary to deliver broadband at those
speeds in Alaska.” (footnote omitted)); ACS USF/ICC Transformation NPRM Reply at 8 (same); Alaska
Commission USF/ICC Transformation NPRM Comments at 24; GCI USF/ICC Transformation NPRM Comments at
2. As discussed elsewhere, we decline to relax the technical performance requirements due to satellite backhaul
limitations for purposes of Mobility Fund Phase I, although we clarify that funds may be used to upgrade middle
mile facilities. We seek additional comment on how to address satellite backhaul issues for Mobility Fund Phase II
in the FNPRM. See infra section XVII.I (Mobility Fund Phase II).
159 Alaska Commission USF/ICC Transformation NPRM Comments at 22; GCI August 3 PN Comments at 10
(estimating that “[t]wenty-seven percent of the state’s population lives in villages that are not on Alaska’s
road/rail/pipeline network, and thus are today reached only by satellite middle-mile.”).
160 See supra paras. 92-96 (adopting speed and latency requirements).
161 GCI August 3 PN Comments at 27.
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funding –remain the same for this class of carriers. We will monitor and review the public interestobligations for satellite backhaul areas. To the extent that new terrestrial backhaul facilities are
constructed, or existing facilities improve sufficiently to meet the public interest obligations, we require
funding recipients to satisfy the relevant broadband public interest obligations in full within twelve
months of the new backhaul facilities becoming commercially available.162
102.
Community Anchor Institutions.163 We expect that ETCs will likely offer broadband at
greater speeds to community anchor institutions in rural and high cost areas, although we do not set
requirements at this time, as the 4 Mbps/1 Mbps standard will be met in the more rural areas of an ETC’s
service territory, and community anchor institutions are typically located in or near small towns and more
inhabited areas of rural America.164 We also expect ETCs to engage with community anchor institutions
in the network planning stages with respect to the deployment of CAF-supported networks.165 We require
ETCs to identify and report on the community anchor institutions that newly gain access to fixed
broadband service as a result of CAF support.166 In addition, the Wireline Competition Bureau will invite
further input on the unique needs of community anchor institutions as it develops a forward-looking cost
model to estimate the cost of serving locations, including community anchor locations, in price cap
territories.167
103.
Broadband Buildout Obligations. All CAF funding comes with obligations to build out
broadband within an ETC’s service area, subject to certain limitations. The timing and extent of these
obligations varies across the different CAF mechanisms, and details are discussed in the specific sections
explaining the separate mechanisms. However, all broadband buildout obligations for fixed broadband
are conditioned on not spending the funds to serve customers in areas already served by an “unsubsidized
competitor.”168 We define an unsubsidized competitor as a facilities-based provider of residential
terrestrial fixed voice and broadband service.169
162 This limited exemption is only available to providers that have no access in their study area to any terrestrial
backhaul facilities, and does not apply to any providers that object to the cost of backhaul facilities. Similarly,
providers relying on terrestrial backhaul facilities today will not be allowed this exemption if they elect to transition
to satellite backhaul facilities.
163 For purposes of this order, we define “community anchor institutions” to mean schools, libraries, medical and
healthcare providers, public safety entities, community colleges and other institutions of higher education, and other
community support organizations and agencies that provide outreach, access, equipment, and support services to
facilitate greater use of broadband service by vulnerable populations, including low-income, the unemployed, and
the aged. We draw upon the definition used in implementing American Recovery and Reinvestment Act of 2009.
See 75 Fed. Reg. 3792, 3797 (Jan. 22, 2010).
164 There is nothing in this order that requires a carrier to provide broadband service to a community anchor
institution at a certain rate, but we acknowledge that community anchor institutions generally require more
bandwidth than a residential customer, and expect that ETCs would provide higher bandwidth offerings to
community anchor institutions in high-cost areas at rates that are reasonably comparable to comparable offerings to
community anchor institutions in urban areas.
165 See infra sections VII.C.2.b (Price Cap Public Interest Obligations) and VII.D.2 (Public Interest Obligations of
Rate-of-Return Carriers).
166 See infra para. 587.
167 See Alliance for Community Media Reply at 2; CWA Comments at 17; Internet2 Comments at 2; SHLB
Coalition Comments at 4; Letter from John Windhausen, Jr., SHLB Coalition, to Chairman Genachowski and
Commissioners (dated Sept. 28, 2011).
168 We recognize that the best data available at this time to determine whether broadband is available from an
unsubsidized competitor at speeds at or above the 4 Mbps/1 Mbps speed threshold will likely be data on broadband
(continued…)
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104.We limit this definition to fixed, terrestrial providers because we think these limitations
will disqualify few, if any, broadband providers that meet CAF speed, capacity, or latency minimums for
all locations within relevant areas of comparison, while significantly easing administration of the
definition. For example, the record suggests that satellite providers are generally unable to provide
affordable voice and broadband service that meets our minimum capacity requirements without the aid of
a subsidy: Consumer satellite services have limited capacity allowances today, and future satellite
services appear unlikely to offer capacity reasonably comparable to urban offerings in the absence of
universal service support.170 Likewise, while 4G mobile broadband services may meet our speed
requirements in many locations, meeting minimum speed and capacity guarantees is likely to prove
challenging over larger areas, particularly indoors.171 And because the performance offered by mobile
services varies by location, it would be very difficult and costly for a CAF recipient or the Commission to
evaluate whether such a service met our performance requirements at all homes and businesses within a
study area, census block, or other required area. A wireless provider that currently offers mobile service
can become an “unsubsidized competitor,” however, by offering a fixed wireless service that guarantees
speed, capacity, and latency minimums will be met at all locations with the relevant area. Taken together,
these considerations persuade us that the advantages of limiting our definition of unsubsidized providers
outweigh any potential concerns that we may unduly disqualify service providers that otherwise meet our
performance requirements. As mobile and satellite services develop over time, we will revisit the
definition of “unsubsidized competitor” as warranted. Recognizing the benefits of certainty, however, we
do not anticipate changing the definition for the next few years.
105.
Summary and Evolution of Technical Characteristics. As set forth in further detail in
section VII, this Order establishes several funding mechanisms within the CAF, each customized to
particular user needs (e.g., fixed vs. mobile voice and broadband) and time horizons (phases I vs. II). The
technical characteristics and broadband buildout obligation under each of these new CAF components can
be summarized as follows:
(Continued from previous page)
availability at 3 Mbps downstream and 768 kbps upstream, which is collected for the National Broadband Map and
through the Commission’s Form 477. Such data may therefore be used as a proxy for the availability of 4 Mbps/1
Mbps broadband. Depending on our anticipated reform to the Form 477 data collection, we may have additional
data in the future upon which the Commission may rely. See Modernizing the FCC Form 477 Data Program, WC
Docket No. 11-10, Development of Nationwide Broadband Data to Evaluate Reasonable and Timely Deployment of
Advanced Services to All Americans, Improvement of Wireless Broadband Subscribership Data, and Development of
Data on Interconnected Voice over Internet Protocol (VoIP) Subscribership, WC Docket No. 07-38, Service Quality,
Customer Satisfaction, Infrastructure and Operating Data Gathering, WC Docket No. 08-190, Review of Wireline
Competition Bureau Data Practices, WC Docket No. 10-132, Notice of Proposed Rulemaking, 26 FCC Rcd 1508
(2011) (Broadband Data NPRM) (seeking comment on reforms to FCC Form 477 data collection).
169 We define a fixed voice and broadband service as one that serves end users primarily at fixed endpoints using
stationary equipment, such as the modem that connects an end user's home router, computer, or other Internet access
device to the network. This term encompasses fixed wireless broadband services (including services using
unlicensed spectrum). The term does not include a broadband service that serves end users primarily using mobile
stations. See 47 U.S.C. § 153(34) (“The term ‘mobile station’ means a radio-communication station capable of
being moved and which ordinarily does move.”).
170 OBI, Broadband Performance at 89; Letter from Lisa Scalpone, ViaSat, Inc., Jeffrey H. Blum, Dish Network
L.L.C., and Dean Manson, Echostar Technologies L.L.C., to Marlene H. Dortch, Secretary, FCC, WC Docket No.
10-90 et al., at 8 (filed Oct. 18, 2011).
171 OBI, Broadband Performance at 66.
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Component of
Broadband Performance
Obligation
CAF
Characteristics
Price Cap CAF
· Speed of at least 4 Mbps/1Extend broadband to areas lacking
(Phase I)
Mbps to a specified number of
768 kbps according to National
Broadband Map and carrier’s best
(Incremental
locations, depending on level of
knowledge; can’t use for areas
support)
incremental support
already in capital improvements plan
· Latency sufficient for real-time
or to fulfill merger commitments or
applications, including VoIP
Recovery Act projects.
· Usage at levels comparable to
terrestrial residential fixed
broadband service in urban
areas
CAF in Price
· Speed of at least 4 Mbps/1Extend broadband to supported
Cap Areas
Mbps to all supported locations, locations; supported locations do not(Phase II)
with at least 6 Mbps/1.5 Mbps
include areas where there is an
to a number of supported
unsubsidized competitor offering 4
locations to be specified by
Mbps/1 Mbps.
model
· Latency sufficient for real-time
applications, including VoIP
· Usage at levels comparable to
terrestrial residential fixed
broadband service in urban
areas
Areas with no
· Speed of at least 1 Mbps/256terrestrial
kbps in locations where
backhaul
otherwise would be obligated to
provide 4 Mbps/1 Mbps
Mobility Fund,
· 3G (200 kbps/50 kbps minimum Provide coverage of between 75 andPhase I
at cell edge)100 percent of road miles in unserved
OR
census blocks.
4G (768 kbps/200 kbps
minimum at cell edge)
OR
· Latency sufficient for real-time
For Tribal Mobility Fund: Provide
applications
coverage of between 75 and 100
· Usage at levels comparable to
percent of pops in unserved census
mobile 3G/4G offerings in
blocks within Tribal lands.
urban areas
Figure 1
106.
Because most of these funding mechanisms are aimed at immediately narrowing
broadband deployment gaps, both fixed and mobile, their performance benchmarks reflect technical
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capabilities and user needs that are expected at this time to be suitable for today and the next few years.172However, we must also lay the groundwork for longer-term evolution of CAF broadband obligations, as
we expect technical capabilities and user needs will continue to evolve. We therefore commit to
monitoring trends in the performance of urban broadband offerings through the survey data we will
collect and rural broadband offerings through the reporting data we will collect,173 and to initiating a
proceeding no later than the end of 2014 to review our performance requirements and ensure that CAF
continues to support broadband service that is reasonably comparable to broadband service in urban
areas.174
107.
In advance of that future proceeding, we rely on our predictive judgment to provide
guidance to CAF recipients on metrics that will satisfy our expectation that they invest the public’s funds
in robust, scalable broadband networks. As shown in the chart below, the National Broadband Plan
estimated that by 2017, average advertised speeds for residential broadband would be approximately 5.76
Mbps downstream. 175 Applying growth rates measured by Akamai, one finds a projected average actual
downstream speed by 2017 of 5.2 Mbps, and a projected average actual peak downstream speed of 6.86
Mbps.
172 Phased down competitive ETC support is not aimed at these objectives. Therefore, it is not subject to these
broadband requirements. Obligations of competitive ETCs are addressed below. See infra section VII.E.5
(Transition of Competitive ETC Support to CAF).
173 See supra para. 99 (delegating authority to the Bureaus conduct an annual survey to monitor urban broadband
offerings) and infra section VIII.A.2 (Reporting Requirements).
174 47 U.S.C. § 254(b). Commenters recommended reviewing the public interest obligations periodically, with
suggested periods ranging from every year to every five years. See, e.g., Frontier USF/ICC Transformation NPRM
Comments at 24 (review every 5 years); Google USF/ICC Transformation NPRM Comments at 16 (review every 3
years); Greenlining USF/ICC Transformation NPRM Comments at 7 (review annually); Nebraska Commission
USF/ICC Transformation NPRM Comments at 16 (review every 4 years). We select three years in light of the
timing of the funding mechanisms we adopt in this Order.
175 See OBI, Broadband Performance at 16 (historical 20 percent annual growth of advertised speeds); Cisco, Cable
and Telco Service Provider Abstract Network Model,
http://www.cisco.com/web/siteassets/legal/terms_condition.html (forecasting increase in file sharing and video);
Akamai State of the Internet Q1 2011 Report, p. 12, fig. 7, www.akamai.com/stateoftheinternet (showing growth
across the last year in average speed of 14 percent in the U.S.).
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Forecast for typical downstream speed
3025
20
Growth rate of Akamai average peak speed
Growth rate noted in OBI Technical Paper #4
15
Growth rate at Akamai average speed
10
5
0
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Figure 2176
108.
Based on these projections, we establish a benchmark of 6 Mbps downstream and 1.5
Mbps upstream for broadband deployments in later years of CAF Phase II.
2.
Measuring and Reporting Broadband
109.We will require recipients of funding to test their broadband networks for compliance
with speed and latency metrics and certify to and report the results to the Universal Service
Administrative Company (USAC) 177 on an annual basis.178 These results will be subject to audit. In
176 Speed forecasts based on growth rates, assuming 4 Mbps speed in 2015.
177 The Universal Service Administrative Company (USAC), a subsidiary of the National Exchange Carrier
Association (NECA), is the private not-for-profit corporation created to serve as the Administrator of the Fund under
the Commission’s direction. See Changes to the Board of Directors of the National Exchange Carrier Association,
Third Report and Order in CC Docket No. 97-21, Fourth Order on Reconsideration in CC Docket No. 97-21 and
Eighth Order on Reconsideration in CC Docket No. 96-45, 13 FCC Rcd 25,058, 25,063-66, paras. 10-14 (1998); 47
C.F.R. § 54.701(a). The Commission appointed USAC the permanent Administrator of all of the federal universal
service support mechanisms. See 47 C.F.R. §§ 54.702(b)-(m), 54.711, 54.715. USAC administers the Fund in
accordance with the Commission’s rules and orders. The Commission provides USAC with oral and written
guidance, as well as regulation through its rulemaking process. USAC plays a critical role as day-to-day
Administrator in collecting necessary information that enables the Commission to oversee the entire universal
service fund. See, e.g., Memorandum of Understanding Between the Federal Communications Commission and the
Universal Service Administrative Company (Sept. 9, 2008) (2008 FCC-USAC MOU), available at
http://www.fcc.gov/omd/usac-mou.pdf. As set forth throughout this Order, we expect USAC to administer the new
fund we create today, the Connect America Fund, including the Mobility Fund.
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addition, as part of the federal-state partnership for universal service, we expect and encourage states toassist us in monitoring and compliance and therefore require funding recipients to send a copy of their
annual broadband performance report to the relevant state or Tribal government.179
110.
Commenters generally supported testing and reporting of broadband performance.180
While some preferred only certifications without periodic testing,181 we find that requiring ETCs to
submit verifiable test results to USAC and the relevant state commissions will strengthen the ability of
this Commission and the states to ensure that ETCs that receive universal service funding are providing at
least the minimum broadband speeds, and thereby using support for its intended purpose as required by
section 254(e).
111.
We adopt the proposal in the USF-ICC Transformation NPRM that actual speed and
latency be measured on each ETC’s access network from the end-user interface to the nearest Internet
access point. In Figures 3 and 4 below, we illustrate basic network structure for terrestrial broadband
networks (wired and wireless, respectively). In these diagrams, the end-user interface end-point would be
(5) the modem, the customer premise equipment typically managed by a broadband provider as the last
connection point to the managed network, while the nearest Internet access point end-point would be (2)
the Internet gateway, the closest peering point between the broadband provider and the public Internet for
a given consumer connection. The results of Commission testing of wired networks suggest that
“broadband performance that falls short of expectations is caused primarily by the segment of an ISP’s
network from [5] the consumer gateway to [2] the ISP’s core network.”182
Basic Wired Network Structure
(Continued from previous page)
178 See infra para. 585.
179 See infra para. 582.
180 ADTRAN USF/ICC Transformation NPRM Comments at 32; GVNW USF/ICC Transformation NPRM Reply at
26 (must be a process for verifying performance); ICORE USF/ICC Transformation NPRM Comments at 12-13
(quality of service obligations and extensive reporting requirements are safeguards that prevent waste and
inefficiency).
181 U.S. Cellular USF/ICC Transformation NPRM Comments at 46-47.
182 Measuring Broadband America Report at 11; see ADTRAN USF/ICC Transformation NPRM Comments at 33-
35 (supporting use of Points 2 and 5 as the end-points for measuring broadband performance).
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(1) Public Internet content: Public Internet content that is hosted by multiple service providers,content providers and other entities in a geographically diverse (worldwide) manner.
(2) Internet gateway: Closest peering point between broadband provider and public Internet for
a given consumer connection.
(3) Link between second mile and middle mile: Broadband provider managed interconnection
between middle mile and last mile
(4) Aggregation Node: First aggregation point for broadband provider (e.g., Digital Subscriber
Line Access Multiplexer (DSLAM), cable node, satellite, etc.)
(5) Modem: Customer premise equipment (CPE) typically managed by a broadband provider as
the last connection point to the managed network (e.g., DSL modem, cable modem, satellite
modem, optical networking terminal (ONT), etc.)
(6) Consumer device: Consumer device connected to modem through internal wire or Wi-Fi
(home networking), including hardware and software used to access the Internet and process
content (customer managed)
Figure 3
Basic Wireless Network Structure
1
2
3
5a
4
6
5b
(1) Public Internet content: Public Internet content that is hosted by multiple service providers,
content providers and other entities in a geographically diverse (worldwide) manner.
(2) Internet gateway: Closest peering point between broadband provider and public Internet for
a given consumer connection.
(3) Link between second mile and middle mile: Broadband provider managed interconnection
between middle mile and last mile
(4) Aggregation Node: First aggregation point for broadband provider (e.g., DSLAM, tower
site, cable node, satellite, etc.)
(5)(a) Household fixed modem/receiver: Customer premise equipment (CPE) typically
managed by a broadband provider as the last connection point to the managed network (e.g.,
DSL modem, cable modem, satellite modem, optical networking terminal (ONT), wireless
modem, etc.)
5(b) Consumer Device: Consumer mobile device (smartphone, laptop, etc.) wireless connected
to provider network
(6) Consumer device: Consumer device connected to modem through internal wire or Wi-Fi
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(home networking), including hardware and software used to access the Internet and processcontent (customer managed)
Figure 4
112.
In the FNPRM, we seek further comment on the specific methodology ETCs should use
to measure the performance of their broadband services subject to these general guidelines, and the format
in which funding recipients should report their results.183 We direct the Wireline Competition Bureau, the
Wireless Telecommunications Bureau, and the Office of Engineering and Technology to work together to
refine the methodology for such testing, which we anticipate will be implemented in 2013.
3.
Reasonably Comparable Rates for Broadband Service
113.Section 254(b) of the Act requires the Commission to base its universal service policies
on certain principles, including that “[c]onsumers in all regions of the Nation . . . should have access to
telecommunications and information services . . . that are available at rates that are reasonably
comparable to rates charged for similar services in urban areas.”184 As with voice services, for broadband
services we will consider rural rates to be “reasonably comparable” to urban rates under section 254(b)(3)
if rural rates fall within a reasonable range of urban rates for reasonably comparable broadband service.
However, we have never compared broadband rates for purposes of section 254(b)(3), and therefore we
direct the Bureaus to develop a specific methodology for defining that reasonable range, taking into
account that retail broadband service is not rate regulated and that retail offerings may be defined by
price, speed, usage limits, if any, and other elements.185 In the FNPRM, we seek comment on how
specifically to define a reasonable range.186
114.
We also delegate to the Wireline Competition Bureau and Wireless Telecommunications
Bureau the authority to conduct an annual survey of urban broadband rates, if necessary, in order to
derive a national range of rates for broadband service.187 We do not currently have sufficient data to
establish such a range for broadband pricing, and are unaware of any adequate third-party sources of data
for the relevant levels of service to be compared. We therefore delegate authority to the Bureaus to
determine the appropriate components of such a survey. By conducting our own survey, we believe we
will be able to tailor the data specifically to our need to satisfy our statutory obligation. We require
recipients of funding to provide information regarding their pricing for service offerings, as described
183 See infra section XVII.A.1 (Measuring Broadband Service).
184 47 U.S.C. § 254(b)(3).
185 Consistent with the fact that the Commission does not set regulated rates for broadband Internet access service,
the comparison of rural and urban rates will be conducted pursuant to the principles set forth in section 254(b)(3) of
the Act and is solely for the purposes of compliance with section 254’s mandates.
186 See infra section XVII.A.2 (Reasonably Comparable Voice and Broadband Services).
187 In the Broadband Data NPRM, the Commission proposed collecting pricing data through a revised FCC Form
477. Broadband Data NPRM, 26 FCC Rcd at 1533-36, paras. 66-76 (seeking comment on whether and how the
Commission should collect price data). We will rely on any pricing data collected pursuant to a revised FCC Form
477 data collection to calculate a national average urban rate for broadband. However, the process of collecting and
publishing industry-wide data through a revised FCC Form 477 may not be completed before the first annual
certification, and therefore a survey may be necessary. See also supra para. 99 (delegating authority to the Wireline
Competition Bureau and Wireless Telecommunications Bureau to conduct annual survey of urban broadband
offerings).
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more fully below.188 We also encourage input from the states and other stakeholders as the Bureausdevelop the survey.
VII.
ESTABLISHING THE CONNECT AMERICA FUND
A.
Overview
115.As described more fully below, we establish the Connect America Fund to bring
broadband to unserved areas; support advanced mobile voice and broadband networks in rural, insular
and high-cost areas; expand fixed broadband and facilitate reform of the intercarrier compensation
system. In establishing the CAF, we also set for the first time a firm and comprehensive budget for the
high-cost program.
116.
For areas served by price cap companies, we institute immediate reforms (Phase I) to
streamline and redirect legacy universal service payments to accelerate broadband deployment in
unserved areas. We also adopt a longer-term approach (Phase II) that, starting as soon as the Wireline
Competition Bureau completes work on a forward-looking broadband cost model, will direct funds for
five years to those areas that are unserved through the operation of market forces, using a mechanism that
combines use of this model and competitive bidding. We also adopt the necessary measures to transition
carriers from existing support to CAF.
117.
For areas served by rate-of-return carriers, we decline to immediately shift support to the
model- and competitive bidding-based mechanism in CAF. Instead, we reform legacy support
mechanisms for rate-of-return carriers to begin the transition towards a more incentive-based form of
regulation with better incentives for efficient operations. In the accompanying FNPRM, we seek further
comment on how best to ensure a predictable path forward for rate-of-return companies to extend
broadband.
118.
Within CAF, we also establish support for mobile voice and broadband services in
recognition of the fact that promoting the universal availability of advanced mobile services is a vital
component of the Commission’s universal service mission. We establish the Mobility Fund as part of
CAF to first provide one-time support (Phase I) to immediately accelerate deployment of networks for
mobile broadband services in unserved areas, and then provide ongoing support (Phase II) to expand and
sustain mobile voice and broadband service in communities in which service would be unavailable absent
federal support. We also set forth the necessary transition for carriers receiving support today under the
legacy rules.
119.
Finally, to ensure that Americans living in the most costly areas in the nation can obtain
affordable broadband through alternative technology platforms, including satellite and unlicensed
wireless, the CAF also includes dedicated funding for extremely high cost areas, which will be disbursed
through a market-based mechanism.
120.
Through these coordinated mechanisms, the CAF will immediately begin making
available broadband and advanced mobile services to unserved American homes, businesses, and
community anchor institutions, while transitioning universal service to an efficient, technology-neutral
system that uses tools, including competitive bidding, to ensure that scarce public resources support the
best possible communications services for rural Americans. Given the disparate treatment of different
carriers and technologies under legacy rules, it is not practicable to transition immediately all components
of the program to competitive-bidding principles. But the approach we take today provides us the
opportunity to see the application of these principles in practice and evaluate their effectiveness, creates a
transition period for carriers to adapt to more incentive-based approaches, and allows time for new
technologies, new competitors, and consumer demand to continue to evolve and mature.
188 See infra paras. 592-594.
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B.
The Budget
121.Background. Many individual mechanisms within the high-cost program function under
fixed budgets under the current system.189 The high-cost program as a whole, however, has never had a
budget. In the USF-ICC Transformation NPRM, the Commission noted its commitment to controlling the
size of the universal service fund.190 The Commission sought comment on setting an overall budget for
the CAF such that the sum of the CAF and any existing legacy high-cost support mechanisms (however
modified in the future) in a given year would remain equal to current funding levels. The Broadband Plan
similarly recommended that the “FCC should aim to keep the overall size of the fund close to its current
size (in 2010 dollars).”191
122.
In response, a broad cross-section of interested stakeholders, including consumer groups,
state regulators, current recipients of funding, and those that do not currently receive funding, agreed that
the Commission should establish a budget for the overall high-cost program, with many urging the
Commission to set that budget at $4.5 billion per year, the estimated size of the program in fiscal year
(FY) 2011.192 Some argue that we should adopt a hard cap to ensure that budget is not exceeded.193
123.
Discussion. For the first time, we now establish a defined budget for the high-cost
component of the universal service fund.194 We believe the establishment of such a budget will best
ensure that we have in place “specific, predictable, and sufficient” funding mechanisms to achieve our
universal service objectives.195 We are today taking important steps to control costs and improve
189 See High-Cost Universal Service Support, WC Docket No. 05-337, Federal-State Joint Board on Universal
Service, CC Docket No. 96-45, Alltel Communications, Inc., et al. Petitions for Designation as Eligible
Telecommunications Carriers, RCC Minnesota, Inc. and RCC Atlantic, Inc. New Hampshire ETC Designation
Amendment, Order, 23 FCC Rcd 8834, 8834, para. 1 (2008) (Interim Cap Order) (adopting an emergency cap on
high-cost support for competitive ETCs); 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 (1993) (detailing cap on HCLS); Access
Charge Reform, Price Cap Performance Review for Local Exchange Carriers, Low-Volume Long Distance Users,
Federal-State Joint Board on Universal Service, Sixth Report and Order in CC Docket Nos. 96-262 and 94-1,
Report and Order in CC Docket No. 99-249, Eleventh Report and Order in CC Docket No. 96-45, 15 FCC Rcd
12962 (2000) (CALLS Order), rev’d and remanded, Texas Office of Public Utility Counsel v. FCC, 265 F. 3d 313
(5th Cir. 2001); and Access Charge Reform, CC Docket No. 96-262, Price Cap Performance Review for LECs, CC
Docket No. 94-1, Low-Volume Long Distance Users, CC Docket No. 99-249, Federal-State Joint Board on
Universal Service, CC Docket No. 96-45, Order on Remand, 18 FCC Rcd 14976 (2003). See also High-Cost
Universal Service Support, Federal State Joint Board on Universal Service, WC Docket No. 05-337, CC Docket
No. 96-45, Order, 23 FCC Rcd. 8834 (2008) (capping IAS for ILECs as of 2008).
190 USF/ICC Transformation NPRM, 26 FCC Rcd at 4680-82, paras. 412-414.
191 National Broadband Plan at 150.
192 ABC Plan Proponents August 3 PN Joint Comments at 17; NASUCA USF/ICC Transformation NPRM
Comments at 10; Rural Associations August 3 PN Comments at 5; State Members USF/ICC Transformation NPRM
Comments at 11.
193 Comcast August 3 PN Comments at 21; Free State USF/ICC Transformation NPRM Comments at 10-11; NCTA
August 3 PN Comments at 6; XO USF/ICC Transformation NPRM Reply at 20-22.
194 As noted above, for purposes of this budget, the term “high-cost” includes all support mechanisms in place as of
the date of this order, specifically, high-cost loop support, safety net support, safety valve support, local switching
support, interstate common line support, high cost model support, and interstate access support, as well as the new
Connect America Fund, which includes funding to support and advance networks that provide voice and broadband
services, both fixed and mobile, and funding provided in conjunction with the recovery mechanism adopted as part
of intercarrier compensation reform. See supra note 16.
195 47 U.S.C. 254(b)(5).
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accountability in USF, and our estimates of the funding necessary for components of the CAF and legacyhigh-cost mechanisms represent our predictive judgment as to how best to allocate limited resources at
this time. We anticipate that we may revisit and adjust accordingly the appropriate size of each of these
programs by the end of the six-year period we budget for today, based on market developments,
efficiencies realized, and further evaluation of the effect of these programs in achieving our goals.
124.
Importantly, establishing a CAF budget ensures that individual consumers will not pay
more in contributions due to the reforms we adopt today. Indeed, were the CAF to significantly raise the
end-user cost of services, it could undermine our broader policy objectives to promote broadband and
mobile deployment and adoption. As we explained with respect to the budget for the Schools and
Libraries program, we “must balance [our] desire to ensure that schools and libraries have access to
valuable communications opportunities with the need to ensure that consumer rates for communications
services remain affordable. End users ultimately bear the cost of supporting universal service, through
carrier charges.”196
125.
We therefore establish an annual funding target, set at the same level as our current
estimate for the size of the high-cost program for FY 2011, of no more than $4.5 billion. This budgetary
target will remain in place until changed by a vote of the Commission. We believe that setting the budget
at this year’s support levels will minimize disruption and provide the greatest certainty and predictability
to all stakeholders. We do not find that amount to be excessive given the reforms we adopt today, which
expand the high-cost program in important ways to promote broadband and mobility; facilitate
intercarrier compensation reform; and preserve universal voice connectivity. At the same time, we do not
believe a higher budget is warranted, given the substantial reforms we concurrently adopt to modernize
our legacy funding mechanisms to address long-standing inefficiencies and wasteful spending. We
conclude that it is appropriate, in the first instance, to evaluate the effect of these reforms before adjusting
our budget.
126.
The total $4.5 billion budget will include CAF support resulting from intercarrier
compensation reform, as well as new CAF funding for broadband and support for legacy programs during
a transitional period.197 As part of this budget, we will provide $500 million per year in support through
the Mobility Fund, of which up to $100 million in funding will be reserved for Tribal lands. We will also
provide at least $100 million to subsidize service in the highest cost areas. The remaining amount –
approximately $4 billion – will be divided between areas served by price cap carriers and areas served by
rate-of-return carriers, with no more than $1.8 billion available annually for price cap territories after a
transition period and up to $2 billion available annually for rate-of-return territories, including, in both
instances, intercarrier compensation recovery. We also institute a number of safeguards in this new
196 Schools and Libraries Universal Service Support Mechanism, CC Docket No. 02-6, Sixth Report and Order, 25
FCC Rcd 18762, 18781, par. 36 (2010).
197 Throughout this document, “Tribal lands” include any federally recognized Indian tribe’s reservation, pueblo or
colony, including former reservations in Oklahoma, Alaska Native regions established pursuant to the Alaska Native
Claims Settlements Act (85 Stat. 688), and Indian Allotments, see 47 C.F.R. § 54.400(e), as well as Hawaiian Home
Lands—areas held in trust for native Hawaiians by the state of Hawaii, pursuant to the Hawaiian Homes
Commission Act, 1920, Act July 9, 1921, 42 Stat. 108, et seq., as amended. We adopt a definition of “Tribal lands”
that includes Hawaiian Home Lands, as the term was used in the Notice. USF/ICC Transformation NPRM, 26 FCC
at 4558, para. 3 n.4. We note that Hawaiian Home Lands were not included within the Tribal definition in the 2007
order that adopted an interim cap on support for competitive eligible telecommunications carriers, with an
exemption of Tribal lands from that cap. See Interim Cap Order, 23 FCC Rcd at 8848-49, paras. 31-33. We agree
with the State of Hawaii that Hawaiian Home Lands should be included in the definition of Tribal lands in the
context of the comprehensive reforms we adopt today for the universal service program. Letter from Bruce A.
Olcott, Counsel to the State of Hawaii, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et al. (filed
Oct. 15, 2011).
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framework to ensure that carriers that warrant additional funding have the opportunity to petition for suchrelief. Although we expect that in some years CAF may distribute less than the total budget, and in other
years slightly more, we adopt mechanisms later in this Order to keep the contribution burden at no more
than $4.5 billion per year, plus administrative expenses, notwithstanding variations on the distribution
side.198 Meanwhile, we will closely monitor the CAF mechanisms for longer-term consistency with the
overall budget goal, while ensuring the budget remains at appropriate levels to satisfy our statutory
mandates.
C.
Providing Support in Areas Served by Price Cap Carriers
127.More than 83 percent of the approximately 18 million Americans who lack access to
fixed broadband live in price cap study areas.199 As a first step to delivering robust, scalable broadband to
these unserved areas, the first phase of the CAF will provide the opportunity for price cap carriers to
begin extending broadband service to hundreds of thousands of unserved locations in their territories. In
the second phase of the CAF, we will use a combination of a forward-looking broadband cost model and
competitive bidding to efficiently support deployment of networks providing both voice and broadband
service for a five-year period. Before 2018, we will determine how best to further expand the use of
market-based mechanisms, such as competitive bidding, to fulfill our universal service mandate in the
most efficient and fiscally responsible manner.
1.
Immediate Steps To Begin Rationalizing Support Levels For Price Cap
Carriers
In this section, we begin the process of transitioning high cost support for price cap
carriers to the CAF by establishing CAF Phase I. In CAF Phase I, we freeze support under our existing
high-cost support mechanisms—HCLS, SNA, safety valve, HCMS, LSS, IAS, and ICLS—for price cap
carriers and their rate-of-return affiliates.200 We will now call this support “frozen high-cost support.” In
addition, to spur the deployment of broadband in unserved areas, we allocate up to $300 million in
198 See infra section VII.H (Enforcing the Budget for Universal Service). The $4.5 billion budget includes only
disbursements of support and does not include administrative expenses, which will continue to be collected
consistent with past practices. Typically, administrative expenses attributed to the high-cost program (including
other overhead expenses from USAC) range from 1 to 2 percent of total program expenses. See USAC Quarterly
Administrative Filings, available at http://www.usac.org/about/governance/fcc-filings/fcc-filings-archive.aspx (for
1998-First Quarter 2012). Similarly, the $4.5 billion budget does not include prior period adjustments associated
with support attributable to years prior to 2012. For example, USAC will be performing true-ups associated with
2010 ICLS in 2012. See 47 C.F.R. 54.903(b)(3). To the extent that those true-ups result in increased support for
2010, those disbursements would not apply to the budget discussed here.
199 See National Broadband Map, available at http://www.broadbandmap.gov. Based on data as of December 2010,
there were an estimated 18.8 million Americans who lacked access to terrestrial fixed broadband services with a
maximum advertised download speed of at least 3 Mbps and a maximum advertised upload speed of at least 768
kbps. Id. For these purposes, terrestrial fixed broadband technologies include xDSL, other copper, cable modem,
fiber to the end user, fixed wireless, whether licensed or unlicensed, and electric power line. To obtain the numbers
of unserved people in price cap regions, staff used data from TeleAtlas North America representing boundaries of
wire centers. These wire centers contain study area codes, which staff associated with USAC codes classifying
those areas as either price cap or rate of return. Staff linked this set of data to the data underlying the National
Broadband Map, which can be used to report broadband availability by study area. See
http://www.broadbandmap.gov/nbm/summarize. The resulting link shows that, of the 18.8 million people without
service, 83 percent are in price cap areas and 17 percent are in rate of return areas, as defined by USAC.
200 In doing so, we eliminate altogether the current HCMS and IAS mechanisms for price cap companies. For
further discussion of changes to HCLS, SNA, LSS and ICLS, applicable to rate-of-return carriers, see infra Section
VII.D.
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additional support to such carriers, distributed through the mechanism described below;201 we call thiscomponent of CAF Phase I support “incremental support.”
129.
In establishing CAF Phase I, we set the stage for a full transition to a system where
support in price cap territories is determined based on competitive bidding or the forward-looking costs of
a modern multi-purpose network. The reforms we adopt today represent an important step away from
distinctions based on whether a company is classified as a rural carrier or a non-rural carrier—distinctions
that, for the purposes of calculating universal service support, are artifacts of our rules rather than
required by the Act. Instead, we establish two pathways for how support is determined—one for
companies whose interstate rates are regulated under price caps, and the other for those whose interstate
rates are regulated under rate-of-return. We make conforming changes to our Part 54 rules as necessary
to reflect that framework.202 Consistent with our goal of providing support to price cap companies on a
forward-looking cost basis, rather than based on embedded costs, we will, for the purposes of CAF Phase
I, treat as price cap carriers the rate-of-return operating companies that are affiliated with holding
companies for which the majority of access lines are regulated under price caps. That is, we will freeze
their universal service support and consider them as price cap areas for the purposes of our new CAF
Phase I distribution mechanism.203
130.
Background. Historically, the Commission’s intrastate universal service programs have
distinguished between companies classified as “rural” and “non-rural” carriers, with the former eligible
for high-cost loop support (HCLS) and the latter eligible for high-cost model support (HCMS).204 The
term “rural telephone company,” however, as defined by the Act, does not simply mean a carrier that
serves rural areas.205 Rather, a rural telephone company, generally speaking, is a relatively small
telephone company that only serves rural areas. Many “non-rural” carriers serve both urban and rural
areas. In fact, price cap companies, which largely are classified as non-rural companies, today serve more
than 83 percent of the people that lack broadband, many of whom live in areas that are just as low-density
and remote as areas served by rural companies.206 Today, some price cap carriers meet the Act’s
201 As detailed more fully above, we set the total CAF budget for areas served by price cap carriers at $1.8 billion
out of the total $4.5 billion annual budget. See supra para. 126. The $300 million in additional support we allocate
to price cap carriers today begins the process of closing the rural-rural divide by directing additional funds to areas
served by price cap carriers in a manner consistent with our overall budget goals and the more limited purpose of
Phase I.
202 We recognize that the statute also makes a distinction in how it directs the states and this Commission to evaluate
requests for designation by additional carriers in areas served by rural companies. In particular, section 214(e)(6)
specifies that the Commission “may, with respect to an area served by a rural telephone company, and shall, in the
case of all other areas, designate more than one common carrier as an eligible telecommunications carrier for a
service area designated under this paragraph . . . . Before designating an additional telecommunications carrier for an
area served by a rural telephone company, the Commission shall find that the designation is in the public interest.”
Nothing in this Order is intended to undermine those statutory directives.
203 This action does not require mandatory price cap conversion for those operating companies, but rather establishes
the principle that such companies in the future will receive support based on a forward looking cost model rather
than their embedded costs.
204 See 47 U.S.C. § 153(37) (definition of rural telephone company); 47 C.F.R. § 51.5 (adopting the Act’s definition
of “rural telephone company” for universal service purposes).
205 See 47 U.S.C. § 153(37).
206 See supra note 199. The distinction in how universal service support is calculated for rural and non-rural carriers
is a vestige of how the Commission initially implemented section 254 in the wake of the 1996 Act. At that time, the
Commission concluded that it would use a forward-looking cost model to calculate the cost of providing universal
service in high-cost areas, but it chose to implement such a mechanism initially only for companies classified as
(continued…)
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definition of a rural telephone company and are eligible for HCLS, while others do not and are eligible forHCMS. In addition, at least some price cap carriers currently receive support from each of the other high-
cost support mechanisms: LSS, IAS, and ICLS.207
131.
In response to the USF/ICC Transformation NPRM, several price cap carriers proposed,
as a transitional measure, to provide support to price cap carriers based on a simplified forward-looking
estimate of the costs of serving each wire center, without averaging such costs on a statewide basis as the
current non-rural support mechanism does.208 We sought further comment on this proposal in the August
3 Public Notice.209 We also specifically requested comment on the amount of support that should be
distributed under such a mechanism and the public interest obligations that should attach to recipients of
such support.210
(Continued from previous page)
“non-rural” under the 1996 Act, which were the Bell operating companies and other large incumbent telephone
companies. It allowed the more than 1,000 small carriers operating in rural areas to continue to receive support
temporarily based on their embedded costs under mechanisms that pre-dated the 1996 Act, with some modifications.
Then, in 2001, the Commission adopted a plan to maintain the existing high-cost loop support program, with some
modifications, for those rural carriers. See Rural Task Force Order, 16 FCC Rcd 11244; see also Federal-State
Joint Board on Universal Service, CC Docket No. 96-45, WC Docket No. 05-337, Order, 21 FCC Rcd 5514, 5515,
para. 2 (2006) (extending rules, which originally had been designed to last for five years, rules until such time that
the Commission “adopts new high-cost support rules for rural carriers”). Because some price cap carriers meet the
definition of a rural carrier under the 1996 Act, however, those companies still receive support today based on their
embedded costs in some study areas.
207 LSS is intended to support the cost of switching equipment; it provides support for study areas with 50,000 or
fewer access lines. See 47 C.F.R. §§ 54.301, 36.125(f)(j); see also infra para. 253. IAS was created as part of the
May 2000 CALLS Order; it was designed to offset certain reductions in price cap carriers’ interstate access charges
made in the same order. See CALLS Order, 15 FCC Rcd at 12974-75, para. 30; see also USF/ICC Transformation
NPRM, 26 FCC Rcd at 4633-34, paras. 229-31. Only those carriers that were price cap carriers at the time of the
CALLS Order receive IAS, however, so the Commission has permitted those carriers that have transitioned from
rate-of-return regulation to price cap regulation subsequent to that order to continue to receive ICLS (which is
ordinarily available only to rate-of-return carriers) on a frozen basis—such support is known as frozen ICLS. See,
e.g., Windstream Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief, 23 FCC Rcd 5294,
5302-04, paras. 19-22 (2008).
208 See Windstream USF/ICC Transformation NPRM Comments at 9; Letter from Jennie B. Chandra, Windstream
Communications, Inc., to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al. (filed June 30, 2011);
Letter from Michael D. Saperstein, Jr., Frontier Communications, to Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10-90, et al. (filed July 26, 2011).
209 See Further Inquiry into Certain Issues in the Universal Service-Intercarrier Compensation transformation
Proceeding, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51,
Public Notice, DA 11-1348, at 10 (Wireline Comp. Bur. rel. Aug. 3, 2011) (August 3 Public Notice). NASUCA
generally supported the proposal to combine disparate support mechanisms, while noting that it cannot evaluate the
proposed targeting of support without knowing which carriers will receive more and which less. See NASUCA
August 3 PN Comments at 97-98. We do not think, however, that our decision on whether this interim measure
appropriately advances our goals depends on a specific analysis of how much money flows to particular price cap
carriers. The Rural Broadband Alliance objects to any use of the existing cost model to determine support levels,
arguing that the only currently appropriate means to provide support is on a rate-of-return basis. Rural Broadband
Alliance August 3 PN Comments, Attach. at 23-24. We find the Rural Broadband Alliance’s undeveloped and
unsupported objections to be without merit.
210 August 3 Public Notice at 10. No commenter offered a proposal regarding the specific amount of support that
should be provided through such a mechanism nor did any specify the public interest obligations that should be
associated with such support.
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132.Discussion. Below, we adopt a framework for the Connect America Fund that will
provide support in price cap territories based on a combination of competitive bidding and a forward-
looking cost model. Developing and implementing such a cost model with appropriate opportunities for
public inspection and comment and finalizing the rules for competitive bidding are expected to take a year
or more. In order to immediately start to accelerate broadband deployment to unserved areas across
America, we modify our rules to provide support to price cap carriers under a transitional distribution
mechanism, CAF Phase I.
133.
Specifically, effective January 1, 2012, we freeze all support under our existing high-cost
support mechanisms, HCLS,211 forward-looking model support (HCMS), safety valve support, LSS, IAS,
and ICLS, on a study area basis for price cap carriers and their rate-of-return affiliates. On an interim
basis, we will provide frozen high-cost support to such carriers equal to the amount of support each
carrier received in 2011 in a given study area.212 Frozen high-cost support will be reduced to the extent
that a carrier’s rates for local voice service fall below an urban local rate floor that we adopt below to
limit universal service support where there are artificially low rates.213 In addition to frozen high-cost
support, we will distribute up to $300 million in incremental support to price cap carriers and their rate of
return affiliates using a simplified forward-looking cost estimate, based on our existing cost model.
134.
This simplified, interim approach is based on a proposal in the record from several
carriers.214 Support will be determined as follows: First, a forward-looking cost estimate will be
generated for each wire center served by a price cap carrier. Our existing forward-looking cost model,
designed to estimate the costs of providing voice service, generates estimates only for wire centers served
by non-rural carriers; it cannot be applied to areas served by rural carriers without obtaining additional
data from those carriers. The simplest, quickest, and most efficient means to provide support solely based
on forward-looking costs for both rural and non-rural price cap carriers is to extend the existing cost
model by using an equation designed to reasonably predict the output of the existing model for wire
centers it already applies to, and apply it to data that are readily available for wire centers in all areas
served by price cap carriers and their affiliates, including areas the current model does not apply to.215
Three price cap carriers submitted an estimated cost equation that was derived through a regression
analysis of support provided under the existing high-cost model, and they submitted, under protective
order, the data necessary to replicate their analysis.216 No commenter objected to the proponents’ cost-
211 HCLS includes SNA.
212 Frozen high-cost support amounts will be calculated by USAC, and will be equal to the amount of support
disbursed in 2011, without regard to prior period adjustments related to years other than 2011 and as determined by
USAC on January 31, 2012. USAC shall publish each carrier’s frozen high-cost support amount 2011 support, as
calculated, on its website, no later than February 15, 2012. As a consequence of this action, rate-of-return operating
companies that will be treated as price cap areas will no longer be required to perform cost studies for purposes of
calculating HCLS or LSS, as their support will be frozen on a study area basis as of year-end 2011.
213 See infra Section VII.D.5. We note that price cap carriers’ rates in some areas are currently well below the urban
local rate average. See infra note 380 .
214 See Letter from Cathy Carpino, AT&T, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al.
(filed Oct. 21, 2011); see also infra note 216.
215 We note that the State Members of the Joint Board recommended as part of their comprehensive plan that the
Commission continue to use its existing cost model, with some modifications. State Members USF/ICC
Transformation NPRM Comments at 37. They also suggested that “statistical cost models are a potentially
promising substitute for the engineering-based cost models currently in use.” Id. at 38.
216 See Letter from Jennie B. Chandra, Windstream Communications, Inc., to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, et al. (filed June 30, 2011) (detailing the regression analysis and the proposed cost-
estimation equation); Letter from Jennie B. Chandra, Windstream Communications, Inc., to Marlene H. Dortch,
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estimation function.217 Following our own assessment of the regression analysis and the proposed cost-estimation function, we conclude that the proposed function will serve our purpose well to estimate costs
on an interim basis in wire centers now served by rural price cap carriers, and we adopt it. That cost-
estimation function is defined as:
ln(Total cost)
=7.08 + 0.02 * ln(distance to nearest central office in feet + 1)
– 0.15 * ln(number of households + businesses in the wire center + 1)
+ 0.22 * ln(total road feed in wire center + 1)
+ 0.06 * (ln(number of households + businesses in wire center + 1)) ^2
– 0.01 * (ln(number of businesses in wire center + 1))^2
– 0.07 * ln((number of households + businesses)/square miles) + 1)
135.
The output of the cost-estimation function will be converted into dollars and then further
converted into a per-location cost in the wire center. The resulting per-location cost for each wire center
will be compared to a funding threshold, which, as explained below, will be determined by our budget
constraint. Support will be calculated based on the wire centers where the cost for the wire center
exceeds the funding threshold. Specifically, the amount by which the per-location cost exceeds the
funding threshold will be multiplied by the total number of household and business locations in the wire
center.
136.
The funding threshold will be set so that, using the distribution process described above,
all $300 million of incremental support potentially available under the mechanism would be allocated.
We delegate to the Wireline Competition Bureau the task of performing the calculations necessary to
(Continued from previous page)
Secretary, FCC, CC Docket No. 96-45 (filed July 20, 2011) (providing data necessary to evaluate the regression
analysis). The r2 value for the regression was 0.91. See Letter from Jennie B. Chandra, Windstream
Communications, Inc., to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al., Attach. at 8 (filed June
30, 2011).
217 One commenter expressed some general concerns with the regression equation, but did not argue that using it
would be inappropriate. See Letter from Peter Bluhm to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-
90, et al. (filed Oct. 18, 2011). In particular, the commenter noted that two variables in the regression equation, total
locations (business locations plus households) and the separate business locations variable, operate in ways that
seem unintuitive, because as locations increase, predicted costs decrease. While we acknowledge this concern, we
note that this is not a model that attempts to predict costs by focusing on variables that cause those costs; instead the
model seeks only to predict costs. Variables capturing locations explicitly might also capture density implicitly; to
the extent they do, as locations increase costs would tend to decrease. While cost equations could be created that
separated these effects, the goal of the cost prediction equation is to predict the output of the current cost model with
as simple a model as possible.
We find that the relevant question for our purposes is whether the equation reliably produces accurate results, which,
as discussed above, it does. In the absence of criticism of its results, or a proposal for an equation that is superior
(e.g., one that produces more accurate results without unduly increasing complexity), we see no reason to fault it on
this basis. This commenter also expressed concern that a log-linear equation regression creates a risk of inaccuracy
for very low values and from synergistic interactions among terms. Such risks, however, appear to be more
theoretical than actual in this case. That is, the commenter does not argue that using a log-linear equation has
actually caused these effects, and we have not seen evidence to suggest that any such effects have rendered the
regression unreliable as a general matter. Finally, this commenter argues that the Commission should give the
public access to the underlying data for it to evaluate the regression to see if it can be improved. As noted above,
see supra note 216, carriers submitted the necessary data under protective order, and the data were made available
for review in accordance with the terms of that order.
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determine the support amounts and selecting any necessary data sources for that task.218 The Bureau willannounce incremental support amounts via Public Notice; we anticipate the Bureau will complete its work
and announce such support amounts on or before March 31, 2012. USAC will disburse CAF Phase I
funds on its customary schedule.219
137.
CAF Phase I incremental support is designed to provide an immediate boost to
broadband deployment in areas that are unserved by any broadband provider. Carriers have been steadily
expanding their broadband footprints, funded through a combination of support provided under current
mechanisms and other sources, and we expect such deployment will continue. We intend for CAF Phase
I to enable additional deployment beyond what carriers would otherwise undertake, absent this reform.
Thus, consistent with our other reforms, we will require carriers that accept incremental support under
CAF Phase I to meet concrete broadband deployment obligations.220
138.
Specifically, the Bureau will calculate, on a holding company basis, how much CAF
Phase I incremental support price cap carriers are eligible for. Carriers may elect to receive all, none, or a
portion of the incremental support for which they are eligible. A carrier accepting incremental support
will be required to deploy broadband to a number of locations equal to the amount it accepts divided by
$775. For example, a carrier projected to receive $7,750,000 will be permitted to accept up to that
amount of incremental support. If it accepts the full amount, it will be required to deploy broadband to at
least 10,000 unserved locations; if it accepts $3,875,000, it will be required to deploy broadband to at
least 5,000 unserved locations. To the extent incremental support is declined, it may be used in other
ways to advance our broadband objectives pursuant to our statutory authority.221
218 In the event the Wireline Competition Bureau concludes that appropriate data are not readily available for these
purposes for certain areas, such as some or all U.S. territories served by price cap carriers, the Bureau may exclude
such areas from the analysis for this interim mechanism, which would result in the carriers in such areas continuing
to receive frozen support.
219 In 2012, USAC will disburse frozen high-cost support over the course of the entire year. Because incremental
support will not be distributed until carriers accept such funding, in 2012, USAC will be required to disburse 2012
incremental support over the course of less than a full calendar year.
220 We acknowledge that our existing cost model, on which our distribution mechanism for CAF Phase I incremental
funding is based, calculates the cost of providing voice service rather than broadband service, although we are
requiring carriers to meet broadband deployment obligations if they accept CAF Phase I incremental funding. We
find that using estimates of the cost of deploying voice service, even though we impose broadband deployment
obligations, is reasonable in the context of this interim support mechanism. First, this interim mechanism is
designed to identify the most expensive wire centers, and the same characteristics that make it expensive to provide
voice service to a wire center (e.g., lack of density) make it expensive to provide broadband service to that wire
center as well. Using a cost estimation function based on our existing model will help to identify which wire centers
are likely to be the most expensive to provide broadband service to, even if it does not reliably identify precisely
how expensive those wire centers will be to serve. Second, and related, our funding threshold is determined by our
budget limit of $300 million for CAF Phase I incremental support rather than by a calculation of what amount we
expect a carrier to need to serve that area. That is, this interim mechanism is not designed to “fully” fund any
particular wire center—it is not designed to fund the difference between (i) the deployment cost associated with the
most expensive wire center in which we could reasonably expect a carrier to deploy broadband without any support
at all and (ii) the actual estimated deployment cost for a wire center. Instead, the interim mechanism is designed to
provide support to carriers that serve areas where we expect that providing broadband service will require universal
service support.
221 For instance, the funds could be held as part of accumulated reserve funds that would help minimize budget
fluctuations in the event the Commission grants some petitions for waiver. Also, a number of parties have urged us
to use high-cost funding to advance adoption programs. We note that the Commission has an open proceeding to
reform the low income assistance programs, which specifically contemplates broadband pilots in the Lifeline and
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139.Our objective is to articulate a measurable, enforceable obligation to extend service to
unserved locations during CAF Phase I. For this interim program, we are not attempting to identify the
precise cost of deploying broadband to any particular location. Instead, we are trying to identify an
appropriate standard to spur immediate broadband deployment to as many unserved locations as possible,
given our budget constraint. In this context, we find that a one-time support payment of $775 per
unserved location for the purpose of calculating broadband deployment obligations for companies that
elect to receive additional support is appropriate.
140.
To develop that performance obligation, we considered broadband deployment projects
undertaken by a mid-sized price cap carrier under the BIP program.222 The average per-location cost of
deployment for those projects—including both the public contribution and the company’s own capital
contribution—was $557,223 significantly lower than the $775 per-location amount—which does not
include any company contribution—we adopt today. We note that our analysis indicated that the per-
location cost for deployments funded through the BIP program varied considerably. In addition, we
observe that the BIP program’s requirements differ from the requirements we adopt here. Specifically,
carriers could obtain BIP funding for improving service to underserved locations as well as deploying to
unserved locations, while carriers can meet their CAF Phase I deployment obligations only by deploying
broadband to unserved locations.224 For these reasons, while we find this average per-location cost to be
relevant, we decline to set our requirement at a per-location cost of $557.
141.
In addition, we considered data from the analysis done as part of the National Broadband
Plan. The cost model used in developing the National Broadband Plan estimated that the median cost of
upgrading existing unserved homes is approximately $650 to $750, with approximately 3.5 million
locations whose upgrade cost is below that figure.225
142.
Commission staff also conducted an analysis using the ABC plan cost model, which
(Continued from previous page)
LinkUp programs. To the extent that savings were available from CAF programs, the Commission could reallocate
that funding for broadband adoption programs, consistent with our statutory authority, while still remaining within
our budget target. Cf. Letter from Blair Levin to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al.
(filed Oct. 19, 2011) (urging the Commission to focus on promoting adoption); Letter from Parul P. Desai,
Consumers Union, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al. (filed Oct. 14, 2011) (same).
Alternatively, savings could be used to reduce the contribution burden.
222 Only one price cap carrier received BIP grant funding for last-mile broadband deployment; we considered all of
that carrier’s projects. Information about BIP projects is available at
http://www.rurdev.usda.gov/supportdocuments/RBBreport_V5ForWeb.pdf.
223 The per-location cost for those carrier’s projects ranged from a low of $286 to a high of $3,000. Assuming all
locations in a project had a per-location cost equal to the average per-location cost in the project, the median
location’s cost was $377, while the 25th percentile cost was $286 and the 75th percentile cost was $813.
224 We also recognize that the cost of future deployment for a carrier may be higher than the average cost of
deployments that the carrier already completed because the carrier may have prioritized deployment to areas that
were least costly to reach.
225 See OBI, Broadband Availability Gap. The OBI model estimated that the initial capex to serve all but the most
expensive 250,000 homes terrestrially is $9.2 billion (see id., Exhibit 4-AP); this investment serves approximately 7
million locations, making the average cost per location approximately $1,300. The average cost is much higher than
the median cost, however, even excluding the most expensive 1 percent of locations (see, e.g., id., Exhibit 1-C).
According to the OBI model, the calculated median cost is roughly 60-70 percent of the average, or approximately
$650 to $750.
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calculates the cost of deploying broadband to unserved locations on a census block basis.226 Commissionstaff estimated that the median cost of a brownfield deployment of broadband to low-cost unserved
census blocks is $765 per location (i.e., there are 1.75 million unserved, low-cost locations in areas served
by price cap carriers with costs below $765); the cost of deploying broadband to the census block at the
25th percentile of the cost distribution is approximately $530 per location (under this analysis, there are
875,000 such locations whose cost is below $530).227 Although, as discussed below, we do not adopt the
proposed cost model to calculate support amounts for CAF Phase II,228 these estimates provide additional
data points to consider.
143.
In addition, we note that several carriers placed estimates of the per-location cost of
extending broadband to unserved locations in their respective territories into the record.229 While several
carriers claim that the cost to serve unserved locations is higher than the figure we adopt today, those
estimates did not provide supporting data sufficient to fully evaluate them.
144.
Taking into account all of these factors, including the cost estimates developed in the
course of BIP applications as well as the flexibility we provide to carriers accepting such funding to
determine where to deploy and our expectation that carriers will supplement incremental support with
their own investment, we conclude that the $775 per unserved location figure represents a reasonable
226 See Letter from Mike Lieberman, AT&T, Michael D. Saperstein, Jr., Frontier, Jeffrey S. Lanning, CenturyLink,
Maggie McCready, Verizon, Michael T. Skrivan, Fairpoint Communications, Frank Schueneman, Windstream
Communications, Inc., to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, et al. (filed Sept. 28, 2011).
227 Because CAF Phase I is structured to provide one-time support, rather than ongoing support, Commission staff
focused on the modeled costs in the ABC plan cost model for areas where the cost to provide service is lower: areas
unserved by both cable and telco broadband, with total costs less than $80 per month. As proposed by the
proponents of the ABC plan, in order to meet their proposed budget target, these areas would not be eligible for
ongoing support.
The ABC model calculates the total cost to serve, including initial capex as well as ongoing capex and opex.
Because of the focus on lower-cost areas, staff assumed that end-user revenue would meet or exceed ongoing costs,
and therefore focused only on a subsidy for the initial investment. The ABC model calculates costs for a greenfield
12,000-foot-loop DSL plant. Since the focus here is on upgrading existing lines to broadband, staff had to estimate
the cost associated only with that upgrade. To do so, staff excluded the capital costs associated with the last 12,000
feet of copper, which staff assumed already exist; these costs are captured in the ABC filing, in the file named
CBG_Detail, as Node3Inv_Res, Node4Inv_Res, Node3Inv_Bus, and Node4Inv_Bus. The cost of upgrading is the
total investment (TotalInv_Res plus TotalInv_Bus) less the capital costs for the last 12,000 feet of copper. That total
cost is then divided by the total number of locations (TotalActiveSubscribers_Res plus TotalActiveSubscribers_Bus,
divided by 0.9 to get locations instead of subscribers, given that the CQBAT model assumed that 90 percent of
locations would subscribe) to get the initial investment per location in each census block group.
Staff then focused only on those parts of low-cost census block groups that are unserved by cable and by telco
broadband in price cap areas. Census block groups were arranged from lowest to highest cost (for the cost of the
brownfield costs described above), and the 25th, 50th (median), and 75th percentile by locations were determined to
be $529, $764, and $1,057 respectively.
228 See infra paras. 184-185.
229 See Letter from Michael D. Saperstein, Frontier Communications, to Marlene H. Dortch, Secretary, FCC, CC
Docket No. 01-92, et al. (filed Oct. 20, 2011); Letter from Jeffrey S. Lanning, CenturyLink, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, et al. (filed Oct. 20, 2011); see also Letter from Russell M. Blau, counsel
for Consolidated Communications, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al., Attach. at 2
(filed Oct. 19, 2011) (providing an estimate of the per-line cost to provide 6 Mbps downstream and 1.5 Mbps
upstream service to all 7,500 customers in its service area to whom Consolidated does not currently offer broadband
service).
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estimate of an interim performance obligation for this one-time support. We also emphasize that CAFPhase I incremental support is optional—carriers that cannot meet our broadband deployment requirement
may decline to accept incremental support or may choose to accept only a portion of the amount for
which they are eligible.
145.
We find that, in this interim support mechanism, setting our broadband deployment
obligations based on the costs of deploying to lower-cost wire centers that would not otherwise be served,
even though we base support on the predicted costs of the highest-cost wire centers, is reasonable because
we are trying to expand voice and broadband availability as much and as quickly as possible. We
distribute support based on the costs of the highest-cost wire centers because the ultimate goal of our
reforms is to ensure that all areas get broadband-capable networks, whether through the operation of the
market or through support from USF. In this interim mechanism, we distribute funding to those carriers
that provide service in the highest-cost areas because these are the areas where we can be most confident,
based on available information, that USF support will be necessary in order to realize timely deployment.
Thus, we can be confident we are allocating support to carriers that will need it to deploy broadband in
some portion of their service territory. At the same time, to promote the most rapid expansion of
broadband to as many households as possible, we wish to encourage carriers to use the support in lower-
cost areas where there is no private sector business case for deployment of broadband, to the extent
carriers also serve such areas. Although at this time we lack data sufficient to identify these areas, we can
encourage this use of funding by setting the deployment requirement based on our overall estimate of
upgrade costs in lower cost unserved areas, while providing carriers flexibility to allocate funding to these
areas, rather than the highest cost wire centers identified by the cost-estimation equation. Accordingly,
while we allocate CAF Phase I support on the basis of carriers’ service to the highest-cost areas, we allow
carriers to use that support in lower-cost areas, and we size their deployment obligations accordingly. We
note that, historically, carriers have always been able to use support in wire centers other than the ones for
which support is paid, and nothing in the Act constrains that flexibility such that it applies only within
state boundaries. Accordingly, in the context of this interim mechanism, we will permit carriers to
continue to have such flexibility.
146.
Within 90 days of being informed of the amount of incremental support it is eligible to
receive, each carrier must provide notice to the Commission, the Administrator, the relevant state or
territorial commission, and any affected Tribal government, identifying the amount of support it wishes to
accept and the areas by wire center and census block in which the carrier intends to deploy broadband to
meet its obligation, or stating that the carrier declines to accept incremental support for that year.230
Carriers accepting incremental support must make the following certifications. First, the carrier must
certify that deployment funded through CAF Phase I incremental support will occur in areas shown on the
most current version of the National Broadband Map as unserved by fixed broadband with a minimum
speed of 768 kbps downstream and 200 kbps upstream, and that, to the best of the carrier’s knowledge,
are, in fact, unserved by fixed broadband at those speeds.231 Second, the carrier must certify that the
230 Because carriers will accept or decline incremental support on a holding company basis, carriers should notify
USAC regarding which ETC operating company or companies USAC should disburse funds to.
231 The National Broadband Map divides broadband transmission technologies into 12 types: asymmetric xDSL,
symmetric xDSL, other copper wireline, cable modem - DOCSIS 3.0, cable modem - other, satellite, terrestrial fixed
wireless - unlicensed, terrestrial fixed wireless - licensed, terrestrial mobile wireless - licensed, electric power line,
and all other. The term “unserved by fixed broadband” for the purpose of CAF Phase I includes areas not identified
by the National Broadband Map as served by at least one of the following technologies: asymmetric xDSL,
symmetric xDSL; other copper wireline; cable modem - DOCSIS 3.0; cable modem - other; electric power line;
terrestrial fixed wireless - unlicensed; and terrestrial fixed wireless - license. For the purposes of CAF Phase I we
find it appropriate to distinguish fixed from mobile broadband service. See supra note 134. We acknowledge that
some have claimed that the National Broadband Map is not completely accurate. Nevertheless, we find that using it
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carrier’s current capital improvement plan did not already include plans to complete broadbanddeployment to that area within the next three years,232 and that CAF Phase I incremental support will not
be used to satisfy any merger commitment or similar regulatory obligation.233
147.
Carriers must complete deployment to no fewer than two-thirds of the required number
of locations within two years, and all required locations within three years, after filing their notices of
acceptance. Carriers must provide a certification to that effect to the Commission, the Administrator, the
relevant state or territorial commission, and any affected Tribal government, as part of their annual
certifications pursuant to new section 54.313 of our rules, following both the two-thirds and completion
milestones. To fulfill their deployment obligation, carriers must offer broadband service of at least 4
Mbps downstream and 1 Mbps upstream,234 with latency sufficiently low to enable the use of real-time
communications, including VoIP, and with usage limits, if any, that are reasonably comparable to those
for comparable services in urban areas.235 Carriers failing to meet a deployment milestone will be
required to return the incremental support distributed in connection with that deployment obligation and
will be potentially subject to other penalties, including additional forfeitures, as the Commission deems
appropriate. If a carrier fails to meet the two-thirds deployment milestone within two years and returns
(Continued from previous page)
in this way, along with our requirement that carriers certify that the areas to which they intend to deploy are
unserved to the best of each carrier’s knowledge, is a reasonable and efficient means to identify areas that are, in
fact, unserved, even if there might be other areas that are also unserved.
232 If a carrier’s pre-existing capital improvement plan provided for build out to an area within three years on the
assumption that the carrier would get support under our existing high-cost mechanisms, the carrier could not make
this certification for that area. We anticipate that carriers will adjust their capital improvement plans in light of our
reforms, which will provide additional incremental funding to many carriers to reach areas where they otherwise did
not intend to deploy broadband. A carrier that intends to use incremental CAF Phase I funding to deploy broadband
to such an area could make the required certification for that area.
233 Other similar obligations include, but are not limited to, BIP deployment obligations or state-funded broadband
deployment obligations.
We note that Frontier Communications has already committed, pursuant to the transfer of Verizon properties to
Frontier, to the following: Within areas transferred from Verizon to Frontier, Frontier will offer broadband service
delivering at least 4 Mbps downstream to at least 70 percent of housing units by the end of 2012, to at least 75
percent of housing units by the end of 2013, to at least 80 percent of housing units by the end of 2014, and to at least
85 percent of housing units by the end of 2015. Frontier will offer at least 1 Mbps upstream to those housing units
built after the transaction closed. Frontier will offer these services to both residential and small business users. In
the Matter of Applications Filed by Frontier Communications Corp. & Verizon Communications Inc. for Assignment
or Transfer of Control, 25 FCC Rcd 5972, 6001 (2010).
Similarly, CenturyLink, pursuant to its merger with Qwest, committed to, among other things, the following:
Within areas transferred from Qwest to CenturyLink, CenturyLink will offer broadband service delivering at least 5
Mbps downstream to at least 62 percent of living units within three years of the merger closing date, to at least 68
percent of living units within five years of the merger closing date, and to at least 78.8 percent of living units within
seven years of the merger closing date. In the Matter of Applications filed by Qwest Communications International
Inc. and CenturyTel, Inc. d/b/a CenturyLink for Consent to Transfer Control, WC Docket No. 10-110,
Memorandum Opinion and Order, 26 FCC Rcd 4194, 4219 (2011).
These obligations are independent of obligations Frontier or CenturyLink would incur in return for receiving CAF
Phase I support, and that such support cannot be used to satisfy Frontier’s or CenturyLink’s pre-existing obligations.
234 Upon a showing that the specified support amount is inadequate to enable build out of broadband with actual
upstream speeds of at least 1 Mbps to the required number of locations, a carrier may request a waiver.
235 See supra Section VI.B.1.
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the incremental support provided, and then meets its full deployment obligation associated with thatsupport by the third year, it will be eligible to have support it returned restored to it.
148.
Our expectation is that CAF Phase II will begin on January 1, 2013. However, absent
further Commission action, if CAF Phase II has not been implemented to go into effect by that date, CAF
Phase I will continue to provide support as follows. Annually, no later than December 15, the Bureau
will announce via Public Notice CAF Phase I incremental support amounts for the next term of
incremental support, indicating whether support will be allocated for the full year or for a shorter term.
We delegate to the Wireline Competition Bureau the authority to adjust the term length of incremental
support amounts, and to pro-rate obligations as appropriate, to the extent Phase II CAF is anticipated to be
implemented on a date after the beginning of the calendar year. The amount of incremental support to be
distributed during a term will be calculated in the manner described above, based on allocating $300
million through the incremental support mechanism, but that amount will be reduced by a factor equal to
the portion of a year that the term will last.236 Within 90 days of the beginning of each term of support,
carriers must provide notice to the Commission, the relevant state commission, and any affected Tribal
government, identifying the amount of support it wishes to accept and the areas by wire center and census
block in which the carrier intends to deploy broadband or stating that the carrier declines to accept
incremental support for that term, with the same certification requirements described above.237
149.
CAF Phase I will also begin the process of transitioning all federal high-cost support to
price cap carriers to supporting modern communications networks capable of supporting voice and
broadband in areas without an unsubsidized competitor. Effective January 1, 2012, we require carriers to
use their frozen high-cost support in a manner consistent with achieving universal availability of voice
and broadband. If CAF Phase II has not been implemented to go into effect on or before January 1, 2013,
we will phase in a requirement that carriers use such support for building and operating broadband-
capable networks used to offer their own retail service in areas substantially unserved by an unsubsidized
competitor.238
236 For example, if the Bureau sets a term as six months, only $150 million will be allocated. Support amounts
would be calculated by first calculating the amount of support each carrier would be entitled to if the full $300
million were to be allocated, and then reducing the amount for which each carrier is eligible proportionately. While
this approach should ensure that total funding to price cap territories in the year in which CAF Phase II is
implemented remains below the overall annual budget for price cap territories of $1.8 billion, we direct the Bureau
to ensure the overall annual budget of $1.8 billion for price cap territories is not exceeded.
237 For purposes of this Order, a carrier accepting incremental support in terms after 2012 will be required to deploy
broadband to a number of locations equal to the amount of incremental support it accepts divided by $775, similar to
the obligation for accepting support in 2012.
238 Support should be used to further the goal of universal voice and broadband, and not to subsidize competition in
areas where an unsubsidized competitor is providing service. However, we recognize that certain expenditures, such
as investments in a digital subscriber line access multiplexer (DSLAM) and/or middle mile infrastructure, that
benefit a geographic area unserved by an unsubsidized competitor may also benefit some locations where an
unsubsidized competitor provides service. We do not intend to preclude such investments. While we expect CAF
recipients to use support in areas without an unsubsidized competitor, to the extent support is used to serve any
geographic area that is partially served by an unsubsidized competitor, the recipient must certify that, with respect to
the frozen high-cost support dollars subject to this obligation, at least 50 percent of the locations served are in census
blocks shown as unserved by an unsubsidized competitor, as shown on the National Broadband Map. For example,
if a given middle mile feeder for which frozen high-cost support dollars are used serves 100 locations, and only 40
of those locations are in census blocks shown as unserved by an unsubsidized competitor on the National Broadband
Map, the recipient would not be in compliance with this requirement. For purposes of determining whether this
requirement is met, carriers must be prepared to provide asset records demonstrating the existence of facilities, such
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150.Specifically, in 2013, all carriers receiving frozen high-cost support must use at least
one-third of that support to build and operate broadband-capable networks used to offer the provider’s
own retail broadband service in areas substantially unserved by an unsubsidized competitor.239 For 2014,
at least two-thirds of the frozen high-cost support must be used in such fashion, and for 2015 and
subsequent years, all of the frozen high-cost support must be spent in such fashion. Carriers will be
required to certify that they have spent frozen high-cost support consistent with these requirements in
their annual filings pursuant to new section 54.313 of our rules.
151.
These interim reforms to our support mechanisms for price cap carriers are an important
step in the transition to full implementation of the Connect America Fund. While we intend to complete
implementation of the CAF rapidly, we find that these interim reforms offer immediate improvements
over our existing support mechanisms. First, existing support for price cap carriers will be frozen and no
longer calculated based on embedded costs. Rather, we begin the process of transitioning all high-cost
support to forward-looking costs and market-based mechanisms, which will improve incentives for
carriers to invest efficiently. Second, these reforms begin the process of eliminating the distinction, for
the purposes of calculating high-cost support, between price cap carriers that are classified as rural and
those that are classified as non-rural, a classification that has no direct or necessary relation to the cost of
providing voice and broadband services. In this way, our support mechanisms will be better aligned with
the text of section 254, which directs us to focus on the needs of consumers in “rural, insular, and high
cost areas”240 but makes no reference to the classification of the company receiving support.241 In
addition, we note that the reforms we adopt today, which include providing immediate support to spur
broadband deployment, can be implemented quickly, without the need to overhaul an admittedly dated
cost model that does not reflect modern broadband network architecture.242 Thus, although the simplified
interim mechanism is imperfect in some respects, it will allow us to begin providing additional support to
price cap carriers on a more efficient basis, while spurring immediate and material broadband deployment
pending implementation of CAF competitive bidding- and model-based support for price cap areas.243
152.
No Effect on Interstate Rates. Historically, IAS was intended to replace allowable
common line revenues that otherwise are not recovered through SLCs, while some carriers received
frozen ICLS because, due to the timing of their conversion to price cap regulation, they could not receive
IAS.244 We note that many price cap carriers did not object to the elimination of the IAS mechanism, as
long is it did not occur before the implementation of CAF.245 We have no indication that these price cap
(Continued from previous page)
as a DSLAM and/or middle mile plant, that serve locations in census blocks where there is no unsubsidized
competitor.
239 See supra para. 103. We note that this obligation applies to carriers, regardless of whether or not they accept
CAF Phase I incremental support.
240 47 U.S.C. § 254(b)(3) (emphasis added).
241 See 47 U.S.C. § 153(37).
242 We note that the State Members of the Joint Board recommended as part of their comprehensive plan that the
Commission continue to use its existing cost model, with some modifications. State Members USF/ICC
Transformation NPRM Comments at 37.
243 See infra Section VII.C.2.
244 See supra note 207.
245 CenturyLink/Qwest USF/ICC Transformation NPRM Comments at 26-28; Frontier USF/ICC Transformation
NPRM Comments at 12-14; Frontier USF/ICC Transformation NPRM Reply Comments at 11-12 (supporting
Windstream proposal); Independent Tel. & Telecom. Alliance USF/ICC Transformation NPRM Comments at 9-11;
(continued…)
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carriers expect to raise their SLCs, presubscribed interexchange carrier charges, or other interstate rates asa result of any reform that would eliminate IAS. For clarity, however, we specifically note that while
carriers receive support under CAF Phase I, the amount of their frozen high cost support equal to the
amount of IAS for which each carrier was eligible in 2011 as being received under IAS, including, but not
limited to, for the purposes of calculating interstate rates will be treated as IAS for purposes of our
existing rules. To the extent that a carrier believes that it cannot meet its obligations with the revenues it
receives under the CAF and ICC reforms, it may avail itself of the total cost and earnings review process
described below.246
153.
Elimination of State Rate Certification Filings. Under section 54.316 of our existing
rules, states are required to certify annually whether residential rates in rural areas of their state served by
non-rural carriers are reasonably comparable to urban rates nationwide.247 As part of the reforms we
adopt today, however, we require carriers to file rate information directly with the Commission.248 For
this reason, we conclude that continuing to impose this obligation on the states is unnecessary, and we
relieve state commissions of their obligations under that provision.249
154.
Hawaiian Telcom Petition for Waiver. Hawaiian Telcom, a non-rural price cap
incumbent local exchange carrier, previously sought a waiver of certain rules relating to the support to
which it would be entitled under the high-cost model.250 As Hawaiian Telcom explained, it received no
high-cost model support at all because support under the model was based not on the estimated costs of
individual wire centers but rather the statewide average of the costs of all individual wire centers included
in the model.251 In its petition, Hawaiian Telcom requested that its support under the model be
determined on a wire center basis, without regard to the statewide average of estimated costs calculated
under the high-cost model.252
155.
In light of the reforms we adopt today for support to price cap carriers, we deny the
Hawaiian Telcom petition. We note that our reforms are largely consistent with the thrust of Hawaiian
Telcom’s petition. Phase II support will not involve statewide averaging of costs determined by a model,
but instead will be determined on a much more granular basis. In Phase I, we adopt, on an interim basis,
a new method for distributing support to price cap carriers. While we freeze existing support, we provide
incremental support to price cap carriers through a mechanism that, consistent with Hawaiian Telcom’s
proposal, identifies carriers serving the highest-cost wire centers but does not average wire center costs in
(Continued from previous page)
Verizon and Verizon Wireless USF/ICC Transformation NPRM Comments at 50-51; Windstream USF/ICC
Transformation NPRM Comments at 44.
246 See infra Section XIII.G.
247 See 47 C.F.R. § 54.316.
248 See infra para. 592.
249 We note that under our existing rules, states are also required to certify that carriers have used non-rural support
(i.e., high cost model support) for the provision, maintenance, and upgrading of the facilities and services for which
it is intended. See 47 C.F.R. § 54.313. A similar obligation applies with regard to support to rural carriers. See 47
C.F.R. § 54.314. As described in more detail below, we simplify our rules and combine these two provisions. See
infra para. 613.
250 See Hawaiian Telcom, Inc. Petition for Waiver of Sections 54.309 and 54.313(d)(vi) of the Commission’s Rules,
WC Docket No. 08-4 (filed Dec. 31, 2007).
251 See id. at 4.
252 See id. at 1.
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a state. We therefore believe that the reforms we adopt today will achieve the relief Hawaiian Telcomseeks in its waiver petition and that, to the extent they do not, Hawaiian Telcom may seek additional
targeted support through a request for waiver.
2.
New Framework for Ongoing Support in Price Cap Territories
156.In this section, we adopt Phase II of the Connect America Fund: a framework for
extending broadband to millions of unserved locations over a five-year period, including households,
businesses, and community anchor institutions, while sustaining existing voice and broadband services.
CAF Phase II will have an annual budget of no more than $1.8 billion. To distribute this funding, we will
use a combination of competitive bidding and a new forward-looking model of the cost of constructing
modern multi-purpose networks. Using the model, we will estimate the support necessary to serve areas
where costs are above a specified benchmark, but below a second “extremely high-cost” benchmark. The
Commission will offer each price cap ETC a model-derived support amount in exchange for a
commitment to serve all locations in its service territory in a state that, based on the model, fall within the
high-cost range and are not served by a competing, unsubsidized provider. As part of this state-level
commitment, the ETC will be required to ensure that the service it offers meets specified voice and
broadband performance criteria. In areas where the price cap ETC refuses the state-level commitment,
support will be determined through a competitive bidding mechanism.
157.
In order to expedite adoption of the model to determine statewide support amounts in
price cap areas, we delegate to the Wireline Competition Bureau the task of selecting a specific
engineering cost model and associated inputs that meet the criteria specified below. We anticipate
adoption of the selected model by the end of 2012 for purposes of providing support beginning January 1,
2013.
a.
Budget for Price Cap Areas
158.Within the total $4.5 billion annual budget, we set the total annual CAF budget for areas
currently served by price cap carriers at no more than $1.8 billion for a five-year period.253 In 2010, the
most recent year for which complete disbursement data are available, price cap carriers and their rate-of-
return affiliates received approximately $1.076 billion in support.254 Collectively, more than 83 percent
of the unserved locations in the nation are in price cap areas,255 yet such areas currently receive
approximately 25 percent of high-cost support.256
159.
We conclude that increased support to areas served by price cap carriers, coupled with
rigorous, enforceable deployment obligations, is warranted in the near term to meet our universal service
mandate to unserved consumers residing in these communities. At the same time, we seek to balance
many competing demands for universal service funds, including the need to extend advanced mobile
services and to preserve and advance universal service in areas currently served by rate-of-return
companies. Budgeting up to $1.8 billion for price cap territories, in our judgment, represents a reasonable
253 For purposes of CAF Phase II, consistent with our approach in CAF Phase I, we will treat as price cap carriers the
rate-of-return operating companies that are affiliated with holding companies for which the majority of access lines
are regulated under price caps. A “price cap territory” therefore includes a study area served by a rate-of-return
operating company affiliated with price cap companies.
254 See Federal Communications Commission, Staff Analysis of 2010 High-Cost Disbursement Data, available at
http://www.fcc.gov/document/universal-service-high-cost-program-disbursements (2010 Disbursement Analysis).
Price cap study areas received approximately $1.036 billion. See id.
255 See supra para. 127. This figure does not include unserved locations in the service areas of rate-of-return carriers
affiliated with price cap carriers.
256 In 2010, high-cost USF disbursements totaled $4.268 billion. See 2010 Disbursement Analysis.
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balance of these considerations. We also stress that these subsidies will go to carriers serving price capareas, not necessarily incumbent price cap carriers. Before 2018, we will re-evaluate the need for ongoing
support at these levels and determine how best to drive support to efficient levels, given consumer
demand and technological developments at that time.
b.
Price Cap Public Interest Obligations
160.Price cap ETCs that accept a state-level commitment must provide broadband service
that is reasonably comparable to terrestrial fixed broadband service in urban America. Specifically, price
cap ETCs that receive model-based CAF support will be required, for the first three years they receive
support, to offer broadband at actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with
latency suitable for real-time applications, such as VoIP, and with usage capacity reasonably comparable
to that available in comparable offerings in urban areas. By the end of the third year, ETCs must offer at
least 4 Mbps/1 Mbps broadband service to at least 85 percent of their high-cost locations – including
locations on Tribal lands – covered by the state-level commitment, as described below. By the end of the
fifth year, price cap ETCs must offer at least 4 Mbps/1 Mbps broadband service to all supported locations,
and at least 6 Mbps/1.5 Mbps to a number of supported locations to be specified.
161.
We establish the 85 percent third-year milestone to ensure that recipients of funding
remain on track to meet their performance obligations. While a number of parties agreed generally with
the concept of setting specific, enforceable interim milestones to safeguard the use of public funds,257
there are few concrete suggestions in the record on what those intermediate deadlines should be. We
agree with the State Members of the Joint Board that there should be intermediate milestones for the
required broadband deployment obligations.258 We set an initial requirement of offering broadband to at
least 85 percent of supported locations by the end of the third year, and to all supported locations by the
end of the fifth year.259 As set forth more fully below,260 recipients of funding will be required annually to
report on their progress in extending broadband throughout their areas and must meet the interim deadline
established for the third year, or face loss of support.
162.
Before the end of the fifth year, we expect to have reviewed our minimum broadband
performance metrics in light of expected increases in speed, and other broadband characteristics, in the
intervening years. Based on the information before us today, we expect that consumer usage of
applications, including those for health and education, may evolve over the next five years to require
speeds higher than 4 Mbps downstream/1 Mbps upstream.261 For this reason, we expect ETCs to build
robust, scalable networks that will provide speeds of at least 6 Mbps/1.5 Mbps to a number of supported
locations to be determined in the model development process, as set forth more fully below.
163.
After the end of the five-year term of CAF Phase II, the Commission expects to be
distributing all CAF support in price cap areas pursuant to a market-based mechanism, such as
257 CWA August 3 PN Comments at 4; NASUCA August 3 PN Comments at 86 (supporting State Members
deployment milestones proposal); TIA August 3 PN Comments at 5 (opposing State Members proposal of losing
funding for failing to meet milestones, but supporting flexible deployment milestones).
258 State Members USF/ICC Transformation NPRM Comments at 63.
259 The State Members suggested that support be reduced if a carrier failed to provide 1.5 Mbps service to 95 percent
of the residential locations in its study area by year three. Id. We recognize, however, that carriers typically would
extend service on a project-by project-basis, and therefore adopt a lower percentage milestone relative to the higher
4 Mbps/1 Mbps standard.
260 See infra para. 585.
261 See supra paras. 106-107.
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competitive bidding.262 However, if such a mechanism is not implemented by the end of the five-yearterm of CAF Phase II, the incumbent ETCs will be required to continue providing broadband with
performance characteristics that remain reasonably comparable to the performance characteristics of
terrestrial fixed broadband service in urban America, in exchange for ongoing CAF Phase II support.
c.
Methodology for Allocating Support
164.Background. In the USF/ICC Transformation NPRM, the Commission sought comment
on alternative approaches for determining CAF recipients and appropriate amounts of ongoing CAF
support that would replace all existing high-cost funding.263 Under one option, the Commission proposed
to use a competitive bidding mechanism to award funding to one provider per geographic area in all areas
designated to receive CAF support.264 Under another option, the Commission proposed to offer the
current carrier of last resort in each service area (typically an incumbent telephone company) a right of
first refusal to serve the area for an ongoing amount of annual support based on a forward-looking cost
model, with ongoing support awarded through a competitive bidding mechanism where the right of first
refusal was refused.265 We also sought comment on limiting the full transition to the CAF to a subset of
geographic areas, such as those served by price cap companies, while continuing to provide ongoing
support to smaller, rate-of-return companies based on reasonable actual investment.266
165.
Discussion. We conclude that the Connect America Fund should ultimately rely on
market-based mechanisms, such as competitive bidding, to ensure the most efficient and effective use of
public resources. However, the CAF is not created on a blank slate, but rather against the backdrop of a
decades-old regulatory system. The continued existence of legacy obligations, including state carrier of
last resort obligations for telephone service, complicate the transition to competitive bidding. In the
transition, we seek to avoid consumer disruption—including the loss of traditional voice service—while
getting robust, scalable broadband to substantial numbers of unserved rural Americans as quickly as
possible. Accordingly, we adopt an approach that enables competitive bidding for CAF Phase II support
in the near-term in some price cap areas, while in other areas holding the incumbent carrier to broadband
and other public interest obligations over large geographies in return for five years of CAF support.
166.
Specifically, we adopt the following methodology for providing CAF support in price cap
areas. First, the Commission will model forward-looking costs to estimate the cost of deploying
broadband-capable networks in high-cost areas and identify at a granular level the areas where support
will be available. Second, using the cost model, the Commission will offer each price cap LEC annual
support for a period of five years in exchange for a commitment to offer voice across its service territory
within a state and broadband service to supported locations within that service territory, subject to robust
public interest obligations and accountability standards.267 Third, for all territories for which price cap
LECs decline to make that commitment, the Commission will award ongoing support through a
262 See infra section XVII.J (Competitive Process in Price Cap Territories). We anticipate that the performance
requirements adopted by the Commission for the auction in areas where the state-level commitment is declined may
be different from the performance requirements used for the post-five-year auction, in part because of the difference
in timing and likely changes in network capabilities and consumer demand.
263 USF/ICC Transformation NPRM, 26 FCC Rcd at 4677, para. 400, 4681-92, paras. 417-56.
264 Id. at 4677, para. 400, 4681-84, paras. 418-30.
265 Id. at 4677, para. 400, 4684-90, paras. 431-47.
266 Id. at 4677, para. 401, 4689-92, paras. 447-56.
267 We seek comment in the FNPRM whether and how to adjust ETC voice service obligations in areas where the
ETC is no longer receiving federal support. See infra Section XVII.F.
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competitive bidding mechanism.167.
Determination of Eligible Areas. We will use a forward-looking cost model to determine,
on a census block or smaller basis, areas that will be eligible for CAF Phase II support.268 In doing so, we
will allocate our budget of no more than $1.8 billion for price cap areas to maximize the number of
expensive-to-serve residences, businesses, and community anchor institutions that will have access to
modern networks providing voice and robust, scalable broadband.269 Specifically, we will use the model
to identify those census blocks where the cost of service is likely to be higher than can be supported
through reasonable end-user rates alone, and, therefore, should be eligible for CAF support. We will also
use the model to identify, from among these, a small number of extremely high-cost census blocks that
should receive funding specifically set aside for remote and extremely high-cost areas, as described
below,270 rather than receiving CAF Phase II support, in order to keep the total size of the CAF and legacy
high-cost mechanisms within our $4.5 billion budget.
168.
This methodology balances our desire to extend robust, scalable broadband to all
Americans with our recognition that the very small percentage of households that are most expensive to
serve via terrestrial technology represent a disproportionate share of the cost of serving currently unserved
areas.271 In light of this fact, the State Members of the Joint Board propose that universal service support
be limited to not more than $100 per high-cost location per month, which they suggest is somewhat
higher than the prevailing retail price of satellite service.272 Similarly, ABC Plan proponents recommend
an alternative technology benchmark of $256 per month based on the plan proponents’ cost model – the
CostQuest Broadband Analysis Tool (CQBAT) – which would limit support per location to no more than
$176 per month ($256 - $80 cost benchmark).273 We agree that the highest cost areas are more
appropriately served through alternative approaches, and in the FNPRM we seek comment on how best to
utilize at least $100 million in annual CAF funding to maximize the availability of affordable broadband
in such areas. Here, we adopt a methodology for calculating support that will target support to areas that
exceed a specified cost benchmark, but not provide support for areas that exceed an “extremely high cost”
threshold.
268 Areas with particularly low population density have large census blocks, which may overlap company
boundaries. For example, some blocks may have areas partially served by a rate-of-return carrier, so these areas
would not be eligible for the support available to price cap carriers. The Wireline Competition Bureau will address
this issue in conjunction with finalization of the cost model that will be developed with public input. See infra
paras. 192-193. We believe this flexibility would also allow us to address the concerns raised by the state of Hawaii.
See Letter from Bruce A. Olcott, Counsel to the State of Hawaii, to Hon. Julius Genachowski, Chairman, FCC at 2,
WC Docket Nos. 10-90, 07-135, 05-337, 03-109; CC Docket Nos. 01-92, 96-45; GN Docket No. 09-51 (Oct. 19,
2011).
269 The reference to community anchor institutions should not signal an intention that the model will skew more
funds to communities that have community anchor institutions. In fact, it may be the case that the most unserved
areas do not have community anchor institutions due to their low population density.
270 See infra Section VII.F.
271 See, e.g., National Broadband Plan at 138, 150.
272 State Members USF/ICC Transformation Comments, at 59.
273 See Letter from Robert W. Quinn, Jr., AT&T, Steve Davis, CenturyLink, Michael T. Skrivan, FairPoint,
Kathleen Q. Abernathy, Frontier, Kathleen Grillo, Verizon, and Michael D. Rhoda, Windstream, to Marlene H.
Dortch, Secretary, FCC, WC Docket No. 10-90 et al., Attach. 2 at 2, Attach. 3 (filed July 29, 2011) (ABC Plan).
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169.We delegate to the Wireline Competition Bureau the responsibility for setting the
extremely high-cost threshold in conjunction with adoption of a final cost model. The threshold should
be set to maintain total support in price cap areas within our up to $1.8 billion annual budget.274
170.
In determining the areas eligible for support, we will also exclude areas where, as of a
specified future date as close as possible to the completion of the model and to be determined by the
Wireline Competition Bureau, an unsubsidized competitor offers affordable broadband that meets the
initial public interest obligations that we establish in this Order for CAF Phase I, i.e., speed, latency, and
usage requirements.275 The model scenarios submitted by the ABC Plan proponents excluded areas
already served by a cable company offering broadband.276 State Members propose, at a minimum,
excluding areas with unsubsidized wireline competition, and suggested that areas with reliable 4G
wireless service could also be excluded.277 In an “Amended ABC Plan,” NCTA proposes to exclude
areas where there is an unsupported wireline or wireless broadband competitor, and areas that received
American Recovery and Reinvestment Act stimulus funding from RUS or NTIA to build broadband
facilities.278 We conclude, on balance, that it would be appropriate to exclude any area served by an
unsubsidized competitor that meets our initial performance requirements, and we delegate to the Wireline
Competition Bureau the task of implementing the specific requirements of this rule.
171.
State-Level Commitment. Following adoption of the cost model, which we anticipate will
be before the end of 2012, the Bureau will publish a list of all eligible census blocks associated with each
incumbent price cap carrier within each state. After the list is published, there will be an opportunity for
comments and data to be filed to challenge the determination of whether or not areas are unserved by an
unsubsidized competitor. Each incumbent carrier will then be given an opportunity to accept, for each
state it serves, the public interest obligations associated with all the eligible census blocks in its territory,
in exchange for the total model-derived annual support associated with those census blocks, for a period
of five years. The model-derived support amount associated with each census block will be the difference
between the model-determined cost in that census block, provided that cost is below the highest-cost
threshold, and the cost benchmark used to identify high-cost areas. If the incumbent accepts the state-
level broadband commitment, it shall be subject to the public interest obligations described above for all
locations for which it receives support in that state, and shall be the presumptive recipient of the model-
derived support amount for the five-year CAF Phase II period.279
274 We anticipate that less—and possibly much less—than one percent of all U.S. residences are likely to fall above
the “extremely high-cost” threshold in the final cost model.
275 See supra paras. 103-104, 147.
276 See ABC Plan, Attach. 2. Three scenarios used a combination of cable coverage from both the NTIA and
Warren Media, and one scenario used Nielsen data.
277 State Members USF/ICC Transformation Comments at 43.
278 NCTA August 3 PN Comments, Attach. at 3. NCTA argues that the ABC Plan will spend more money than
necessary because it does not account for the availability of wireless broadband services (either fixed or mobile),
wireline broadband services other than cable, or reasonably anticipate deployments, such as construction pursuant to
Recovery Act stimulus funding from RUS or NTIA, announced deployment schedules for 4G wireless services, and
construction commitments made in context of merger proceedings. Id. at 14-15.
279 In meeting its obligation to serve a particular number of locations in a state, an incumbent that has accepted the
state-level commitment may choose to serve some census blocks with costs above the highest cost threshold instead
of eligible census blocks (i.e., census blocks with lower costs), provided that it meets the public interest obligations
in those census blocks, and provided that the total number of unserved locations and the total number of locations
covered is greater than or equal to the number of locations in the eligible census blocks.
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172.Carriers accepting a state-level commitment will receive funding for five years. At the
end of the five-year term, in the areas where the price cap carriers have accepted the five-year state level
commitment, we expect the Commission will use competitive bidding to award CAF support on a going-
forward basis, and may use the competitive bidding structure adopted by the Commission for use in areas
where the state-level commitment is declined.280
173.
We conclude that the state-level commitment framework we adopt is preferable to the
right of first refusal approach proposed by the Commission in the USF/ICC Transformation NPRM,
which would have been offered at the study area level,281 and to a right of first refusal offered at the wire
center level, as proposed by some commenters.282 Both of these approaches would have allowed price
cap carriers to pick and choose on a granular basis the areas where they would receive model-based
support within a state. This would allow the incumbent to cherry pick the most attractive areas within its
service territory, leaving the least desirable areas for a competitive process. This concern was greatest
with the ABC proposal, under which carriers would have been able to exercise a right of first refusal on a
wire center basis, but also applies to the study area proposal in our NPRM. Although for some price cap
carriers, their study areas are their entire service area within a state, other carriers still have many study
areas within a state.283 These carriers may have acquired various properties over time and chosen to keep
them as separate study areas for various reasons, including potentially to maximize universal service
support. Rather than enshrine such past decisions in the new CAF, we conclude that it is more equitable
to treat all price cap carriers the same and require them to offer service to all high-cost locations between
an upper and lower threshold within their service territory in a state, consistent with the public interest
obligations described above, in exchange for support. Requiring carriers to accept or decline a
commitment for all eligible locations in their service territory in a state should reduce the chances that
eligible locations that may be less economically attractive to serve, even with CAF support, get bypassed,
and increase the chance such areas get served along with eligible locations that are more economically
attractive.
174.
In determining how best to award CAF support in price cap areas, we carefully weighed
the risks and benefits of alternatives, including using competitive bidding everywhere, without first giving
incumbent LECs an opportunity to enter a state-level service commitment. We conclude that, on balance,
the approach we adopt will best ensure continued universal voice service and speed the deployment of
broadband to all Americans over the next several years, while minimizing the burden on the Universal
Service Fund.
175.
In particular, several considerations support our determination not to immediately adopt
competitive bidding everywhere for the distribution of CAF support. Because we exclude from the price
cap areas eligible for support all census blocks served by an unsubsidized competitor,284 we will generally
be offering support for areas where the incumbent LEC is likely to have the only wireline facilities, and
there may be few other bidders with the financial and technological capabilities to deliver scalable
280 See infra Section XVII.J.
281 USF/ICC Transformation NPRM, 26 FCC Rcd at 4684, para. 431 (proposing that a carrier accepting the right of
first refusal would commit to deploying a network capable of delivering broadband and voice services “throughout
its service area”).
282 ABC Plan, Attach. 1.
283 CenturyLink, for example, has sixteen study areas in Wisconsin. See USAC Quarterly Administrative Filings,
available at http://www.usac.org/about/governance/fcc-filings/fcc-filings-archive.aspx (for Fourth Quarter 2011, at
HC01).
284 See supra para. 103.
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broadband that will meet our requirements over time. In addition, it is our predictive judgment that theincumbent LEC is likely to have at most the same, and sometimes lower, costs compared to a new entrant
in many of these areas.285 We also weigh the fact that incumbent LECs generally continue to have carrier
of last resort obligations for voice services. While some states are beginning to re-evaluate those
obligations, in many states the incumbent carrier still has the continuing obligation to provide voice
service and cannot exit the marketplace absent state permission. On balance, we believe that that our
approach best serves consumers in these areas in the near term, many of whom are receiving voice
services today supported in part by universal service funding and some of whom also receive broadband,
and will speed the delivery of broadband to areas where consumers have no access today.
176.
We disagree with commenters who assert that the principle of competitive neutrality
precludes the Commission from giving incumbent carriers an opportunity to commit to deploying
broadband throughout their service areas in a state in exchange for five years of funding. The principle of
competitive neutrality states that “[u]niversal service support mechanisms and rules should be
competitively neutral,” which means that they should not “unfairly advantage nor disadvantage one
provider over another, and neither unfairly favor nor disfavor one technology over another.”286 The
competitive neutrality principle does not require all competitors to be treated alike, but “only prohibits the
Commission from treating competitors differently in ‘unfair’ ways.”287 Moreover, neither the competitive
neutrality principle nor the other section 254(b) principles impose inflexible requirements for the
Commission’s formulation of universal service rules and policies. Instead, the “promotion of any one
goal or principle should be tempered by a commitment to ensuring the advancement of each of the
principles” in section 254(b).288
177.
As an initial matter, we note that our USF reforms generally advance the principle of
competitive neutrality by limiting support to only those areas of the nation that lack unsubsidized
providers. Thus, providers that offer service without subsidy will no longer face competitors whose
service in the same area is subsidized by federal universal service funding. Especially in this light, we
conclude that any departure from strict competitive neutrality occasioned by affording incumbent LECs
an opportunity to commit to deploying broadband in their statewide service areas is outweighed by the
advancement of other section 254(b) principles, in particular, the principles that “[a]ccess to advanced
telecommunications and information services should be provided in all regions of the Nation,” and that
consumers in rural areas should have access to advanced services comparable to those available in urban
areas.289 Although other classes of providers may be well situated to make broadband commitments with
respect to relatively small geographic areas such as discrete census blocks, the purpose of the five-year
commitment is to establish a limited, one-time opportunity for the rapid deployment of broadband
285 See infra para. 191, discussing the relative costs of wireless and wireline networks for residential and business
broadband.
286 See Universal Service First Report and Order, 12 FCC Rcd at 8801, para. 47).
287 Rural Cellular, 588 F.3d at 1104.
288 Universal Service First Report and Order, 12 FCC Rcd at 8803, para. 52; see also Qwest I, 258 F.3d at 1199
(“The FCC may balance the principles against one another, but must work to achieve each one unless there is a
direct conflict between it and either another listed principle or some other obligation or limitation on the FCC's
authority.”); Alenco Communications, Inc. v. FCC, 201 F.3d 608, 621 (5th Cir. 2000) (“We reiterate that
predictability is only a principle, not a statutory command. To satisfy a countervailing statutory principle, therefore,
the FCC may exercise reasoned discretion to ignore predictability.”); Rural Cellular Ass’n, 588 F.3d at 1103 (“The
Commission enjoys broad discretion when conducting exactly this type of balancing.”) (citing Fresno Mobile Radio,
Inc. v. FCC, 165 F.3d 965, 971 (D.C.Cir.1999)).
289 47 U.S.C. § 254(b)(2), (3).
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services over a large geographic area. The fact that incumbent LECs’ have had a long history ofproviding service throughout the relevant areas – including the fact that incumbent LECs generally have
already obtained the ETC designation necessary to receive USF support throughout large service areas –
puts them in a unique position to deploy broadband networks rapidly and efficiently in such areas.290 We
see nothing in the record that suggests a more competitively neutral way of achieving that objective
quickly, without abandoning altogether the goal of obtaining large-area build-out commitments or
substantially ballooning the cost of the program.291
178.
Moreover, it is important to emphasize the limited scope and duration of the state-level
commitment procedure. Incumbent LECs are afforded only a one-time opportunity to make a
commitment to build out broadband networks throughout their service areas within a state. If the
incumbent declines that opportunity in a particular state, support to serve the unserved areas located
within the incumbent’s service area will be awarded by competitive bidding, and all providers will have
an equal opportunity to seek USF support, as described below. Furthermore, even where the incumbent
LEC makes a state-level commitment, its right to support will terminate after five years, and we expect
that support after such five-year period will be awarded through a competitive bidding process in which
all eligible providers will be given an equal opportunity to compete. Thus, we anticipate that funding will
soon be allocated on a fully competitive basis. In light of all these considerations, we conclude that
adhering to strict competitive neutrality at the expense of the state-level commitment process would
unreasonably frustrate achievement of the universal service principles of ubiquitous and comparable
broadband services and promoting broadband deployment, and unduly elevate the interests of competing
providers over those of unserved and under-served consumers who live in high-cost areas of the country,
as well as of all consumers and telecommunications providers who make payments to support the
Universal Service Fund.
179.
Competitive Bidding. In areas where the incumbent declines a state-level commitment,
we will use a competitive bidding mechanism to distribute support. In the FNPRM, we propose to design
this mechanism in a way that maximizes the extent of robust, scalable broadband service subject to the
budget.292 Assigning support in this way should enable us to identify those providers that will make most
effective use of the budgeted funds, thereby extending services to as many consumers as possible. We
propose to use census blocks as the minimum geographic unit eligible for competitive bidding and seek
comment on ways to allow aggregation of such blocks. Although we propose using the same areas
identified by the CAF Phase II model as eligible for support, we also seek comment on other
approaches—for example, excluding areas served by any broadband provider, or using different cost
290 As noted above, incumbent LECs in many states are designated as the carriers of last resort and thus have a
preexisting obligation to ensure service to consumers who request it. See supra para. 175.
291 For example, NCTA proposes a commitment framework based upon counties rather than statewide service areas
to accommodate the ability of other types of providers to make commitments. See NCTA Oct. 21, 2011 Letter Att.
B, at 1. NCTA concedes, however, that “[c]ounties are smaller than . . . statewide ILEC study areas.” Id. at 2. For
example, in Texas there are 254 counties but only five price cap companies. 2010 United States Census Data,
http://www2.census.gov/census_2010/01-Redistricting_File--PL_94-171/ and documentation at
http://www.census.gov/prod/cen2010/doc/pl94-171.pdf; 2010 Disbursement Analysis. Moreover, under NCTA's
proposal, there may be greater delay in implementing any commitment because “[p]roviders that are not already
designated ETCs would be required to certify that they will apply for ETC status if they are selected to receive
support and must acknowledge that no support will be provided until ETC status is obtained.” Id. at 1. As noted,
incumbent LECs typically have already obtained ETC designations and, therefore, could begin the buildout of
broadband infrastructure to unserved areas more quickly.
292 See infra Section XVII.J.
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thresholds.293 We also seek targeted comment on other issues, including bidder eligibility, auction design,and auction process.
180.
Transition to New Support Levels. Support under CAF Phase II will be phased in, in the
following manner. For a carrier accepting the state-wide commitment, in the first year, the carrier will
receive one-half the full amount the carrier will receive under CAF Phase II and one-half the amount the
carrier received under CAF Phase I for the previous year (which would be the frozen amount if the carrier
declines Phase I or the frozen amount plus the incremental amount if the carrier accepts Phase I); in the
second year, each carrier accepting the state-wide commitment will receive the full CAF Phase II
amount.294 For a carrier declining the state-wide commitment, the carrier will continue to receive support
in an amount equal to its CAF Phase I support amount until the first month that the winner of any
competitive process receives support under CAF Phase II; at that time, the carrier declining the state-wide
commitment will cease to receive high-cost universal service support. No additional broadband
obligations apply to funds received during the transition period. That is, carriers accepting the state-wide
commitment are obliged to meet the Phase II broadband obligations described above, while carriers
declining the state-wide commitment will be required to meet their pre-existing Phase I obligations, but
will not be required to deploy additional broadband in connection with their receipt of transitional
funding.
d.
Forward-Looking Cost Model
181.Background. In the USF Reform NOI/NPRM, the Commission sought comment
generally on whether we should develop a nationwide broadband model, and what type of model, to help
determine support levels in areas where there is no private sector business case to provide broadband and
voice services.295 In the USF/ICC Transformation NPRM, we proposed that the Commission use a green-
field, “scorched node” approach in developing a broadband cost model, rather than a brown-field
approach that assumes the existence of a last-mile copper network.296 We also noted that “[o]ver the
lifetime of a network, the cost of a fiber-to-the-premises (FTTP) and short-loop (12,000-foot) DSL
network may be basically equal, meaning that green-field costs are equivalent to those for a FTTP
deployment.”297 In the August 3 Public Notice, the Bureau sought further comment on specific proposals
for reform that would use a forward-looking cost model to determine support, including the State
293 See infra 1190.
294 To the extent a carrier will receive less money from CAF Phase II than it will receive under frozen high-cost
support, there will be an appropriate multi-year transition to the lower amount. It is premature to specify the length
of that transition now, before the cost model is adopted, but it will be addressed in conjunction with finalization of
the cost model that will be developed with public input.
295 Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN Docket No. 09-
51, High-Cost Universal Service Support, WC Docket No. 05-337, Notice of Inquiry and Notice of Proposed
Rulemaking, 25 FCC Rcd 6657, 6665-6673, paras. 14-40 (2010) (USF Reform NOI/NPRM). Specifically, the
Commission sought comment on whether we should develop a new model, rather than updating the Commission’s
existing model; whether the model should estimate total costs or incremental costs; and whether the model should
estimate revenues as well as costs. Id. at 6669-73, paras. 31-40.
296 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4687, paras. 437-38.
297 Id. at 4684, para. 436 & n.617 (citing OBI Technical Paper No. 1). This observation was based on Commission
staff analysis of the model used to create the National Broadband Plan. See id. at 4684, para. 436 n.617. We also
sought more focused comment on developing a total cost model, rather than an incremental cost model, and on the
difficulties in accurately estimating and modeling revenues. Id. at 4687, paras. 438-39.
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Members’ Plan, and the ABC Plan.298182.
The State Members’ Plan proposes that the Commission continue to use its existing cost
model – which was originally adopted in 1998 – with certain modifications. Specifically, they propose
that the model: use current geocoded data for customer locations; be revised to account for current
special access line counts by wire center; use a road-constrained minimum spanning tree to route plant; be
adjusted to reflect the costs of actual distribution plant mix (aerial, buried, and underground); and include
the costs of current calling usage and middle mile transport costs for Internet data.299 Under the State
Members’ Plan, support for all non-rural carriers would be determined by an updated version of the
current model; rural carriers could receive model-determined support, but also could elect to have their
support determined on an embedded cost basis.300
183.
The ABC Plan Coalition proposes that the Commission use a different forward-looking
cost model – the CQBAT– which estimates the greenfield costs of deploying a network with a maximum
copper loop length of 12,000 feet.301 The model estimates build-out investments and operating costs for
each census block, and calculates support amounts based on a number of user-defined parameters.302 The
ABC Plan summarizes results from the CQBAT model under four different scenarios.303 Although the
model itself was not filed in the record of this proceeding, the ABC Plan Coalition subsequently offered
interested parties free online access to CQBAT results, subject to the terms of a protective order and
licensing agreement, and more extensive access to the model for certain fees, subject to a mutual non-
disclosure agreement, as well as the protective order and licensing agreement.304
184.
Discussion. Although we agree with both the State Members and the ABC Plan
proponents that we should use a forward-looking model to assist in setting support levels in price cap
298 Further Inquiry into Certain Issues in the Universal Service-Intercarrier Compensation transformation
Proceeding, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51,
Public Notice, DA 11-1348 (Wireline Comp. Bur. rel. Aug. 3, 2011); State Members’ USF/ICC Transformation
NPRM Comments; ABC Plan.
299 State Members USF/ICC Transformation NPRM Comments at 37-38.
300 Id. at 36.
301 See ABC Plan, Attach. 3 at 11, Fig. 1.
302 See ABC Plan, Attach. 3 at 9, 19.
303 See ABC Plan, Attach. 2. The ABC Plan Coalition filed additional information regarding CQBAT results and
inputs. See Letter from Jonathan Banks, US Telecom, to Marlene H. Dortch, Secretary, FCC, Docket No. 10-90 et
al., (filed Aug. 16, 2011) (number of residential and business locations in served and unserved areas, and in areas
that would be served by satellite as modeled; state-by-state support amounts); Letter from Mike Lieberman, AT&T,
Jeffrey S. Lanning, CenturyLink, Michael T. Skrivan, FairPoint, Michael D. Saperstein, Jr., Frontier, Margaret
McCready, Verizon, and Frank Schueneman, Windstream, to Marlene H. Dortch, Secretary, FCC, WC Docket No.
10-90, et al. (filed Aug. 18, 2011) (inputs) (ABC Coalition Aug 18 Ex Parte).
304 See Developing a Unified IntercarrierCompensation Regime, Establishing Just and Reasonable Rates for Local
Exchange Carriers, Connect America Fund, High-Cost Universal Service Support, A National Broadband Plan for
Our Future, CC Docket No. 01-92, WC Docket Nos. 07-135, 10-90, 05, 337, GN Docket No. 09-51, Supplemental
Protective Order, DA 11-1525 (rel. Sept. 9, 2011); Letter from Mike Lieberman, AT&T, Michael D. Saperstein, Jr.,
Frontier, Jeffrey S. Lanning, CenturyLink, Maggie McCready, Verizon, Michael T. Skrivan, Fairpoint
Communications, Frank Schueneman, Windstream, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90,
et al. (filed Sept. 9, 2011); Letter from Mike Lieberman, AT&T, Michael D. Saperstein, Jr., Frontier, Jeffrey S.
Lanning, CenturyLink, Maggie McCready, Verizon, Michael T. Skrivan, Fairpoint Communications, Frank
Schueneman, Windstream, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al. (filed Sept. 28,
2011).
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territories, we do not adopt the CQBAT cost model proposed by the ABC Coalition, nor do we accept theState Board’s proposal that we simply update our existing cost model. Instead, we initiate a public
process to develop a robust cost model for the Connect America Fund to accurately estimate the cost of a
modern voice and broadband capable network, and delegate to the Wireline Competition Bureau the
responsibility of completing it.
185.
In light of the limited opportunity the public has received to review and modify the ABC
Coalition’s proposed CQBAT model, we reject the group’s suggestion that we adopt that model at this
time. The Commission has previously held that before any cost model may be “used to calculate the
forward-looking economic costs of providing universal service in rural, insular, and high cost areas,” the
“model and all underlying data, formulae, computations, and software associated with the model must be
available to all interested parties for review and comment. All underlying data should be verifiable,
engineering assumptions reasonable, and outputs plausible.”305 We see no reason to depart from this
conclusion here, and the CQBAT model, as presented to the Commission at this time, does not meet this
requirement.
186.
We likewise reject the State Members’ proposal to modify the Commission’s existing
cost model to estimate the costs of modern voice and broadband-capable network. The Commission’s
existing cost model does not fully reflect the costs associated with modern voice and broadband networks
because the model calculates cost based on engineering assumptions and equipment appropriate to the
1990s. In addition, modeling techniques and capabilities have advanced significantly since 1998, when
the Commission’s existing high cost model was developed, and the new techniques could significantly
improve the accuracy of modeled costs in a new model relative to an updated version of the
Commission’s existing model. For example, new models can estimate the costs of efficient routing along
roads in a way that the older model cannot.306 We see the benefits of leveraging our existing model to
rapidly deploy interim support, and we do just that for Phase I of the CAF. For the longer-term
disbursement of support, however, we conclude that it is preferable to use a more accurate, up to date
model based on modern techniques.
187.
To expedite the process of finalizing the model to be used as part of the state-level
commitment, we delegate to the Wireline Competition Bureau the authority to select the specific
engineering cost model and associated inputs, consistent with this Order. For the reasons below, the
model should be of wireline technology and at a census block or smaller level. In other respects, we
direct the Wireline Competition Bureau to ensure that the model design maximizes the number of
locations that will receive robust, scalable broadband within the budgeted amounts. Specifically, the
model should direct funds to support 4 Mbps/1 Mbps broadband service to all supported locations, subject
only to the waiver process for upstream speed described above, and should ensure that the most locations
possible receive a 6 Mbps/1.5 Mbps or faster service at the end of the five year term, consistent with the
CAF Phase II budget. The Wireline Competition Bureau’s ultimate choice of a greenfield or brownfield
model, the modeled architecture, and the costs and inputs of that model should ensure that the public
interest obligations are achieved as cost-effectively as possible.
188.
Geographic Granularity. We conclude that the CAF Phase II model should estimate
costs at a granular level – the census block or smaller – in all areas of the country. Geographic
305 Universal Service First Report and Order, 12 FCC Rcd at 8913, 8915, para. 250.
306 The State Members advocate that we adopt a road-constrained minimum spanning tree to route plant as an
“update” to the existing model, but we think this would change the model so fundamentally that the process
involved would be comparable to the adoption of a new model. We anticipate that the new model will adopt the
routing method the State Members suggest, although we delegate the final decision on this point to the Wireline
Competition Bureau.
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granularity is important in capturing the forward-looking costs associated with deploying broadbandnetworks in rural and remote areas.307 Using the average cost per location of existing deployments in
large areas, even when adjusted for differences in population and linear densities, presents a risk that costs
may be underestimated in rural areas. Deployments in rural markets are likely to be subscale, so an
analysis based on costs averaged over large areas, particularly large areas that include both low- and high-
density zones, will be inaccurate. A granular approach, calculating costs based on the plant and hardware
required to serve each location in a small area (i.e., census block or smaller), will provide sufficient
geographic and cost-component granularity to accurately capture the true costs of subscale markets. For
example, if only one home in an area with very low density is connected to a DSLAM, the entire cost of
that DSLAM should be allocated to the home rather than the fraction based on DSLAM capacity.
Furthermore, to the extent that a home is served by a long section of feeder or distribution cabling that
serves only that home, the entire cost of such cabling should be allocated to the home as well.308
189.
Wireline Network Architecture. We conclude that the CAF Phase II model should
estimate the cost of a wireline network. For a number of reasons, we reject some commenters’ suggestion
that we should attempt to model the costs of both wireline and wireless technologies and base support on
whichever technology is lower cost in each area of the country.309
190.
For one, we have concerns about the feasibility of developing a wireless cost model with
sufficient accuracy for use in the CAF Phase II framework. We recognize that all cost models involve a
certain degree of imprecision. As we noted in the USF Reform NOI/NPRM, however, accurately
modeling wireless deployment may raise challenges beyond those that exist for wireline models,
particularly where highly localized cost estimates are required.310 For example, the availability of
desirable cell sites can significantly affect the cost of covering any given small geographic area and is
challenging to model without detailed local siting information. Propagation characteristics may vary
based on local and difficult to model features like foliage. Access to spectrum, which substantially affects
overall network costs, varies dramatically among potential funding recipients and differs across
geographies. Because the cost model for CAF Phase II will need to calculate costs for small areas
(census-block or smaller), high local variability in the accuracy of outputs will create challenges, even if a
cost model provides high quality results when averaged over a larger area. In light of the issues with
modeling wireless costs, we remain concerned that a lowest-cost technology model including both
wireless and wireline components could introduce greater error than a wireline-only model in identifying
eligible areas.311 We do not believe that delaying implementation of CAF Phase II to resolve these issues
serves the public interest.
191.
Finally, the record fails to persuade us that, in general, the costs of cellular wireless
networks are likely to be significantly lower than wireline networks for providing broadband service that
meets the CAF Phase II speed, latency, and capacity requirements. In particular, we emphasize that, as
described above, carriers receiving CAF Phase II support should expect to offer service with increasing
download and upload speeds over time, and that allows monthly usage reasonably comparable to
307 See Omnibus Broadband Initiative, The Broadband Availability Gap: OBI Technical Paper No. 1, at 35-37
(April 2010) (OBI, Broadband Availability Gap), available at http://www.broadband.gov/plan/broadband-working-
reports-technical-papers.html.
308 Id.
309 See NASUCA August 3 PN Comments at 83.
310 See USF Reform NOI/NPRM, 25 FC Rcd at 6669, paras. 28-29.
311 See infra Section XVII.I.6.
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terrestrial fixed residential broadband offerings in urban areas.312 The National Broadband Plan modeledthe nationwide costs of a wireless broadband network dimensioned to support typical usage patterns for
fixed services to homes, and found that the cost was similar to that of wireline networks.313 None of the
parties advocating for the use of a wireless model has submitted into the record a wireless model for fixed
service and, therefore, we have no evidence that such service would be less costly.
192.
Process for Adopting the Model. We anticipate that the Wireline Competition Bureau
will adopt the specific model to be used for purposes of estimating support amounts in price cap areas by
the end of 2012 for purposes of providing support beginning January 1, 2013. Before the model is
adopted, we will ensure that interested parties have access to the underlying data, assumptions, and logic
of all models under consideration, as well as the opportunity for further comment. When the Commission
adopted its existing cost model, it did so in an open, deliberative process with ample opportunity for
interested parties to participate and provide valuable assistance. We have had three rounds of comment
on the use of a model for purposes of determining Connect America Fund support and remain committed
to a robust public comment process. To expedite this process, we delegate to the Wireline Competition
Bureau the authority to select the specific engineering cost model and associated inputs, consistent with
this Order. We direct the Wireline Competition Bureau to issue a public notice within 30 days of release
of this Order requesting parties to file models for consideration in this proceeding consistent with this
Order, and to report to the Commission on the status of the model development process no later than June
1, 2012.
193.
We note that price cap carriers serving Alaska, Hawaii, Puerto Rico, the U.S. Virgin
Islands and Northern Marianas Islands argue they face operating conditions and challenges that differ
from those faced by carriers in the contiguous 48 states.314 We direct the Wireline Competition Bureau to
consider the unique circumstances of these areas when adopting a cost model, and we further direct the
Wireline Competition Bureau to consider whether the model ultimately adopted adequately accounts for
the costs faced by carriers serving these areas. If, after reviewing the evidence, the Wireline Competition
Bureau determines that the model ultimately adopted does not provide sufficient support to any of these
312 Today, mobile broadband providers that limit data usage often impose monthly usage limits that are an order of
magnitude or more lower than limits for residential and business services in urban areas. See supra note 147.
313 OBI, Broadband Availability Gap, at 62, Ex. 4-C (comparing costs of fixed wireless and 12,000 foot DSL
networks). Modeling done for the National Broadband Plan shows that the total cost of building out a wireless
network to all unserved homes in the country is approximately 1.3 times more expensive than the cost of upgrading
existing facilities to offer broadband over 12,000-foot-loop DSL. See id. at 62-83 (describing methodology for
modeling fixed wireless costs). Although the National Broadband Plan modeling focused on the difference between
cost and expected revenue, the data sets published in conjunction with the Broadband Availability Gap technical
paper include data showing that the total cost for wireless is significantly higher than the total cost for DSL. See
“All Cost/All Revenue” data sets published at http://www.broadband.gov/plan/deployment-cost-model.html.
Furthermore, the cost calculations described in the Broadband Availability Gap technical paper assumed an average
bandwidth per user of 160 kbps through 2015. As demand for capacity increases, wireless providers will face much
larger cost increases as they undertake costly cell splitting to accommodate increased usage. So while a wireless
deployment may be lower cost for a significant fraction of locations, assuming a 160 kbps average bandwidth per
user, increase in demand drives more cost in wireless and leads to wireless being more expensive in a growing
majority of areas. In addition, to the extent that locations that already have access to broadband choose to subscribe
to the wireless offering, providers would have to add still more capacity, driving costs even higher.
314 See, e.g., Regulatory Commission of Alaska USF/ICC Transformation NPRM Comments at 3-7; Alaska
Communications Systems USF/ICC Transformation NPRM Comments at 3-5; GCI USF/ICC Transformation
NPRM Comments at 2; Hawaiian Telcom USF/ICC Transformation NPRM Comments, appendix; Puerto Rico
Telephone Company USF/ICC Transformation NPRM Comments at 7-8; Vitelco USF/ICC Transformation NPRM
Comments at 4-5; Docomo Pacific, Inc., et al USF/ICC Transformation NPRM Comments of, at 4-10.
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areas, the Bureau may maintain existing support levels, as modified in this Order, to any affected pricecap carrier, without exceeding the overall budget of $1.8 billion per year for price cap areas.
D.
Universal Service Support for Rate-of-Return Carriers
1.Overview
194.As we transition to the CAF, many carriers will still, for some time period, receive
support under our existing support mechanisms, subject to specific modifications to improve the
efficiency and effectiveness of such universal service support pending full transition to the CAF. Here,
we discuss the immediate steps we are taking that affect rate-of-return carriers. Some of our current rules
are not meeting their intended purposes, while others simply no longer make sense in a broadband world.
Reforming these rules will help further the statutory goals of ensuring (1) quality services at “just,
reasonable, and affordable rates,” and (2) “equitable and non-discriminatory” contributions such that
support is “sufficient” to meet the purposes of section 254 of the Act,315 and will advance the
Commission’s goals of ensuring fiscal responsibility in all USF expenditures, increasing the
accountability for Fund recipients, and extending modern broadband-capable networks
195.
In particular, we implement a number of reforms to eliminate waste and inefficiency and
improve incentives for rational investment and operation by rate-of-return LECs. Consistent with the
competitive bidding approach we adopt for the Mobility Fund Phase I and the framework we establish for
support in price cap territories that combines a new forward-looking cost model and competitive bidding,
we also lay the foundation for subsequent Commission action that will set rate-of-return companies on a
path toward a more incentive-based form of regulation. These reforms, summarized below, will ensure
that the overall size of the Fund is kept within budget by maintaining total funding for rate-of- return
companies at approximately $2 billion per year—approximately equal to current levels—while
transitioning from a system that supports only telephone service to a system that will enable the
deployment of modern high-speed networks capable of delivering 21st century broadband services and
applications, including voice. We believe that keeping rate-of-return carriers at approximately current
support levels in the aggregate during this transition appropriately balances the competing demands on
universal service funding and the desire to sustain service to consumers and provide continued incentives
for broadband expansion as we improve the efficiency of rate-of-return mechanisms.
196.
First, we establish benchmarks that, for the first time, will establish parameters for what
actual unseparated loop and common line costs carriers may seek recovery for under the federal universal
service program. Specifically, we adopt a rule to limit reimbursable capital and operations expenses for
purposes of determining HCLS support, which we expect will be implemented no later than July 1, 2012
after further public comment on a proposed methodology.316 As suggested by the Rural Associations,317
315 47 USC §§ 254(b)(1), (b)(4)-(5), (d), (e). The Commission’s interpretation of the term “sufficient” to mean that
support should not be excessive has been upheld by the Fifth, Tenth, and District of Columbia Circuit Courts of
Appeal. See Alenco Communications, Inc. v. FCC, 201 F.3d 608, 620-21 (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.”); Qwest Communications Int’l, Inc. v. FCC, 398
F.3d 1222, 1234 (10th Cir. 2005) (“excessive subsidization arguably may affect the affordability of
telecommunications services, thus violating the principle in § 254(b)(1)”) (citing Qwest Corp. v. FCC, 258 F.3d
1191, 1200 (10th Cir. 2001)); Rural Cellular Assn. v. FCC, 588 F.3d 1095, 1102 (D.C. Cir. 2009) (explaining that,
in assessing whether universal service subsidies are excessive, the Commission “must consider not only the
possibility of pricing some customers out of the market altogether, but the need to limit the burden on customers
who continue to maintain telephone service”).
316 See infra Section VII.D.3.
317 See Rural Associations USF/ICC Transformation NPRM Comments at 11.
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we also extend the limit on recovery of corporate operations expenses, currently only applicable to HCLS,to ICLS effective January 1, 2012. In so doing, we update the formula formerly applicable only to HCLS,
which has not been modified since 2001, and apply the updated formula to the two programs.318
197.
Second, we take immediate steps to ensure that carriers in rural areas are not unfairly
burdening consumers across the nation by using excess universal service support to subsidize artificially
low end-user rates. Specifically, effective July 1, 2012, we will reduce, on a dollar-for-dollar basis, high-
cost loop support to the extent that a carrier’s local rates are below a specified urban local rate floor. This
rule will be phased in gradually before full implementation in 2014.
198.
Third, we eliminate a program that is no longer meeting its intended purpose. Safety net
additive support was put in place more than a decade ago to encourage new investment, but is not
effectively performing that function. Two-thirds of such support today rewards companies because they
are losing access lines, rather than because they are investing. In addition, the program fails to target new
investment to areas of need and, in particular, may be rewarding investment in areas where there are
unsubsidized competitors, contrary to our principle of fiscal responsibility. Accordingly, safety net
additive support received as a result of line loss will be phased out during 2012. The remaining current
recipients of safety net additive support will continue to receive such support pursuant to the existing
rules; however, no new carriers will receive safety net additive support.
199.
Fourth, we eliminate local switching support effective July 1, 2012; thereafter, any
allowable recovery for switching investment will occur through the recovery mechanism adopted as part
of ICC reform.319
200.
Fifth, we adopt a rule to eliminate support for rate-of-return companies in any study area
that is completely overlapped by an unsubsidized competitor, as defined above,320 as there is no need for
universal service subsidies to flow to such areas to ensure that consumers are served.
201.
Sixth, we adopt a rule that support in excess of $250 per line per month will no longer be
provided to any carrier. Support reductions will be phased in over three years for carriers currently above
the cap, beginning July 1, 2012.
202.
We recognize that the aggregate impact of the foregoing rule changes will affect different
individual companies to a greater or lesser degree. To the extent that any individual company can
demonstrate that it needs temporary and/or partial relief from one or more of these reforms in order for its
customers to continue receiving voice service in areas where there is no terrestrial alternative, the
Commission is prepared to review a waiver request for additional support.321 However, we do not expect
to routinely grant requests for additional support, and any company that seeks additional funding will be
subject to a thorough total company earnings review.
203.
We also make certain technical corrections and improvements to our rules in light of
other rule changes adopted today. We rebase the 2012 annual high cost loop cap to reflect the fact that
support for price cap companies, including their rate-of-return study areas, will be distributed through a
transitional method in the first phase of the CAF. Because price cap companies and their rate-of-return
318 These two steps are consistent with the recommendations of the Rural Associations who proposed taking the
immediate steps of (1) capping the recovery of corporate operations expenses by applying the current HCLS
corporate operations expense cap formula to ICLS and LSS, and (2) imposing a limitation on federal USF recovery
of certain RLEC capital expenditures. See id. at 8-11.
319 See infra para. 872.
320 See supra para. 103.
321 See infra Section VII.G.
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affiliates will no longer receive HCLS as of January 1, 2012, we reduce downward the HCLS cap by theamount of HCLS received by those companies in 2011. We also articulate a new standard for study area
waivers and streamline the process for review of such waiver requests.
204.
Finally, we seek comment in the FNRPM on the specific proposal offered by the rural
associations for new CAF support.322 The reforms we adopt today are interim steps that are necessary to
allow rate-of-return carriers to continue receiving support based on existing mechanisms for the time
being, but also begin the equally necessary process of transitioning to a more incentive-based form of
regulation.323
2.
Public Interest Obligations of Rate-of-Return Carriers
205. We recognize that, in the absence of any federal mandate to provide broadband, rate-of-return carriers have been deploying broadband to millions of rural Americans, often with support from a
combination of loans from lenders such as RUS and ongoing universal service support.324 We now
require that recipients use their support in a manner consistent with achieving universal availability of
voice and broadband.
206. To implement this policy, rather than establishing a mandatory requirement to deploy
broadband-capable facilities to all locations within their service territory, we continue to offer a more
flexible approach for these smaller carriers. Specifically, beginning July 1, 2012, we require the
following of rate-of-return carriers that continue to receive HCLS or ICLS or begin receiving new CAF
funding in conjunction with the implementation of intercarrier compensation reform, as a condition of
receiving that support: Such carriers must provide broadband service at speeds of at least 4 Mbps
downstream and 1 Mbps upstream with latency suitable for real-time applications, such as VoIP, and with
usage capacity reasonably comparable to that available in residential terrestrial fixed broadband offerings
in urban areas, upon reasonable request.325 We thus require rate-of-return carriers to provide their
customers with at least the same initial minimum level of broadband service as those carriers who receive
model-based support, but given their generally small size, we determine that rate-of-return carriers should
be provided greater flexibility in edging out their broadband-capable networks in response to consumer
demand. At this time we do not adopt intermediate build-out milestones or increased speed requirements
322 See infra Section XVII.B. Under the Rural Association Plan, loop costs would be allocated to the interstate
jurisdiction based on the current 25 percent allocator or the individual carrier’s broadband adoption rate, whichever
is greater. The new interstate revenue requirement would also include certain key broadband-related costs (i.e.,
middle mile facilities and Internet backbone access). CAF support would be provided under this new mechanism
for any provider’s broadband costs that exceeded a specified benchmark representing wholesale broadband costs in
urban areas. Existing HCLS and ICLS would phase out as customers adopt broadband. See Rural Associations
USF/ICC Transformation NPRM Comments at iv-v, 27-38.
323 This is consistent with the approach taken in the Universal Service First Report and Order, 12 FCC Rcd at 8889,
para. 204 (“rural carriers would gradually shift to a support system based on forward-looking economic cost at a
date the Commission will set after further review”). “The Commission…will also consider whether a competitive
bidding process could be used to set support levels for rural carriers.” Id. 8918, para. 256.
324 According to NTCA’s 2010 survey, 75 percent of NTCA’s predominantly rural member carriers reported
offering Internet access service at speeds of 1.5 to 3.0 Mbps (downstream). NTCA 2010 Broadband/Internet
Availability Survey Report, National Telecommunications Cooperative Assoc. (Jan. 2011), available at
http://www.ntca.org/images/stories/Documents/Advocacy/SurveyReports/2010_NTCA_Broadband_Survey_Report.
pdf.
325 We intend to target support to areas where there is no unsubsidized competitor. In the FNPRM, we seek
comment on how to apply this policy in areas where a rate-of-return ETC is overlapped in part by an unsubsidized
competitor. See infra Section XVII.D (Eliminating Support for Areas with an Unsubsidized Competitor).
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for future years, but we expect carriers will deploy scalable broadband to their communities and willmonitor their progress in doing so, including through the annual reports they will be required to submit.326
The broadband deployment obligation we adopt is similar to the voice deployment obligations many of
these carriers are subject to today.
207. We believe these public interest obligations are reasonable.327 Although many carriers may
experience some reduction in support as a result of the reforms adopted herein, those reforms are
necessary to eliminate waste and inefficiency and improve incentives for rational investment and
operation by rate-of-return LECs. We note that these carriers benefit by receiving certain and predictable
funding through the CAF created to address access charge reform.328 In addition, rate-of-return carriers
will not necessarily be required to build out to and serve the most expensive locations within their service
area.
208. Upon receipt of a reasonable request for service, carriers must deploy broadband to the
requesting customer within a reasonable amount of time.329 We agree with the State Members of the
Federal-State Joint Board on Universal Service that construction charges may be assessed, subject to
limits.330 In the Accountability and Oversight section of this Order, we require ETCs to include in their
annual reports to USAC and to the relevant state commission and Tribal government, if applicable, the
number of unfulfilled requests for service from potential customers and the number of customer
complaints, broken out separately for voice and broadband services.331 We will monitor carriers’ filings
to determine whether reasonable requests for broadband service are being fulfilled, and we encourage
states and Tribal governments to do the same. As discussed in the legal authority section above,332 we are
funding a broadband-capable voice network, so we believe that to the extent states retain jurisdiction over
voice service, states will have jurisdiction to monitor these carriers’ responsiveness to customer requests
for service.
209. We recognize that smaller carriers serve some of the highest cost areas of the nation. We
seek comment in the FNPRM below on alternative ways to meet the needs of consumers in these highest
cost areas. Pending development of the record and resolution of these issues, rate-of-return carriers are
simply required to extend broadband on reasonable request. We expect that rate-of-return carriers will
follow pre-existing state requirements, if any, regarding service line extensions in their highest-cost areas.
3.
Limits on Reimbursable Capital and Operating Costs
210. In this section, we adopt a framework for ensuring that companies do not receive moresupport than necessary to serve their communities. The framework consists of benchmarks for prudent
326 See supra paras. 105-106 (committing to initiating a proceeding no later than the end of 2014 to review
performance requirements).
327 See supra paras. 92-100 (adopting broadband performance metrics).
328 See infra Section XIII.F.3 (Monitoring Compliance with Recovery Mechanism).
329 C.f. 47 C.F.R. § 54.202 (requiring any carrier petitioning to be federally-designated ETCs to “[c]ommit to
provide service throughout its proposed designated service area to all customers making a reasonable request for
service” and to certify that it will provide service “on a timely basis” to customers within its existing network
coverage and “within a reasonable time” to customers outside of its existing network coverage if service can be
provided at reasonable cost).
330 State Members August 3 PN Comments at Appx. A, 159.
331 See infra para. 580.
332 See supra section V (Legal Authority).
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levels of capital and operating costs; these costs are used for purposes of determining high-cost supportamounts for rate-of-return carriers. This framework will create structural incentives for rate-of-return
companies to operate more efficiently and make prudent expenditures. In the attached FNPRM, we seek
comment on a specific proposed methodology for setting the benchmark levels to estimate appropriate
levels of capital expenses and operating expenses for each incumbent rate-of-return study area, using
publicly available data.333 We delegate authority to the Wireline Competition Bureau to implement a
methodology and expect that limits will be implemented no later than July 1, 2012.
211. Background. In the USF/ICC Transformation NPRM, we proposed to establish benchmarks
for reimbursable capital and operating costs for loop plant for rate-of-return companies. Under our
current rules, some carriers with high loop costs may have up to 100 percent of their marginal loop costs
above a certain threshold reimbursed from the federal universal service fund.334 As we explained, this
produces two interrelated effects that may lessen incentives for some carriers to control costs and invest
rationally. First, carriers have incentives to increase their loop costs and recover the marginal amount
entirely from the federal universal service fund. Second, carriers that take measures to cut their costs to
operate more efficiently may actually lose support to carriers that increase their costs.335
212. To address these problems, we proposed to use regression analyses to estimate appropriate
levels of capital expenses and operating expenses for each incumbent rate-of-return study area and limit
expenses falling above a benchmark based on this estimate.336 We noted that the Nebraska Rural
Companies had submitted an analysis of outside plant capital expenditures in January 2011.337
Consultants for the Nebraska Companies analyzed engineering cost estimates for hundreds of fiber-to-the-
premises projects built or planned by rate-of-return companies from 2004 to 2010, with the goal of
producing a statistically reliable cost predictor.338 They compared individual company non-public cost
data to a variety of objective publicly available geographic and demographic variables (public variables)
and performed regression analyses using the public variables as independent variables and construction
cost per household as the dependent variable.339 Their final resulting regression equation included six
independent public variables: linear density, households, frost index, wetlands percentage, soils texture,
and road intersections frequency.340
213. The Nebraska Companies submitted a similar regression analysis designed to predict
operating expenses of rate-of-return companies that operate voice and broadband-capable networks in
333 See infra section XVII.E.
334 USF/ICC Transformation NPRM, 26 FCC Rcd at 4624-26, paras. 201-07.
335 Id. at 4624-25, para. 202.
336 Id. at 4625, para. 203.
337 See Letter from Thomas Moorman, Counsel to Nebraska Rural Independent Companies, to Marlene H. Dortch,
Secretary, FCC, WC Docket Nos. 10-90, 05-337, GN Docket No. 09-51, Attach. (Nebraska Rural Independent
Companies’ Capital Expenditure Study: Predicting the Cost of Fiber to the Premise) (dated Jan. 7, 2011) (Nebraska
Companies’ Capital Expenditure Study).
338 See Nebraska Companies’ Capital Expenditure Study at 1-3; Reply Comments of the Nebraska Rural
Independent Companies, WC Docket No. 10-90, GN Docket No. 09-51, WC Docket No. 07-135, WC Docket No.
05-337, CC Docket No. 01-92, CC Docket No. 96-45, WC Docket No. 03-109, at 13 (filed May 23, 2011).
339 Nebraska Companies’ Capital Expenditure Study at 4-11.
340 Id. at 18.
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rural areas.341 In this regression the dependent variable was average annual operating expenses perconnection (in thousands of dollars) and the four independent variables that were found to be significant
were customer density, company location, company size, and number of employees.342
214. Discussion. We conclude that the Commission should use regression analyses to limit
reimbursable capital expenses and operating expenses for purposes of determining high-cost support for
rate-of-return carriers. The methodology will generate caps, to be updated annually, for each rate-of-
return company. This rule change will place important constraints on how rate-of-return companies
invest and operate that over time will incent greater operational efficiencies.
215. Several commenters support our proposal to impose reasonable limits on reimbursable
capital and operating expenses.343 Although many small rate-of-return carriers seem to imply that we
should not adopt operating expense benchmarks because their operating expenses are “fixed,”344 other
representatives of rural rate-of-return companies support the concept of imposing reasonable
benchmarks.345 The Rural Associations concede that “[t]o the extent any ‘race to the top’ occurs, it
undermines predictability and stability for current USF recipients.”346
216. We set forth in the FNPRM and Appendix H a specific methodology for capping recovery
for capital expenses and operating expenses using quantile regression techniques and publicly available
cost, geographic and demographic data. The net effect would be to limit high-cost loop support amounts
for rate-of-return carriers to reasonable amounts relative to other carriers with similar characteristics.347
341 See Letter from Paul M. Schudel, Counsel to Nebraska Rural Independent Companies, to Marlene H. Dortch,
Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92,
96-45, Attach. (Operating Expense Study Sponsored by the Nebraska Rural Independent Companies and Telegee
Alliance of Certified Public Accounting Firms: Predicting the Operating Expenses of Rate-of-Return
Telecommunications Companies) (dated May 10, 2011) (Nebraska Companies’ Operating Expense Study); Letter
from Cheryl L. Parrino, Parrino Strategic Consulting Group, to Marlene H. Dortch, Secretary, FCC, GN Docket No.
09-51, WC Docket Nos. 10-90, 05-337, CC Docket No. 01-92, Attach. 2 (Operating Expense Study Sponsored by
the Nebraska Rural Companies: Update to Predicting the Operating Expenses of Rate-of-Return
Telecommunications Companies) (dated Sept. 29, 2011) (Parrino Sept. 29 Ex Parte).
342 Nebraska Companies’ Operating Expense Study at 6-10.
343 See, e.g., Moss Adams USF/ICC Transformation NPRM Comments, at 13 (recommending that, “rather than
drastically reducing or eliminating these funding mechanisms on a wholesale basis, the FCC could utilize expense
and capital investment benchmarks to determine annual costs to be recovered by rural carriers”); CTIA USF/ICC
Transformation NPRM Comments at 16; RBAUSF/ICC Transformation NPRM Comments at 16-17; Moss Adams
August 3 PN Comments at 6 (recognizing it may be appropriate to limit the costs that a company can incur in a year,
taking into account variability of companies).
344 See e.g., Ducor Telephone USF/ICC Transformation NPRM Comments at 7. They also claim that the USF/ICC
Transformation NPRM suggests that operating expenses are discretionary. Id.
345 See Moss Adams August 3 PN Comments, at 6 (recognizing it may be appropriate to limit the costs that a
company can incur in a year, taking into account variability of companies); Rural Broadband Alliance USF/ICC
Transformation NPRM Comments, at 16-17.
346 Rural Associations USF/ICC Transformation NPRM Comments at 9.
347 HCLS helps offset the non-usage based costs associated with the local loop in areas where the cost to provide
voice service is relatively high compared to the national average cost per line. Today, 75 percent of loop costs are
assigned to the intrastate jurisdiction and 25 percent of such costs are assigned to the interstate jurisdiction. Carriers
recover up to 75 percent of their unseparated loop costs above a specified dollar figure from HCLS. The remaining
25 percent of loop cost is recovered through ICLS, to the extent the interstate common line revenue requirement
exceeds their SLC revenues.
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Specifically, the methodology uses NECA cost data and 2010 Census data to cap permissible expensesfor certain costs used in the HCLS formula.348 We invite public input in the attached FNPRM on that
methodology and anticipate that HCLS benchmarks will be implemented for support calculations
beginning in July 2012.
217. We set forth here the parameters of the methodology that the Bureau should use to limit
payments from HCLS. We require that companies’ costs be compared to those of similarly situated
companies. We conclude that statistical techniques should be used to determine which companies shall
be deemed similarly situated. For purposes of this analysis, we conclude the following non-exhaustive
list of variables may be considered: number of loops, number of housing units (broken out by whether
the housing units are in urbanized areas, urbanized clusters, and nonurban areas), as well as geographic
measures such as land area, water area, and the number of census blocks (all broken out by urbanized
areas, urbanized clusters, and nonurban areas). We grant the Bureau discretion to determine whether
other variables, such as soil type, would improve the regression analysis. We note that the soils data from
the Natural Resource Conservation Service (NRCS) that the Nebraska study used to generate soil, frost
and wetland variables do not cover the entire United States.349 We seek comment in the FNPRM on
sources of other publicly available soil data. We delegate authority to the Bureau to adopt the initial
methodology, to update it as it gains more experience and additional information, and to update its
regression analysis annually with new cost data.
218. Each year the Wireline Competition Bureau will publish in a public notice the updated
capped values that will be used in the NECA formula in place of an individual company’s actual cost data
for those rate-of-return cost companies whose costs exceed the caps, which will result in revised support
amounts.350 We direct NECA to modify the high-cost loop support universal service formula for average
schedule companies annually to reflect the caps derived from the cost company data.
219. We conclude that establishing reasonable limits on recovery for capital expenses and
operating expenses will provide better incentives for carriers to invest prudently and operate efficiently
than the current system.351 Under our current HCLS rules, a company receives support when its costs are
348 NECA’s HCLS formula, i.e., the 26-step Cost Company Loop Cost Algorithm, is available at
http://transition.fcc.gov/wcb/iatd/neca.html. See National Exchange Carrier Assoc., Inc., NECA’s Overview of
Universal Service Fund, Submission of 2010 Study Results, at App. B (filed Sept. 30, 2011); 2010 United States
Census Data, http://www2.census.gov/census_2010/01-Redistricting_File--PL_94-171/ and documentation at
http://www.census.gov/prod/cen2010/doc/pl94-171.pdf. The census block level data was rolled up to study areas
using Study Area Boundaries: Tele Atlas Telecommunications Suite, June 2010.
349 These data, called the Soil Survey Geographic Database or SSURGO, do not cover about 24 percent of the
United States land mass, including Puerto Rico, Guam, American Samoa, US Virgin Islands and Northern Mariana
Islands as well as Alaska, which accounts for much of the missing land area. Thus, there are some study areas
where there is no SSURGO data (such as the study area served by Adak Tel Utility) and other study areas where the
SSURGO data not cover the entire study area.
350 Incumbent local exchange carriers file investment and expense account data and loop counts pursuant to sections
36.611 and 36.612 of the Commission’s rules for purposes of determining whether they are entitled to receive
HCLS. See 47 C.F.R. §§ 36.611, 36.612. Only “cost” companies files such data, however. “Average schedule”
companies are not required to perform company-specific cost studies – the basis upon which a carrier’s HCLS is
calculated. HCLS for average schedule companies is calculated pursuant to formulas developed by NECA and
approved or modified annually by the Wireline Competition Bureau. See, e.g., National Exchange Carrier
Association, Inc. and Universal Service Administrative Company, 2010 Modification of Average Schedule Universal
Service Support Formulas, High-Cost Universal Service Support, WC Docket No. 05-337, Order, 25 FCC Rcd
17520 (Wireline Comp. Bur. 2010).
351 Implementing this methodology would have two potential effects. First, as designed, it gives carriers an
incentive to constrain their capital and operating costs. Carriers considering significant new capital investment will
(continued…)
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relatively high compared to a national average – without regard to whether a lesser amount would besufficient to provide supported services to its customers. The current rules fail to create incentives to
reduce expenditures; indeed, because of the operation of the overall cap on HCLS, carriers that take
prudent measures to cut costs under our current rules may actually lose HCLS support to carriers that
significantly increase their costs in a given year.
220. Under our new rule, 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.
We note that the fact that an individual company will not know how the benchmark affects its support
levels until after investments are made is no different from the current operation of high-cost loop
support, in which a carrier receives support based on where its own cost per loop falls relative to a
national average that changes from year to year. Even today, companies can only estimate whether their
expenditures will be reimbursed through HCLS. In contrast to the current situation, the new rule will
discourage companies from over-spending relative to their peers. The new rule will provide additional
support to those companies that are otherwise at risk of losing HCLS altogether, and would not otherwise
be well-positioned to further advance broadband deployment.
221. We reject the argument that imposing benchmarks in this fashion would negatively impact
companies that have made past investments in reliance upon the current rules or the “no barriers to
advanced services” policy. 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.”352 That is, while section 254 directs the Commission to provide
support that is sufficient to achieve universal service goals, that obligation does not create any entitlement
or expectation that ETCs will receive any particular level of support or even any support at all. The new
rule will inject greater predictability into the current HCLS mechanism, as companies will have more
certainty of support if they manage their costs to be in alignment with their similarly situated peers.
222. Our obligation to consumers is to ensure that they receive supported services. Our
expectation is that carriers will provide such services to their customers through prudent facility
investment and maintenance. To the extent costs above the benchmark are disallowed under this new
rule, companies are free to file a petition for waiver to seek additional support.353
223. We find that our approach – which limits allowable investment and expenses with reference
to similarly situated carriers – is a reasonable way to place limits on recovery of loop costs. The Rural
Associations propose an alternative limitation on capital investment that would tie the amount of a rural
company’s recovery of prospective investment that qualifies for high-cost support to the accumulated
depreciation in its existing loop plant.354 Their proposal would limit only future annual loop investment
(Continued from previous page)
need to consider how those projects would impact their capital and operating expenses. Carriers could still choose a
more expensive deployment, but if the costs associated with the capital expenditures exceed their benchmarks, these
carriers would have to recover those costs from sources other than USF (such as from their customer base) to ensure
a return on that increased investment. Just as carriers will be more mindful of the cost of their future capital
expenditures, they will need to be mindful of future operating expenses associated with new investment. Second,
this methodology also will help to identify those study areas where past investments may have been excessive and
caps their reimbursement.
352 Rural Cellular Association v. FCC, 588 F.3d 1095, 1103 (D.C. Cir. 2009) (quoting Alenco Communications, Inc.
v. FCC, 201 F.3d 608, 621 (5th Cir. 2000)). See also infra paras. 293-294.
353 See infra paras. 539-544.
354 See Rural Associations USF/ICC Transformation NPRM Comments at 8-10, App. A.
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for individual companies by multiplying (a) the ratio of accumulated loop depreciation to total loop plantor (b) twenty percent, whichever is lower, times (c) an estimated total loop plant investment amount
(adjusted for inflation). This proposal 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.355 In addition, it would likely be administratively impracticable for the
Commission to verify the inflation adjustments each company would make for various pieces of
equipment acquired at various times.
224. We also conclude that our approach can be more readily implemented and updated than the
specific proposal presented by the Nebraska Companies.356 Consultants for the Nebraska Companies, in
their regression analyses, used proprietary cost data. Because the proprietary cost data were not placed in
the record, Commission staff was not able to verify the results of the Nebraska Companies’ studies. The
Nebraska Companies subsequently proposed that the Commission begin collecting similar investment and
operating expense data, as well as independent variables such as density per route mile, to be used in
similar regression analyses.357 For example, they suggest that “[o]ne useful source for this data would be
the investment costs associated with actual broadband construction projects that meet or exceed current
engineering standards.”358 Although the Nebraska Companies’ proposal shares objectives similar to our
methodology, it would require the collection of additional data that the Commission does not currently
have, which would lead to considerable delay in implementation. We also are concerned about the
difficulty in obtaining a sufficiently representative and standardized data set based on construction
projects that will vary in size, scope and duration. Moreover, regressions based on such data could not
easily be updated on a regular basis without further data collection and standardization. On balance, we
do not believe that any advantages of the Nebraska Companies’ approach outweigh the benefits of relying
on cost data that the Commission already collects on a regular basis. As explained in detail in the
attached FNPRM and Appendix H, Commission staff used publicly available NECA cost data and other
publicly available geographic and demographic data sets to develop the proposed benchmarks.359
225. Finally, we note that while the methodology in Appendix H is specifically designed to
modify the formula for determining HCLS, we conclude that we should also develop similar benchmarks
for determining ICLS. We direct NECA to file the detailed revenue requirement data it receives from
carriers, no later than thirty days after release of this Order, so that the Wireline Competition Bureau can
evaluate whether it should adopt a methodology using these data. Over time, benchmarks to limit
reimbursable recovery of costs will provide incentives for each individual company to keep its costs
lower than its own cap from prior years, and more generally moderate expenditures and improve
355 Indeed, as one commenter notes, such an approach would lock in past disparities in investment patterns, so that a
company that spent excessively on its current plant could continue to invest significant amounts in the future, while
a company that has not invested sufficiently in the past would face a limited budget to upgrade aging plant.
Nebraska Rural Independent Companies USF/ICC Transformation NPRM Reply , at 6.
356 Parrino Sept. 29 Ex Parte, at Attach. 1 (Letter from Wendy Thompson Fast, Consolidated Companies, and Ken
Pfister, Great Plains Communications, to Carol Mattey, FCC, GN Docket No. 09-51, WC Docket Nos. 10-90, 05-
337, CC Docket No. 01-92).
357 Id. at Attach. 1, 2, 5-7.
358 Id. at Attach. 1, 2 (“Cost data should be derived solely from broadband networks that have been engineered to
ensure that consumer applications in rural areas will remain comparable to those generally available and used in
urban areas.”).
359 See National Exchange Carrier Assoc., Inc., Universal Service Fund Data: NECA Study Results, 2010 Report
(filed Sept. 30, 2011), http://transition.fcc.gov/wcb/iatd/neca.html.
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efficiency, and we believe these objectives are as important in the context of ICLS as they are for HCLS.We seek comment in the FNPRM on ICLS benchmarks.
226. We delegate authority to the Wireline Competition Bureau to finalize a methodology to
limit HCLS and ICLS reimbursements after this further input.
4.
Corporate Operations Expense
227. Background. Corporate operations expenses are general and administrative expenses,sometimes referred to as overhead expense. More specifically, corporate operations expense includes
expenses for overall administration and management, accounting and financial services, legal services,
and public relations. Corporate operations expenses are currently eligible for recovery through HCLS,
LSS, and ICLS. For many years the Commission has limited the amount of recovery for these expenses
through HCLS but not through LSS and ICLS.360
228. In the USF/ICC Transformation NPRM, we proposed to reduce or eliminate universal
service support for corporate operations expense.361 We also sought comment on reducing or eliminating
corporate operations expense as an eligible expense for both LSS and ICLS.362
229. Discussion. As supported by many parties,363 we will adopt the more modest reform
proposal to extend the limit on recovery of corporate operations expense to ICLS effective January 1,
2012. We concluded in the Universal Service First Report and Order that the amount of recovery of
corporate operations expense from HCLS should be limited to help ensure that carriers use such support
only to offer better service to their customers through prudent facility investment and maintenance,
consistent with their obligations under section 254(k).364 We now conclude that the same reasoning
applies to ICLS.365 Extending the limit on the recovery of corporate operations expenses to ICLS
likewise furthers our goal of fiscal responsibility and accountability.366
230. We note, however, that the current formula for limiting the eligibility of corporate
operations expenses for HCLS has not been revised since 2001.367 The initial formula was implemented
360 47 C.F.R. § 32.6720.
361 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4623, para. 194.
362 See id. at 4624, para. 198. The FPSC supported eliminating eligibility of corporate operations expense from all
support mechanisms. See Florida Commission USF/ICC Transformation NPRM Comments at 7-8.
363 See, e.g. Rural Associations USF/ICC Transformation NPRM Comments at 42: Alexicon USF/ICC
Transformation NPRM Comments at 11; FairPoint USF/ICC Transformation NPRM Comments at 11-12; Montana
Commission USF/ICC Transformation NPRM Reply at 6; Moss Adams USF/ICC Transformation NPRM
Comments at 12-13.
364 See Universal Service First Report and Order, 12 FCC Rcd at 8930, para. 283.
365 The same reasoning also would apply to LSS; however, as discussed below in section VII.D.7 (Local Switching
Support), we are eliminating LSS as a stand-alone support program and will not extend the corporate operations
limit to LSS for the remainder of its existence. Those costs will be addressed through the ICC recovery mechanism
adopted in section XII (Comprehensive Intercarrier Compensation Reform) and section XIII (Recovery Mechanism)
below.
366 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4560-61, para. 10.
367 See Rural Task Force Order, 16 FCC Rcd at 11270-77, paras. 60-76; 47 C.F.R. § 36.621(a)(4)
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in 1998, based on 1995 cost data.368 In 2001, the formula was modified to reflect increases in GrossDomestic Product-Chained Price Index (GDP-CPI),369 but has not been updated since then.
231. There have been considerable changes in the telecommunications industry in the last decade,
given the “ongoing evolution of the voice network into a broadband network,”370and we believe updating
the formula based on more recent cost data will ensure that it reflects the current economics of serving
rural areas and appropriately provides incentives for efficient operations. Therefore, we now update the
limitation formula based on an analysis of the most recent actual corporate operations expense submitted
by rural incumbent LECs.371 As set forth in Appendix C, the basic statistical methods for developing the
limitation formula and the structure of the formula are the same as before.372 We also conclude that the
updated formula we adopt today should include a growth factor, consistent with the current formula that
applies to HCLS.373
232. Accordingly, effective January 1, 2012, we modify the existing limitation on corporate
operations expense formula as follows:
·
For study areas with 6,000 or fewer total working loops the monthly amount per loop shall be
(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, the monthly
amount per loop shall be $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;
·
Beginning January 1, 2013, the monthly per-loop limit shall be adjusted each year to reflect
the annual percentage change in GDP-CPI.
233. The chart below depicts the per-line limits on corporate operations expense currently in
place for 2011 compared to the new per-line limit we adopt today, which will become effective January 1,
2012.
368 See Universal Service First Report and Order, 12 FCC Rcd at 8930-32, paras. 283-85, 8942, para. 307.
369 See Rural Task Force Order, 16 FCC Rcd at 11275, para. 73.
370 See August 3 PN; Rural Associations August 3 PN Comments at 19.
371 In the August 3 PN, we sought comment on applying an updated formula to limit recovery of corporate
operations expenses for HCLS, ICLS, and LSS. See August 3 PN 26 FCC Rcd at 11117.
372 See Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Order on Reconsideration, 12 FCC
Rcd 10095, 10102-05, paras. 17-22 and Appendix B.
373 The Rural Associations commented that the updated formula did not include a growth factor to reflect increases
in GDP-CPI, as does the current formula that applies to HCLS. See Rural Associations August 3 PN Comments at
21-22.
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Corporate Operations Expense Limit Formula: Current vs. Updated
Current FormulaUpdated Formula
$45
$40
$35
$30
$25
$20
Current Formula
$15
Updated Formula
Monthly Corporate Operations Limit Per Loop
$10$5
0.5 1
1.5 2 2.5 3 3.5 4 4.5 5
6
7
8
9
10 11 12 13 14 15 16 17 19 20 21
Number of Loops (In thousands)
5.Reducing High Cost Loop Support for Artificially Low End-User Rates
234. Background. Section 254(b) of the Act requires that “[c]onsumers in all regions of theNation . . . should have access to telecommunications and information services . . . that are available at
rates that are reasonably comparable to rates charged for similar services in urban areas.”374 In the
USF/ICC Transformation NPRM, we sought comment on tools, such as rate benchmarks and imputation
of revenues, that might be used both today and as the marketplace fully transitions to broadband networks
to meet this statutory mandate.375 Among other things, we sought comment on using a rate benchmark, or
floor, based on local rates for voice service at the outset of any transition for high-cost support reform.376
One commenter, in response to the USF/ICC Transformation NPRM, suggested we develop a benchmark
for voice service and reduce a carrier’s high-cost support by the amount that its rate falls below the
benchmark.377
235. Discussion. We now adopt a rule to limit high-cost support where end-user rates do not meet
a specified local rate floor. This rule will apply to both rate-of-return carriers and price cap companies.
374 47 U.S.C. § 254(b)(3).
375 USF/ICC Transformation NPRM, 26 FCC Rcd at 4733-34, para. 573. Under a benchmark approach, the
benchmarked rate is imputed to the carrier for purposes of determining support, but carriers typically are not
required to raise their rates to the benchmark level.
376 Id. See also id. at 4603, para. 139 and n. 223 (seeking comment on developing a rate benchmark for voice [and
broadband] services to satisfy Congress’s requirement that universal service ensure that services are available to all
regions, “including rural, insular, and high cost areas,” at rates that are “affordable” and “reasonably comparable” to
those in urban areas).
377 Ad Hoc USF/ICC Transformation NPRM Comments at 26. We sought comment specifically on this approach in
a subsequent Public Notice addressing specific aspects of additional proposals and issues. August 3 PN, 26 FCC
Rcd at 11118.
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Section 254 obligates states to share in the responsibility of ensuring universal service. We recognizesome state commissions may not have examined local rates in many years, and carriers may lack
incentives to pursue a rate increase when federal universal service support is available. Based on
evidence in the record, however, there are a number of carriers with local rates that are significantly lower
than rates that urban consumers pay.378 Indeed, as noted in Figure 5 below, there are local rates paid by
customers of universal service recipients as low as $5 in some areas of the country. For example, we note
that two carriers in Iowa and one carrier in Minnesota offer local residential rates below $5 per month.379
We do not believe that Congress intended to create a regime in which universal service subsidizes
artificially low local rates in rural areas when it adopted the reasonably comparable principle in section
254(b); rather, it is clear from the overall context and structure of the statute that its purpose is to ensure
that rates in rural areas not be significantly higher than in urban areas.
236. We focus here on the impact of such a rule on rate-of-return companies.380 Data submitted
by NECA summarizing residential R-1 rates for over 600 companies — a broad cross-section of carriers
that typically receive universal service support — show that approximately 60 percent of those study
areas have local residential rates that are below the 2008 national average local rate of $15.62. This
distribution plot shows that most rates fall within a five-dollar range of the national average, but more
than one hundred companies, collectively representing hundreds of thousands of access lines, have a basic
R-1 rate that is significantly lower. This appears consistent with rate data filed by other commenters.381
Figure 5
Sample of Local Residential Service Monthly Rates
NECA Survey of 641 Respondents
378 In the August 3 PN, we stated that our high-cost universal service rules may subsidize excessively low rates for
consumers served by rural and rate-of-return carriers. August 3 PN, 26 FCC Rcd at 4614-15, para. 172. We noted
that one commenter stated that roughly 20 percent of the residential lines of small rate-of-return companies have
monthly rates of $12 or less and another 22 percent have local rates between $12 and $15 per month, while the
nationwide average urban rate, it contends, was approximately $15.47 based on the most recent published reference
book of rates by the FCC. Id. While individual consumers in those areas may benefit from such low rates, when a
carrier uses universal service support to subsidize local rates well below those required by the Act, the carrier is
spending universal service funds that could potentially be better deployed to the benefit of consumers elsewhere. Id.
379 Local residential rates, or flat rates for residential service, are more commonly referred to as the “R-1” rate. See,
e.g., Letter from the Supporters of the Missoula Plan to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92
at 3 (filed February 5, 2007) (referencing “the basic residential local rate (1FR or equivalent)”).
380 While price cap companies on average tend to have higher R-1 rates than rate-of-return companies, we note that
data in the record indicates that a number of price cap companies also have local R-1 rates below the most recently
available national average local rate, $15.62, in a number of states. See Letter from Malena F. Barzilai, Regulatory
Counsel & Director, Windstream Communications, to Marlene H. Dortch, Secretary, FCC, Confidential Information
Subject to Protective Order in CC Docket No. 01-92, WC Docket Nos. 05-337, 07-135, 10-90, and GN Docket No.
09-51 (filed Oct. 15, 2011) (NECA Survey); Letter from Michael D. Saperstein, Jr., Director of Federal Regulatory
Affairs, Frontier Communications, to Marlene H. Dortch, Secretary, FCC, Confidential Information Subject to
Protective Order in CC Docket No. 01-92, WC Docket Nos. 05-337, 07-135, 10-90, and GN Docket No. 09-51 (filed
Dec. 16, 2010). In fact, price cap companies have some R-1 rates lower than $9.
381 The data for this distribution comes from the NECA Survey. See also Oregon Telecommunications Association
and the Washington Independent Telecommunications Association Comments, Table 7 (filed July 12, 2010)
(providing existing monthly local residential rates ranging from $10.00 to $27.39 not including subscriber line
charges of $6.50 per month); Oregon Telecommunications Association and the Washington Independent
Telecommunications Association Reply Comments, Table 3 (filed August 11, 2010) (providing existing monthly
local residential rates ranging from $12.25 to $30.50 not including subscriber line charges of $6.50 per month).
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237. It is inappropriate to provide federal high-cost support to subsidize local rates beyond whatis necessary to ensure reasonable comparability. Doing so places an undue burden on the Fund and
consumers that pay into it. Specifically, we do not believe it is equitable for consumers across the country
to subsidize the cost of service for some consumers that pay local service rates that are significantly lower
than the national urban average.
238. Based on the foregoing, and as described below, we will limit high-cost support where local
end-user rates plus state regulated fees (specifically, state SLCs, state universal service fees, and
mandatory extended area service charges) do not meet an urban rate floor representing the national
average of local rates plus such state regulated fees. Our calculation of this urban rate floor does not
include federal SLCs, as the purposes of this rule change are to ensure that states are contributing to
support and advance universal service and that consumers are not contributing to the Fund to support
customers whose rates are below a reasonable level.382
239. We will phase in this rate floor in three steps, beginning with an initial rate floor of $10 for
the period July 1, 2012 through June 30, 2013 and $14 for the period July 1, 2013 through June 30, 2014.
Beginning July 1, 2014, and in each subsequent calendar year, the rate floor will be established after the
Wireline Competition Bureau completes an updated annual survey of voice rates. Under this approach,
the Commission will reduce, on a dollar-for-dollar basis, HCLS and CAF Phase I support to the extent
that a carrier’s local rates (plus state regulated fees) do not meet the urban rate floor.
240. To the extent end-user rates do not meet the rate floor, USAC will make appropriate
reductions in HCLS support. This calculation will be pursuant to a rule that is separate from our existing
rules for calculation of HCLS, which is subject to an annual cap. As a consequence, any calculated
382 See 47 U.S.C. §§ 254(b)(5), 254(f), 254(k); Federal-State Joint Board on Universal Service, Order on Remand,
CC Docket No. 96-45, Further Notice of Proposed Rulemaking, and Memorandum Opinion and Order, 18 FCC Rcd
22559, 22568 para. 17 (2003) (“The Act makes clear that preserving and advancing universal service is a shared
federal and state responsibility.”).
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reductions will not flow to other carriers that receive HCLS, but rather will be used to fund other aspectsof the CAF pursuant to the reforms we adopt today.383
241. This offset does not apply to ICLS because that mechanism provides support for interstate
rates, not intrastate end-user rates. Accordingly, we will revise our rules to limit a carrier’s high-cost loop
support when its rates do not meet the specified local urban rate floor.384
242. As shown in Figures 6 and 7 below, phasing in this requirement in three steps will
appropriately limit the impact of the new requirement in a measured way. Based on the NECA data, we
estimate that there are only 257,000 access lines in study areas having local rates less than $10 – which
would be affected by the rule change in the second half of 2012 – and there are 827,000 access lines in
study areas that potentially would be affected in 2013. 385 We assume, however, that by 2013 carriers will
have taken necessary steps to mitigate the impact of the rule change. By adopting a multi-year transition,
we seek to avoid a flash cut that would dramatically affect either carriers or the consumers they serve.
Figure 6
Total Impacted Access Lines
400351
350
Figure 7
$15.62 (Average Basic Local Residential Rate
2008 Average Basic Local Residential Rate)
300
235
250
219
203
193
200
165
1200000
150
150
Total
109
113
105
87
100
61
64
Number of Lines (in thousands)
100000050
Esti
32 ma39 ted Number of Access Lines Below Rate Floors
30 41 44
12
23
6
15
16
18
3
Source: NECA Carrier Survey
2 1 2 0
0 0 5
0
800000
1 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 32 33 36 38
Local Residential Rates
Source: NECA Carrier Survey, 2011600000
Access Lines
400000200000
0
Less or equal to $10 rate
Less or equal to $14 rate
383 See supra Section VII.H.
384 See infra Section 54.318, Appendix A.
385 The data for this distribution comes from the NECA Survey. See supra note 381.
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243. In addition, because we anticipate that the rate floor for the third year will be set at a figureclose to the sum of $15.62 plus state regulated fees, we are confident that $10 and $14 are conservative
levels for the rate floors for the first two years. $15.62 was the average monthly charge for flat-rate
service in 2008, the most recent year for which data was available.386 Under our definition of “reasonably
comparable,” rural rates are reasonably comparable to urban rates under section 254(b) if they fall within
a reasonable range above the national average.387 Under this definition, we could set the rate floor above
the national average urban rate but within a range considered reasonable. In the present case, we are
expecting to set the end point rate floor at the average rate, and we are setting rate floors well below our
current best estimate of the average during the multi-year transition period.
244. Although the high-cost program is not the primary universal service program for addressing
affordability, we note that some commenters have argued that if rates increase, service could become
unaffordable for low-income consumers.388 However, staff analysis suggests that this rule change should
not disproportionately affect low-income consumers, because there is no correlation between local rates
and average incomes in rate-of-return study areas—that is, rates are not systematically lower where
consumer income is lower and higher where consumer income is higher. We further note that the
Commission’s Lifeline and Link Up program remains available to low-income consumers regardless of
this rule change.389
245. In 2010, 1,048 rate-of-return study areas received HCLS support. Using data from the
NECA survey filed pursuant to the Protective Order in this proceeding and U.S. Census data from third-
party providers, we analyzed monthly local residential rate data for 641 of these study areas and median
income data for 618 of those 641 study areas.390 Based on the 618 study areas for which we have both
local rate data and median income data, when we set one variable dependent upon the other (price as a
386 Reference Book of Rates, Price Indices, and Household Expenditures for Telephone Service, Industry Analysis
and Technology Division, Wireline Competition Bureau, Residential Rates for Local Service in Urban Areas, Table
1.1 (2008) (2008 Reference Book of Rates). We note that some parties have submitted information into the record
indicating that the local rates are higher than this $15.62 figure in a number of states. For example, Kansas has
increased its affordable residential rates for rural incumbent LECs to $16.25 per month, and Nebraska has
conditioned state USF eligibility upon carriers increasing local rates to its adopted rate floor of $17.95 in urban areas
and $19.95 in rural areas. Letter from Mark Sievers, Chairman, Kansas Corporation Commission; Orjiakor Isiogu,
Chairman, Michigan Public Service Commission; Tim Schram, Chairman, Nebraska Public Service Commission;
Patrick H. Lyons, Chairman, New Mexico Public Regulation Commission; Steve Oxley, Deputy Chair, Wyoming
Public Service Commission, to Marlene H. Dortch, Secretary, FCC, re: Universal Service Intercarrier Compensation
Transformation Proceeding, WC Docket Nos. 10-90, 07-135, 05-337 and 03-109; CC Docket Nos. 01-92 and 96-45;
GN Docket No. 09-51 (filed September 15, 2011).
387 Federal-State Joint Board on Universal Service, High-Cost Universal Service Support, WC Docket No. 05-337,
CC Docket No. 96-45, Order on Remand and Memorandum Opinion and Order, 25 FCC Rcd 4072, 4101, para. 53
(2010) (Qwest II Remand Order).
388 See, e.g., Comments of the Asian American Justice Center at 2 (filed August 24, 2011); see also Comments of
the National Association of State Utility Consumer Advocates at 51 (filed April 18, 2011); see generally Reply
Comments of the National Association of State Utility Consumer Advocates at 50-51 (filed May 23, 2011).
389 For more than two decades, the Lifeline and Link Up Program has helped tens of millions of Americans afford
basic phone service, providing a “lifeline” for essential daily communications as well as emergencies. See generally
Lifeline and Link Up Reform and Modernization, Federal-State Joint Board on Universal Service, Lifeline and Link
Up, WC Docket No. 11-42, CC Docket No. 96-45, WC Docket No. 03-109, Notice of Proposed Rulemaking, 26
FCC Rcd 2770 (2011).
390 See NECA Survey. Median income data was based on data from the U.S Census Bureau.
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function of income), we do not observe prices correlating at all with median income levels in the givenstudy areas. We observe a wide range of prices — many are higher than expected and just as many are
lower than expected. In fact, some areas with extremely low residential rates exhibit higher than average
consumer income.
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Figure 8246. To implement these rule changes, we direct that all carriers receiving HCLS must report
their basic voice rates and state regulated fees on an annual basis, so that necessary support adjustments
can be calculated.391 In addition, all carriers receiving frozen high-cost support will be required to report
their basic voice rates and state regulated fees on an annual basis.392 Carriers will be required to report
their rates to USAC, as set forth more fully below [cross reference to reporting section: (See Section XX,
infra)]. As noted above, we have delegated authority to the Wireline Competition Bureau and the
Wireless Telecommunications Bureau to take all necessary steps to develop an annual rate survey for
voice services.393 We expect this annual survey to be implemented as part of the annual survey described
above in the section discussing public interest obligations for voice telephony. We expect the initial
annual rate survey will be completed prior to the implementation of the third step of the transition.394
247. Finally, we note that the Joint RLECs contend that a benchmark approach for voice services
fails to address rate comparability for broadband services.395 Although we address only voice services
here, elsewhere in this Order we address reasonable comparability in rates for broadband services.396 We
believe that it is critical to reduce support for voice — the supported service — where rates are artificially
low. Doing so will relieve strain on the USF and, thus, greatly assist our efforts in bringing about the
overall transformation of the high-cost program into the CAF.397
391 Similarly, companies that receive HCMS (or any interim model support) will also be required to report their basic
voice rates and state-regulated fees, so that USAC can determine any reductions in support that are required.
392 See supra Section VII.C.1.
393 See supra Section VI.A.
394 See Modernizing the FCC Form 477 Data Program, Development of Nationwide Broadband Data to Evaluate
Reasonable and Timely Deployment of Advanced Services to All Americans, Improvement of Wireless Broadband
Subscribership Data, and Development of Data on Interconnected Voice over Internet Protocol (VoIP)
Subscribership, Service Quality, Customer Satisfaction, Infrastructure and Operating Data Gathering, Review of
Wireline Competition Bureau Data Practices, Notice of Proposed Rulemaking, WC Docket Nos. 11-10, 07-38, 08-
90 and 10-132, 26 FCC Rcd 1508 (2011). The Bureau may elect to develop the relevant rate benchmark using data
from Form 477 if changes in that collection provide access to relevant pricing information. Even if the Commission
does decide to collect pricing information on Form 477, and even if that information will allow the development of a
rate benchmark, we recognize that PRA requirements and other timing constraints may limit the availability of such
data, particularly in the near future. Therefore, an additional separate survey to implement this rule may be
necessary.
395 Rural Associations August 3 PN Comments at 31.
396 See supra Section VI.B.3.
397 The Rural Associations contend that if the Commission were to adopt the RLEC Plan and also the Ad Hoc
Telecommunications Users Committee benchmark approach, it would create the potential for a “double whammy”
for rural carriers and their customers; i.e., that there would be two benchmarks – one for USF and one for ICC –
with separate and distinct revenue reductions tied to a single rate charged to each customer, dramatically upsetting
the careful balance of revenue reductions and support mechanisms. Rural Associations August 3 PN Comments at
32. Our benchmark mechanism in the universal service context is a floor for eligibility for support that
complements the ICC residential rate ceiling by adding an incentive for local rate rebalancing. If a carrier’s rate is
below the benchmark in the USF context, then its payments are reduced by the difference between it’s rates and the
benchmark; i.e., the benchmark rate is imputed to the carrier as the minimum amount a customer is expected to pay
and of which USF will not cover. Once a carrier’s rates reach or exceed the benchmark, no reduction would be
applied to the high-cost support the carrier would otherwise be eligible for.
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6.Safety Net Additive
248. Background. In 2001, as part of the Rural Task Force proceeding, the Commission adoptedthe “safety net additive” with the intent of providing additional support to rural incumbent LECs who
make additional significant investments, notwithstanding the cap on high-cost loop support.398 Once an
incumbent LEC qualifies for such support, it receives such support for the qualifying year plus the four
subsequent years.399 Specifically, the safety net additive provides additional loop support if the
incumbent LEC realizes growth in year-end telecommunications plant in service (TPIS) (as prescribed in
section 32.2001 of the Commission’s rules) on a per-line basis of at least 14 percent more than the study
area’s TPIS per-line investment at the end of the prior period.400
249. From 2003 to 2010, the safety net additive increased from $9.1 million to $78.9 million.401
It is projected to be $94 million for 2011, an increase of approximately ten-fold in nine years.402 To
qualify for the safety net additive, an incumbent LEC’s year-over-year TPIS, on a per-line basis, must
increase by a minimum of 14 percent. The majority of incumbent LECs that currently are receiving the
safety net additive qualified in large part due to significant loss of lines, not because of significant
increases in investment, which is contrary to the intent of the rule to provide additional funding only for
significant new investment.403 When the Commission adopted the safety net additive, access lines were
growing. The Commission did not anticipate that incumbent telephone companies would lose access
lines as they have over the past decade. For the past two years, close to sixty percent of incumbent LECs
that qualified for the safety net additive did not have total TPIS increase by more than 14 percent year-
over-year.404 However, because of the loss of lines, such incumbent LECs qualified for the safety net
398 47 C.F.R. § 36.605. The safety net additive was adopted based on the recommendation of the Rural Task Force.
See Rural Task Force Order, 16 FCC Rcd at 11276-81, paras. 77-90. Specifically, the safety net additive is equal to
the amount of capped high-cost loop support in the qualifying year minus the amount of support in the year prior to
qualifying for support subtracted from the difference between the uncapped expense adjustment for the study area in
the qualifying year minus the uncapped expense adjustment in the year prior to qualifying for support as shown in
the by the following equation: Safety net additive support = (Uncapped support in the qualifying year−Uncapped
support in the base year)−(Capped support in the qualifying year−Amount of support received in the base year). 47
C.F.R. § 36.605(b).
399 For the four subsequent years, the safety net additive is the lesser of the sum of capped support and the safety net
additive support received in the qualifying year or the rural telephone company's uncapped support. See 47 C.F.R.
§ 36.605(c)(3)(ii).
400 See 47 C.F.R. §§ 36.605(c) and 32.2001.
401 See 2010 Universal Service Monitoring Report at Table 3.7.
402 See Universal Service Administrative Company, Quarterly Administrative Filings for 2011, Fourth Quarter (4Q),
Appendices at HC01 (filed Aug. 2, 2011) (USAC 4Q 2011 Filing), http://www.usac.org/about/governance/fcc-
filings/2011/
403 For example, one incumbent LEC will receive approximately $6.4 million in safety net additive during 2011 (the
highest among any incumbent LEC), even though its total annual year-end TPIS has increased only in the range of
between 5 percent and 9 percent per-year, during the past five years. That carrier, however, lost approximately 8
percent of its lines in each of the past two years and 18 percent of its lines over the past five years. Additionally, its
cost per loop is well below the HCLS qualifying threshold and therefore does not qualify for HCLS. See USAC 2Q
2011 filing, Appendices at HC01; NECA 2010 USF Data Filing. We also note that two incumbent LECs qualified
for safety net additive beginning 2010 due to line loss and their TPIS also declined. See NECA 2010 USF Data
Filing and National Exchange Carrier Assoc., Inc., Universal Service Fund Data; NECA Study Results, 2009 Report
(filed Sept. 30, 2009) (NECA 2009 USF Data Filing).
404 Staff analysis of National Exchange Carrier Assoc., Inc., Universal Service Fund Data: NECA Study Results,
2008 Report through 2010 Report, http://www.fcc.gov/wcb/iatd/neca.html.
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additive because the rule is based on per-line investment. Accordingly, in the USF/ICC TransformationNPRM, we proposed to eliminate safety net additive support.405
250. Discussion. We conclude the safety net additive is not designed effectively to encourage
additional significant investment in telecommunications plant,406 and therefore eliminate the rule
immediately. We grandfather existing recipients and begin phasing out their support in 2012.407
251. Several commenters suggest that rather than eliminate the safety net additive, we revise the
rule to base qualification on the total year-over-year changes in TPIS, rather than on per-line change in
TPIS.408 We decline to adopt this suggestion, and we conclude instead that we should phase out safety
net additive rather than modify how it operates. While revising the rule as some commenters suggested
would address one deficiency with safety net additive support, doing so would not address our
overarching concern that safety net additive as a whole does not provide the right incentives for
investment in modern communications networks. It does not ensure that investment is reasonable or cost-
efficient, nor does it ensure that investment is targeted to areas that would not be served absent support.
For example, even if we changed the rule as proposed, safety net additive could continue to allow
incumbent LECs to get additional support if, for instance, they choose to build fiber-to-the-home on an
accelerated basis in an area that is also served by an unsubsidized cable competitor. That said, we do
modify our proposed phase out of safety net additive based on the record.
252. We conclude that beneficiaries of safety net additive whose total TPIS increased by more
than 14 percent over the prior year at the time of their initial qualification should continue to receive such
support for the remainder of their eligibility period, consistent with the original intent of the rule. For the
remaining beneficiaries of safety net, we find that such support should be phased down in 2012 because
such support is not being paid on the basis of significant investment in telecommunications plant.
Specifically, for the latter group of beneficiaries, the safety net additive will be reduced 50 percent in
2012, and eliminated in 2013. We do not provide any new safety net support for costs incurred after
2009.409
405 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4621, para. 185.
406 Several parties support eliminating the safety net additive. See e.g. NCTA USF/ICC Transformation NPRM
Comments at 12 (arguing that the safety net additive rule, as designed, is an inefficient use of limited universal
service funds); Florida Commission USF/ICC Transformation NPRM Comments at 7; Nebraska Rural Companies
August 3 PN Reply at 17 (“it is reasonable to remove SNA from companies that have received such funding due to
line decreases, as well as not permit new recipients of SNA”).
407 While we focus here on rate-of-return companies, we note that today rural price cap companies also may receive
SNA. As discussed more fully above in Section VII.C.I, SNA is completely eliminated for price cap companies,
who will receive all support from a forward-looking model.
408 See, e.g. Rural Associations USF/ICC Transformation NPRM Comments at 42-43.
409 See Nebraska Rural Companies August 3 PN Reply at 17 (“it is reasonable to remove SNA from companies that
have received such funding due to line decreases, as well as not permit new recipients of SNA”). We recognize that
some carriers denied support under this rule may have made investments in 2010 and 2011 expecting to receive
SNA in 2012 or 2013 for those expenditures. As described above, however, we reject the argument that carriers
have any entitlement to support based on this expectation. See supra para. 221. Moreover, since early 2010, the
Commission has given carriers ample notice that we intended to undertake comprehensive universal service reform
in the near term. See, e.g., Joint Statement on Broadband, GN Docket No. 10-66, Joint Statement on Broadband, 25
FCC Rcd 3420, 3421 (2010); USF/ICC Transformation NPRM, 26 FCC Rcd at 4560-61, para. 10. Thus, carriers
that have not yet started receiving SNA but may have been anticipating such support based on 2010 and 2011
investments stand in a materially different position than companies that have already started receiving support based
on earlier expenditures. Moreover, because SNA support has grown rapidly in recent years, allowing USF recovery
(continued…)
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7.Local Switching Support
253. Background. LSS allows rural incumbent LECs serving 50,000 access lines or fewer toallocate a larger percentage of their switching costs (including related overhead costs) to the interstate
jurisdiction and recover those costs through the federal universal service fund.410 Historically, the
rationale for LSS was that traditional circuit switches, which were based on specialized hardware, were
relatively expensive for the smallest of carriers because such switches were not easily scaled to the size of
the carrier, and therefore required additional support from the federal jurisdiction. In recent years,
however, telecommunications technology has been evolving from circuit-switched to IP-based, and many
smaller rate-of-return carriers are purchasing soft switches and routers which tend to be cheaper and more
efficiently scaled to smaller operating sizes than the specialized hardware-based switches that
predominated when LSS was created.411 Qualification for LSS is solely based on the size of the
incumbent LEC study area, i.e. the number of access lines served, with eligibility thresholds that bear no
rational linkage to modern network architecture. Moreover, incumbent LECs do not have to meet a high-
cost threshold to qualify for LSS.
254. In the USF/ICC Transformation NPRM, we proposed to eliminate local switching support,
or in the alternative, to combine this program with high-cost loop support.412 A number of commenters
agree that LSS should be eliminated because today’s soft switches are less expensive and more efficiently
scaled to small operating sizes than past circuit-based switches,413 while other commenters oppose the
elimination of LSS.414 The Rural Associations state that the future of LSS should be addressed in
conjunction with the Commission’s ICC reform proceeding.415
(Continued from previous page)
for 2010 or 2011 investments would likely place large new burdens on the Fund, while slowing the Commission’s
effort to transition to more efficient, targeted, and accountable mechanisms for incenting new broadband
deployment. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4620-21, para. 184; Universal Service
Administrative Company, Quarterly Administrative Filings for 2012, First Quarter (1Q), Appendices at HC06 (filed
Nov. 2, 2011) (USAC 1Q 2012 Filing) (projecting SNA support of $122 million for 2012),
http://www.usac.org/about/governance/fcc-filings/2012/
410 Incumbent LECs recover their interstate switching costs through interstate tariffs (i.e., interstate access charges)
and recover intrastate switching costs (i.e., intrastate access charges and basic local service) as provided by the
relevant state ratemaking authority. 47 C.F.R. § 36.125(f), (j). The precise amount of the extra allocation depends
on a dial equipment minute (DEM) weighting factor determined by the number of access lines served by the
incumbent LEC, with key thresholds established at 10,000, 20,000, and 50,000 lines. See 47 C.F.R. § 36.125(f); 47
C.F.R. § 54.301.
411 See, e.g., High-Cost Universal Service Support, WC Docket No. 05-337, Order on Remand and Report and Order
and Further Notice of Proposed Rulemaking, 24 FCC Rcd 6475, 6610-14, App. A, paras. 254-57, 260-61. A soft
switch connects calls by means of software running on a computer system. In such configurations the “switching” is
virtual because the actual path through the electronics is based on signaling and database information rather than a
physical pair of wires. Soft switches are economically desirable because they offer significant savings in
procurement, development, and maintenance. Such devices feature vastly improved economies of scale compared to
switches based on specialized hardware.
412 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4621, para. 186.
413 See e.g. Florida Commission USF/ICC Transformation NPRM Comments at 7-8; CTIA USF/ICC
Transformation NPRM Comments at 15; Comcast USF/ICC Transformation NPRM Comments at 13; New Jersey
Rate Counsel USF/ICC Transformation NPRM Reply at 7.
414 Rural incumbent LECs and their trade associations generally oppose eliminating LSS or combining it with
HCLS. See e.g. Rural Associations USF/ICC Transformation NPRM Comments at 43-45; Eastern Rural Telecom
(continued…)
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255. Discussion. We agree with the Rural Associations that reforms to LSS should be integratedwith reforms to ICC and the accompanying creation of a CAF to provide measured replacement of lost
intercarrier revenues. We continue to believe that the rationale for LSS has weakened with the advent of
cheaper, more scalable switches and routers.416 We also agree with the Ad Hoc Telecommunications
Users Committee that the LSS funding mechanism provides a disincentive for those carriers owning
multiple study areas in the same state to combine those study areas, potentially resulting in inefficient,
costly deployment of resources.417 Further, because qualification is solely based on the number of lines in
the study area, LSS does not appropriately target funding to high-cost areas, nor does it target funding to
areas that are unserved with broadband.418
256. At the same time, we recognize that today many small companies recover a portion of the
costs of their switching investment, both for circuit switches and recently purchased soft switches,
through LSS. LSS is a form of explicit recovery for switching investment that otherwise would be
recovered through intrastate access charges or end user rates. As such, any reductions in LSS would
result in a revenue requirement flowing back to the state jurisdiction.
257. For all of these reasons, we conclude that it is time to end LSS as a stand-alone universal
service support mechanism, but that, as discussed in more detail in the ICC section of this Order, limited
recovery of the costs previously covered by LSS should be available pursuant to our ICC reform and the
accompanying creation of an ICC recovery mechanism through the CAF. Effective July 1, 2012 we will
eliminate LSS as a separate support mechanism. In order to simplify the transition of LSS, beginning
January 1, 2012 and until June 30, 2012, LSS payments to each eligible incumbent LEC shall be frozen at
2011 support levels subject to true-up based on 2011 operating results. To the extent that the elimination
of LSS support affects incumbent LECs interstate switched access revenue requirement, we address that
issue in the ICC context.419
8.
Other High-Cost Rule Changes
a.Adjusted High Cost Loop Cap for 2012
258. Background. In 1993, the Commission adopted a cap on high-cost loop support.420 In 2001,the Commission modified the cap to adjust it annually by an index based on changes in the GDP/CPI and
(Continued from previous page)
Association USF/ICC Transformation NPRM Comments at 4-5; Delhi Telephone USF/ICC Transformation NPRM
Comments at 5; FairPoint USF/ICC Transformation NPRM Comments at 9-10.
415 See Rural Associations USF/ICC Transformation NPRM Comments at 45.
416 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4621, para. 187.
417 See Ad Hoc USF/ICC Transformation NPRM Comments at 12.
418 For this reason, we decline to adopt Alexicon’s alternative proposal that we adjust downward the qualifying
threshold for LSS from 50,000 access lines to 15,000 access lines. See Alexicon USF/ICC Transformation NPRM
Comments at 13-14. Changing the size threshold does not address our underlying concern that in an era of scalable
soft switches, it does not make sense to base eligibility for LSS solely on the size of the study area, without regard to
whether the area in question in fact is high-cost.
419 See infra para. 872.
420 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 (1993) (subsequent history omitted).
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access lines.421 In recent years, with low inflation and loss of access lines, the annual cap for HCLS hasbeen adjusted downward.
259. Discussion. NECA projects that the high-cost loop cap will be $858 million for all rural
incumbent LECs for 2012, which is $48 million less than the $906 million projected to be disbursed in
2011.422 Due to the elimination of HCLS for price cap companies as discussed above, we are lowering
the HCLS cap for 2012 by the amount of HCLS support price cap carriers would have received for 2012.
We reset the 2012 high-cost loop cap to the level that remaining rate-of-return carriers are projected to
receive in 2012. Although price cap holding companies currently receive HCLS in a few rate-of- return
study areas, as a result of the rule changes discussed above, all of their remaining rate-of-return support
will be distributed through a new transitional CAF program, rather than existing mechanisms like
HCLS.423 Accordingly, NECA is required to re-calculate the HCLS cap for 2012 after deducting all
HCLS that price cap carriers and their affiliated rate-of-return study areas would have received for 2012.
NECA is required to submit to the Wireline Bureau the revised 2012 HCLS cap within 30 days of the
release of this Order. NECA shall provide to the Wireline Bureau all calculations and assumptions used
in re-calculating the HCLS cap.
b.
Study Area Waivers
(i)Standards for Review
260. Background. A study area is the geographic territory of an incumbent LEC’s telephoneoperations. The Commission froze all study area boundaries effective November 15, 1984.424 The
Commission took this action to prevent incumbent LECs from establishing separate study areas made up
only of high-cost exchanges to maximize their receipt of high-cost universal service support. A carrier
must therefore apply to the Commission for a waiver of the study area boundary freeze if it wishes to
transfer or acquire additional exchanges.425 In evaluating petitions seeking a waiver of the rule freezing
study area boundaries, the Commission currently applies a three-prong standard: (1) the change in study
area boundaries must not adversely affect the universal service fund; (2) the state commission having
regulatory authority over the transferred lines does not object to the transfer; and (3) the transfer must be
in the public interest.426 In evaluating whether a study area boundary change will have an adverse impact
on the universal service fund, the Commission historically analyzed whether a study area waiver would
result in an annual aggregate shift in an amount equal to or greater than one percent of nationwide high-
cost support in the most recent calendar year.427
421 47 C.F.R. § 36.603
422 National Exchange Carrier Association, Universal Service Fund, 2011 Submission of 2010 Data Collection
Study Results (Sep. 30, 2011).
423 See supra paras. 115-193.
424 See MTS and WATS Market Structure, Amendment of Part 67 of the Commission’s Rules and Establishment of a
Joint Board, CC Docket Nos. 78-72, 80-286, Decision and Order, 50 Fed. Reg. 939 (1985) (Part 67 Order). See
also 47 C.F.R. Part 36, App.
425 Part 67 Order Fed. Reg. at 939-40, para. 1.
426 See, e.g., US WEST Communications, Inc., and Eagle Telecommunications, Inc., Joint Petition for Waiver of the
Definition of “Study Area” Contained in Part 36, Appendix-Glossary of the Commission’s Rules, AAD 94-27,
Memorandum Opinion and Order, 10 FCC Rcd 1771, 1772, para. 5 (1995) (PTI/Eagle Order).
427 See id. at 1774, paras. 14-17; see also US WEST Communications, Inc., and Eagle Telecommunications, Inc.,
Joint Petition for Waiver of “Study Area” Contained in Part 36, Appendix-Glossary of the Commission's Rules, and
(continued…)
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261. The Commission began applying the one-percent guideline in 1995 to limit the potentialadverse impact of exchange sales on the overall fund, and partially in response to the concern that,
because high-cost loop support was capped, an increase in the draw of any fund recipient necessarily
would reduce the amounts that other LECs receive from that support fund.428 Although the Commission
adopted the “parent trap” rule in 1997 prohibiting companies that acquire lines from realizing additional
high-cost support for those lines, it continued to apply the one-percent guideline to determine the impact
on the universal service fund on changes in safety valve support and ICLS, to which the parent trap rule
did not apply.429
262. At the time the one-percent guideline was implemented in 1995, the Universal Service Fund
consisted of high-cost loop support for incumbent LECs.430 The annual aggregate high-cost loop support
at that time was approximately $745 million.431 The threshold for determining an adverse impact,
therefore, was approximately $7.45 million. Subsequently, the Telecommunications Act of 1996 directed
the Commission to make universal service support explicit, rather than implicitly included in interstate
access rates.432 As a result, over the next few years the Commission created explicit universal service
high-cost support mechanisms for local switching, interstate common line access, and interstate access.433
263. The expansion of universal service high-cost support to include additional mechanisms,
pursuant to the 1996 Act, significantly increased the base from which the one-percent guideline is
calculated. Currently, annual aggregate high-cost support for all mechanisms is projected to be
approximately $4.5 billion.434 One-percent of $4.5 billion is $45 million. No study area waiver request in
recent years has come close to triggering the one-percent rule.435
(Continued from previous page)
Petition for Waiver of Section 61.41(c) of the Commission's Rules, AAD 94-27, Memorandum Opinion and Order on
Reconsideration, 12 FCC Rcd 4644 (1997).
428 See PTI/Eagle Order, 10 FCC Rcd at 1773-74, para. 13.
429 47 C.F.R. § 54.305; see infra note 444.
430 See PTI/Eagle Order, 10 FCC Rcd at 1773, para. 17; 47 C.F.R. § 36.601-631. Although dial equipment minute
(DEM) weighting and other implicit support flows were present in the Commission’s rules at the time, only high-
cost loop support was considered for the purposes of the one-percent rule.
431 See Universal Service Fund 1997 Submission of 1996 Study Results by the National Exchange Carrier
Association, Tab 11, page 225 (October 1, 1997). This filing included five years of historical data. High-cost loop
payments for 1995 were based on 1993 cost and loop data.
432 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996) (the 1996 Act). The 1996 Act
amended the Communications Act of 1934. 47 U.S.C. §§ 151, et seq. 47 U.S.C. § 254(e) (“Any such [universal
service] support should be explicit and sufficient to achieve the purposes of this section.”).
433 47 C.F.R. §§ 54.301, 54.901-904, and 54.800-809. Forward-looking high-cost model support was also
implemented to provide support to non-rural incumbent LECs, however, but not as a result of the statute’s
requirement that all support be explicit. 47 C.F.R. § 54.309.
434 See USAC 4Q 2011 Filing at Appendices at HC01.
435 The study area waiver with the greatest estimated impact on universal service support in the past several years
was the United-Twin Valley Order where the estimated increase in support was $800,000 or only approximately 2
percent of the current $45 million one-percent threshold. See United Telephone Company of Kansas, United
Telephone of Eastern Kansas, and Twin Valley Telephone, Inc., Joint Petition for Waiver of the Definition of “Study
Area” Contained in Part 36 of the Commission’s Rules; Petition for Waiver of Section 69.3(e)(11) of the
(continued…)
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264. In the USF/ICC Transformation NPRM, we proposed to eliminate the one-percent guidelineas a measure of evaluating whether a study area waiver will have an adverse impact on the universal
service fund because continuing to apply the one-percent guideline in this manner is unlikely to shed any
insight on whether a study area waiver should be granted.436
265. Discussion. We conclude that the one-percent guideline is no longer an appropriate
guideline to evaluate whether a study area waiver would result in an adverse effect on the fund and,
therefore, eliminate the one-percent guideline in evaluating petitions for study area waiver. Therefore, on
a prospective basis, our standards for evaluating petitions for study area waiver are: (1) the state
commission having regulatory authority over the transferred exchanges does not object to the transfer and
(2) the transfer must be in the public interest.437 As proposed in the USF/ICC Transformation NPRM, our
evaluation of the public interest benefits of a proposed study area waiver will include: (1) the number of
lines at issue; (2) the projected universal service fund cost per line; and (3) whether such a grant would
result in consolidation of study areas that facilitates reductions in cost by taking advantage of the
economies of scale, i.e., reduction in cost per line due to the increased number of lines.438 We stress that
these guidelines are only guidelines and not rigid measures for evaluating a petition for study area waiver.
We believe that this streamlined process will provide greater regulatory certainty and a more certain
timetable for carriers seeking to invest in additional exchanges.
(ii)
Streamlining the Study Area Waiver Process
266. Background. In the USF/ICC Transformation NPRM, we proposed to streamline the processfor addressing petitions for study area waivers.439 The Commission’s current procedures for addressing
petitions for study area waiver require the Wireline Competition Bureau to issue an order either granting
or denying the request. Most petitions for study area waiver are routine in nature and are granted as filed
without modification. Nevertheless, the current procedure requires the issuance of an order granting the
petition for waiver. In the USF/ICC Transformation NPRM, we proposed a process similar to the
Bureau’s processing of routine section 214 transfers of control applications.440 The section 214 process
deems the application granted, absent any further action by the Bureau, on the 31st day after the date of
the public notice listing the application as accepted for filing as a streamlined application.441
267. Discussion. To more efficiently and effectively process petitions for waiver of the study
area freeze, we adopt our proposal to streamline the study are waiver process. Upon receipt of a petition
for study area waiver, a public notice shall be issued seeking comment on the petition. As is our usual
practice, comments and reply comments will be due within 30 and 45 days, respectively, after release of
the public notice. Absent any further action by the Bureau, the waiver will be deemed granted on the 60th
day after the reply comment due date. Additionally, any study area waiver related waiver requests that
petitioners routinely include in petitions for study area waiver and we routinely grant – such as requests
(Continued from previous page)
Commission’s Rules, Petition for Clarification or Waiver of Section 54.305 of the Commission’s Rules, CC Docket
No. 96-45, Order, 21 FCC Rcd 10111 (Wireline Comp. Bur. 2006) (United-Twin Valley Order).
436 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4631-32, para. 224.
437 Petitions for study area waiver filed prior to the adoption of this order will be evaluated based on the former
three-prong standard. See supra note 426.
438 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4631-32, para. 224.
439 See id. at 4630, para. 219.
440 See id.; 47 C.F.R. §§ 63.03-04.
441 47 C.F.R. § 63.03.
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for waiver of sections 69.3(e)(11) (to include any acquired lines in the NECA pool) and 69.605(c) (toremain an average schedule company after an acquisition of exchanges ) – will also be deemed granted on
the 60th day after the reply comment due date absent any further action by the Bureau.442 Should the
Bureau have concerns with any aspect of the petition for study area waiver or related waivers, however,
the Bureau may issue a second public notice stating that the petition will not be deemed granted on the
60th day after the reply comment due date and is subject to further analysis and review.443
c.
Revising the “Parent Trap” Rule, Section 54.305
268. Background. Section 54.305(b) of the Commission’s rules provides that a carrier acquiringexchanges from an unaffiliated carrier shall receive the same per-line levels of high-cost universal service
support for which the acquired exchanges were eligible prior to their transfer.444 The Commission
adopted section 54.305 to discourage a carrier from placing unreasonable reliance upon potential
universal service support in deciding whether to purchase exchanges or merely to increase its share of
high-cost universal service support.445
269. We proposed in the USF/ICC Transformation NPRM to eliminate the unintended
consequence of the operation of section 54.305 that some rural incumbent LECs receive support pursuant
to section 54.305 that would not otherwise receive support or would receive lesser support based on their
own actual costs.446
270. Discussion. We find that the proposed minor revision to the rule will better effectuate the
intent of section 54.305 that incumbent LECs not purchase exchanges merely to increase their high-cost
442 47 C.F.R. §§ 69.3(e)(11) and 69.605(c). Requests for waiver of section 54.305 are not routinely granted because
such requests require a high degree of analysis. See United-Twin Valley Order, 21 FCC Rcd at 10117, n. 45.
443 See Appendix A for new rules.
444 47 C.F.R. § 54.305(b). This rule applies to high-cost loop support and local switching support. A carrier’s
acquired exchanges, however, may receive additional support pursuant to the Commission’s “safety valve”
mechanism for additional significant investments. See 47 C.F.R. § 54.305(d)-(f). Since 2005, safety valve support
has ranged from an annual low of $700,000 to a projected high of $6.2 million for 2011. See 2010 Universal
Service Monitoring Report at Table 3.8; USAC 2Q 2011 Filing, Appendices at HC01. A carrier acquiring
exchanges also may be eligible to receive ICLS, which is not subject to the limitations set forth in section 54.305(b).
See 47 C.F.R. § 54.902.
445 See Universal Service First Report and Order, 12 FCC Rcd at 8942-43, para. 308. Prior to the adoption of
section 54.305 of the Commission’s rules, the Common Carrier Bureau had approved several study area waivers
relying on purported minimal increases in universal service support, and later the acquiring carriers subsequently
received significant increases in universal service support. For example, in 1990 the Bureau approved a study area
waiver in order to permit Delta Telephone Company (Delta) to change its study area boundaries in conjunction with
its acquisition of Sherwood Telephone Company (Sherwood). Delta stated in its petition for waiver that it did not
currently receive universal service support while Sherwood only received $468 for 1989, and Delta stated that the
acquisition would not skew high cost support in Delta’s favor. The Bureau concluded that the merging of the two
carriers could not have a substantial impact on the high cost support program. After completion of the merger,
Delta’s support grew from $83,000 in 1991 to $397,000 in 1993. See Delta Telephone Company, Waiver of the
Definition of “Study Area” contained in Part 36, Appendix-Glossary, of the Commission’s Rules, AAD 90-20,
Memorandum Opinion and Order, 5 FCC Rcd 7100 (Com. Car. Bur. 1990). In another example, in the US West and
Gila River Telecommunications, Inc. (Gila River) study area waiver proceeding, Gila River’s high-cost support
escalated from $169,000 to $492,000 from 1992 to 1993. See US West Communications and Gila River
Telecommunications, Inc., Joint Petition for Waiver of the Definition of “Study Area” contained in Part 36,
Appendix-Glossary, of the Commission’s Rules, AAD 91-2, Memorandum Opinion and Order, 7 FCC Rcd 2161
(Com. Car. Bur. 1992).
446 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4633, para. 227.
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universal service support and should not dissuade any transactions that are in the public interest.Therefore, effective January 1, 2012, any incumbent LEC currently and prospectively subject to the
provisions of section 54.305, that would otherwise receive no support or lesser support based on the
actual costs of the study area, will receive the lesser of the support pursuant to section 54.305 or the
support based on its own costs.447
271. We note that above, we freeze all support under our existing high-cost support mechanisms
on a study area basis for price cap carriers and their rate-of-return affiliates, at 2011 levels, effective
January 1, 2012.448 Our modification of the operation of section 54.305 is not intended to reduce support
levels for those companies; they will receive frozen high-cost support equal to the amount of support each
carrier received in 2011 in a given study area, adjusted downward as necessary to the extent local rates
are below the specified urban rate floor.
9.
Limits on Total per Line High-Cost Support
272. Background. In the USF/ICC Transformation NPRM, we proposed to adopt a $3,000 peryear cap on total support per line for all companies, both incumbent LECs and competitive ETCs,
operating in the continental United States.449 Although the current HCLS mechanism is capped in the
aggregate, there is no cap on the amount of high-cost loop support an individual incumbent LEC study
area may receive. Further, there is no limit on support either in the aggregate or for an individual
incumbent LEC study area for ICLS and LSS.
273. For calendar year 2010, out of a total of approximately 1,442 incumbent LEC study areas
receiving support, fewer than twenty incumbents received more than $3,000 per line annually (i.e., more
than $250 monthly) in high-cost universal service support; all of those study areas were served by rate-of-
return companies.450 In addition, two competitive ETCs received support in 2010 in excess of $3,000 per
line annually. We sought comment on whether requiring American consumers and businesses, whose
contributions support universal service, to pay more than $3,000 annually or more than $250 per month
for a single phone line is consistent with fiscally responsible universal service reform. A number of
commenters supported the proposed cap, while the State members of the Joint Board suggested that
support should be capped at a lower amount, $100 per line per month instead of $250.451
447 See Appendix A for the revised rule.
448 See supra para. 128.
449 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4626, para. 208.
450 See id. at 4626, para. 209; 2010 Disbursement Analysis; USAC High-Cost Disbursement Tool.
451 The State Members of the Universal Service Joint Board argue that satellite-based broadband service is generally
available for about $80 per month, therefore, a $100 limit per high-cost location would allow for some terrestrial
service to receive a subsidy higher than the prevailing retail price of satellite service. See State Members USF/ICC
Transformation NPRM Comments at 58-59. Ad Hoc, the Massachusetts DTC, CRUSIR, COMPTEL, CTIA, Florida
Commission, and Hawaiian Telecom all support a per-line cap. See Ad Hoc USF/ICC Transformation NPRM
Comments at 22-25; Massachusetts DTCUSF/ICC Transformation NPRM Comments at 9-10; CRUSIR USF/ICC
Transformation NPRM Comments at 7; COMPTEL USF/ICC Transformation NPRM Comments at 30; CTIA
USF/ICC Transformation NPRM Comments at 16; Florida Commission USF/ICC Transformation NPRM
Comments at 8-9; Hawaiian Telecom USF/ICC Transformation NPRM Comments at 6. GCI states that support
should be applied to “contiguous” states, not the “continental” United States. GCI USF/ICC Transformation NPRM
Comments at 30-31. JSI states that the State Members recommendation to limit support at $100 per month is also
arbitrary and unfair because it does not address the facts of terrain and vegetation that preclude the areas from
receiving satellite service. See JSIUSF/ICC Transformation NPRM Reply at 6.
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274. Discussion. After consideration of the record, we find it appropriate to implementresponsible fiscal limits on universal service support by immediately imposing a presumptive per-line cap
on universal service support for all carriers, regardless of whether they are incumbents or competitive
ETCs. For administrative reasons, we find that the cap shall be implemented based on a $250 per-line
monthly basis rather than a $3,000 per-line annual basis because USAC disburses support on a monthly
basis, not on an annual basis. We find that support drawn from limited public funds in excess of $250
per-line monthly (not including any new CAF support resulting from ICC reform) should not be provided
without further justification.
275. This rule change will be phased in over three years to ease the potential impact of this
transition.452 From July 1, 2012 through June 30, 2013, carriers shall receive no more than $250 per-line
monthly plus two-thirds of the difference between their uncapped per-line amount and $250. From July
1, 2013 through June 30, 2014, carriers shall receive no more than $250 per-line monthly plus one-third
of the difference between their uncapped per-line amount and $250. July 1, 2014, carriers shall receive
no more than $250 per-line monthly.
276. The Rural Associations argue that a cap on total annual per-line high-cost support should
not be imposed without considering individual circumstances and that if such a cap is imposed only on
non-tribal companies located in the contiguous 48 states, about 12,000 customers would experience rate
increases of $9.24 to $1,200 per month and the overall effect would reduce high-cost disbursements by
less than $15 million.453 The Rural Associations also point out while that it is reasonable to ask whether it
makes sense for USF to support extremely high per-line levels going forward, the Commission must
consider the consequences of imposing such a limit on companies with high costs based on past
investments.454
277. We emphasize that virtually all (99 percent) of incumbent LEC study areas currently
receiving support are under the $250 per-line monthly limit. Only eighteen incumbent carriers and one
competitive ETC today receive support in excess of $250 per-line monthly, and as a result of the other
reforms described above, we estimate that only twelve will continue to receive support in excess of $250
per-line monthly.
278. We also recognize that there may be legitimate reasons why certain companies have
extremely high support amounts per line. For example, some of these extremely high-cost study areas
exist because states sought to ensure a provider would serve a remote area. We estimate that the cap we
adopt today will affect companies serving approximately 5,000 customers, many of whom live in
extremely remote and high-cost service territories.455 That is, all of the affected study areas total just
5,000 customers. Therefore, as suggested by the Rural Associations,456 we will consider individual
circumstances when applying the $250 per-line monthly cap. Any carrier affected by the $250 per-line
monthly cap may file a petition for waiver or adjustment of the cap that would include additional financial
data, information, and justification for support in excess of the cap using the process we set forth
below.457 We do not anticipate granting any waivers of undefined duration, but rather would expect
452 ICORE states that a $3,000 per-line cap should be phased in gradually. ICORE USF/ICC Transformation NPRM
Comments at 10.
453 See Rural Associations USF/ICC Transformation NPRM Comments at 45-46.
454 Id. at 47.
455 The number of affected customers is after all other reforms we adopt today.
456 See Rural Associations USF/ICC Transformation NPRM Comments at 45-46.
457 See infra paras. 539-544.
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carriers to periodically re-validate any need for support above the cap. We also note that even if a carriercan demonstrate the need for funding above the $250 per-line monthly cap, they are only entitled to the
amount above the cap they can show is necessary, not the amount they were previously receiving.
279. Absent a waiver or adjustment of the $250 per-line monthly cap, USAC shall commence
reductions of the affected carrier’s support to $250 per-line monthly six months after the effective date of
these rules. This six month delay should 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. To reach the $250 per-line cap, USAC shall reduce
support provided from each universal support mechanism, with the exception of LSS, based on the
relative amounts received from each mechanism.458
10.
Elimination of Support in Areas with 100 Percent Overlap
280. Background. We noted in the USF/ICC Transformation NPRM that in many areas of thecountry, “universal service provides more support than necessary to achieve our goals” by “subsidizing a
competitor to a voice and broadband provider that is offering service without government assistance.”459
To address this inefficiency, we sought comment on NCTA’s proposal “to reduce the amount of universal
service support provided to carriers in those areas of the country where there is extensive, unsubsidized
facilities-based voice competition and where government subsidies no longer are needed to ensure that
service will be made available to consumers.”460 In addition, in the August 3rd Public Notice, we sought
comment on the suggestion in the RLEC Plan to reduce an incumbent’s support if another facilities-based
provider proves that it provides sufficient voice and broadband service to at least 95 percent of the
households in the incumbent’s study area without any support or cross-subsidy.461
281. Discussion. We now adopt a rule to eliminate universal service support where an
unsubsidized competitor462 – or a combination of unsubsidized competitors – offers voice and broadband
service throughout an incumbent carrier’s study area, and seek comment on a process to reduce support
where such an unsubsidized competitor offers voice and broadband service to a substantial majority, but
not 100 percent of the study area. Providing universal service support in areas of the country where
another voice and broadband provider is offering high-quality service without government assistance is an
inefficient use of limited universal service funds. We agree with commenters that “USF support should
be directed to areas where providers would not deploy and maintain network facilities absent a USF
subsidy, and not in areas where unsubsidized facilities-based providers already are competing for
customers.”463 For this reason, we exclude from the CAF areas that are overlapped by an unsubsidized
458For example, if the per-line cap is $250 and an incumbent LEC would have received, prior to the application of a
cap, $300, $200, and $100 ($600 total) in HCLS, LSS, and ICLS, respectively, HCLS, and ICLS would each absorb
75 percent, and 25 percent, respectively, of the $350 in excess of the per-line cap of $250.
459 USF/ICC Transformation NPRM, 26 FCC Rcd at 4559, para. 7.
460 Id. at 4674, para. 391 (citing NCTA Petition for Rulemaking at I; Universal Service Reform Act of 2010, H.R.
5828, 111th Cong. (2010)).
461 RLEC Plan at 51-56.
462 See supra para. 103.
463 Sprint Nextel USF/ICC Transformation NPRM Comments at 34-35. Sprint Nextel further expressed concern that
“If providers are willing and able to serve an area without support, then USF subsidies to the incumbents in those
locales serve only to deter competition and/or allow the subsidized provider to earn artificially inflated profits.” Id.
at 35; see also Coalition for Rational Universal Service and Intercarrier Compensation Reform USF/ICC
Transformation NPRM at 9 (“As a general rule, subsidies should not be given in order to allow a subsidized carrier
to run a competitor out of town.”); NCTA USF/ICC Transformation NPRM Comments at 12; CTIA USF/ICC
Transformation NPRM Comments at 26-27.
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competitor (see infra Section VII.C). Likewise, we do not intend to continue to provide current levels ofhigh-cost support to rate-of-return companies where there is overlap with one or more unsubsidized
competitors.464
282. At the same time, we recognize that there are instances where an unsubsidized competitor
offers broadband and voice service to a significant percentage of the customers in a particular study area
(typically where customers are concentrated in a town or other higher density sub-area), but not to the
remaining customers in the rest of the study area, and that continued support may be required to enable
the availability of supported voice services to those remaining customers.465 In those cases, we agree with
the Rural Associations that there should be a process to determine appropriate support levels.
283. Accordingly, we adopt a rule to phase out all high-cost support received by incumbent rate-
of-return carriers over three years in study areas where an unsubsidized competitor – or a combination of
unsubsidized competitors – offers voice and broadband service at speeds of at least 4 Mbps downstream/1
Mbps upstream, and with latency and usage limits that meet the broadband performance requirements
described above,466 for 100 percent of the residential and business locations in the incumbent’s study area.
284. The FNPRM seeks comment on the methodology and data for determining overlap. Upon
receiving a record on those issues, we direct the Wireline Competition Bureau to publish a finalized
methodology for determining areas of overlap and to publish a list of companies for which there is a 100
percent overlap. In study areas where there is 100 percent overlap, we will freeze the incumbent’s high-
cost support at its total 2010 support, or an amount equal to $3,000 times the number of reported lines as
of year end 2010, whichever is lower ,467 and reduce such support over three years (i.e. by 33 percent each
year).468 In addition, in the FNPRM, we seek comment on a process for determining support in study
areas with less than 100 percent overlap.
11.
Impact of These Reforms on Rate-of-Return Carriers and the Communities
They Serve
certain of the existing universal service mechanism to enhance performance and improve
sustainability.”469 We take a number of important steps to do so in this Order, and we are careful to
implement these changes in a gradual manner so that our efforts do not jeopardize service to consumers or
investments made consistent with existing rules. It is essential that we ensure the continued availability
and affordability of offerings in the rural and remote communities served by many rate-of-return carriers.
464 Cincinnati Bell August 3 PN Comments at 14 (“[T]he Commission should strive for consistency in its approach to
universal service; if it is going to deny support to some areas that have cable broadband service, it should treat all
such areas similarly.”).
465 CenturyLink USF/ICC Transformation NPRM Comments at 35.
466 See supra Section VI.B.
467 For this purpose, “total 2010 support” is the amount of support disbursed to carrier for 2010, without regard to
prior period adjustments related to years other than 2010 and as determined by USAC on January 31, 2011.
468 Consistent with our discussion above, we do not disturb any existing state voice COLR obligations, and therefore
carriers must satisfy those voice requirements as required by their state. For those states that still maintain voice
COLR obligations, we encourage them to review their respective regulations and policies in light of the changes we
adopt here today and revisit the appropriateness of maintaining those obligations for entities that no longer receive
either state or federal high-cost universal service funding and where competitive services are available to consumers.
See supra para. 1100.
469 See Rural Associations USF/ICC Transformation NPRM Comments at i.
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The existing regulatory structure and competitive trends have placed many small carriers under financialstrain and inhibited the ability of providers to raise capital.470
286. Today, we reaffirm our commitment to these communities. We provide rate-of-return
carriers the predictability of remaining under the legacy universal service system in the near-term, while
giving notice that we intend to transition to more incentive-based regulation in the near future.471 We also
provide greater certainty and a more predictable flow of revenues than the status quo through our
intercarrier compensation reforms, and set a total budget to direct up to $2 billion in annual universal
service (including CAF associated with intercarrier compensation reform) payments to areas served by
rate-of-return carriers. We believe that this global approach will provide a more stable base going
forward for these carriers, and the communities they serve.
287. Today’s package of universal service reforms is targeted at eliminating inefficiencies and
closing gaps in our system, not at making indiscriminate industry-wide reductions. Many of the rules
addressed today have not been comprehensively examined in more than a decade, and direct funding in
ways that may no longer make sense in today’s marketplace. By providing an opportunity for a stable
11.25 percent interstate return for rate-of-return companies, regardless of the necessity or prudence of any
given investment, our current system imposes no practical limits on the type or extent of network
upgrades or investment. Our system provides universal service support to both a well-run company
operating as efficiently as possible, and a company with high costs due to imprudent investment
decisions, unwarranted corporate overhead, or an inefficient operating structure.
288. In this Order, we take the overdue steps necessary to address the misaligned incentives in the
current system by correcting program design flaws, extending successful safeguards, ensuring basic fiscal
responsibility, and closing loopholes to ensure our rules reward only prudent and efficient investment in
modern networks. Today’s reforms will help ensure rate-of-return carriers retain the incentive and ability
to invest and operate modern networks capable of delivering broadband as well as voice services, while
eliminating unnecessary spending that unnecessarily limits funding that is available to consumers in high-
cost, unserved communities.
289. Because our approach is focused on rooting out inefficiencies, these reforms will not affect
all carriers in the same manner or in the same magnitude. After significant analysis, including review of
numerous cost studies submitted by individual small companies and cost consultants,472 NECA and
USAC data, and aggregated information provided by the Rural Utilities Service (RUS) on their current
loan portfolio,473 we are confident that these incremental reforms will not endanger existing service to
470 See, e.g., CoBank USF/ICC Transformation NPRM Comments at 3-5; Letter from Jonathan Adelstein, Rural
Utilities Service, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al, Attach. (July 29, 2011) (RUS
Letter); Letter from C. Douglas Jarrett, Rural Telephone Finance Cooperative, to Marlene H. Dortch, Secretary,
FCC, CC Docket No. 01-92, et al. (Aug. 10, 2011).
471 We seek comment in the FNPRM on the Rural Associations’ proposal for a broadband-focused CAF and in
particular ask how we could modify that proposal to incorporate appropriate incentives for efficient investment and
operations. See Rural Associations USF/ICC Transformation NPRM Comments at 7-38; See infra Section XVII
(Further Notice of Proposed Rulemaking).
472 See, e.g., JSI Ex Parte (filed Mar. 29, 2011); Fred Williamson & Associates, Inc. Ex Parte (filed May 19, 2011).
We note that many of the carriers or their consultants presented an analysis of the reforms as proposed in the NPRM,
assuming that the Commission would adopt all of the proposals. Because the package of reforms we adopt today is
more modest than originally proposed, with a number of reforms phased in over a period of time, the impact is much
less significant than those commenters projected.
473 RUS Ex Parte (filed Aug. 8, 2011).
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consumers. Further, we believe strongly that carriers that invest and operate in a prudent manner will beminimally affected by this Order.
290. Indeed, based on calendar year 2010 support levels, our analysis shows that nearly 9 out of
10 rate-of-return carriers will see reductions in high-cost universal service receipts of less than 20 percent
annually, and approximately 7 out of 10 will see reductions of less than 10 percent.474 In fact, almost 34
percent of rate-of-return carriers will see no reductions whatsoever, and more than 12 percent of providers
will see an increase in high-cost universal service receipts. This, coupled with a stabilized path for ICC,
will provide the predictability and certainty needed for new investment.
291. Looking more broadly at all revenues, we believe that the overall regulatory and revenue
predictability and certainty for rate-of-return carriers under today’s reforms will help facilitate access to
capital and efficient network investment. Specifically, it is critical to underscore that legacy high-cost
support is but one of four main sources of revenues for rate-of-return providers: universal service
revenues account for approximately 30 percent of the typical rate-of-return carrier’s total revenues.475
Today’s action does not alter a provider’s ability to collect regulated or unregulated end-user revenues,
and comprehensively reforms the fourth main source of revenues, the intercarrier compensation system.
Importantly, ICC reforms will provide rate-of-return carriers with access to a new explicit recovery
mechanism in CAF, offering a source of stable and certain revenues that the current intercarrier system
can no longer provide.476 Taking into account these other revenue streams, and the complete package of
reforms, we believe that rate-of-return carriers on the whole will have a stronger and more certain
foundation from which to operate, and, therefore, continue to serve rural parts of America.
292. We are, therefore, equally confident that these reforms, while ensuring significant overall
cost savings and improving incentives for rational investment and operation by rate-of-return carriers, will
in general not materially impact the ability of these carriers to service their existing debt. Based on an
analysis of the reform proposals in the Notice, RUS projects that the Times Interest Earned Ratio (TIER)
for some borrowers could fall below 1.0, which RUS considers a minimum baseline level for a healthy
borrower.477 However, the package of reforms adopted in this Order is more modest than the set proposed
in the Notice. In addition, companies may still have positive cash flow and be able to service their debt
even with TIERs of less than 1.0.478 Indeed of the 444 RUS borrowers in 2010, 75 (17 percent) were
474 In order to analyze the impact of reforms, Commission staff estimated the dollar impact of each individual rule
change on every cost company for which it had data, using the most recently available disbursement and cost data.
Commission staff utilized data from both NECA and USAC. See e.g., National Exchange Carrier Assoc., Inc.,
Universal Service Fund Data: NECA Study Results, 2010 Report (filed Sept. 30, 2011); USAC High-Cost
Disbursement Tool. Staff then summed the individual change in support amounts (positive or negative) across the
individual programs to derive a company-specific net change, both in actual dollars and on a percentage basis. For
calculations involving changes to HCLS, estimates did not take into account the effect of the shift in the national
average cost per line resulting from all rule changes; actual impacts therefore could vary slightly.
475 See Western Telecommunications Alliance Comments in re NBP PN #19 (Comment Sought on the Role of the
Universal Service Fund and Intercarrier Compensation in the National Broadband Plan, GN Docket No. 09-47, 09-
51, 09-137, Public Notice, 24 FCC Rcd 13757 (WCB 2009) (NBP PN #19)) at 25, 27 (filed Dec. 7, 2009) (stating
that for small rural LECs, high cost represents 30–40 percent of regulated revenues); RUS Ex Parte (filed Aug. 1,
2011), Attach. at slide 24 (stating that over 70 percent of RUS borrowers receive greater than 25 percent of
operating revenues from USF).
476 See infra section XII (Comprehensive Intercarrier Compensation Reform).
477 RUS indicates that over a five-year horizon, it expects borrowers to maintain a minimum 1.25 TIER ratio. RUS
Ex Parte (filed Aug. 1, 2011), Attach. at slides 18-21.
478 Id. at slide 18. The RUS modeling assumed a percentage loss of USF support and then analyzed the impact on
borrowers, but the analysis did not include the possibility that borrowers’ profits could rise through increased
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below TIER 1.0.479 Moreover, whereas RUS assumed that all USF reductions directly impact borrowers’bottom lines, in fact we expect many borrowers affected by our reforms will be able to achieve
operational efficiencies to reduce operating expenses, for instance, by sharing administrative or operating
functions with other carriers, and thereby offset reductions in universal service support.
293. We, therefore, reject the sweeping argument that the rule changes we adopt today would
unlawfully necessarily affect a taking.480 Commenters seem to suggest that they are entitled to continued
USF support as a matter of right. Precedent makes clear, however, that carriers have no vested property
interest in USF. To recognize a property interest, carriers must “have a legitimate claim of entitlement
to” USF support.481 Such entitlement would not be established by the Constitution, but by independent
sources of law.482 Section 254 does not expressly or impliedly provide that particular companies are
entitled to ongoing USF support. Indeed, there is no statutory provision or Commission rule that provides
companies with a vested right to continued receipt of support at current levels, and we are not aware of
any other, independent source of law that gives particular companies an entitlement to ongoing USF
support. Carriers, therefore, have no property interest in or right to continued USF support.483
(Continued from previous page)
revenues and profits from non-regulated services, or other possible sources of revenues, e.g., by raising artificially
low rates.
479 Id. at slide 26.
480 Alexicon USF/ICC Transformation NPRM Comments at 25-29; SureWest USF/ICC Transformation NPRM
Reply at 2.
481 Board of Regents v. Roth, 408 U.S. 564, 577 (1972).
482 Id.; see also Members of the Peanut Quota Holders Assoc. v. U.S., 421 F.2d 1323, 1334 (Fed. Cir. 2005), cert.
denied, 548 U.S. 904 (2006)(finding that congressional action amending peanut quota program to exclude prior
beneficiaries from that program did not effect a takings because “peanut quota is entirely the product of a
government program unilaterally extending benefits to the quota holders, and nothing in the terms of the statute
indicated that the benefits could not be altered or extinguished at the government’s election”).
483 Moreover, even if we were to recognize a property interest in USF support, our action today would not result in a
taking in circumstances such as these, where the “interference arises from some public program adjusting the
benefits and burdens of economic life to promote the common good.” Penn Central Transportation v. New York
City, 438 U.S. 104, 124 (1978); see also Connolly v. Pension Benefit Guaranty Corporation, 475 U.S. 211, 225
(1986). The “purpose of universal service is to benefit the customer, not the carrier.” Rural Cellular Association v.
FCC, 588 F.3d 1095, 1103 (D.C. Cir. 2009) (quoting Alenco Communications, Inc. v. FCC, 201 F.3d 608, 621 (5th
Cir. 2000)). As we have made clear, our national goal is to advance broadband availability while preserving the
voice and broadband service that exists today, and this objective would be achieved more effectively by revising our
current rules and adjusting support amounts for particular recipients, balancing the principles set forth in section
254(b). The Commission has discretion to balance competing section 254(b) principles. Qwest Communications
Intern., Inc. v. FCC, 298 F.3d 1222, 1234 (10th Cir. 2005) (“The FCC may exercise its discretion to balance the
principles against one another when they conflict, but may not depart from them altogether to achieve some other
goal.”). Thus, the Commission may balance the principles posited in section 254(b)(3) (“Access to advanced
telecommunications and information services should be provided in all regions of the Nation”) and (b)(4)
(“Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost
areas, should have access to telecommunications and information services” at rates that are reasonably comparable
to urban rates) with the principle in section 254(b)(5) principle (“There should be specific, predictable and sufficient
Federal an State mechanisms to preserve and advance universal service”). Nothing in the Takings Clause or section
254 precludes the Commission from such reasoned decision making, even if it means taking support away from
some current support recipients. The requirement that support should be “specific, predictable and sufficient” does
not mean that support levels can never change and does not establish a right to the funding.
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294. Additionally, carriers have not shown that elimination of USF support will result inconfiscatory end-user rates. To be confiscatory, government-regulated rates must be so low that they
threaten a regulated entity’s “financial integrity”484 or “destroy the value” of the company’s property.485
Carriers face a “heavy burden” in proving confiscation as a result of rate regulation. 486 To the extent that
any rate-of-return carrier can effectively demonstrate that it needs additional support to avoid
constitutionally confiscatory rates, the Commission will consider a waiver request for additional
support.487 We will seek the assistance of the relevant state commission in review of such a waiver to the
extent that the state commission wishes to provide insight based on its understanding of the carrier’s
activities and other circumstances in the state. We do not expect to routinely grant requests for additional
support, but this safeguard is in place to help protect the communities served by rate-of-return carriers.
E.
Rationalizing Support for Mobility
295. Mobile voice and mobile broadband services are increasingly important to consumers and toour nation’s economy. Given the important benefits of and the strong consumer demand for mobile
services, ubiquitous mobile coverage must be a national priority. Yet despite growth in annual funding
for competitive ETCs of almost 1000 percent over the past decade—from less than $17 million in 2001 to
roughly $1.22 billion in 2010488—there remain many areas of the country where people live, work, and
travel that lack any mobile voice coverage, and still larger geographic areas that lack current generation
mobile broadband coverage. To increase the availability of current generation mobile broadband, as well
as mobile voice, across the country, universal service funding for mobile networks must be deployed in a
more targeted and efficient fashion than it is today.
296. It is clear that the current system does not efficiently serve the nation. In 2008, the
Commission concluded that rapid growth in support to competitive ETCs as a result of the identical
support rule threatened the sustainability of the universal service fund.489 Further, it found that providing
the same per-line support amount to competitive ETCs had the consequence of encouraging wireless
competitive ETCs to supplement or duplicate existing services while offering little incentive to maintain
or expand investment in unserved or underserved areas.490 As a consequence, the Commission adopted an
interim state-by-state cap on high-cost support for competitive ETCs, subject to two exceptions, pending
comprehensive high-cost universal service reform.491
484 Illinois Bell Tel. Co. v. FCC, 988 F.2d 1254, 1263 (D.C. Cir. 1993).
485 Duquesne Light Co. v. Barasch, 488 U.S. 299, 307 (1989).
486 FPC v. Hope Natural Gas Co., 320 U.S. 591, 605 (1944).
487 See infra paras. 539-544.
488 Interim Cap Order, 23 FCC Rcd at 8837-38, para. 6 (noting growth from $17 million in 2001 to $1.18 billion in
2007); 2010 Disbursement Analysis.
489 Section 54.307 of the Commission’s rules, also known as the “identical support rule,” provides competitive ETCs
the same per-line amount of high-cost universal service support as the incumbent local exchange carrier serving the
same area. 47 C.F.R. § 54.307.
490 Interim Cap Order, 23 FCC Rcd at 8843-44, paras. 20-21.
491 Id. at 8837, para. 5. Specifically, the Commission capped support for competitive ETCs in each state at the total
amount of support for which all competitive ETCs serving the state were eligible to receive in March 2008,
annualized. Id. at 8846, paras. 26-28. The Interim Cap Order included exceptions for competitive ETCs serving
Tribal lands and Alaska Native regions (“covered locations”) and for competitive ETCs submitting cost studies
demonstrating their own high costs of providing service. Id. at 8848-49, paras. 31-33. The interim cap for
(continued…)
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297. The interim cap slowed the growth in competitive ETC funding, but it did not address wheresuch funding is directed or whether there are better ways to achieve our goal of advancing mobility in
areas where such service would not exist absent universal service support. Many areas are served by
multiple wireless competitive ETCs that likely are competing with each other.492 In other areas of the
country, mobile coverage is lacking, and there may be no firms willing to enter the market, even at
current support levels.
298. Today we adopt reforms that will secure funding for mobility directly, rather than as a side-
effect of the competitive ETC system, while rationalizing how universal service funding is provided to
ensure that it is cost-effective and targeted to areas that require public funding to receive the benefits of
mobility. While we proposed providing support to a single fixed or mobile service provider, many
commenters supported the establishment of separate fixed and mobile programs.493 As described above,
we establish ubiquitous availability of mobile services as a universal service goal.494
299. To accomplish this goal, we establish the Mobility Fund. The first phase of the Mobility
Fund will provide one-time support through a reverse auction, with a total budget of $300 million, and
will provide the Commission with experience in running reverse auctions for universal service support.
We expect to distribute this support as quickly as feasible, with the goal of holding an auction in 2012,
with support beginning to flow no later than 2013. As part of this first phase, we also designate an
additional $50 million for one-time support for advanced mobile services on Tribal lands, for which we
expect to hold an auction in 2013. The second phase of the Mobility Fund will provide ongoing support
for mobile service with the goal of holding the auction in the third quarter of 2013 and support disbursed
(Continued from previous page)
competitive ETCs was set at $1.36 billion. See Letter from Sharon Gillett, Chief, Wireline Competition Bureau, to
Karen Majcher, USAC, WC Docket No. 05-337, DA 11-243 (dated Feb. 8, 2011). Actual disbursements to
competitive ETCs in 2010 were approximately $1.22 billion. 2010 Disbursement Analysis. Actual competitive ETC
disbursements vary from the interim cap amount for two reasons. First, true-ups and other out-of-period
adjustments sometimes result in disbursements in a year other than the one against the payments apply for interim
cap purposes. Second, some states have seen a reduction in demand for competitive ETC support since the cap was
established and, as a result, total support disbursed is less than the interim cap amount.
492 See Federal Communications Commission Response to United States House of Representatives Committee on
Energy and Commerce, Universal Service Fund Data Request of June 22, 2011, Request 7: Study Areas with the
Most Eligible Telecommunications Carriers (Table 1: Study Areas with the Most Eligible Telecommunications
Carriers in 2010), available at
http://republicans.energycommerce.house.gov/Media/file/PDFs/2011usf/ResponsetoQuestion7.pdf. (FCC Response
to House Energy and Commerce Committee). Ten incumbent study areas have 11 or more competitive ETCs, albeit
not necessarily serving overlapping service areas within the incumbent study areas. Id.
493 In the USF/ICC Transformation NPRM, we proposed moving to a long-term CAF that would provide ongoing
support for a single mobile or fixed broadband provider in any given geographic area, but also sought comment on
creating separate programs to support mobile and fixed services. USF/ICC Transformation NPRM, 26 FCC Rcd at
4697-701, paras. 479-89. AT&T USF/ICC Transformation NPRM Comments at 87, 108; Mid-Rivers USF/ICC
Transformation NPRM Reply at 14; Nebraska Commission USF/ICC Transformation NPRM Comments at 17;
Rural Associations USF/ICC Transformation NPRM Comments at 83; RICA USF/ICC Transformation NPRM
Comments, at 4; South Dakota Public Utilities Commission USF/ICC Transformation NPRM Reply at 5; TCA
USF/ICC Transformation NPRM Comments, at 15-16; T-Mobile USF/ICC Transformation NPRM Comments at 2,
4-6; US Cellular USF/ICC Transformation NPRM Comments, at 10-11. See also Joint Board 2007 Recommended
Decision, 22 FCC Rcd 20477 (recommending establishment of a separate Mobility Fund).
494 See supra para. 53.
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starting in 2014, with an annual budget of $500 million.495 This dedicated support for mobile servicesupplements the other competitive bidding mechanisms under the Connect America Fund.496
300. In the remainder of this section, we establish Phase I of the Mobility Fund and the dedicated
Tribal Mobility Fund, each providing for one-time support; establish the budget for Phase II of the
Mobility Fund to provide ongoing support; and establish the transition from the identical support rule to
these new dedicated funding mechanisms for mobility. In the FNPRM, we seek comment on specific
proposals to determine and distribute ongoing support in Phase II of the Mobility Fund, including
proposals to target dedicated funding to Tribal lands.
1.
Mobility Fund Phase I
a.Introduction and Background
301. Millions of Americans live in communities where current-generation mobile service isunavailable, and millions more work in or travel through such areas. In order to help ensure the
availability of mobile broadband across America, we establish the Mobility Fund. In the three decades
since the Commission issued the first cellular telephone licenses, the wireless industry has continually
expanded and upgraded its networks to the point where third generation (often called “advanced” or
“3G”) mobile wireless services are now widely available.497 Such services typically include both voice
telecommunications service and Internet access. However, significant mobility gaps remain a problem
for residents, public safety first responders, businesses, public institutions, and travelers, particularly in
rural areas. Such gaps impose significant disadvantages on those who live, work, and travel in these
areas. Today’s Order seeks to address these gaps.
302.
The Mobility Fund builds on prior proposals for modernizing the structure and operation
of the USF. It was the Federal-State Joint Board on Universal Service (“Joint Board”) that first
recognized the importance of directly addressing the infrastructure needs in areas unserved by mobile
service, and in the 2007 Recommended Decision, the Joint Board recommended that the Commission
establish a Mobility Fund.498 In the Recommended Decision, the Joint Board acknowledged that the
universal availability of mobile services was a national priority and proposed that a Mobility Fund be
created to subsidize the costs of construction of new facilities in “unserved” areas where significant
population density lacked wireless voice service.499 The Joint Board also contemplated that funds would
be available to construct facilities along roads and highways, to advance important public safety
interests.500 Finally, the Joint Board recommended that some funds be made available – at least for some
limited period of time – to provide continuing operating subsidies to carriers where service is essential but
where usage is so slight that there is not a business case to support ongoing operations, even with
substantial support for construction.501
495 See infra para. 481.
496 See supra section VII.C.2.
497 In this Order, we use the terms “current generation,” “3G,” and “advanced” interchangeably to refer to mobile
wireless services that provide voice telecommunications service on networks that also provide data services such as
Internet access. The meaning of “advanced” in this context is constantly evolving. We expect that some would
include 4G today and that, in the near future, 4G and subsequent technologies also will be within the meaning of
“advanced” mobile services.
498 See Recommended Decision, 22 FCC Rcd at 20,482, paras. 16-18.
499 Id. at 20,478, para. 4, 20,482, para. 16.
500 Id. at 20,482, para. 16
501 Id. at 20,482 para. 16, 20,486, para. 38.
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303.Following on the Joint Board’s work, the National Broadband Plan recommended a
Mobility Fund in connection with broader reforms of the USF.502 The plan recommended targeted, one-
time support for deployment of 3G infrastructure in order to bring all states to a minimum level of mobile
service availability, without increasing the size of the USF.
304.
In the USF Reform NOI/NPRM, the Commission sought comment on the use of a form
of procurement auction to determine and target one-time subsidies for deployment of broadband-capable
networks in areas unserved by such networks.503 In the Mobility Fund NPRM, the Commission outlined a
process by which it would solicit bids for support by providers willing to expand current generation
wireless networks into areas without such service.504
305.
Following the release of the Mobility Fund NPRM, the Wireless Bureau released a Public
Notice seeking comment on a series of more detailed questions focused on how to facilitate service to
Tribal lands.505 The Public Notice proposed various mechanisms by which Tribal governments might
help shape the outcome of an auction to bring mobile services to Tribal lands.
b.
Overall Design of Mobility Fund Phase I
(i) Legal Authority306.
We have discussed above the Commission’s authority to provide universal service
funding to support the provision of voice telephony services. We explained that, pursuant to our statutory
authority, we may require that universal service support be used to ensure the deployment of broadband
networks capable of offering not only voice telephony services, but also advanced telecommunications
and information services, to all areas of the nation, as contemplated by the principles set forth in section
254(b) of the Act. In this section, we apply our legal analysis of our statutory authority to the
establishment of Phase I and II of the Mobility Fund.506 We note that multiple commenters support our
authority to extend universal service support to providers of mobile services.507
307.
As an initial matter, it is wholly apparent that mobile wireless providers offer “voice
telephony services” and thus offer services for which federal universal support is available. Furthermore,
wireless providers have long been designated as ETCs eligible to receive universal service support.
Nonetheless, a number of parties responding to the Mobility Fund NPRM question the Commission’s
502 National Broadband Plan at 146.
503 USF Reform NOI/NPRM, 25 FCC Rcd at 6674-76, paras. 43-48.
504 See, generally, Universal Service Reform – Mobility Fund, WT Docket No. 10-208, Notice of Proposed
Rulemaking, 25 FCC Rcd 14,716 (2010) (Mobility Fund NPRM).
505 Further Inquiry into Tribal Issues Relating to Establishment of a Mobility Fund, WT Docket No. 10-208, Public
Notice, 26 FCC Rcd 5997 (Wireless Telecom. Bur. 2011) (Tribal Mobility Fund Public Notice).
506 The prior discussion of the Commission’s legal authority to support networks capable of offering voice and
broadband addresses some of the arguments commenters made in response to the Mobility Fund NPRM. For
example, Cellular South contended in comments responding to the Mobility Fund NPRM that the proposal violated a
statutory mandate to support competition together with universal service. See Cellular South et al. Mobility Fund
NPRM Comments at 17-19. As noted above in the discussion of the Commission’s general legal authority, our
proposals today further both competition and universal service. See supra paras. 68-69.
507 See, e.g., TIA Mobility Fund NPRM Comments at 2, 6-7; Verizon Mobility Fund NPRM Comments at 6-7;
Verizon Mobility Fund NPRM Reply at 3, 12-13, and 15.
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authority to establish the Mobility Fund as described below.508 We reject those arguments for the reasonsstated below.
308.
First, we reject the argument that we may not support mobile networks that offer services
other than the services designated for support under section 254. As we have already explained, under
our longstanding “no barriers” policy, we allow carriers receiving high-cost support “to invest in
infrastructure capable of providing access to advanced services” as well as supported voice services.509
Moreover, section 254(e)’s reference to “facilities” and “services” as distinct items for which federal
universal service funds may be used demonstrates that the federal interest in universal service extends not
only to supported services but also the nature of the facilities over which they are offered. Specifically,
we have an interest in promoting the deployment of the types of facilities that will best achieve the
principles set forth in section 254(b) (and any other universal service principle that the Commission may
adopt under section 254(b)(7)), including the principle that universal service program be designed to
bring advanced telecommunications and information services to all Americans, at rates and terms that are
comparable to the rates and terms enjoyed in urban areas. Those interests are equally strong in the
wireless arena. We thus conclude that USF support may be provided to networks, including 3G and 4G
wireless services networks, that are capable of providing additional services beyond supported voice
services.510
309.
For similar reasons, we reject arguments made by MetroPCS, NASUCA, and US
Cellular that the Mobility Fund would impermissibly support an “information service;”511 by Free Press
and the Florida Commission that establishment of the Mobility Fund would violate section 254 because
mobile data service is not a supported service;512 and by various parties that section 254(c)(1) prohibits
funding for services to which a substantial majority of residential customers do not subscribe.513 All of
these arguments incorrectly assume that the Mobility Fund will be used to support mobile data service as
a supported service in its own right. To the contrary, the Mobility Fund will be used to support the
provision of “voice telephony service” and the underlying mobile network. That the network will also be
used to provide information services to consumers does not make the network ineligible to receive
508 Apart from the Commission’s authority to establish a Mobility Fund, several parties also dispute the
Commission’s authority to fund it from reserve USF funds that were relinquished by Verizon Wireless and Sprint.
See, e.g., MTPCS Mobility Fund NPRM Comments at 6-8; RCA Mobility Fund NPRM Comments at 11-12; USA
Coalition Mobility Fund NPRM Comments at 25-26; US Cellular Mobility Fund NPRM Comments at 16-18;
SouthernLINC Mobility Fund NPRM Reply at 5-6. We address and reject those arguments elsewhere. See infra
Appendix F.
509 Rural Task Force Order, 16 FCC Rcd at 11,322, para. 200 (“[U]se of support to invest in infrastructure capable
of providing access to advanced services does not violate section 254(e), which mandates that support be used ‘only
for the provision, maintenance, and upgrading of facilities and services for which the support is intended.’ The
public switched telephone network is not a single-use network. Modern network infrastructure can provide access
not only to voice services, but also to data, graphics, video, and other services.”) (footnote omitted).
510 Rural Task Force Order, 16 FCC Rcd at 11,322, para. 199 (“[O]ur universal service policies should not
inadvertently create barriers to the provision of access to advanced services.”).
511 See MetroPCS Mobility Fund NPRM Comments at 4-5; NASUCA Mobility Fund NPRM Comments at 3; US
Cellular Mobility Fund NPRM Comments at 6, 10. Cf. USA Coalition Mobility Fund NPRM Comments at 4
(“wireless networks are an integrated facility capable of providing both supported telecommunications services as
well as information services.”).
512 Free Press Mobility Fund NPRM Comments at 2; Florida Commission Mobility Fund NPRM Reply at 2-3.
513 Free Press Mobility Fund NPRM Comments at 2; USA Coalition Mobility Fund NPRM Comments at 5-6, 8;
Benton et al. Mobility Fund NPRM Reply at 3; USA Coalition Mobility Fund NPRM Reply at 7-8. Compare HITN
Mobility Fund NPRM Reply at 3 (“majority of Americans do indeed have access to mobile broadband services”).
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support; to the contrary, such use directly advances the policy goals set forth in section 254(b), our newuniversal service principle recommended by the Joint Board, as well as section 706.514
310.
We also reject the argument that the Mobility Fund violates the principle in section
254(b)(5) that “[t]here should be specific, predictable and sufficient Federal and State mechanisms to
preserve and advance universal service.”515 Commenters argue that non-recurring funding won in a
reverse auction is not “predictable” because the final amount of support is not known in advance of the
bidding or “sufficient” because non-recurring funding will not meet recurring costs.516 We disagree. The
terms “predictable” and “sufficient” modify “Federal and State mechanisms.” Here, our reverse auction
rules establish a predictable mechanism to support universal service in that the carrier receiving support
has notice of its rights and obligations before it undertakes to fulfill its universal service obligations.517
Moreover, this interpretation of the statute was upheld by the Fifth Circuit’s decision in Alenco
Commc’ns v. FCC.518 In determining whether certain universal service distribution mechanisms were
“predictable,” as required by section 254(b)(5), the Alenco court found that “the Commission reasonably
construed the predictability principle to require only predictable rules that govern distribution of
subsidies….”519
311.
Our mechanism is also “sufficient.” The auction process is effectively a self-selecting
mechanism: Bidders are presumed to understand that Mobility Fund Phase I will provide one-time
support, that bidders will face recurring costs when providing service, and that they must tailor their bid
amounts accordingly. We decline to interpret the “sufficiency” requirement so broadly as to require the
Commission to guarantee that carriers who receive support make the correct business judgments in
deciding how to structure their bids or their service offerings to consumers.
312.
Cellular South contends that “by collecting USF contributions from all ETCs and
awarding distributions to only a limited set of ETCs, support auctions would transform the Fund into an
unconstitutional tax.”520 Again, we disagree. As the Supreme Court has explained, “a statute that creates
a particular governmental program and that raises revenue to support that program, as opposed to a statute
that raises revenue to support Government generally, is not a ‘Bil[l] for raising Revenue’ within the
meaning of the Origination Clause.”521 This analysis clearly applies to the sections of the
Telecommunications Act of 1996 authorizing the Universal Service Fund, including the Mobility Fund.
Moreover, we conclude that the Fifth Circuit’s analysis of this issue with respect to paging carriers
applies equally to all carriers. As that court explained: “universal service contributions are part of a
particular program supporting the expansion of, and increased access to, the public institutional
514 47 U.S.C. § 254(b). Because we are not designating mobility as a supported service, we need not concern
ourselves with RICA’s argument that doing so could jeopardize existing support to incumbent LECs and wireline
competitive ETCs not offering mobility. RICA Mobility Fund NPRM Reply at 3. RICA’s argument is premised on
47 U.S.C. § 214(e)(1)(A), which requires ETCs to offer all supported services throughout their service territory. Id.
515 47 U.S.C. § 254(b)(5).
516 Cellular South et al. Mobility Fund NPRM Comments at 19; RTG Mobility Fund NPRM Comments at 5; USA
Coalition Mobility Fund NPRM Reply at 6.
517 See Verizon Mobility Fund NPRM Reply at 13.
518 Alenco Communications et al. v. FCC, 201 F.3d 608 (5th Cir. 2000).
519 Alenco, 201 F.3d at 623 (emphasis added); see also id. at 622 (explaining that universal service support for high-
cost loops was “predictable” because “[t]he methodology governing subsidy disbursements [wa]s plainly stated and
made available to LECs.”) (emphasis added).
520 Cellular South et al. Mobility Fund NPRM Comments at 16.
521 United States v. Munoz-Flores, 495 U.S. 385, 398 (1990).
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telecommunications network. Each paging carrier directly benefits from a larger and larger network and,with that in mind, Congress designed the universal service scheme to exact payments from those
companies benefiting from the provision of universal service.”522 Finally, as Verizon notes, there is
always likely to be a disparity between the contributions parties make to the USF and the amounts that
they receive from the USF.523 Indeed, section 254(d) requires contributions from “every
telecommunications carrier that provides interstate telecommunications services,” not just ETCs or
funding recipients.524
(ii)
Size of Mobility Fund Phase I
313.Background. In the Mobility Fund NPRM, the Commission proposed to use $100
million to $300 million in USF high-cost universal service support to fund, on a one-time basis, the
expansion of current-generation mobile wireless services through creation of the Mobility Fund.525 The
Commission noted that the ultimate impact of any amount of support would depend on a variety of
factors, including the extent to which non-recurring funding makes it possible to offer service profitably
in areas previously uneconomic to serve and the extent to which new customers adopt services newly
made available.526 The Mobility Fund NPRM sought comment on what amount was optimal to provide
effective, targeted support to expand coverage within a relatively short timeframe to those areas without
current-generation networks where build out of such networks may be accelerated with one-time
assistance.527
314.
Discussion. We conclude that $300 million is an appropriate amount for one-time
Mobility Fund Phase I support, and is consistent with our goal of swiftly extending current generation
wireless coverage in areas where it is cost effective to do so with one-time support. We believe that there
are unserved areas for which such support will be useful, and that competition among wireless carriers for
support to serve these areas will be sufficient to ensure that the available funds are distributed efficiently
and effectively. We agree with those commenters that suggest a one-time infusion of $300 million will
achieve significant benefits, while at the same time ensuring adequate universal service monies are
available for other priorities, including broader reform initiatives to address ongoing support.528 We also
note that, consistent with a number of comments filed in response to the Mobility Fund NPRM,529 we are
522 See Texas Office of Public Utility Counsel et al. v. FCC, 183 F.3d 393, 428 (5th Circ. 1999) (rejecting argument
of paging carriers that collecting contributions from them for universal service violates the Origination Clause). The
Fifth Circuit also concluded, in dicta, that contributions under the Universal Service Fund are fees and not taxes, for
purposes of the Taxation Clause. Id. at n.52.
523 Verizon Mobility Fund NPRM Reply at 13. There is no statutory or regulatory requirement that ETCs derive a
benefit from the program equivalent to their contributions to USF. Moreover, USF contributions typically are
collected by ETCs directly from consumers, as a separate line item, on consumers’ phone bills. As such, the
benefits of USF rightly flow to consumers, as contemplated by section 254.
524 47 U.S.C. § 254(d). For the same reason, we disagree with Cellular South that auctions would be “inequitable
and discriminatory” in violation of section 254(d). Cellular South et al. Mobility Fund NPRM Comments at 17.
Nothing in that section suggests that contributors are entitled to USF disbursements.
525 Mobility Fund NPRM, 25 FCC Rcd at 14,722, para. 13.
526 Id. at 14,722, para. 14.
527 Id.
528 See, e.g., Verizon Mobility Fund NPRM Comments at 5; ACA Mobility Fund NPRM Reply at 4. See also CWA
Mobility Fund NPRM Comments at 2-4 (limit one-time support to reserve USF support for more comprehensive
reform); Windstream Mobility Fund NPRM Comments at 4-6 (Mobility Fund should serve as complement to CAF).
529 See, e.g., Alaska Telephone Mobility Fund NPRM Comments at 2; CTIA Mobility Fund NPRM Comments at 6-
11; ITTA Mobility Fund NPRM Comments at 3-4; RTG Mobility Fund NPRM Comments at 5-6; Texas Statewide
(continued…)
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deciding to provide significant ongoing support for mobile services through our Mobility Fund Phase II.We recognize that a number of commenters, in responding to the Mobility Fund NPRM, contend that the
originally proposed range of $100-$300 million in one-time support for the Mobility Fund would not be
sufficient to achieve ubiquitous deployment of mobile broadband.530 We find, however, that $300 million
should be sufficient to enable the deployment of 3G or better mobile broadband to many of the areas
where such services are unavailable.531
(iii)
Basic Structure for Mobility Fund Phase I
315.Background. Given the Commission’s goals for the Mobility Fund, it proposed in the
Mobility Fund NPRM not to adopt the structure of the USF’s existing competitive ETC rules, which allow
support for multiple providers in one area, but rather to provide support to no more than one entity in any
given geographic area.532 The Commission also proposed to adopt certain terms and conditions to
minimize competitive concerns raised by certain wireless providers.533
316.
Discussion. We decline to adopt the structure of the current competitive ETC rules,
which provide support for multiple providers in an area. As discussed elsewhere, we are concluding that
that structure has led to duplicative investment by multiple competitive ETCs in certain areas at the
expense of investment that could be directed elsewhere, including areas that are not currently served. We
therefore conclude that, as a general matter, the Commission should not award Mobility Fund Phase I
support to more than one provider per area unless doing so would increase the number of units (road
miles) served, as is possible with partially overlapping bids. We agree with numerous commenters that
our priority in awarding USF support should be to expand service,534 and that permitting multiple winners
as a routine matter in any geographic area to serve the same pool of customers would drain Mobility Fund
(Continued from previous page)
Mobility Fund NPRM Comments at 6-7; TIA Mobility Fund NPRM Comments at 2-9; T-Mobile Mobility Fund
NPRM Comments at 5; USA Coalition Mobility Fund NPRM Comments at 20-22; Alaska Governor Mobility Fund
NPRM Reply at 2; CTIA Mobility Fund NPRM Reply at 4-5; GCI Mobility Fund NPRM Reply at 6; RCA Mobility
Fund NPRM Reply at 4-5; SouthernLINC Mobility Fund NPRM Reply at 4; USA Coalition Mobility Fund NPRM
Reply at 6, 9.
530 See, e.g., AT&T Mobility Fund NPRM Comments at 2-3; New EA Mobility Fund NPRM Comments at 6; Indiana
Commission Mobility Fund NPRM Comments at 6-7; Mid-Rivers Mobility Fund NPRM Comments at 4; Ohio
Commission Mobility Fund NPRM Comments at 3; RCA Mobility Fund NPRM Comments at 9; RTG Mobility Fund
NPRM Comments at 2; T-Mobile Mobility Fund NPRM Comments at 2, 6; USA Coalition Mobility Fund NPRM
Comments at 20-24; Alaska Commission Mobility Fund NPRM Reply at 7-8. CTIA’s 2011 Mobility Study finds
that it would require $7.8 billion of initial investment to ensure ubiquitous coverage of both HSPA and EvDO (3G)
mobile broadband services, and $21 billion of initial investment to ensure ubiquitous coverage of both LTE and
WiMax (4G) mobile broadband services. We note that significant private investment is being made to deploy
mobile wireless broadband, and conclude we should not, and cannot, structure our universal service support for
mobility to displace private investment being used to expand coverage of 3G and 4G networks. Instead, our goal is
to supplement that investment where and to the degree necessary. See CTIA-The Wireless Association, U.S.
Ubiquitous Mobility Study, dated September 21, 2011, submitted in ex parte notification filed by the CTIA-The
Wireless Association on September 22, 2011, in GN Docket No. 09-51, WC Docket Nos. 96-45, 05-337, and 10-90;
WT Docket No. 10-208; and CC Docket No. 01-92 (CTIA 2011 Mobility Study).
531 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4560-61, para. 10; see also National Broadband Plan at
149-150.
532 Mobility Fund NPRM, 25 FCC Rcd at 14,723, para. 15.
533 Id. at 14,723, para. 15, 14,728, para. 36.
534 See CenturyLink Mobility Fund NPRM Comments at 8; ITTA Mobility Fund NPRM Comments at 4-5; Indiana
Commission Mobility Fund NPRM Comments at 4; Verizon Mobility Fund NPRM Reply at 16.
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resources with limited corresponding benefits to consumers.535 We note, however, that in certain limitedcircumstances, the most efficient use of resources may result in small overlaps in supported service.
Thus, we delegate to the Bureaus, as part of the auctions procedures process, the question of the
circumstances, if any, in which to allow overlaps in supported service to permit the widest possible
coverage given the overall budget.536
317.
Commenters that oppose our proposal maintain that it would unfairly deprive customers
of the benefits of competition,537 create barriers to entry,538 and require the Commission to “hyper
regulate” to protect against anti-competitive behavior.539 Some assert that these presumed consequences
violate express provisions of the Communications Act regarding universal service support.540
318.
Many of the objections to the Commission’s authority assume that the Universal Service
Fund’s existing competitive ETC rules, which allow support for multiple providers in one area, are the
only way to fulfill the goals of the statute. We disagree with this premise. As Verizon notes, the statute’s
goal is to expand availability of service to users.541 It is certainly true that section 214(e) allows the states
to designate more than one provider as an eligible telecommunications provider in any given area.542 But
nothing in the statute compels the states (or this Commission) to do so; rather, the states (and this
Commission) must determine whether that is in the public interest. Likewise, nothing in the statute
compels that every party eligible for support actually receive it.
319.
We acknowledge that in the past the Commission concluded that universal service
subsidies should be portable, and allowed multiple competitive ETCs to receive support in a given
geographic area. Based on the experience of a decade, however, we conclude that this prior policy of
supporting multiple networks may not be the most effective way of achieving our universal service goals.
In this case, we choose not to subsidize competition through universal service in areas that are
challenging for even one provider to serve.543 Given that Mobility Fund Phase I seeks to expand the
availability of current and next generation services, it will be used to offer services where no provider
535 See Verizon Mobility Fund NPRM Reply at 16. The CTIA 2011 Mobility Study provides an indication of how
much more money could be required to support multiple providers. Specifically, the study found $10 billion would
be required to ensure 4G mobile broadband coverage using either LTE or WiMax technologies, but more than
double that amount, $21 billion, would be required to ensure 4G broadband coverage using both LTE and WiMax.
536 See infra para. 420.
537 See ACS Mobility Fund NPRM Comments at 5-6; ATA Mobility Fund NPRM Comments at 3; Cellular South et
al. Mobility Fund NPRM Comments at 21-22; CTIA Mobility Fund NPRM Comments at 7-9; Sprint Mobility Fund
NPRM Comments at 2; T-Mobile Mobility Fund NPRM Comments at 3, 7; US Cellular Mobility Fund NPRM
Comments at 20-21. But see Verizon Mobility Fund NPRM Reply at 14 (competitive bidding would treat all market
participants alike; “there will be no mystery to the application process or the criteria for selecting winning
bidders.”).
538 See New EA Mobility Fund NPRM Comments at 4-5.
539 See, e.g., US Cellular Mobility Fund NPRM Comments at 20-21.
540 See RCA Mobility Fund NPRM Comments at 8; SouthernLINC Mobility Fund NPRM Reply at 3; NE Colorado
Mobility Fund NPRM Reply at 6; US Cellular Mobility Fund NPRM Reply at 13.
541 Verizon Mobility Fund NPRM Reply at 10 (“Nowhere in the USF policy goals listed in section 254(b) of the Act
does it say that universal service programs should be designed to prop up multiple providers with government
subsidies in areas that are prohibitively expensive for even one provider to serve.”).
542 47 U.S.C. § 214(e).
543 See infra section VII.E.4. (Eliminating the Identical Support Rule); see also Verizon Mobility Fund NPRM Reply
at 10, 16.
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currently offers such service. We conclude that the public interest is best served by maximizing theexpansion of networks into currently unserved communities given the available budget, which will
generally result in providing support to no more than one provider in a given area.
320.
We further note, however, that participation in Mobility Fund Phase I is conditioned on
collocation and data roaming obligations designed to minimize anticompetitive behavior. We also require
that recipients provide services with Mobility Fund Phase I support at reasonably comparable rates.544
These obligations should help address the concerns of those that argue for continued support of multiple
providers in a particular geographic area and further our goal to ensure the widest possible reach of Phase
I of the Mobility Fund.
(iv)
Auction To Determine Awards of Support
321.Background. In the Mobility Fund NPRM, the Commission proposed to use a
competitive bidding mechanism to determine the entities that would receive support and the amount of
support they would receive. That is, it proposed to award support based on the lowest per-unit bid
amounts submitted in a reverse auction, subject to the constraint discussed above that there will be no
more than one recipient per geographic area, so as to make the limited funds available go as far as
possible.545 The Mobility Fund NPRM sought comment on this approach generally and on particular
aspects of how such an auction might work. The Commission further proposed to give the Wireline
Bureau and the Wireless Bureau discretion to determine specific auction procedures in a separate pre-
auction proceeding, consistent with our approach in spectrum auctions.
322.
Discussion. The goal of Mobility Fund Phase I is to extend the availability of mobile
voice service on networks that provide 3G or better performance and to accelerate the deployment of 4G
wireless networks in areas where it is cost effective to do so with one-time support. The purpose of the
mechanism we choose is to identify those areas where additional investment can make as large a
difference as possible in improving current-generation mobile wireless coverage. We adopt a reverse
auction format because we believe it is the best available tool for identifying such areas – and associated
support amounts – in a transparent, simple, speedy, and effective way. In such a reverse auction, bidders
are asked to indicate the amount of one-time support they would require to achieve the defined
performance standards for specified numbers of units in given unserved areas. We discuss later the
details of the auction mechanism, including our proposal to award support to maximize the number of
units covered given the funds available. Here, we conclude simply that a reverse auction is the best way
to achieve our overall objective of maximizing consumer benefits given the available funds.
323.
Objections to our proposal to use a competitive bidding mechanism largely challenge or
misunderstand the goals of the instant proposal. GVNW, for example, argues that the Mobility Fund will
not provide adequate support over the longer term. This fails to recognize that Mobility Fund Phase I is
focused solely on identifying recipients that can extend coverage with one-time support.546 Other
commenters argue that our approach is unlikely to provide support for the areas that are the very hardest
to cover, noting how important high-cost USF support is in these areas.547 In this regard, we reiterate that
Phase I has a limited and targeted purpose and is not intended to ensure that the highest cost areas receive
support. Those issues are addressed separately in the sections of the Order discussing Mobility Fund
Phase II and other aspects of CAF, as well as in the FNPRM adopted today.
544 See infra paras. 384-385.
545 Mobility Fund NPRM, 25 FCC Rcd at 14,723, para. 16.
546 GVNW Mobility Fund NPRM Comments at 3-8.
547 ACS Mobility Fund NPRM Comments at 3-4; ATA Mobility Fund NPRM Comments at 2-3; Alaska Commission
Mobility Fund NPRM Reply at 4; Alaska Governor Mobility Fund NPRM Reply at 2.
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324.Others contend that funding will be directed to areas that will be built out with private
investment even without support.548 To prevent funding from going to such areas, Windstream suggests
that the Commission could require a certain level of private investment before any subsidy kicks in or
include an assessment of revenue/expense forecasts as part of the selection process.549 We observe that
the areas eligible for Mobility Fund Phase I funding generally are ones where the economics have not
been sufficient to date to attract private investment. While it may be true that some of these areas
potentially could be built out using private investment over time, our goal in establishing the Mobility
Fund is to provide the necessary “jump start” to accelerate service to areas where it is cost effective to do
so. As discussed below, we are also excluding from auction those areas where a provider has made a
regulatory commitment to provide 3G or better wireless service, or has received a funding commitment
from a federal executive department or agency in response to the carrier’s commitment to provide 3G or
better service.550 Taken together, we believe these measures provide sufficient safeguards to exclude
funding for areas that would otherwise be built with private investment in the near term.
325.
Other commenters object to our proposal to use an auction based on issues that are
common to any competitive mechanism. The Blooston Rural Carriers, among others, argue that reverse
auctions can lead to construction and equipment quality short-cuts due to cost cutting measures.551 We
must of course define clear performance standards and effective enforcement of those standards, as is
prudent when seeking any commitment for specific performance. We expect that bidders will consider
cost-effective ways of fairly meeting those requirements, which in turn is consistent with our objective to
extend coverage for mobile services as much as possible given available funds.
326.
We are unpersuaded by arguments that we should not conduct a reverse auction because
larger carriers, with greater economies of scale or other potential advantages, will be able to bid more
competitively than smaller providers.552 For a variety of reasons noted elsewhere, we are confident that
both the auction design and natural advantages of carriers with existing investments in networks in rural
areas should provide opportunities for smaller providers to compete effectively at auction. Some parties
have contended that reverse auctions generally unduly harm small businesses or offer no benefits to
federal agencies that make use of them, citing prior attempts to utilize reverse auctions in other contexts,
such as Medicare.553 The examples provided, however, illustrate issues in implementing specific reverse
auction programs, rather than demonstrating that reverse auctions are inherently biased against small
548 See, e.g., Free Press Mobility Fund NPRM Comments at 3; GCI Mobility Fund NPRM Comments at ii; RCA
Mobility Fund NPRM Comments at 9; Windstream Mobility Fund NPRM Comments at 4-5; ACA Mobility Fund
NPRM Reply at 5; Benton et al. Mobility Fund NPRM Reply at 4; GCI Mobility Fund NPRM Reply at 9.
549 Windstream Mobility Fund NPRM Comments at 5-6.
550 See infra paras. 341-342.
551 Blooston Mobility Fund NPRM Comments at 2; Cellular South et al. Mobility Fund NPRM Comments at 12;
GVNW Mobility Fund NPRM Comments at 8; RTG Mobility Fund NPRM Comments at 7.
552 See, e.g., Blooston Mobility Fund NPRM Comments at 5-6; JCPES Mobility Fund NPRM Comments at 4-5; Mid-
Rivers Mobility Fund NPRM Comments at 6; MTPCS Mobility Fund NPRM Comments at 4; RTG Mobility Fund
NPRM Comments at 7-8; RCA Mobility Fund NPRM Reply at 9; RICA Mobility Fund NPRM Reply at 6.
553 See Nex-Tech and Carolina West Wireless, Ex Parte Notice, December 8, 2010 (Redacted); Nex-Tech Wireless,
Carolina West Wireless, and Cellular One of East Central Illinois, Ex Parte Notice, September 28, 2010 (Redacted);
see also United States Government Accountability Office, Medicare, CMS Working To Address Problems from
Round 1 of the Durable Medical Equipment Competitive Bidding Program, GAO-10-207, November 2009.
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businesses.554 Accordingly, we do not find that these examples demonstrate that small businesses areunable to meaningfully participate in a well-designed and executed reverse auction.
327.
MTPCS and US Cellular advocate that the Commission take into account factors other
than the lowest price, and consider factors such as quality of service, the existence of redundant
connections, and availability of quality equipment.555 The commenters do not, however, suggest how
such metrics could be implemented in this context. Indeed, we conclude that, for purposes of Mobility
Fund Phase I, the difficulty in appropriately weighting such differences in the service provided outweigh
the benefits that might be gained from such an approach. Rather, we choose to focus on the more
concrete and direct approach of adopting appropriate, uniform, minimum performance requirements
applicable to all support recipients.
328.
Finally, certain commenters object to the use of a reverse auction on the grounds that a
reverse auction would provide support to at most one bidder in an area. 556 For reasons discussed above,
we have decided not to provide support routinely to more than one provider in an area, contrary to current
provision of support to competitive ETCs.
329.
Delegation of Authority. We also adopt our proposal to delegate to the Bureaus authority
to administer the policies, programs, rules and procedures to implement Mobility Fund Phase I as
established today. The only commenter addressing this particular point, T-Mobile, supported the
delegation to the Wireless Bureau to provide useful flexibility in pre-auction preparation.557 In addition
to the specific tasks noted elsewhere, such as identifying areas eligible for Mobility Fund support and the
number of units associated with each, this delegation includes all authority necessary to conduct a
Mobility Fund Phase I auction and conduct program administration and oversight consistent with the
policies and rules we adopt in this Order.558
(v)
Identifying Unserved Areas Eligible for Support
330.In the Mobility Fund NPRM, the Commission proposed to identify unserved areas on a
census block basis and offer support by census tracts, grouping together all unserved census blocks in the
same tract for purposes of awarding support based on competitive bidding.559 This proposal involves
several related elements, including determining the geographic basis for identifying served and unserved
areas, the coverage units associated with unserved geographic areas, and the minimum geographic basis
on which unserved areas will be grouped when offered in bidding for Mobility Fund Phase I support. For
the reasons discussed with respect to each element, we adopt the proposal in the Mobility Fund NPRM,
with modifications. We will use road miles, rather than residential population, as the baseline for
coverage units in each unserved area, and we delegate to the Bureaus, as part of the auctions procedures
554 For example, according to the Government Accountability Office (GAO), the primary problems with Round 1 of
the Durable Medical Equipment Competitive Bidding program involved “poor timing and lack of clarity in bid
submission information, a failure to inform all suppliers that losing bids could be reviewed, and an inadequate
electronic bid submission system.” GAO Highlights, Highlights of GAO-10-27, Medicare, CMS Working to
Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program, November
2009. Nonetheless, the GAO noted that competitive bidding “has the potential to produce considerable benefits,
including reducing overall Medicare spending for [durable medical equipment].” Id.
555 MTPCS Mobility Fund NPRM Comments at 4; US Cellular Mobility Fund NPRM Reply at 24.
556 Cellular South et al. Mobility Fund NPRM Comments at 17, 21; RCA Mobility Fund NPRM Comments at 2-4;
US Cellular Mobility Fund NPRM Comments at 20-22; NE Colorado Cellular Mobility Fund NPRM Reply at 1.
557 T-Mobile Mobility Fund NPRM Comments at 16.
558 See infra paras. 337 and 353.
559 Mobility Fund NPRM, 25 FCC Rcd at 14,724, para. 20.
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process, the question of whether to use a minimum area for bidding like census tracts, as we hadproposed, or whether to provide for bidding on individual census blocks with the opportunity for package
bidding on combinations of census blocks.
(a)
Using Census Blocks to Identify Unserved Areas
331.Background. The Commission proposed to determine the availability of service at the
census block level as the first step in identifying those areas that are eligible for Mobility Fund Phase I
support.560 The census block is the smallest geographic unit for which the Census Bureau collects and
tabulates decennial census data. Determining the extent of current-generation mobile wireless services by
census block should provide a very detailed picture of the availability of 3G mobile services.
332.
Discussion. We will identify areas eligible for Mobility Fund Phase I support at the
census block level. We believe a granular review will allow us to identify unserved areas with greater
accuracy than if we used larger areas.561 Although census blocks, particularly in rural areas, may include
both served and unserved areas,562 it is not feasible to identify unserved areas on a more granular level for
Mobility Fund Phase I, since as noted, census blocks are the smallest unit for which the Census Bureau
provides data. NTCH observes that reviewing service by census block will result in a larger absolute
number of unserved areas than a review based on larger geographic areas,563 but we do not believe this
larger absolute number of unserved areas will unduly complicate administration of the fund.
(b)
Identifying Unserved Census Blocks
(i)Using American Roamer Data
333.Background. The Commission further proposed to measure the availability of current-
generation mobile wireless services by using American Roamer data identifying the geographic coverage
of networks using EV-DO, EV-DO Rev A, and UMTS/HSPA.564 The Mobility Fund NPRM sought
comment on whether there are differences in the way that carriers report information to American Roamer
that should affect our decision on this issue and whether possible alternative datasets exist for this
purpose.565
334.
Discussion. We conclude that American Roamer data is the best available choice at this
time for determining wireless service at the census-block level. American Roamer data is recognized as
the industry standard for the presence of service, although commenters note that the data may not be
comprehensive and accurate in all cases.566 We anticipate that the Bureaus will exercise their delegated
authority to use the most recent American Roamer data available in advance of a Phase I auction in 2012.
We note that, in so doing, they should use the data to determine the geographic coverage of networks
560 Id. at 14,724, para 21.
561 T-Mobile Mobility Fund NPRM Comments at 10-11.
562 See Letter from Bruce A. Olcott, Counsel to the State of Hawaii, to Hon. Julius Genachowski, Chairman, FCC, at
2, WC Docket Nos. 10-90, 07-135, 05-337, 03-109; CC Docket Nos. 01-92, 96-45; GN Docket No. 09-51 (Oct. 19,
2011).
563 NTCH Mobility Fund NPRM Comments at 3.
564 Mobility Fund NPRM, 25 FCC Rcd at 14,724, para. 22.
565 Id. at 14,724-25, para. 23.
566 AT&T Mobility Fund NPRM Comments at 9-10; Alaska Commission Reply at 11; Benton et al. Reply at 9;
HITN Reply at 3-4; NE Colorado Cellular Reply at 9. But see Verizon Mobility Fund NPRM Comments at 16
(“Using American Roamer data for this purpose is sensible and . . . we are not aware of any other source that
presents a viable alternative.”)
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using the technologies noted in the Mobility Fund NPRM (i.e., EV-DO, EV-DO Rev A, UMTS/HSPA) orbetter.567
335.
Some commenters propose that the Commission rely instead on data provided for the
National Broadband Map created pursuant to the American Recovery and Reinvestment Act, or on data
previously submitted to the Commission on FCC Form 477, though the latter source would not reflect
reporting by census block.568 For future mobility-focused auctions, it may be possible to obtain
information from state and Tribal governments to identify areas in need of support. In addition, it may
soon be possible to rely, at least in part, on the data provided in connection with the National Broadband
Map and FCC Form 477, depending on our anticipated reform to that data collection. Inconsistencies
with respect to wireless services have been noted in the initial phase of data gathering for the National
Broadband Map, however. Although we expect those discrepancies to be resolved as the project evolves
over time,569 we cannot now conclude that National Broadband Map data will be an appropriate source of
data in time for a Mobility Fund Phase I auction.
336.
Some commenters observe that American Roamer data relies on reporting by existing
providers and therefore may tend to over-report the extent of existing coverage.570 While we intend to be
as accurate as possible in determining the extent of coverage, we recognize that perfect information is not
available. We know of no data source that is more reliable than American Roamer, nor does the record
reflect any other viable options. Moreover, to the extent that American Roamer data may reflect over-
reporting of coverage, we note that this makes it less likely that we will mistakenly identify areas already
served by 3G networks as unserved, and hence, less likely that we will assign support to cover areas that
are not in fact unserved by our definition. Our objective is, of course, to identify unserved areas as
accurately as possible.
337.
Several commenters note that the potential for error is unavoidable and therefore
advocate that some provision be made for outside parties to appeal or initiate a review of the initial
coverage determination for a particular area.571 We conclude that we will, within a limited timeframe
only, entertain challenges to our determinations regarding unserved geographic areas for purposes of
Mobility Fund Phase I. Specifically, we will make public a list of unserved areas as part of the pre-
auction process and afford parties a reasonable opportunity to respond by demonstrating that specific
areas identified as unserved are actually served and/or that additional unserved areas should be included.
567 Here, we make clear that in identifying unserved census blocks we will exclude census blocks that are served by
3G or better service. Better than 3G service would include any 4G technologies, including, for example, HSPA+ or
LTE.
568 California Commission Mobility Fund NPRM Comments at 12-14; Verizon Mobility Fund NPRM Comments at
16.
569 See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the
Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 10-159,
Seventh Broadband Progress Report and Order on Reconsideration, 26 FCC Rcd 8008, 8078-93, App. F (2011)
(Section 706 Seventh Report and Order on Reconsideration).
570 New EA Mobility Fund NPRM Comments at 5; Alaska Commission Mobility Fund NPRM Reply at 11; Benton
et al. Mobility Fund NPRM Reply at 9; HITN Mobility Fund NPRM Reply at 3-4; NE Colorado Mobility Fund
NPRM Reply at 9-10.
571 AT&T Mobility Fund NPRM Comments at 9-10; Texas Statewide Coop Mobility Fund NPRM Comments at 6;
WorldCall Mobility Fund NPRM Comments at 10. HITN cautions that we should require parties who seek to
challenge that a specific area is unserved to provide empirical data rather than rely on advertising claims to support
any such challenge. HITN Mobility Fund NPRM Reply at 4.
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Our goal is to accelerate expanded availability of mobile voice service over current-generation or betternetworks by providing one-time support from a limited source of funds, and any more extended pre-
auction review process might risk undue delay in making any support available. Providing for post-
auction challenges would similarly inject uncertainty and delay into the process. We therefore conclude
that it is important to provide finality prior to the auction with respect to the specific unserved census
blocks eligible for support. Accordingly, the Bureaus will finalize determinations with respect to which
areas are eligible for support in a public notice establishing final procedures for a Mobility Fund Phase I
auction.
(ii)
Other Service-Related Factors
338.Background. In the Mobility Fund NPRM, the Commission sought comment on whether
factors other than existing mobile service, including the presence of voice and broadband services on non-
mobile networks, should be considered in determining which census blocks are unserved and eligible for
support.572
339.
Discussion. After review of the record, we conclude that we will not consider the
presence in a census block of voice or broadband services over non-mobile networks in determining
which census blocks are unserved. As noted by commenters, mobile services provide benefits, consistent
with, and in furtherance of the principles of section 254, not offered by fixed services.573 The ability to
communicate from any point within a mobile network’s coverage area lets people communicate at times
when they may need it most, including during emergencies. The fact that fixed communications may be
available nearby does not detract from this critical benefit. Moreover, the Internet access provided by
current and next generation mobile networks renders them qualitatively different from existing voice-only
mobile networks. Current and next generation networks offer the ability to tap resources well beyond the
resources available through basic voice networks. Accordingly, in identifying blocks eligible for
Mobility Fund support, we will not consider whether voice and/or broadband services are available using
non-mobile technologies or pre-3G mobile wireless technologies.
340.
Some commenters also suggest that the Commission prioritize support to those areas
where there is no wireless service availability at all.574 We share commenters’ goal of expanding the
availability of basic mobile services to all Americans. However, the areas that currently lack basic mobile
services are likely to be among the most difficult or expensive to serve and would likely require
significant ongoing support to remain operational. Given the limited size and scope of the Mobility Fund
Phase I, we do not believe that this support mechanism, even with a priority for completely unserved
areas, would most efficiently address those areas. Rather, we address these areas in the parts of this Order
and the FNPRM addressing ongoing support for wireless services and highest cost areas.
341.
That said, to help focus Mobility Fund Phase I support toward unserved locations where
it will have the most significant impact, we provide that support will not be offered in areas where,
notwithstanding the current absence of 3G wireless service, any provider has made a regulatory
commitment to provide 3G or better wireless service, or has received a funding commitment from a
572 Mobility Fund NPRM, 25 FCC Rcd at 14,724-25, para. 23.
573 WorldCall Mobility Fund NPRM Comments at 11-12.
574 See AT&T Mobility Fund NPRM Comments at 4; Free Press Mobility Fund NPRM Comments at 3; MetroPCS
Mobility Fund NPRM Comments at 8; CWA Mobility Fund NPRM Reply at 4; RCA Mobility Fund NPRM Reply at
3-4; RICA Mobility Fund NPRM Reply at 2.
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federal executive department or agency in response to the carrier’s commitment to provide 3G or betterwireless service.575
342.
To implement this decision, we will require that all wireless competitive ETCs that
receive USF high cost support, under either legacy or reformed programs, as well as all parties that seek
Mobility Fund support, review the list of areas eligible for Mobility Fund support when published by the
Commission and identify any areas with respect to which they have made a regulatory commitment to
provide 3G or better wireless service or received a federal executive department or agency funding
commitment in exchange for their commitment to provide 3G or better wireless service. We recognize
that a regulatory commitment ultimately may not result in service to the area in question. Nevertheless,
given the limited resources provided for Mobility Fund Phase I and the fact that the commitments were
made in the absence of any support from the Mobility Fund, we conclude that it would not be an
appropriate use of available resources to utilize Mobility Fund support in such areas.
(iii)
Using Centroid Method
343.Background. In the Mobility Fund NPRM, the Commission proposed to consider any
census block as unserved, i.e., eligible for support, if the American Roamer data indicates that the
geometric center of the block – referred to as the centroid576 – is not covered by networks using EV-DO,
EV-DO Rev A, or UMTS/HSPA or better.577 The Commission also sought comment on alternative
approaches.578
344.
Discussion. We conclude that employing the centroid method is relatively simple and
straightforward, and will be an effective method for determining whether a block is uncovered. Some
commenters support the Commission proposal to use the centroid method both as manageable and
effective,579 while others prefer the alternative proportional method described in the Mobility Fund
NPRM.580 Parties advocating for the alternative method assert that a proportional process will be more
accurate.581 More specifically, some note that although most census blocks are small, some can be large,
particularly in low-density rural areas, and that coverage at the centroid might result, incorrectly, in the
entirety of those large areas being deemed served.582 While we acknowledge that advantages and
disadvantages exist with both methods, we find that, on balance, the centroid method is the best approach
for this purpose. We note that the Commission has consistently used the centroid method for determining
coverage in other contexts, such as evaluating competition in the mobile wireless services industry, where
it is also useful to have a clear and consistent methodology for determining whether a given area has
coverage. Based on our experience in these contexts, we find the centroid method to be an
575 Such federal funding commitments may have been made under, but are not limited to, the Broadband Technology
Opportunities Program (BTOP) and Broadband Initiatives Program (BIP) authorized by the American Recovery and
Reinvestment Act of 2009, P.L. 111-5, 123 Stat. 115 (ARRA).
576 We use the term “centroid” to refer to the internal point latitude/longitude of a census block polygon. For more
information, see U.S. Census Bureau, Putting It All Together,
http://lehd.did.census.gov/led/library/doc/PuttingItTogether_20100817.pdf (visited Nov. 4, 2011).
577 Mobility Fund NPRM, 25 FCC Rcd at 14,724, para. 22.
578 Id. at 14,724-5, paras. 22-23.
579 AT&T Mobility Fund NPRM Comments at 10; Verizon Mobility Fund NPRM Comments at 16.
580 Greenlining Mobility Fund NPRM Comments at 3. Cf. Mid-Rivers Mobility Fund NPRM Comments at 7; NTCH
Mobility Fund NPRM Comments at 4.
581 Greenlining Mobility Fund NPRM Comments at 3.
582 Mid-Rivers Mobility Fund NPRM Comments at 7.
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administratively simple and efficient approach that, if used here, will permit us to begin distributing thissupport without undue delay. For these reasons, we will use the centroid method to determine which
census blocks are unserved by 3G or better networks for purposes of Mobility Fund Phase I.
(c)
Offering Support for Unserved Areas by Census
Block
Background. The Commission proposed in the Mobility Fund NPRM to group unserved
census blocks by larger areas – census tracts – as the minimum area for competitive bidding, since
individual census blocks may be too small to serve as a viable basis for providing support.583 The
Commission therefore proposed to accept bids for support to expand coverage to all the unserved census
blocks within a particular census tract and sought comment on that approach.584
346.
Discussion. Upon review of the comments and further reflection, we determine that the
census block should be the minimum geographic building block for defining areas for which support is
provided. Using census blocks as the minimum geographic area gives the Commission and bidders more
flexibility to tailor their bids to their business plans. Because census blocks are numerous and can be
quite small, we believe that we will need to provide at the auction for the aggregation of census blocks for
purposes for bidding. We delegate to the Bureaus, as part of the auctions procedures process, the task of
deciding whether to provide a minimum area for bidding comprised of an aggregation of eligible census
blocks (e.g., census tracts or block groups) or whether to permit bidding on individual census blocks and
provide bidders with the opportunity to make “all-or-nothing” package bids on combinations of census
blocks. Package bidding procedures could specify certain predefined packages,585 or could provide
bidders greater flexibility in defining their own areas, comprised of census blocks. However, we would
not expect that any aggregation, whether predetermined by the Bureaus or defined by bidders, would
exceed the bounds of one Cellular Market Area (CMA).586
347.
In deciding this issue, we recognize that the unique circumstances raised by the large size
of census areas in Alaska may require that bidding be permitted on individual census blocks, rather than a
larger pre-determined area, such as a census tract or block group. In Alaska, the average census block is
more than 50 times the size of the average census block in the other 49 states and the District of
Columbia,587 such that the large size of census areas poses distinctive challenges in identifying unserved
communities and providing service.588
583 Mobility Fund NPRM, 25 FCC Rcd at 14,725, paras. 25-26. Census tracts generally have between 1,200 and
8,000 inhabitants and average about 4,000 inhabitants. Each census tract consists of multiple census blocks and
every census block fits within a census tract. There are over 11 million census blocks nationwide.
584 Id. at 14,725, para. 25. As discussed herein, a provider receiving support would be considered to cover a
particular census block when it demonstrates compliance with the performance requirements adopted by the
Commission, and not simply by covering the block’s centroid.
585 See, e.g., Auction of 700 MHz Band Licenses Scheduled for January 24, 2008; Notice and Filing Requirements,
Minimum Opening Bids, Reserve Prices, Upfront Payments, and Other Procedures for Auctions 73 and 76, Public
Notice, 22 FCC Rcd 18,141, 18,179-81, paras. 138-144 (Wireless Telecom. Bur. 2007) (700 MHz Auction
Procedures Public Notice).
586 Cellular Market Areas (CMAs) are the areas in which the Commission initially granted licenses for cellular
service. Cellular markets comprise Metropolitan Statistical Areas (MSAs) and Rural Service Areas (RSAs). See 47
C.F.R. § 22.909.
587 2010 census data indicates that the average census block size in Alaska is 14.7 square miles, while the average
census block size in the other 49 states and the District of Columbia is .28 square miles.
588 See ACS Mobility Fund NPRM Comments at 5; GCI Mobility Fund NPRM Comments at 4; Alaska Commission
Mobility Fund NPRM Reply at 10.
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348.Few commenters address the minimum geographic building block issue directly. Those
that do generally support the Commission’s initial proposal to structure the auction to provide for bidding
on census tracts that include unserved census blocks, although few took issue with the possibility of using
census blocks as the basic building block.589 Others propose alternatives, such as permitting carriers to
define their own service areas in which they seek to bid.590 Nearly all of the comments touching on the
minimum geographic bidding area acknowledge the underlying goals of making a selection based on ease
of administration, effective identification of unserved areas, and promoting the widest possible
deployment of mobile services.
(d)
Establishing Unserved Units
349.Background. In the Mobility Fund NPRM, the Commission proposed to use population
as the base unit with which to compare unserved census blocks.591 It also sought comment on taking into
account characteristics such as road miles, traffic density, and/or community anchor institutions in
determining the number of units in each unserved census block and asked how, if multiple characteristics
were to be used, the various factors should be weighted.592
350.
Discussion. After further consideration, we conclude that we will use a single
characteristic, the number of linear road miles – rather than population – as the basis for calculating the
number of units in each unserved census block. We base this decision on a number of factors. First, we
find that requiring additional coverage of road miles more directly reflects the Mobility Fund’s goal of
extending current generation mobile services, as some commenters noted.593 We also find that using road
miles, rather than population, as a unit for bids and awards of support is more consistent with our decision
to measure mobile broadband service based on drive tests and to require coverage of a specified
percentage of road miles as described below.
351.
Moreover, we believe that using per-road mile bids as a basis for awarding support
implicitly will take into account many of the other factors that commenters argue are important – such as
business locations, recreation areas, and work sites – since roads are used to access those areas.594 And
while traffic data might be superior to simple road miles as a measure of actual use, we have not found
comprehensive and consistent traffic data across multiple states and jurisdictions nationwide. Because
bidders are likely to take potential roaming and subscriber revenues into account when deciding where to
bid for support under Mobility Fund Phase I, we believe that support will tend to be disbursed to areas
where there is greater traffic, even without our factoring traffic into the number of road mile units.
352.
Further, using road miles as the basic unit for the Mobility Fund Phase I will be
relatively simple to administer, since standard nationwide data exists for road miles, as it does for
population. In both cases, the data can be disaggregated to the census block level. Commenters that
supported our proposal to use population as a unit did so largely based on its simplicity and its
589 See, e.g., AT&T Mobility Fund NPRM Comments at 10-11; Greenlining Institute Mobility Fund NPRM
Comments at 3; NTCH Mobility Fund NPRM Comments at 3-4; T-Mobile Mobility Fund NPRM Comments at 10-
11; Verizon Mobility Fund NPRM Comments at 15; Windstream Mobility Fund NPRM Comments at 6.
590 See ACS Mobility Fund NPRM Comments at 5; Alaska Commission Mobility Fund NPRM Reply at 11; see also
Mid-Rivers Mobility Fund NPRM Comments at 6-7 (proposing the use of licensed coverage areas).
591 Mobility Fund NPRM, 25 FCC Rcd at 14,725, para. 27.
592 Id.
593 WorldCall Mobility Fund NPRM Comments at 8; Mid-Rivers Mobility Fund NPRM Comments at 7.
594 CTIA Mobility Fund NPRM Comments at 12; NTCH Mobility Fund NPRM Comments at 4.
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straightforward nationwide applicability, so that the logic of those commenters is consistent with ourdecision to use road miles instead.595
353.
We note that the TIGER road miles data made available by the Census Bureau can be
used to establish the road miles associated with each census block eligible for Mobility Fund Phase I
support. TIGER data is comprehensive and consistent nationwide, and available at no cost. As with our
standard for identifying census blocks that will be eligible for Phase I support, we anticipate that in the
pre-auction process, the Bureaus will establish the road miles associated with each and identify the
specific road categories considered – e.g., interstate highways, etc. – to be consistent with our
performance requirements and with our goal of extending coverage to the areas where people live, work,
and travel.
(e)
Distributing Mobility Fund Phase I Support Among
Unserved Areas
Background. In the Mobility Fund NPRM, the Commission invited comment on
distributing support among unserved areas nationwide and on various alternative methods for targeting
support to a subset of unserved areas, such as states that significantly lag behind the level of 3G coverage
generally available nationwide.596 In particular, the Commission requested any insights commenters
could provide regarding which of these alternatives would most effectively utilize the offered support to
maximize the public benefits of expanded 3G coverage.597 The Commission also sought comment on
whether and how to prioritize support for unserved areas that currently lack any mobile wireless
service.598
355.
Discussion. As discussed elsewhere, we will create a separate Mobility Fund Phase I to
support the extension of current generation wireless service in Tribal lands. For both general and Tribal
Mobility Fund Phase I support, we also require providers seeking to serve Tribal lands to engage with the
affected Tribal governments, where appropriate, and we provide a bidding credit for Tribally-owned and
controlled providers seeking to serve Tribal lands with which they are associated.599 Apart from these
provisions, we conclude that we should not attempt to prioritize within the areas otherwise eligible for
support from Phase I.
356.
Commenters note a variety of factors that might be relevant to whether to prioritize some
unserved areas over others, such as adoption rates and projected rates of population growth or decline.600
Several commenters addressing this issue favor making support available on a consistent basis to all areas
defined as unserved by mobile broadband.601 Others take up the Commission’s suggestion and propose
prioritizing support for unserved areas lacking any mobile service.602
357.
After careful consideration of these alternatives, we find that we will achieve the greatest
amount of new coverage with Mobility Fund Phase I support if we impose no restrictions on the unserved
595 AT&T Mobility Fund NPRM Comments at 11; Verizon Mobility Fund NPRM Comments at 17.
596 Mobility Fund NPRM, 25 FCC Rcd at 14,726-27, para. 32.
597 Id.
598 Id.
599 See infra paras. 489-490.
600 Ohio Commission Mobility Fund NPRM Comments at 6-7.
601 AT&T Mobility Fund NPRM Comments at 11-12; TechAmerica Mobility Fund NPRM Comments at 3; Verizon
Mobility Fund NPRM Comments at 18.
602 T-Mobile Mobility Fund NPRM Comments at 11.
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areas that are eligible for the program, and allow all unserved areas to compete for funding on an equalfooting. We conclude that making all unserved areas eligible for support and allowing the auction
process to prioritize which areas can be served is most likely to achieve our goal of maximizing the
number of units covered given the funds available.
(vi)
Public Interest Obligations
(a)Mobile Performance Requirements
358.Background. In the Mobility Fund NPRM, the Commission proposed that Mobility Fund
support be used to expand the availability of advanced mobile communications services comparable or
superior to those provided by networks using HSPA or EV-DO, which are commonly available 3G
technologies.603 The Commission suggested that supported carriers would have to demonstrate that they
provide services over a 3G network that supports voice and has achieved particular data rates under
particular conditions, and sought comment on whether to require 4G instead.604 The Commission also
proposed that recipients be required to meet certain deployment milestones in each unserved census block
in a tract in order to remain qualified for the full amount of any Mobility Fund award.605 In addition, the
Commission sought comment on establishing appropriate coverage metrics.606
359.
Discussion. This Order elsewhere provides an overview of the public interest obligations
that must be met by all recipients of Connect America Fund support, including recipients of Mobility
Fund support.607 Recipients of Mobility Fund support, like all CAF support recipients, must offer voice
service.608 Likewise, all recipients of Mobility Fund support must offer standalone voice service to the
public as a condition of support.609 As the broader overview notes, however, specific broadband service
requirements, unlike voice service requirements, vary for CAF recipients depending upon the particular
public interest goal being met by the support provided.610 Our objective for Mobility Fund Phase I is to
provide support to expand current and next generation mobile services to areas without such services
today. The voice and broadband services offered with support must be reasonably comparable to service
603 Mobility Fund NPRM, 25 FCC Rcd at 14,728-29, para. 37. Universal service support may be provided for
services based on widely available current generation technologies – or superior next generation technologies
available at the same or lower costs – even though supported services could be based on earlier technologies.
Technologies used to provide the services supported by universal service funds need not be technologies that are
strictly limited to providing the particular services designated for support. See Federal-State Joint Board on
Universal Service, Order and Order on Reconsideration, 18 FCC Rcd 15,090, 15,095-96, para. 13 (2003) (“We
recognize that the network is an integrated facility that may be used to provide both supported and non-supported
services. We believe that . . . our policy of not impeding the deployment of plant capable of providing access to
advanced or high-speed services is fully consistent with the Congressional goal of ensuring access to advanced
telecommunications and information services throughout the nation.”) (subsequent history omitted).
604 Mobility Fund NPRM, 25 FCC Rcd at 14,728-30, paras. 37, 40.
605 Id. at 14,729, para. 39.
606 Id. at 14,728, para. 34.
607 See supra section VI. (Public Interest Obligations).
608 See id.
609 See id.
610 See id.
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available in urban areas.611 We detail below the mobile broadband service public interest obligations thatMobility Fund recipients must meet to satisfy this requirement.612
360.
Mobile service providers receiving non-recurring Mobility Fund Phase I support will be
obligated to provide supported services over a 3G or better network that has achieved particular data rates
under particular conditions. Specifically, Phase I recipients will be required to specify whether they will
be deploying a network that meets 3G requirements or 4G requirements in areas eligible for support as
those requirements are detailed here. Numerous commenters concur with our proposal to require that
supported networks meet or exceed a minimum standard for voice service and data rates established by
reference to current generation services, i.e., 3G services.613 As noted in some comments, this approach is
also consistent with permitting providers to provide 4G services instead.614 Other commenters, however,
argue that the Commission should support only 4G networks, contending that current generation networks
will soon be obsolete, in light of the on-going roll-out of 4G.615
361.
Recognizing the unavoidable variability of mobile service within a covered area, we
proposed and are adopting performance standards that will adopt a strong floor for the service provided.
Consequently, we expect that many users will receive much better service when, for example, accessing
the network from a fixed location or when close to a base station. In light of this fact, and our decision to
permit providers to elect whether to provide 3G or 4G service, we are adopting different speeds than
originally proposed for those providing 3G, while retaining our original proposal for those that offer 4G.
For purposes of meeting a commitment to deploy a 3G network, providers must offer mobile
transmissions to and from the network meeting or exceeding an outdoor minimum of 200 kbps
downstream and 50 kbps upstream to handheld mobile devices.
362.
Recipients that commit to provide supported services over a network that represents the
latest generation of mobile technologies, or 4G, must offer mobile transmissions to and from the network
meeting or exceeding the following minimum standards: outdoor minimum of 768 kbps downstream and
200 kbps upstream to handheld mobile devices. As with the 3G speeds set forth above, we further specify
that these data rates should be achievable in both fixed and mobile conditions, at vehicle speeds consistent
with typical speeds on the roads covered. These minimum standards must be achieved throughout the cell
area, including at the cell edge. Signal coverage satisfying these 4G standards will produce substantially
faster speeds under conditions closer to the base station, very often exceeding the 4 Mbps downstream
and 1Mbps upstream that have been proposed as minimum speeds for fixed broadband.
363.
With respect to latency, in order to assure that recipients offer service that enables the
use of real-time applications such as VoIP, we also require that round trip latencies for communications
over the network be low enough for this purpose.
364.
With respect to capacity, we decline at this time to adopt a specific minimum capacity
611 See id.
612 We note that some parties contend that limiting support to one carrier per area will require undue regulation to
protect the public interest, contrary to the Commission’s efforts to minimize regulation. See, e.g., Cellular South et
al. Mobility Fund NPRM Comments at 19-20. We reject these arguments and find that the requirements set forth
herein are consistent with the Commission’s policy of regulating only to the extent necessary to serve the public
interest.
613 See, e.g., Sprint Mobility Fund NPRM Comments at 8; Tech America Mobility Fund NPRM Comments at 3; T-
Mobile Mobility Fund NPRM Comments at 12; Verizon Mobility Fund NPRM Comments at 20.
614 Verizon Mobility Fund NPRM Comments at 20.
615 Greenlining Mobility Fund NPRM Comments at 6-7; MetroPCS Mobility Fund NPRM Comments at 6; New EA
Mobility Fund NPRM Comments at 9.
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requirement that supported providers must offer mobile broadband users. However, we emphasize thatany usage limits imposed by a provider on its mobile broadband offerings supported by the Mobility Fund
must be reasonably comparable to any usage limits for comparable mobile broadband offerings in urban
areas.616
365.
Recipients that elect to provide supported services over 3G networks will have two years
to meet their requirements and those that elect to deploy 4G networks will have three years. At the end of
the applicable period for build-out, providers will be obligated to provide the service defined above in the
areas for which they receive support, over at least 75 percent of the road miles associated with census
blocks identified as unserved by the Bureaus in advance of the Mobility Fund Phase I auction. The
Commission delegates to the Bureaus the question of whether a higher coverage threshold should be
required should the Bureaus permit bidding on individual census blocks. We note that a higher coverage
threshold may be appropriate in such circumstances because bidders can choose the particular census
blocks they can cover. Presumably, this would allow them to choose areas in which their coverage can be
95 to 100 percent, as suggested by the Mobility Fund NPRM.
366.
Many commenters oppose requiring 100 percent coverage within areas identified as
unserved for purposes of a Mobility Fund Phase I auction.617 Commenters note that due to the relatively
high expense of providing last mile coverage in difficult circumstances, requiring 100 percent coverage
may dissuade parties from seeking support and expanding coverage.618 Proposals to address this
difficulty include permitting bidders to state the extent of the coverage that they will offer as a component
of their bid for support.619 A number of commenters support a coverage requirement of at least 95 percent
but less than 100 percent, as discussed in the Mobility Fund NPRM.620 Alternatively, some commenters
suggest lower thresholds of coverage, e.g., 50 to 80 percent, as minimum requirements.621
367.
Should the Bureaus choose to implement a coverage area requirement of less than 100
percent, a recipient will receive support only for those road miles actually covered and not for the full 100
percent of road miles of the census blocks or tracts for which it is responsible. For example, if a recipient
covers 90 percent of the road miles in the minimum geographic area (and it meets the threshold), then that
recipient will receive 90 percent of the total support available for that area. To the extent that a recipient
covers additional road miles, it will receive support in an amount based on its bid per road mile up to 100
percent of the road miles associated with the specific unserved census blocks covered by a bid.622
368.
In contrast to other support provided under CAF, support provided through Mobility
Fund Phase I will be non-recurring. Consequently, we will not plan to modify the service obligations of
providers that receive Phase I support.
616 We note that this should not be interpreted to mean that the Commission intends to regulate usage limits, nor that
the Commission is approving of or endorsing usage limits.
617 ITTA Mobility Fund NPRM Comments at 11; MTPCS Mobility Fund NPRM Comments at 10; Verizon Mobility
Fund NPRM Comments at 14.
618 ITTA Mobility Fund NPRM Comments at 11.
619 AT&T Mobility Fund NPRM Comments at 13, fn. 35; Verizon Mobility Fund NPRM Comments at 18.
620 T-Mobile Mobility Fund NPRM Comments at 11-12. Cf. TIA Mobility Fund NPRM Comments at 12.
621 Verizon Mobility Fund NPRM Comments at 19.
622 Accordingly, when reserving available support based upon those bids that are determined to be winning bids, the
Commission will reserve an amount necessary to pay the support that the recipient would be entitled to in the event
that it covered 100 percent of the road miles in the previously unserved census blocks.
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(b)Measuring and Reporting Mobile Broadband
369.Background. In the Mobility Fund NPRM, the Commission proposed using data
submitted from drive tests to measure whether recipients meet performance requirements.623
370.
Discussion. As proposed in the Mobility Fund NPRM, we will require that parties
demonstrate that they have deployed a network that covers the relevant area and meets their public
interest obligations with data from drive tests.624 The drive test data satisfying the requirements must be
submitted by the deadline for providing the service.625
371.
Several commenters acknowledge that the Commission is building on current industry
practice in proposing to require drive tests for proof of deployment.626 No commenters take issue with the
particular data rates in the Commission’s proposal, although some seek some leeway in meeting the
standard, due to potential variability in conditions.627 Others contend that simple self-certification should
suffice for proof of deployment.628 Some commenters contend that the Commission’s proposal to
measure data rates fails to measure rates in a manner that will reflect the end-to-end performance that
matters to members of the public utilizing the access.629
372.
GCI argues that our proposed requirement regarding drive tests demonstrating data
speeds “to the network” considers only data speeds from towers to the mobile user and therefore could be
satisfied by networks with insufficient “middle mile” capacity to deliver the same data speeds to and from
the Internet.630 We do not agree with GCI’s interpretation of the proposed rule but, in light of their
interpretation, take this opportunity to clarify what “to the network” means for these purposes. “To the
network” means to the physical location of core network equipment, such as the mobile switching office
or the evolved packet core. We envision that a test server utilized to conduct drive tests will be at such a
central location rather than at a base station, so that the drive test results take into account the effect of
backhaul on communication speeds.
373.
AT&T proposes that instead of requiring support recipients to meet fixed minimum
requirements, we should “permit recipients to follow standard industry benchmarks (i.e., data rates should
be no lower than x percent of the industry average).”631 Such an approach would enable the relevant
metrics to evolve along with industry practices. However, in the context of non-recurring funding, we
believe that setting a clear and consistent measurement of service better achieves the public interest than
allowing the measurement to change depending on industry practice.
623 Mobility Fund NPRM, 25 FCC Rcd at 14,729-30, para. 40.
624 Id.
625 We are also requiring recipients to submit drive test data to demonstrate they have met the 50 percent minimum
coverage requirement required to receive the second payment of Mobility Fund Phase I support. See infra para. 466.
626 See, e.g., AT&T Mobility Fund NPRM Comments at 17; Sprint Mobility Fund NPRM Comments at 9-10.
627 TIA Mobility Fund NPRM Comments at 12. We note that ACS contends that drive tests are not feasible in
Alaska because of lack of roads. ACS Mobility Fund NPRM Comments at 7. This contention may have had merit
when we were considering drive tests as a means of measuring coverage provided to resident population. However,
at least with respect to support that requires providers to cover road miles in the area rather than population, we
conclude that ACS’ objection regarding feasibility does not apply. See supra para. 350.
628 Verizon Mobility Fund NPRM Comments at 21-22.
629 GCI Mobility Fund NPRM Comments at 7.
630 Id.
631 AT&T Mobility Fund NPRM Comments at 17.
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374.CTIA argues against “overly burdensome performance requirements” and contends that
providers’ performance is best measured by participation of new broadband customers in previously
unserved areas and not by static metrics.632 Expanding mobile coverage to new areas will benefit not only
new customers in previously unserved areas but also customers in other areas who either want to
communicate with those in the previously unserved area or travel through it. However, these benefits will
depend on a minimum level of functional service in the newly covered area. We conclude that the public
interest mandates that when public support is provided for a service, we should require that a minimum
level of service be provided.
(c)
Collocation
375.Background. In the Mobility Fund NPRM, the Commission proposed to encourage
future competition in the market for 3G or better services in geographic areas being supported by the
Mobility Fund.633 As some have observed, the incompatibility of existing 3G technologies, e.g., CDMA
and GSM, limits the benefits of an expanded network to users of the same technology.634 Consequently,
the Commission proposed that any new tower constructed to satisfy Mobility Fund performance
obligations provide the opportunity for collocation and sought comment on whether to require any
minimum number of spaces for collocation on any new towers and/or specify terms for collocation.635
376.
Discussion. We will require that recipients of Mobility Fund support allow for
reasonable collocation by other providers of services that would meet the technological requirements of
the Mobility Fund on newly constructed towers that Mobility Fund recipients own or manage in the
unserved area for which they receive support. This includes a duty: (1) to construct towers where
reasonable in a manner that will accommodate collocations; and (2) to engage in reasonable negotiations
on a not unreasonably discriminatory basis with any party that seeks to collocate equipment at such a site
in order to offer service that would meet the technological requirements of the Mobility Fund.636
Furthermore, we prohibit Mobility Fund recipients from entering into arrangements with third parties for
access to towers or other siting facilities wherein the Mobility Fund recipients restrict the third parties
from allowing other providers to collocate on their facilities.637 We conclude that these collocation
requirements are in the public interest because they will help increase the benefits of the expanded
coverage made possible by the Mobility Fund, by facilitating service that meets the requirements of the
Mobility Fund by providers using different technologies.638
377.
Commenters generally recognize that requiring collocation potentially will benefit
competition.639 While most commenters find a collocation requirement to be “acceptable” or even
632 CTIA Mobility Fund NPRM Comments at 10.
633 Mobility Fund NPRM, 25 FCC Rcd at 14,728, para. 36.
634 See id. at 14,723, para. 15. See also Alaska Telephone Mobility Fund NPRM Comments at 3; CTIA Mobility
Fund NPRM Comments at 7-9.
635 Mobility Fund NPRM at 14,728, para. 36.
636 We do not require Mobility Fund recipients to permit collocation for other purposes.
637 We recognize that many towers on which communications licenses locate their facilities are owned and managed
by third parties, and we do not impose any affirmative obligations on the owners of such towers.
638 We clarify that we do not require Mobility Fund recipients to favor providers of services that meet Mobility Fund
requirements over other applicants for limited collocation spaces.
639 PCIA Mobility Fund NPRM Comments at 1, 4; Sprint Mobility Fund NPRM Comments at 7. But see ITTA
Mobility Fund NPRM Comments at 12-13 (“ITTA urges the Commission to maintain focus on the goal of extending
coverage, a pursuit that should not be confused with expanding competition.”).
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preferable, many also agree that the Commission should not specify a minimum number of spaces forcollocation on new towers.640 AT&T contends that the Commission should limit any collocation
requirement to a requirement for good faith negotiation on a non-discriminatory basis without additional
required terms.641 We agree with commenters that attempting to specify collocation practices that are
applicable in all circumstances may unduly complicate efforts to expand coverage, and thus decline to
adopt more specific requirements for collocation by any specific number of providers or require any
specific terms or conditions as part of any agreement for collocation.
(d)
Voice and Data Roaming642
378.Background. In the Mobility Fund NPRM, the Commission also proposed that Mobility
Fund recipients be required to provide data roaming on reasonable and not unreasonably discriminatory
terms and conditions on the mobile broadband networks that are built through Mobility Fund support.643
379.
Discussion. We will require that recipients of Mobility Fund support comply with the
Commission’s voice and data roaming requirements on networks that are built through Mobility Fund
support. Subsequent to the Mobility Fund NPRM, the Commission adopted rules that create a general
mandate for data roaming.644 Specifically, we require that recipients of Mobility Fund support provide
roaming pursuant to section 20.12 of the Commission’s rules on networks that are built through Mobility
Fund support.645
380.
Some commenters responding to the Mobility Fund NPRM contend that there is no need
to adopt a data roaming requirement specifically for Mobility Fund recipients because our general data
roaming rules already address the issue or that such a requirement is unrelated to the goals of the Mobility
Fund.646 We disagree. Our general policy of distributing federal universal service support to only one
provider per area raises competitive issues for those providers not receiving funds. As a result, we
believe it is appropriate to attach roaming conditions even though generally applicable requirements also
exist. Making compliance with these rules a condition of universal service support will mean that
violations can result in the withholding or clawing back of universal service support – sanctions based on
the receipt of federal support – that would be in addition to penalties for violation of our generally
applicable data roaming rules. Moreover, in addition to the sanctions that would apply to any party
violating our general requirements, Mobility Fund recipients may lose their eligibility for future Mobility
Fund participation as a consequence of any violation. Recipients shall comply with these requirements
without regard to any judicial challenge thereto.
381.
Other commenters contend that our roaming requirements will not mitigate the
competitive advantage that recipients of Mobility Fund support receive from the additional coverage the
640 AT&T Mobility Fund NPRM Comments at 15.
641 Id.
642 Commissioner McDowell does not join in this subsection and would not impose a data roaming requirement for
the reasons stated in his dissenting statement in Reexaminaton of Roaming Obligations of Commercial Mobile Radio
Service Providers and Other Providers of Mobile Data Services, WT Docket No. 05-265, Second Report and Order,
26 FCC Rcd 5411, 5483-84 (2011) (Roaming Second Report and Order).
643 Mobility Fund NPRM, 25 FCC Rcd at 14,728, para. 36.
644 See, generally, Roaming Second Report and Order, 26 FCC Rcd 5411.
645 47 C.F.R. § 20.12.
646 AT&T Mobility Fund NPRM Comments at 15; Verizon Mobility Fund NPRM Comments at 19-20; CWA
Mobility Fund NPRM Reply at 5.
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funding supports.647 In light of the public interest in expanding coverage, we conclude that our roamingrequirements are sufficient to balance against any competitive advantage Mobility Fund recipients obtain.
382.
Consistent with this Order, any interested party may file a formal or informal complaint
using the Commission’s existing processes if it believes a Mobility Fund recipient has violated our
roaming requirements.648 As noted, the Commission intends to address roaming-related disputes
expeditiously.649 The Commission also has the authority to initiate enforcement actions on its own
motion.
(e)
Reasonably Comparable Rates
383.Background. The Commission sought comment in the Mobility Fund NPRM on how to
implement, in the context of the Mobility Fund, the statutory principle that supported services should be
made available to consumers in rural, insular, and high-cost areas at rates that are reasonably comparable
to rates charged for similar services in urban areas.650 Given the absence of affirmative regulation of rates
charged for commercial mobile services, as well as the rate practices and structures used by providers of
such services, the Commission asked how parties might demonstrate that the rates they charge in areas
where they receive support are reasonably comparable to rates charged in urban areas.651 The
Commission further sought input regarding an appropriate standard for “reasonably comparable” and
“urban areas” in this context.652
384.
Discussion. We will evaluate the rates for services offered with Mobility Fund Phase I
support based on whether they fall within a reasonable range of urban rates for mobile service. The
record on this issue was mixed. Some commenters argue that the Commission should require support
recipients to certify their compliance with section 254(b)(3), in expectation that nationwide pricing plans
will tend to result in carriers offering reasonably comparable rates to those in urban areas.653 Others
propose that the Commission adopt a target for evaluating rates and require that providers offer rates
within a particular range of that target figure.654
385.
To implement the statutory principle regarding comparable rates while offering Mobility
Fund Phase I support at the earliest time feasible, the Bureaus may develop target rate(s) for Mobility
Fund Phase I before fully developing all the data to be included in a determination of comparable rates
with respect to other Connect America Fund support. For Mobility Fund Phase I, we will require
recipients to certify annually that they offer service in areas with support at rates that are within a
reasonable range of rates for similar service plans offered by mobile wireless providers in urban areas.655
647 USA Coalition Mobility Fund NPRM Reply at 15.
648 See, e.g., 47 C.F.R. § 20.12.
649 Roaming Second Report and Order, 26 FCC Rcd at 5449-50, para. 77. As described in the roaming proceeding,
Accelerated Docket procedures, including pre-complaint mediation, are among the various dispute resolution
procedures available with respect to data roaming disputes. See id., 47 C.F.R. § 1.730.
650 Mobility Fund NPRM, 25 FCC Rcd at 14,729, para. 38; 47 U.S.C. § 254(b)(3).
651 Mobility Fund NPRM at 14,729, para. 38.
652 Id.
653 AT&T Mobility Fund NPRM Comments at 15; Sprint Mobility Fund NPRM Comments at 9; T-Mobile Mobility
Fund NPRM Comments at 12.
654 Greenlining Mobility Fund NPRM Comments at 11; ITTA Mobility Fund NPRM Comments at 14; Sprint
Mobility Fund NPRM Comments at 8-9.
655 We note that Cellular South contends that providing support to one provider per area through the Mobility Fund
will result in the supported carrier charging excessively high rates and therefore violates section 254. Cellular South
(continued…)
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Recipients’ service offerings will be subject to this requirement for a period ending five years after thedate of award of support. The Bureaus, under their delegated authority, may define these conditions more
precisely in the pre-auction process. We will retain our authority to look behind recipients’ certifications
and take action to rectify any violations that develop.
c.
Mobility Fund Phase I Eligibility Requirements
386.The Commission proposed that to be eligible for Mobility Fund support, entities must (1)
be designated as a wireless ETC pursuant to section 214(e) of the Communications Act, by the state
public utilities commission (“PUC”) (or the Commission, where the state PUC does not have jurisdiction
to designate ETCs) in any area that it seeks to serve; (2) have access to spectrum capable of 3G or better
service in the geographic area to be served; and (3) certify that it is financially and technically capable of
providing service within the specified timeframe.656 With a limited exception, discussed infra,657 we adopt
these requirements.
387.
As noted elsewhere, we also adopt a two-stage application filing process for participants
in the Mobility Fund Phase I auction, similar to that used in spectrum license auctions, which will, among
other things, require potential Mobility Fund recipients to make disclosures and certifications establishing
their eligibility. Specifically, in the pre-auction “short-form” application, a potential bidder will need to
establish its eligibility to participate in the Mobility Fund Phase I auction and, in a post-auction “long-
form” application, a winning bidder will need to establish its eligibility to receive support. Such an
approach should provide an appropriate screen to ensure serious participation without being unduly
burdensome. Below, we discuss these eligibility requirements and the timing of each.
(i)
ETC Designation
388.Background. The Commission proposed to require that applicants be designated as
wireless ETCs covering the relevant geographic area prior to participating in an auction.658 As an
alternative, the Commission asked commenters whether entities that have applied for designation as ETCs
in the relevant area should be eligible to participate in an auction.659 The Commission also sought broad
comment on the ETC designation requirements of section 214(e), and how to best interpret all the
interrelated requirements of that section in order to achieve the purposes of the Mobility Fund.660
(Continued from previous page)
et al. Mobility Fund NPRM Comments at 20-21. Given the rules being adopted in this Order, we disagree with
Cellular South’s factual premise and legal conclusion. The requirement we adopt with respect to reasonably
comparable rates is one of the provisions that helps ensure that section 254 will not be violated.
656 Mobility Fund NPRM at 14,731, para. 45.
657 See infra para. 491, 47 C.F.R. § 54.1004(a).
658 Mobility Fund NPRM at 14,731, para. 47.
659 Id. at 14,732, para. 48. Pursuant to 47 U.S.C. § 214(e)(1) and 47 C.F.R. § 54.101(b), an ETC is obligated to
provide all of the supported services defined in 47 C.F.R. § 54.101(a) throughout the area for which it has been
designated an ETC. Therefore, an ETC must be designated (or have applied for designation) with respect to an area
that includes area(s) on which it wishes to receive Mobility Fund support. Moreover, a recipient of Mobility Fund
support will remain obligated to provide supported services throughout the area for which it is designated an ETC if
that area is larger than the areas for which it receives Mobility Fund support.
660 Mobility Fund NPRM at 14,732, para. 49.
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389.Discussion. We generally adopt our proposal and require that Mobility Fund Phase I
participants be ETCs prior to participating in the auction.661 As a practical matter, this means that parties
that seek to participate in the auction must be ETCs in the areas for which they will seek support at the
deadline for applying to participate in the auction.
390.
By statute, the states, along with the Commission, are empowered to designate common
carriers as ETCs.662 ETCs must satisfy various service obligations, consistent with the public interest.
We decline to adopt new federal rules to govern the ETC designation process solely for purposes of
designating entities to receive non-recurring support, as suggested by some commenters. 663 In light of the
roughly comparable amounts of time required for the Commission and states to process applications to be
designated as an ETC and the time required to move from the adoption of this R&O to the acceptance of
applications to participate in a Mobility Fund Phase I auction, parties contemplating requesting new
designations as ETCs for purposes of participating in the auction should act promptly to begin the
process. The Commission will make every effort to process such applications in a timely fashion, and we
urge the states to do likewise.
391.
Many commenters request that the Commission eliminate or streamline many of the
service obligations that apply to ETCs, on ground that these obligations are unrelated to the Mobility
Fund and its immediate goals.664 We do not see this as cause to set aside those obligations. The Mobility
Fund will offer existing ETCs support to accelerate the expansion of coverage by current generation
wireless networks within their designated service area as a means to meeting their ETC obligations. We
are not, however, crafting an alternative to the USF but rather developing a mechanism to effectively use
a portion of existing funds to promote the expansion of mobile voice service over current-generation (or
better) network technology. Given that current ETCs already have their existing obligations throughout
their service area, it would be a step backwards to relieve them of those obligations based on the receipt
of Mobility Fund support. Accordingly, we retain existing ETC requirements and obligations and move
forward by adopting our proposal to require that parties be ETCs in the area in which they seek Mobility
Fund support.665
392.
Furthermore, with the narrow exception discussed infra, we decline to adopt the
alternative of allowing parties to bid for support prior to being designated an ETC, provided they have an
application for designation pending.666 We believe this approach would inject uncertainties as to
eligibility that could interfere with speedy deployment of networks by those that are awarded support, or
disrupt the Mobility Fund auction. Moreover, requiring that applicants be designated as ETCs prior to a
Mobility Fund Phase I auction may help ensure that the pool of bidders is serious about seeking support
and meeting the obligations that receipt of support would entail.
661 As discussed infra, we adopt a narrow exception to permit participation by Tribally-owned or controlled entities
that have filed for ETC designation prior to the short-form application deadline. See infra para. 491, 47 C.F.R. §
54.1004(a)..
662 Generally, the states have primary jurisdiction to designate ETCs; the Commission designates ETCs where states
lack jurisdiction. See 47 U.S.C. § 214(e).
663 AT&T Mobility Fund NPRM Comments at 6-8; Sprint Mobility Fund NPRM Comments at 4-5.
664 Sprint Mobility Fund NPRM Comments at 4-5.
665 It is sufficient for purposes of an application to participate in the Mobility Fund Phase I auction that the applicant
has received its ETC designation conditioned only upon receiving Mobility Fund Phase I support.
666 Mobility Fund NPRM, 25 FCC Rcd at 14,732, para. 48.
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(ii)Access to Spectrum
393.Background. In order to participate in a Mobility Fund auction and receive support, the
Commission proposed in the Mobility Fund NPRM that an entity must hold, or otherwise have access to, a
Commission authorization to provide service in a frequency band that can support 3G or better services.
The Commission sought comment on a number of questions relating to this proposed eligibility
requirement.667
394.
Discussion. We require that any applicant for a Mobility Fund Phase I auction have
access to the necessary spectrum to fulfill any obligations related to support. Many commenters support
this requirement.668 Thus, those eligible for Mobility Fund Phase I support include all entities that, prior
to an auction, hold a license authorizing use of appropriate spectrum, as discussed more fully below, in
the geographic area(s) for which support is sought. As suggested by some commenters, we also conclude
that the spectrum access requirement can be met by leasing appropriate spectrum, prior to an auction,
covering the relevant geographic area(s).669 We require that spectrum access through a license or leasing
arrangement be in effect prior to auction for an applicant to be eligible for an award of support. We also
require that whether an applicant claims required access to spectrum through a license or a lease, it must
retain access for at least five years from the date of award of Phase I support.670 For purposes of
calculating term length, parties may include opportunities for license and/or lease renewal.
395.
Further, we seek to facilitate participation by parties that may make their acquisition of
license or their lease of spectrum access contingent on winning support from Mobility Fund Phase I.
Accordingly, parties may satisfy the spectrum access requirement if they have acquired spectrum access,
including any necessary renewal expectancy, that is contingent on their obtaining support in the auction.
Other contingencies, however, will render the relevant spectrum access insufficient for the party to meet
our requirements for participation.
396.
We reject the suggestion of some commenters that we should use a substantially more
relaxed standard that might allow entities to seek to acquire access to spectrum (as a licensee or lessee)
only after becoming a winning bidder.671 For instance, New EA argues that limiting eligibility to only
those carriers holding licenses would “reinforce[] incumbent control,” and asserts that a more liberal
approach ought not to be problematic given that areas with no mobile broadband “typically have an
abundance of fallow spectrum.”672 We conclude, however, that failing to ensure spectrum access, on at
least a conditional basis, prior to entering a Mobility Fund auction would be inconsistent with the serious
undertakings implicit in bidding for support. We therefore require applicants to ensure that if they
become winning bidders, they will have the spectrum to meet their obligations as quickly and successfully
as possible.
397.
As noted, in the Mobility Fund NPRM, the Commission proposed that entities seeking to
receive support from the Mobility Fund must have access to spectrum capable of supporting the required
services. The Commission noted that spectrum for use in Advanced Wireless Services, the 700 MHz
Band, Broadband Radio Services, broadband PCS, or cellular bands should all be capable of 3G services,
667 Id. at 14,732-33, paras. 50-53.
668 CenturyLink Mobility Fund NPRM Comments at 8-9; ITTA Mobility Fund NPRM Comments at 15-16;
MetroPCS Mobility Fund NPRM Comments at 11; RTG Mobility Fund NPRM Comments at 11.
669 Verizon Mobility Fund NPRM Comments at 24-25; RTG Mobility Fund NPRM Comments at 11.
670 See 47 C.F.R. § 54.1003(b).
671 See New EA Mobility Fund NPRM Comments at 5-6; NTCH Mobility Fund NPRM Comments at 7-8.
672 New EA Mobility Fund NPRM Comments at 6, 8.
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and asked if other spectrum bands would be appropriate.673 The Commission also asked whether it shouldrequire that parties seeking support have access to a minimum amount of bandwidth and whether only
paired blocks of bandwidth should be deemed sufficient. The few comments we received on these issues
generally support requiring that auction participants demonstrate access to spectrum that is adequate to
support the services demanded of Mobility Fund providers, but did not provide specifics on what that
spectrum should be.674
398.
T-Mobile noted that carriers with spectrum in lower bands would have an advantage over
those with access to higher band spectrum due to propagation characteristics that may make it less costly
to provide wireless broadband in rural areas using lower frequencies.675 While we recognize that access
to lower band spectrum, particularly sub-1 GHz spectrum, reduces the cost of build-out,676 we disagree
with T-Mobile that this is an “unfair” advantage in the context of the Mobility Fund. The Mobility Fund
is designed to provide support in areas where it is cost effective to do so with the limited available funds.
Thus, its ultimate goal is to maximize the number of units covered given the funds available.
399.
We agree with commenters that advocate a simple approach to defining what spectrum
will establish eligibility for the Mobility Fund. Therefore, we will require entities seeking to receive
support from the Mobility Fund to certify that they have access to spectrum capable of supporting the
required services. While we decline to restrict the frequencies applicants must use to be eligible for
Mobility Fund Support, we note that there are certain spectrum bands that will not support mobile
broadband (e.g., paging service). As discussed below in connection with our discussion of application
requirements, we will require that applicants identify the particular frequency bands and the nature of the
access on which they assert their eligibility for support. We will assess the reasonableness of eligibility
certifications based on information we will require be submitted in short- and long-form
applications. Should entities make this certification and not have access to the appropriate level of
spectrum, they will be subject to the penalties described below.
(iii)
Certification of Financial and Technical Capability
400.Background. In the Mobility Fund NPRM, the Commission sought comment on how
best to determine if an entity has sufficient resources to satisfy Mobility Fund obligations.677 The
Commission also sought comment on a certification regarding an entity’s technical capacity.678 The
Commission asked if we need to be specific as to the minimum showing required to make the
certification, or whether we can rely on our post-auction performance requirements.679
401.
Discussion. We will require that an applicant certify, in the pre-auction short-form
application and in the post-auction long-form application, that it is financially and technically capable of
providing 3G or better service within the specified timeframe in the geographic areas for which it seeks
673 Mobility Fund NPRM, 25 FCC Rcd at 14,733, para. 53.
674 ITTA Mobility Fund NPRM Comments at 15-16; TechAmerica Mobility Fund NPRM Comments at 3; T-Mobile
Mobility Fund NPRM Comments at 14.
675 T-Mobile Mobility Fund NPRM Comments at 9.
676 See Implementation of Section 6002(b) of the Omnibus Budget Reconciliation Act of 1993, Annual Report and
Analysis of Competitive Market Conditions with Respect to Mobile Wireless, Including Commercial Mobile
Services, WT Docket No. 10-133, Fifteenth Report, 26 FCC Rcd 9664, 9834-35, para. 293 (2011) (15th Annual
Mobile Wireless Competition Report).
677 Mobility Fund NPRM at 14,733, para. 54.
678 Id.
679 Id.
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support. Given that Mobility Fund Phase I provides non-recurring support, applicants for Phase I fundsneed to assure the Commission that they can provide the requisite service without any assurance of
ongoing support for the area in question after Phase I support has been exhausted.
402.
Among commenters, there was no dispute that the Commission should require parties to
be financially and technically capable of satisfying the performance requirements.680 Some contend,
however, that there is no need for financial or technical certifications given the requirements bidders must
satisfy to qualify as ETCs and to participate in the Mobility Fund.681 In contrast, one commenter urges
that, even before bidding, the Commission should require applicants to submit details about the
technology and the network they will use to satisfy Mobility Fund obligations.682 Another draws a
parallel between the Commission and investors, comparing requiring qualifications to due diligence.683
One commenter proposes requiring applicants to demonstrate that they will bear a fixed percentage of the
total costs of extending coverage. 684 Comments also argue against Commission review, suggesting that
the Commission’s expertise might not be adequate to make the determinations in the process of reviewing
applications.685
403.
We conclude that applicant certifications of qualifications are sufficient, both at the short
and long-form application stage. In the context of our spectrum auctions, we have relied successfully on
certifications to ensure certain regulatory and legal obligations have been met by the applicants.
Notwithstanding the differences between the spectrum license and USF contexts, we conclude that such
an approach is appropriate here as well. Taking the time to review the finances and technical capacities
of all applicants, particularly at the short-form stage when there may be far more applicants than
eventually will receive support, could result in a substantial delay in making Mobility Fund support
available for very little gain.
404.
Moreover, we elect not to require that Mobility Fund Phase I participants finance a fixed
percentage of any build-out with non-Mobility Fund funds.686 While requiring that Fund recipients put up
a share of their own funds for a project may be an effective way to ensure that the recipient has sufficient
stake in the project to effect its completion, we do not believe this requirement is needed in light of the
other measures we adopt here.
405.
Finally, requiring a certification of financial and technical capability is a real additional
safeguard. Applicants making certifications to the Commission expose themselves to liability for false
certifications. Applicants should take care to review their resources and their plans before making the
required certification and be prepared to document their review, if necessary.
680 AT&T Mobility Fund NPRM Comments at 9.
681 T-Mobile Mobility Fund NPRM Comments at 14-15.
682 AT&T Mobility Fund NPRM Comments at 9.
683 ITTA Mobility Fund NPRM Comments at 16.
684 MetroPCS Mobility Fund NPRM Comments at 9-10.
685 New EA Mobility Fund NPRM Comments at 8.
686 MetroPCS suggests that the Commission require a Mobility Fund recipient to demonstrate that it has the financial
capacity to make a substantial matching investment by requiring it to contribute from its own funds, 75 percent of
the project costs. In addition, MetroPCS would have us provide Mobility Fund support to a recipient only after the
recipient has expended the full amount of its 75 percent share of the project funding, reasoning that such a
requirement would provide incentive for the recipient to compete the project quickly. MetroPCS Mobility Fund
NPRM Comments at 9-10.
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(iv)Other Qualifications
406.Background. In the Mobility Fund NPRM, the Commission sought comment on whether
it should impose any other eligibility requirements on entities seeking to receive support from the
Mobility Fund, including whether there are any steps we should take to encourage smaller eligible parties
to participate in the Mobility Fund.687
407.
Discussion. We conclude that, with one exception, we will not impose any additional
eligibility requirements to participation in the Mobility Fund. One commenter advocates barring Tier 1
carriers from participation,688 while another contends that Verizon should not be allowed to participate,
given that it already voluntarily relinquished the funds to be disbursed through the Mobility Fund.689
Other commenters seek to limit eligibility to participate in the Mobility Fund based on other criteria such
as labor relations and exclusive handset arrangements.690
408.
We will not bar any party from seeking Mobility Fund Phase I support based solely on
the party’s past decision to relinquish Universal Service Funds provided on another basis. We see no
inconsistency in Verizon Wireless or Sprint relinquishing support previously provided under the identical
support rule – ongoing support provided with no specific obligation to expand voice coverage where it
was lacking – and seeking one-time support under new rules to expand voice and broadband service over
current generation wireless networks to areas presently lacking such facilities.
409.
We also decline to bar any particular class of parties out of concern that they might
appear to be better positioned to win Mobility Fund support, for example due to their size. As we have
done in the context of spectrum auctions, we expect that our general auction rules and the more detailed
auction procedures to be developed on delegated authority for a specific auction will provide the basis for
an auction process that will promote our objectives for the Mobility Fund and provide a fair opportunity
for serious, interested parties to participate.
410.
One commenter questions whether the Mobility Fund should be available to parties in
particular areas if the party previously, i.e., without respect to Mobility Fund support, indicated an
intention to deploy wireless voice and broadband service in that area.691 We conclude that this concern
has merit and we will restrict parties from bidding for support in certain limited circumstances to assure
that Mobility Fund Phase I support does not go to finance coverage that carriers would have provided in
the near term without any subsidy. In particular, we will require an applicant for Mobility Fund Phase I
support to certify that it will not seek support for any areas in which it has made a public commitment to
deploy 3G or better wireless service by December 31, 2012. This restriction will not prevent a provider
from seeking and receiving support for a geographic area where another carrier has announced such a
commitment to deploy 3G or better, but it may conserve funds and avoid displacing private investment by
making a carrier that made such a commitment ineligible for Mobility Fund Phase I support with respect
to the identified geographic area(s). Because circumstances are more likely to change over a longer term,
we do not agree that providers should be held to statements for any time period beyond December 31,
2012.692
687 Mobility Fund NPRM, 25 FCC Rcd at 14,733, para. 55.
688 RTG Mobility Fund NPRM Comments at 11.
689 RCA Mobility Fund NPRM Reply at 9-10.
690 See CWA Mobility Fund NPRM Reply at 5; Blooston Mobility Fund NPRM Comments at 8-9.
691 GCI Mobility Fund NPRM Comments at 9.
692 Id.
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d.Reverse Auction Mechanism
411.We adopt our proposal, discussed below, to establish program and auction rules for the
Mobility Fund Phase I in this proceeding, to be followed by a process conducted by the Bureaus on
delegated authority identifying areas eligible for support, and seeking comment on specific detailed
auction procedures to be used, consistent with this Order.693 This process will be initiated by the release of
a Public Notice announcing an auction date, to be followed by a subsequent Public Notice specifying the
auction procedures, including dates, deadlines, and other details of the application and bidding process.
(i)
Basic Auction Design
412.Background. In the Mobility Fund NPRM, the Commission proposed to use a single-
round sealed bid reverse auction to select awardees for Mobility Fund support, determine the areas that
will receive support, and establish award amounts.694 The Commission also sought comment on
alternatives.
413.
Discussion. We continue to believe that our proposal to use a single-round sealed bid
format is most appropriate for Mobility Fund Phase I reverse auction, although we do not make a final
determination here. In the context of our spectrum auctions, the question of whether to conduct bidding
in one or more rounds is typically addressed in the pre-auction development of specific procedures and
we conclude that we should do the same here.
414.
A variety of commenters supported a format with more than one round of bidding.695
MetroPCS supported a multi-round format to allow more informed bidding.696 Verizon suggested that
allowing 2-3 rounds of bidding would result in more competitive bidding, claiming that more rounds
would reduce costs of the program in the long-run since bidders will be generally very conservative in
their first-round bids.697 NE Colorado Cellular commented that a single round auction would worsen
industry concentration.698 T-Mobile, however, supported our proposal to conduct a single-round auction,
citing simplicity and lower costs for participants, and, in contrast to NE Colorado Cellular’s position,
claimed that such a format may improve smaller carriers’ chances of winning Mobility Fund support.699
415.
We are not convinced that multiple bidding rounds are needed in order for bidders to
make informed bid decisions or submit competitive bids. A Mobility Fund Phase I auction provides a
mechanism by which to identify whether, and if so, at what price, providers are willing to extend
coverage over relatively small unserved areas in exchange for a one-time support payment – decisions
that depend upon internal cost structures, private assessments of risk, and other factors related to the
providers’ specific circumstances. While uncertainty about many of these considerations must be taken
into account when determining a bid amount, as when making other financial commitments, the bid
amounts of other auction participants are unlikely to contain information that will affect significantly the
bidder’s own cost assessments and bid decisions. Nor do we agree that a single round auction for
Mobility Fund Phase I support, as opposed to a multiple round format, would have an adverse effect on
693 See supra para. 329.
694 Mobility Fund NPRM, 25 FCC Rcd at 14,734, para. 58.
695 Commnet Mobility Fund NPRM Comments at 6; MetroPCS Mobility Fund NPRM Comments at 11-12; MTPCS
Mobility Fund NPRM Comments at 11; Verizon Mobility Fund NPRM Comments at 25.
696 MetroPCS Mobility Fund NPRM Comments at 11-12.
697 Verizon Mobility Fund NPRM Comments at 25.
698 NE Colorado Cellular Mobility Fund NPRM Reply at 1.
699 T-Mobile Mobility Fund NPRM Comments at 16.
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industry structure, as asserted by one commenter. For all these reasons, we would be inclined toimplement our proposal to conduct Phase I auction using a single-round sealed bid format. Nevertheless,
given that under our general approach to establishing auction procedures, this issue would typically be
delegated to the Bureaus to consider in connection with establishing detailed auction procedures, we leave
it to the Bureaus to implement a format with more than one round, if they deem it more appropriate.
(ii)
Application Process
416.Background. The Mobility Fund NPRM sought comment on a proposal to use a two-
stage application process similar to the one we use in spectrum license auctions. Parties interested in
participating at auction would submit a “short-form” application providing basic ownership information
and certifying as to its qualifications to receive support.700 After the auction, we would conduct a more
extensive review of the winning bidders’ qualifications through “long-form” applications.701
417.
Discussion. Consistent with record support, we adopt a two-stage application process
described above, noting that our experience with such a process for spectrum licensing auctions has been
positive, and balances the need to collect essential information with administrative efficiency.702
418.
We adopt our proposals regarding the types of information bidders should be required to
disclose in Mobility Fund auction short-form applications. Thus, we will require that each auction
applicant provide information to establish its identity, including disclosure of parties with ownership
interests, consistent with the ownership interest disclosure required in Part 1 of our rules for applicants for
spectrum licenses, and any agreements the applicant may have relating to the support to be sought
through the auction.703 With respect to eligibility requirements relating to ETC designation and spectrum
access, applicants will be required to disclose and certify their ETC status as well as the source of the
spectrum they plan to use to meet Mobility Fund obligations in the particular area(s) for which they plan
to bid. Specifically, applicants will be required to disclose whether they currently hold or lease the
spectrum, or have entered into a binding agreement, and have submitted an application with the
Commission, to either hold or lease spectrum. Moreover, applicants will be required to certify that they
will retain their access to the spectrum for at least five years from the date of award of support. We
anticipate that the Bureaus will exercise their delegated authority to establish the specific form in which
such information will be collected from applicants. We conclude that this approach strikes an appropriate
balance in ensuring that entities are “legally, technically and financially qualified,”704 as AT&T suggests,
while minimizing undue burden on applicants and Commission staff.
(iii)
Bidding Process
419.Background. The Mobility Fund NPRM also sought comment on certain other aspects of
the proposed bidding process, including the process used to determine winning bidders and maximize the
available support.705
700 Mobility Fund NPRM, 25 FCC Rcd at 14,731, 14,734, paras. 46, 59.
701 Id.
702 Verizon Mobility Fund NPRM Comments at 25; T-Mobile Mobility Fund NPRM Comments at 16-19.
703 See 47 C.F.R. §§ 1.21001(b), 54.1005(a)(1). Applicants will only be able to make minor modifications to their
short-form applications. Major amendments, for example, changes in an applicant’s ownership that constitute an
assignment or transfer of control, will make the applicant ineligible to bid. See 47 C.F.R. § 1.21001(d)(4).
704 AT&T Mobility Fund NPRM Comments at 8-9.
705 Mobility Fund NPRM, 25 FCC Rcd at 14,735-37, paras. 63-74.
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420.Discussion. We delegate authority to the Bureaus to administer the policies, programs,
rules, and procedures we establish for Mobility Fund Phase I today and take all actions necessary to
conduct a Phase I auction. We anticipate that the Bureaus will exercise this authority by conducting a
pre-auction notice-and-comment process to establish the specific procedures for the auction. Such
procedures will implement the general rule we adopt to enable the establishment of procedures for
reviewing bids and determining winning bidders. The overall objective of the bidding in this context is to
maximize the number of units to be covered in unserved areas given our overall budget for support. The
Bureaus have discretion to adopt the best procedures to achieve this objective during the pre-auction
process taking into account all relevant factors, including the implementation feasibility and the simplicity
of bidder participation.
421.
Several commenters address our proposal to base winning bids on the lowest per-unit bid
amounts, expressing concern that it would marginalize rural areas706 and suggesting instead that bids be
evaluated by giving priority to the hardest-to-serve areas.707 One commenter asserts that determining
winners based on low bids would encourage the winner to do only the minimum required to meet service
obligations.708 We agree with these and other commenters’ concerns that there are areas that may not be
good candidates for one-time support under Mobility Fund Phase I – and may be better served through
other USF reform initiatives, such as Mobility Fund Phase II. We also recognize that some areas that
benefit from Phase I support may eventually have been built out anyway, but we see significant benefit in
accelerating that build-out. We disagree, however, with the suggestion that Mobility Fund Phase I would
not serve rural areas generally; we believe that many rural areas will be able to benefit from Phase I
support, although we acknowledge that support is not likely to be sufficient to reach the most remote
areas. With respect to the concern that winners selected on the basis of a low bid will have little incentive
to meet more than the minimum service obligations, we note that this issue arises regardless of selection
criteria. Hence, in this R&O, we adopt performance requirements and enforcement procedures to ensure
that Mobility Fund Phase I support is utilized as intended.
422.
We also address here several additional aspects of the general framework for the bidding
process on which we sought comment in the Mobility Fund NPRM.
423.
Maximum Bids and Reserve Prices. The Commission proposed a rule in the Mobility
Fund NPRM to provide for auction procedures that establish maximum acceptable per-unit bid amounts
and reserve amounts, separate and apart from any maximum opening bids, and to provide that those
reserves may be disclosed or undisclosed.709
424.
Commenters are divided on the issue of whether reserve prices and maximum bids are
needed or desired, and if implemented, how they should be determined, but none oppose our proposal to
retain the discretion to establish such amounts. Some suggest that no reserve prices are necessary because
we can rely on competition to discipline bids,710 while others assume that we will base any reserve prices
on estimated costs.711 Another proposes that we conduct bidding on a regional basis, and base reserve
prices for each region on the unserved populations in each region.712 We adopt our proposed rule on
706 ATA Mobility Fund NPRM Comments at 4.
707 US Cellular Mobility Fund NPRM Comments at 10-11; RCA Mobility Fund NPRM Comments at 8-9; AT&T
Mobility Fund NPRM Comments at 4.
708 Texas Statewide Coop Mobility Fund NPRM Comments at 6-7.
709 Mobility Fund NPRM, 25 FCC Rcd at 14,736, para. 66.
710 AT&T Mobility Fund NPRM Comments at 18-19; T-Mobile Mobility Fund NPRM Comments at 17.
711 Cellular South et al. Mobility Fund NPRM Comments at 22-23; NASUCA Mobility Fund NPRM Comments at 7.
712 Verizon Mobility Fund NPRM Comments at 26-27.
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reserve prices and anticipate that, as detailed procedures for a Mobility Fund Phase I auction areestablished during the pre-auction period, the Bureaus will consider these and other proposals with
respect to reserve prices in light of the specific timing of and other circumstances related to the auction.
425.
Aggregating Service Areas and Package Bidding. In the Mobility Fund NPRM, the
Commission proposed a rule to provide for auction procedures that permit bidders to submit bids on
packages of tracts, with any specific procedures to be determined as part of the pre-auction process.713
The Commission also invited comment on the use of package bidding – in which a single bid is submitted
to cover a group of areas – in the Mobility Fund, and specifically mentioned some ways of implementing
limited package bidding.714
426.
We received no comments specifically on our proposal to address issues related to
package bidding in the process of establishing detailed auction procedures and will address issues relating
to package bidding as part of the pre-auction process, which is consistent with the way we approach this
issue for spectrum auctions.715 Interested parties will have an opportunity to comment on the desirability
of package bidding in the pre-auction process in connection with the determination of the minimum area
for bidding.716 Potential bidders will be able to provide input on whether specific package bidding
procedures would allow them to formulate and implement bidding strategies to incorporate Mobility Fund
Phase I support into their business plans and capture efficiencies, and on how well those procedures will
facilitate the realization of the Commission’s objectives for Mobility Fund Phase I.
427.
Refinements to the Selection Mechanism to Address Limited Available Funds. In the
Mobility Fund NPRM, the Commission proposed a rule that would provide the discretion to establish
procedures in the pre-auction process to deal with the possibility that funds may remain available after the
auction has identified the last lowest per-unit bid that does not assign support exceeding the total funds
available.717 The Commission also proposed a rule to give discretion to address a situation where there
are two or more bids for the same per-unit amount but for different areas (“tied bids”) and remaining
funds are insufficient to satisfy all of the tied bids.718
428.
We adopt our proposed rules to provide the Bureaus with discretion to develop
appropriate procedures to address these issues during the pre-auction notice-and-comment process. These
procedures shall be consistent with our objective of awarding support so as to maximize the number of
units that will gain coverage in unserved areas subject to our overall budget for support.
429.
Withdrawn Bids. In the Mobility Fund NPRM, the Commission proposed that, as in the
case of spectrum auctions, it would establish a rule to provide for procedures for withdrawing
provisionally winning bids.719 We adopt the proposed rule on withdrawn bids, but as noted in the
Mobility Fund NPRM, we do not expect the Bureaus to permit withdrawn bids, particularly if the
713 Mobility Fund NPRM, 25 FCC Rcd at 14,736, paras. 67-68.
714 Id.
715 See 47 C.F.R. § 1.2103(b). See also, e.g., Auction of 700 MHz Band Licenses Scheduled for January 16, 2008;
Comment Sought on Competitive Bidding Procedures For Auction 73, Public Notice, 22 FCC Rcd 15,004, 15,010-
14, paras. 17-24 (Wireless Telecom. Bur. 2007); 700 MHz Auction Procedures Public Notice, 22 FCC Rcd at
18,179-81, paras. 138-144.
716 See supra para. 346.
717 Mobility Fund NPRM, 25 FCC Rcd at 14,736, para. 69.
718 Id. at 14,736-37, para. 70.
719 Id. at 14,737, paras. 72-74.
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Mobility Fund Phase I auction will be conducted in a single round. Furthermore, we address how we willdeal with auction defaults below.720
430.
Preference for Tribally-Owned or Controlled Providers. As we do for Tribal Mobility
Fund Phase I, discussed below,721 we adopt a 25 percent bidding credit for Tribally-owned or controlled
providers that participate in a Mobility Fund Phase I auction. The preference would act as a “reverse”
bidding credit that would effectively reduce the bid amount by 25 percent for the purpose of comparing it
to other bids, thus increasing the likelihood that a Tribally-owned or controlled entity would receive
funding. The preference would be available solely with respect to the eligible census blocks located
within the geographic area defined by the boundaries of the Tribal land associated with the Tribal entity
seeking support.
(iv)
Information and Competition
431.In the Mobility Fund NPRM, the Commission proposed to prohibit applicants competing
for support in the auction from communicating with one another regarding the substance of their bids or
bidding strategies and to limit public disclosure of auction-related information as appropriate.722 We
adopt our proposed rules, which are similar to those used for spectrum license auctions. We anticipate that
the Bureaus will seek comment during the pre-auction procedures process and decide on the details and
extent of information to be withheld until the close of the auction.
(v)
Auction Cancellation
432.The Mobility Fund NPRM proposed to provide discretion to delay, suspend, or cancel
bidding before or after a reverse auction begins under a variety of circumstances, including natural
disasters, technical failures, administrative necessity, or any other reason that affects the fair and efficient
conduct of the bidding.723 We received no comments on this proposal. Based on our experience with a
similar rule for spectrum license auctions, we conclude that such a rule is necessary and adopt it here.
e.
Post-Auction Long-Form Application Process
433.After the auction has concluded, a winning bidder will be required to file a “long-form”
application to qualify for and receive Mobility Fund support. Those applications will be subject to an in-
depth review of the applicants’ eligibility and qualifications to receive USF support. Here, we discuss the
long-form applications and the review process that will precede award of support from the Mobility Fund.
(i)
Long-Form Application
434.Background. In the Mobility Fund NPRM, the Commission proposed that a winning
bidder would be required to provide detailed information showing that it is legally, technically and
financially qualified to receive support from the Mobility Fund.724 The Commission sought comment on
our proposal and on the specific information that winning bidders should be required to provide to make
the required showings.725
435.
Discussion. We adopt the long-form application process we proposed in the Mobility
Fund NPRM. As we discuss above, we delegate to the Wireless and Wireline Bureaus responsibility for
720 See infra paras. 458-461.
721 See infra para. 490.
722 Mobility Fund NPRM at 14,737, para. 75.
723 Id. at 14,737, para. 76.
724 Id. at 14,739, paras. 79-81.
725 Id.
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establishing the necessary FCC application form(s). RCA notes that “onerous” application requirementswill deter smaller bidders, although it does not suggest that our specific proposals regarding the
application process would be problematic.726 We do not view the application process that we have
outlined as “onerous,” nor do other commenters indicate that the proposals would be burdensome. Our
experience with such a long-form application process for spectrum licensing auctions has been positive,
balancing the need to collect essential information with administrative efficiency. Therefore, we adopt
our proposal to require a post-auction long-form application as described below.
436.
After bidding for Mobility Fund Phase I support has ended, the Commission will declare
the bidding closed and identify and notify the winning bidders. Unless otherwise specified by public
notice, within 10 business days after being notified that it is a winning bidder for Mobility Fund support,
a winning bidder will be required to submit a long-form application. In the sections below, we address the
information an applicant will be required to submit as part of the long-form application.
(ii)
Ownership Disclosure
437.Background. In the Mobility Fund NPRM, we sought comment on the specific
information that should be required at the long-form application stage sufficient to establish their
ownership and control, as well as eligibility to receive support.727
438.
Discussion. We will adopt for the Mobility Fund the existing ownership disclosure
requirements in Part 1 of our rules that already apply to short-form applicants to participate in spectrum
license auctions and long-form applicants for licenses in the wireless services.728 Thus, an applicant for
Mobility Fund support will be required to fully disclose its ownership structure as well as information
regarding the real party- or parties-in-interest of the applicant or application.729 Wireless providers that
have participated in spectrum auctions will already be familiar with these requirements, and are likely to
already have ownership disclosure information reports (FCC Form 602) on file with the Commission,
which may simply need to be updated. To minimize the reporting burden on winning bidders, we will
allow them to use ownership information stored in existing Commission databases and update that
ownership information as necessary.
(iii)
Eligibility To Receive Support
439.ETC Designation. As noted, with the limited exception discussed infra, we require any
entity bidding for Mobility Fund support to be designated an ETC prior to the Mobility Fund auction
short-form application deadline.730 A winning bidder will be required to submit with its long-form
application appropriate documentation of its ETC designation in all of the areas for which it will receive
support. In the event that a winning bidder receives an ETC designation conditioned upon receiving
Mobility Fund support, it may submit documentation of its conditional designation, provided that it
promptly submits documentation of its final designation after its long-form application has been approved
but before any disbursement of Mobility Fund funds.
440.
Access to Spectrum. Applicants for Mobility Fund support will also be required to
identify the particular frequency bands and the nature of the access (e.g., licenses or leasing
arrangements) on which they assert their eligibility for support. Because not all spectrum bands are
726 RCA Mobility Fund NPRM Comments at 9.
727 Mobility Fund NPRM at 14,739-40, paras. 82-83.
728 See, e.g., 47 C.F.R. § 1.2112(a). Because applicants for Mobility Fund Phase I support will not be applying for
designated entity status, only subsection (a) of 47 C.F.R. § 1.2112 will be applicable.
729 See 47 C.F.R. § 1.2112(a).
730 See supra para. 730.
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capable of supporting mobile broadband, and leasing arrangements can be subject to wide variety ofconditions and contingencies, before an initial disbursement of support is approved, we will assess the
reasonableness of these assertions.731 Should an applicant not have access to the appropriate level of
spectrum, it will be found not qualified to receive Mobility Fund support and will be subject to an auction
default payment.732
(iv)
Project Construction
441.Background. In the Mobility Fund NPRM, we proposed that a participant be required to
submit with its long-form application a project schedule that identifies a variety of project milestones.733
442.
Discussion. Consistent with record support, we conclude that a winning bidder’s long-
form application should include a description of the network it will construct with Mobility Fund
support.734 We will require carriers to specify on their long-form applications whether the supported
project will qualify as either a 3G or 4G network, including the proposed technology choice and
demonstration of technical feasibility. Applications should also include a detailed description of the
network design and contracting phase, construction period, and deployment and maintenance period. We
will also require applicants to provide a complete projected budget for the project and a project schedule
and timeline. Recipients will be required to provide updated information in their annual reports and in the
information they provide to obtain a disbursement of funds. In addition, as we do for Tribal Mobility
Fund Phase I, discussed below, winning bidders of areas that include Tribal lands must comply with
Tribal engagement obligations to demonstrate that they have engaged Tribal governments in the planning
process and that the service to be provided will advance the goals established by the Tribe.735
(v)
Financial Security and Guarantee of Performance
443.Background. In the Mobility Fund NPRM, we asked whether a winning bidder should be
required to post financial security as a condition to receiving Mobility Fund support to ensure that it has
committed sufficient financial resources to meeting the program obligations associated with such
support.736
444.
Discussion. As discussed in greater detail below, we will require winning bidders for
Mobility Fund support to provide us with an irrevocable stand-by Letter of Credit (“LOC”), issued in
substantially the same form as set forth in the model Letter of Credit provided in Appendix N737 by a bank
731 We recognize that an applicant whose access to spectrum derives from a spectrum manager leasing arrangement
pursuant to section 1.9020 of the Commission’s rules may have a greater burden than other licensees and spectrum
lessees to demonstrate through the execution of contractual conditions in its leasing arrangements that it has the
necessary access to spectrum required to qualify for disbursement of MCAF-I support. See, e.g., 47 C.F.R. §§
1.9010, 1.9020, 1.9030.
732 See infra para. 458.
733 Mobility Fund NPRM, 25 FCC Rcd at 14,740, para. 84.
734 AT&T Mobility Fund NPRM Comments at 9; T-Mobile Mobility Fund NPRM Comments at 19. Because the
long-form application will be a public document, states will have access to this information for the ETCs that are
within their jurisdiction.
735 See infra para. 489.
736 Mobility Fund NPRM at 14,740, para. 85.
737 A Mobility Fund support recipient’s LOC must be issued in substantially the same form as our model LOC and,
in any event, must be acceptable in all respects to the Commission.
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that is acceptable to the Commission,738 in an amount equal to the amount of support as it is disbursed,plus an additional percentage of the amount of support disbursed which shall serve as a default payment,
which percentage will be determined by the Bureaus in advance of the auction.
445.
We received few comments on the method by which we should secure our financial
commitment. MetroPCS maintains that the Commission would benefit from requiring a performance
bond, because it would allow third parties to evaluate and back the bidder’s business plan and ensure that
the recipient actually builds what it promises.739 It suggests that a performance bond is preferable to an
LOC because the latter generally requires a deposit in the amount of the obligation, which “will detract
from the money available to construct and operate the system.”740 In contrast, MTPCS and T-Mobile
believe that a posting of financial security is unnecessary.741 MTPCS comments that, in the “unlikely
event” a carrier becomes insolvent, another carrier would purchase and operate the system, whereas
requiring an LOC “could fatally impair a company’s ability to obtain private or public markets funding”
because “existing senior lenders who finance larger portions of a company’s assets and operations would
insist upon retaining their primary status.”742
446.
Although we recognize the benefit of requiring winning bidders to obtain a performance
bond, we think an LOC will be more effective in this instance in ensuring that we achieve the Mobility
Fund’s objectives, and we are reluctant to require winning bidders to undertake the expense of obtaining
both instruments. A performance bond would have the advantage of providing a source of funds to
complete build-out in the unserved area in the case of a recipient’s default. However, we must first be
concerned with protecting the integrity of the USF funds disbursed to the recipient. Should a recipient
default on its obligations under the Mobility Fund, our priority should be to secure a return of the USF
funds disbursed to it for this purpose, so that we can reassign the support consistent with our goal to
maximize the number of units covered given the funds available. We also recognize that a Mobility Fund
recipient’s failure to fulfill its obligations may impose significant costs on the Commission and higher
support costs for USF. Therefore, we also conclude that it is necessary to adopt a default payment
obligation for performance defaults. With these priorities in mind, we disagree with commenters
suggesting that the posting of financial security is unnecessary or that in the event of the insolvency of the
recipient of Mobility Fund support, we should rely on whichever carrier eventually purchases the
recipient’s system. Moreover, companies who have existing lenders regularly use LOCs in the normal
course of operating their businesses and are able to maintain multiple forms of financing, thus, we give
little credence to the suggestion that this requirement could fatally impair a company’s ability to obtain
private or public market funding.
447.
Consistent with our goal of using the LOC to protect the government’s interest in the
funds it disburses in Mobility Fund Phase I, we will require winning bidders to obtain an LOC in an
amount equal to the amount of support it receives plus an additional percentage of the amount of support
disbursed to safeguard against costs to the Commission and the USF. The precise amount of this
additional percentage will not exceed 20 percent and will be determined by the Bureaus as part of its
process for establishing the procedures for the auction. Thus, before an application for Mobility Fund
support is granted and funds are disbursed, we will require the winning bidder to provide an LOC in the
738 The rules we adopt today provide specific requirements for a bank to be acceptable to the Commission to issue
the LOC. Those requirements vary for United States banks and non-U.S. banks. See 47 C.F.R. § 54.1007(a)(1).
739 MetroPCS Mobility Fund NPRM Comments at 12-13.
740 Id.
741 MTPCS Mobility Fund NPRM Comments at 12; T-Mobile Mobility Fund NPRM Comments at 19.
742 MTPCS Mobility Fund NPRM Comments at 12. MTPCS believes requiring performance bonds would likewise
hinder applicants. Id. at 13.
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amount of the first one-third of the support associated with the unserved census tract that will bedisbursed upon grant of its application, plus the established additional default payment percentage.
Before a participant receives the second third of its total support, it will be required to provide a second
letter of credit or increase the initial LOC to correspond to the amount of that second support payment
such that LOC coverage will be equal to the total support amount plus the established default payment
percentage. The LOC(s) will remain open and must be renewed to secure the amounts disbursed as
necessary until the recipient has met the requirements for demonstrating coverage and final payment is
made. This approach will help to reduce the costs recipients incur for maintaining the LOCs, because
they will only have to maintain LOCs in amounts that correspond to the actual USF funds as they are
being disbursed.
448.
Consistent with the purpose of the LOC, we will require recipients to maintain the LOC
in place until at least 120 days after they have completed their supported expansion to unserved areas and
received their final payment of Mobility Fund Phase I support. Under the terms of the LOC, the
Commission will be entitled to draw upon the LOC upon a recipient’s failure to comply with the terms
and conditions upon which USF support was granted. The Commission, for example, will draw upon the
LOC when the recipient fails to meet its required deployment milestone(s).743 Failure to satisfy essential
terms and conditions upon which USF support was granted or to ensure completion of the supported
project, including failure to timely renew the LOC, will be deemed a failure to properly use USF support
and will entitle the Commission to draw the entire amount of the LOC. Failure to comply will be
evidenced by a letter issued by the Chief of either the Wireless Bureau or Wireline Bureau or their
designees, which letter, attached to an LOC draw certificate, shall be sufficient for a draw on the LOC.744
In addition, a recipient that fails to comply with the terms and conditions of the Mobility Fund support it
is granted could be disqualified from receiving additional Mobility Fund support or other USF support.745
449.
In the Mobility Fund NPRM, the Commission sought comment on the relative merits of
performance bonds and LOCs and the extent to which performance bonds, in the event of the bankruptcy
of the recipient of Mobility Fund support, might frustrate our goal of ensuring timely build-out of the
network.746 We think an LOC will better serve our objective of minimizing the possibility that Mobility
Fund support becomes property of a recipient’s bankruptcy estate for an extended period of time, thereby
preventing the funds from being used promptly to accomplish the Mobility Fund’s goals. It is well
established that an LOC and the proceeds thereunder are not property of a debtor’s estate under section
541 of Title 11 of the United States Code (the “Bankruptcy Code”).747 In a proper draw upon an LOC,
the issuer honors a draft under the LOC from its own assets and not from the assets of the debtor who
caused the letter of credit to be issued.748 Because the proceeds under an LOC are not property of the
bankruptcy estate, absent extreme circumstances such as fraud, neither the LOC nor the funds drawn
down under it are subject to the automatic stay provided by the Bankruptcy Code. This is an additional
reason for our decision to require recipients of Mobility Fund support to provide LOCs rather than
performance bonds.
743 Parties receiving support are required to cover at least 75 percent of the designated units in the unserved census
blocks, as a condition of support. See supra para. 365.
744 While such letter may not foreclose an appeal or challenge by the recipient, it will not prevent a draw on the
LOC.
745 See 47 C.F.R. §§ 54.1006(f), 54.1007(c)(1).
746 Mobility Fund NPRM, 25 FCC Rcd at 14,741-42, paras. 88, 94.
747 11 U.S.C. § 541; see also, e.g., Kellog v. Blue Quail Energy, Inc., 831 F.2d 586, 589 (5th Cir. 1987).
748 Kellog, 831 F.2d at 589.
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450.In the long-form application filing, we will require each winning bidder to submit a
commitment letter from the bank issuing the LOC.749 The winning bidder will, however, be required to
have its LOC in place before it is authorized to receive Mobility Fund Phase I support and before any
Mobility Fund Phase I support is disbursed. Further, at the time it submits its LOC, a winning bidder will
be required to provide an opinion letter from legal counsel clearly stating, subject only to customary
assumptions, limitations and qualifications, that in a proceeding under Bankruptcy Code, the bankruptcy
court would not treat the LOC or proceeds of the LOC as property of winning bidder’s bankruptcy estate,
or the bankruptcy estate of any other bidder-related entity requesting issuance of the LOC, under section
541 of the Bankruptcy Code.750
451.
We will not limit the LOC requirement to a subset of bidders that fail to meet certain
criteria, such as a specified minimum credit rating, a particular minimum debt to equity ratio, or other
minimum capital requirements.751 We think that such criteria would require a level of financial analysis
of applicants that is likely to be more complex and administratively burdensome than is warranted for a
program that will provide one-time support, and could result in undue delay in funding and deployment of
service. Moreover, limiting the LOC requirement to bidders below a certain level of capitalization would
likely disproportionately burden small business entities, even though small entities are often less able to
sustain the additional cost burden of posting financial security while still being able to compete with
larger entities.
(vi)
Other Funding Restrictions
452.Background. In the Mobility Fund NPRM, the Commission sought comment on whether
participants who receive support from the Mobility Fund should be barred from receiving funds for the
same activity under any other federal program, including, for example, federal grants, awards, or loans.752
453.
Discussion. While we agree with commenters that Mobility Fund recipients might
benefit if they were able to leverage resources from other federal programs, we must also take care to
ensure that USF funds are put to their most efficient and effective use. Therefore, as noted elsewhere, we
will exclude all areas from the Mobility Fund where, prior to the short-form filing deadline, any carrier
has made a regulatory commitment to provide 3G or better service, or has received a funding commitment
from a federal executive department or agency in response to the carrier’s commitment to provide 3G or
better service.753 ITTA believes the Commission should not bar Mobility Fund recipients from receiving
funding from other Federal programs, since recipients “should enjoy the benefit of leveraging multiple
resources.”754 As we noted in the Mobility Fund NPRM, however, our intention is to direct funding to
those places where deployment of mobile broadband is otherwise unlikely.755
749 The commitment letter will at a minimum provide the dollar amount of the LOC and the issuing bank’s
agreement to follow the terms and conditions of the Commission’s model LOC, found in Appendix N.
750 11 U.S.C. § 541.
751 See Mobility Fund NPRM, 25 FCC Rcd at 14,740, para. 85.
752 Id. at 14,741, para. 89.
753 Such federal funding commitments may have been made under, but are not limited to, the Broadband Technology
Opportunities Program (BTOP) and Broadband Initiatives Program (BIP) authorized by the American Recovery
and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009) (ARRA). See CenturyLink Mobility Fund
NPRM Comments at 9; NTCH Mobility Fund NPRM Comments at 8 (supporting exclusion of areas that received
federal loan or grant funding).
754 ITTA Mobility Fund NPRM Comments at 17.
755 See Mobility Fund NPRM, 25 FCC Rcd at 14,721-22, paras. 11, 14.
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(vii)Post-Auction Certifications
454.Background. In the Mobility Fund NPRM, the Commission sought comment on a
number of possible certifications that we might require of a winning bidder to receive Mobility Fund
support.756
455.
Discussion. We adopt our proposal regarding post-auction certifications. Prior to
receiving Mobility Fund support, an applicant will be required in its long-form application to certify to
the availability of funds for all project costs that exceed the amount of support to be received from the
Mobility Fund and certify that they will comply with all program requirements.
456.
As discussed above, recipients of Mobility Fund support are required by statute to offer
services in rural areas at rates that are reasonably comparable to those charged to customers in urban
areas.757 Accordingly, our post-auction long-form certifications will include a certification that the
applicant will offer services in rural areas at rates that are reasonably comparable to those charged to
customers in urban areas.
(viii)
Auction Defaults
457.Background. In the Mobility Fund NPRM, the Commission sought comment on the
procedures that we should apply to a winning bidder that fails to submit a long-form application by the
established deadline.758
458.
Discussion. Auction Default Payments. We will impose a default payment on winning
bidders that fail to timely file a long-form application. We also conclude that such a payment is
appropriate if a bidder is found ineligible or unqualified to receive Mobility Fund support, its long-form
application is dismissed for any reason, or it otherwise defaults on its bid or is disqualified for any reason
after the close of the auction.759
459.
In its comments, T-Mobile advocates the imposition of a significant payment obligation
for the withdrawal of a bid after the Mobility Fund auction closes “to discourage manipulation of the
bidding process or disruption of the distribution of support.”760 We agree that adoption of some measure,
in addition to dismissal of any late-filed application, is needed to ensure that auction participants fulfill
their obligations and do not impose significant costs on the Commission and the USF. Our competitive
bidding rules for spectrum license auctions provide that if, after the close of an auction, a winning bidder
defaults on a payment obligation or is disqualified, the bidder is liable for a default payment.761 The
Wireless Bureau in advance of each spectrum license auction as part of the process for establishing the
procedures for the auction sets the precise percentage to be applied in calculating the default payment.
460.
Here, too, failures to fulfill auction obligations may undermine the stability and
predictability of the auction process, and impose costs on the Commission and higher support costs for
USF. In the case of a reverse auction for USF support, we think a default payment is appropriate to
756 Id. at 14,741, para. 90.
757 See 47 U.S.C. § 254(b)(3).
758 Mobility Fund NPRM at 14,739, para. 81.
759 See 47 U.S.C. §§ 154(i), 254(d).
760 T-Mobile Mobility Fund NPRM Comments at 17.
761 This payment consists of a deficiency portion, which would not be applicable in this context, plus an additional
payment equal to between 3 and 20 percent. See Implementation of the Commercial Spectrum Enhancement Act and
Modernization of the Commission’s Competitive Bidding Rules and Procedures, WT Docket No. 05-211, Report and
Order, 21 FCC Rcd 891, 903-04, paras. 30-32 (2006).
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ensure the integrity of the auction process and to safeguard against costs to the Commission and the USF.We leave it to the Bureaus to consider methodologies for determining such a payment. We recognize that
the size of the payment and the method by which it is calculated may vary depending on the procedures
established for the auction, including auction design. In advance of the auction, the Bureaus will
determine whether a default payment should be a percentage of the defaulted bid amount or should be
calculated using another method, such as basing the amount on differences between the defaulted bid and
the next best bid(s) to cover the same number of road miles as without the default. If the Bureaus
establish a default payment to be calculated as a percentage of the defaulted bid, that percentage will not
exceed 20 percent of the total amount of the defaulted bid. However it is determined, agreeing to that
payment in event of a default will be a condition for participating in bidding. The Bureaus may determine
prior to bidding that all participants will be required to furnish a bond or place funds on deposit with the
Commission in the amount of the maximum anticipated default payment. A winning bidder will be
deemed to have defaulted on its bid under a number of circumstances if it withdraws its bid after the close
of the auction, it fails to timely file a long form application, it is found ineligible or unqualified to receive
Mobility Fund Phase I support, its long-form application is dismissed for any reason, or it otherwise
defaults on its bid or is disqualified for any reason after the close of the auction. In addition to being
liable for an auction default payment, a bidder that defaults on its bid may be subject to other sanctions,
including but not limited to disqualification from future competitive bidding for USF support.762
461.
We distinguish here between a Mobility Fund auction applicant that defaults on its
winning bid and a winning bidder whose long-form application is approved but subsequently fails or is
unable to meet its minimum coverage requirement or demonstrate an adequate quality of service that
complies with Mobility Fund requirements. In the latter case of a recipient’s performance default, in
addition to being liable for a performance default payment, the recipient will be required to repay the
Mobility Fund all of the support it has received and, depending on the circumstances involved, could be
disqualified from receiving any additional Mobility Fund or other USF support.763 As we have discussed
above, we may obtain its performance default payment and repayment of a recipient’s Mobility Fund
support by drawing upon the irrevocable stand-by letter of credit that recipients will be required to
provide in the full amount of support received.
462.
Undisbursed Support Payments. We received no comments on the disposition of
Mobility Fund support for which a winning bidder does not timely file a long-form application. We
anticipate that when a winning bidder defaults on its bid or is disqualified for any reason after the close of
the auction, the funds that would have been provided to such an applicant will be used in a manner
consistent with the purposes of the Universal Service program.
f.
Accountability and Oversight
463.In the Mobility Fund NPRM the Commission sought comment on issues relating to the
administration, management and oversight of the Mobility Fund. On a number of these issues we adopt
uniform requirements that will apply to all recipients of high-cost and CAF support, including recipients
of Mobility Fund Phase I support. Recipients of Phase I support will be subject generally to the reporting,
audit, and record retention requirements that are discussed in the Accountability and Oversight section of
this Order. We discuss below certain aspects of support disbursement, and the annual reporting and
record retention requirements that will apply specifically to Mobility Fund Phase I.
762 See 47 C.F.R. § 1.21004(c).
763 See 47 C.F.R. § 54.1006(f).
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(i)Disbursing Support Payments
464.Background. In the Mobility Fund NPRM, the Commission sought comment on our
proposal to disburse support payments in one-third increments. 764 We received four comments reflecting
a wide range of views. On one end, AT&T supports withholding the disbursement of all funds until the
winning bidder certifies that it is providing the supported service throughout its designated service area.765
AT&T suggests, in the alternative, disbursing one-third of the support amount once the Commission
selects a provider’s bid and the remaining two-thirds after completion of construction and after the
selected bidder certifies that it is offering the supported service throughout its designated service area.766
The Florida Commission supports the proposal set forth in the Mobility Fund NPRM (i.e., the one-third
payment structure) “because it places the burden on carriers seeking support to demonstrate progress
towards achieving the program objectives.”767 Verizon urges the Commission to give recipients at least
50 percent of their support upfront because in the areas targeted by the Mobility Fund, the upfront
investment costs to deploy infrastructure will be significant.768 Finally, T-Mobile supports disbursing the
“bulk” of the Mobility Fund support when the application is granted, given difficulty in obtaining private
financing in high cost areas.769
465.
Discussion. Mobility Fund Phase I support will be provided in three installments. This
approach strikes the appropriate balance between advancing funds to expand service and assuring that
service is actually expanded.
466.
Specifically, each party receiving support will be eligible to receive from USAC a
disbursement of one-third of the amount of support associated with any specific census tract once its long-
form application for support is granted. Although we are not adopting an interim deployment milestone
requirement, we will allow support recipients to demonstrate coverage as a basis for receiving a second
support payment for an unserved area prior to completion of the project. Thus, a recipient will be eligible
to receive the second third of its total support when it files a report demonstrating it has met 50 percent of
its minimum coverage requirement for the census block(s) deemed unserved that are within that census
tract.770 While we realize that some carriers might incur higher up front project costs prior to actually
being in a position to commence the provision of service to the targeted area, after the initial payment of
one-third of the support amount, we will not disburse support without proof of coverage. Disbursing
support based on the construction expenses incurred by the carrier instead of on actual service to an
unserved area would be contrary to the Mobility Fund’s objective of spurring deployment of new mobile
764 Mobility Fund NPRM, 25 FCC Rcd at 14,742, para. 92.
765 AT&T Mobility Fund NPRM Comments at 20. AT&T believes this approach is “the safest course” because it
will “protect against half-completed, useless networks” as well as “guarantee bidders live up to their commitments”
and “best protect consumers.” Id.
766 Id. AT&T adds that a second disbursement at the 50 percent coverage benchmark makes little sense because that
“threshold corresponds neither to a provider’s costs not to how it deploys a network, where it may take many
months to reach 50 percent but only a short time thereafter to reach 100 percent coverage.” Id.
767 Florida Commission Mobility Fund NPRM Reply at 4.
768 Verizon Mobility Fund NPRM Comments at 28.
769 T-Mobile Mobility Fund NPRM Comments at 19. T-Mobile adds that, if a winning bidder fails to follow its
projected build-out, it should be “required to repay any support it received [plus interest and other fines or
assessments], and its affiliates should be help responsible if the bidder fails to meet its obligations.” Id.
770 Because we propose below to delegate jointly to the Wireless Bureau and the Wireline Bureau the authority to
determine the method and procedures by which parties submit documents and information required to receive
Mobility Fund support, we do not propose here specific filing procedures for these reports.
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wireless service. For this reason, to qualify for the second installment of support, a recipient will berequired to demonstrate it has met 50 percent of its minimum coverage requirement using the same drive
tests that will be used to analyze network coverage to provide proof of deployment at the end of the
project to receive its final installment of support. The report a recipient files for this purpose will be
subject to review and verification before support is disbursed. We note that input from states on
recipients’ filed reports could be very helpful to this process.
467.
A party will receive the remainder of its support after filing with USAC a report with the
required data that demonstrates that it has deployed a network covering at least the required percent of the
relevant road miles in the unserved census block(s) within the census tract. This data will be subject to
review and verification before the final support payment for an unserved area is disbursed to the recipient.
A party’s final payment would be the difference between the total amount of support based on the road
miles of unserved census blocks actually covered, i.e., a figure between the required percent and 100
percent of the road miles, and any support previously received.
468.
Because we will disburse at least some support to qualifying applicants in advance of
fulfilling their service obligations, we recognize some risk of lost funds to parties that ultimately fail to
meet those obligations. However, to minimize that risk, we are requiring participants to maintain their
letter(s) of credit in place until after they have completed their supported network construction and
received their final payment of Mobility Fund Phase I support. In addition, we will require participants to
certify that they are in compliance with all requirements for receipt of Mobility Fund Phase I support at
the time that they request disbursements.
469.
As we explain above,771 our purpose in this proceeding is to aggressively extend
coverage, and recipients will not be allowed to receive Mobility Fund support if they fail to cover at least
the required percentage of the road miles in the unserved census blocks for which they received support.
Accordingly we decline the suggestion to adopt a level of service that falls short of the required
percentage of coverage for which we would allow the recipient to offset its liability for repayment,
because doing so would be inconsistent with our objective.772
(ii)
Annual Reports
470.Background. The Commission proposed in the Mobility Fund NPRM that parties
receiving Mobility Fund support be required to file annual reports with the Commission demonstrating
the coverage provided with support from the Mobility Fund for five years after qualifying for support.773
The proposed reports were to include maps illustrating the scope of the area reached by new services, the
population residing in those areas (based on Census Bureau data and estimates), and information
regarding efforts to market the service to promote adoption among the population in those areas. In
addition, annual reports were to include all drive test data that the party receives or makes use of, whether
the tests were conducted pursuant to Commission requirements or any other reason.
471.
Discussion. We will adopt our proposal with some minor modifications. To the extent
that a recipient of Mobility Fund support is a carrier subject to other existing or new annual reporting
requirements under section 54.313 of our rules based on their receipt of universal service support under
another high cost mechanism, it will be permitted to satisfy its Mobility Fund Phase I reporting
requirements by filing a separate Mobility Fund annual report or by including this additional information
in a separate section of its other annual report filed with the Commission.774 Mobility Fund recipients
771 See supra para. 28.
772 Verizon Mobility Fund NPRM Comments at 18-19.
773 Mobility Fund NPRM, 25 FCC Rcd at 14,731, para. 44.
774 See infra paras. 576-614.
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choosing to fulfill their Mobility Fund reporting requirements in an annual report filed under section54.313 must, at a minimum, file a separate Mobility Fund annual report notifying us that the required
information is included the other annual report.
472.
Based on our decision to define unserved units based on the linear road miles associated
with unserved census blocks, we will require that a Mobility Fund Phase I recipient provide annual
reports that include maps illustrating the scope of the area reached by new services, the population
residing in those areas (based on Census Bureau data and estimates), and the linear road miles covered.
In addition, annual reports must include all coverage test data for the supported areas that the party
receives or makes use of, whether the tests were conducted pursuant to Commission requirements or any
other reason. Further, annual reports will include any updated project information including updates to
the project description, budget and schedule. We would welcome state input on these aspects of the
annual reports of Mobility Fund Phase I recipients.
473.
Because we do not impose any marketing requirements other than the advertising
requirements to which designated ETCs are already subject, we do not require that annual reports include
information on marketing efforts.
474.
Few commenters addressed the proposal regarding annual reports. One party notes a
discrepancy between the proposal set forth in the discussion in the Mobility Fund NPRM (and described
above) and the text of the proposed rules regarding the number of years for which annual reports would
be required.775 Verizon suggests requiring reports from winning bidders until the project dollars are
invested.776 We clarify here and in the final rules that the proposal we adopt requires filing of annual
reports on the use of Mobility Fund support as described for five years after the winning bidder is
authorized to receive Mobility Fund support.
(iii)
Record Retention
475.Background. In the Mobility Fund NPRM, the Commission sought comment on what
records Mobility Fund recipients should be required to retain related to their participation in the Fund.777
We proposed that the record retention requirements for recipients of support apply to all agents of the
recipient, and any documentation prepared for or in connection with the recipient’s Mobility Fund Phase I
support.778 We also proposed a five-year period for record retention, consistent with the rules we
previously adopted for those receiving other universal service high cost support.779
476.
Discussion. Elsewhere in this Order, we adopt revised requirements that extend the
record retention period to ten years for all recipients of high-cost and CAF support, including recipients of
775 AT&T Mobility Fund NPRM Comments at 16-17. The proposed rule section 54.1005(a) in the Mobility Fund
NPRM stated that annual reports would be submitted for ten years. Mobility Fund NPRM, 25 FCC Rcd at 14,753.
776 Verizon Mobility Fund NPRM Comments at 27.
777 Mobility Fund NPRM, 25 FCC Rcd at 14,743-44, paras. 98-100.
778 Id. at 14,744, para. 99. We further proposed that beneficiaries be required to make all such documents and
records that pertain to them, contractors, and consultants working on behalf of the beneficiaries, available to the
Commission’s Office of Managing Director, Wireless Bureau, Wireline Bureau, and Office of Inspector General, the
USF Administrator, and their auditors. Id.
779 Id. at 14,744, para. 100. See 47 C.F.R. § 54.202(e) (2007). Cf. the five-year limitation on imposition of
forfeitures for violations of section 220(d) of the Act. 47 C.F.R. § 1.80(c)(2).
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Mobility Fund Phase I.780 We find that the new retention period will be adequate to facilitate audits ofMobility Fund program participants, with one clarification regarding the required retention period. 781
477.
We received two comments on this issue. Sprint suggests that all reporting and
certification requirements should sunset within three years after expenditure of the support dollars
received.782 T-Mobile favors a period of five years for retention of records associated with Mobility Fund
support.783 In view of the record retention requirements we adopt for recipients of other USF high-cost
and CAF support, we believe it is reasonable to apply the same retention period to recipients of Mobility
Fund support.
478.
We clarify, however, that for the purpose of the Mobility Fund program, the ten-year
period for which records must be maintained will begin to run only after a recipient has received its final
payment of Mobility Fund support. That is, because recipients will receive Mobility Fund support in up
to three installments, but recipients that ultimately fail to deploy a network that meets our minimum
coverage and performance requirements or otherwise fail to meet their Mobility Fund public interest
obligations will be liable for repayment of all previously disbursed Mobility Fund support, we will
require recipients to retain records for ten years from the receipt of the final disbursement of Mobility
Fund funds.
2.
Service to Tribal Lands
479.In the Mobility Fund NPRM, the Commission acknowledged the relatively low level of
telecommunications deployment on Tribal lands and the distinct challenges in bringing connectivity to
these areas.784 The Commission observed that communities on Tribal lands have historically had less
access to telecommunications services than any other segment of the population.785 The Mobility Fund
NPRM also noted that Tribal lands are often in rural, high-cost areas, and present distinct obstacles to the
deployment of broadband infrastructure.786 The Commission observed that greater financial support
therefore may be needed in order to ensure the availability of broadband in Tribal lands.787 In light of the
Commission’s unique government-to-government relationship with Tribes and the distinct challenges in
bringing communications services to Tribal lands, the Commission also noted that a more tailored
approach regarding Mobility Fund support for Tribal lands may be beneficial.788
480.
In April 2011, the Wireless Bureau released a Public Notice seeking comment on
specific proposals that could be used in the context of a Mobility Fund to address Tribal issues.789 The
Public Notice sought comment on establishing: (1) possible requirements for engagement with Tribal
governments prior to auction; (2) a possible preference for Tribally-owned and controlled providers; and
780 See infra para. 620.
781 See infra para. 621; 47 C.F.R. § 54.320(b) (“All eligible telecommunications carriers shall retain all records
required to demonstrate to auditors that the support received was consistent with the universal service high-cost
program rules. This documentation must be maintained for at least ten years from the receipt of funding.”).
782 Sprint Mobility Fund NPRM Comments at 10.
783 T-Mobile Mobility Fund NPRM Comments at 13, 20.
784 Mobility Fund NPRM, 25 FCC Rcd at 14,727, para. 33. See supra note 197.
785 Mobility Fund NPRM at 14,727, para. 33.
786 Id.
787 Id.
788 Id.
789 See, generally, Tribal Mobility Fund Public Notice, 26 FCC Rcd 5997.
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(3) a possible mechanism to reflect Tribal priorities for competitive bidding. The Public Notice alsosought comment on the timing of any Tribal Mobility Fund auction.
a.
Tribal Mobility Fund Phase I
481.We adopt our proposal to establish a separate Tribal Mobility Fund Phase I to provide
one-time support to deploy mobile broadband to unserved Tribal lands,790 which have significant
telecommunications deployment and connectivity challenges.791 We anticipate that an auction will occur
as soon as feasible after a general Mobility Fund Phase I auction, providing for a limited period of time in
between so that applicants that may wish to participate in both auctions may plan and prepare for a Tribal
Phase I auction after a general Phase I auction.792 Our decision to establish a Tribal Mobility Fund Phase
I stems from the Commission’s policy regarding “Covered Locations,”793 and represents our commitment
to Tribal lands, including Alaska. We agree with the Alaska Commission that “[a] separate fund would
indeed direct support to many areas that currently lag behind the nation in provisioning of advanced
wireless services.”794 We allocate $50 million from universal service funds reserves for Tribal Mobility
Fund Phase I, separate and apart from the $300 million we are allocating for the general Mobility Fund
Phase I. Providers in Tribal lands will be eligible for both the general and Tribal Mobility Fund Phase I
auctions. Consistent with the approach we took with the general Mobility Fund Phase I, we delegate to
the Bureaus authority to administer the policies, programs, rules and procedures to implement Tribal
Mobility Fund Phase I as established today.
482.
We determine that allocating $50 million from universal service fund reserves to support
the deployment of mobile broadband to unserved Tribal lands is necessary, separate and apart from the
$300 million we are allocating for Mobility Fund Phase I, because of special challenges involved in
deploying mobile broadband on Tribal lands. As we have previously observed, various characteristics of
Tribal lands may increase the cost of entry and reduce the profitability of providing service, including:
“(1) The lack of basic infrastructure in many tribal communities; (2) a high concentration of low-income
individuals with few business subscribers; (3) cultural and language barriers where carriers serving a
tribal community may lack familiarity with the Native language and customs of that community; (4) the
process of obtaining access to rights-of-way on tribal lands where tribal authorities control such access;
and (5) jurisdictional issues that may arise where there are questions concerning whether a state may
assert jurisdiction over the provision of telecommunications services on tribal lands.”795 Commenters
790 Some carriers request a separate funding mechanism for insular areas. See, e.g., PR Wireless Mobility Fund
NPRM Comments at 1-5. Because these areas generally do not face the same level of deployment challenges as
Tribal lands, we decline to create a separate component of the Mobility Fund for them.
791 Mobility Fund NPRM, 25 FCC Rcd at 14,727, para. 33. See, e.g., Alaska Commission Mobility Fund NPRM
Reply at 2 (explaining that “there are more than 200 remote rural locations with low populations that are accessible
only by air, water or snowmobile”).
792 We are mindful of commenters’ views that a “separate track” should not be a “slow track,” and believe that
conducting a Tribal Mobility Fund Phase I auction shortly after concluding the general Mobility Fund Phase I
auction will ensure that Tribal lands are not disadvantaged. See NPM and NCAI Mobility Fund NPRM Comments
at 11-12.
793 As discussed supra, the Commission adopted the Covered Locations exemption in 2008, in recognition that many
Tribal lands have low penetration rates for basic telephone. High-Cost Universal Service Support et al, WC Docket
No. 05-337, CC Docket No.96-45, Order, 23 FCC Rcd 8834, 8848, para. 32 (2008).
794 Alaska Commission Mobility Fund NPRM Reply at 12.
795 Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Twelfth Report and Order, Memorandum
Opinion and Order, and Further Notice of Proposed Rulemaking, 15 FCC Rcd 12,208, 12,226, para. 32 (2000) (USF
Twelfth Report and Order).
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confirm that the particular challenges in deploying telecommunications services on Tribal lands remain.796As discussed below, there are areas where $50 million in one-time support will help to extend the
availability of mobile voice and broadband services.
483.
We further observe that promoting the development of telecommunications infrastructure
on Tribal lands is consistent with the Commission’s unique trust relationship with Tribes. As we
recognized previously, “by increasing the total number of individuals, both Indian and non-Indian, who
are connected to the network within a tribal community the value of the network for tribal members in
that community is greatly enhanced.”797 By structuring the support to benefit Tribal lands, rather than
attempting to require wireless providers to distinguish between Tribal and non-Tribal customers, we will
“reduc[e] the possible administrative burdens associated with implementation of the enhanced federal
support, [and] eliminate a potential disincentive to providing service on Tribal lands.”798
484.
Support for Tribal lands generally will be awarded on the same terms and subject to the
same rules as general Mobility Fund Phase I support.799 We find, however, that in some instances a more
tailored approach is appropriate. For example, we adopt modest revisions to our general rules for
establishing appropriate coverage units. We also adopt Tribal engagement requirements and preferences
that reflect our unique relationship with Tribes. We believe that these measures should provide
meaningful support to expand service to unserved areas in a way that acknowledges the unique
characteristics of Tribal lands and reflects and respects Tribal sovereignty. As discussed below, we also
propose an ongoing support mechanism for Tribal lands in Phase II of the Mobility Fund, as well as a
separate Connect America Fund mechanism to reach the most remote areas, including Tribal lands.
485.
Size of Fund. We dedicate $50 million in one-time support for the Tribal Mobility Fund
Phase I, which should help facilitate mobile deployment in unserved areas on Tribal lands. This amount
is in addition to the $300 million to be provided under the general Mobility Fund Phase I, for which
qualifying Tribal lands would also be eligible, and is in addition to the up to $100 million in ongoing
support being dedicated to Tribal lands in the Tribal Mobility Fund Phase II.800 We believe that a one-
time infusion of $50 million through the Tribal Mobility Fund can make a difference in expanding the
availability of mobile broadband in Tribal lands unserved by 3G. The $50 million in one-time support we
allocate today is approximately 25 percent of the ongoing support awarded to competitive ETCs serving
Covered Locations in 2010. The more targeted nature of this support will enhance the impact of this
significant one-time addition to current support levels. At the same time, this funding level is consistent
with our commitment to fiscal responsibility and the varied objectives we have for our limited funds,
including our proposals for ongoing support for mobile services as established below. We also observe
that, although $50 million reflects a smaller percentage of total Mobility Fund support than suggested by
796 See Gila River Mobility Fund NPRM Comments at 3-4; NNTRC Mobility Fund NPRM Reply at 2; NPM and
NCAI Mobility Fund NPRM Comments at 4-5; Smith Bagley April 18 PN Comments at 3; Standing Rock April 18
PN Comments at 2-6.
797 USF Twelfth Report and Order, 15 FCC Rcd at 12,225, para. 29.
798 Id. at 12,225-26, para. 31.
799 We incorporate by reference the eligible geographic area, provider eligibility, public interest obligations, auction
and post-auction processes, and program management and oversight measures established for Phase I of the
Mobility Fund. To address concerns raised by commenters regarding the performance challenges posed by the
reliance on satellite backhaul in Alaska, we clarify that funds may be used to construct or upgrade middle mile
facilities. See ACS Mobility Fund NPRM Comments at 8; GCI Mobility Fund NPRM Comments at 2-3.
800 See infra para. 494.
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some commenters,801 the $300 million we adopt today is at the upper end of our proposed range and, thus,$50 million is roughly equivalent to what many commenters suggested. On balance, we believe that there
is an opportunity for entities to obtain meaningful support – both through the Tribal and general Mobility
Fund Phase I auctions, in addition to the ongoing support mechanisms – in order to accelerate mobile
broadband deployment on Tribal lands.
486.
Mechanism To Award Support. Consistent with our general approach to awarding Phase
I support, to maximize consumer benefits we generally will award support to one provider per qualifying
area by reverse auction and will only award support to more than one provider per area where doing so
would allow us to cover more total units given the budget constraint.802 We recognize that some
commenters suggested alternative mechanisms for awarding support to Tribal lands. These included a
procurement model under which Tribes would solicit bids for service,803 a scoring mechanism the
Commission could use to evaluate proposals according to certain criteria (generally reflective of need),804
and a process to give Tribal carriers first priority in receiving funds.805
487.
We agree that it is essential to award support in a way that respects and reflects Tribal
needs. To that end, and as discussed below, we adopt Tribal engagement obligations to ensure that needs
are identified and appropriate solutions are developed. We also adopt a bidding credit for Tribally-owned
or controlled providers seeking to expand service on their Tribal lands. At the same time, we remain
committed to our goal of awarding support in a fiscally responsible manner and targeting support to
locations where it is most likely to make a difference. We are concerned that none of the alternatives
suggested thus far would provide an effective means to maximize the impact of our limited budget to
expand service as far as possible on unserved Tribal lands. In addition, we are committed to awarding
funds openly, transparently, and fairly. We believe that any subjective mechanism to assess the merits of
various proposals or any mechanism that would provide an absolute priority to Tribes that have
established their own communications service provider is less likely to promote these objectives.
Accordingly, we conclude that a reverse auction mechanism, together with the Tribal engagement and
preferences we adopt below, would best achieve our goals in expanding service to Tribal lands in a
respectful, fair, and fiscally responsible manner.
488.
Establishing Unserved Units. For purposes of determining the number of unserved units
in a given geographic area, we conclude that for a Tribal Phase I auction, a population-based metric is
more appropriate than road miles, which will be used in a general Mobility Fund Phase I auction.806
801 See, e.g., Gila River Mobility Fund NPRM Comments at 7 (recommending 20 percent allocation of one-time
Mobility Fund to Tribal lands); NTTA Mobility Fund NPRM Comments at 7 (recommending up to 30 percent
allocation); NPM and NCAI Mobility Fund NPRM Comments at 8 (recommending 33 percent allocation).
802 We note that in certain limited circumstances, depending on the bidding at auction, allowing small overlaps in
support could result in greater overall coverage.
803 NTTA Mobility Fund NPRM Comments at 14-15; NTTA April 18 PN Comments at 7-8.
804 Standing Rock Sioux April 18 PN Comments at 5-7.
805 NPM and NCAI Mobility Fund NPRM Comments at 11. Several commenters note that the Commission should
also undertake efforts to identify spectrum to more effectively serve Tribal lands. See Gila River Mobility Fund
NPRM Comments at 11-12; NPM and NCAI Mobility Fund NPRM Comments at 6; NTTA Mobility Fund NPRM
Comments at 4. We note that we have raised those issues in the Spectrum over Tribal Lands proceeding, and
recognize that proceeding’s importance. See Improving Communications Services for Native Nations by Promoting
Greater Utilization of Spectrum over Tribal Lands, WT Docket No. 11-40, Notice of Proposed Rulemaking, 26 FCC
Rcd 2623 (2011) (Spectrum over Tribal Lands NPRM).
806 In light of this conclusion, we note that the “drive tests” used to demonstrate coverage supported by Tribal
Mobility Fund Phase I may be conducted by means other than in automobiles on roads. Providers may demonstrate
(continued…)
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While road miles generally best reflect the value of mobility, there are compelling concerns raised herethat warrant a different approach in the context of Tribal lands. We are sensitive to concerns raised by
Tribes that mobile wireless deployment to date on Tribal lands has largely centered along major highways
and has, unlike other rural deployments, ignored population centers and community anchor institutions.807
Moreover, we observe that infrastructure generally is less developed on Tribal lands, particularly in
Alaska.808 While we note that the stringent coverage requirement we incorporate here will help to
mitigate the concern that these patterns could continue in Mobility-Fund-supported areas, we find that,
taken together, this concern still suggests that a population-based metric is more appropriate for Tribal
lands.
b.
Tribal Engagement Obligation
489.Throughout this proceeding, commenters have repeatedly stressed the essential role that
Tribal consultation and engagement plays in the successful deployment of mobile broadband service.809
We agree. For both the general and Tribal Mobility Fund Phase I auctions, we encourage applicants
seeking to serve Tribal lands to begin engaging with the affected Tribal government as soon as possible
but no later than the submission of its long-form.810 Moreover, any bidder winning support for areas
within Tribal lands must notify the relevant Tribal government no later than five business days after being
identified by Public Notice as such a winning bidder. Thereafter, at the long-form application stage, in
annual reports, and prior to any disbursement of support from USAC, Mobility Fund Phase I winning
bidders will be required to comply with the general Tribal engagement obligations discussed infra in
Section IX.A.811
c.
Preference for Tribally-Owned or Controlled Providers
490.Consistent with record evidence812 and Commission precedent,813 we adopt a preference
for Tribally-owned or controlled providers814 seeking general or Tribal Mobility Fund Phase I support.
(Continued from previous page)
coverage of an area with a statistically significant number of tests in the vicinity of residences being covered.
Moreover, equipment to conduct the testing can be transported by off-road vehicles, such as snow-mobiles or other
vehicles appropriate to local conditions.
807 See, e.g., NPM and NCAI Mobility Fund NPRM Comments at 7-8; Benton et al. Mobility Fund NPRM Reply at
11.
808 See, e.g., ACS Mobility Fund NPRM Comments at 2-3; Gila River Mobility Fund NPRM Comments at 3-4; NPM
and NCAI Mobility Fund NPRM Comments at 5.
809 See, e.g., NPM and NCAI Mobility Fund NPRM Comments at 8-9; Navajo Commission Mobility Fund NPRM
Reply at 4; Twin Houses April 18 PN Comments at 1-3, 6.
810 We note, however, that any such engagement must be done consistent with our auction rules prohibiting certain
communications during the competitive bidding process.
811 See infra Section IX.A.
812 See NTTA April 18 PN Comments at 11; So Cal TDV April 18 PN Comments at 2; Twin Houses April 18 PN
Comments at 3.
813 See, e.g., Policies to Promote Rural Radio Service and to Streamline Allotment and Assignment Procedures, MB
Docket No. 09-52, First Report and Order and Further Notice of Proposed Rulemaking, 25 FCC Rcd 1583, 1587-97,
paras. 7-27 (2010) (Rural Radio R&O and FNPRM); see also Spectrum over Tribal Lands NPRM, 26 FCC Rcd at
2635-37, paras. 35-40.
814 Eligible entities include Tribes or tribal consortia, and entities majority owned or controlled by Tribes. Rural
Radio R&O and FNPRM, 25 FCC Rcd at 1587, para. 7. Currently there are eight Tribally-owned and controlled
providers.
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The preference will act as a “reverse” bidding credit that will effectively reduce the bid amount of aqualified Tribally owned- or controlled provider by a designated percentage for the purpose of comparing
it to other bids, thus increasing the likelihood that Tribally-owned and controlled entities will receive
funding. The preference will be available with respect to the eligible census blocks located within the
geographic area defined by the boundaries of the Tribal land associated with the Tribal entity seeking
support. While commenters generally support a preference for Tribally-owned and controlled providers,
we received no comment on the appropriate size of a bidding credit. We note that, in the spectrum
auction context, the Commission typically awards small business bidding credits ranging from 15 to 35
percent, depending on varying small business size standards.815 We believe that a bidding credit in that
range would further Tribal self-government by increasing the likelihood that the bid would be awarded to
a Tribal entity associated with the relevant Tribal land, without providing an unfair advantage over
substantially more cost-competitive bids. Accordingly we adopt a 25 percent bidding credit.816
d.
ETC Designation for Tribally-Owned or Controlled Entities
491.To afford Tribes an increased opportunity to participate at auction, in recognition of their
interest in self-government and self-provisioning on their own lands, we will permit a Tribally-owned or
controlled entity that has an application for ETC designation pending at the relevant short-form
application deadline to participate in an auction to seek general and Tribal Mobility Fund Phase I support
for eligible census blocks located within the geographic area defined by the boundaries of the Tribal land
associated with the Tribe that owns or controls the entity. We note that allowing such participation at
auction in no way prejudges the ultimate decision on a Tribally-owned or controlled entity’s ETC
designation and that support will be disbursed only after it receives such designation.817
e.
Tribal Priority
492.We conclude that further comment is warranted before we would move forward with a
Tribal priority process that would afford Tribes “priority units” to allocate to areas of particular
importance to them.818 As noted below, we are seeking additional input on this proposal in the context of
the Tribal Mobility Fund Phase II. In the meantime, we believe that the Tribal engagement obligations
we adopt here, combined with build-out obligations, will ensure that Tribal needs are met in bringing
service to unserved Tribal communities in the Mobility Fund Phase I.
3.
Mobility Fund Phase II
493.In addition to Phase I of the Mobility Fund, we also establish today Phase II of the
Mobility Fund, which will provide ongoing support for mobile services in areas where such support is
needed. As noted above, millions of Americans live in communities where current-generation mobile
service is unavailable or where current-generation mobile service is available only with universal service
support, and millions more work in or travel through such areas. Whereas Mobility Fund Phase I will
provide one-time funding for the expansion of current and next generation mobile networks, here, we
establish Phase II of the Mobility Fund in recognition of the fact that there are areas in which offering of
mobile services will require ongoing support. We adopt a budget for Phase II below and seek further
comment on the details of Phase II in the FNRPM accompanying this Order.
815 See 47 C.F.R. § 1.2110(f).
816 See also infra para. 1166 (seeking comment on a proposal to adopt a similar credit for Mobility Fund Phase II).
817 A Tribally-owned or controlled entity that does not obtain and provide the required ETC designation will not be
entitled to any support payments and may ultimately be in default in accordance with the rules. See 47 C.F.R. §
54.1005(b)(3)(v); 47 C.F.R. § 1.21004.
818 See discussion infra; see also Tribal Mobility Fund Public Notice, 26 FCC Rcd at 5998-99.
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494.We designate $500 million annually for ongoing support for mobile services, to be
distributed in Phase II of the Mobility Fund. Of this amount, we anticipate that we would designate up to
$100 million to address the special circumstances of Tribal lands. We set a budget of $500 million to
promote mobile broadband in these areas, where a private sector business case cannot be met without
federal support. Although the budget for fixed services exceeds the budget for mobile services, we note
that today significantly more Americans have access to 3G mobile coverage than have access to
residential broadband via fixed wireless, DSL, cable, or fiber.819 We expect that as 4G mobile service is
rolled out, this disparity will persist – private investment will enable the availability of 4G mobile service
to a larger number of Americans than will have access to fixed broadband with speeds of at least 4 Mbps
downstream and 1 Mbps upstream.820
495.
In 2010, wireless ETCs other than Verizon Wireless and Sprint received $921 million in
high-cost support. Under 2008 commitments to phase down their competitive ETC support, Verizon
Wireless and Sprint have already given up significant amounts of the support they received under the
identical support rule, and there is nothing in the record showing that either carrier is reducing coverage
or shutting down towers even as this support is eliminated. Nor is there anything in the record that
suggests AT&T or T-Mobile would reduce coverage or shut down towers in the absence of ETC support.
We therefore find that it reasonable to assume that the four national carriers will maintain at least their
existing coverage footprints even if the support they receive today is phased out. In 2010, $579 million
flowed to regional and small carriers, i.e., carriers other than the four nationwide providers.821 Of this
$579 million, we know in many instances that this support is being provided to multiple wireless carriers
in the same geographic area.822 We also note that the State Members of the Federal State Joint Board on
Universal Service have proposed that the Commission establish a dedicated Mobility Fund that would
provide $50 million in the first year, $100 million in the second year, and then increase by $100 million
each year until support reaches $500 million annually.823 Thus, we believe that our $500 million annual
budget will be sufficient to sustain and expand the availability of mobile broadband. We anticipate as
well that mobile providers may also be eligible for support in CAF 1 in areas where price cap carriers opt
not to accept the state-level commitment, in addition to Mobility Fund Phase II support.
496.
We recognize that some small proportion of geographic areas may be served by a single
wireless ETC, which might reduce coverage if it fails to win ongoing support within our $500 million
budget. But the current record does not persuade us that the best approach to ensure continuing service in
those instances is to increase our overall $500 million budget. Rather, we have established a waiver
process as discussed below, that a wireless ETC may use to demonstrate that additional support is needed
for its customers to continue receiving mobile voice service in areas where there is no terrestrial mobile
819 See 15th Annual Mobile Wireless Competition Report, 26 FCC Rcd at 9742-43, paras. 120-122. See also Section
706 Seventh Report and Order on Reconsideration, 26 FCC Rcd at 8049-51, App. B.
820 15th Annual Mobile Wireless Competition Report, 26 FCC Rcd at 9736-41, paras. 109-116 and Table 11.
821 See 2010 Disbursement Analysis.
822 Federal Communications Commission Response to United States House of Representatives Committee on
Energy and Commerce, Universal Service Fund Data Request of June 22, 2011, Request 7: Study Areas with the
Most Eligible Telecommunications Carriers (Table 1: Study Areas with the Most Eligible Telecommunications
Carriers in 2010), (Waxman Report) available at
http://republicans.energycommerce.house.gov/Media/file/PDFs/2011usf/ResponsetoQuestion7.pdf.
823 State Joint Board May 2, 2011 Comments at 68-73 (proposing that this support be provided through grants
awarded by States on a project-specific basis to fund 50 percent of the debt cost of new construction, with the grants
to be paid over ten years).
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alternative.824497.
Of the $500 million, we set aside up to $100 million for a separate Tribal Mobility Fund,
for the same reasons we articulated with respect to the Tribal Mobility Fund Phase I. In addition, we
acknowledge that many Tribal lands require ongoing support in order to provide service and therefore
designate a substantial level of funding to ensure that these communities are not left behind. We observe
that this amount is roughly equivalent to the amount of funding currently provided to Tribal lands in the
lower 48 states and in Alaska, excluding support awarded to study areas that include the most densely
populated communities in Alaska.825
4.
Eliminating the Identical Support Rule
498. Background. Section 54.307 of the Commission’s rules, also known as the “identicalsupport rule,” provides competitive ETCs the same per-line amount of high-cost universal service support
as the incumbent local exchange carrier serving the same area.826 As shown below, the identical support
rule’s primary role has been to support mobile services, although the Commission did not identify that
purpose when it adopted the rule.827
499. In the NPRM, we sought comment on eliminating the identical support rule as we establish
better targeted mechanisms to support mobility.828
500. The Federal-State Joint Board on Universal Service urged the Commission to eliminate the
identical support rule in 2007, and the state members recently reiterated that viewpoint in this
proceeding.829 In the current proceeding, a broad cross-section of stakeholders have advocated
eliminating the identical support rule.830
824 See infra Section VII.G.
825 See NECA and USAC Data, USF Data Under USAC Memo of Understanding (Appendix C),
CETCAnalysisMOU5Extract.XLS, at http://transition.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-
State_Link/Monitor/CETCAnalysisMOU5Extract.XLS (listing initial competitive ETC support payments by month
and by incumbent local exchange carrier study area).
826 47 C.F.R. § 54.307. In adopting the identical support rule, the Commission assumed that competitive ETCs
would be competitive LECs (i.e., wireline telephone providers) competing directly with incumbent LECs for
particular customers. See Universal Service First Report and Order, 12 FCC Rcd at 8932, para. 286. Based on this
assumption, the Commission concluded that high-cost support should be portable – i.e., that support would follow
the customer to the new LEC when the customer switched service providers. Id. at 8932-33, paras. 287-88. The
Commission planned that eventually all support would be provided based on forward-looking economic cost
estimates and not based on the incumbents’ embedded costs. Id. at 8932, paras. 287. The Commission did not
contemplate the complementary role that mobile service would play in the years ahead.
827 See Universal Service First Report and Order, 12 FCC Rcd at 8944-45 paras. 311-13. As discussed in paragraph
501, wireline competitive ETCs received only $23 million out of $1.2 billion disbursed to competitive ETCs in
2010. 2010 Disbursement Analysis
828 See American Cable Ass’n USF/ICC Transformation NPRM Comments at 18-19; Comcast USF/ICC
Transformation NPRM Comments at 15; Iowa Utilities Board USF/ICC Transformation NPRM Comments at 9-10;
Moss Adams USF/ICC Transformation NPRM Comments at 14; Rural Associations USF/ICC Transformation
NPRM Comments at 57; Windstream USF/ICC Transformation NPRM Comments at 30-32; see also USF/ICC
Transformation NPRM, 26 FCC Rcd at 4677-78 paras. 403-07.
829 See Joint Board 2007 Recommended Decision, 22 FCC Rcd at 20491-94, paras. 55-68; State Joint Board
Members USF/ICC Transformation NPRM Comments at 10.
830 See Verizon & Verizon Wireless USF/ICC Transformation NPRM Comments at 47-50; AT&T USF/ICC
Transformation NPRM Comments at 90, 107; CenturyLink USF/ICC Transformation NPRM Comments at 30, 35;
(continued…)
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501. In 2010, 446 competitive ETCs, owned by 212 holding companies, received funding underthe identical support rule.831 Aside from Verizon Wireless, which agreed in 2008 to give up its
competitive ETC high-cost support as a condition of obtaining Commission approval of a transfer of
control, the largest competitive ETC recipient by holding company in 2010 was AT&T, which received
$289 million.832 Last year, about $611 million went to one of the four national wireless providers,
representing approximately 50 percent of competitive ETC support disbursed in 2010. The remaining
$602 million was disbursed to the other 208 competitive ETC holding companies. Of this, approximately
$23 million was disbursed to wireline competitive ETCs.
Total 2010 CETC Funding
Verizon Wireless &
Sprint*
AT&T & T-Mobile
$579MWireline CETCs
$319MOther Wireless (small
$23Mto mid-size carriers)
*Verizon Wireless and Sprint are
already subject to voluntary phase-
down of high-cost competitive ETC
Total : $1.2B
support.
502. Discussion. We eliminate the identical support rule. Based on more than a decade of
experience with the operation of the current rule and having received a multitude of comments noting that
(Continued from previous page)
Windstream USF/ICC Transformation NPRM Comments at 30-32; Florida Public Service Commission USF/ICC
Transformation NPRM Comments at 10-11; NASUCA USF/ICC Transformation NPRM Comments at 46-47.
Several commenters supported retaining the identical support rule for some carriers, in some places, or with
adjustments, but not as it currently exists for all competitive ETCs. See ACS USF/ICC Transformation NPRM
Comments at 21 (proposing per-line freeze); Cox USF/ICC Transformation NPRM Comments at 10-11 & n.14
(proposing to retain identical support for wireline competitive ETCs until CAF is implemented); GCI USF/ICC
Transformation NPRM Comments at 30 (proposing to retain identical support for Covered locations); Docomo
Pacific et al USF/ICC Transformation NPRM Comments at 14-15 (proposing to retain identical support in U.S.
Territories).
831 Actual disbursements in 2010 were $1.22 billion. 2010 Disbursement Analysis; USAC High-Cost Disbursement
Tool. These amounts include disbursements to Verizon Wireless and Sprint that USAC now is in the process of
reclaiming pursuant to the Corr Wireless Order. High-Cost Universal Service Support, Federal-State Joint Board
on Universal Service, Request for Review of Decision of Universal Service Administrator by Corr Wireless
Communications, LLC, WC Docket No. 05-337, CC Docket No. 96-45, 25 FCC Rcd 12854, 12859-63, paras. 14-22
(2010) (Corr Wireless Order).
832 2010 Disbursement Analysis; USAC High-Cost Disbursement Tool.
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the current rule fails to efficiently target support where it is needed, we reiterate the conclusion that thisrule has not functioned as intended.833 As described in more detail below, identical support does not
provide appropriate levels of support for the efficient deployment of mobile services in areas that do not
support a private business case for mobile voice and broadband. Because the explicit support for mobility
we adopt today will be designed to appropriately target funds to such areas, the identical support rule is
no longer necessary or in the public interest.
503. The Commission anticipated that universal service support would be driven to the most
efficient providers as they captured customers from the incumbent provider in a competitive marketplace.
It originally expected that growth in subscribership to a competitive ETC’s services would necessarily
result in a reduction in subscribership to the incumbent’s services. Instead, the vast majority of
competitive ETC support has been attributable to the growing role of wireless in the United States.
Overwhelmingly, high-cost support for competitive ETCs has been distributed to wireless carriers
providing mobile services.834 Although nearly 30 percent of households nationwide have cut the cord and
have only wireless voice service, many households subscribe to both wireline voice service and wireless
voice service.835 Moreover, because households typically have multiple mobile phones, wireless
competitive ETCs have been able to receive multiple subsidies for the same household. Although the
expansion of wireless service has brought many benefits to consumers, the identical support rule was not
designed to efficiently provide appropriate levels of support for mobility.
504. The support levels generated by the identical support rule bear no relation to the efficient
cost of providing mobile voice service in a particular geography. In areas where the incumbent’s support
per line is high, a competitive ETC will receive relatively high levels of support per line, while it would
receive markedly less support in an adjacent area with the same cost characteristics, if the incumbent
there is receiving relatively little support per line. This makes little sense. Demographics, topography,
and demand by travelers for mobile coverage along roads, as opposed to residences, are considerations
that may create different business cases for fixed vs. mobile voice services in different areas, with a
resulting effect on the level of need for subsidization.836 As a result of these and other differences in cost
and revenue structures, the per-line amounts received by competitive ETCs are a highly imperfect
approximation of the amount of subsidy necessary to support mobile service in a particular geographic
area and such structures have simply missed the mark.
505. Given the way the identical support rule operates, wireless competitive ETCs often do not
have appropriate incentives for entry. Some areas with per-line support amounts that are relatively high
may be attracting multiple competitive ETCs, each of which invests in its own duplicative infrastructure.
Indeed, many areas have four or more competitive ETCs providing overlapping service.837 These areas
833 Interim Cap Order, 23 FCC Rcd at 8843-44, paras. 19-20. See also supra note 826.
834 USAC estimates that 95 to 97 percent of high-cost support to competitive ETCs is provided to wireless carriers.
High-Cost Program Quarterly Statistics, “High-Cost Support Distribution by Wireless & Wireline CETCs, 1998-
1Q2011” available at http://www.usac.org/about/universal-service/fund-facts/fund-facts-high-cost-quarterly-
program-statistics.aspx
835 Blumberg & Luke, Wireless Substitution: Early Release of Estimates from the National Health Interview Survey,
July – December 2010, CDC Division of Health Interview Statistics, National Center for Health Statistics (rel. June
8, 2011) available at www.cdc.gov/nchs/data/nhis/earlyrelease/wireless201106.pdf.
836 See OBI Broadband Availability Gap; see also Rural Associations USF/ICC Transformation NPRM Comments at
57 (“[d]ifferent network technologies
provide different service functionalities and entail different construction, operating and
maintenance costs”).
837 Most of Puerto Rico, including San Juan, is served by four or more competitive ETCs receiving support. See
Universal Service Administrative Company, Federal Universal Service Support Mechanism Fund Size Projections
(continued…)
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may be attracting investment that could otherwise be directed elsewhere, including areas that are notcurrently served. Conversely, in some areas the subsidy provided by the identical support rule may be too
low, so that no competitive ETCs seek to serve the area, resulting in inadequate mobile coverage.
506. Moreover, today, competitive ETC support is calculated, and lines are reported, according to
the billing address of the subscriber.838 Although the identical support rule provides a per-line subsidy for
each competitive ETC handset in service, the customer need not use the handset at the billing address in
order to receive support. Indeed, mobile competitive ETCs may receive support for some customers that
rarely use their handsets in high-cost areas, but typically use their cell phones on highways and in towns
or other places in which coverage would be available even without support.839 As currently constructed,
the rule fails to ensure that facilities are built in areas that actually lack coverage.840
507. We reject contentions that competitive ETCs serving certain types of areas should be
exempted from elimination of the identical support rule.841 For example, a number of commenters from
Alaska suggest that Alaska should be excluded altogether from today’s reforms, and that high-cost
support should generally continue in Alaska at existing levels with redistribution of that support within
the state.842 We appreciate and recognize that Alaska faces uniquely challenging operating conditions,
and agree that national solutions may require modification to serve the public interest in Alaska. We do
not, however, believe that the Alaskan proposals ultimately best serve the interest of Alaskan consumers.
(Continued from previous page)
for Fourth Quarter 2011, filed Aug. 2, 2011, at Apps. HC10, HC19. Similarly, four or more competitive ETCs are
designated to serve much of Mississippi and Alabama, including sizable communities such as Jackson, Birmingham,
and Huntsville, and along the Interstate highways and other major roadways of the state. Id. at App. HC21. See
also FCC Response to House Energy and Commerce Committee, Table 1.
838 47 C.F.R. § 54.307(b).
839 Conversely, some carriers have recognized that the use of billing addresses does not accurately represent the
costs of serving their customers who reside in low-cost areas but use their mobile phones in remote areas, such as oil
fields. See Arctic Slope Tel. Ass’n Cooperative, Inc., Petition for Waiver of the Federal Communications
Commissions Rules Concerning the Administration of the Universal Service Fund, CC Docket No. 96-45 (filed Jan.
31, 2008); Letter from John Nakahata, Counsel to General Communications, Inc., to Dana Shaffer, FCC, filed
January 26, 2009 (proposing alternative methods of locating customers for high-cost universal service purposes).
840 We acknowledge that ETC designations typically create build-out requirements for wireless carriers that are
designated ETCs. See Mississippi PSC USF/ICC Transformation NPRM Comments at 4-6. However, we believe
that federal support to advance our goal of achieving universal availability of mobile voice and broadband should
provide direct incentives for the achievement of our goals, aligning support payments with deployment and
coverage.
841 See GCI USF/ICC Transformation NPRM Comments at 30 (proposing to retain identical support for Covered
locations); Smith Bagley USF/ICC Transformation NPRM Comments at 9 (proposing to retain identical support for
Covered Locations); Docomo Pacific et al USF/ICC Transformation NPRM Comments at 14-15 (proposing to retain
identical support in Territories); ACS USF/ICC Transformation NPRM Comments at 21 (proposing “improved”
identical support frozen on a per-line basis); Alaska Rural August 29 USF/ICC Transformation NPRM Comments at
7-11; National Tribal Telecom Ass’n USF/ICC Transformation NPRM Comments at 49; MTPCS USF/ICC
Transformation NPRM Comments at 7-8; MTPCS & Viaero USF/ICC Transformation NPRM Comments at 22-24;
IT&E USF/ICC Transformation NPRM Reply at 2. Nonetheless, as described below, see infra paras. 529-531, we
delay the phase-down of identical support for certain competitive ETCs serving remote areas of Alaska and for
Standing Rock Telecommunications, a Tribally owned competitive ETC, by two years. During that interim, the
identical support rule will continue to apply in those areas, albeit subject to constraints. The identical support rule
will be fully eliminated in all areas when the delayed phase-down begins.
842 GCI USF/ICC Transformation NPRM Comments at 30; ACS USF/ICC Transformation NPRM Comments at 21;
Alaska Rural August 3 PN Comments at 7-11.
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We believe that the package of reforms adopted in the Order targeting funding for broadband andmobility, eliminating duplicative support, and ensuring all mechanisms provide incentives for prudent and
efficient network investment and operation is the best approach for all parts of the Nation, including
Alaska.
508. That said, it is important to ensure our approach is flexible enough to take into account the
unique conditions in places like Alaska, and we make a number of important modifications to the national
rules, particularly with respect to public interest obligations,843 the Mobility Funds,844 and competitive
ETC phase down,845 to account for those special circumstances, such as its remoteness, lack of roads,
challenges and costs associated with transporting fuel, lack of scalability per community, satellite and
backhaul availability, extreme weather conditions, challenging topography, and short construction season.
Further, to the extent specific proposals have a disproportionate or inequitable impact on any carriers
(wireline or wireless) serving Alaska, we note that we will provide for expedited treatment of any related
waiver requests for all Tribal and insular areas.846 We believe this approach, on balance, provides the
benefits of our national approach while taking into account the unique operating conditions in some
communities. Analogous proposals to maintain existing wireline and wireless support levels in other
geographic areas, including the U.S. Territories and other Tribal lands, suffer the same infirmities as the
proposals related to Alaska,847 and are also rejected.
509. We note that the elimination of the identical support rule applies also to competitive ETCs
providing fixed services, including competitive wireline service providers. The reforms we adopt
elsewhere in the Order are designed to achieve nearly ubiquitous broadband deployment. In those states
where the incumbent price cap carrier declines to make a state-level commitment to build broadband in
exchange for model-based support, all competitive ETCs will have the opportunity to compete to provide
supported services. In other areas, where the incumbent service providers will be responsible for
achieving the universal service goals, we find it would not be in the public interest to provide additional
support to carriers providing duplicative services. In addition, in areas where unsubsidized providers
have built out service, no carrier – incumbent or competitive – will receive support, placing all providers
on even footing.848
510. We reject any arguments that we may not eliminate the identical support rule because doing
so would prevent some carriers from receiving high-cost support. 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.”849 ETCs are not
entitled to the expectation of any particular level of support, or even any support, so long as the level of
support provided is sufficient to achieve universal service goals. As explained above, we find that the
843 See supra para. 101.
844 See supra paras. 481-492, 497.
845 See infra paras. 529-531.
846 See infra para. 544.
847 See, e.g., Smith Bagley USF/ICC Transformation NPRM Comments at 9; National Tribal Telecom Ass’n
USF/ICC Transformation NPRM Comments at 49; MTPCS USF/ICC Transformation NPRM Comments at 7-8;
Docomo Pacific et al. USF/ICC Transformation NPRM Comments at 14-15; IT&E USF/ICC Transformation NPRM
Reply at 2.
848 See supra para. 170.
849 Rural Cellular Association v. FCC, 588 F.3d 1095, 1103 (D.C. Cir. 2009) (quoting Alenco Communications, Inc.
v. FCC, 201 F.3d 608, 621 (5th Cir. 2000)). See also supra para. 293.
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identical support rule does not provide an amount to any particular carrier that is reasonably calculated tobe sufficient but not excessive for universal service purposes.
511. For all of these reasons, we find the identical support rule does not effectively serve the
Commission’s goals, and we eliminate the rule effective January 1, 2012.
5.
Transition of Competitive ETC Support to CAF
512. Background. In the NPRM, we proposed to transition all existing support for competitiveETCs to a new CAF program over a five-year period.850 In the alternative, we proposed to transition
existing support to the new CAF program over a five-year period, but to allow individual competitive
ETCs to make either rules-based or waiver-based showings that would permit them to continue to receive
support until the new CAF program had been implemented.851 We also sought comment on GCI’s
proposal that any transition of competitive ETC support to the CAF include an exception for competitive
ETCs serving Tribal lands and Alaska Native regions (“covered locations”).852
513. Discussion. We transition existing competitive ETC support to the CAF, including our
reformed system for supporting mobile service over a five-year period beginning July 1, 2012. We find
that a transition is desirable in order to avoid shocks to service providers that may result in service
disruptions for consumers. Several commenters supported longer transition periods, but we do not find
their arguments compelling.853 We understand that current recipients would prefer a slower, longer
transition that provides them with more universal service revenues under the current system. We find,
however, that a five-year transition will be sufficient for competitive ETCs that are currently receiving
high-cost support to adjust and make necessary operational changes to ensure that service is maintained
during the transition.
514. Moreover, during this period, competitive ETCs offering mobile wireless services will have
the opportunity to bid in the Mobility Fund Phase I auction in 2012 and participate in the second phase of
the Mobility Fund in 2013. Competitive ETCs offering broadband services that meet the performance
standards described above will also have the opportunity to participate in competitive bidding for CAF
support in areas where price cap companies decline to make a state-level broadband commitment in
exchange for model-determined support, as described above, in 2013. With these new funding
opportunities, many carriers, including wireless carriers, could receive similar or even greater amounts of
funding after our reforms than before, albeit with that funding more appropriately targeted to the areas
that need additional support.
515. For the purpose of this transition, we conclude that each competitive ETC’s baseline support
amount will be equal to its total 2011 support in a given study area, or an amount equal to $3,000 times
850 USF/ICC Transformation NPRM, 26 FCC Rcd at 4640-42, paras. 246-49.
851 Id. at paras. 250-55.
852 Id. at para. 259.
853 See RTG USF/ICC Transformation NPRM Comments at 4, 10; United States Cellular USF/ICC Transformation
NPRM Comments at 15; USA Coalition at 22. Some commenters urged immediate elimination of competitive ETC
funding. XO Communications USF/ICC Transformation NPRM Comments at 38-39; RICA USF/ICC
Transformation NPRM Comments at 11-15 (proposing immediate elimination of identical support rule, but support
based on own costs); see also NASUCA USF/ICC Transformation NPRM Comments at 45 (proposing immediate
elimination of IAS for competitive ETCs); Sprint Nextel USF/ICC Transformation NPRM Comments at 34
(proposing 3-year phase-down); Verizon USF/ICC Transformation NPRM Comments at 49-50 (proposing
immediate 40 percent reduction).
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the number of reported lines as of year-end 2011, whichever is lower.854 Using a full calendar year ofsupport to set the baseline will provide a reasonable approximation of the amount that competitive ETCs
would currently expect to receive, absent reform, and a natural starting point for the phase-down of
support.
516. In addition, we limit the baseline to $3,000 per line in order to reflect similar changes to our
rules limiting support for incumbent wireline carriers to $3,000 per line per year.855 As discussed above,
the per-line amounts received by competitive ETCs are a highly imperfect approximation of the amount
of subsidy necessary to support mobile service in a particular geographic area. There is no indication in
the record before us that competitive ETCs need support in excess of $3,000 per line to maintain existing
service pending transition to the Mobility Fund. Moreover, if we did not apply the $3,000 per line limit
to the baseline amount for competitive ETCs, their baselines could, in some circumstances, be much
higher than the amount that they would have been permitted had we retained the identical support rule
going forward, due to other changes that may lower support for the incumbent carrier.
517. Because the amount of Mobility Fund Phase II support provided will be designed to provide
a sufficient level of support for a mobile carrier to provide service, we find there is no need for any carrier
receiving Mobility Fund Phase II support to also continue receiving legacy support. Therefore, any such
carrier will cease to be eligible for phase-down support in the first month it is eligible to receive support
pursuant to the Mobility Fund Phase II. The receipt of support pursuant to Mobility Fund Phase I will not
impact a carrier’s receipt of support under the phase-down. Similarly, the receipt of support pursuant to
Mobility Fund Phase II for service to a particular area will not affect a carrier’s receipt of phase-down
support in other areas.856
518. We note that, pursuant to section 214(e) of the Act, competitive ETCs are required to offer
service throughout their designated service areas.857 This requirement remains in place, even as support
provided pursuant to the identical support rule is phased down. A competitive ETC may request
modification of its designated service area by petitioning the entity with the relevant jurisdictional
authority.858 In considering such petitions, the Commission will examine how an ETC modification
would affect areas for which there is no other mobile service provider, and we encourage state
commissions to do the same.
519. Competitive ETC support per study area will be frozen at the 2011 baseline, and that
monthly baseline amount will be provided from January 1, 2012 to June 30, 2012. Each competitive ETC
will then receive 80 percent of its monthly baseline amount from July 1, 2012 to June 30, 2013, 60
percent of its baseline amount from July 1, 2013, to June 30, 2014, 40 percent from July 1, 2014, to June
30, 2015, 20 percent from July 1, 2015, to June 30, 2016, and no support beginning July 1, 2016. We
854 For the purpose of this transition, “total 2011 support” is the amount of support disbursed to a competitive ETC
for 2011, without regard to prior period adjustments related to years other than 2011 and as determined by USAC on
January 31, 2012.
855 See supra paras. 272-279. For the purpose of applying the $3,000 per line limit, USAC shall use the average of
lines reported by a competitive ETC pursuant to line count filings required for December 31, 2010, and December
31, 2011. This will provide an approximation of the number of lines typically served during 2011.
856 In the FNPRM, we seek comment on whether competitive ETCs providing fixed service should be subject to a
similar rule to the extent they win CAF Phase II support. See infra paras. 1095-1097.
857 47 U.S.C. § 214(e). We seek comment on issues related to ETC service areas in the attached Further Notice. See
infra paras. 1089-1120.
858 47 U.S.C. §§ 214(e)(2), (6). A competitive ETC may also be required to seek redefinition of a rural telephone
company’s service area in some instances. 47 U.S.C. § 214(e)(5).
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expect that the Mobility Fund Phase I auction will occur in 2012, and that ongoing support through theMobility Fund Phase II will be implemented by 2013, with $500 million expressly dedicated to mobility.
If the Mobility Fund Phase II is not operational by June 30, 2014, we will halt the phase-down of support
until it is operational.859 We will similarly halt the phase-down of support for competitive ETCs serving
Tribal lands if the Mobility Fund Phase II for Tribal lands has not been implemented at that time. We
anticipate that any temporary halt of the phase-down would be accompanied by additional mobile
broadband public interest obligations, to be determined.860
520. We note that Verizon Wireless and Sprint will continue to be subject to the phase-down
commitments they made in the November 2008 merger Orders.861 Consistent with the process we set
forth in the Corr Wireless Order, their specific phase downs will be applied to the revised rules of general
applicability we adopt today.862 As a result, each carrier will have its baseline support calculated based on
disbursements, with a 20 percent reduction applied beginning July 1, 2012. Sprint, which elected Option
A described in the Corr Wireless Order, will, in 2012, have an additional reduction applied as necessary
to reduce its support to 20 percent of its 2008 baseline amount. Verizon Wireless, which elected Option
B, will, in 2012, have an 80 percent reduction applied to the support it would otherwise receive. In 2013,
neither carrier will receive phase down support, consistent with the commitments. To the extent that they
qualify by remaining ETCs or obtaining ETC designations and agreeing to the obligations imposed on all
Mobility Fund recipients, they will be permitted to participate in Mobility Fund Phases I and II.863
521. In determining this transition process, we also considered (a) applying the reduction factors
to each state’s interim cap amount, or (b) converting each competitive ETC’s baseline amount to a per-
line amount, to which the reduction factor would be applied. We reject these alternatives because they
would provide less certainty regarding support amounts for competitive ETCs during the transition and
would create greater administrative burdens and complexity. Under the first alternative, an individual
competitive ETC’s support would continue to be affected by line counts, support calculations and
relinquishments for other, unrelated carriers within the state. Under the second alternative, a competitive
859 We estimate that this would stabilize competitive ETC phase-down support at approximately $600 million
annually.
860 The temporary halt will apply to wireline competitive ETCs as well as competitive ETCs providing mobile
services. As noted above, see supra para. 501, wireline competitive ETCs receive a relatively small portion of total
competitive ETC support and developing administrative procedures to separately address wireline competitive ETCs
would be unduly administratively burdensome.
861 Applications of Cellco Partnership d/b/a Verizon Wireless and Atlantis Holdings LLC for Consent to Transfer
Control of Licenses, Authorizations, and Spectrum Manager and De Facto Transfer Leasing Arrangements and
Petition for Declaratory Ruling That the Transaction Is Consistent with Section 310(b)(4) of the Communications
Act, WT Docket No. 08-95, Memorandum Opinion and Order and Declaratory Ruling, 23 FCC Rcd 17444 (2008);
Sprint Nextel Corporation and Clearwire Corporation Applications for Consent to Transfer Control of Licenses,
Leases, and Authorizations, WT Docket No. 08-94, Memorandum Opinion and Order and Declaratory Ruling, 23
FCC Rcd 17570 (2008).
862 Corr Wireless Order, 25 FCC Rcd at 12589-61, paras. 14-17. The Corr Wireless Order provided Sprint and
Verizon Wireless each with two options regarding how the merger commitments would be applied. Option A
established a fixed baseline support amount to which a specified reduction factor would be applied each year during
the phasedown. After calculating the carrier’s support pursuant to the Commission’s rules, the carrier’s support is
reduced pursuant to the merger commitment only if the support exceeds the reduced baseline. Id. Under Option B,
the carrier’s baseline floats each quarter, based on the amount of support it is eligible to receive pursuant to the
Commission’s rules, and the specified reduction factor is applied to that support amount. Sprint elected Option A
and Verizon Wireless elected Option B.
863 See supra paras. 386-410.
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ETC’s support would fluctuate based on line growth or loss. We believe, on balance, that the additionalcertainty to all competitive ETCs and the administrative efficiencies for USAC of freezing study area
support as the baseline, particularly at a time when considerable demands will be placed on USAC to
implement an entirely new support mechanism, outweigh the potential negative impact to any individual
competitive ETCs that otherwise might receive greater support amounts during the transition to the CAF.
In addition, competitive ETCs will be relieved of the obligation to file quarterly line counts, which will
reduce their administrative burden as well.
522. In the NPRM, we sought comment on whether exceptions to the phase down or other
modified transitions should be permitted for some carriers.864 Although we adopt limited exceptions for
some remote parts of Alaska described below and for one Tribally-owned carrier whose ETC designation
was modified after release of the USF-ICC Transformation NPRM, we decline to adopt any general
exceptions to our transition. Although some commenters have argued that broad exceptions will be
needed, they did not generally provide the sort of detailed data and analysis that would enable us to
develop a general rule for which carriers would qualify.865 The purpose of the phase down is to avoid
unnecessary consumer disruption as we transition to new programs that will be better designed to achieve
universal service goals, especially with respect to promoting investment in and deployment of mobile
service to areas not yet served. We do not wish to encourage further investment based on the inefficient
subsidy levels generated by the identical support rule. We conclude that phasing down and transitioning
existing competitive support will not create significant or widespread risks that consumers in areas that
currently have service, including mobile service, will be left without any viable mobile service provider
serving their area.866
523. We will, however, consider waiver requests on a case-by-case basis.867 Consistent with the
phase-down support’s purpose of protecting existing service during the transition to the Mobility Fund
programs, we would not find persuasive arguments that waivers are necessary in order to expand
deployment and service offerings to new areas. We anticipate that future investment supported with
universal service support will be provided pursuant to the new programs.
524. The Commission will carefully consider all requests for waiver of the phase down that meet
the requirements described above. We expect that those requests will not be numerous. We note that two
of the four nationwide carriers – Verizon Wireless and Sprint – have already given up significant amounts
of the support they received under the identical support rule, and there is no indication in the record
before us that those companies have turned off towers as a consequence of relinquishing their support.
525. We note that the transition we adopt here will include those carriers currently receiving
support under the Covered Locations exception to the interim cap and those carriers that have sought to
take advantage of the own-costs exception to the cap.868 In adopting the Covered Locations exception to
the funding cap in the 2008 Interim Cap Order, we recognized that penetration rates for basic telephone
864 USF/ICC Transformation NPRM, 26 FCC Rcd at 4640-42, paras. 250-55.
865 See RTG USF/ICC Transformation NPRM Comments at 11; see also NASUCA USF/ICC Transformation
NPRM Comments at 46 (arguing that fixed rules would be subject to abuse, but waivers may be necessary).
866 As described, supra para. 509, we think any loss of service is particularly unlikely with respect to consumers
served by competitive ETCs providing fixed services – e.g., wireline competitive ETCs – because the incumbent
LEC in the area served by the competitive carrier is required to provide voice service throughout its service territory.
867 See infra paras. 539-544.
868 See Interim Cap Order, 23 FCC Rcd at 8848-49, para. 31-33.
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service on Tribal lands869 were lower than for the rest of the Nation, and we concluded that competitiveETCs serving those areas were not merely providing complementary services.870 Under this exception,
competitive ETCs serving Tribal lands have operated without a cap, and have benefited from significant
funding increases. Indeed, support provided for service in Covered Locations has nearly doubled, from
an estimated $72 million in 2008 to an estimated $150 million in 2011, while competitive ETC high-cost
support for the remainder of the nation was frozen.871
526. We note that a significant numbers of supported lines under the Covered Locations
exception are in larger cities in Alaska where multiple competitive ETCs often serve the same area.872
The result is that a significant amount of support in Alaska is provided to competitive ETCs serving the
three largest Alaskan cities, Anchorage, Fairbanks, and Juneau.873
527. The interim cap—along with its exceptions—was intended to be in place only until the
Commission adopted comprehensive reforms to the high-cost program.874 We adopt those reforms today.
It is therefore appropriate, as we transition away from the identical support rule and the interim cap to a
new high-cost support mechanism, including for mobile services, that this transition should begin for all
competitive ETCs, including those that previously received uncapped support under exceptions to the
interim cap.
528. With respect to Covered Locations, we recognize the significant strides that competitive
ETCs have made in Covered Locations in the last two years, and that more still must be done to support
expanded mobile coverage on Tribal lands. But, as with the rest of the Nation, we conclude that the most
effective way to do so will be through mechanisms that specifically and explicitly target support to
expand coverage in Tribal lands where there is no economic business case to provide mobile service, not
through the permanent continuation of the identical support rule.875 Our newly created Mobility Funds
will provide dedicated funding to Tribal lands in a manner consistent with the policy objectives
underlying our Covered Locations policy to continue to promote deployment in these communities.
529. We therefore lift the Covered Locations exception, and conclude that those carriers serving
Tribal lands will be subject to the national five-year transition period. We find persuasive, however,
869 Covered Locations were defined in the Interim Cap Order to include tribal lands or Alaska Native regions as
those terms are defined in section 54.400(e) of the Commission’s rules. See 47 C.F.R. 54.400(e) (tribal lands or
Alaska Native regions are “any federally recognized Indian tribe's reservation, pueblo, or colony, including former
reservations in Oklahoma, Alaska Native regions established pursuant to the Alaska Native Claims Settlement Act
(85 Stat. 688), and Indian allotments.”).
870 See Interim Cap Order, 23 FCC Rcd at 8848, para. 32.
871 See High-Cost Program Quarterly Statistics, “Covered Locations Study Area Support” available at
http://usac.org/about/universal-service/fund-facts-charts/Covered-Locations-Study-Area-Support.pdf
872 Universal Service Administrative Company, Federal Universal Service Support Mechanism Fund Size
Projections For First Quarter 2012, filed Nov. 2, 2011, at App. HC19. Fifty-nine percent of competitive ETC lines
in Alaska are in three study areas that include Anchorage, Juneau, and Fairbanks. Id. In each of those study areas, at
least three competitive ETCs receive funding today.
873 Twenty percent of 2010 high-cost competitive ETC disbursements in Alaska were distributed to competitive
ETCs serving the Anchorage, Fairbanks, and Juneau study areas alone. Competitive ETC Support by Incumbent
Study Area by Month as Provided by USAC (Attach. C Report 5, submitted pursuant to Memorandum of
Understanding between Federal Communications Commission and the Universal Service Administrative Company),
available at http://transition.fcc.gov/wcb/iatdineca.html.
874 See Interim Cap Order, 23 FCC Rcd at 8834, para. 1.
875 See supra paras. 481-492, 497.
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arguments that carriers serving remote parts of Alaska,876 including Alaska Native villages, should have aslower transition path in order to preserve newly initiated services and facilitate additional investment in
still unserved and underserved areas during the national transition to the Mobility Funds.877 Over 50
remote communities in Alaska have no access to mobile voice service today, and many remote Alaskan
communities have access to only 2G services.878 While carriers serving other parts of Alaska will be
subject to the national five-year transition period, we are convinced a more gradual approach is warranted
for carriers in remote parts of Alaska. Specifically, in lifting the Covered Locations exception, we delay
the beginning of the five-year transition period for a two-year period for remote areas of Alaska. As a
result, we expect that ongoing support through the Mobility Fund Phase II, including the Tribal Mobility
Fund Phase II, will be implemented prior to the beginning of the five-year transition period in July 2014
for remote parts of Alaska, providing greater certainty and stability for carriers in these areas.879 During
this two-year period, we establish an interim cap for remote areas of Alaska880 for high-cost support for
competitive ETCs, which balances the need to control the growth in support to competitive ETCs in
uncapped areas and the need to provide a more gradual transition for the very remote and very high-cost
areas in Alaska to reflect the special circumstances carriers and consumers face in those communities.881
530. In addition, we adopt a limited exception to the phase-down of support for Standing Rock
Telecommunications, Inc. (Standing Rock), a Tribally-owned competitive ETC that had its ETC
designation modified within calendar year 2011 for the purpose of providing service throughout the entire
876 For purposes of this Order, we treat as remote areas of Alaska all areas other than the study areas, or portions
thereof, that include the three major cities in Alaska with over 30,000 in population, Anchorage, Juneau, and
Fairbanks. See http://quickfacts.census.gov/qfd/states/02/0224230.html. With respect to Anchorage, we exclude the
ACS of Anchorage study area (SAC 613000) as well as Eagle River Zones 1 and 2 and Chugiak Zones 1 and 2 of
the Matanuska Telephone Authority study area (SAC 619003). For Fairbanks, we exclude zone 1 of the ACS of
Fairbanks (SAC 613008), and for Juneau, we exclude the ACS Alaska - Juneau study area (SAC 613012). We note
that ACS and GCI concur that the study areas, or portions thereof, that include these three cities are an appropriate
proxy for non-remote areas of Alaska. See Letter from John Nakahata, counsel to General Communications, Inc., to
Marlene H. Dortch, Secretary, FCC (filed Oct. 21, 2011) (GCI/ACS Oct. 21 Letter). There is no evidence on the
record that any accommodation is necessary to preserve service or protect consumers in these larger Alaskan
communities.
877 GCI/ACS Oct. 21 Letter.
878 Id. at 2.
879 As noted above, carriers in remote areas of Alaska may not receive phase-down support in any area in which they
receive support pursuant to either component of Mobility Fund Phase II. See supra para. 517. Further, we note that
the halt of the phase-down described above would apply to remote areas of Alaska as well. See supra para. 519.
880 This cap will be modeled on the state-by-state interim cap that has been in place under the Interim Cap Order.
23 FCC Rcd at 8846, paras. 26-28. Specifically, the interim cap for remote areas of Alaska will be set at the total of
all competitive ETC’s baseline support amounts in remote areas of Alaska using the same process described above.
See supra paras. 515-516. On a quarterly basis, USAC will calculate the support each competitive ETC would have
received under the frozen per-line support amount as of December 31, 2011 capped at $3000 per year, and then, if
necessary, calculate a state reduction factor to reduce the total amount down to the cap amount for remote areas of
Alaska. Specifically, USAC will compare the total amount of uncapped support to the interim cap for remote areas
of Alaska. Where the total uncapped support is greater than the available support amount, USAC will divide the
interim cap support amount by the total uncapped amount to yield the reduction factor. USAC will then apply the
reduction factor to the uncapped amount for each competitive ETC within remote areas of Alaska to arrive at the
capped level of high-cost support. If the uncapped support is less than the available capped support amount, no
reduction will be required.
881 See supra paras. 507-508.
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Standing Rock Sioux Reservation.882 We recognize that Tribally-owned ETCs play a vital role in servingtheir communities, often in remote, low-income, and unserved and underserved regions. We find that a
tailored approach in this particular instance is appropriate because of the unique federal trust relationship
we share with federally recognized Tribes,883 which requires the federal government to adhere to certain
fiduciary standards in its dealings with Tribes.884 In this regard, the federal government has a
longstanding policy of promoting Tribal self-sufficiency and economic development, as embodied in
various federal statutes.885 As an independent agency of the federal government, “the Commission
recognizes its own general trust relationship with, and responsibility to, federally recognized Tribes.”886
In keeping with this recognition, the Commission has previously taken actions to aid Tribally-owned
companies, which are entities of their Tribal governments and instruments of Tribal self-determination.887
For example, we have adopted licensing procedures to increase radio station ownership by Tribes and
Tribally-owned entities through the use of a “Tribal Priority.”888
531. A limited exception to the phase-down of competitive ETC support will give Standing
Rock, a nascent Tribally-owned ETC that was designated to serve its entire Reservation and the only such
ETC to have its ETC designation modified since release of the USF-ICC Transformation NPRM in
February 2011, the opportunity to ramp up its operations in order to reach a sustainable scale to serve
consumers in its service territory. We find that granting a two-year exception to the phase-down of
support to this Tribally-owned competitive ETC is in the public interest. For a two-year period, Standing
Rock will receive per-line support amounts that are the same as the total support per line received in the
fourth quarter of this year. We adopt this approach in order to enable Standing Rock to reach a
sustainable scale so that consumers on the Reservation can realize the benefits of connectivity that, but for
Standing Rock, they might not otherwise have access to.889
882 See Telecommunications Carriers Eligible for Universal Service Support; Standing Rock Telecommunications,
Inc. Petition for Designation as an Eligible Telecommunications Carrier; Petition of Standing Rock
Telecommunications, Inc. to Redefine Rural Service Area; Petition for Reconsideration of Standing Rock
Telecommunications, Inc.’s Designation as an Eligible Telecommunications Carrier on the Standing Rock Sioux
Reservation, WC Docket No. 09-197, Memorandum Opinion and Order on Reconsideration, 26 FCC Rcd 9160
(2011) (Standing Rock Final ETC Designation Order).
883 See, e.g., Seminole Nation v. United States, 316 U.S. 286, 296 (1942) (citations omitted).
884 See, e.g., United States v. Mitchell, 463 U.S. 206 (1983).
885 See, e.g., The Indian Financing Act of 1974, 25 U.S.C. § 1451(1974); The Indian Self-Determination and
Education Assistance Act of 1975, 25 U.S.C. § 450 (1975); The Indian Civil Rights Act of 1968, 25 U.S.C. § 1301
(1968).
886 Statement of Policy on Establishing a Government-to-Government Relationship with Indian Tribes, 16 FCC Rcd
4078, 4080-81 (2000) (Tribal Policy Statement).
887 See Improving Communications Services for Native Nations, CG Docket No. 11-41, Notice of Inquiry, 26 FCC
Rcd 2672, 2677-78 (2011) (Native Nations NOI) (“Emphasizing the historic federal trust relationship between itself
and the Tribes, and the ability of the Commission to create the Tribal Priority based on the constitutional
classification of Tribes as governmental entities, the Commission limited eligibility for the Tribal Priority to Tribes
and entities majority owned by Tribes and proposing to serve Tribal lands.”) (citing Policies To Promote Rural
Radio and To Streamline Allotment and Assignment Procedures, MB Docket No. 09-52, First Report and Order and
Notice of Proposed Rulemaking, 25 FCC Rcd 1583, 1590, 1596) (Rural Radio First Report and Order)).
888 Rural Radio First Report and Order, 25 FCC Rcd at 1587-88.
889 According to its most recently reported line counts, Standing Rock reported serving only 808 lines. See
Universal Service Administrative Company, Federal Universal Service Support Mechanisms Fund Size Projections
for First Quarter 2012, at Apps. HC19, HC20 (filed Nov. 2, 2011).
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532. We conclude that carriers that have sought to take advantage of the “own-costs” exceptionto the existing interim cap on competitive ETC funds should not be exempted from the phase down of
support. The “own costs” exception was intended to exempt carriers filing their own cost data from the
interim cap to the extent their costs met an appropriate threshold.890 Because we are transitioning away
from support based on the identical support rule and toward new high-cost support mechanisms, we see
no reason to continue to make the exception available going forward.891
F.
Connect America Fund in Remote Areas
533. In this section, we establish a budget for CAF support in remote areas. This reflects ourcommitment to ensuring that Americans living in the most remote areas of the nation, where the cost of
deploying wireline or cellular terrestrial broadband technologies is extremely high, can obtain affordable
broadband through alternative technology platforms such as satellite and unlicensed wireless. As the
National Broadband Plan observes, the cost of providing service is typically much higher for terrestrial
networks in the hardest-to-serve areas of the country than in less remote but still rural areas.892
Accordingly, we have exempted the most remote areas, including fewer than 1 percent of all American
homes, from the home and business broadband service obligations that otherwise apply to CAF
recipients.893 By setting aside designated funding for these difficult-to-serve areas, however, and by
modestly relaxing the broadband performance obligations associated with this funding to encourage its
use by providers of innovative technologies like satellite and fixed wireless, which may be significantly
less costly to deploy in these remote areas, we can ensure that those who live and work in remote
locations also have access to affordable broadband service.
534. Although we seek further comment on the details of distributing dedicated remote-areas
funding in the Further Notice of Proposed Rulemaking accompanying this Order, we set as the budget for
this funding at least $100 million annually. Our choice of budget necessarily involves the reasonable
exercise of predictive judgment, rather than a precise calculation: Many of the innovative, lower-cost
approaches to serving hard to reach areas continue to evolve rapidly; we are not setting the details of the
distribution mechanism in this Order; and we are balancing competing priorities for funding.
Nevertheless, we conclude that a budget of at least $100 million per year is likely to make a significant
difference in ensuring meaningful broadband access in the most difficult-to-serve areas.
535. We note in this regard that some remote areas in rural America already have broadband that
meets the performance requirements we establish above, and we do not envision that the dedicated
funding we establish with this budget would be available in those areas. For example, the CQBAT model
relied on by the ABC Plan predicts that there are 1.2 million residential and business locations where the
890 Interim Cap Order, 23 FCC Rcd at 8848, para. 31. See also id. at 8850, para. 36 & n.108 (noting that the interim
cap would go into effect immediately, but that the exceptions would go into effect only after approval of the relevant
reporting requirements by the Office of Management and Budget).
891 The Commission will address pending petitions filed pursuant to the own-cost exception in a separate
proceeding.
892 See National Broadband Plan at 138; OBI, Broadband Availability Gap at 6.
893 As described above, we have excluded from carriers’ broadband service obligations in price-cap territories all
areas where the model-estimated cost to serve a location is above an “extremely high cost” threshold. For rate-of-
return areas, we may adopt a similar approach once the CAF model is finalized. In the meantime, rate-of-return
carriers are required to extend broadband on reasonable request. See supra section VII.D.2. (Public Interest
Obligations of Rate-of-Return Carriers).
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forward-looking cost of wireline broadband service is greater than $256 per month, and that of these, onlyapproximately 670,000 locations are unserved by any terrestrial broadband.894
536. Based on the RUS’s prior experience with dedicated satellite funding to remote areas, we are
confident that a budget of at least $100 million could make a significant difference in expanding
availability of affordable broadband service at such locations. Satellite broadband is already available to
most households and small businesses in remote areas,895 and is likely to be available at increasing speeds
over time,896 but current satellite services tend to have significantly higher prices to end-users than
terrestrial fixed broadband services, and include substantial up-front installation costs.897 To help
overcome these barriers in the RUS’s BIP satellite program, supported providers received a one-time
upfront payment per location to offer service for at least one year at a reduced price.898 There has been
substantial consumer participation in this program, with providers estimating that they would be able to
provide service to approximately 424,000 people at the reduced rates.899 Were the FCC to take a similar
approach in distributing the $100 million we set aside for remote areas funding, we could, in principle,
provide a one-time sign-up subsidy to almost all of the estimated 670,000 remote, terrestrially-unserved
locations within 4 years.900
537. We emphasize that this calculation is only illustrative. For one, we do not anticipate
restricting the technology that can be used for remote area support. To the contrary, we seek to encourage
894 Of the remainder, some areas already have broadband meeting our performance requirements, while other areas
have some form of basic broadband that does not yet meet those requirements. See Letter from Mike Lieberman,
AT&T, Michael D. Saperstein, Jr., Frontier, Jeffrey S. Lanning, CenturyLink, Maggie McCready, Verizon, Michael
T. Skrivan, Fairpoint Communications, Frank Schueneman, Windstream, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, et al. (filed Sept. 28, 2011).
895 While such funding will be available to community anchor institutions, we observe that community anchor
institutions in rural America often are located near the more densely populated area in a given county – the small
town, the county seat, and so forth – which are less likely to be extremely high cost areas.
896 See, e.g., Satellite Broadband Providers (DISH, EchoStar, Hughes, ViaSat, WildBlue) Joint Comments at 10-11;
ViaSat Comments at 2-3, 5; Satellite Broadband Providers (DISH, EchoStar, Hughes, ViaSat, WildBlue) Joint Reply
Comments at 3.
897 We seek comment below in the FNPRM on how and whether Remote Areas Fund support should be allocated to
defray the higher startup costs for satellite services. See infra paras. 1269-1271.
898 Generally, providers must offer their Basic Service Package for no more $50 per month for at least one year,
with no length of service requirements. Certain exceptions apply to the extent a provider is offering a Basic Service
Package for $40 or less/month or for Expanded or Commercial Service Packages. In addition, providers must
provide customer premise equipment (CPE) at no cost. See Broadband Initiatives Program, Request for Proposals.
Federal Register 75 (7 May 2010) 25185-25195.
899 Spacenet, Inc., Echostar XI Operating LLC, Hughes Network Systems, and WildBlue Communications were
awarded $100 million in grant funds, with approximately 424,000 people standing to benefit nationwide. See Rural
Utility Service, Press Release, Satellite Awards, Broadband Initiatives Program (Oct. 20, 2010) available at
http://www.rurdev.usda.gov/supportdocuments/BIPSatelliteFactSheet10-20-10.pdf.
900 The CQBAT model relied on by the ABC plan indicates that there are approximately 670,000 remote,
terrestrially-unserved locations. See supra note 894. The average number of people per household in the U.S. is
2.59, indicating that there are approximately 1,735,300 people living in remote locations. See U.S. Census Bureau,
Current Population Survey, 2010 Annual Social and Economic (ASEC) Supplement, Table AVG1 (last visited Oct.
28, 2011) available at http://www.census.gov/population/socdemo/hh-fam/cps2010/tabAVG1.xls. Thus, if we took
an approach similar to the RUS BIP, only 39,300 people (or approximately 15,000 households) would not have
received a one time subsidy at the end of four years.
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maximum participation of providers able to serve these most difficult to reach areas. In addition, theCommission may choose to disburse funding for remote areas in ways that either increase or decrease the
dollars per supported customer, as compared to the RUS program. For example, the Commission may
choose to provide ongoing support, in addition to or instead of a one-time subsidy, or we may adopt a
means-tested approach to reducing the cost of service in remote areas, to target support to those most in
need. We seek comment on each of these approaches in the Further Notice.
538. Notwithstanding this uncertainty, however, the record before us is sufficient for us to
conclude that a budget of at least $100 million falls within a reasonable initial range for a program
targeted at innovative broadband technologies in remote areas. We expect to revisit this decision over
time, and will adjust support levels as appropriate.
G.
Petitions for Waiver
539. During the course of this proceeding, various parties, both incumbents and competitiveETCs, have argued that reductions in current support levels would threaten their financial viability,
imperiling service to consumers in the areas they serve.901 We cannot, however, evaluate those claims
absent detailed information about individualized circumstances, and conclude that they are better handled
in the course of case-by-case review. Accordingly, we permit any carrier negatively affected by the
universal service reforms we take today to file a petition for waiver that clearly demonstrates that good
cause exists for exempting the carrier from some or all of those reforms, and that waiver is necessary and
in the public interest to ensure that consumers in the area continue to receive voice service.
540. We do not, however, expect to grant waiver requests routinely, and caution petitioners that
we intend to subject such requests to a rigorous, thorough and searching review comparable to a total
company earnings review. In particular, we intend to take into account not only all revenues derived from
network facilities that are supported by universal service but also revenues derived from unregulated and
unsupported services as well.902 The intent of this waiver process is not to shield companies from secular
market trends, such as line loss or wireless substitution. Waiver would be warranted where an ETC can
demonstrate that, without additional universal service funding, its support would not be “sufficient to
achieve the purposes of [section 254 of the Act].”903 In particular, a carrier seeking such waiver must
demonstrate that it needs additional support in order for its customers to continue receiving voice service
in areas where there is no terrestrial alternative. We envision granting relief only in those circumstances
in which the petitioner can demonstrate that the reduction in existing high-cost support would put
consumers at risk of losing voice services, with no alternative terrestrial providers available to provide
voice telephony service using the same or other technologies that provide the functionalities required for
supported voice service.904 We envision granting relief only in those circumstances in which the
petitioner can demonstrate that the reduction in existing high-cost support would put consumers at risk of
losing voice services, with no alternative terrestrial providers available to provide voice telephony service
to consumers using the same or other technologies that provide the functionalities required for supported
voice service. We will also consider whether the specific reforms would cause a provider to default on
901 See, e.g., Kansas Rural Independent Telephone Companies, et al. August 3 PN Comments at 2; RCA USF/ICC
Transformation Comments at 22; Moss Adams LLP USF/ICC Transformation Comments at 4-9; Utah Public
Service Commission USF/ICC Transformation Comments at 2.
902 See Comcast August 3 PN Comments at 18-19.
903 47 U.S.C. 254(e)
904 We do not require petitioners to demonstrate that satellite voice service is unavailable in the area at issue. The
record before us does not conclusively establish that, at this time, satellite voice services (which typically involve
higher latencies than terrestrial services) provide the same consumer benefits as terrestrial voice services. As
satellite services evolve, we may revisit this issue.
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existing loans and/or become insolvent. For mobile providers, we will consider as a factor specificshowings regarding the impact on customers, including roaming customers, if a petitioner is the only
provider of CDMA or GSM coverage in the affected area.
541. Petitions for waiver must include a specific explanation of why the waiver standard is met in
a particular case.905 Conclusory assertions that reductions in support will cause harm to the carrier or
make it difficult to invest in the future will not be sufficient.
542. In addition, petitions must include all financial data and other information sufficient to
verify the carrier’s assertions, including, at a minimum, the following information:
·
Density characteristics of the study area or other relevant geographic area including total
square miles, subscribers per square mile, road miles, subscribers per road mile, mountains,
bodies of water, lack of roads, remoteness, challenges and costs associated with transporting
fuel, lack of scalability per community, satellite and backhaul availability, extreme weather
conditions, challenging topography, short construction season or any other characteristics that
contribute to the area’s high costs.
·
Information regarding existence or lack of alternative providers of voice and whether those
alternative providers offer broadband.
·
(For incumbent carriers) How unused or spare equipment or facilities is accounted for by
providing the Part 32 account and Part 36 separations category this equipment is assigned to.
·
Specific details on the make-up of corporate operations expenses such as corporate salaries,
the number of employees, the nature of any overhead expenses allocated from affiliated or
parent companies, or other expenses.
·
Information regarding all end user rate plans, both the standard residential rate and plans that
include local calling, long distance, Internet, texting, and/or video capabilities.
·
(For mobile providers) A map or maps showing (1) the area it is licensed to serve; (2) the
area in which it actually provides service; (3) the area in which it is designated as a CETC;
(4) the area in which it is the sole provider of mobile service; (5) location of each cell site.
For the first four of these areas, the provider must also submit the number of road-miles,
population, and square miles. Maps shall include roads, political boundaries, and major
topographical features. Any areas, places, or natural features discussed in the provider’s
waiver petition shall be shown on the map.
·
(For mobile providers) Evidence demonstrating that it is the only provider of mobile service
in a significant portion of any study area for which it seeks a waiver. A mobile provider may
satisfy this evidentiary requirement by submitting industry-recognized carrier service
availability data, such as American Roamer data, for all wireless providers licensed by the
FCC to serve the area in question. If a mobile provider claims to be the sole provider in an
area where an industry-recognized carrier service availability data indicates the presence of
905 Generally, the Commission may waive its rules for good cause shown. See 47 C.F.R. § 1.3. The Commission
may exercise its discretion to waive a rule where the particular facts make strict compliance inconsistent with the
public interest. See Northeast Cellular Telephone Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990) (Northeast
Cellular). In addition, the Commission may take into account considerations of hardship, equity, or more effective
implementation of overall policy on an individual basis. See WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir.
1969), cert. denied, 409 U.S. 1027 (1972); Northeast Cellular, 897 F.2d at 1166. Waiver of the Commission’s rules
is therefore appropriate only if special circumstances warrant a deviation from the general rule, and such deviation
will serve the public interest.
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other service, then it must support its claim with the results of drive tests throughout the areain question. In the parts of Alaska or other areas where drive testing is not feasible, a mobile
provider may offer a statistically significant number of tests in the vicinity of locations
covered. Moreover, equipment to conduct the testing can be transported by off-road vehicles,
such as snow-mobiles or other vehicles appropriate to local conditions. Testing must examine
a statistically meaningful number of call attempts (originations) and be conducted in a
manner consistent with industry best practices. Waiver petitioners that submit test results
must fully describe the testing methodology, including but not limited to the test's geographic
scope, sampling method, and test set-up (equipment models, configuration, etc.). Test results
must be submitted for the waiver petitioner’s own network and for all carriers that the
industry-recognized carrier service availability data shows to be serving the area in which the
petitioner claims to be the only provider of mobile service.
·
(For mobile providers). Revenue and expense data for each cell site for the three most recent
fiscal years. Revenues shall be broken out by source: end user revenues, roaming revenues,
other revenues derived from facilities supported by USF, all other revenues. Expenses shall
be categorized: expenses that are directly attributable to a specific cell site, network expenses
allocated among all sites, overhead expenses allocated among sites. Submissions must
include descriptions the manner in which shared or common costs and corporate overheads
are allocated to specific cell sites. To the extent that a mobile provider makes arguments in its
waiver petition based on the profitability of specific cell sites, petitioner must explain why its
cost allocation methodology is reasonable.
·
(For mobile providers) Projected revenues and expenses, on cell-site basis, for 5 years, with
and without the waiver it seeks. In developing revenue and expense projections, petitioner
should assume that it is required to serve those areas in which it is the sole provider for the
entire five years and that it is required to fulfill all of its obligations as an ETC through
December 2013.
·
A list of services other than voice telephone services provided over the universal service
supported plant, e.g., video or Internet, and the percentage of the study area’s telephone
subscribers that take these additional services.
·
(For incumbent carriers) Procedures for allocating shared or common costs between
incumbent LEC regulated operations, competitive operations, and other unregulated or
unsupported operations.
·
Audited financial statements and notes to the financial statements, if available, and otherwise
unaudited financial statements for the most recent three fiscal years. Specifically, the cash
flow statement, income statement and balance sheets. Such statements shall include
information regarding costs and revenues associated with unregulated operations, e.g., video
or Internet.
·
Information regarding outstanding loans, including lender, loan terms, and any current
discussions regarding restructuring of such loans.
·
Identification of the specific facilities that will be taken out of service, such as specific cell
towers for a mobile provider, absent grant of the requested waiver.
·
For Tribal lands and insular areas, any additional information about the operating conditions,
economic conditions, or other reasons warranting relief based on the unique characteristics of
those communities.
543. Failure to provide the listed information shall be grounds for dismissal without prejudice. In
addition to the above, the petitioner shall respond and provide any additional information as requested by
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Commission staff. We will also welcome any input that the relevant state commission may wish toprovide on the issues under consideration, with a particular focus on the availability of alternative
unsubsidized voice competitors in the relevant area and recent rate-setting activities at the state level, if
any.
544. We delegate to the Wireline Competition and Wireless Telecommunications Bureaus the
authority to approve or deny all or part of requests for waiver of the phase-down in support adopted
herein. Such petitions will be placed on public notice, with a minimum of 45 days provided for
comments and reply comments to be filed by the general public and relevant state commission. We direct
the Bureaus to prioritize review of any applications for waiver filed by providers serving Tribal lands and
insular areas, and to complete their review of petitions from providers serving Tribal lands and insular
areas within 45 days of the record closing on such waiver petitions.
H.
Enforcing the Budget for Universal Service
545. As previously noted, we have established an annual budget for the high-cost portion of theUSF of no more than $4.5 billion for the next six years, which will include all support disbursed under
legacy high-cost mechanisms as they are phased out as well as support under new mechanisms, including
the CAF access replacement mechanism discussed more fully below.906 In this section, we address
administrative issues regarding the implementation of that budget target.
546. Specifically, we adopt a framework that will permit the universal service fund to accumulate
reserves in the near term to be used to facilitate the transition to the CAF and to fund one-time universal
service expenses, such as the Mobility Fund Phase I, without causing undesirable volatility in the
contribution factor. To do this, we amend section 54.709(b), giving the Commission greater flexibility to
direct USAC to manage collections to mitigate fluctuations in the contribution factor. Using this new
flexibility, we then provide instruction to USAC to set quarterly demand filings so that consumers
collectively do not contribute more than $4.5 billion on an annual basis to support service in rural and
high cost areas. We also provide instructions to USAC for winding down the existing broadband reserve
account established pursuant to the Corr Wireless Order.
1.
Creating New Flexibility To Manage Fluctuations in Demand
547. Background. In the Corr Wireless Order, the Commission, among other actions, created atemporary reserve account in the Universal Service Fund for the purpose of funding future universal
service program changes without causing undue volatility in the contribution factor.907 The Commission
accomplished this through two actions. First, it instructed USAC, in its quarterly contribution factor
demand filing, to forecast high-cost demand by competitive ETCs at the full amount of the interim cap on
competitive ETC support, even if forecasted demand would otherwise be lower.908 Second, the
Commission waived section 54.709(b) of its rules, which would otherwise require USAC to reduce its
forecasted demand in a subsequent quarter by an amount equal to any excess contributions received.909
Pursuant to the waiver, the Commission instructed USAC not to make such prior period adjustments as
they relate to competitive ETC support for a period of 18 months and to instead place the funds in a
reserve account.910 The eighteen-month waiver is due to expire on February 3, 2012. In addition to
providing these instructions and waiving section 54.709(b), the Commission also sought comment on
906 See infra section XIII.
907 Corr Wireless Order, 25 FCC Rcd at 12862 paras. 20-22.
908 Id. at 12862 para. 21.
909 Id. at 12862-63 para. 22.
910 Id.
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amending section 54.709(b) to permit it to provide alternative instructions to USAC in the future withoutwaiving the rule.911
548. Discussion. We adopt the proposed amendment to section 54.709(b) to permit the
Commission to instruct USAC to take alternative action with regard to prior period adjustments when
making its quarterly demand filings. Currently, the section requires that excess contributions received in
a quarter “will be carried forward to the following quarter.”912 We amend the rule to add paragraph
54.709(b)(1), which shall read, “The Commission may instruct USAC to treat excess contributions in a
manner other than as prescribed in paragraph (b). Such instructions may be made in the form of a
Commission Order or a Public Notice released by the Wireline Competition Bureau. Any such Public
Notice will become effective fourteen days after release of the Public Notice, absent further Commission
action.”
549. Permitting the Commission to modify its current treatment of excess contributions as
necessary on a case-by-case basis will permit it to better manage the effects of one-time and seasonal
events that may create undue volatility in the contribution factor. Programmatic changes, one-time
distributions of support (such as Mobility Fund Phase I), and other transitional processes will likely cause
the quarterly funding demands to fluctuate considerably until the transitions are complete, similarly to
how large, unforecasted one-time contributions have caused significant fluctuations in the past.913 The
ability to provide specific, case-by-case instructions will allow the Commission to smooth the effects of
such events on the contribution factor, rendering it more predictable for the consumers who ultimately
pay for universal service.
550. In response to the NPRM seeking comment on whether to modify section 54.709(b), some
commenters raise questions about whether section 254 of the Act provides the Commission the authority
to establish a broadband reserve fund intended to make disbursements according to rules that were, at the
time, not yet adopted.914 As RICA put it, section 254 requires carriers to contribute to the “specific,
911 Id. at 12863-64 paras. 25-26. In that NPRM, the Commission also sought comment on a modification to its rules
governing the interim cap on competitive ETC support. Id. at para. 24. The Commission adopted the rule –
reducing the interim cap amount when a competitive ETC relinquishes its ETC status – in a subsequent Order.
High-Cost Universal Service Support, Federal-State Joint Board on Universal Service, Request for Review of
Decision of Universal Service Administrator by Corr Wireless Communications, LLC, WC Docket No. 05-337, CC
Docket No. 96-45, Order, 25 FCC Rcd 18146 (2010).
912 47 C.F.R. § 54.709(b).
913 See, e.g., AT&T Corp. Petition for Declaratory Ruling Regarding Enhanced Prepaid Calling Card Services,
Regulation of Prepaid Calling Card Services, WC Docket Nos. 03-133 and 05-68, Order and Notice of Proposed
Rulemaking, 20 FCC Rcd 4826, 4836-37 paras. 30-33 (2005) (ordering AT&T to restate revenues by an estimated
$160 million for universal service purposes).
914 See Comments of Verizon and Verizon Wireless, WC Docket No. 05-337, CC Docket No. 96-45, at 5 (filed Oct.
5, 2010) (Verizon Corr Comments); Comments of Rural Telecommunications Group, Inc., WC Docket No. 05-337,
CC Docket No. 96-45, at 3-5 (filed Oct. 7, 2010); Comments of Rural Independent Competitive Alliance, WC
Docket No. 05-337, CC Docket No. 96-45, at 5 (filed Oct. 7, 2010) (RICA Corr Comments); Reply Comments of
CTIA, WC Docket No. 05-337, CC Docket No. 96-45, at 8 (filed Oct. 21, 2010). In any event, that is not the case
here. As set forth below, the temporary reserve was used to support the E-rate inflation adjustment in FY 2010, and
will be used to fund Phase I of the Mobility Fund and CAF Phase I established by this Order. See infra paras. 564-
567. Other commenters supported the Commission’s determination to create the reserve fund. See Comments of
Free Press at 4 (filed Oct. 7, 2010) (“The Commission’s proposed implementation timetable for USF reform is
appropriately aggressive. Under this timetable, it makes sense to keep the contribution factor stable by holding
reserves as the Connect America Fund is designed and implemented.”). See also Comments of the Public Utilities
Commission of Ohio at 6-7 (filed Oct. 7, 2010); Comments of Telephone Association of Maine at 2 (filed Oct. 7,
2010).
(continued…)
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predictable, and sufficient mechanisms established (not to be established) by the Commission to preserveand advance Universal Service.”915 Verizon, similarly, suggests that section 254’s reference to “‘specific’
and ‘predictable’ USF programs and support—and contributions collected for ‘established’ universal
service mechanisms—counsels against reserving support for mechanisms that do not yet exist.”916
Nevertheless, for the reasons set forth below, we conclude that a broadband reserve account is consistent
with section 254 of the Act.
551. Section 254(d) of the Act provides:
TELECOMMUNICATIONS CARRIER CONTRIBUTION.—Every telecommunications carrier that
provides interstate telecommunications services shall contribute, on an equitable and
nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the
Commission to preserve and advance universal service. The Commission may exempt a carrier
or class of carriers from this requirement if the carrier’s telecommunications activities are limited
to such an extent that the level of such carrier’s contribution to the preservation and advancement
of universal service would be de minimis. Any other provider of interstate telecommunications
may be required to contribute to the preservation and advancement of universal service if the
public interest so requires.917
552. We do not read this language as limiting the Commission’s authority to require contributions
only to support specific mechanisms that are already established at the time the contributions are required,
for several reasons.
553. Broadly speaking, we understand section 254(d) to be directed to explaining who must
contribute to the Federal universal service mechanisms—specifically, telecommunications carriers that
provide interstate telecommunications services, unless exempted by the Commission, as well as other
providers of interstate telecommunications if the Commission determines the public interest so
requires.918 The reference in section 254(d) to “the specific, predictable, and sufficient mechanisms
established by the Commission to preserve and advance universal service” is not, as these commenters
suggest, a limitation on what kinds of mechanisms—i.e., already-established mechanisms—will be
supported; it is instead a reference to language in section 254(b), which directs the Commission (as well
as the Joint Board) to be guided by several principles in establishing universal service policies, including
the principle that “[t]here should be specific, predictable and sufficient Federal and State mechanisms to
preserve and advance universal service.” In other words, it merely requires that contributions under
section 254 are to be used to support the Federal mechanisms that are established under section 254.
554. We also find that commenters’ argument is unpersuasive given the grammatical construction
of the relevant section of the law. In the phrase “mechanisms established by the Commission,” the clause
“established by the Commission” functions as an adjectival phrase identifying which mechanisms are
funded through section 254(d). Specifically, the mechanisms funded by section 254(d) are the
mechanisms “established by the Commission” consistent with the principles of section 254(b) (that they
(Continued from previous page)
915 RICA Corr Comments at 5 (emphasis in original).
916 Verizon Corr Comments at 5.
917 47 U.S.C. § 254(d).
918 Our understanding, in addition to being the most natural reading of the statute, is also consistent with the
legislative history. See S. Conf. Rep. 104-230 at 131 (noting that section 254(d) “requires that all
telecommunications carriers providing interstate telecommunications services shall contribute to the preservation
and advancement of universal service.”).
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be specific, predictable, and sufficient). When used in this way, the word “established” is not a word inthe past tense; it is not a word that signifies any particular tense at all.919 Commenters who read the word
“established” as signifying the past tense are, we conclude, improperly reading “already” into the phrase,
so that it would read “mechanisms already established by the Commission.” Congress could have written
the statute that way, but it did not. Admittedly, Congress could have written the statute in yet other ways
that would have made clearer that these commenters’ concerns are misplaced. But that indicates only that
the statute is amenable to various interpretations. And for the reasons explained here, we conclude our
interpretation is the better reading of the statute.
555. These commenters’ view also raises troubling questions of interpretation, which we believe
Congress did not intend. That is, under these commenters’ reading of the statute, contributions may only
be collected to fund a mechanism that has already been established. Broadly speaking, all of the rule
changes that the Commission has implemented since the 1996 Act, including those adopted in this Order,
have been to effectuate the general statutory directive that consumers should have access to
telecommunication and information services in rural and high cost areas. As such, the entire collection of
rules can be viewed as the “high-cost mechanism,” and the specific existing programs, as well as the
Connect America Fund that we establish today, are part of that high-cost mechanism.
556. To read the statute in any other way would create significant administrative issues that we
cannot believe Congress would have intended. How would the Commission—or a court— decide
whether a modified mechanism is a new, not-yet-established mechanism (which could not provide
support until new funds are collected for it), or whether the modifications are minor enough such that the
mechanism, although different, is still the mechanism that was already established? We do not believe
that Congress intended either the Commission or a court to be required to wrestle with such questions,
which serve no obvious congressional purpose. Alternatively, any change, no matter how minor, could
transform the mechanism into one that was not-yet-established. Interpreting the statute in that way would
similarly serve no identifiable congressional purpose, but would serve only to slow down and complicate
reforms to support mechanisms that the Commission determines are appropriate to advance the public
interest.920 Significantly in this regard, Congress in section 254 specifically contemplated that universal
service programs would change over time;921 reading the statute the way these commenters suggest would
add unnecessary burdens to that process.
919 The D.C. Circuit has repeatedly held that where (as here) a statutory phrase is “simply an adjectival phrase, not a
verbial phrase indicating the past tense,” the phrase “allows alternative temporal readings.” See United States Dep’t
of the Treasury v. FLRA, 960 F.2d 1068, 1072 (D.C. Cir. 1992) (the phrase “adversely affected” could reasonably be
construed by FLRA to refer to future as well as past adverse effects); see also County of Los Angeles v. Shalala, 192
F.3d 1005, 1013 (D.C. Cir. 1999) (the statutory phrase “payments made” could reasonably be read to mean not just
“payments that have been made,” but also “payments to be made”); Administrators of Tulane Educ. Fund v. Shalala,
987 F.2d 790, 796 (D.C. Cir. 1993) (the phrase “recognized as reasonable” in the Medicare Act “does not tell us
whether Congress means to refer the Secretary to action already taken or to give directions on actions about to be
taken”). See generally Transitional Hospitals Corp. of Louisiana, Inc. v. Shalala, 222 F.3d 1019, 1027-28 (D.C.
Cir. 2000) (citing these cases with approval). The Supreme Court has endorsed the same principle of statutory
construction. See Regions Hospital v. Shalala, 522 U.S. 448, 458 (1998) (the phrase “recognized as reasonable” in
the Medicare Act is ambiguous; it could refer to “costs the Secretary (1) has recognized as reasonable for 1984 …
cost-reimbursement purposes, or (2) will recognize as reasonable as a base for future … calculations”).
920 For example, it is not clear whether such a reading of the statute would require the Commission to segregate
Universal Service Fund contributions received before and after a rule change, so as to prevent disbursements of pre-
reform contributions based on the new rules.
921 See 47 U.S.C. § 254(b)(7), (c)(1)-(2).
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2.Setting Quarterly Demand to Meet the $4.5 Billion Budget
557. Background. In the USF-ICC Transformation NPRM, the Commission sought comment onsetting an overall budget for the CAF such that the sum of the CAF and any existing high-cost support
mechanisms (however modified in the future) in a given year are equal to current funding levels. The
Commission noted its commitment to controlling the size of the federal universal service fund.922
558. In response, a broad cross-section of interested stakeholders, including consumer groups,
state regulators, current recipients of funding, and those that do not currently receive funding, agreed that
the Commission should establish a budget for the overall high-cost program, with many urging the
Commission to set that budget at $4.5 billion per year.923 Some argue that we should adopt a hard cap to
ensure that budget is not exceeded.924
559. Discussion. As described above, we conclude that for years 2012-2017, contributions to
fund high-cost support mechanisms should not exceed $4.5 billion on an annualized basis.925 Various
parties have submitted proposed budgets into the record suggesting that the Commission could maintain
an overall $4.5 billion annual budget by collecting that amount in the near term, projecting that actual
demand will be lower than that amount, and using those funds in subsequent quarters to address actual
demand that exceeds $1.125 billion.926 We are persuaded that, on balance, it would be appropriate to
provide greater flexibility to USAC to use past contributions to meet future program demand so that we
can implement the Connect America Fund in a way that does not cause dramatic swings in the
contribution factor. We now set forth our general instructions to USAC on how to implement our $4.5
billion budget target.
560. First, beginning with the quarterly demand filing for the first quarter of 2012, USAC should
forecast total high-cost universal service demand as no less than $1.125 billion, i.e., one quarter of the
annual high-cost budget.927 To the extent that USAC forecasts demand will actually be higher than that
922 USF/ICC Transformation NPRM, 26 FCC Rcd at 4679-81, paras. 412-14.
923 State Members USF/ICC Transformation NPRM Comments at 11 (proposing to limit fund size to current amount
in 2010); Letter from Walter B. McCormick, Jr., United States Telecom Ass’n, Robert S. Quinn, Jr., Senior Vice
President—Federal Regulatory, AT&T, Melissa Newman, Vice President—Federal Regulatory Affairs,
CenturyLink, Michael T. Skrivan, Vice President—Regulatory, FairPoint Communications, Kathleen Q. Abernathy,
Chief Legal Officer and Executive Vice President—Regulatory and Government Affairs, Frontier, Kathleen Grillo,
Senior Vice President—Federal Regulatory Affairs, Verizon, Michael D. Rhoda, Senior Vice President—
Government Affairs, Windstream, Shirley Bloomfield, Chief Executive Officer, National Telecommunications
Cooperative Association, John Rose, President, OPASTCO, Kelly Worthington, Executive Vice President, Western
Telecommunications Alliance, to Chairman Genachowski, Commissioner Copps, Commissioner McDowell, and
Commission Clyburn, at 2 (filed Jul. 29, 2011). (Submitted attached to Letter from Jonathan Banks, USTelecom, to
Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92; WC Docket Nos. 05-337, 07-135, 10-90; GN Docket
No. 09-51; CC Docket No. 96-45; WC Docket No. 06-122; CC Docket Nos. 99-200, 96-98, 99-68; WC Docket No.
04-36 at 4 (filed July 29, 2011)) (Joint Letter) (proposing $4.5 billion); ABC Plan, Attach. 1, at 1-2 (proposing $4.5
billion).
924 NCTA USF/ICC Transformation NPRM Comments at 4.
925 See supra paras. 121-126. The Commission’s budget for contributions includes all contributions that support
disbursements to the various high-cost programs. However, actual disbursements may exceed this amount as the
Commission disburses funds from the reserve account created in the Corr Wireless Order. 25 FCC Rcd at 12862,
para. 20. See also infra paras. 564-567 (providing direction to USAC relating to the Corr Wireless Order reserve
account).
926 ABC Plan, Attach. 1, at 1-2.
927 Recognizing that USAC will submit its first quarter 2012 demand filing on October 31, 2011, we direct USAC to
file an updated high-cost demand filing upon the effective date of these rules.
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amount, USAC should reflect that higher forecast in its quarterly demand filing.928 USAC should nolonger forecast total competitive ETC support at the original interim cap amount, as previously
instructed,929 but should forecast competitive ETC support subject to the rules we adopt today.930
561. Second, consistent with the newly revised section 54.709(b) of our rules, we instruct USAC
not to make prior period adjustments related to high-cost support if actual contributions exceed demand.
Excess contributions shall instead be credited to a new Connect America Fund reserve account, to be used
as described below.
562. Third, beginning with the second quarter of 2012, we direct USAC to use the balances
accrued in the CAF reserve account to reduce high-cost demand to $1.125 billion in any quarter that
would otherwise exceed $1.125 billion.
563. We expect the reforms we adopt today to keep annual contributions for the CAF and any
existing high-cost support mechanisms to no more than $4.5 billion. And through the use of incentive-
based rules and competitive bidding, the fund could require less than $4.5 billion to achieve its goals in
future years. However, if actual program demand , exclusive of funding provided from the CAF or Corr
Wireless reserve accounts, for CAF and existing high-cost mechanisms exceed an annualized $4.5 billion
over any consecutive four quarters, this situation will automatically trigger a process to bring demand
back under budget. Specifically, immediately upon receiving information from USAC regarding actual
quarterly demand, the Wireline Competition Bureau will notify each Commissioner and publish a Public
Notice indicating that program demand has exceeded $4.5 billion over the last four quarters. Then, within
75 days of the Public Notice being published, the Bureau will develop options and provide to the
Commissioners a recommendation and specific action plan to immediately bring expenditures back to no
more than $4.5 billion.
3.
Drawing Down the Corr Wireless
Reserve Account
564. Background. As noted above, pursuant to the Corr Wireless Order, the Commissioninstructed USAC to place certain excess contributions associated primarily with the Verizon Wireless and
Sprint phase-down commitments in a broadband reserve account over a period of 18 months, ending in
February 2012931 We intend to allow the waiver to lapse at that time, without any further extensions or
early termination.
565. Discussion. In order to wind down the current broadband reserve account, we provide the
following instructions to USAC.
566. First, we direct USAC to utilize $300 million in the Corr Wireless reserve account to fund
commitments that we anticipate will be made in 2012 to recipients of the Mobility Fund Phase I to
accelerate advanced mobile services.932 We also direct USAC to use the remaining funds and any
928 If high-cost demand actually exceeds $1.125 billion, no additional funds will accumulate in the reserve account
for that quarter and, consistent with our third instruction below, the reserve account will be used to constrain the
high-cost demand in the contribution factor.
929 See Corr Wireless Order, 25 FCC Rcd at 12862 para. 21.
930 Specifically, USAC shall forecast competitive ETC demand as set by the frozen baseline per study area as of year
end 2011, as adjusted by the phase-down in the relevant time period. See supra paras. 512-532.
931 The Commission directed USAC to “reserve any reclaimed funds as a fiscally responsible down payment on
proposed broadband universal service reforms, as recommended in the National Broadband Plan.” Corr Wireless
Order, 25 FCC Rcd at 12862, para. 20.
932 See supra paras. 28, 313-314, 493-497.
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additional funding necessary for Phase I of the CAF for price cap carriers in 2012.933 Those actionstogether should exhaust the Corr Wireless reserve account.934
567. Second, we instruct USAC not to use the Corr Wireless reserve account to fund inflation
adjustments to the e-rate cap for the current 2011 funding year.935 Inflation adjustments to the e-rate cap
for Funding Year 2011 and future years shall be included in demand projections for the e-rate program.
VIII.
ACCOUNTABILITY AND OVERSIGHT
568. The billons of dollars that the Universal Service Fund disburses each year to support vitalcommunications services come from American consumers and businesses, and recipients must be held
accountable for how they spend that money. This requires vigorous ongoing oversight by the
Commission, working in partnership with the states, Tribal governments, where appropriate, and U.S.
Territories, and the Fund administrator, USAC.936 This section reforms the framework for that ETC
oversight.937 We establish a uniform national framework for information that ETCs must report to their
respective states and this Commission, while affirming that states will continue to play a critical role
overseeing ETCs that they designate. We modify and extend our existing federal reporting requirements
to all ETCs, whether designated by a state or this Commission, to reflect the new public interest
obligations adopted in this Order. We simplify and consolidate our existing certification requirements
and adopt new certifications relating to the public interest obligations adopted in this Order. We address
consequences for failure to meet program rules. We also clarify our record retention rules, describe the
audit process we have implemented in conjunction with the Fund’s administrator, and clarify USAC’s and
our ability to obtain all data relevant to calculations of support amounts.
A.
Uniform Framework for ETC Oversight
569. First, we discuss the need for a uniform national oversight framework, implemented as apartnership between the Commission and the states, U.S. Territories, and Tribal governments, where
appropriate. Second, we describe the specific reporting requirements that are part of that uniform
framework. Third, we amend our rules relating to the annual certifications ETCs must make to confirm
933 See supra Section VII.C.1.
934 While we expect funding for Mobility Fund Phase I to be committed in 2012, those funds are not likely to be
disbursed in 2012; rather, funding will be disbursed over a two or three-year period, as recipients meet deployment
milestones.
935 Schools and Libraries Universal Service Support Mechanism; A National Broadband Plan for Our Future, CC
Docket No. 02-6, GN Docket No. 09-51, 25 FCC Rcd 18762, 18781-82 para. 38 (2010). The current funding year
(2011) runs from July 1, 2011, to June 30, 2012.
936 Because the Connect America Fund, including the Mobility Fund, are part of the Universal Service Fund, we
conclude that USAC shall administer these new programs under the terms of its current appointment as
Administrator, subject to all existing Commission rules and orders applicable to the Administrator. USAC engages
in frequent consultation with the Commission. Today, under the Memorandum of Understanding with USAC, the
Commission’s Wireline Competition Bureau is the USF Administrator’s primary point of contact regarding USF
policy questions, including without limitation questions regarding the applicability of rules, orders, and directives,
unless otherwise specified. 2008 FCC-USAC MOU at paragraph III.B.3. Personnel from other Bureaus and
Offices, including the Office of Managing Director (OMD), the Enforcement Bureau, and the Office of the Inspector
General assist with various aspects of management and oversight of the USF and USAC. We hereby designate the
Wireless Telecommunications Bureau as a point of contact, in addition to the Wireline Competition Bureau, on
policy matters relating to Universal Service Fund administration.
937 For purposes of this section, “ETCs” refers only to those ETCs receiving the types of support provided for in this
Order. It does not refer to ETCs receiving disbursements from the low-income program.
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that they use “support only for the provision, maintenance, and upgrading of facilities and services forwhich the support is intended.”938
1.
Need for Uniform Standards for Accountability and Oversight
570. Background. Pursuant to section 214(e), the states designate common carriers over whichthey have jurisdiction as ETCs, and this Commission designates common carriers as ETCs in those
instances where the state lacks jurisdiction.939 An important component of accountability and oversight is
the information that companies seeking designation to become ETCs are required to provide in order to
obtain designation, and then must file annually thereafter.
571. In 2005, the Commission adopted requirements governing federal ETC designations and
encouraged the states to adopt similar requirements.940 Since that time, a number of states have amended
their state-specific rules for ETCs to more closely conform to the rules for federally-designated ETCs.
Nonetheless, variation remains in what information is annually reported to state commissions as well as
the oversight processes followed by individual state commissions.941 Under our current rules, states
annually certify to this Commission that support is being used for its intended purpose by state-designated
ETCs.942 Failure by a state to make such certification for a particular ETC results in a loss of support for
that ETC.943
572. In the USF-ICC Transformation NPRM, we sought comment generally on the role of the
states in preserving and advancing universal service, and whether and how to modify existing ETC
requirements to achieve our reform objectives.944 Subsequently, in the August 3rd PN, we sought more
focused comment on “specific illustrative areas where the states could work in partnership with the
Commission in advancing universal service, subject to a uniform national framework.”945
573. Discussion. A uniform national framework for accountability, including unified reporting
and certification procedures, is critical to ensure appropriate use of high-cost support and to allow the
Commission to determine whether it is achieving its goals efficiently and effectively.946 Therefore, we
938 47 U.S.C. § 254(e)
939 47 U.S.C. § 214(e)
940 Matter of Federal-State Joint Board on Universal Service, Report and Order, 20 FCC Rcd 6371 (2005) (ETC
Designation Order).
941 United States Government Accountability Office, Report to Congressional Committees, Telecommunications:
FCC Needs to Improve Performance Management and Strengthen Oversight of the High-Cost Program, at 31-34
(June 2008) (GAO High-Cost Report).
942 47 C.F.R. §§ 54.313 and 54.314. Federally-designated ETCs make such certifications directly to the
Commission.
943 47 C.F.R. §§ 54.313(c) and 54.314(d).
944 USF/ICC Transformation NPRM at 4585, 4587-88, paras. 84, 88.
945 Further Inquiry into Certain Issues in the Universal Service-Intercarrier Compensation Transformation
Proceeding, WC Docket No. 10-90 et al., Public Notice, 26 FCC Rcd 11112, 11115, para. 5 (Wireline Comp. Bur.
2011).
946 For purposes of this Section VIII, our references to ETCs include those ETCs that receive high-cost support
pursuant to legacy high-cost programs and CAF programs adopted in this Order. It does not generally include ETCs
that receive support solely pursuant to Mobility Fund Phase I, which has separate reporting obligations, discussed
above in Section VII.E.. Where the requirements discussed in this section also apply to ETCs receiving only Phase I
Mobility Fund support, we specifically state so. In the FNPRM, we seek comment on alternative reporting
(continued…)
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now establish a national framework for oversight that will be implemented as a partnership between theCommission and the states, U.S. Territories, and Tribal governments, where appropriate.947 As set forth
more fully in the subsections immediately following, this national framework will include annual
reporting and certification requirements for all ETCs receiving universal funds—not just federally-
designated ETCs—which will provide federal and state regulators the factual basis to determine that all
USF recipients are using support for the intended purposes, and are receiving support that is sufficient,
but not excessive. We have authority to require all ETCs to comply with these national requirements as a
condition of receiving federal high-cost universal service support.
574. We clarify that the specific reporting and certification requirements adopted below are a
floor rather than a ceiling for the states. In section 254(f), Congress expressly permitted states to take
action to preserve and advance universal service, so long as not inconsistent with the Commission’s
universal service rules.948 The statute permits states to adopt additional regulations to preserve and
advance universal service so long as they also adopt state mechanisms to support those additional
substantive requirements.949 Consistent with this federal framework, state commissions may require the
submission of additional information that they believe is necessary to ensure that ETCs are using support
consistent with the statute and our implementing regulations, so long as those additional reporting
requirements do not create burdens that thwart achievement of the universal service reforms set forth in
this Order.
575. We note, however, that one benefit of a uniform reporting and certification framework for
ETCs is that it will minimize regulatory compliance costs for those ETCs that operate in multiple states.
ETCs should be able to implement uniform policies and procedures in all of their operating companies to
track, validate, and report the necessary information. Although we adopt a number of new reporting
requirements below, we conclude that the critical benefit of such reporting – to ensure that statutory and
regulatory requirements associated with the receipt of USF funds are met – outweighs the imposition of
some additional time and cost on individual ETCs to make the necessary reports. Under this uniform
framework, ETCs will provide annual reports and certifications regarding specific aspects of their
compliance with public interest obligations to the Commission, USAC, and the relevant state
commission, relevant authority in a U.S. Territory, or Tribal government, as appropriate by April 1 of
each year. These annual reporting requirements should provide the factual basis underlying the annual
(Continued from previous page)
requirements for Mobility Fund support to reflect basic differences in the nature and purpose of the support provided
for mobile services. See XVII.H.
947 Numerous commenters support a continued state oversight role. See, e.g., Connecticut PURA USF/ICC
Transformation NPRM Comments at 7-8; DC Commission August 3 PN Comments at 3; Delaware Commission
August 3 PN Comments at 2-3; Virginia Commission August 3 PN Comments at 3; South Dakota Commission
August 3 PN Further Comments at 3-4; Montana Commission August 3 PN Reply Comments at 8; North Dakota
Commission August 3 PN Reply Comments at 2; Kansas Commission August 3 PN Reply Comments at 24-25;
NARUC August 3 PN Further Comments at 4; NASUCA August 3 PN Comments at 87-88; Nebraska Companies
August 3 PN Comments at 33-37; ITTA August 3 PN Comments at 5; Greenlining August 3 PN Comments at 7. But
see ABC Plan, Attach. 5 at 60 (proposing exclusive federal designation and oversight of broadband providers).
948 See 47 U.S.C. § 254(f) (“A state may adopt regulations not inconsistent with the Commission’s rules to preserve
and advance universal service. * * * A state may adopt regulations to provide for additional definitions and
standards to preserve and advance universal service within that State only to the extent that such regulations adopt
additional specific, predictable, and sufficient mechanisms to support such definitions or standards that do not rely
on or burden Federal universal service support mechanisms.”).
949 Id.
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section 254(e) certification by the state commission (or ETC in the case of federally designated ETCs) byOctober 1 of every year that support is being used for the intended purposes.
2.
Reporting Requirements
576. Background. In 2005, the Commission adopted section 54.209, which requires federally-designated ETCs to submit an annual report to the Commission including: a progress report on their five-
year build-out plans; data and explanatory text concerning outages, unfulfilled requests for service,
complaints received; and certifications of compliance with applicable service quality and consumer
protection standards950 and of the ability to function in emergency situations.
577. As noted above, since the Commission adopted the annual reporting requirements, a number
of states have established similar reporting obligations for ETCs within their jurisdiction.951 The 2008
GAO High-Cost Report noted, however, that states have different requirements for the information they
collect from carriers regarding how they use high-cost program funds.952
578. In the USF/ICC Transformation NPRM, we sought comment on how the annual reporting
requirements should be modified as we transition to the Connect America Fund.953 We proposed to
collect data from recipients on deployment, pricing, and adoption for both voice and broadband services.
We also proposed to collect financial information from all recipients.
579. Discussion. We take several steps to harmonize and update annual reporting requirements.
We extend current reporting requirements for voice service to all ETCs, and we adopt uniform broadband
reporting requirements for all ETCs. We also adopt rules requiring the reporting of financial and
ownership information to assist our discharge of statutory requirements.
580. First, we extend the current federal annual reporting requirements to all ETCs, including
those designated by states.954 These requirements will now be located in new section 54.313.955
Specifically, we conclude that all ETCs must include in their annual reports the information that is
currently required by section 54.209(a)(1)-(a)(6) – specifically, a progress report on their five-year build-
out plans; data and explanatory text concerning outages; unfulfilled requests for service; complaints
950 47 C.F.R. § 54.209.
951 See, e.g., Michigan Commission USF/ICC Transformation NPRM Comments at 4 (Michigan Public Service
Commission requires ETCs to provide information each year in connection with renewal of their designations;
Mississippi Commission USF/ICC Transformation NPRM Comments at 5-6; Missouri Commission USF/ICC
Transformation NPRM Comments at 5 (stating that Missouri’s rules regarding, among other things, annual
certification filings “were based, to an extent, on the FCC’s recommended guidelines” but are more stringent than
the federal rules); N.M. Admin. Code § 17.11.27.8; GAO High-Cost Report at 33.
952 See United States Government Accountability Office, Report to Congressional Committees, Telecommunications:
FCC Needs to Improve Performance Management and Strengthen Oversight of the High-Cost Program, at 31 (June
2008) (GAO High-Cost Report).
953 USF/ICC Transformation NPRM 4692-93, para. 459.
954 Most commenters addressing the issue support the extension of reporting requirements to all recipients of high-
cost support. See, e.g., IUB USF/ICC Transformation NPRM Comments at 8; U.S. Cellular USF/ICC
Transformation NPRM Comments at 42; NASUCA USF/ICC Transformation NPRM Comments at 40.
955 As discussed in section VIII.A.3. below, we are eliminating current section 54.313. Recipients of high-cost
support, including CAF support, will now report pursuant to new section 54.313 rather than current section 54.209.
Section 54.209, which applies to the various universal service mechanisms, sets forth reporting and certification
requirements for entities designated as ETCs by the Commission. 47 C.F.R. § 54.209. Lifeline-only ETCs,
however, will remain subject to section 54.209.
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received; and certifications of compliance with applicable service quality956 and consumer protectionstandards and of the ability to function in emergency situations.957 We conclude that it is necessary and
appropriate to obtain such information from all ETCs, both federal- and state-designated, to ensure the
continued availability of high-quality voice services and monitor progress in achieving our broadband
goals and to assist the FCC in determining whether the funds are being used appropriately. As we said at
the time we adopted these requirements for federally-designated ETCs, these reporting requirements
ensure that ETCs comply with the conditions of the ETC designation and that universal service funds are
used for their intended purposes.958 They also help prevent carriers from seeking ETC status for purposes
unrelated to providing rural and high-cost consumers with access to affordable telecommunications and
information services.959 Accordingly, we now conclude that these requirements should serve as a baseline
requirement for all ETCs.
581. All ETCs that receive high-cost support will file the information required by new section
54.313 with the Commission, USAC, and the relevant state commission, relevant authority in a U.S.
Territory, or Tribal government, as appropriate.960 Section 54.313 reports will be due annually by April 1,
beginning on April 1, 2012.961 We will also require that an officer of the company certify to the accuracy
of the information provided and make the certifications required by new section 54.313, with all
certifications subject to the penalties for false statements imposed under 18 U.S.C. § 1001.962
582. Second, we incorporate new reporting requirements described below to ensure that
recipients are complying with the new broadband public interest obligations adopted in this Order,
including broadband public interest obligations associated with CAF ICC.963 This information must be
included in annual section 54.313 reports filed with Commission, USAC, and the relevant state
commission, relevant authority in a U.S. Territory, or Tribal government, as appropriate. However, some
of the new elements are tied to new public interest obligations that will be implemented in 2013 or a
subsequent year and, therefore, they need not be included until that time, as detailed below.
583. Competitive ETCs whose support is being phased down will not be required to submit any
of the new information or certifications below related solely to the new broadband public interest
obligations, but must continue to submit information or certifications with respect to their provision of
voice service.964
956 If ETCs are complying with any voluntary code (e.g., the voluntary code of conduct concerning “bill shock” or
the CTIA Consumer Code for Wireless Service), they should so indicate in their reports.
957 We do, however, modify subparagraph (a)(3), regarding unfulfilled requests for service, to require carriers to
provide that information broken out separately for voice and broadband.
958 ETC Designation Order, para. 68.
959 ETC Designation Order, para. 70.
960 USAC will review such information as appropriate to inform its ongoing audit program, in depth data
validations, and related activities.
961 We delegate authority to the Wireline Competition Bureau to modify the initial filing deadline as necessary to
comply with the requirements of the Paperwork Reduction Act.
962 We already require recipients and beneficiaries of universal service support to make certifications subject to the
penalties available under 18 U.S.C. § 1001. See, e.g., FCC Form 470; FCC Form 471; FCC Form 492A; FCC Form
507, FCC Form 508; FCC Form 509; FCC Form 525.
963 Section XIII.
964 As discussed in Section VII.E.4., competitive ETCs are required to offer service throughout their designated
service areas, even as support provided pursuant to the identical support rule is phased down.
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584. We delegate to the Wireline Competition Bureau and Wireless Telecommunication Bureausthe authority to determine the form in which recipients of support must report this information.
585. Speed and latency. Starting in 2013, we will require all ETCs to include the results of
network performance tests conducted in accordance with the requirements of this Order and any further
requirements adopted after consideration of the record received in response to the FNPRM.965
Additionally, in the calendar year no later than three years after implementation of CAF Phase II, price
cap recipients must certify that they are meeting all interim speed and latency milestones, including the 4
Mbps/1 Mbps speed standard required by Section VII.C.1. of this Order. In the calendar year no later
than five years after implementation of CAF Phase II, those price cap recipients must certify that they are
meeting the default speed and latency standards applicable at the time.966
586. Capacity. Starting in 2013, we require all ETCs to include a self-certification letter
certifying that usage capacity limits (if any) for their services that are subject to the broadband public
interest standard associated with the type of funding they are receiving are reasonably comparable to
usage capacity limits for comparable terrestrial residential fixed broadband offerings in urban areas, as set
forth in the Public Interest Obligations sections above. ETCs will also be required to report on specific
capacity requirements (if any) in conjunction with reporting of pricing of their broadband offerings that
meet our public interest obligations, as discussed below.
587.
Build-out/Service. Recognizing that existing five-year build out plans may need to
change to account for new broadband obligations set forth in this Order, we require all ETCs to file a new
five-year build-out plan in a manner consistent with 54.202(a)(1)(ii) by April 1, 2013. Under the terms of
new section 54.313(a), all ETCs will be required to include in their annual 54.313 reports information
regarding their progress on this five-year broadband build-out plan beginning April 1, 2014. This
progress report shall include the number, names, and addresses of community anchor institutions to which
the ETCs newly offer broadband service.967 As discussed above, we expect ETCs to use their support in a
manner consistent with achieving universal availability of voice and broadband. Incumbent carriers, both
rate-of-return and price cap, should make certifications to that effect beginning April 1, 2013 for the 2012
calendar year.
588. In addition, all ETCs must supply the following information:
(a)
Rate-of-Return Territories. We require all rate-of-return ETCs receiving support
to include a self-certification letter certifying that they are taking reasonable steps to offer broadband
service meeting the requirements established above throughout their service area,968 and that requests for
such service are met within a reasonable amount of time. As noted above, these carriers must also notify
the Commission, USAC, and the relevant state commission, relevant authority in a U.S. Territory, or
Tribal government, as appropriate, of all unfulfilled requests for broadband service meeting the 4 Mbps/1
Mbps standard we establish as our initial CAF requirement, and the status of such requests.
(b)
Price Cap Territories. We require all ETCs receiving CAF support in price cap
territories based on a forward-looking cost model to include a self-certification letter certifying that they
are meeting the interim deployment milestones as set forth in the Public Interest Obligations section
above and that they are taking reasonable steps to meet increased speed obligations that will exist for a
specified number of supported locations before the expiration of the five-year term for CAF Phase II
965 Section VI.B.2.
966 Section VI.B.
967 “Community anchor institutions” is defined above. See supra note 37.
968 See supra Section VII.D.2.
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funding. ETCs that receive CAF support awarded through a competitive process will also be required tofile such self-certifications, subject to any modifications adopted pursuant to the FNPRM below.
589. In addition, as discussed above, price cap ETCs will be able to elect to receive CAF Phase I
incremental funding under a transitional distribution mechanism prior to adoption and implementation of
an updated forward-looking broadband-focused cost model for CAF Phase II. As a condition of receiving
such support, those companies will be required to deploy broadband to a certain number of unserved
locations within three years, with deployment to no fewer than two-thirds of the required number of
locations within two years and to all required locations within three years after filing their notices of
acceptance. As of that time, carriers must offer broadband service of at least 4 Mbps downstream and 1
Mbps upstream, with latency sufficiently low to enable the use of real-time communications, including
VoIP, and with usage limits, if any, that are reasonably comparable to those in urban areas. As noted
above, no later than 90 days after being informed of its eligible incremental support amount, each price
cap ETC must provide notice to the Commission and to the relevant state commission, relevant authority
in a U.S. Territory, or Tribal government, as appropriate, identifying the areas, by wire center and census
block, in which the carrier intends to deploy broadband to meet this obligation, or stating that the carrier
declines to accept incremental support for that year.
590. The carrier must also certify that (1) deployment funded by CAF Phase I incremental
support will occur in areas shown as unserved by fixed broadband on the National Broadband Map that is
most current at that time, and that, to the best of the carrier’s knowledge, are unserved by fixed broadband
with a minimum speed of 768 kbps downstream and 200 kbps upstream, and that, to the best of the
carrier’s knowledge, are, in fact, unserved by fixed broadband at those speeds; and (2) the carrier’s
current capital improvement plan did not already include plans to deploy broadband to that area within
three years, and that CAF Phase I support will not be used to satisfy any merger commitment or similar
regulatory obligation. 969 In addition, carriers must certify that: (1) within two years after filing a notice
of acceptance, they have deployed to no fewer than two-thirds of the required number of locations; and
(2) within three years after filing a notice of acceptance, they have deployed to all required locations and
that they are offering broadband service of at least 4 Mbps downstream and 1 Mbps upstream, with
latency sufficiently low to enable the use of real-time communications, including VoIP, and with usage
limits, if any, that are reasonably comparable to those in urban areas. These certifications must be
included in the first annual report due following the year in which the carriers reach the required
milestones.
591.
In addition, price cap carriers that receive frozen high-cost support will be required to
certify that they are using such support in a manner consistent with achieving universal availability of
voice and broadband.970 Specifically, in the 2013 certification, all price cap carriers receiving frozen
high-cost support must certify to the Commission, the relevant state commission, relevant authority in a
U.S. Territory, and to any affected Tribal government that they used such support in a manner consistent
with achieving the universal availability of voice and broadband. In the 2014 certification, all price cap
carriers receiving frozen high-cost support must certify that at least one-third of the frozen-high cost
support they received in 2013 was used to build and operate broadband-capable networks used to offer the
provider’s own retail broadband service in areas substantially unserved by an unsubsidized competitor.971
In the 2015 certification, carriers must certify that at least two-thirds of the frozen high-cost support the
969 See supra Section VII.C.1.
970 A carrier must certify that with respect to the frozen high cost support dollars subject to this obligation, a
substantial portion went to areas without an unsubsidized competitor.
971 See Section VI.B.a. above. We note that this obligation applies to carriers, regardless of whether or not they
accept CAF Phase I incremental support.
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carrier received in 2014 was used in such fashion, and for 2016 and subsequent years, carriers mustcertify that all frozen high-cost support they received in the previous year was used in such fashion.
These certifications must be included in the carriers’ annual reports due April 1 of each year. Price cap
companies that receive CAF ICC also are obligated to certify that they are using such support for building
and operating broadband-capable networks used to offer their own retail service in areas substantially
unserved by an unsubsidized competitor.
592. Price. We require all ETCs to submit a self-certification that the pricing of their voice
services is no more than two standard deviations above the national average urban rate for voice service,
which will be specified annually in a public notice issued by the Wireline Competition Bureau. This
certification requirement begins April 1, 2013, to cover 2012.
593. ETCs receiving only Mobility Fund Phase I support will self-certify annually that they offer
service in areas with support at rates that are within a reasonable range of rates for similar service plans
offered by mobile wireless providers in urban areas. ETCs receiving any other support will submit a self-
certification that the pricing of their broadband service is within a specified reasonable range. That range
will be established and published as more fully described in Section VI.B.3. above for recipients of high-
cost and CAF support, other than Mobility Fund Phase I.972 This certification requirement begins April 1,
2013, to cover 2012.
594. ETCs must also report pricing information for both voice and broadband offerings. They
must submit the price and capacity range (if any) for the broadband offering that meets the relevant speed
requirement in their annual reporting. In addition, beginning April 1, 2012, subject to PRA approval, all
incumbent local exchange company recipients of HCLS, frozen high-cost support, and CAF also must
report their flat rate for residential local service to USAC so that USAC can calculate reductions in
support levels for those carriers with R1 rates below the specified rate floor, as established above.973
Carriers may not request confidential treatment for such pricing and rate information.
595. Financial Reporting. We sought comment on requiring all ETCs to provide financial
information, including balance sheets, income statements, and statements of cash flow.
596. Upon consideration of the record, we now adopt a less burdensome variation of this
proposal.974 We conclude that it is not necessary to require submission of such information from publicly
traded companies, as we can obtain such information directly for SEC registrants. Likewise, we conclude
at this time it is not necessary to require the filing of such information by recipients of funding determined
through a forward-looking cost model or through a competitive bidding process, even if those recipients
are privately held. We expect that a model developed through a transparent and rigorous process will
produce support levels that are sufficient but not excessive, and that support awarded through competitive
processes will be disciplined by market forces. The design of those mechanisms should drive support to
efficient levels.
972 See Section VII.E.1.
973 See Section VII.D.5.
974 Several commenters supported requiring financial disclosures. See, e.g., CWA USF/ICC Transformation NPRM
Comments at 20; NASUCA USF/ICC Transformation NPRM Comments at 86; WISPA USF/ICC Transformation
NPRM Comments at 10. Another party asserts, however, that “it is not clear whether these burdensome
requirements would be necessary to serve any public policies related to administration of the universal service
fund.” Cellular One and Viaero USF/ICC Transformation NPRM Comments at 29. Although WISPA supports
financial disclosures, it asserts that such disclosures should be limited to financial information related to the
recipients’ CAF activities. See WISPA USF/ICC Transformation NPRM Comments at 10. We disagree, as we
conclude that it is appropriate to understand the overall finances of privately-held rate-of-return carriers receiving
support, as discussed below, to ensure that universal service subsidies are not subsidizing unregulated operations.
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597. We emphasize, however, that we may request additional information on a case-by-case basisfrom all ETCs, both private and public, as necessary to discharge our universal service oversight
responsibilities.975
598. For privately-held rate-of-return carriers that continue to receive support based in part on
embedded costs, we adopt a more limited reporting requirement, beginning in 2012. We require all
privately-held rate-of-return carriers receiving high-cost and/or CAF support to file with the Commission,
USAC, and the relevant state commission, relevant authority in a U.S. Territory, or Tribal government, as
appropriate beginning April 1, 2012, subject to PRA approval, a full and complete annual report of their
financial condition and operations as of the end of their preceding fiscal year, which is audited and
certified by an independent certified public accountant in a form satisfactory to the Commission, and
accompanied by a report of such audit. The annual report shall include balance sheets, income
statements, and cash flow statements along with necessary notes to clarify the financial statements. The
income statements shall itemize revenue by its sources.
599. The ETCs subject to this new requirement are all already subject to the Uniform System of
Accounts, which specifies how required financial information shall be maintained in accordance with Part
32 of the Commission’s rules. Because Part 32 of our rules already requires incumbent carriers to break
down accounting by study area, it should provide an accurate picture of how recipients are using the high-
cost support they receive in particular study areas. Additionally, Part 32 provides a uniform system of
accounting that allows for an accurate comparison among carriers. ETCs that receive loans from the
Rural Utility Service (RUS) are already required to provide RUS with annual financial reports maintained
in accordance with Part 32. We will allow these carriers to satisfy their financial reporting obligation by
simply providing electronic copies of their annual RUS reports to the Commission, which should not
impose any additional burden. All other rate-of-return carriers, in their initial filing after adoption of this
Order, shall provide the required financial information as kept in accordance with Part 32 of the
Commission’s rules.
600. We delegate to the Wireline Competition Bureau the authority to resolve all other questions
regarding the appropriate format for carriers’ first financial filing following this Order, as well as the
authority to set the format for subsequent reports. We may in future years implement a standardized
electronic filing system, and we also delegate to the Wireline Competition Bureau the task of establishing
an appropriate format for transmission of this information.
601. We do not expect privately held ETCs will face a significant burden in producing the
financial disclosures required herein because such financial accounting statements are normally prepared
975 We note that a number of states already require carriers to file financial information with state commissions.
Most of those states require that telecommunications providers file financial information including, at a minimum,
income statements and, in most instances, balance sheets. See, e.g., Georgia Pub. Serv. Comm’n Rule 515-3-1-
.04(1); http://www.psc.state.ga.us/telecom/compliance_memo.pdf; Hawaii Public Utilities Commission Rule 6-80-
91; http://psc.mt.gov/Docs/AnnualReports/forms/2009TelephoneAnnualReport.pdf; Wash. Code 480-120-382 and
480-120-385; http://www.lpsc.org/teleannualreports.aspx; Mississippi Code § 77-3-79;
http://www.mpus.ms.gov/utility/telecomm/forms.html;
http://www.psc.state.ne.us/home/NPSC/forms/Online/Communications.2004.12.31.Annual%20Report%20Complia
nce%20Form.pdf; http://www.bpu.state.nj.us/bpu/pdf/telecopdfs/TelcoAr.pdf. Montana and Nebraska both require
that accounts be kept in accordance with Part 32 of the Commission’s rules. See
https://psc.mt.gov/Docs/AnnualReports/forms/2009TelephoneUtilityCoversheetandTOC.pdf; 291 Neb. Code §
002.24B. New Jersey requires its telecommunications carriers to maintain their accounts in accordance with either
Part 32 of the Commission’s rules or Generally Accepted Accounting Principles. See
http://www.bpu.state.nj.us/bpu/pdf/telecopdfs/TelcoAr.pdf.
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in the usual course of business.976 In particular, because incumbent LECs are already required to maintaintheir accounts in accordance with Part 32,977 the required disclosures are expected to impose minimal new
burdens. Indeed, for the many carriers that already provide Part 32 financial reports to RUS, there will be
no additional burden.
602. Finally, we conclude that these carriers’ financial disclosures should be made publicly
available. The only comment we received on this issue came from NASUCA, which strongly urged the
Commission to require public disclosure of all financial reports.978 NASUCA rightly observed that
recipients of high-cost and/or CAF support receive extensive public funding, and therefore the public has
a legitimate interest in being able to verify the efficient use of those funds.979 Moreover, by making this
information public, the Commission will be assisted in its oversight duties by public interest watchdogs,
consumer advocates, and others who seek to ensure that recipients of support receive funding that is
sufficient but not excessive.
603. Ownership Information. All recipients of funding today are required to obtain FCC
registration numbers to do business with the Commission, and are assigned Study Area Codes by USAC
to receive high-cost funding. We now adopt a rule requiring all ETCs to report annually the company’s
holding company, operating companies, affiliates, and any branding (a “dba,” or “doing-business-as
company” or brand designation). In addition, filers will be required to report relevant universal service
identifiers for each such entity by Study Area Codes. This will help the Commission reduce waste, fraud,
and abuse and increase accountability in our universal service programs by simplifying the process of
determining the total amount of public support received by each recipient, regardless of corporate
structure. Such information is necessary in order for the Commission to ensure compliance with various
requirements adopted today that take into account holding company structure.980 For purposes of this
requirement, affiliated interests shall be reported consistent with section 3(2) of the Communications Act
of 1934, as amended.981
604. Tribal Engagement. ETCs serving Tribal lands must include in their reports documents or
information demonstrating that they have meaningfully engaged Tribal governments in their supported
areas.982 The demonstration must document that they had discussions that, at a minimum, included: (1) a
needs assessment and deployment planning with a focus on Tribal community anchor institutions; (2)
feasibility and sustainability planning; (3) marketing services in a culturally sensitive manner; (4) rights
976 See Comments of John Staurulakis, Inc., GN Docket Nos. 10-90, 09-51, WC Docket No. 05-337 (filed July 12,
2010), at 10 (noting that “independent audit firms review the financial records of virtually all rate-of-return
regulated RLECs on an annual basis”).
977 47 C.F.R. § 32.11(a).
978 See NASUCA USF/ICC Transformation NPRM Comments at 86.
979 See NASUCA USF/ICC Transformation NPRM Comments at 86.
980 See Sections VII.C.1. and VII.D.10. above and Section XIII below. We note that on occasion, we receive
congressional requests for information regarding receipt of high-cost funding at the holding-company level. Letter
from Fred Upton, Chairman, House Committee on Energy and Commerce, Henry A. Waxman, Ranking Member,
House Committee on Energy and Commerce, Greg Walden, Chairman, House Subcommittee on Communications
and Technology, Anna G. Eshoo, Ranking Member, House Subcommittee on Communications and Technology, to
Julius Genachowski, Chairman, FCC, (June 22, 2011)
981 47 U.S.C. § 153(2) (“The term ‘affiliate’ means a person that (directly or indirectly) owns or controls, is owned
or controlled by, or is under common ownership or control with, another person. For purposes of this paragraph, the
term ‘own’ means to own an equity interest (or the equivalent thereof) of more than 10 percent.”).
982 See Section IX.A. below.
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of way processes, land use permitting, facilities siting, environmental and cultural preservation reviewprocesses; and (5) compliance with Tribal business and licensing requirements.983
605. Elimination of Certain Data Reporting Requirements. Finally, as discussed above,984 we are
eliminating LSS and IAS as standalone support mechanisms. This obviates the need for reporting
requirements specific to 54.301(b) and 54.802 of our rules (and 54.301(e) after December 31, 2012).985
606. Overall, we think that the changes to the reporting requirements do not impose an undue
burden on ETCs and that the benefits outweigh any burdens. Given the extensive public funding these
entities receive, the expanded goals of the program, and the need for greater oversight, as noted by the
GAO, it is prudent to impose narrowly tailored reporting requirements focused on the information that
will demonstrate compliance with statutory requirements and our implementing rules. These specific
reporting requirements are tailored to ensure that ETCs are complying with their public interest
obligations and using support for the intended purposes, as required by section 254(e) of the Act. Where
possible, we are minimizing burdens by requiring certifications in lieu of collecting data, and by allowing
the filing of reports already prepared for other government agencies in lieu of new reports. Moreover, we
are eliminating some of the existing requirements, which will reduce burdens for some ETCs. Finally, to
the extent ETCs currently provide information either to their state or to the Commission, they will not
bear any significant additional burden in now also providing copies of such information to the other
regulatory body.986
3.
Annual Section 254(e) Certifications
607. Background. As noted above, section 254(e) requires that a carrier shall use “support onlyfor the provision, maintenance, and upgrading of facilities and services for which the support is
intended.”987 The Commission currently requires states to annually certify with respect to ETCs they
designate that this statutory requirement is met in order to receive HCLS, SVS, SNA, HCMS, or LSS.988
States take different approaches in how they develop a factual basis to support this certification,
however.989 Federally-designated ETCs are required to make an annual certification directly to this
983 Tribal business and licensing requirements include business practice licenses that Tribal and non-Tribal business
entities, whether located on or off Tribal lands, must obtain upon application to the relevant Tribal government
office or division to conduct any business or trade, or deliver any goods or services to the Tribes, Tribal members, or
Tribal lands. These include certificates of public convenience and necessity, Tribal business licenses, master
licenses, and other related forms of Tribal government licensure.
984 See Sections VII.C.1. and VII.D.7. above.
985 Section 54.301(b), which applies to LSS, requires an ILEC designated as an ETC and serving a study area with
50,000 or fewer access lines to “provide the Administrator with the projected total unseparated dollar amount
assigned to each account listed below for the calendar year following each filing.” 47 C.F.R. § 54.301(b). Section
54.301(e) requires carriers subject to 54.301(b) to submit historical data to the Administrator to allow the
Administrator to calculate a true-up adjustment for the preceding year. 47 C.F.R. § 54.301(e). Section 54.802,
which applies to IAS, requires ETCs providing service within an area served by a price cap LEC to file quarterly
line-count data, as well as certain other information, with the Fund Administrator. 47 C.F.R. § 54.802.
986 See Cellular One and Viaero USF/ICC Transformation NPRM Comments at 30.
987 47 U.S.C. § 254(e).
988 47 C.F.R. §§ 54.313 (non-rural carriers), 54.314 (rural carriers).
989 For example, the Michigan Public Service Commission requires ETCs to provide information each year in
connection with renewal of their designations. See Michigan Commission USF/ICC Transformation NPRM
Comments at 4. And as stated in the GAO High-Cost Report, “[s]tates most frequently require carriers to submit
(continued…)
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Commission in order to receive HCLS, SVS, SNA, HCMS, LSS, IAS, or ICLS,990 but the Commissionhas not specified what factual basis must support such certifications. GAO found inconsistencies in the
certification process among states and questioned whether such certifications enabled program
administrators to fully assess whether carriers are appropriately using high-cost program support.991 In
the Notice, we sought comment on how to harmonize certifications and ensure that they are
meaningful.992
608. Discussion. We modify our rules to streamline and improve ETCs’ annual certification
requirements.
609. First, we require that states – and entities not falling within the states’ jurisdiction (i.e.,
federally-designated ETCs) – certify that all federal high-cost and CAF support was used in the preceding
calendar year and will be used in the new calendar year only for the provision, maintenance, and
upgrading of facilities and services for which the support is intended, regardless of the rule under which
that support is provided. This corrects a defect in our current rules, which require only a certification with
respect to the coming year.993 The certifications required by new section 54.314 will be due by October 1
of each year, beginning with October 1, 2012. The certification requirement applies to all recipients of
high-cost and CAF support, including those that receive only Phase I Mobility Fund support.
610. Second, we maintain states’ ongoing role in annual certifications. Several commenters take
the position that responsibility for ensuring USF recipients comply with their public interest obligations
should remain with the states.994 As discussed above, we agree that the states should play an integral role
in assisting the Commission in monitoring compliance, consistent with an overarching uniform national
framework.995 States will continue to certify to the Commission that support is used by state-designated
ETCs for the intended purpose, which is modified to include the provision, maintenance, and upgrading
of facilities capable of delivering voice and broadband services to homes, businesses and community
anchor institutions.996
(Continued from previous page)
affidavits that future support will be used for its intended purpose; plans for quality, coverage, or capacity
improvements; and evidence that past support was used for its intended purposes.” GAO High-Cost Report at 33.
990 47 C.F.R. §§ 54.313 (non-rural carriers), 54.314 (rural carriers), 54.809 (IAS), 54.904 (ICLS)
991 GAO High-Cost Report at 38.
992 USF/ICC Transformation NPRM, 26 FCC Rcd at 4696, para. 475.
993 Current sections 54.313 and 54.314 of our rules provide that states “must file an annual certification with the
Administrator and the Commission stating that all federal high-cost support provided to such carriers within that
State will be used only for the provision, maintenance, and upgrading of facilities and services for which the support
is intended.” 47 C.F.R. §§ 54.313(a) and 54.314(a).
994 See State Members USF/ICC Transformation NPRM Comments at 140; Frontier USF/ICC Transformation
NPRM Comments at 25; Nebraska Commission USF/ICC Transformation NPRM Comments at 16; Kansas
Commission USF/ICC Transformation NPRM Comments at 24, 27; Missouri Commission USF/ICC
Transformation NPRM Comments at 5, 9-11; Washington Commission USF/ICC Transformation NPRM Comments
at 4-6; Greenlining USF/ICC Transformation NPRM Comments at 10.
995 The State Members noted that the basic model of requiring states to make annual certifications is sound, but
should be updated to include the new provider of last resort duties assigned to broadband providers. State Members
Comments at 140. Another commenter supported federal standards “so states that exercise authority over ETCs
have the ability to gather information from ETCs ensuring USF support is being used appropriately.” Missouri
Commission USF/ICC Transformation NPRM Comments at 9.
996 47 C.F.R. §§ 54.313 and 54.314.
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611. Under our reformed rules, as before, some recipients of support may be designated by theCommission rather than the states. States are not required to file certifications with the Commission with
respect to carriers that do not fall within their jurisdiction. However, consistent with the partnership
between the Commission and the states to preserve and enhance universal service, and our recognition
that states will continue to be the first place that consumers may contact regarding consumer protection
issues, we encourage states to bring to our attention issues and concerns about all carriers operating
within their boundaries, including information regarding non-compliance with our rules by federally-
designated ETCs. We similarly encourage Tribal governments, where appropriate, to report to the
Commission any concerns about non-compliance with our rules by all recipients of support operating on
Tribal lands. Any such information should be provided to the Wireline Competition Bureau and the
Consumer & Governmental Affairs Bureau. Through such collaborative efforts, we will work together to
ensure that consumer interests are appropriately protected.
612. Third, we clarify that we expect a rigorous examination of the factual information provided
in the annual section 54.313 reports prior to issuance of the annual section 254(e) certifications. Because
the underlying reporting requirements for recipients of Mobility Fund Phase I support differ from the
reporting requirements for ETCs receiving other high-cost support, Mobility Fund Phase I recipients’
certifications will be based on the factual information they provide in the annual reports they file pursuant
to section 54.1009 of the Mobility Fund rules.997 We expect that states (or the ETC if the state lacks
jurisdiction) will use the information reported in April of each year for the prior calendar year in
determining whether they can certify that carriers’ support has been used and will be used for the intended
purposes. In light of the public interest obligations we adopt in this Order, a key component of this
certification will now be that support is being used to maintain and extend modern networks capable of
providing voice and broadband service. Thus, for example, if a state commission determines, after
reviewing the annual section 54.313 report, that an ETC did not meet its speed or build-out requirements
for the prior year, a state commission should refuse to certify that support is being used for the intended
purposes. In conjunction with such review, to the extent the state has a concern about ETC performance,
we welcome a recommendation from the state regarding prospective support adjustments or whether to
recover past support amounts.998 As discussed more fully below, failure to meet all requirements will not
necessarily result in a total loss of support, to the extent we conclude, based on a review of the
circumstances, that a lesser reduction is warranted. Likewise, we will look at ETCs’ annual 54.313
reports to verify certifications by ETCs (in instances where the state lacks jurisdiction) that support is
being used for the intended purposes.999
613. Fourth, we streamline existing certifications. Today, we have two different state
certification rules, one for rural carriers and one for non-rural carriers. There is no substantive difference
between the existing certification rules for the two classes of carriers, and as a matter of administrative
997 Because ETCs of Mobility Fund Phase I support that receive support pursuant to other high-cost mechanisms are
subject to the reporting requirements of new section 54.313, those companies’ certifications will be based on the
factual information in the annual reports they file pursuant to both new section 54.313 and section 54.1009 of the
Mobility Fund rules.
998 This should help address the concern of the State Members of the Federal-State Joint Board on Universal Service
that, under the annual certification process as it exists today, “a State has only one remedy, denial of certification.”
State Members USF/ICC Transformation NPRM Comments at 140.
999 ETC Designation Order, 20 FCC Rcd at 6402, para. 72 (“If a review of the data submitted by an ETC indicates
that the ETC is no longer in compliance with the Commission’s criteria for ETC designation, the Commission may
suspend support disbursements to that carrier or revoke the carrier’s designation as an ETC. Likewise, as the Joint
Board noted, state commissions possess the authority to rescind ETC designations for failure of an ETC to comply
with the requirements of section 214(e) of the Act or any other conditions imposed by the state.”).
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convenience, we consolidate all certifications into a single rule. Moreover, because the net effect of thechanges that we are implementing to our high-cost programs is, as a practical matter, to shift the focus
from whether a company is classified as “rural” versus “non-rural” to whether a company receives all
support through a forward-looking model or competitive process or, instead, based in part on embedded
costs,1000 it does not make sense to maintain separate certification rules for “rural” and “non-rural”
carriers. We see no substantive difference in the certifications that should be made. Thus, we eliminate
the certification requirements currently found in sections 54.313 and 54.314 of our rules1001 and
implement new rule 54.314.
614. Finally, we also eliminate carriers’ separate certification requirements for IAS and ICLS.
As discussed above, we are eliminating IAS as a standalone support mechanism, and this obviates the
need for IAS-specific certifications.1002 Although ICLS will remain in place for some carriers, those
carriers will certify compliance through new section 54.314. However, to ensure there is no gap in
coverage, those carriers will file a final certification under section 54.904 due June 30, 2012, covering the
2012-13 program year. Thus, by this Order, we eliminate section 54.809 and, effective July 2013, section
54.904 of our rules.1003 And as discussed in section VII.C.1. above, we also eliminate section 54.316 of
our rules, relating to rate comparability.1004
B.
Consequences for Non-Compliance with Program Rules
615. Background. In the USF/ICC Transformation NPRM, we sought comment on proposedconsequences for a Fund recipient’s failure to fulfill its public interest obligations.1005 We also sought
comment on whether we should reduce or suspend universal support payments for non-compliance with
the various reporting requirements.1006 Under our existing rules, companies lose support if the state (or
the ETC, in the case of federally designated ETCs) fails to file the required certifications or information,
such as the annual reports required by current section 54.209.1007
616. Discussion. Effective enforcement is necessary to ensure that the reforms we make in this
Order achieve their intended goal.1008 Our existing rules already have self-effectuating mechanisms to
incent prompt filing of requisite certifications and information necessary to calculate support amounts, as
1000 See Section VII.C.1. above.
1001 Current section 54.313 requires certifications with regard to support pursuant to sections 54.309 and 54.311. 47
C.F.R. § 54.313. Current section 54.314’s requirements pertain to support pursuant to sections 54.301, 54.305, and
54.307, as well as part 36, subpart F. 47 C.F.R. § 54.314.
1002 See Section VII.C.1. above.
1003 Sections 54.809 and 54.904 require carriers receiving IAS and ICLS support, respectively, to file a certification
stating that all such support “will be used only for the provision, maintenance, and upgrading of facilities and
services for which the support is intended.” 47 C.F.R. §§ 54.809 and 54.904.
1004 Section 54.316 requires that states certify as to rate comparability for areas served by non-rural carriers. 47
C.F.R. § 54.316.
1005 USF/ICC Transformation NPRM at ¶ 153.
1006 USF/ICC Transformation NPRM at ¶ 466.
1007 47 C.F.R. § 54.209(b).
1008 See Greenlining USF/ICC Transformation NPRM Comments at 9. We received almost no comments on this
issue. Those we did receive were largely conclusory and provided no specifics as to appropriate penalties or
remedies. See, e.g., CWA USF/ICC Transformation NPRM Comments at 20; Greenlining USF/ICC Transformation
NPRM Comments at 10.
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companies lose support to the extent such information is not provided in a timely fashion.1009 While weneed such information to ensure that support is being used for the intended purposes, consistent with
section 254(e) of the Act, we also need to ensure that such certifications, which will be based upon the
certifications and information provided in the new section 54.313 annual reports, adequately address all
areas of material non-compliance with program obligations.
617. We believe that in the majority of cases involving repeated failures to timely file
certifications or data, the Commission’s existing enforcement procedures and penalties will adequately
deter noncompliance with the Commission’s rules, as herein amended, regarding high-cost and CAF
support.1010 We adopt the provisions of section 54.209(b) in new section 54.313, which provides for
reductions in support for failing to file the reports required by section 54.209(a) in a timely fashion, and
extend those provisions to all recipients of high-cost support.1011 We also adopt new section 54.314,
which provides for a similar reduction in support for the late filing of annual certifications that the funds
received were used in the preceding calendar year and will be used in the coming calendar year only for
the provision, maintenance, and upgrading of facilities and services for which the support is intended.1012
Our rules also provide for debarment of those convicted of or found civilly liable for defrauding the high-
cost support program,1013 and we emphasize that those rules apply with equal force to CAF, including the
Mobility Fund Phase I.
618. To further ensure that the recipients of existing high-cost and/or CAF support use those
funds for the purposes for which they are provided, we create a rule that entities receiving such support
will receive reduced support should they fail to fulfill their public interest obligations, such as by failing
to meet deployment milestones, to provide broadband at the speeds required by this Order, or to provide
service at reasonably comparable rates.1014 This is consistent with the suggestions of the State Members
1009 Under current rules, certifications are due by October. If a carrier files late, but on or before January 1, the
carrier will receive support for Q2, Q3 and Q4. If a carrier files late, but on or before April 1, the carrier will receive
support for Q3 and Q4. If the carrier files late, but on or before July 1, the carrier will receive support for Q4. If a
carrier files after July 1, the carrier will not receive any support for that year. See 47 C.F.R. §§ 54.209(b),
54.313(d), 54.314(d).
1010 See 47 C.F.R. § 1.80. See also 47 C.F.R. § 1.80, Note to para. (b)(4), “Guidelines for Assessing Forfeitures”
(Forfeiture Guidelines). The Forfeiture Guidelines provide base forfeiture amounts for certain specified violations.
However, those base amounts are subject to adjustment based on the factors set forth in section 1.80(b)(4) and in
Section II of the Forfeiture Guidelines. Thus, the Commission has assessed forfeitures of $50,000 per violation for a
carrier’s failure to timely file Forms 499A and 499Q because of the programmatic importance of such filings and the
impact a carrier’s failure to file has on other carriers’ contribution obligations. See, e.g., ADMA Telecom, Inc.,
Forfeiture Order, 26 FCC Rcd 4152, 4155, paras. 9-10 (2011); Globalcom, Inc., Notice of Apparent Liability for
Forfeiture, 25 FCC Rcd 3479, 3486, para. 17 (2010); Globcom, Inc., Order of Forfeiture, 21 FCC Rcd 4710, 4720,
¶¶ 26-28 (2006); InPhonic, Inc., Notice of Apparent Liability of Forfeiture and Order, 20 FCC Rcd 13277, 13287, ¶
26 (2005).
1011 For each quarter the filing is late, the carrier loses support for an additional quarter. 47 C.F.R. § 54.209(b).
1012 Current sections 54.313 and 54.314, both of which are being replaced by new section 54.314, provide for this
same reduction in support. See 47 C.F.R. §§ 54.313(d), 54.314(d). As with section 54.209(b), the carrier loses
support for one quarter for each quarter the filing is late. Id.
1013 47 C.F.R. § 54.8.
1014 See Section XVII.G. below.
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of the Federal-State Joint Board on Universal Service,1015 who further note that revoking a carrier’s ETCdesignation is too blunt an instrument.1016 We agree that revoking a carrier’s ETC status is not an
appropriate consequence for noncompliance, except in the most egregious circumstances.1017 In the
FNPRM, we seek comment on appropriate enforcement options for partial non-performance. We do not
rule out the option of revoking an ETC’s status, but we seek comment on what circumstances would
justify such a remedy and what alternatives might be appropriate in other circumstances. We delegate to
the Wireline Competition Bureau and Wireless Telecommunications Bureau the task of implementing
reductions in support based on the record received in response to the FNPRM.
C.
Record Retention
619. Background. Without proper documentation, it is impossible to conduct effective audits andassessments of high-cost or CAF recipients. In 2007, the Commission adopted a five-year record
retention requirement for recipients of high-cost support. 1018 In the USF/ICC Transformation NPRM, we
sought comment on whether those record retention requirements are adequate to facilitate audits of
program recipients or whether additional requirements are needed in light of the changed responsibilities
and expectations for Fund recipients called for in this Order. No commenters addressed this issue.
620. Discussion. We find that the current record retention requirements, although adequate to
facilitate audits of program participants, are not adequate for purposes of litigation under the False Claims
Act,1019 which can involve conduct that relates back substantially more than five years. Thus, we revise
our record retention requirements to extend the retention period to ten years.
621. Additionally, we believe our record retention requirements need clarification. The current
record retention requirements appear in section 54.202(e) of the Commission’s rules.1020 Section 54.202
is entitled: “Additional requirements for Commission designation of eligible telecommunications
carriers.”1021 Subsections (a) through (d) of that section apply, by their terms, only to ETCs designated
under section 214(e)(6) of the Act – i.e., ETCs designated by the Commission rather than by the states.1022
Subsection (e), however, is not so limited.1023 Indeed, the Commission intended the requirements of
section 54.202(e) to apply to all recipients of high-cost support.1024 To fully support our ongoing
oversight, the record retention requirements must apply to all recipients of high-cost and CAF support.
Thus, by this Order, we amend our rules by re-designating section 54.202(e) as new section 54.320 to
1015 State Members USF/ICC Transformation NPRM Comments at 62 (Step 7 of the multi-step penalty framework
in the proposed “Provider of Last Resort Fund” would “reduce[] support if the ETC fails to meet specific build-out
requirements or to provide adequate service quality”).
1016 See State Members USF/ICC Transformation NPRM Comments at 140.
1017 At least one commenter contended that recipients who fail to deploy should face “significant penalties,” such as
asset seizure. See ACA USF/ICC Transformation NPRM Comments at 32.
1018 See 47 C.F.R. § 54.202(e).
1019 31 U.S.C. §§ 3729–33. Under the False Claims Act, carriers receiving funds under fraudulent pretenses may be
held liable for a civil penalty of between $5,000 and $10,000, plus treble damages. 31 U.S.C. § 3729(a)(1).
1020 See 47 C.F.R. § 54.202(e).
1021 See 47 C.F.R. § 54.202.
1022 See 47 C.F.R. § 54.202(a)-(d).
1023 See 47 C.F.R. § 54.202(e).
1024 See Matter of Comprehensive Review of the Universal Service Fund Management, Administration, and
Oversight, Report and Order, 22 FCC Rcd 16372, 16383-84, para. 24 (2007).
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clarify that these ten-year record retention requirements apply to all recipients of high-cost and CAFsupport.1025 To ensure access to documents and information needed for effective ongoing oversight, we
include in new section54.320 a requirement that all documents be made available upon request to the
Commission and any of its Bureaus or offices, the Administrator, and their respective auditors.
D.
USAC Oversight Process
622. Background. In the USF/ICC Transformation NPRM, we sought comment on ways toimprove USAC’s audit process to reduce improper payments and assess risks. We received only one set
of comments addressing this issue.1026
623. Discussion. As noted in the USF/ICC Transformation NPRM, audits are an essential tool for
the Commission and USAC to ensure program integrity and to detect and deter waste, fraud, and
abuse.1027 In the USF/ICC Transformation NPRM, we discussed the concerns expressed by the GAO in
2008 regarding, among other things, the audit process that existed at the time.1028 The USF/ICC
Transformation NPRM also acknowledged USAC’s December 2010 Final Report,1029 which detailed the
findings of the audits conducted at the direction of the Commission’s Office of Inspector General.1030
624. As directed by the Commission’s Office of the Managing Director, USAC now has two
programs in place to safeguard the Universal Service Fund – the Beneficiary/Contributor Compliance
Audit Program (BCAP) and Payment Quality Assurance (PQA) program.1031 We created these programs,
in conjunction with USAC, in order to address the shortcomings of the audit processes discussed in the
GAO High-Cost Report and USAC’s December 2010 Final Report. The PQA program was launched in
August 2010,1032 and the first round of BCAP audits were announced on December 1, 2010. OMD
oversees USAC’s implementation of both programs.1033
625. Audits done pursuant to BCAP are intended to: (1) ensure that recipients of USF support are
in compliance with the Commission’s rules; (2) prevent, detect, and deter waste, fraud, and abuse; (3)
1025 As noted in Section VII.E.f.iii. above, Mobility Fund Phase I recipients will be required to retain documentation
for at least ten years after the date on which the company receives its final disbursement of Mobility Fund Phase I
support.
1026 See COMPTEL USF/ICC Transformation NPRM Comments at 21 (“One critical action that the Commission
should take immediately to strengthen its audit processes … is to ensure that the audits are completed on a timely
basis and that timely efforts are made to recover improper payments.”). We did, however, receive comments
supporting our ability to audit recipients. See, e.g., WISPA USF/ICC Transformation NPRM Comments at 10-11.
1027 USF/ICC Transformation NPRM at ¶ 471.
1028 USF/ICC Transformation NPRM at ¶ 469. See GAO High-Cost Report at 34-36.
1029 USF/ICC Transformation NPRM at ¶¶ 472-73.
1030 See Universal Service Administrative Company, Final Report and Statistical Analysis of the 2007-08 Federal
Communications Commission Office of Inspector General High-Cost Program Beneficiary Audits (Dec. 15, 2010),
available at http://www.fcc.gov/omd/usf-letters2011.html (December 2010 USAC Compliance Report).
1031 See Letter from Steven VanRoekel, FCC, to Scott Barash, USAC (Feb. 12, 2010), available at
http://www.fcc.gov/omd/usac-letters/2010/021210-ipia.pdf (Feb. 12, 2010 USAC Letter) (directing USAC to
separate its two audit objectives into distinct programs – one focused on Improper Payments Information Act (IPIA)
assessment and the second on auditing compliance with all four USF programs.)
1032 See USAC 2010 Annual Report at 5. This report may be found at:
http://www.usac.org/about/governance/annual-reports/2010.html.
1033 See Feb. 12, 2010 USAC Letter.
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recover funds for rule violations; and (4) ensure equitable contributions to the USF. These complianceaudits will also verify the accuracy of the underlying data,1034 thus addressing one of the concerns
expressed by the GAO,1035 the State Members of the Federal-State Joint Board on Universal Service, and
Comptel.1036
626. Unlike BCAP, the PQA program does not involve audits.1037 Rather, it provides for reviews
specifically designed to assess estimated rates of improper payments, thereby supporting Improper
Payments Information Act (IPIA) requirements. The PQA reviews measure the accuracy of USAC
payments to applicants, evaluate the eligibility of program applicants, and involve high-level testing of
information obtained from program participants. USAC tailors the scope of procedures to ensure
reasonable costs while still meeting IPIA requirements. These reviews occur in four-month cycles, with
USAC conducting 20-60 assessments of high-cost recipients per cycle. 1038
627. To assist program participants, USAC has information about BCAP and the PQA program
available on its website.1039 In addition to BCAP and the PQA program, USAC conducts outreach
training events as well as individual outreach activities via phone, e-mail, video-conference, or in
person.1040 USAC also has outreach products on its website, including video tutorials. 1041 USAC has also
“enhanced internal controls and data gathering to gain greater visibility into payment operations,
calibrated audit and audit follow-up activities to gain greater certainty about beneficiary support, and
modernized information technology systems to achieve greater efficiencies and improve reporting
capabilities.”1042
628. We direct USAC to review and revise the BCAP and PQA programs to take into account the
changes adopted in this Order. We direct USAC to annually assess compliance with the new
requirements established for recipients, including for recipients of CAF Phase I and Phase II. For CAF
Phase I, we establish above a requirement that companies have completed build-out to two-thirds of the
requisite number of locations within two years. We direct USAC to assess compliance with this
requirement for each holding company that receives CAF Phase I funds. ETCs that receive CAF Phase I
funding should ensure that their underlying books and records support the assertion that assets necessary
to offer broadband service have been placed in service in the requisite number of locations. We also
direct USAC to test the accuracy of certifications made pursuant to our new reporting requirements. Any
oversight program to assess compliance should be designed to ensure that management is reporting
accurately to the Commission, USAC, and the relevant state commission, relevant authority in a U.S.
Territory, or Tribal government, as appropriate, and should be designed to test some of the underlying
1034 See http://www.usac.org/hc/about/understanding-audits.aspx.
1035 GAO High-Cost Report at 37.
1036 State Members USF/ICC Transformation NPRM Comments at 55; COMPTEL USF/ICC Transformation NPRM
Comments at 20-21. We received no other comments in response to our request for comment on how to improve the
data validation process to correct the weakness identified by GAO.
1037 See http://www.usac.org/fund-administration/about/program-integrity/pqa-faqs.aspx.
1038 See http://www.usac.org/fund-administration/about/program-integrity/pqa-faqs.aspx.
1039 See http://www.usac.org/hc/about/understanding-audits.aspx; http://www.usac.org/fund-
administration/about/program-integrity/pqa-program.aspx.
1040 See http://www.usac.org/about/resource-room/individual-outreach/.
1041 See http://www.usac.org/hc/tools/video-tutorials.aspx.
1042 December 2010 USAC Compliance Report.
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data that forms the basis for management’s certification of compliance with various requirements. Thislist is not intended to be exhaustive, but rather illustrative of the modifications that USAC should make to
its existing oversight activities. We direct USAC to submit a report to WCB, WTB, and OMD within 60
days of release of this Order proposing changes to the BCAP and PQA programs consistent with this
Order.
629. To assist USAC’s audit and review efforts, we clarify in new section 54.320 that all ETCs
that receive high-cost support are subject to random compliance audits and other investigations to ensure
compliance with program rules and orders.1043
E.
Access to Cost and Revenue Data
630. Background. Although USAC is the USF Administrator, high-cost universal service datacollection responsibilities are divided between USAC and NECA. In the USF/ICC Transformation
NPRM, we noted that NECA collects data for the high-cost loop support program, while USAC collects
data for the remaining components of the high-cost program. As a result of this division, certain
information that is relevant to administration of universal service, including validation of universal
service payments, is not routinely provided to USAC. For example, because NECA is responsible for
Part 36 Subpart F-Universal Service Fund (HCLS) data collection under the Commission’s current rules,
NECA analyzes the cost data, performs certain calculations, and then transmits that information to USAC
for use in determining HCLS payments to rural carriers, but USAC does not have access to the underlying
Part 36 data that carriers submit to NECA.
631. Similarly, section 54.901 of the Commission’s rules requires USAC to calculate ICLS
support as the difference between the common line revenue requirement and the sum of end-user common
line charges and certain other revenues.1044 Yet NECA calculates the common line revenue requirement
and submits the results of its analysis to USAC; USAC does not have access to the underlying
information that carriers submit to NECA. In order for USAC to validate ICLS payments to rate-of-
return carriers, USAC must request from NECA underlying cost study information and supporting
documentation for SLC revenues (residence and single line business and multiline business),
uncollectibles, end user ISDN port revenue, and special access revenues.
632. Moreover, the Commission does not routinely receive from NECA and USAC all data used
to calculate high-cost payments. Accordingly, in the NPRM, we sought comment on ways to increase the
flow of information, including to improve the data validation process to ensure that the funds are used “to
advance modern networks capable of providing broadband and voice services.”1045
633. Discussion. We take two steps to facilitate the exchange of information needed to
administer and oversee universal service programs. First, we modify our rules to clarify that USAC has a
right to obtain – at any time and in any unaltered format – all cost and revenue submissions and related
information that carriers submit to NECA that is used to calculate payments under any of the existing
programs and any new programs, including the new CAF ICC (access replacement) support.
634. Second, we modify our rules to ensure that the Commission has timely access to relevant
data. Specifically, we require that USAC (and NECA to the extent USAC does not directly receive such
information from carriers) provide to the Commission upon request all underlying data collected from
ETCs to calculate payments under current support mechanisms – specifically, HCLS, ICLS, LSS, SNA,
SVS, HCMS and IAS – as well as to calculate CAF payments. This includes information or data
1043 This includes audits and investigations conducted by the Commission and its Bureaus and Offices.
1044 See 47 C.F.R. § 54.901.
1045 USF/ICC Transformation NPRM at ¶¶ 467, 476.
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underlying existing and future analyses that USAC uses to determine the amount of federal universalservice support disbursed in the past or the future, including the new CAF.
635. We anticipate that NECA and USAC will submit summary filings to the Commission on a
regular basis, and we delegate to the Wireline Competition Bureau authority to determine the format and
timing of such summary filings, but we emphasize that USAC and NECA must timely provide any
underlying data upon request. We also modify our rules to require rate-of-return carriers to submit to the
Commission upon request a copy of all cost and revenue data and related information submitted to NECA
for purposes of calculating intercarrier compensation and any new CAF payments resulting from
intercarrier compensation reform adopted in this Order.1046
IX.
ADDITIONAL ISSUES
A.
Tribal Engagement
636.The deep digital divide that persists between the Native Nations of the United States and
the rest of the country is well-documented.1047 Many residents of Tribal lands lack not only broadband
access, but even basic telephone service.1048 Throughout this reform proceeding, commenters have
repeatedly stressed the essential role that Tribal consultation and engagement play in the successful
deployment of service on Tribal lands.1049 For example, the National Tribal Telecommunications
Association, the National Congress of American Indians, and the Affiliated Tribes of Northwest Indians
have stressed the importance of measures to “specifically support and enhance tribal sovereignty, with
emphasis on consultation with Tribes.”1050
637.
We agree that engagement between Tribal governments and communications providers
either currently providing service or contemplating the provision of service on Tribal lands is vitally
important to the successful deployment and provision of service. We, therefore, will require that, at a
minimum, ETCs to demonstrate on an annual basis that they have meaningfully engaged Tribal
governments in their supported areas.1051 At a minimum, such discussions must include: (1) a needs
assessment and deployment planning with a focus on Tribal community anchor institutions; (2) feasibility
and sustainability planning; (3) marketing services in a culturally sensitive manner; (4) rights of way
processes, land use permitting, facilities siting, environmental and cultural preservation review processes;
1046 See Section XIII.
1047 See, e.g., Improving Communications Services for Native Nations, CG Docket No. 11-41, Notice of Inquiry, 26
FCC Rcd 2672, 2673 (2011) (Native Nations NOI); Improving Communications Services for Native Nations by
Promoting Greater Utilization of Spectrum Over Tribal Lands, WT Docket No. 11-40, Notice of Proposed
Rulemaking, 26 FCC Rcd 2623, 2624-25 (2011) (Spectrum Over Tribal Lands NPRM); Connecting America: The
National Broadband Plan, prepared by staff of the Federal Communications Commission, March 10, 2010 (National
Broadband Plan).
1048 Native Nations NOI, 26 FCC Rcd at 2673. See also Extending Wireless Telecommunications Services to Tribal
Lands, WT Docket No. 99-266, Report and Order and Further Notice of Rule Making, 15 FCC Rcd 11794, 11798
(2000) By virtually any measure, communities on Tribal lands have historically had less access to
telecommunications services than any other segment of the population.”); National Broadband Plan at 152, Box 8-
4.
1049 See, e.g., NTTA, NCAI, and ATNI Oct. 18, 2011 ex parte letter; Navajo Commission Oct. 24, 2011 ex parte
letter; NPM and NCAI Comments at 8-9; Navajo Commission Reply Comments at 4; Twin Houses Public Notice
Comments at 1-3, 6; Navajo Nation Telecommunications Regulatory Commission Ex Parte
1050 NTTA, NCAI, and ATNI Oct. 18, 2011 ex parte letter.
1051 As discussed, infra, we note that additional engagement obligation would apply in the context of bidding for,
and receiving, Mobility Fund support.
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and (5) compliance with Tribal business and licensing requirements.1052 In requiring Tribal engagement,we do not seek to supplant the Commission’s own ongoing obligation to consult with Tribes on a
government-to-government basis, but instead recognize the important role that all parties play in
expediting service to Tribal lands. As discussed above, support recipients will be required to submit to the
Commission and appropriate Tribal government officials an annual certification and summary of their
compliance with this Tribal government engagement obligation.1053 Carriers failing to satisfy the Tribal
government engagement obligation would be subject to financial consequences, including potential
reduction in support should they fail to fulfill their engagement obligations.1054 We envision that the
Office of Native Affairs and Policy (“ONAP”), in coordination with the Wireline and Wireless Bureaus,
would utilize their delegated authority to develop specific procedures regarding the Tribal engagement
process as necessary.
B.
Interstate Rate of Return Prescription
638.In the USF-ICC Transformation Notice, the Commission sought comment on whether to
initiate a proceeding to represcribe the authorized interstate rate of return for rate-of-return carriers if it
determines that such carriers should continue to receive high-cost support under a modified rate-of-return
system.1055 The Commission has not revisited the current 11.25 percent rate of return for over 20 years.
Several commenters supported our proposal to initiate a represcription proceeding.1056 Others offered
comments on how the Commission should proceed in the event it does initiate such a proceeding.1057 We,
therefore, conclude that the Commission should represcribe the authorized interstate rate of return for
rate-of-return carriers, and we initiate that represcription process today. In the FNPRM, we propose that
the interstate rate of return should be adjusted to ensure that it more accurately reflects the true cost of
capital today. Based on our preliminary analysis and record evidence, we believe the current rate of
return of 11.25 percent is no longer consistent with the Act and today’s financial conditions. In this
Order, we find good cause to waive certain procedural requirements in the Commission’s rules relating to
rate represcriptions to streamline and modernize this process to align it with the current Commission
practice.
1052 Tribal business and licensing requirements include business practice licenses that Tribal and non-Tribal business
entities, whether located on or off Tribal lands, must obtain upon application to the relevant Tribal government
office or division to conduct any business or trade, or deliver any goods or services to the Tribes, Tribal members, or
Tribal lands. These include certificates of public convenience and necessity, Tribal business licenses, master
licenses, and other related forms of Tribal government licensure.
1053 Appropriate Tribal government officials are elected or duly authorized government officials of federally
recognized American Indian Tribes and Alaska Native Villages. In the instance of the Hawaiian Home Lands, this
engagement must occur with the State of Hawaii Department of Hawaiian Home Lands and Office of Hawaiian
Affairs.
1054 We direct the Office of Native Affairs and Policy (ONAP), in coordination with the Bureaus, to develop best
practices regarding the Tribal engagement process to help facilitate these discussions.
1055 USF-ICC Transformation Notice, 26 FCC Rcd at 4692, para. 456.
1056 See, e.g., April 18 Comments of CTIA at 28 (“And the permitted rate of return unquestionably must be reduced
from the current 11.25 percent level.”).
1057 See, e.g., Pennsylvania PUC August 3 PN Comments at 19; N.E. Colorado Cellular August 3 PN Comments at 1,
17-8; Surewest Communications USF/ICC Transformation NPRM Comments at 18.
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1.Represcription
639.Section 205(a) of the Act authorizes the Commission, on an appropriate record, to
prescribe just and reasonable charges of common carriers.1058 The Commission last adjusted the
authorized rate of return in 1990, reducing it from 12 percent to 11.25 percent.1059 In 1998, the
Commission initiated a proceeding to represcribe the authorized rate of return for rate-of-return
carriers.1060 However, in the MAG Order, the Commission terminated that prescription proceeding.1061
Given the time that has elapsed since the authorized rate of return was last prescribed, and the major
changes that have occurred in the market since then, we find that the authorized interstate rate of return
should be reviewed and begin that process, seeking the information necessary to prescribe a new rate of
return.1062
640.
The Commission’s rules provide that the trigger for a new prescription proceeding is
satisfied if the monthly average yields on ten-year United States Treasury securities remain, for a
consecutive six month period, at least 150 basis points above or below the average of the monthly average
yields in effect for the consecutive six month period immediately prior to the effective date of the current
prescription.1063 The monthly average yields for the past six months have been over 450 basis points
below the monthly average yields in the six months immediately prior to the last prescription.1064 Our
trigger is easily satisfied, and we initiate the represcription now.
2.
Procedural Requirements
641.Section 205(a) requires the Commission to give “full opportunity for hearing” before
prescribing a rate.1065 However, a formal evidentiary hearing is not required under section 205,1066 and we
have on multiple occasions prescribed individual rates in notice and comment rulemaking proceedings.1067
1058 47 U.S.C. §§ 201(b), 205(a).
1059 Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No.
89-624, Order, 5 FCC Rcd 7507 (1990) (1990 Prescription Order).
1060 Prescribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No.
98-166, Notice Initiating a Prescription Proceeding and Notice of Proposed Rulemaking, 13 FCC Rcd 20561 (1998)
(1998 Prescription Notice).
1061 See MAG Order, 16 FCC Rcd at 19701, para. 208.
1062 See infra XVII.C.
1063 47 CFR § 65.101
1064 See 10-Year Treasury Constant Maturity Rate (GS10), Federal Reserve Bank of St. Louis (available at
http://research.stlouisfed.org/fred2/series/GS10) (last visited Oct. 21, 2011).
1065 47 U.S.C. § 205(a).
1066 In AT&T v. FCC, for example, the Second Circuit made clear that because section 205 does not require a
hearing “on the record,” the Administrative Procedures Act (APA) does not require a full evidentiary hearing in
section 205 prescription proceedings. 572 F.2d 17, 21-23 (2d Cir. 1978). Moreover, the court found that the
language of section 205(a) itself did not impose greater hearing requirements than the APA – concluding that AT&T
“may not complain that it had anything less than a ‘full opportunity’ to be heard” after receiving, in the context of
the particular proceeding on review, three rounds of comments. 572 F.2d at 22.
1067 See, e.g., Access Charge Reform, First Report and Order, 12 FCC Rcd 15982 , paras. 75-87 (1997), aff’d
Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998) (prescribing new limits on subscriber line charges
for non-primary residential and multi-line business lines); Access Charge Reform, Sixth Report and Order, 15 FCC
Rcd 12962, paras. 58, 70-75 (2000), aff’d in pertinent part, Texas Office of Pub. Util. Counsel, 265 F.3d 313 (5th
Cir. 2001) (prescribing revised ceilings on subscriber line charges).
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Although we have found it useful in the past to impose somewhat more detailed requirements in rate ofreturn prescription proceedings, we have expressly rejected the proposition that we could not “lawfully
use simple notice and comment procedures to prescribe the rate of return authorized for LEC interstate
access services.”1068 Accordingly, in the FNPRM we initiate a new rate of return prescription proceeding
using notice and comment procedures, and on our own motion, we waive certain existing procedural rules
to facilitate a more efficient process.
642.
The Commission’s current interstate rate of return represcription rules in Part 65
contemplate a streamlined paper hearing process.1069 These procedural rules are more specific and
detailed than the Commission’s rules for filing comments, replies, and written ex parte presentations in
permit-but-disclose proceedings. The Part 65 rules require that:
-
an original and four copies of all submissions must be filed with the Secretary (rule
65.103(d)),
-
all participants in the proceeding state in their initial pleading whether they wish to receive
service of documents filed in the proceeding (rule 65.100(b)), and filing parties must serve
copies of their submissions (other than initial submissions) on all participants who properly
so requested (rule 65.103(e)),
-
parties may file “direct case submissions, responses, and rebuttals,” with direct case
submissions due 60 days after the beginning of the proceeding, responses due 60 days
thereafter, and rebuttals due 21 days thereafter (rule 65.103(b),
-
direct case submissions and responses are subject to a 70-page limit, and rebuttals to a 50-
page limit (rule 65.104(a)-(c)),
-
parties must file copies of all information (such as financial analysts’ reports) that they relied
on in preparing their submissions (rule 65.105(a)), and
-
parties may file written interrogatories and discovery requests directed at any other party’s
submissions, and the submitting parties may oppose those requests (rule 65.105(b)-(f)).
643.
We find good cause to waive some of these procedural requirements on our own
motion.1070 We find that these procedures would be onerous and are not necessary to ensure adequate
public participation. For instance, there is no need for parties to file an original plus four copies of
submissions with the Secretary.1071 The Commission recently revised its rules to encourage electronic
filing of comments and replies whenever technically feasible, and to require that ex parte submissions be
filed electronically unless doing so poses a hardship.1072 Given the vast improvements to the electronic
1068 Amendment of Parts 65 and 69 of the Commission’s Rules to Reform the Interstate Rate of Return
Represcription and Enforcement Processes, Report and Order, 10 FCC Rcd 6788, 6814, para. 55 (1995) (Rate of
Return Streamlined Rules R&O). See generally id., 10 FCC Rcd at 6814-15, paras. 55-57 (citing case law
establishing that the “full opportunity for hearing” language of section 205 does not mandate “trial-type procedures
in addition to, or instead of, notice and comment procedures”).
1069 47 C.F.R. Part 65; Rate of Return Streamlined Rules R&O, 10 FCC Rcd at 6812-15, paras. 51-57.
1070 47 C.F.R. § 1.3; see also WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969); Northeast Cellular Tel. Co. v.
FCC, 897 F.2d 1166 (D.C. Cir. 1990).
1071 47 C.F.R. § 65.103(d).
1072 47 C.F.R. § 1.1206(b)(2)(i); Amendment of Certain of the Commission’s Part 1 Rules of Practice and Procedure
and Part 0 Rules of Commission Organization, Report and Order, 26 FCC Rcd 1594, 1596 para. 6 (2011)
(encouraging the migration to electronic filing).
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filing system, and the usual practice now of many parties to file documents electronically rather than onpaper, we see no reason to require the submission of paper copies. Rather, parties to this proceeding may
comply with our usual procedures in permit-but-disclosure proceedings.1073 Pleadings other than ex parte
submissions may be filed electronically or may be filed on paper with the Secretary’s office. If they are
filed on paper, the original and one copy should be provided.
644.
The Part 65 rules also contemplate that all parties to the proceeding will be served with
copies of all other parties’ submissions.1074 Again, this is no longer necessary. Before the greater and
more accepted use of electronic filing, service may have been a reasonable requirement to assure timely
distribution of relevant materials. However, our electronic filing system generally makes filings available
within 24 hours, and the vast majority of parties have access to these materials via the Internet. We,
therefore, find that service is not required, and we waive the requirement. Any party that wishes to
receive an electronic notification when new documents are filed in the proceeding may subscribe to an
RSS feed, available from ECFS.
645.
In addition, we waive the specific filing schedule contained in section 65.103(b) of the
Commission’s rules so that comments may be filed pursuant to the pleading cycle adopted for sections
XVII.A-K of the FNPRM. We also find the page limits applicable to rate represcription proceedings to
be inappropriate here. Lastly, we waive the requirement in section 65.301 that the Commission publish in
this notice the cost of debt, cost of preferred stock, and capital structure computed under our rules,
because, as detailed in the FNPRM,1075 the data set necessary to calculate those formulas is no longer
collected by the Commission. We seek comment in the FNRPM on those calculations and the related
data and methodology issues.
C.
Pending Matters
646.We also deny four pending high-cost maters currently pending before the Commission:
two petitions for reconsideration of the Corr Wireless Order;1076 Puerto Rico Telephone Company, Inc.’s
petition to reconsider our decision declining to adopt a new high-cost support mechanism for non-rural
insular carriers;1077 and Verizon Wireless’s Petition for Reconsideration of the Wireline Competition
Bureau’s letter directing the USAC to implement certain caps on high-cost universal service support for
two companies, known as the “company-specific caps.”1078
D.
Deletion of Obsolete Universal Service Rules and Conforming Changes to
Existing Rules
As part of comprehensive reform, we make conforming changes to delete obsolete rules
from the Code of Federal Regulations. Specifically, we eliminate our rules governing Long Term
Support, which the Commission eliminated as a discrete support program in the MAG Order, and Interim
Hold Harmless Support for Non-Rural Carriers, which addressed non-rural carriers’ transition from high-
cost loop support to high-cost model support.1079 Because these rules are obsolete, we find good cause to
1073 Our rules already designate rate prescription proceedings under section 205 as permit-but-disclose for ex parte
purposes. 47 C.F.R. § 1.1206(a)(10).
1074 47 C.F.R. §§ 65.100(b), 65.103(e).
1075 See infra. Section XVII.C.
1076 See Appendix F.
1077 See Appendix D.
1078 See Appendix E.
1079 47 C.F.R. §§ 54.303, 311.
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delete them without notice and comment.1080 We also make conforming changes to existing rules toensure they are consistent with changes made in this Order.1081
X.
OVERVIEW OF INTERCARRIER COMPENSATION
648.In this section, we comprehensively reform the intercarrier compensation system to bring
substantial benefits to consumers, including reduced rates for all wireless and long distance customers,
more innovative communications offerings, and improved quality of service for wireless consumers and
consumers of long distance services. The reforms also improve the fairness and efficiency of subsidies
flowing to high-cost rural areas, and promote innovation by eliminating barriers to the transformation of
today’s telephone networks into the all-IP broadband networks of the future. The existing intercarrier
compensation system—built on geographic and per-minute charges and implicit subsidies—is
fundamentally in tension with and a deterrent to deployment of all IP networks. And the system is
eroding rapidly as demand for traditional telephone service falls, with consumers increasingly opting for
wireless, VoIP, texting, email, and other phone alternatives. Falling demand has led to rising access rates
for smaller rural carriers, fueling wasteful arbitrage schemes and prompting costly compensation disputes.
649.
To address these issues, we first take immediate action to curtail two of the most
prevalent arbitrage activities today, access stimulation and phantom traffic. These schemes involve
service providers exploiting loopholes in our rules and ultimately cost consumers hundreds of millions of
dollars annually.
650.
Next, we launch long-term intercarrier compensation reform by adopting bill-and-keep as
the ultimate uniform, national methodology for all telecommunications traffic exchanged with a LEC.
We make clear that states will continue to play a vital role within this framework, particularly in the
context of negotiated interconnection agreements, arbitrating interconnection disputes under the section
251/252 framework, and defining the network “edge” for bill-and-keep.
651.
We begin the transition to bill-and-keep with terminating switched access rates, which
are the main source of arbitrage today. We provide for a measured, gradual transition to a bill-and-keep
methodology for these rates, and adopt a recovery mechanism that provides carriers with certain and
predictable revenue streams. We also begin the process of reforming originating access and other rate
elements by capping all interstate rates and most intrastate rates as of the effective date of the rules
adopted pursuant to this Order.
652.
This Order also makes clear the prospective payment obligations for VoIP traffic and
adopts a transitional intercarrier compensation framework for VoIP. In addition, we clarify certain
aspects of CMRS-LEC compensation to reduce disputes and address existing ambiguity. We also make
clear our expectation that carriers will negotiate in good faith in response to requests for IP-to-IP
interconnection for the exchange of voice traffic.
653.
Finally, in the Further Notice of Proposed Rulemaking (FNPRM), we seek comment on
the transition and recovery mechanism for rate elements not reduced as part of this Order, including
originating access and certain common and dedicated transport. We also seek comment on ways to
implement our expectation of good faith negotiations for IP-to-IP interconnection for the exchange of
voice traffic, ways to promote IP-to-IP interconnection, as well as other implementation issues for the
bill-and-keep end state.
654.
Our reforms will bring numerous and significant benefits to consumers. As with past
intercarrier compensation reforms, we anticipate savings from intercarrier compensation payments will
1080 5 U.S.C. 553(b)(3)(B).
1081 See Appendix A.
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result in more robust wireless service, more innovative offerings, and cost savings to consumers. Ourproposed gradual reduction of intercarrier charges and movement to a bill-and-keep methodology will
significantly increase the efficiency of long distance and local calling, and of other services more
generally. Indeed, we estimate, based on conservative assumptions, that once our ICC reform is
complete, mobile and wireline phone consumers stand to gain benefits worth over $1.5 billion dollars per
year.1082
655.
In addition, our reforms will promote the nation’s transition to IP networks, creating
long-term benefits for consumers, businesses, and the nation. The convergence of data, voice, video, and
text in networks based upon IP supports the Internet as an open platform for innovation, investment, job
creation, economic growth, competition, and free expression.
XI.
MEASURES TO ADDRESS ARBITRAGE
A.
Rules To Reduce Access Stimulation
656.In this section, we adopt revisions to our interstate switched access charge rules to
address access stimulation. Access stimulation occurs when a LEC with high switched access rates enters
into an arrangement with a provider of high call volume operations such as chat lines, adult entertainment
calls, and “free” conference calls. The arrangement inflates or stimulates the access minutes terminated
to the LEC, and the LEC then shares a portion of the increased access revenues resulting from the
increased demand with the “free” service provider, or offers some other benefit to the “free” service
provider. The shared revenues received by the service provider cover its costs, and it therefore may not
need to, and typically does not, assess a separate charge for the service it is offering. Meanwhile, the
wireless and interexchange carriers (collectively IXCs) paying the increased access charges are forced to
recover these costs from all their customers, even though many of those customers do not use the services
stimulating the access demand.
657.
Access stimulation schemes work because when LECs enter traffic-inflating revenue-
sharing agreements, they are currently not required to reduce their access rates to reflect their increased
volume of minutes. The combination of significant increases in switched access traffic with unchanged
access rates results in a jump in revenues and thus inflated profits that almost uniformly make the LEC’s
interstate switched access rates unjust and unreasonable under section 201(b) of the Act.1083 Consistent
with the approach proposed in the USF/ICC Transformation NPRM, we adopt a definition of access
stimulation that includes two conditions. If a LEC meets those conditions, the LEC generally must
reduce its interstate switched access tariffed rates to the rates of the price cap LEC in the state with the
lowest rates, which are presumptively consistent with the Act.1084 This will reduce the extent to which
IXC customers that do not use the stimulating services are forced to subsidize the customers that do use
the services.
658.
Based on the record received in response to the single-pronged trigger proposed in the
USF/ICC Transformation NPRM, we modify our approach from defining an access stimulation trigger to
defining access stimulation. The access stimulation definition we adopt now has two conditions: (1) a
1082 See infra Appendix I.
1083 47 U.S.C. § 201(b), which provides that “[a]ll charges, practices, classifications, and regulations for and in
connection with such communication service, shall be just and reasonable, and any such charge, practice,
classification, or regulation that is unjust or unreasonable is declared to be unlawful . . . .” See Establishing Just
and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135, Notice of Proposed Rulemaking, 22
FCC Rcd 17989, 17995-96, para. 14 (Access Stimulation NPRM).
1084 See infra Appendix A, Section 61.26(g).
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revenue sharing condition, revised slightly from the proposal in the USF/ICC Transformation NPRM; and(2) an additional traffic volume condition, which is met where the LEC either: (a) has a three-to-one
interstate terminating-to-originating traffic ratio in a calendar month; or (b) has had more than a 100
percent growth in interstate originating and/or terminating switched access MOU in a month compared to
the same month in the preceding year. If both conditions are satisfied, the LEC generally must file
revised tariffs to account for its increased traffic.
659.
Adoption of the definition of access stimulation with two conditions will facilitate
enforcement of the new access stimulation rules in instances where a LEC meets the conditions for access
stimulation but does not file revised tariffs. In particular, IXCs will be permitted to file complaints based
on evidence from their traffic records that a LEC has exceeded either of the traffic measurements of the
second condition, i.e., that the second condition has been met. If the IXC filing the complaint makes this
showing, the burden will shift to the LEC to establish that it has not met the access stimulation definition
and therefore that it is not in violation of our rules. This burden-shifting approach will enable IXCs to
bring complaints based on their own traffic data, and will help the Commission to identify circumstances
where a LEC may be in violation of our rules.
660.
We conclude that these revised interstate access rules are narrowly tailored to minimize
the costs of the rule revisions on the industry, while reducing the adverse effects of access stimulation and
ensuring that interstate access rates are at levels presumptively consistent with section 201(b) of the Act.
1.
Background
661.In the USF/ICC Transformation NPRM, we proposed that carriers that have entered a
revenue sharing arrangement be required to refile their interstate switched access tariffs to reflect a rate
more consistent with their volume of traffic. For rate-of-return LECs, the rate would be adjusted to
account for new demand and any increase in costs. For competitive LECs, that rate would be
benchmarked to that of the BOC in the state, or, if there was no BOC in the state, to the largest incumbent
LEC in the state. We also sought comment on alternative approaches.1085
2.
Discussion
a.Need for Reform to Address Access Stimulation
662.The record confirms the need for prompt Commission action to address the adverse
effects of access stimulation and to help ensure that interstate switched access rates remain just and
reasonable, as required by section 201(b) of the Act. Commenters agree that the interstate switched
access rates being charged by access stimulating LECs do not reflect the volume of traffic associated with
access stimulation.1086 As a result, access stimulating LECs realize significant revenue increases and thus
inflated profits that almost uniformly make their interstate switched access rates unjust and unreasonable.
663.
Access stimulation imposes undue costs on consumers, inefficiently diverting capital
away from more productive uses such as broadband deployment.1087 When access stimulation occurs in
locations that have higher than average access charges, which is the predominant case today, the average
per-minute cost of access and thus the average cost of long-distance calling is increased.1088 Because of
the rate integration requirements of section 254(g) of the Act, long-distance carriers are prohibited from
1085 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4757-70, paras. 635-670.
1086 See, e.g., Free Conferencing Corporation Section XV Comments at 26; ZipDX Section XV Comments at 5.
1087 See 47 U.S.C. § 1302.
1088 See, e.g., AT&T Section XV Comments at 7-8, 11-12.
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passing on the higher access costs directly to the customers making the calls to access stimulatingentities.1089 Therefore, all customers of these long-distance providers bear these costs, even though many
of them do not use the access stimulator’s services, and, in essence, ultimately support businesses
designed to take advantage of today’s above-cost intercarrier compensation rates.1090
664.
The record indicates that a significant amount of access traffic is going to LECs
engaging in access stimulation. TEOCO estimates that the total cost of access stimulation to IXCs has
been more than $2.3 billion over the past five years.1091 Verizon estimates the overall costs to IXCs to be
between $330 and $440 million per year, and states that it expected to be billed between $66 and $88
million by access stimulators for approximately two billion wireline and wireless long-distance minutes in
2010.1092 Other parties indicate that payment of access charges to access stimulating LECs is the subject
of large numbers of disputes in a variety of forums.1093 When carriers pay more access charges as a result
of access stimulation schemes, the amount of capital available to invest in broadband deployment and
other network investments that would benefit consumers is substantially reduced.1094
665.
Access stimulation also harms competition by giving companies that offer a “free”
calling service a competitive advantage over companies that charge their customers for the service. For
example, conference calling provider ZipDX indicates that, by not engaging in access stimulation, it is at
a disadvantage vis-à-vis competitors that engage in access stimulation.1095 Providers of conferencing
services, like ZipDX, are recovering the costs of the service, such as conference bridges, marketing, and
billing, from the user of the service rather than, as explained above in the case of access stimulators,
spreading those costs across the universe of long-distance subscribers.1096 As a result, the services offered
by “free” conferencing providers that leverage arbitrage opportunities put companies that recover the cost
of services from their customers at a distinct competitive disadvantage.
666.
Several parties claim that access stimulation offers economic development benefits,
including the expansion of broadband services to rural communities and tribal lands.1097 Although
1089 47 U.S.C. § 254(g). IXCs charge averaged rates for long-distance calls pursuant to the rate integration policy.
To the extent that its average access costs are increased, the costs are spread among all customers of the IXC.
1090 See, e.g., AT&T Section XV Comments at 7. Some parties argue that IXCs are profitable overall or they would
eliminate their “all you can eat” pricing plans. See, e.g., Bluegrass Section XV Comments at 8-9; Free
Conferencing Corporation Section XV Comments at 24-25. Whether the IXC’s revenues for a call are more or less
than its cost of terminating the call is not at issue. The question is whether just and reasonable rates are being
charged for the provision of interstate switched access services. See 47 U.S.C. § 201(b).
1091 See TEOCO, ACCESS STIMULATION BLEEDS CSPS OF BILLIONS, at 5 (TEOCO Study), attached to Letter from
Glenn Reynolds, Vice President – Policy, USTelecom, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 07-
135 (filed Oct. 18, 2010).
1092 See Letter from Donna Epps, Vice President-Federal Regulatory, Verizon, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 07-135, at 1 (filed Oct. 12, 2010).
1093 See, e.g., Bluegrass Section XV Comments at 28-29.
1094 See, e.g., AT&T Section XV Comments at 3; USTelecom Section XV Comments at 6-8.
1095 Letter from David Frankel, CEO, ZipDX, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 07-135, at 1,
3 (filed Nov. 26, 2010).
1096 See Testimony of David Frankel, Founder, ZipDX, at the April 6, 2011, WCB Workshop at 25 (“[Zip DX]
pay[s] interstate compensation charges as part of [our] wholesale arrangements with our underlying service
providers”), available at http://webapp01.fcc.gov/ecfs/document/view?id=7021340998.
1097 See, e.g., Free Conferencing Corporation Section XV Comments at 6-7 (the revenues that LECs generate from
traffic on their networks allow those carriers to invest in building out their networks with no federal financial
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expanding broadband services in rural and Tribal lands is important, we agree with other commenters thathow access revenues are used is not relevant in determining whether switched access rates are just and
reasonable in accordance with section 201(b).1098 In addition, excess revenues that are shared in access
stimulation schemes provide additional proof that the LEC’s rates are above cost. Moreover, Congress
created an explicit universal service fund to spur investment and deployment in rural, high cost, and
insular areas, and the Commission is taking action here and in other proceedings to facilitate such
deployment.1099
(i)
Access Stimulation Definition
667.We adopt a definition to identify when an access stimulating LEC must refile its
interstate access tariffs at rates that are presumptively consistent with the Act. After reviewing the record,
we make a few changes to the USF/ICC Transformation NPRM proposal, including defining access
stimulation as occurring when two conditions are met. The first condition is that the LEC has entered into
an access revenue sharing agreement, and we clarify what types of agreements qualify as “revenue
sharing.” The second condition is met where the LEC either has had a three-to-one interstate terminating-
to-originating traffic ratio in a calendar month, or has had a greater than 100 percent increase in interstate
originating and/or terminating switched access MOU in a month compared to the same month in the
preceding year. We adopt these changes to ensure that the access stimulation definition is not over-
inclusive and to improve its enforceability.
668.
Definition of a Revenue Sharing Agreement. Many parties agree that the use of the
revenue sharing arrangement trigger alone as proposed in the USF/ICC Transformation NPRM would be
reasonable to reduce access stimulation,1100 and other parties argue the existence of a revenue sharing
arrangement should be used in conjunction with another condition.1101 However, the use of a revenue
sharing approach alone was criticized by some as being ambiguous, circular, or a poor indicator of access
stimulation.1102 Other parties found the definition of revenue sharing to be over-inclusive and/or under-
(Continued from previous page)
support); Global Section XV Comments at 8 (revenues from competitive conferencing services help further
investment in rural infrastructure, thereby promoting development).
1098 See, e.g., NASUCA and NJ Rate Counsel Section XV Comments at 11-12; Sprint Section XV Reply at 1-2;
Statement of Iowa Utilities Board Member Krista Tanner at the April 6, 2011 Workshop, at 61 (“[I]t doesn’t matter
what the traffic is for. It doesn’t matter what you do with your reasonable profits.”). The Commission is
considering a wide range of issues related to improving communications services for Native Nations. See generally
Improving Communications Services for Native Nations, CG Docket No. 11-41, Notice of Inquiry, 26 FCC Rcd
2672 (2011).
1099 See supra Sections VI and VII; see also, e.g., Implementation of Section 224 of the Act; A National Broadband
Plan For Our Future, WC Docket No. 07-245, GN Docket No. 09-51, Report and Order and Order on
Reconsideration, 26 FCC Rcd 5240 at 5319, para. 178 (2011) (2011 Pole Attachment Order).
1100 See, e.g., CenturyLink Section XV Comments at 39-40; Global Section XV Comments at 12 (“appropriately
tailored step that strikes a proper balance between the Commission’s policy concerns and the legitimate business
practices of carriers”); Omnitel and Tekstar Section XV Comments at 12-13. But see Beehive Section XV
Comments at 5-7; EarthLink Section XV Comments at 13-16; HyperCube Section XV Comments at 4; Free
Conferencing Corporation Section XV Comments at 2-3, 12-13.
1101 See, e.g., AT&T Section XV Comments at 18-20; Leap Wireless and Cricket Section XV Comments at 6-7.
1102 See, e.g., ZipDX Section XV Comments at 5; EarthLink Section XV Comments at 13-14; RNK Section XV
Comments at 10-11 (will generate more disputes); Letter from Edward A. Yorkgitis, Jr., Counsel to Omnitel
Communications, Inc and Tekstar Communications, Inc., to Marlene H. Dortch, Secretary, FCC, WC Docket No.
07-135, at 2 (filed May 9, 2011) (Omnitel and Tekstar May 9, 2011 Ex Parte Letter).
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inclusive.1103 Several commenters offered suggestions on how to revise the definitional language.1104669.
After reviewing the record, we clarify the scope of the access revenue sharing agreement
condition of the new access stimulation definition. The access revenue sharing condition of the access
stimulation definition we adopt herein is met when a rate-of-return LEC or a competitive LEC: “has an
access revenue sharing agreement, whether express, implied, written or oral, that, over the course of the
agreement, would directly or indirectly result in a net payment to the other party (including affiliates) to
the agreement, in which payment by the rate-of-return LEC or competitive LEC is based on the billing or
collection of access charges from interexchange carriers or wireless carriers. When determining whether
there is a net payment under this rule, all payments, discounts, credits, services, features, functions, and
other items of value, regardless of form, provided by the rate-of-return LEC or competitive LEC to the
other party to the agreement shall be taken into account.”1105
670.
This rule focuses on revenue sharing that would result in a net payment to the other
entity over the course of the agreement1106 arising from the sharing of access revenues.1107 We intend the
net payment language to limit the revenue sharing definition in a manner that, along with the traffic
measurements discussed below, best identifies the revenue sharing agreements likely to be associated
with access stimulation and thus those cases in which a LEC must refile its switched access rates.
Revenue sharing may include payments characterized as marketing fees or other similar payments that
result in a net payment to the access stimulator. However, this rule does not encompass typical, widely
available, retail discounts offered by LECs through, for example, bundled service offerings.
671.
Some commenters assert that the proposed definition of access revenue sharing
arrangements was over-inclusive and/or under-inclusive.1108 We believe that the net payment language,
1103 See, e.g., Rural Associations Section XV Comments at 32-36; PAETEC et al. Section XV Comments at 21.
1104 See, e.g., ZipDX Section XV Comments at 5 (proposing a revised definition to read: “Access revenue sharing
occurs when a rate-of-return ILEC or CLEC enters in an agreement with another party (including an affiliate) that
results in the aggregate fees owed to the ILEC or CLEC by the other party decreasing as the volume of access-fee-
generating traffic attributable to that other party increases (including to the point that the other party is receiving a
net payment from the ILEC or CLEC.”); HyperCube Section XV Comments at 10 (proposing to distinguish
wholesale sharing agreements from retail agreements and exclude wholesale agreements from the definition of
revenue sharing); Omnitel and Tekstar May 9, 2011 Ex Parte Letter, Attach. at 1 (proposing a revised definition to
read: “Access revenue sharing occurs when a rate-of-return ILEC or a CLEC enters into an agreement that will
result in a net payment over the course of the agreement to the other party (including affiliates) to the agreement, in
which payment by the rate-of-return ILEC or CLEC is tied to the billing or collection of access charges from
interexchange carriers. When determining whether there is a net payment under this rule, all payment, discounts,
credits, services, features and functions, and other items of value, regardless of form, given by the rate-of-return
ILEC or CLEC to the other party in connection with the shall be taken into account.”).
1105 See infra Appendix A.
1106 The use of “over the course of the agreement” does not preclude an IXC from filing a complaint if the traffic
measurement condition is met. The agreement is to be interpreted in terms of what the anticipated net payments
would be over the course of the agreement.
1107 We clarify that patronage dividends paid by cooperatives generally do not constitute revenue sharing as
contemplated by this definition. See Rural Associations Section XV Comments at 33-34. However, a cooperative,
like other LECs, could structure payments in a manner to engage in revenue sharing that would cause it to meet the
definition as discussed herein.
1108 See, e.g., PAETEC et al. Section XV Comments at 21 (claiming that the net payor test is both over- and under-
inclusive because it targets the wrong factor—unreasonable traffic spikes in high-access-cost areas is more a
function of the portability of the traffic than the direction or amount of net payments); Rural Associations Section
XV Comments at 32-36 (claiming that the Commission must distinguish between situations where traffic levels are
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combined with either the terminating-to-originating traffic ratio or the traffic growth requirement,sufficiently limits the scope of the revenue sharing definition by narrowing the number of carriers that
could be subject to the trigger. HyperCube argues that the Commission should exclude wholesale
services from the definition of revenue sharing agreements.1109 We find HyperCube’s proposal
unpersuasive because the sharing of access revenues is involved and thus should be covered if the second
condition of the definition is met. 1110 If a LEC’s circumstances change because it terminates the access
revenue sharing agreement(s), it may file a tariff to revise its rates under the rules applicable when access
stimulation is not occurring.1111 As part of that tariff filing, an officer of the LEC must certify that it has
terminated the revenue sharing agreement(s).
672.
Several parties have urged us to declare revenue sharing to be a violation of section
201(b) of the Act.1112 Other parties argue that the Commission should prohibit the collection of switched
access charges for traffic sent to access stimulators.1113 Many commenters, on the other hand, assert that
revenue sharing is a common business practice that has been endorsed in some situations by the
Commission.1114 As proposed in the USF/ICC Transformation NPRM, we do not declare revenue sharing
to be a per se violation of section 201(b) of the Act.1115 A ban on all revenue sharing arrangements could
be overly broad,1116 and no party has suggested a way to overcome this shortcoming. Nor do we find that
parties have demonstrated that traffic directed to access stimulators should not be subject to tariffed
access charges in all cases. We note that the access stimulation rules we adopt today are part of our
comprehensive intercarrier compensation reform. That reform will, as the transition unfolds, address
remaining incentives to engage in access stimulation.
(Continued from previous page)
artificially inflated and situations where traffic increases as a result of legitimate economic activity); HyperCube
Section XV Comments at 4 (claiming that the revenue sharing definition is over-inclusive because it would
encompass wholesale revenue sharing arrangements that HyperCube believes are in the public interest by promoting
a competitive environment, rather than focusing on end-user stimulation).
1109 HyperCube Section XV Comments at i, 4.
1110 In all events, HyperCube states that it is already benchmarking to the rates of the BOC in its service areas and
thus would likely be unaffected by the rules adopted here, even though we are departing from the BOC rates as the
benchmark and using the lowest price cap rate in the state. Id. at 3.
1111 See Bluegrass Section XV Comments at 19.
1112 See, e.g., CenturyLink Section XV Comments at 33-34, 53 (sharing of revenues is unreasonable practice under
section 201(b)); XO Section XV Comments at 44; USTelecom Section XV Comments at 10; AT&T Section XV
Comments at 12-13.
1113 See, e.g., AT&T Section XV Comments at 12-15; Sprint Section XV Comments at 20; CenturyLink Section XV
Comments at 34-35 (Billing IXC for tariffed access charges for traffic delivered to business partner instead of end
user violates most LECs’ access tariffs and FCC rules.).
1114 See, e.g., HyperCube Section XV Comments at 7-8 (Commission should not ban revenue sharing agreements
that are invisible to the calling party, such as HyperCube, and therefore do not stimulate the calling party to place
additional calls.).
1115 See, e.g., Cablevision and Charter Section XV Comments at 13-14; Free Conferencing Corporation Section XV
Comments at 30; Neutral Tandem Section XV Comments at 5.
1116 See, e.g., Access Charge Reform, Reform of Access Charges Imposed by Competitive Local Exchange Carriers,
CC Docket No. 96-262, Eighth Report and Order and Fifth Order on Reconsideration, 19 FCC Rcd 9108, 9142-43,
para. 70 (2004) (CLEC Access Charge Reform Reconsideration Order); AT&T’s Private Payphone Commission
Plan, ENF-87-19, Memorandum Opinion and Order, 7 FCC Rcd 7135 (1992).
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673.A few parties argue that the Commission explicitly approved revenue sharing in the
CLEC Access Charge Reconsideration Order when it found that commission payments from competitive
LECs to generators of toll-free traffic, such as hotels and universities, did not create any incentives for the
individuals who use those facilities to place excessive or fraudulent calls.1117 That case is inapposite. The
Commission there was responding to IXC assertions in connection with 8YY calling and the Commission
noted that it did not appear that the payments would affect calling patterns because the commissions did
not create any incentive for those actually placing the calls to artificially inflate their 8YY traffic.1118 By
contrast, when access traffic is being stimulated, the party receiving the shared revenues has an economic
incentive to increase call volumes by advertising the stimulating services widely.
674.
Several parties ask that we address the potential for LECs to attempt to evade the
prohibition on access stimulation by integrating high call volume operations within the same corporate
entity as the LEC, rather than providing those services through contracts with third parties or affiliates, so
that it is able to characterize this arrangement as something other than a revenue sharing agreement.1119 In
particular, CenturyLink argues that revenue sharing in the access stimulation context, however structured,
violates section 254(k) of the Act because terminating switched access is a monopoly service and the
conferencing services are competitive.1120 The rules adopted here pursuant to sections 201 and 202 of the
Act address conferencing services being provided by a third party, whether affiliated with the LEC or
not.1121 Section 254(k) would apply to a LEC’s operation of an access stimulation plan within its own
corporate organization. In that context, as we have found in other proceedings, terminating access is a
monopoly service. 1122 The conferencing activity, as portrayed by the parties engaged in access
stimulation, would be a competitive service.1123 Thus, the use of non-competitive terminating access
revenues to support competitive conferencing service within the LEC operating entity would violate
section 254(k) and appropriate sanctions could be imposed.
675.
Addition of a Traffic Measurement Condition. After reviewing the record, we agree that
it is appropriate to include a traffic measurement condition in the definition of access stimulation.1124
Accordingly, in addition to requiring the existence of a revenue sharing agreement, we add a second
condition to the definition requiring that a LEC: “has either an interstate terminating-to-originating traffic
ratio of at least 3:1 in a calendar month, or has had more than a 100 percent growth in interstate
originating and/or terminating switched access MOU in a month compared to the same month in the
1117 PAETEC et al. Section XV Comments at 27; EarthLink Section XV Comments at 19-20.
1118 See CLEC Access Charge Reform Reconsideration Order, 19 FCC Rcd at 9142-43, para. 70.
1119 See, e.g., Level 3 Section XV Comments at 5; Verizon Section XV Comments at 43-44.
1120 CenturyLink Section XV Comments at 43-50. In relevant part, section 254(k) provides that “[a]
telecommunications carrier may not use services that are not competitive to subsidize services that are subject to
competition.” 47 U.S.C. § 254(k).
1121 Free Conferencing Corporation, on the other hand, argues that using revenue sharing as a trigger discriminates
in favor of vertically integrated companies, such as AT&T and Verizon, where the conference calling provider and
the LEC collecting access charges are part of the same overall enterprise. Free Conferencing Corporation Section
XV Comments at 26-27; see also Global Section XV Comments at 11-12. This argument is unpersuasive for the
reasons stated in paragraph 666 supra.
1122 See CLEC Access Charge Order, 16 FCC Rcd 9923, 9935, para. 30.
1123 See, e.g., Free Conferencing Corporation Section XV Comments at 1, 17; Global Section XV Comments at 9.
1124 See, e.g., AT&T Section XV Comments at 18-20; ITTA Section XV Comments at 25; Verizon Section XV
Comments at 44.
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preceding year.”1125 The addition of a traffic measurement component to the access stimulation definitioncreates a bright-line rule that responds to record concerns about using access revenue sharing alone. We
conclude that these measurements of switched access traffic of all carriers exchanging traffic with the
LEC reflect the significant growth in traffic volumes that would generally be observed in cases where
access stimulation is occurring and thus should make detection and enforcement easier. Carriers paying
switched access charges can observe their own traffic patterns for each of these traffic measurements and
file complaints based on their own traffic patterns. Thus, this will not place a burden on LECs to file
traffic reports, as some proposals would.1126
676.
The record offers support for both a terminating-to-originating traffic ratio1127 and a
traffic growth factor.1128 The Commission adopted a 3:1 ratio in its 2001 ISP-Remand Order to address a
similar arbitrage scheme based on artificially increasing reciprocal compensation minutes.1129 Further, the
Wireline Competition Bureau employed a 100 percent traffic growth factor as a benchmark in a tariff
investigation to address the potential that some rate-of-return LECs might engage in access stimulation
after having filed tariffs with high switched access rates.1130 In each case, the approach was largely
successful in identifying and reducing the practice.
677.
We conclude that the use of a terminating-to-originating traffic ratio in conjunction with
a traffic growth factor as alternative traffic measures addresses the shortcomings of using either
component separately. A few parties argue that carriers can game the terminating-to-originating traffic
ratio component by simply increasing the number of originating MOU.1131 The traffic growth component
protects against this possibility because increasing the originating access traffic to avoid tripping the 3:1
component would likely mean total access traffic would increase enough to trip the growth component.
1125 See infra Appendix A.
1126 See Letter from Henry Goldberg, Counsel for Free Conferencing Corporation, to Marlene H. Dortch, Secretary,
FCC, WC Docket Nos. 10-90, 07-135, GN Docket No. 09-51, CC Docket No. 01-92, Attach. at 7 (filed July 8,
2011) (Free Conferencing Corporation July 8, 2011 Ex Parte Letter).
1127 See, e.g., CTIA Section XV Comments at 7-9; Sprint Section XV Comments at 8-9, 18-20; Ohio Commission
Section XV Comments at 15; Time Warner Cable Section XV Comments at 15-16; Leap Wireless and Cricket
Section XV Comments at 6-7.
1128 See, e.g., XO Section XV Comments at 41-43; RNK Section XV Comments at 11-12; Cox Section XV
Comments at 13; NASUCA and NJ Rate Counsel Section XV Comments at 10.
1129 See Intercarrier Compensation for ISP-Bound Traffic, CC Docket Nos. 96-98, 99-68, Order on Remand and
Report and Order, 16 FCC Rcd 9151, 9183, para. 70 (2001) (subsequent history omitted) (ISP Remand Order).
There, as here, reciprocal compensation rates were sufficiently high that many competitive LECs found it profitable
to target and serve ISP customers who were large recipients of local traffic, since dial-up Internet customers would
place calls to their ISP with lengthy hold times. This practice led to significant traffic imbalances, with competitive
LECs seeking substantial amounts in reciprocal compensation payments from other LECs.
1130 See Investigation of Certain 2007 Annual Access Tariffs, WC Docket No. 07-184, WCB/Pricing No. 07-10,
Order Designating Issues for Investigation, 22 FCC Rcd 11619 at 16120, para. 28 (WCB 2007) (Designation
Order). The Designation Order identified two safe harbor provisions that would allow the affected carriers to avoid
the investigation if the carrier either: (1) elected to return to the NECA pool; or (2) added language to its tariff that
would commit to the filing of a revised tariff if the filing carrier experienced a 100 percent increase in monthly
demand when compared to the same month in the prior year. Id.
1131 See, e.g., Letter from Henry Goldberg, Counsel for Free Conferencing Corporation, to Marlene H. Dortch,
Secretary, FCC, WC Docket Nos. 10-90, 07-135, GN Docket No. 09-51, CC Docket No. 01-92, Attach. at 8 (filed
May 26, 2011); Letter from Norina Moy, Director, Government Affairs, Sprint, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 07-135, at 4-7 (filed June 15, 2011).
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The terminating-to-originating traffic ratio component will capture those current access stimulationsituations that already have very high volumes that could otherwise continue to operate without tripping
the growth component. For example, a LEC that has been engaged in access stimulation for a significant
period of time would have a high terminating traffic volume that, under a traffic growth factor alone,
could continue to expand its operations, possibly avoiding the condition entirely by controlling its
terminating traffic. Because these alternative traffic measurements are combined with the requirement
that an access revenue sharing agreement exist, we reduce the risk that the terminating-to-originating
traffic ratio or traffic growth components of the definition could be met by legitimate changes in a LEC’s
calling patterns. The combination of these two traffic measurements as alternatives is preferable to either
standing alone, as some parties have urged.1132 A terminating-to-originating traffic ratio or traffic growth
condition alone could prove to be overly inclusive by encompassing LECs that had realized access traffic
growth through general economic development, unaided by revenue sharing. Such situations could
include the location of a customer support center in a new community without any revenue sharing
arrangement, or a new competitive LEC that is experiencing substantial growth from a small base.1133
678.
We decline to adopt a condition based on absolute MOU per line, either on a stand-alone
basis or in conjunction with a revenue sharing condition, as suggested by several parties.1134 Under these
proposals, if a LEC’s MOUs per line exceeded a specified threshold, the LEC would be required to take
some action to reduce its rates. Many LECs could evade a MOU per line condition simply by adding
additional lines. Moreover, a MOU per line approach would require self-reporting, because neither an
IXC nor the Commission could otherwise readily tell if the condition had been met.
(ii)
Remedies
679.If a LEC meets both conditions of the definition, it must file a revised tariff except under
certain limited circumstances. As explained in more detail below, a rate-of-return LEC must file its own
cost-based tariff under section 61.38 of the Commission’s rules and may not file based on historical costs
under section 61.39 of the Commission’s rules or participate in the NECA traffic-sensitive tariff. If a
competitive LEC meets the definition, it must benchmark its tariffed access rates to the rates of the price
cap LEC with the lowest interstate switched access rates in the state, rather than to the rates of the BOC or
the largest incumbent LEC in the state (as proposed in the USF/ICC Transformation NPRM). We
conclude, however, that if a LEC has terminated its revenue sharing agreement(s) before the deadline we
establish for filing its revised tariff, or if the competitive LEC’s rates are already below the benchmark
rate, such a LEC does not have to file a revised interstate switched access tariff. However, once a rate-of-
return LEC or a competitive LEC has met both conditions of the definition and has filed revised tariffs,
when required, it may not file new tariffs at rates other than those required by the revised pricing rules
until it terminates its revenue sharing agreement(s), even if the LEC no longer meets the 3:1 terminating-
to-originating traffic ratio condition of the definition or traffic growth threshold. As price cap LECs
1132 See, e.g., XO Section XV Comments at 46; RNK Section XV Comments at 12 (50 percent increase over the
previous six months would create a rebuttable presumption of being engaged in access stimulation).
1133 State Joint Board Members propose a condition for access stimulation based on a terminating ratio one standard
deviation above the national average terminating ratio annually. See State Members Comments at 156. Under their
proposal, a carrier meeting this condition would set new rates so that the terminating revenue for any carrier equals
the carrier’s initial rate times its originating minutes times the terminating ratio at the one standard deviation point.
Id. We decline to adopt this proposal because it is unclear that using originating traffic volumes would produce a
rate that adequately reflects the increased terminating traffic volumes sufficient to ensure that rates are just and
reasonable as required by Section 201(b) of the Act.
1134 See, e.g., USTelecom Section XV Comments at 9 n.20; Rural Associations Section XV Comments at 33-36;
ITTA Section XV Comments at 25; Louisiana Small Company Committee Section XV Comments at 16-17; Toledo
Telephone Section XV Comments at 7.
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reduce their switched access rates under the ICC reforms we adopt herein, competitive LECs mustbenchmark to the reduced rates.
680.
Rate-of-Return Carriers Filing Tariffs Based on Historical Costs and Demand: Section
61.39. We adopt our proposal in the USF/ICC Transformation NPRM that a LEC filing access tariffs
pursuant to section 61.39 would lose its ability to base its rates on historical costs and demand if it is
engaged in access stimulation.1135 Incumbent LECs filing access tariffs pursuant to section 61.39 of the
Commission’s rules currently base their rates on historical costs and demand, which, because of their
small size, generally results in high switched access rates based on the high costs and low demand of such
carriers.1136 The limited comment in the record was supportive of our proposal for the reasons set forth in
the USF/ICC Transformation NPRM.1137 We accordingly revise section 61.39 to bar a carrier otherwise
eligible to file tariffs pursuant to section 61.39 from doing so if it meets the access stimulation definition.
We also require such a carrier to file a revised interstate switched access tariff pursuant to section 61.38
within 45 days after meeting the definition, or within 45 days after the effective date of this rule in cases
where the carrier meets the definition on that date.
681.
Participation in NECA Tariffs. In the USF/ICC Transformation NPRM, the Commission
proposed that a carrier engaging in revenue sharing would lose its eligibility to participate in the NECA
tariffs 45 days after engaging in access stimulation, or 45 days after the effective date of this rule in cases
where it currently engages in access stimulation.1138 A carrier leaving the NECA tariff thus would have to
file its own tariff for interstate switched access, pursuant to section 61.38 of the rules.1139
682.
The record is generally supportive of this approach for the reasons stated in the USF/ICC
Transformation NPRM,1140 and we adopt it, subject to one modification. We clarify that, pursuant to
section 69.3(e)(3) of the rules,1141 a LEC required to leave the NECA interstate tariff (which includes both
switched and special access services) because it has met the access stimulation definition must file its own
tariff for both interstate switched and special access services.1142
683.
We also adopt a revision to the proposed rule similar to a suggestion by the Louisiana
Small Carrier Committee, which recommends that rate-of-return carriers be given an opportunity to show
1135 USF/ICC Transformation NPRM, 26 FCC Rcd at 4767, para. 664.
1136 47 C.F.R. § 61.39.
1137 See, e.g., AT&T Section XV Comments at 17-18; Level 3 Section XV Comments at 3; USTelecom Section XV
Comments at 11.
1138 USF/ICC Transformation NPRM, 26 FCC Rcd at 4766, para. 662.
1139 Id.
1140 See, e.g., Rural Associations Section XV Comments at 35-36; AT&T Section XV Comments at 17-18; Level 3
Section XV Comments at 3; but see USTelecom Section XV Comments at 10-11 (arguing that such a rule is
unnecessary).
1141 47 C.F.R. § 69.3(e)(3).
1142 USTelecom suggests that given that shared revenues are not appropriately included in a carrier’s revenue
requirement, the Commission does not need to address eligibility for participation in NECA tariffs in its access
stimulation rules—a carrier would either stop sharing, or file its own tariff without any mandate to do so.
USTelecom Section XV Comments at 10-11. We disagree, because current rules only provide for a participating
carrier to leave the NECA tariff at the time of the annual tariff filing. A rule prohibiting LECs from further
participating in the NECA tariff when the definition is met, and providing for advance notice to NECA, spells out
the procedure.
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that they are in compliance with the Commission’s rules before being required to file a revised tariff.1143Accordingly, we conclude that if a carrier sharing access revenues terminates its access revenue sharing
agreement before the date on which its revised tariff must be filed, it does not have to file a revised tariff.
We believe that when sharing agreements are terminated, in most instances traffic patterns should return
to levels that existed prior to the LEC entering into the access revenue sharing agreement. This eliminates
a burden on such carriers when there is no ongoing reason for requiring such a filing.
684.
Rate of Return Carriers Filing Tariffs Based On Projected Costs and Demand: Section
61.38. In the USF/ICC Transformation NPRM, we proposed that a carrier filing interstate switched
access tariffs based on projected costs and demand pursuant to section 61.38 of the rules be required to
file revised access tariffs within 45 days of commencing access revenue sharing, or within 45 days of the
effective date of the rule if the LEC on that date is engaged in access revenue sharing,1144 unless the costs
and demand arising from the new revenue sharing arrangement had been reflected in its most recent tariff
filing.1145 We further proposed that payments made by a LEC pursuant to an access revenue sharing
arrangement should not be included as costs in the rate-of-return LEC’s interstate switched access
revenue requirement because such payments have nothing to do with the provision of interstate switched
access service and are thus not used and useful in the provision of such service.1146 Thus, we proposed to
clarify prospectively that a rate-of-return carrier that shares access revenue, provides other compensation
to an access stimulating entity, or directly provides the stimulating activity, and bundles those costs with
access, is engaging in an unreasonable practice that violates section 201(b) and the prudent expenditure
standard.1147
685.
We adopt the approach proposed in the USF/ICC Transformation NPRM. Commenters
that addressed this issue support the approach.1148 In particular, we adopt a rule requiring carriers filing
interstate switched access tariffs based on projected costs and demand pursuant to section 61.38 of the
rules to file revised access tariffs within 45 days of commencing access revenue sharing, or within 45
days of the effective date of the rule if the LEC on that date was engaged in access revenue sharing,1149
unless the costs and demand arising from the new access revenue sharing agreement were reflected in its
most recent tariff filing. This tariff filing requirement provides the carrier with the opportunity to show,
and the Commission to review, any projected increase in costs, as well as to consider the higher
anticipated demand in setting revised rates. If the access revenue sharing agreement(s) that required the
new tariff filing has been terminated by the time the revised tariff is required to be filed, we will not
1143 Louisiana Small Company Committee Section XV Comments at 17 (for example, because unexpectedly high
levels of traffic have been terminated).
1144 USF/ICC Transformation NPRM, 26 FCC Rcd at 4767, para. 663.
1145 Id.
1146 Id. at 4766, para. 661.
1147 Id. The prudent expenditure standard is associated with the “used and useful” doctrine, which together are
employed in evaluating whether a carrier’s rates are just and reasonable. See Access Stimulation NPRM, 22 FCC
Rcd at 17997, para. 19, n.47.
1148 See, e.g., AT&T Section XV Comments at 17-18; USTelecom Section XV Comments at 11. Sprint is
concerned that rates filed under section 61.38 will not be just and reasonable, even if LECs’ projections are made in
good faith because of the lack of a true-up mechanism. Sprint Section XV Comments at 15. Sprint’s concern is
unfounded. The revised tariffs filed by a section 61.38 carrier meeting the revenue sharing definition will be subject
to the Commission’s tariff review processes in which the projected cost and demand data can be reviewed and
appropriate action taken if necessary.
1149 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4767, para. 663.
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require the filing of a revised tariff, as the proposal would have. A refiling in that instance would beunnecessary because the original rates will now more likely reflect the cost/demand relationship of the
carrier. If a LEC, however, subsequently reactivates the same telephone numbers in connection with a
new access revenue sharing agreement, we will presumptively treat that action to be furtive concealment
resulting in the loss of deemed lawful status for the LEC’s tariff, as discussed below in conjunction with
the discussion of section 204(a)(3) of the Act.1150 This will prevent a LEC from entering into a series of
access revenue sharing agreements to avoid the 45-day filing requirement, while benefiting from the
advertising of those telephone numbers used under previous agreements.
686.
We also adopt the proposal that payments made by a LEC pursuant to an access revenue
sharing agreement are not properly included as costs in the rate-of-return LEC’s interstate switched access
revenue requirement. This proposal received broad support in the record.1151
687.
We decline to adopt either of two suggested alternative pricing proposals for section
61.38 LECs. First, several parties suggested allowing a rate-of-return carrier filing a tariff based on
projected costs and demand pursuant to section 61.38 to file a rate of $0.0007, rather than requiring it to
make a new cost showing.1152 Second, other parties proposed that a section 61.38 carrier be allowed to
benchmark to the BOC rate in the state since that rate is just and reasonable.1153 An established
ratemaking procedure for section 61.38 LECs already exists. No party has demonstrated why either of the
proposed rates would be preferable to the rates developed under existing ratemaking procedures. Thus,
the rule we adopt will require section 61.38 carriers to set their rates based on projected costs and demand
data. 1154
688.
Competitive LECs. In the USF/ICC Transformation NPRM, we proposed that when a
competitive LEC is engaged in access stimulation, it would be required to benchmark its interstate
switched access rates to the rate of the BOC in the state in which the competitive LEC operates, or the
independent incumbent LEC with the largest number of access lines in the state if there is no BOC in the
state, and if the competitive LEC is not already benchmarking to that carrier’s rate.1155 Under the
proposal, a competitive LEC would have to file a revised tariff within 45 days of engaging in access
stimulation, or within 45 days of the effective date of the rule if it currently engages in access
stimulation.1156
689.
After reviewing the record, we adopt our proposal with one modification to ensure that
the LEC refiles at a rate no higher than the lowest rate of a price cap LEC in the state. In so doing, we
conclude that neither the switched access rate of the rate-of-return LEC in whose territory the competitive
1150 See infra para. 695. As described therein, a carrier may be required to make refunds if its tariff does not have
deemed lawful status.
1151 See, e.g., AT&T Section XV Comments at 12-15; CenturyLink Section XV Comments at 53; Level 3 Section
XV Comments at 3; XO Section XV Comments at 44; RNK Section XV Comments at 11.
1152 See, e.g., AT&T Section XV Comments at 15-17; CTIA Section XV Comments at 7; MetroPCS Section XV
Comments at 5; Sprint Section XV Comments at 8-9, 18-20; T-Mobile Section XV Comments at 8-9.
1153 CenturyLink Section XV Comments at 42; North County Section XV Comments at 2-3 (LECs reduce rates as
volumes increase until the BOC rate is reached).
1154 Beginning July 1, 2012, rate-of-return LECs must comply with the transition procedures described in Section
XII.C, infra.
1155 USF/ICC Transformation NPRM, 26 FCC Rcd at 4767, para. 665.
1156 Id.
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LEC is operating nor the rate used in the rural exemption1157 is an appropriate benchmark when thecompetitive LEC meets the access stimulation definition. In those instances, the access stimulator’s
traffic vastly exceeds the volume of traffic of the incumbent LEC to whom the access stimulator is
currently benchmarking.1158 Thus, the competitive LEC’s traffic volumes no longer operationally
resemble the carrier’s traffic volumes whose rates it had been benchmarking because of the significant
increase in interstate switched access traffic associated with access stimulation.1159 Instead, the access
stimulating LEC’s traffic volumes are more like those of the price cap LEC in the state,1160 and it is
therefore appropriate and reasonable for the access stimulating LEC to benchmark to the price cap
LEC.1161
690.
Although many parties support using the switched access rates of the BOC in the state,
or the rates of the largest independent LEC in the state if there is no BOC,1162 as we proposed, we
conclude that the lowest interstate switched access rate of a price cap LEC in the state is the rate to which
a competitive LEC must benchmark if it meets the definition.1163 Generally, the BOC will have the
lowest interstate switched access rates. However, the record reveals that in California, Pacific Bell’s
interstate switched access rates are higher than those of other price cap LECs in the state, as well as being
higher than the interstate switched access rates of price cap LECs in other states. Benchmarking to the
lowest price cap LEC interstate switched access rate in the state will reduce rate variance among states
and will significantly reduce the rates charged by competitive LECs engaging in access stimulation, even
if it does not entirely eliminate the potential for access stimulation.1164 However, should the traffic
1157 See 47 C.F.R. § 61.26(e).
1158 For example, AT&T submitted data showing that the terminating MOU of 12 competitive LECs in Iowa,
Minnesota, and South Dakota averaged 750,000,000 compared to 2,028,398 for NECA Band 8 LECs in those states.
See Letter from Brian J. Benison, Director, Federal Regulatory, AT&T Services Inc., to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 07-135, Attach. at 6 (filed Dec. 3, 2009) (AT&T Dec. 3, 2009 Ex Parte Letter).
The relationship of those traffic volumes has not changed significantly since 2009. See Letter from Brian J.
Benison, Director, Federal Regulatory, AT&T Services Inc., to Marlene H. Dortch, Secretary, FCC, WC Docket No.
07-135, Attach. at 4 (filed May 13, 2011).
1159 See, e.g., AT&T Section XV Comments at 14-17; CenturyLink Section XV Comments at 37-40; T-Mobile
Section XV Comments at 7-8.
1160 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4767, para. 665. AT&T shows that “rural” access
stimulating competitive LECs in Iowa, Minnesota and South Dakota collectively are terminating three to five times
as many minutes as the largest incumbent LEC operating in the same state. AT&T Dec. 3, 2009 Ex Parte Letter,
Attach. at 4.
1161 We reject NASUCA’s suggestion that we use the lowest NECA rate as the benchmark. NASUCA and NJ Rate
Counsel Section XV Comments at 11. The traffic patterns of those NECA carriers are likely to be even less
comparable to the traffic patterns of a competitive LEC engaged in access stimulation.
1162 See, e.g., CenturyLink Section XV Comments at 38-39; ITTA Section XV Comments at 24-25; Level 3 Section
XV Comments at 3; Omnitel and Tekstar Section XV Reply at 4, 17; IUB Section XV Comments at 17-18; Ohio
Commission Section XV Comments at 14-15. Several parties argue that a lower rate would be reasonable and
should be adopted. See, e.g., AT&T Section XV Comments at 17; CTIA Section XV Comments at 6-7; Sprint
Section XV Comments at 2.
1163 We decline to adopt the Level 3 proposal that we adopt a requirement that a competitive LEC must file a
declaration with the Commission attesting to the fact that it entered into an access revenue sharing agreement within
45 days of the effective date of the agreement. See Level 3 Section XV Comments at 4. Under the revised rules,
competitive LECs are required to file revised tariffs if they engage in access stimulation. The proposed declaration
would be duplicative.
1164 See, e.g., AT&T Section XV Comments at 17; Sprint Section XV Comments at 13.
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volumes of a competitive LEC that meets the access stimulation definition substantially exceed the trafficvolumes of the price cap LEC to which it benchmarks, we may reevaluate the appropriateness of the
competitive LEC’s rates and may evaluate whether any further reductions in rates is warranted. In
addition, we believe the reforms we adopt elsewhere in this Order will, over time, further reduce
intercarrier payments and the incentives for this type of arbitrage.
691.
We require a competitive LEC to file a revised interstate switched access tariff within 45
days of meeting the definition, or within 45 days of the effective date of the rule if on that date it meets
the definition. A competitive LEC whose rates are already at or below the rate to which they would have
to benchmark in the refiled tariff will not be required to make a tariff filing.
692.
We will not adopt a benchmarking rate of $0.0007 in instances when the definition is
met, as is suggested by a few parties.1165 The $0.0007 rate originated as a negotiated rate in reciprocal
compensation arrangements for ISP-bound traffic, and there is insufficient evidence to justify abandoning
competitive LEC benchmarking entirely. Nor will we immediately apply bill-and-keep, as some parties
have urged.1166 We adopt a bill-and-keep methodology for intercarrier compensation below, but decline
to mandate a flash cut to bill-and-keep here. Additionally, we reject the suggestion that we detariff
competitive LEC access charges if they meet the access stimulation definition.1167 Our benchmarking
approach addresses access stimulation within the parameters of the existing access charge regulatory
structure. We expect that the approach we adopt will reduce the effects of access stimulation
significantly, and the intercarrier compensation reforms we adopt should resolve remaining concerns.
693.
A few parties encourage the Commission to require high volume access tariffs (HVATs)
for competitive LECs.1168 These tariffs reduce rates as volumes increase and, as suggested by some
parties, would provide a transition from today’s interstate switched access rates to the benchmarked rate
over two years.1169 Under our benchmarking approach, if a competitive LEC meets the definition, its
rates must be revised so that such rates are at or below the benchmark rate, unless they are already at
those levels. A transitional HVAT that had one or more rates that exceeded the benchmark rate would not
be in compliance with the benchmarking requirement adopted herein. Proponents of a transitional HVAT
have not established why a transition is required or even appropriate, particularly considering the high
traffic volumes associated with access stimulation. A competitive LEC that met the definition could, of
course, file an HVAT if all of the rates in the tariff are below the benchmark rate.
694.
We also decline to require or allow competitive LECs to use the “settlements specified in
the extended average schedules published by NECA”1170 or the NECA rate band 1 local switching rate,1171
or to permit a competitive LEC to use section 61.38 procedures to establish its interstate switched access
1165 See, e.g., AT&T Section XV Comments at 21; Sprint Section XV Comments at 2, 8-9.
1166 See, e.g., CTIA Section XV Comments at 7; Leap Wireless and Cricket Section XV Comments at 7; MetroPCS
Section XV Comments at 4; T-Mobile Section XV Comments at 2, 8-9.
1167 See, e.g., AT&T Section XV Comments at 13-17 (the BOC rate would continue to encourage traffic pumping);
Sprint Section XV Comments at 20-21.
1168 See, e.g., Free Conferencing Corporation Section XV Comments at 37-38; see also Free Conferencing
Corporation July 8, 2011 Ex Parte Letter, Attach. at 6 (urging the use of HVAT as a transition to BOC rates in two
years).
1169 See Free Conferencing Corporation July 8, 2011 Ex Parte Letter, Attach. at 6-8.
1170 NASUCA Section XV Comments at 11.
1171 Bluegrass Section XV Comments at 15-16.
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rates if the price cap LEC rates would not adequately compensate the competitive LEC.1172 We maintainthe benchmarking approach to the regulation of the rates of competitive LECs. The average schedules
published by NECA are inadequate for this purpose. The schedules are constrained by the characteristics
of the carriers included in their samples, which likely do not include any rate-of-return LECs engaging in
access stimulation. Thus, NASUCA has not shown that the average schedules would be a reasonable
approach for establishing a rate to which competitive LECs could benchmark. There is insufficient
evidence in the record that abandoning the benchmarking approach for competitive LEC tariffs and
compelling competitive LECs to comply with 61.38 rules is necessary to address concerns regarding
access stimulation, particularly considering the burden that would be imposed on competitive LECs to
start maintaining regulatory accounting records. Instead, we believe it is more appropriate to retain the
benchmarking rule but revise it to ensure that the competitive LEC benchmarks to the price cap LEC with
the lowest rate in the state, a rate which is likely most consistent with the volume of traffic of an access
stimulating LEC.
695.
Section 204(a)(3) (“Deemed Lawful”) Considerations. In the USF/ICC Transformation
NPRM, we proposed that LECs that meet the revenue sharing definition be required to file revised tariffs
on not less than 16 days’ notice.1173 We further proposed that if a LEC failed to comply with the tariffing
requirements, we would find such a practice to be an effort to conceal its noncompliance with the
substantive rules that would disqualify the tariff from deemed lawful treatment.1174 Finally, we proposed
that rate-of-return LECs would be subject to refund liability for earnings over the maximum allowable
rate-of-return,1175 and competitive LECs would be subject to refund liability for the difference between
the rates charged and the rate that would have been charged if the carrier had used the prevailing BOC
rate, or the rate of the independent LEC with the largest number of access lines in the state if there is no
BOC.1176
696.
After reviewing the record,1177 we decline to adopt our proposal. We conclude that the
policy objectives of this proceeding can be achieved without creating an exception to the statutory
tariffing timelines. LECs that meet the access stimulation trigger are required to refile their interstate
switched access tariffs as outlined above. Any issues that arise in these refiled tariffs can be addressed
through the suspension and rejection authority of the Commission contained in section 204 of the Act, or
through appropriate enforcement action.
697.
We conclude that a LEC’s failure to comply with the requirement that it file a revised
tariff if the trigger is met constitutes a violation of the Commission’s rules, which is sanctionable under
section 503 of the Act.1178 We also conclude that such a failure would constitute “furtive concealment” as
1172 Bluegrass Section XV Comments at 14-15; but see Free Conferencing Corporation Section XV Comments at 35
(opposing requiring a competitive LEC to use section 61.38).
1173 USF/ICC Transformation NPRM, 26 FCC Rcd at 4768, para. 666.
1174 The carrier would also be subject to sanctions for violating the Commission’s tariffing rules.
1175 47 C.F.R. § 65.700. An exchange carrier’s interstate earnings are measured in accordance with the requirements
set forth in 47 C.F.R. § 65.702.
1176 USF/ICC Transformation NPRM, 26 FCC Rcd at 4768, para. 666.
1177 See, e.g., Level 3 Section XV Comments at 4.
1178 Section 503(b)(2)(B) of the Act authorizes the Commission to assess a forfeiture of up to $150,000 for each
violation, or each day of a continuing violation, up to a statutory maximum of $1,500,000 for a single act or failure
to act by common carriers; see also 47 C.F.R. § 1.80(b)(2). In 2008, the Commission amended its rules to increase
the maximum forfeiture amounts in accordance with the inflation adjustment requirements contained in the Debt
Collection Improvement Act of 1996, 28 U.S.C. § 2461. See Amendment of Section 1.80(b) of the Commission’s
(continued…)
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described by the D.C. Circuit in ACS v. FCC. 1179 We therefore put parties on notice that if we find in acomplaint proceeding under sections 206-209 of the Act, that such “furtive concealment” has occurred,
that finding will be applicable to the tariff as of the date on which the revised tariff was required to be
filed and any refund liability will be applied as of such date. We conclude that this approach will
eliminate any incentives that LECs may have to delay or avoid complying with the requirement that they
file revised tariffs. Several parties support this approach.1180
698.
All American Telephone Co. filed a petition for declaratory ruling requesting that the
Commission find that commercial agreements involving the sharing of access revenues between LECs
and “free” service providers do not violate the Communications Act.1181 In this Order, we adopt a
definition of access revenue sharing agreement and prescribe that a LEC meeting the conditions of that
definition must file revised tariffs. Given our findings and the rules adopted today, we decline to address
the All American petition and it is dismissed.
(iii)
Enforcement
699.The revised interstate access rules adopted in this Order will facilitate enforcement
through the Commission’s complaint procedures, if necessary.1182 A complaining carrier may rely on the
3:1 terminating-to-originating traffic ratio and/or the traffic growth factor for the traffic it exchanges with
the LEC as the basis for filing a complaint. This will create a rebuttable presumption that revenue sharing
is occurring and the LEC has violated the Commission’s rules. The LEC then would have the burden of
showing that it does not meet both conditions of the definition. We decline to require a particular
showing, but, at a minimum, an officer of the LEC must certify that it has not been, or is no longer
engaged in access revenue sharing, and the LEC must also provide a certification from an officer of the
company with whom the LEC is alleged to have a revenue sharing agreement(s) associated with access
stimulation that that entity has not, or is not currently, engaged in access stimulation and related revenue
sharing with the LEC.1183 If the LEC challenges that it has met either of the traffic measurements, it must
(Continued from previous page)
Rules, Adjustment of Forfeiture Maximum to Reflect Inflation, EB File No. EB-06-SE-132, Order, 23 FCC Rcd 9845
at 9847 (2008).
1179 In 2002, the United States Court of Appeals for the D.C. Circuit, in reversing a Commission decision that had
found a tariff filing did not qualify for deemed lawful treatment and was thus subject to possible refund liability,
noted that it was not addressing “the case of a carrier that furtively employs improper accounting techniques in a
tariff filing, thereby concealing potential rate of return violations.” ACS of Anchorage, Inc. v. FCC, 290 F.3d 403,
413 (D.C. Cir. 2002) (ACS v. FCC).
1180 See, e.g., PAETEC et al. Section XV Comments at 31; XO Section XV Comments at 46 (adopt a rebuttable
presumption that increases in access volumes of more than 100 percent in a six month time period would
automatically revoke, for the period contemporaneous with and following the increase, the “deemed lawful” status
of a LEC whose interstate tariffed rates are above those of the BOC or largest incumbent LEC in the state until
reviewed by the Commission).
1181 See Petition for Declaratory Ruling of All American Telephone Co., Inc., e.Pinnacle Communications, Inc., and
ChaseCom to Reconfirm that Local Exchange Carrier Commercial Agreements with Providers of Conferencing,
“Chat Line” and Other Services Do Not Violate the Communications Act, WC Docket No. 07-135 (filed May 20,
2009).
1182 Given the two-year statute of limitations in section 405 of the Act, 47 U.S.C. § 405, a complaining IXC would
have two years from the date the cause of action accrued (the date after the tariff should have been filed) to file its
complaint. Because the rules we adopt are prospective, they will have no binding effect on pending complaints.
1183 The Ohio Commission argues that the Commission should not prohibit rebates, credits, discounts, etc. Ohio
Commission Section XV Comments at 13-14. Section 203(c)(1) provides that no carrier shall “charge, demand,
collect, or receive a greater or less or different compensation for such communication…than the charges specified in
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provide the necessary traffic data to establish its contention. With the guidance in this Order, we believeparties should in good faith be able to determine whether the definition is met without further
Commission intervention.
700.
Non-payment Disputes. Several parties have requested that the Commission address
alleged self-help by long distance carriers who they claim are not paying invoices sent for interstate
switched access services.1184 As the Commission has previously stated, “[w]e do not endorse such
withholding of payment outside the context of any applicable tariffed dispute resolution provisions.”1185
We otherwise decline to address this issue in this Order, but caution parties of their payment obligations
under tariffs and contracts to which they are a party. The new rules we adopt in today’s Order will
provide clarity to all affected parties, which should reduce disputes and litigation surrounding access
stimulation and revenue sharing agreements.
(iv)
Conclusion
701.The rules we adopt in this section will require rates associated with access stimulation to
be just and reasonable because those rates will more closely reflect the access stimulators’ actual traffic
volume. Taking this basic step will immediately reduce some of the inefficient incentives enabled by the
current intercarrier compensation system, and permit the industry to devote resources to innovation and
investment rather than access stimulation and disputes. We have balanced the need for our new rules to
address traffic stimulation with the costs that may be imposed on LECs and have concluded that the
benefits justify any burdens. Our new rules will work in tandem with the comprehensive intercarrier
compensation reforms we adopt below, which will, when fully implemented, eliminate the incentives in
the present system that give rise to access stimulation.
B.
Phantom Traffic
702. In this portion of the Order, we amend the Commission’s rules to address “phantom traffic”by ensuring that terminating service providers receive sufficient information to bill for
telecommunications traffic sent to their networks, including interconnected VoIP traffic. The
amendments we adopt close loopholes that are being used to manipulate the intercarrier compensation
system.
703. “Phantom traffic” refers to traffic that terminating networks receive that lacks certain
identifying information. In some cases, service providers in the call path intentionally remove or alter
identifying information to avoid paying the terminating rates that would apply if the call were accurately
signaled and billed. For example, some parties have sought to avoid payment of relatively high intrastate
access charges by making intrastate traffic appear interstate or international in nature.1186 Parties have
also disguised or routed non-local traffic subject to access charges to avoid those charges in favor of
lower reciprocal compensation rates.1187 Collectively, problems involving unidentifiable or misidentified
(Continued from previous page)
the schedule then in effect.” 47 U.S.C. § 203(c)(1). A corollary to subparagraph (1), section 203(c)(2) provides that
no carrier shall “refund or remit by any means or device any portion of the charges so specified.” 47 U.S.C. §
203(c)(2). This prohibition on rebates is intended to preclude discrimination in charges, and the practice may be
subject to sanctions under section 503. 47 U.S.C. § 503.
1184 See, e.g., Pac-West Section XV Comments at 17-19 (carriers must dispute and pay for there to be a level playing
field for all carriers).
1185 All American Telephone Co., et al. v. AT&T Corp., File EB-10-MD-003, Memorandum Opinion and Order, 26
FCC Rcd 723, 728 (2011).
1186 See, e.g., CenturyLink Section XV Comments at 19.
1187 See id.; see also Windstream Section XV Comments at 15-16.
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traffic appear to be widespread. Parties have documented that phantom traffic is a sizeable problem, withestimates ranging from 3-20 percent of all traffic on carriers’ networks,1188 which costs carriers—and
ultimately consumers—potentially hundreds of millions of dollars annually.1189 In turn, carriers are
diverting resources to investigate and pursue billing disputes, rather than use such resources for more
productive purposes such as capital investment.1190 This sort of gamesmanship distorts the intercarrier
compensation system and chokes off revenue that carriers depend on to deliver broadband and other
essential services to consumers, particularly in rural and difficult to serve areas of the country.
704. To address the problem, in the USF/ICC Transformation NPRM, we proposed to modify
our call signaling rules to require originating service providers to provide signaling information that
includes calling party number (“CPN”) for all voice traffic, regardless of jurisdiction, and to prohibit
interconnecting carriers from stripping or altering that call signaling information. Based on the record
developed in this proceeding, we now adopt our original proposal with the minor modifications described
in further detail below. Service providers that originate interstate or intrastate traffic on the PSTN, or that
originate inter- or intrastate interconnected VoIP traffic destined for the PSTN, will now be required to
transmit the telephone number associated with the calling party to the next provider in the call path.
Intermediate providers must pass calling party number or charge number signaling information they
receive from other providers unaltered, to subsequent providers in the call path.1191 These requirements
will assist service providers in appropriately billing for calls traversing their networks.
705. By ensuring that the calling party telephone number information is provided and
transmitted for all types of traffic originating or terminating on the PSTN, our revised rules will assist
service providers in accurately identifying and billing for traffic terminating on their networks, and help
to guard against further arbitrage practices. These measures will work in tandem with the Commission’s
reforms adopted elsewhere in this Order, which, by minimizing intercarrier compensation rate
differences, promise to eliminate the incentive for providers to engage in phantom traffic arbitrage.1192
Together, these changes will benefit consumers by enabling providers to devote more resources to
investment and innovation that would otherwise have been spent resolving billing disputes.
706. Below, we briefly review how service providers exchange necessary billing information
and why the current regime of information exchange has proved inadequate to avoid the problems of
phantom traffic. We explain how the rules we adopt present an effective, technologically neutral, and
forward-looking solution to reduce litigation and disputes over unidentifiable traffic. Finally, we review
several proposals received in the record related to our proposed rules.
1188 See TCA Section XV Comments at 5 (“TCA concurs in various estimates indicating that phantom traffic
comprises up to 20 percent of all terminating traffic for many rural LECs.”); Kansas Commission Section XV
Comments at 17; Letter from Michael D. Saperstein, Jr., Director of Federal Regulatory Affairs, Frontier
Communications, to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-51, WC Docket Nos. 07-135, 05-337,
04-36, CC Docket Nos. 99-68, 01-92 at 1 (filed Dec. 21, 2010); see also April 6, 2011 ICC Hearing Transcript at 44-
45.
1189 ITTA Section XV Comments at 4 (citing C. Goldfarb, “Phantom Traffic” – Problems Billing for the
Termination of Telephone Calls: Issues for Congress 1 (Cong Res. Serv., June 27, 2008)).
1190 See, e.g., CenturyLink Section XV Comments at 19; Louisiana Small Company Committee Section XV
Comments at 11 (“Phantom traffic impacts carriers’ ability to invest in networks and services, and undermines their
ability to ensure adequate facilities are in place to meet consumers’ evolving and expanding needs.”).
1191 See infra at App. [] .
1192 See Cincinnati Bell August 3 PN Comments at 10-11; Charter August 3 PN Reply at 6; VON Coalition August 3
PN Comments at 7.
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1.Background
707. Service providers need to know certain information for each call to bill for and receiveintercarrier payments for traffic that terminates on their networks. Specifically, to know what intercarrier
compensation charges apply, a terminating provider must be able to identify the appropriate upstream
service provider and the geographic location of the caller (or a proxy for the caller’s location). For calls
directly connected between an originating service provider and a terminating service provider, this
information typically is apparent or easily obtained.1193 However, for calls where the originating and
terminating network are not directly connected (i.e., when calls are delivered via tandem transit service or
interexchange carrier),1194 accurate call information may not be available because there may be one or
more interconnecting service providers that handle the call before delivering it to the terminating service
provider. The terminating carrier may not receive accurate identifying information for a variety of
reasons. For instance, signaling for the call may never have been populated with accurate information or
the information may have been intentionally stripped.1195
708. As described in the USF/ICC Transformation NPRM, terminating service providers that are
not directly connected to originating providers receive information about calls sent to their networks for
termination from a variety of sources. First, terminating service providers may rely on information
contained in the Signaling System 7 (SS7) signaling stream. SS7 is a separate or “out of band” network
that runs parallel to the PSTN. Commission rules require carriers that use SS7 to convey the calling party
number (CPN) to subsequent carriers on interstate calls where it is technically feasible to do so.1196
Billing records from tandem switch operators are another source of information for terminating service
providers about traffic on their networks.1197 Notably, the CPN or Charge Number (CN) information used
in billing records is derived from the SS7 signaling stream.1198 Finally, service providers may also rely on
1193 See PAETEC et al. Section XV Comments at 3.
1194 USF/ICC Transformation NPRM, 26 FCC Rcd at 4752-53, para. 622. Competitive LECs, CMRS carriers, and
rural LECs, who would otherwise have no efficient means of connecting their networks, often rely upon transit
service from incumbent LECs to facilitate indirect interconnection with each other. See Developing a Unified
Intercarrier Compensation Regime, CC Docket No. 01-92, Further Notice of Proposed Rulemaking, 20 FCC Rcd
4685 at 4740, para. 125 (2005).
1195 See infra para. 709.
1196 See 47 C.F.R. § 64.1601. As we described in the USF/ICC Transformation NPRM, the SS7 call signaling
system is used to set up a pathway across the PSTN and the system performs the function of identifying a path a call
can take after the caller dials the called party’s number. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4751-
52, para. 621. Although 47 C.F.R. § 64.1601 requires that the CPN be transmitted where technically feasible, the
technical content and format of SS7 signaling is governed by industry standards rather than by Commission rules.
1197 Billing records are typically created by a tandem switch that receives a call for delivery to a terminating network
via tandem transit service. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4752-53, para. 622 and n.950.
Service providers delivering billing records typically use the Exchange Message Interface (EMI) format created and
maintained by the Alliance for Telecommunications Industry Solutions Ordering and Billing Forum (ATIS/OBF), an
industry standards setting group. See ATIS Exchange Message Interface 22 Revision 2, ATIS Document number
0406000-02200 (July 2005).
1198 SS7 was designed to facilitate call routing and was not designed for billing purposes. See USF/ICC
Transformation NPRM, 26 FCC Rcd at 4751-52, para. 621 (citing Letter from L. Charles Keller, Counsel for
Verizon Wireless, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92 at 2 (filed Sept. 13, 2005) (Verizon
Wireless Sept. 13, 2005 Ex Parte Letter)).
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identifying information contained in Internet protocol sessions or messages (e.g., Session InitiationProtocol (SIP) header fields) for VoIP calls.1199
709. The record in this proceeding confirms that numerous service providers have encountered
difficulties with traffic arriving for termination with insufficient or inaccurate identifying information.1200
The record suggests that gamesmanship with regard to calling party information is rife.1201 Commenters
describe a number of phantom traffic tactics used to avoid higher intercarrier charges including masking
intrastate traffic to make it appear interstate or international in nature.1202 One carrier alleges that a
common phantom traffic scheme it faces involves carriers that disguise traffic by putting a telephone
number into the CN field that is local to the terminating exchange to avoid higher intercarrier
compensation rates.1203
2.
Revised Call Signaling Rules
710. Intrastate Traffic. As described below, we expand the scope of our existing call signalingrules to encompass jurisdictionally intrastate traffic. The record reflects broad support for expanding our
rules in this manner and no party opposed or questioned the Commission’s legal authority to do so.1204
The Commission has previously recognized, in exercising authority over intrastate call signaling for caller
ID purposes, that “CPN-based services are ‘jurisdictionally mixed services’” and that it would be
“impractical and uneconomic” to require the development and implementation of systems that would
permit separate federal and state call signaling rules to operate.1205 We conclude that, as with call
signaling in the caller ID context, it would be impractical to have separate federal and state rules
regarding inclusion of CPN in signaling.1206 And, we agree with comments in the record asserting that
1199See USF/ICC Transformation NPRM, 26 FCC Rcd at 4751-53, paras. 621-22; RFC 3261, SIP: Session Initiation
Protocol (2002) at www.ietf.org/rfc/rfc3261.txt; Megaco Protocol Version 1.0 (2000) at
https://datatracker.ietf.org/doc/rfc3015/.
1200 See, e.g., USTelecom Section XV Comments at 4 (“Many carriers report that the amount of traffic being
received by terminating carriers without calling party identifying information has continued to grow.”).
1201 For example, according to Frontier, an investigation found an “incredible amount of traffic from one telephone
number” terminating to its network - an average of 43,378 minutes of interstate traffic a day. Frontier Section XV
Comments at 11. According to Frontier, this number was being used to make the traffic appear to be interstate so as
to mask the true intrastate nature of the calls to avoid paying intrastate access charges. Id.; see also USTelecom
Section XV Comments at 4.
1202 CenturyLink Section XV Comments at 19.
1203 Windstream Section XV Comments at 16.
1204 Numerous parties supported the proposal to expand the scope of the rule to encompass intrastate traffic. See,
e.g., California Commission Section XV Comments at 6 (“And we agree that these new rules be extended, as the
FCC proposes, ‘to all traffic originating or terminating on the PSTN, including but not limited to, jurisdictionally
intrastate traffic …’ ”); Rural Associations Section XV Comments at 17, 25; TCA Section XV Comments at 6.
1205 Rules and Policies Regarding Calling Number Identification Service – Caller ID, CC Docket No. 91-281,
Memorandum Opinion and Order on Reconsideration, Second Report and Order and Third Notice of Proposed
Rulemaking, 10 FCC Rcd 11700, 11723, para. 62 (1995) (Caller ID Order).
1206 In the caller ID context, the Commission found that it would be impractical to require the development and
implementation of systems that would permit separate federal and state call signaling rules to operate because such
systems would be burdensome, confusing to consumers, and would potentially slow down the call signaling process.
See id. at 11724-27, paras. 65-74. In the present context of including CPN in signaling, we conclude that separate
CPN inclusion requirements for interstate and intrastate traffic are impractical because a call’s jurisdiction is
typically not determined until after the call signaling process occurs.
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extension of the call signaling rules to intrastate traffic is “justified… because maintaining separatemechanisms for passing CPN is infeasible, and passing CPN is necessary to identify and thus facilitate
federal regulation of interstate traffic.”1207
711. Calling Party Number. In the USF/ICC Transformation NPRM, we sought comment on
extending our call signaling rules (which currently require certain common carriers using SS7 to transmit
the CPN associated with an interstate call to interstate carriers1208) to all traffic originating or terminating
on the PSTN, including but not limited to jurisdictionally intrastate traffic1209 and traffic transmitted using
Internet protocols.1210 The record broadly supports this change to our rules either as proposed, or as a
baseline for addressing phantom traffic problems.1211 We expect that these rule modifications will help
reduce regulatory gamesmanship.1212
712. SS7 Charge Number (CN). The USF/ICC Transformation NPRM also proposed to apply
call signaling rules to address CN where carriers use SS7 signaling.1213 Generally, the CN field is not
populated in the SS7 stream when it is the same as CPN.1214 However, in cases where the CN is different
from the CPN (e.g., where a business has a single charge number for multiple end user numbers), the CN
parameter is populated and included in billing records in place of CPN.1215 Consistent with industry
practice, the USF/ICC Transformation NPRM proposed to clarify that populating the SS7 CN field with
information other than the charge number to be billed for a call is prohibited.
713. Windstream maintains that “[i]t is critical that the Commission make clear that scheming
carriers cannot disguise jurisdiction on billing records by failing to provide or manipulating the CN,” a
practice it states is common.1216 On the other hand, some parties object to any requirement to not alter the
1207 AT&T Section XV Comments at 22 (“Extension of the current rules to intrastate calls is justified under these
standards because maintaining separate mechanisms for passing CPN is infeasible, and passing CPN is necessary to
identify and thus facilitate federal regulation of interstate traffic.”). Unlike the caller ID context, in which a
California law permitting CPN blocking in certain circumstances was expressly preempted, (See Caller ID Order,
10 FCC Rcd at 11730, para. 85) we are not aware of any state laws that conflict with the call signaling rules we
adopt. Accordingly, we do not preempt any state laws at this time. If, however, a state law conflicting with our
revised call signaling rules were enacted, preemption analysis would be appropriate.
1208 See 47 C.F.R. § 64.1601.
1209 See supra note 1204.
1210 See infra para. 717.
1211 See, e.g., Missouri Commission Section XV Comments at 7; NASUCA and NJ Rate Counsel Section XV Reply
at 8-9; XO Section XV Comments at 37.
1212 As we stated in the USF/ICC Transformation NPRM, our proposed rules are not intended to affect existing
agreements between service providers regarding how to jurisdictionalize traffic in the event that traditional call
identifying parameters are missing, as long as such agreements are otherwise consistent with Commission rules and
other legal requirements. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4756, para. 632. Accordingly, we
decline to adopt proposals to use calling party number or originating and terminating numbers as the basis for
jurisdictionalizing calls. See, e.g., Rural Associations Section XV Comments at 27-29; Rural Associations Section
XV Reply at 12; but see CTIA Section XV Comments at 9-10; NASUCA and NJ Rate Counsel Section XV Reply at
11.
1213 USF/ICC Transformation NPRM, 26 FCC Rcd at 4756, para. 631.
1214 See id.
1215 See Windstream Section XV Comments at 13.
1216 Id. at 14.
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CN field.1217 According to these parties, the proposed requirement is problematic because intermediateproviders may not be able to pass the CN field in some instances,1218 and the requirement would prevent
intermediate providers from modifying the CN for their own purposes.1219
714. We adopt the proposal contained in the USF/ICC Transformation NPRM to require that the
CN be passed unaltered where it is different from the CPN. We believe that this requirement will be an
adequate remedy to the problem of CN number substitution that disguises the characteristics of traffic to
terminating service providers. Additionally, we note that the CN field may only be used to contain a
calling party’s charge number, and that it may not contain or be populated with a number associated with
an intermediate switch, platform, or gateway, or other number that designates anything other than a
calling party’s charge number. We are not persuaded by objections to this requirement. First,
unsupported objections that there may be “circumstances where a CN may be different from the CPN but
cannot be easily transmitted” are unpersuasive without more specific evidence.1220 Second, we note that
the Commission addressed similar circumstances in the 2006 Prepaid Calling Card Order, and prohibited
carriers that serve prepaid calling card providers from passing the telephone number associated with the
platform in the charge number parameter.1221 In this case, we agree with the analysis of the Prepaid
Calling Card Order that “[b]ecause industry standards allow for the use of CN to populate carrier billing
records … passing the number of the [] platform in the parameters of the SS7 stream to carriers involved
in terminating a call may lead to incorrect treatment of the call for billing purposes.”1222 In sum, the
record demonstrates that CN substitution is a technique that leads to phantom traffic, and our proposed
rules are a necessary and reasonable response.1223
715. Multi-Frequency (MF) Automatic Number Identification (ANI). As noted in the USF/ICC
Transformation NPRM, some service providers do not use SS7 signaling, but instead rely on Multi-
Frequency (MF) signaling.1224 The USF/ICC Transformation NPRM proposed that service providers
using MF Signaling pass the CPN, or the CN if different, in the MF Automatic Number Identification
(MF ANI) field.1225
716. We amend our rules to require service providers using MF signaling to pass the number of
the calling party (or CN, if different) in the MF ANI field. This requirement will provide consistent
treatment across signaling systems and will ensure that information identifying the calling party is
included in call signaling information for all calls.1226 Moreover, this requirement responds to the
1217 See, e.g., PAETEC et al. Section XV Comments at 8-9; PAETEC et al. Section XV Reply at 6-7.
1218 See Verizon Section XV Comments at 49 n. 69; HyperCube Section XV Reply at 12-13.
1219 PAETEC et al. Section XV Reply at 6-7.
1220 Verizon Section XV Comments at 49 n.69.
1221 Regulation of Prepaid Calling Card Services, WC Docket No. 05-68, Declaratory Ruling and Report and Order,
21 FCC Rcd 7290, 7302-03, para. 34 (2006) (Prepaid Calling Card Order).
1222 See id.
1223 See, e.g., Windstream Section XV Comments at 15-17.
1224 Some providers also use IP signaling. See infra para. 717.
1225 See Core Section XV Comments at 11(“Identifying the calling party’s number in the SS7 context, and the ANI
and/or Caller ID in the MF signaling context, will certainly help carriers reduce and narrow call rating disputes.”);
but see AT&T Section XV Comments at 25.
1226 As a result, we decline to adopt AT&T’s suggestion that we broadly exempt MF signaling. See AT&T Section
XV Comments at 25.
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concerns expressed in the record that MF signaling can be used by “unscrupulous providers” to engage inphantom traffic practices.1227 The previous record concerning the technical limitations of MF ANI
appears to be mixed.1228 In balancing the need for a rule that covers all traffic with the technical
limitations asserted in the record, we conclude that the approach most consistent with our policy objective
is not to exclude the entire category of MF traffic. Such a categorical exclusion could create a
disincentive to invest in IP technologies and invite additional opportunities for arbitrage. Although our
rules will apply to carriers that use or pass MF signaling, we do not mandate any specific method of
compliance. Carriers will have flexibility to devise their own means to pass this information in their MF
signaling. Nevertheless, to the extent that a party is unable to comply with our rule as a result of technical
limitations related to MF signaling in its network, it can seek a waiver for good cause shown, pursuant to
section 1.3 of the Commission’s rules.1229
717. IP Signaling. Consistent with the proposal in the USF/ICC Transformation NPRM, the
rules we adopt today also apply to interconnected VoIP traffic. Failure to include interconnected VoIP
traffic in our signaling rules would create a large and growing loophole as the number of interconnected
VoIP lines in service continues to grow.1230 Many commenters supported application of the proposed
requirements to VoIP traffic.1231 Therefore, VoIP service providers will be required to transmit the
telephone number of the calling party for all traffic destined for the PSTN that they originate. If they are
intermediate providers in a call path, they must pass, unaltered, signaling information they receive
indicating the telephone number, or billing number if different, of the calling party. Because IP
transmission standards and practices are rapidly changing, we refrain from mandating a specific
compliance method and instead leave to service providers using different IP technologies the flexibility to
determine how best to comply with this requirement.
718. In extending our call signaling rules to interconnected VoIP service providers, we
acknowledge that the Commission has not classified interconnected VoIP services as
“telecommunications services” or “information services.” We need not resolve this issue here, for we
would have authority to impose call signaling on interconnected VoIP providers even under an
1227 See XO Section XV Comments at 36-37.
1228 Compare AT&T Section XV Comments at 25 (“Multi Frequency signaling was not designed in many instances
to forward originating CN or CPN data to a terminating carrier in the MF Automatic Number Identification (ANI)
field. Rather, the MF ANI standards and technology were developed to provide IXCs with the data they need to bill
end user customers that originate calls.”); Verizon 2008 ICC/USF NPRM Comments at 65 n.97 (“MF trunks are
configured to signal ANI only on the originating end of a Feature Group D access call. . . . MF trunks do not signal
ANI on non-access calls or on the terminating leg of an access call.”); with Participating Wyoming Rural
Independents Missoula Plan Comments at 17 (an exception for MF signaling relating to non-Feature Group D traffic
is unnecessary, because “[c]urrent technology and methods do exist to enable carriers to identify MF signaling
protocol. Thus, to allow for an unnecessary exception would exacerbate phantom traffic problems”).
1229 See infra para. 723; 47 C.F.R. § 1.3.
1230 Total business and residential interconnected VoIP service connections have increased from 21.7 million in
December 2008 to 31.7 million in December 2010. See Industry Analysis and Technology Division, Wireline
Competition Bureau, Local Telephone Competition Report: Status as of December 2010, at 2 (Oct. 2011). See also
e.g., Blooston Section XV Comments at 5; ITTA Section XV Comments at 3; CenturyLink Section XV Comments
at 7.
1231 Frontier Section XV Comments at 12 (“Failure to apply these rules equally to VoIP traffic would leave a gaping
hole in the Commission’s rules for the fastest-growing segment of traffic”); see also Consolidated Section XV
Comments at 34-36.
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information service classification.1232 This Order adopts intercarrier compensation requirements for theexchange of VoIP-PSTN traffic between a LEC and another carrier.1233 Applying our call signaling rules
to interconnected VoIP service providers will enable service providers terminating interconnected VoIP
traffic to receive signaling information that will help prevent this traffic from terminating without
compensation,1234 contrary to the prospective intercarrier compensation regime we adopt for that traffic
under section 251(b)(5). In addition, under the intercarrier compensation reform framework we adopt
today, traffic terminating without compensation could create a need for recovery that shifts costs created
by phantom traffic to end-user rates or the Connect America Fund, undermining the transitional role for
intercarrier compensation charges established as part of that framework. Our new call signaling rules are
necessary to address these concerns.
3.
Prohibition of Altering or Stripping Call Information
719. In the USF/ICC Transformation NPRM, we also sought comment on a proposed rule thatwould prohibit service providers from altering or stripping relevant call information. More specifically,
we proposed to require all telecommunications providers and entities providing interconnected VoIP
service to pass the calling party’s telephone number (or, if different, the financially responsible party’s
number), unaltered, to subsequent carriers in the call path.1235 Commenters overwhelmingly supported
this proposal.1236 We believe that a prohibition on stripping or altering information in the call signaling
stream serves the public interest. The prohibition should help ensure that the signaling information
required by our rules reaches terminating carriers. Therefore, we adopt our proposal to prohibit stripping
or altering call signaling information with the modifications discussed below.
720. In response to comments in the record, we make several clarifying changes to the text of
the proposed rules in this section. First, commenters objected to the use of the undefined term
“financially responsible party” in the proposed rules.1237 We agree with the concerns and clarify that
providers are required to pass the billing number (e.g., CN in SS7) if different from the calling party’s
number. For similar reasons, for purposes of this rule, we add the following definition of the term
“intermediate provider” to the rules: “any entity that carries or processes traffic that traverses or will
traverse the PSTN at any point insofar as that entity neither originates nor terminates that traffic.” We
1232 See 47 U.S.C. §§ 151, 152, 154(i); Comcast Corp. v. FCC, 600 F.3d 642, 646 (D.C. Cir. 2010) (quoting Am.
Library Ass’n v. FCC, 406 F.3d 689, 691-692 (D.C. Cir. 2005)) (“The Commission ... may exercise ancillary
jurisdiction only when two conditions are satisfied: (1) the Commission’s general jurisdictional grant under Title I
[of the Communications Act] covers the regulated subject; and (2) the regulations are reasonably ancillary to the
Commission’s effective performance of its statutorily mandated responsibilities.”). Additionally, as the Commission
has previously found, section 706 provides authority applicable in this context. See generally Preserving the Open
Internet; Broadband Industry Practices, GN Docket No. 09-191, WC Docket No. 07-52, Report and Order, 25 FCC
Rcd 17905, 17968-72, paras. 117-23 (2010).
1233 See infra Section XIV.
1234 Carriers are generally prohibited from blocking calls. See Establishing Just and Reasonable Rates for Local
Exchange Carriers; Call Blocking by Carriers, WC Docket No. 07-135, 22 FCC Rcd 11629 (2007) (Call Blocking
Declaratory Ruling). Therefore, there may be situations where a carrier is forced to complete a call even though it is
unable to bill for that call due to lack of identifying information in its signaling. See Core Section XV Reply at 2;
see also infra para 973.
1235 USF/ICC Transformation NPRM, 26 FCC Rcd at 4793, App. B.
1236 See, e.g., ATA Section XV Comments at 4; Comcast Section XV Comments at 9; Leap Wireless and Cricket
Section XV Comments at 8.
1237 See AT&T Section XV Comments 25; Verizon Section XV Comments at 51.
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find that adding this definition will eliminate potential ambiguity in the revised rule.1238 As provided inAppendix A, we also make modest adjustments to the rules proposed in the USF/ICC Transformation
NPRM. Specifically, we clarify that the obligation to pass signaling information applies to the telephone
number or billing number,1239 and we clarify that the revised rules apply to telecommunications carriers
and providers of interconnected VoIP services. Finally, because, as discussed below, our waiver process
is available to parties seeking exceptions to the revised rule, we remove the proposed rule language
limiting applicability in relation to industry standards.1240 With these minor changes, we adopt the
proposed prohibition on stripping or altering information regarding the calling party number.
4.
Exceptions
721. The USF/ICC Transformation NPRM sought comment on whether phantom traffic rulesshould contain limited exceptions, including where it would not be technically feasible to comply with the
obligation to transmit the calling party number with the network technology deployed or where industry
standards would permit deviation from the duty to pass signaling information unaltered.1241 Some parties
suggested that the Commission should exercise caution before including any exceptions to its rules. For
example, the Missouri Small Telephone Company Group stated that it “does not believe it is appropriate
for an industry standard to trump a federal rule,” and as such “the entire exception [should] be
deleted.”1242 Similarly, parties recommended that the Commission eliminate or carefully enumerate the
circumstances in which it would be acceptable to deviate from the requirement to pass signaling
information unaltered. The Nebraska Rural Independent Companies expressed concern that the technical
feasibility exception “leaves room for many providers to use the excuse of ‘transmission was not
technically feasible’” and therefore posited that there should be “few to no circumstances that the
proposed rules will not be followed.”1243
722. Meanwhile, other parties proposed that technical feasibility and industry standards
exceptions be applied to both sections of the proposed signaling rules, §§ 64.1601(a) and (b).1244
Commenters also suggested that the rules include an exception for all industry standards, whether
published or not,1245 and asked that the Commission clarify that the rules do not require the deployment of
new equipment or otherwise add costs for compliance.1246 Finally, parties asked the Commission to
explicitly recognize certain exceptions to the proposed rules.1247
723. We agree with the concern expressed by some commenters that any exceptions would have
1238 See, e.g., Verizon Section XV Comments at 50 (noting that the term “intermediate provider” was undefined).
1239 See, e.g., id. at 50 n. 71 (urging the Commission to delete references to “all” SS7 notation from the final rules).
1240 See infra para. 723.
1241 USF/ICC Transformation NPRM, 26 FCC Rcd at 4793, App. B.
1242 MoSTCG Section XV Comments at 10; see also NECA et al. Section XV Comments at 24.
1243 Nebraska Rural Companies Section XV Comments at 25.
1244 See Verizon Section XV Comments at 49; Level 3 Section XV Reply at 9-10; see also AT&T Section XV
Comments at 24; Verizon Section XV Reply at 32.
1245 See PAETEC et al. Section XV Comments at 4, 13; Earthlink Section XV Comments at 24.
1246 See AT&T Section XV Comments at 24-25, Reply at 15; CTIA Section XV Comments at 9; Level 3 Section
XV Reply at 9. However, some parties have indicated that the revised rules will not incrementally increase the costs
to any carrier. See ITTA Section XV Comments at 21.
1247 See, e.g., AT&T Section XV Comments at 24-25.
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the potential to undermine the rules.1248 Moreover, we are concerned that disputes concerning theapplicability of exceptions could arise and lead to costly disagreements or litigation. Accordingly, we
decline to adopt any general exceptions to our new call signaling rules at this time. Parties seeking
limited exceptions or relief in connection with the call signaling rules we adopt can avail themselves of
established waiver procedures at the Commission. To that end, we delegate authority to the Wireline
Competition Bureau to act upon requests for a waiver of the rules adopted herein in accordance with
existing Commission rules.1249
5.
Signaling / Billing Record Requirements
a.Proposals
724. A number of parties commenting on the USF/ICC Transformation NPRM1250 suggest thatour signaling rules should address, in addition to CPN and CN information, other call signaling fields
including Operating Company Number (OCN),1251 Carrier Identification Code (CIC),1252 Jurisdiction
Information Parameter (JIP),1253 and Local Routing Number (LRN).1254 These parties propose additional
1248 See MoSTCG Section XV Comments at 10; Nebraska Rural Companies Section XV Comments at 25; Rural
Associations Section XV Comments at 22-24.
1249 47 C.F.R. § 1.3.
1250 See, e.g., Frontier Section XV Comments at 13; Rural Associations Section XV Comments at 22, 27, n. 64,
Rural Associations Section XV Reply at 9-14; PAETEC et al. Section XV Comments at 4, 6-8, PAETEC et al.
Section XV Reply at 3-5.
1251 Operating Company Numbers (OCNs), also called company codes, are a four digit numerical code used to
uniquely identify telecommunications service providers per industry standard ATIS-0300251, Codes for
Identification of Service Providers for Information Exchange. NECA assigns all company codes. According to
NECA, applications of OCNs include, but are not limited to NECA F.C.C. Tariff No. 4, Assignment of OCNs in the
Local Exchange Routing Guide (LERG), Access Service Requests (ASRs), Multiple Exchange Carrier Access
Billing (MECAB), Small Exchange Carrier Access Billing (SECAB), Exchange Message Interface (EMI), and
Exchange Message Records (EMR). See
https://www.neca.org/cms400min/NECA_Templates/Code_Administration.aspx (last visited May 31, 2011). The
Operating Company Number (OCN) is used in billing records to identify a local telecommunications provider.
Billing records for calls completed without an IXC identify the originating carrier by an OCN. See Verizon,
Verizon’s Proposed Regulatory Action to Address Phantom Traffic at 4 (Verizon Phantom Traffic White Paper),
attached to Letter from Donna Epps, Vice President, Federal Regulatory Advocacy, Verizon, to Marlene H. Dortch,
Secretary, FCC, CC Docket No. 01-92 (filed Dec. 20, 2005).
1252 CICs (Carrier Identification Code) are a numeric code assigned by the North American Numbering Plan
Administrator for the provisioning of selected switched services. The numeric code is unique to each entity and is
used by the telephone company to route calls to the trunk group designated by the entity to which the code was
assigned. See ATIS Telecom Glossary http://www.atis.org/glossary/definition.aspx?id=6095 (last visited June 6,
2011). CIC is also defined in the Commission’s rules as a code used in tandem switching that can be used to
identify an interexchange provider. See 47 C.F.R. § 69.2(vv).
1253 The Jurisdiction Information Parameter (JIP) is defined as an optional parameter in the SS7 Initial Address
Message. In the number portability context, the JIP parameter is used to retain, in call signaling, the first six dialed
digits of a telephone number that has been ported. See TRAVIS RUSSELL, SIGNALING SYSTEM #7 366, 643 (Table
8.35) McGraw-Hill Communications (Fifth Edition 2006); see also Frontier Section XV Comments at 13 (JIP “is
the NPA-NXX that identifies the originating caller’s geographic location and the originating caller’s service
provider.”). The record in this proceeding also indicates that parties are making alternate use of the optional JIP
parameter pursuant to agreements. See XO Section XV Comments at 33 (“pursuant to agreements already in place,
some carriers are currently exchanging VoIP traffic via local interconnection trunks and populating the
Jurisdictional Indicator Parameter (“JIP”) field on the call record to designate the traffic as VoIP traffic”).
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signaling requirements that they assert will allow terminating carriers to identify the service providerfinancially responsible for each call, to jurisdictionalize traffic, and to bill the appropriate parties.1255
Other parties oppose these proposals.1256
b.
Discussion
725. After considering the substantial record received in response to the USF/ICCTransformation NPRM, we determine that limiting the scope of the rules we adopt to address phantom
traffic to CPN and CN signaling is consistent with our goal of helping to ensure complete and accurate
passing of call signaling information, while minimizing disruption to industry practices or existing carrier
agreements.1257 Our revised and expanded requirements with regard to CPN and CN will ensure that
terminating carriers will receive, via SS7, MF, or IP signaling, information helpful in identifying carriers
sending terminating traffic to their networks. This information, in combination with billing records
provided to terminating carriers in accordance with industry standards, should significantly reduce the
amount of unbillable traffic that terminating carriers receive.
726. As detailed above, several commenters advocate requirements for CIC or OCN to be
included in billing records. However, neither our existing nor our proposed rules specify any billing
record requirements. Accordingly, we decline, at this time, to disturb the industry billing record
processes that have developed independently of Commission regulation.
727. Other commenters want to require CIC or OCN information to be passed in call
signaling.1258 These commenters do not, however, address certain complexities related to such a
requirement, such as whether and how the signaling should be required in the SS7 stream, whether
equivalent signaling should be required for IP traffic, and if so, what formats and protocols should be
required.1259 These complexities are, in our view, best resolved by industry standard setting bodies so that
they can be informed by, and adapt to, changing technology.1260 Accordingly, unlike calling party
(Continued from previous page)
1254 The Local Routing Number (LRN) is a telephone number assigned in the local number portability database for
the purposes of routing a call to a telephone number that has been ported. When a call is made to a number that has
been ported, the routing path for the call is established based on the LRN rather than on the dialed number. See
TRAVIS RUSSELL, SIGNALING SYSTEM #7 640 McGraw-Hill Communications (Fifth Edition 2006).
1255 Specifically, parties proposing CIC and OCN signaling requirements would like the Commission to mandate
inclusion of CIC or OCN in providers’ SS7 call signaling or in billing records, as appropriate. See GVNW Section
XV Comments at 5-6; PAETEC et al. Section XV Comments at 6-7. Parties proposing JIP and LRN signaling
requirements assert that such requirements would help solve phantom traffic problems. See, e.g., Frontier Section
XV Comments at 13; Rural Associations Section XV Comments at 21-23.
1256 See AT&T Section XV Reply at 18; Verizon Section XV Reply Comments at 33.
1257USF/ICC Transformation NPRM, 26 FCC Rcd at 4756, para. 632.
1258 Blooston Section XV Comments at 10; Consolidated Section XV Comments at 37-38.
1259 For example, as discussed above, commenters request that the Commission require providers to include CIC or
OCN codes in signaling information and/or billing records. But, no commenter explains exactly how these
proposals would be implemented, given that the CIC field is optional under the current SS7 industry standard. And,
the proposals do not provide specific procedures by which IXCs involved in a call path would access the SS7
signaling stream to insert their OCN in the CIC field. Additionally, Sprint commented that if a terminating carrier
subtends a tandem, the tandem owner has the responsibility to pass the OCN and CIC to the terminating carrier.
Sprint does not offer a legal basis to impose such an obligation on a tandem owner if it is providing transit service.
See Sprint Section XV Comments at 26.
1260 See ATIS Section XV Comments at 7.
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number-based requirements, which have long been at the core of our signaling rules, we decline toinclude requirements for signaling CIC or OCN in our revised call signaling rules. If the reforms adopted
herein prove inadequate to curb problems associated with phantom and unidentifiable traffic, we will
revisit measures such as additional signaling mandates at a later date.
728. There is debate in the record about the technical feasibility of proposals relating to
JIP. For example, the Nebraska Rural Independent Companies propose that wireless carriers be
required to populate the JIP with a two digit state identifier and a two digit MTA code associated
with the cell site along with the six-digit NPA-NXX of the originating switch.1261 But, in reply
comments, HyperCube noted that “the JIP can be populated only with the LRN 6-digit NPA-NXX
code. There are only six spaces in the field, and therefore wireless carriers cannot be required to populate
the field not only with the LRN of the originating switch but also with a two-digit state code and a two-
digit MTA code associated with the originating cell site.”1262 Additionally, wireless providers note that
JIP does not, in some circumstances, provide accurate information about a call’s jurisdiction.1263 The
record pertaining to JIP lacks the specific factual information necessary to resolve conflicting information
at this level of detail about the operation, and carrier usage of JIP. Furthermore, as with CIC and OCN
signaling, complexities related to JIP signaling are, in our view, best resolved by industry standard setting
bodies so that they can be informed by and adapt to changing technology.1264 Finally, we are reluctant to
mandate any particular use of the JIP field as doing so would preclude innovative use of the field for other
purposes, such as identification of VoIP traffic, specified in agreements between carriers. 1265
729. We also note that the OCN and JIP fields provide alternatives to CPN and CN as a means
of identifying the originating carrier for a call. We are thus not convinced that signaling requirements
related to OCN and JIP will lead to any additional incremental reductions in the phantom traffic problem
over our revised rules related to CPN and CN.
c. Enforcement
730. Commenters to the USF/ICC Transformation NPRM urged the Commission to consider a
number of measures to ensure compliance with our new rules.1266 As explained below, however, there is
1261 See Nebraska Rural Companies Section XV Comments at 23-24.
1262 HyperCube Section XV Reply Comments at 13 n.39.
1263 See, e.g., AT&T Reply at 19; T-Mobile Section XV Comments at 13.
1264 Similar conflicting information is present in the record regarding the LRN and its applicability in the call
signaling context as well. Several commenters propose requiring the LRN to be included in signaling or in billing
records. See TDS Section XV Comments at 9; Texas Telephone Section XV Comments at 11-12. Other
commenters note that the LRN is not an SS7 parameter and is used primarily for the limited purpose of routing calls
to numbers that have been ported to providers other than the carrier to which the number was assigned. See AT&T
Section XV Reply Comments at 19 n.51. The record before us does not contain sufficiently detailed information to
resolve this discrepancy, and, as with other signaling proposals discussed above, we believe these issues are best
resolved by industry standards setting bodies.
1265 See XO Section XV Comments at 33.
1266 See infra paras. 731-735, We note that some parties suggested that the Commission expand the scope of the
Commission’s T-Mobile Order to allow all LECs to demand interconnection with all carriers. See Developing a
Unified Intercarrier Compensation Regime; T-Mobile et al. Petition for Declaratory Ruling Regarding Incumbent
LEC Wireless Termination Tariffs, CC Docket No. 01-92, Declaratory Ruling and Report and Order, 20 FCC Rcd
4855 (2005) (T-Mobile Order), petitions for review pending, Ronan Tel. Co. et al. v. FCC, No. 05-71995 (9th Cir.
filed Apr. 8, 2005); see also ITTA Section XV Comments at 22-23; Rural Associations Section XV Comments at
(continued…)
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no persuasive evidence that existing enforcement mechanisms and complaint processes are inadequate.1267We therefore decline to adopt these enforcement proposals. Parties aggrieved by violations of our
phantom traffic rules have a number of options, such as filing an informal or formal complaint.1268 In
addition, the Commission has broad authority to initiate proceedings on its own motion to investigate and
enforce its phantom traffic rules.1269
731. Some commenters suggest that the Commission impose financial responsibility on the last
carrier sending traffic with incomplete billing data.1270 Under this proposal, the terminating carrier would
be allowed to charge its highest rate to the service provider delivering the phantom traffic to it. In turn, an
intermediate provider would be able to charge that rate to the service provider that preceded it in the call
path until ultimately the carrier that improperly labeled the traffic would be penalized.1271
732. We decline to adopt additional measures related to enforcement of our phantom traffic
rules. Proposals to impose upstream liability or financial responsibility on carriers threaten to unfairly
burden tandem transit and other intermediate providers with investigative obligations. Instead, we agree
that the “responsibility – and liability – should lie with the party that failed to provide the necessary
information, or that stripped the call-identifying information from the traffic before handing it off.”1272
Moreover, the phantom traffic rules we adopt herein are not intended to ensnare providers that happen to
receive incomplete signaling information.1273 Imposing upstream liability on all carriers in a call path
would be likely to generate confusion and result in the unintended consequence of yielding additional
phantom traffic disputes.
733. Commenters also advocated for imposition of a “penalty rate” for unidentifiable traffic or
treble damages for willful and repeated action, suggesting that this approach will provide “strong
(Continued from previous page)
30; USTelecom Section XV Comments at 5-6; Windstream Section XV Comments at 17-19. We address these
issues in Sections XII.C.5 and XVII.N.
1267 In response to suggestions that the Commission encourage use of the complaint process to combat phantom
traffic, we reiterate that allegations of violations of our rules will be subject to the Commission’s existing
enforcement and complaint mechanisms. See CenturyLink Section XV Comments at 22; ITTA Section XV
Comments at 21-22; Time Warner Cable Section XV Comments at 13-14.
1268 See 47 C.F.R. § 1.711. Parties can file an informal complaint by contacting the Enforcement Bureau, which will
seek to facilitate a resolution to the issue. See 47 C.F.R. §§ 1.716-18. Additionally, parties can avail themselves of
the Commission’s formal complaint process, if they were not satisfied with the outcome of their informal complaint.
47 U.S.C. § 208; 47 C.F.R. §§ 1.718, 1.720-36. Formal complaint proceedings are similar to court proceedings and
are generally resolved on a written record. See 47 C.F.R. § 1.720. We note, under the Act, that section 208
complaints can only be brought against common carriers. See 47 U.S.C. § 208(a). Parties seeking relief against an
interconnected VoIP provider for alleged violations of our signaling rules could seek relief against that
interconnected VoIP provider’s partnering or affiliated LEC. If this proves to be insufficient, the Commission could
reevaluate whether a different approach is appropriate.
1269 See 47 U.S.C. §§ 403, 503.
1270 See Rural Associations Section XV Comments at 26-27; XO Section XV Comments at 38; NASUCA and NJ
Rate Counsel Section XV Reply at 11.
1271 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6647-49 App. A, paras 336-42; id. at 6846-48 App. C, paras.
332-38.
1272 Comcast Section XV Comments at 10.
1273 AT&T Section XV Reply at 16; see also Level 3 Section XV Reply at 10; CenturyLink Section XV Reply at 20.
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financial incentives to ensure compliance.”1274 We note that commenters advocating for additionalenforcement measures such as financial penalties provide no sufficient reason that the Commission’s
existing enforcement mechanisms are inadequate to address any rule violations.1275 We also note that a
phantom traffic-specific penalty rate or other financial penalty provision would likely divert additional
industry and Commission resources to disputes over the applicability and enforcement of the penalty rate.
Based on the availability of the Commission’s existing enforcement mechanisms, we think it is unlikely
that any benefits of an additional phantom-traffic specific enforcement mechanism will outweigh its costs.
Therefore, we decline to adopt a “penalty rate” or other financial punishment in connection with phantom
traffic.
734. Parties also proposed that the Commission allow selective call blocking, which would
permit carriers in the call path to block traffic that is unidentified or for which parties refuse to accept
financial responsibility.1276 We decline to adopt any remedy that would condone, let alone expressly
permit, call blocking.1277 The Commission has a longstanding prohibition on call blocking.1278 In the
2007 Call Blocking Order, the Wireline Competition Bureau emphasized that “the ubiquity and reliability
of the nation’s telecommunications network is of paramount importance to the explicit goals of the
Communications Act of 1934, as amended” and that “Commission precedent provides that no carriers,
including interexchange carriers, may block, choke, reduce or restrict traffic in any way.”1279 We find no
reason to depart from this conclusion. We continue to believe that call blocking has the potential to
degrade the reliability of the nation’s telecommunications network.1280 Further, as NASUCA highlights
in its reply comments, call blocking ultimately harms the consumer, “whose only error may be relying on
an originating carrier that does not fulfill its signaling duties.”1281
735. Other Proposals. Finally, parties proposed that the Commission should impose rules
surrounding the proper look-up1282 and routing for traffic.1283 Because these proposals are unrelated to the
Commission’s limited phantom traffic objectives related to signaling, and because we find little evidence
1274 GVNW Section XV Comments at 6; see also Frontier Section XV Comments at 12; WGA Section XV
Comments at 5.
1275 See supra note 1267. Although we decline to adopt any specific enforcement mechanism related to phantom
traffic and continue to believe our existing enforcement mechanisms are adequate, we will monitor this issue and, if
necessary, may determine that additional measures are appropriate.
1276 See, e.g., Frontier Section XV Reply at 9; Missouri Commission Section XV Comments at 9; RNK
Communications Section XV Comments at 9.
1277 We note that at least two states currently allow for blocking of intrastate traffic in certain circumstances. See
Missouri Commission Section XV Comments at 9; Ohio Commission Section XV Comments at 11-12.
1278 See Call Blocking Declaratory Ruling, 22 FCC Rcd at 11629, 11631 paras. 1, 6; see also Blocking Interstate
Traffic in Iowa, Memorandum Opinion and Order, 2 FCC Rcd 2692 (1987) (denying application for review of
Bureau order, which required petitioners to interconnect their facilities with those of an interexchange carrier in
order to permit the completion of interstate calls over certain facilities).
1279 Call Blocking Declaratory Ruling, 22 FCC Rcd at 11631, para. 6.
1280 Id. at 11631, para. 5 (internal citation omitted).
1281 NASUCA and NJ Rate Counsel Section XV Reply at 11.
1282 See, e.g., CenturyLink Section XV Comments at 24.
1283 See, e.g., Aventure Section XV Comments at 7-9; Rural Associations Section XV Comments at 29-30.
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at this time of a need for additional Commission action, we decline to adopt these proposals.1284 Webelieve the changes to the call signaling rules adopted in this Order provide a narrowly tailored and
straightforward remedy to the problems of unidentifiable traffic.
XII.
COMPREHENSIVE INTERCARRIER COMPENSATION REFORM
736.Consistent with the National Broadband Plan’s recommendation to phase out regulated
per-minute intercarrier compensation charges,1285 in this section we adopt bill-and-keep as the default
methodology for all intercarrier compensation traffic. We believe setting an end state for all traffic will
promote the transition to IP networks, provide a more predictable path for the industry and investors, and
anchor the reform process that will ultimately free consumers from shouldering the hidden multi-billion
dollar subsidies embedded in the current system.
737.
Under bill-and-keep arrangements, a carrier generally looks to its end-users—which are
the entities and individuals making the choice to subscribe to that network—rather than looking to other
carriers and their customers to pay for the costs of its network. To the extent additional subsidies are
necessary, such subsidies will come from the Connect America Fund, and/or state universal service funds.
Wireless providers have long been operating pursuant to what are essentially bill-and-keep arrangements,
and this framework has proven to be successful for that industry.1286 Bill-and-keep arrangements are also
akin to the model generally used to determine who bears the cost for the exchange of IP traffic, where
providers bear the cost of getting their traffic to a mutually agreeable exchange point with other providers.
738.
Bill-and-keep has significant policy advantages over other proposals in the record.1287 A
bill-and-keep methodology will ensure that consumers pay only for services that they choose and receive,
eliminating the existing opaque implicit subsidy system under which consumers pay to support other
carriers’ network costs. This subsidy system shields subsidy recipients and their customers from price
signals associated with network deployment choices. A bill-and-keep methodology also imposes fewer
regulatory burdens and reduces arbitrage and competitive distortions inherent in the current system,
eliminating carriers’ ability to shift network costs to competitors and their customers.1288 We have legal
1284 See AT&T Section XV Reply at 15 n.39; XO Section XV Comments at 38-39.
1285 See National Broadband Plan at 150 (Recommendation 8.14).
1286 CMRS providers are prohibited from filing interstate access tariffs, see 47 C.F.R. § 20.15(c), but may collect
access charges from an IXC if both parties agree pursuant to contract. See Petitions of Sprint PCS and AT&T Corp.
for Declaratory Ruling Regarding CMRS Access Charges, WT Docket No. 01-316, Declaratory Ruling, 17 FCC
Rcd 13192, 13198, para. 12 (2002) (Sprint/AT&T Declaratory Ruling), petitions for review dismissed, AT&T Corp.
v. FCC, 349 F.3d 692 (D.C. Cir. 2003). Practically speaking, this means that CMRS providers generally do not
collect access charges for calls that originate or terminate on their networks. CMRS providers are, however, able to
receive reciprocal compensation for eligible traffic that terminates on their networks, although the record indicates
that many of those arrangements are also bill-and-keep. See, e.g., Letter from Tamara Preiss, Vice President,
Federal Regulatory, Verizon, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, WC Docket No. 07-135,
at 6, 10 (filed June 28, 2010); CTIA USF/ICC Transformation NPRM Comments at 36 (explaining that bill-and-
keep “is the model that has been successful in the wireless industry”); T-Mobile USF/ICC Transformation NPRM
Comments at 24 (internal citations omitted) (detailing that “[w]ireless carriers essentially operate now under a bill-
and-keep regime, and bill-and-keep, is in large part, the end point of this proposal”); cf. ABC Plan, Attach. 5 at 36-
37 (commenting that the majority of intraMTA wireless traffic has been, and currently is, exchanged at rates at or
below $0.0007 per minute).
1287 See infra Section XII.A.1.
1288 See generally, Letter from Kathleen O’Brien Ham, VP, Federal Regulatory Affairs, T-Mobile, to Marlene H.
Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 03-109; CC Docket Nos. 01-92, 96-46; GN Docket No.
09-51 (filed Oct. 20, 2011) (T-Mobile Oct. 20, 2011 Ex Parte Letter).
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authority to adopt a bill-and-keep methodology as the end point for reform pursuant to our rulemakingauthority to implement sections 251(b)(5) and 252(d)(2), in addition to authority under other provisions of
the Act, including sections 201 and 332.1289
739.
We also adopt in this section a gradual transition for terminating access, providing price
cap carriers, and competitive LECs that benchmark to price cap carrier rates, six years and rate-of-return
carriers, and competitive LECs that benchmark to rate-of-return carrier rates, nine years to reach the end
state. We believe that initially focusing the bill-and-keep transition on terminating access rates will allow
a more manageable process and will focus reform where some of the most pressing problems, such as
access charge arbitrage, currently arise. Additionally, we believe that limiting reform to terminating
access charges at this time minimizes the burden intercarrier compensation reform will place on
consumers and will help manage the size of the access replacement mechanism adopted herein. We
recognize, however, that we need to further evaluate the timing, transition, and possible need for a
recovery mechanism for those rate elements–including originating access, common transport elements not
reduced, and dedicated transport–that are not immediately transitioned; we address those elements in the
FNPRM. The transition we adopt sets a default framework, leaving carriers free to enter into negotiated
agreements that allow for different terms.1290
A.
Bill-and-Keep as the End Point for Reform
740.In this section, we first explain the policy reasons for adopting a bill-and-keep
methodology. We then explain our legal authority to comprehensively reform intercarrier compensation
and adopt a bill-and-keep methodology as the end state for all traffic. Finally, we explain why, on
balance, a national, uniform framework best advances our goals and how states will have a critical role in
implementing this national framework.
1.
Bill-and-Keep Best Advances the Goals of Reform
741.We adopt a bill-and-keep methodology as a default framework and end state for all
intercarrier compensation traffic. We find that a bill-and-keep framework for intercarrier compensation
best advances the Commission’s policy goals and the public interest, driving greater efficiency in the
operation of telecommunications networks1291 and promoting the deployment of IP-based networks.1292
742.
Bill-and-Keep Is Market-Based and Less Burdensome than the Proposed Alternatives.
Bill-and-keep brings market discipline to intercarrier compensation because it ensures that the customer
1289 See infra Section XII.A.2.
1290 We agree with commenters that “[c]arriers should be free to negotiate commercial agreements that may depart
from the default regime.” Verizon USF/ICC Transformation NPRM Comments at 7.
1291 See National Broadband Plan at 142. See also T-Mobile USF/ICC Transformation NPRM Comments at 17
(explaining that “LEC requirements that packet-based traffic be converted into TDM further deprive consumers of
the full benefits that packet-based technologies can offer. This arrangement also stifles investment. . . .”); Global
Crossing USF/ICC Transformation NPRM Comments at 7 (stating that “Global Crossing has previously noted that it
spends approximately 2,290 man-hours per month managing the intercarrier compensation regime, which accounts
for time required to address disputes, bill reconciliation, contract negotiation, routing, and other tasks.”).
1292 See AT&T USF/ICC Transformation NPRM Reply at 3; see also CTIA USF/ICC Transformation NPRM
Comments at 36; Google USF/ICC Transformation NPRM Comments at 9; Sprint USF/ICC Transformation NPRM
Comments, App. B at 4. See also Letter from Stuart Polikoff, VP – Regulatory Policy and Business Development,
OPASTCO to Marlene H. Dortch, Secretary, FCC, GN Docket No. 09-51, WC Docket Nos. 05-337 and 06-122, CC
Docket Nos. 96-45 and 01-92, at 2 (filed Oct. 28, 2009) (urging that “[a]ll intercarrier compensation (ICC) rates
transition down to zero over seven years”).
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who chooses a network pays the network for the services the subscriber receives.1293 Specifically, a bill-and-keep methodology requires carriers to recover the cost of their network through end-user charges,1294
which are potentially subject to competition. Under the existing approach, carriers recover the cost of
their network from competing carriers through intercarrier charges, which may not be subject to
competitive discipline. Thus, bill-and-keep gives carriers appropriate incentives to serve their customers
efficiently.1295
743.
Bill-and-keep is also less burdensome than approaches that would require the
Commission and/or state regulators to set a uniform positive intercarrier compensation rate, such as
$0.0007. In particular, bill-and-keep reduces the significant regulatory costs and uncertainty associated
with choosing such a rate, which would require complicated, time consuming regulatory proceedings,
based on factors such as demand elasticities for subscription and usage as well as the nature and extent of
competition.1296 As the Commission has recognized with respect to the existing reciprocal compensation
rate methodology, “[s]tate pricing proceedings under the TELRIC [Total Element Long Run Incremental
Cost] regime have been extremely complicated and often last for two or three years at a time. . . . The
drain on resources for the state commissions and interested parties can be tremendous.”1297 Indeed, the
cost of implementing such a framework potentially could outweigh the resulting intercarrier
compensation revenues for many carriers.1298 Moreover, in setting any new intercarrier rate, it would be
necessary to rely on information from carriers who would have incentives to maximize their own
revenues, rather than ensure socially optimal intercarrier compensation charges.1299 Thus, the costs of
1293 See infra Section XII.A.2.
1294 In certain areas, we recognize that, in addition to end user charges, explicit universal service support may also
be appropriate. See generally Section XIII.
1295 See, e.g., Patrick DeGraba, Central Office Bill and Keep as a Unified Inter-carrier Compensation Regime, 19
Yale Journal of Regulation 37 (2002) (DeGraba); AT&T USF/ICC Transformation NPRM Reply at 23.
1296 See, e.g., Body of European Regulators for Electronic Communications, BEREC Common Statement on Next
Generation Networks Future Charging Mechanisms/Long Term Termination Issues, June 2010,
http://erg.eu.int/doc/berec/bor_10_24_ngn.pdf, at 24-26, 51 (BEREC Common Statement); see also DeGraba at 26-
27; Intercarrier Compensation FNPRM, 20 FCC Rcd at 4790-92, App. C (“In practice, however, regulators rarely
have sufficient information or sufficient resources to establish rates that accurately reflect the cost of providing
service. . . . Furthermore, as new technologies and network architectures develop, the challenges associated with
setting cost-based rates will only increase.”).
1297 Review of the Commission’s Rules Regarding the Pricing of Unbundled Network Elements and Resale of Service
by Incumbent Local Exchange Carriers, Notice of Proposed Rulemaking, 18 FCC Rcd 18945 at 18948-49, para. 6
(2003). See also, e.g., Pennsylvania Commission 2008 Order and ICC/USF FNPRM Comments at 24 (describing
the possible adoption of a new incremental cost pricing methodology as imposing an “obligation upon the states to
carry out a new series of very complex and expensive proceedings in order to derive cost-based rates”); Verizon
2008 Order and ICC/USF FNPRM Comments at 47-48 (discussing the burdens associated with the regulatory
process of setting reciprocal compensation rates under a new methodology).
1298 See, e.g., Virginia Commission August 3 PN Comments at 6; Vermont Commission USF/ICC Transformation
NPRM Reply at 6; TCA 2008 Order and ICC/USF FNPRM Comments at 10; Nebraska PSC 2008 Order and
ICC/USF FNPRM Comments at 7; Leap Wireless 2008 Order and ICC/USF FNPRM Comments at 10-11.
1299 See, e.g., BEREC Common Statement at 24; DeGraba at 26-27.
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choosing a new positive intercarrier compensation rate would be significant, and a reasonable outcomewould be highly uncertain.1300
744.
Bill-and-Keep Is Consistent with Cost Causation Principles. As the USF/ICC
Transformation NPRM observed, “[u]nderlying historical pricing policies for termination of traffic was
the assumption that the calling party was the sole beneficiary and sole cost-causer of a call.”1301
However, as one regulatory group has observed, if the called party did not benefit from incoming calls,
“users would either turn off their phone or not pick up calls.”1302 This is particularly true given the
prevalence of caller ID, the availability of the national do-not-call registry, and the option of having
unlisted telephone numbers.1303 More recent analyses have recognized that both parties generally benefit
from participating in a call, and therefore, that both parties should split the cost of the call. That line of
economic research finds that the most efficient termination charge is less than incremental cost, and could
be negative.1304
1300 See, e.g., Application of Verizon New England Inc., Bell Atlantic Communications, Inc. (d/b/a Verizon Long
Distance), NYNEX Long Distance Company (d/b/a Verizon Global Networks Inc., for Authorization to Provide In-
Region, Interlata Services in Massachusetts, CC Docket No. 01-9, 16 FCC Rcd 8988 (2001).
1301 USF/ICC Transformation NPRM, 26 FCC Rcd at 4716, para. 525.
1302 BEREC Common Statement at 28.
1303 See, e.g., AT&T USF/ICC Transformation NPRM Comments at 15 & n.22.
1304 See Benjamin E. Hermalin and Michael L. Katz, Network Interconnection with Two-Sided User Benefits, Walter
A. Haas School of Business, University of California, Berkeley (2001); see also DeGraba at 37-84; Doh-Shin Jeon,
Jean-Jacque Laffont and Jean Tirole, On the “Receiver Pays” Principle, 35 RAND J. OF ECON., 85 (2004). See
generally, Wilko Bolt and Alexander F. Tieman, Social Welfare and Cost Recovery in Two-Sided Markets, IMF
Working Paper, at 103–117, www.imf.org/external/pubs/ft/wp/2005/wp05194.pdf (2005); E. Glen Weyl, A Price
Theory of Multi-Sided Platforms, 100 AM. ECON. REV., 1642 (2010); Alexander White, and E. Glen Weyl, Imperfect
Platform Competition: A General Framework, http://alex-white.net/Home/Research_files/WWIPC.pdf (2011). See
also, e.g., USF/ICC Transformation NPRM, 26 FCC Rcd at 4716, para. 525 (citing relevant sources); Intercarrier
Compensation FNPRM, 20 FCC Rcd at 4782-86, App. C. See also ISP Remand Order, 16 FCC Rcd at 9183-85,
paras. 71-74; CTIA USF/ICC Transformation NPRM Comments at 36 (Bill-and-keep “is also perfectly consistent
with the realities of the modern telecommunications network and cost-causation principles. Both the calling and
called parties benefit from participating in the call, and a bill-and-keep regime fairly apportions costs premised on
that reality – a point the Commission has recognized for a decade.”) (internal citations omitted).
Earlier models of interconnection pricing assumed that the calling party was both the cost causer and the sole
beneficiary of the call. See, e.g., Jean-Jacques Laffont, Patrick Rey, and Jean Tirole, Network Competition I:
Overview and Non-Discriminatory Pricing, 29 RAND J. OF ECON., 1 (1998); Jean-Jacques Laffont, Patrick Rey, and
Jean Tirole, Network Competition II: Price Discrimination, 29 RAND J. OF ECON., 38 (1998); Mark Armstrong,
Network Interconnection in Telecommunications, 108 THE ECON. J., 545 (1998). Even in this stylized setting a
number of results were found that implied that above cost termination charges were inefficient. For example,
network providers can tacitly collude through access charges to set monopolistic retail prices, and worse, network
providers acting competitively may raise termination charges beyond the monopoly level, harming consumers and
themselves. See, e.g., Michael Carter and Julian Wright, Interconnection in Network Industries, 14 REV. OF INDUS.
ORG., 1 (1999); see also Julian Wright, Access Pricing Under Competition: An Application to Cellular Networks, 50
J. OF INDUS. ECON., 289 (2002); see also Mark Armstrong, The Theory of Access Pricing and Interconnection, 1
HANDBOOK OF TELECOMM. ECON., 295 (Cave M. et al., eds. 2002).
In some cases, unregulated networks also wish to mark usage prices up over their incremental costs. See, e.g.,
Wouter Dessein, Network Competition in Nonlinear Pricing, 34 RAND J. OF ECON., 593 (2003); Wouter Dessein,
Network Competition with Heterogeneous Customers and Calling Patterns, 16 INFO. ECON. AND POLICY, 323
(2004); David Harbord & Marco Pagnozzi, Network-Based Price Discrimination and “Bill-and-Keep” vs. “Cost-
(continued…)
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745.Moreover, the subscription decisions of the called party play a significant role in
determining the cost of terminating calls to that party.1305 A consequent effect of the existing intercarrier
compensation regime is that it allows carriers to shift recovery of the costs of their local networks to other
providers because subscribers do not have accurate pricing signals to allow them to identify lower-cost or
more efficient providers.1306 By contrast, a bill-and-keep framework helps reveal the true cost of the
network to potential subscribers by limiting carriers’ ability to recover their own costs from other carriers
and their customers,1307 even as we retain beneficial policies regarding interconnection, call blocking, and
geographic rate averaging.1308
(Continued from previous page)
Based” Regulation of Mobile Termination Rates, 10 REV. OF NETWORK ECON. (2010). This means that so long as
overall costs can be recovered through other charges, such as a fixed fee, the efficient termination charge is less than
the carrier’s incremental cost (so that retail prices, after markups, reflect underlying resource costs). See, e.g., Jean-
Jacques Laffont & Jean Tirole, COMPETITION IN TELECOMM., Section 2.5 (2000). Similarly, in an analysis of
dynamic investment incentives, it was shown that access charges (both origination and termination) should be set
below incremental cost. See Carlo Cambini and Tommaso Valletti, Investments and Network Competition, 36
RAND J. OF ECON., 446 (2005); see also Carlo Cambini and Tommaso Valletti, Network Competition with Price
Discrimination: ‘Bill and Keep’ Is Not So Bad After All, 81 ECON. LETTERS 205 (2003).
1305 It is the called party that chooses the carrier that will be used for originating calls from, and terminating calls to,
that user.
1306 This was made possible by virtue of the interrelationship of the tariffed access charge regime, mandatory
interconnection and policies against blocking or refusing to deliver traffic and statutory requirements for nationwide
averaging of long distance rates. See, e.g., CLEC Access Reform Order, 16 FCC Rcd at 9935–36, para. 31; Access
Charge Reform, Price Cap Performance Review for Local Exchange Carriers, CC Docket Nos. 96-262 and 94-1,
Sixth Report and Order, Low-Volume Long-Distance Users, CC Docket No. 99-249, Report and Order, Federal-
State Joint Board on Universal Service, CC Docket No. 96-45, Eleventh Report and Order, 15 FCC Rcd 12962
(CALLS Order), aff’d in part, rev’d in part, and remanded in part, Texas Office of Public Util. Counsel et al. v.
FCC, 265 F.3d 313 (5th Cir. 2001) (subsequent history omitted).
1307 Intercarrier Compensation FNPRM, 20 FCC Rcd at 4787-88, App. C. Bill-and-keep “rewards efficient carriers
and punishes inefficient ones by forcing carriers to incorporate their costs into their own retail rates – which, unlike
regulated intercarrier compensation, are subject to competition.” AT&T USF/ICC Transformation NPRM Reply at
23.
1308 Under geographic rate averaging, long-distance providers are precluded from charging customers of an interstate
service in one state a rate different from that in another state. See 47 U.S.C. § 254(g).
We therefore reject the contentions of some parties that the cost of completing calls to their customers from other
providers’ networks are being imposed on them by the customers of those other networks. See, e.g., NASUCA
USF/ICC Transformation NPRM Reply at 125; PAETEC et al. USF/ICC Transformation NPRM Reply at 27. To
the extent that these commenters in reality are contending that both calling and called parties benefit from a call, but
not to an equal degree in all cases, they have not provided evidence demonstrating the relative benefit to each party,
how that should be factored in to any intercarrier compensation payment owed, nor how the benefits arising from
such an approach outweigh the regulatory costs associated with its implementation. See, e.g., Core USF/ICC
Transformation NPRM Comments at 13-14; State Members USF/ICC Transformation NPRM Comments at 152.
Some carriers contending that the calling party is the cost causer have acknowledged that, even in the face of non-
payment of intercarrier compensation, “it may be self-defeating to ‘turn off’ a large IXC and leave one’s own
customers unable to place or receive calls carried via that long distance provider.” Rural Associations Section XV
Comments at 37 (emphasis added).
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746.We reject claims that bill-and-keep does not allow for sufficient cost recovery.1309 In the
past, parties have argued that a bill-and-keep approach somehow results in “free” termination.1310 But
bill-and-keep merely shifts the responsibility for recovery from other carrier’s customers to the customers
that chose to purchase service from that network plus explicit universal service support where
necessary.1311 Such an approach provides better incentives for carriers to operate efficiently by better
reflecting those efficiencies (or inefficiencies) in pricing signals to end-user customers.1312
747.
To the extent carriers in costly-to-serve areas are unable to recover their costs from their
end users while maintaining service and rates that are reasonably comparable to those in urban areas,
universal service support, rather than intercarrier compensation should make up the difference. In this
respect, bill-and-keep helps fulfill the direction from Congress in the 1996 Act that the Commission
should make support explicit rather than implicit.1313
748.
Consumer Benefits of Bill-and-Keep. Economic theory suggests that carriers will reduce
consumers’ effective price of calling, through reduced charges and/or improved service quality. We
predict that reduced quality-adjusted prices will lead to substantial savings on calls made, and to increased
calling. Economic theory suggests that quality-adjusted prices will be reduced regardless of the extent of
competition in any given market,1314 but will be reduced most where competition is strongest.1315 These
price reductions will be most significant among carriers who, by and large, incur but do not collect
termination charges, notably CMRS and long-distance carriers. The potential for benefits to wireless
customers is particularly important, as today there are approximately 300 million wireless devices,
compared to approximately 117 million fixed lines, in the United States.1316 Lower termination charges
for wireless carriers could allow lower prepaid calling charges and larger bundles of free calls for the
1309 The Commission has cited evidence suggesting that the forward-looking incremental cost of terminating traffic
was extremely low, and very near $0—certainly much lower than current switched access charges, and even many
reciprocal compensation rates. See, e.g., 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6610-12, 6613-14
App. A, paras. 254-57, 260-61; id. at 6808-10, 6811-12, App. C at paras. 249-52, 255-56. See also BEREC
Common Statement at 48, 51; see also Letter from Gary M. Epstein and Richard R. Cameron, Counsel for ICF, to
Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, at Attach. 3, p. 3 (filed Aug. 17, 2004). But see
CenturyLink USF/ICC Transformation NPRM Comments at 62 (noting possible proliferation of arbitrage if there is
inadequate cost recovery).
1310 See, e.g., Core Section XV Reply at 15; Louisiana Small Company Committee Section XV Comments at 9;
KMC Telecom and Xspedia Intercarrier Compensation FNPRM Reply at 2.
1311 See, e.g., AT&T USF/ICC Transformation NPRM Reply at 23 (explaining that bill-and-keep would not limit the
amount of recovery but merely the source of that recovery) (emphasis in original).
1312 Id. at 23-24. See also supra paras. 742-743.
1313 See, e.g., VON Coalition August 3 PN Comments at 6-7; Vonage Section XV Reply at iii, 12.
1314 See, e.g., J. Bulow and P. Pfleiderer, A Note on the Effect of Cost Changes on Prices, J. OF POLITICAL ECON., 91
(1983).
1315 See id.; see also, J. Hausman and G. Leonard, Efficiencies from the Consumer Viewpoint, 7 GEO. MASON LAW
REVIEW, 707 (1999).
1316 See CTIA, “U.S. Wireless Quick Facts,” http://www.ctia.org/advocacy/research/index.cfm/aid/10323; see also
FCC, Wireline Competition Bureau, Local Telephone Competition Status as of Dec. 31, 2010,
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1007/DOC-310264A1.pdf.
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same monthly price.1317 For example, carriers presently offer free “in-network” wireless calls at least inpart because they do not have to pay to terminate calls on their own network. Lower termination charges
could also enable more investment in wireless networks, resulting in higher quality service—e.g., fewer
dropped calls and higher quality calls—as well as accelerated deployment of 4G service.1318 Similarly,
IXCs, calling card providers, and VoIP providers will be able to offer cheaper long-distance rates and
unlimited minutes at a lower price.
749.
Moreover, as carriers face intercarrier compensation charges that more accurately reflect
the incremental cost of making a call, consumers will see at least three mutually reinforcing types of
benefits. First, carriers operations will become more efficient as they are able to better allocate resources
for delivering and marketing existing communications services. Specifically, as described below, bill-
and-keep will over time eliminate wasteful arbitrage schemes and other behaviors designed to take
advantage of or avoid above-cost interconnection rates, as well as reducing ongoing call monitoring,
intercarrier billing disputes, and contract enforcement efforts. Second, carrier decisions to invest in,
develop, and market communications services will increasingly be based on efficient price signals.1319
750.
Third, and perhaps most importantly, we expect carriers will engage in substantial
innovation to attract and retain consumers. New services that are presently offered on a limited basis will
be expanded, and innovative services and complementary products will be developed. For example, with
the substantial elimination of termination charges under a bill-and-keep methodology, a wide range of IP-
calling services are likely to be developed and extended,1320 a process that may ultimately result in the
sale of broadband services that incorporate voice at a zero or nominal charge. All these changes will
bring substantial benefits to consumers.
751.
The impact of the Commission’s last substantial intercarrier compensation reform
supports our view that consumers will benefit significantly from today’s reforms. In 2000, the CALLS
Order reduced interstate access charges.1321 At the same time, in ways similar to the present reforms, we
imposed modest increases in the fixed charges faced by end users.1322 In the CALLS Order, the
Commission forecasted that reduced interstate access rates would bring a range of efficiency benefits.1323
Although some of these forecasts were met with initial skepticism,1324 end-users in fact realized benefits
1317 Previous ICC reforms have translated into wireless consumer rate reductions and an increase in service
offerings, we anticipate a similar outcome as a result of the reform adopted herein. See, e.g., Letter from Scott K.
Bergmann, Assistant Vice President, Regulatory Affairs, CTIA to Marlene H. Dortch, Secretary, FCC, WC Docket
Nos. 10-90, 09-51, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45 at 5 (filed Sept. 29, 2011).
1318 See Letter from Charles McKee,VP, Federal and State Regulatory, Sprint, to Marlene H. Dortch, Secretary,
FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket No. 01-92, 96-45,
Attach. at 1 (filed Oct. 3, 2011) (“Sprint will be able to invest such expense savings in enhancing its network and
expanding its provision of wireless broadband services, while continuing to provide consumers with industry-
leading pricing.”).
1319 See, e.g. Steven Landsburg (2011), Price Theory and Applications, South-Western Publishers, p. 36.
1320 For example, bill-and-keep could allow substantial extension and development of services such as GoogleVoice
and Skype.
1321 See CALLS Order, 15 FCC Rcd 12962, 12975-76 para. 30.
1322 See id.
1323 See generally, CALLS Order, 15 FCC Rcd 12962-74, paras. 1-28.
1324 NJ Division of the Ratepayer Advocate CALLS NPRM Comments at 8-9 (“Under this proposal, residential
customers would see a cost increase of $50 million per month if this proposal is adopted. This cost would increase
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that exceeded most expectations. In particular, the CALLS Order resulted in substantial decreases incalling prices, but in largely unexpected ways. As a result of the CALLS Order, retail toll charges fell
sharply, bringing average customer expenditures per minute of interstate toll calling down 18 percent
during the year 2000.1325 However, rather than merely reducing per-minute rates, wireless carriers started
offering a new form of pricing, a fixed fee for a “bucket” of minutes, and ended distance-based pricing.
As a result of these price declines, the gains in consumer surplus for wireless users in the United States
from the CALLS Order were estimated to be about $115 billion per year.1326 Competitive pressure from
wireless providers brought similar changes to fixed line carriers, who began offering unlimited domestic
calls. These price declines and innovations also had important indirect effects, allowing end-users to
fundamentally change the way they used telephony services. For example, lower calling charges enabled
a substantial and ongoing shift from landlines to wireless. In short, the Commission’s prior intercarrier
compensation reform led to more convenient access to telecommunication services and substantially
lower costs for long-distance calls.
752.
Bill-and-Keep Eliminates Arbitrage and Marketplace Distortions. Bill-and-keep will
address arbitrage and marketplace distortions arising from the current intercarrier compensation regimes,
and therefore will promote competition in the telecommunications marketplace. Intercarrier
compensation rates above incremental cost have enabled much of the arbitrage that occurs today,1327 and
to the extent that such rates apply differently across providers, have led to significant marketplace
distortions. Rates today are determined by looking at the average cost of the entire network, whereas a
bill-and-keep approach better reflects the incremental cost of termination,1328 reducing arbitrage
incentives. For example, based on a hypothetical calculation of the cost of voice service on a next
generation network providing a full range of voice, video, and data services, one study estimated that the
incremental cost of delivering an average customer’s total volume of voice service could be as low as
$0.000256 per month; on a per minute basis, this incremental cost would translate to a cost of $0.0000001
per minute.1329 Moreover, non-voice traffic on next generation networks (NGNs) is growing much more
(Continued from previous page)
to $200 million per month if the SLC charge reaches the cap of $7.00 per month. In the short term, there is a huge
monthly cost increase to consumers and over the long term, there could be a $2.4 billion dollar increase on an
annualized basis to consumers.”). See NASUCA CALLS NPRM Comments at 7-15 (predicting that the CALLS
proposal will negatively affect consumers by increasing the rates paid, reducing consumer confidence and negatively
impacting low income and low volume end users).
1325 See Federal Communications Commission/WCB (2008), Reference Book on Rates, Price Indices, and
Household Expenditures for Telephone Service, Table 1.15,
http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-284934A1.pdf. For three years, 1997-1999, average
customer expenditures per minute of interstate toll calls held constant at $0.11 per minute. In 2000, average
customer expenditures per minute of interstate toll calls fell 18 percent to $0.09 cents per minute. However, this
likely understates the full decline in reduction as a result of the Commission’s reforms because the access charge
reduction occurred in July of 2000. In 2001, the average rate fell to $0.08, or 27 percent from the $0.11 starting
point. Rates fell again in 2002, to $0.07 cents per minute, and again in 2003 to $0.06 cents. See id.
1326 See ABC Plan, at Attach. 4, para. 11.
1327 See supra paras. 662-666. We therefore reject claims that arbitrage arises solely because of differences in rates
among jurisdictions of traffic or otherwise regardless of the absolute rate level. See, e.g., CRUSIR USF/ICC
Transformation NPRM Comments at 11-12; Rural Carriers - State USF USF/ICC Transformation NPRM Comments
at 2-3; ITTA USF/ICC Transformation NPRM Comments at 39-40.
1328 See infra note 1304. See, e.g., 2008 Order and USF/ICC FNPRM, 24 FCC Rcd at 6610-14 paras. 253-61
1329 See Letter from Henry Hultquist, Vice President – Federal Regulatory, AT&T Services, Inc. to Marlene H.
Dortch, Secretary, FCC, CC Docket Nos. 96-45, 01-92; WC Docket Nos. 99-68, 05-337, 07-135, at 4 (filed Oct. 13,
2008) (incremental cost of a softswitch is between 0.0010 and 0.00024).
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rapidly than voice traffic, and under any reasonable methods of cost allocation, the share of voice cost tototal cost will continue to be small in an NGN.1330 Record evidence indicates that the incremental cost of
termination for circuit-switched networks is likewise extremely small.1331
753.
Our conclusion that the incremental cost of call termination is very nearly zero, coupled
with the difficulty of appropriately setting an efficient, positive intercarrier compensation charge, further
supports our adoption of bill-and-keep.1332 Exact identification of efficient termination charges would be
extremely complex, and considering the costs of metering, billing, and contract enforcement that come
with a non-zero termination charge, we find that the benefits obtained from imposing even a very careful
estimate of the efficient interconnection charge would be more than offset by the considerable costs of
doing so.1333
754.
Some parties have expressed concerns that bill-and-keep arrangements will encourage
carriers to “dump” traffic on other providers’ terminating network, because the cost of termination to the
carrier delivering the traffic will be zero.1334 Such concerns, however, appear to be largely speculative; no
commenter has identified a concrete reason why any carrier would engage in such “dumping” or how it
would do so. Indeed, there has been no evidence that any such “dumping” has occurred in the wireless
industry, which has operated under a similar framework. Even so, if a long distance carrier decided to
deliver all of its traffic to a terminating LECs’ tandem switch, that practice could result in tandem
exhaust, requiring the terminating LEC to invest in additional switching capacity. To help address this
concern, we confirm that a LEC may include traffic grooming requirements in its tariffs. These traffic
grooming requirements specify when a long distance carrier must purchase dedicated DS1 or DS3 trunks
to deliver traffic rather than pay per-minute transport charges, a determination based on the amount of
traffic going to a particular end office. We believe this accountability and additional information will
deter concerns regarding traffic dumping.1335
1330 See, e.g., Ref. 2009-70-MR-EC-Future of Interconnection Charging Methods at 74, Nov. 23, 2010,
http://ec.europa.eu/information_society/policy/ecomm/doc/library/ext_studies/2009_70_mr_final_study_report_F_1
01123.pdf (“In the future, the voice total costs will be much smaller in an ‘NGN only’ network than in a ‘PSTN
only’ legacy network. The share of the voice total costs in the total costs of the network will be small in an NGN
network.”); see also Letter from Donna N. Lampert, Counsel for Google, to Marlene H. Dortch, Secretary, FCC, CC
Docket Nos. 01-92, 96-45; WC Docket Nos. 10-90, 05-337; GN Docket No. 09-51, Attach. at 2-7 (filed June 16,
2011) (Google June 16, 2011 Ex Parte Letter) (arguing that “standalone voice will represent a vanishingly small
segment of overall network traffic” and illustrating “the changing nature of the relationship between traditional
voice traffic and modern IP-based communications”). “The move to bill-and-keep would rid the intercarrier
compensation system of the inefficiencies and arbitrage opportunities that have plagued it and speed the transition to
more efficient feature-rich IP networks. . . .” T-Mobile Oct. 20, 2011 Ex Parte Letter at 1.
1331 See, e.g., 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6610-14, paras. 253-61; 6808-12, paras. 248-56.
1332 We note that the statutory text of section 252(d)(2) provides that the methodology for reciprocal compensation
should allow for the recovery of the “additional costs” of a call which equals incremental cost, not the average or
total cost of transporting or terminating a call. See 47 U.S.C. § 252(d)(2)(A)(ii) (noting that costs should be
approximate “the additional costs of terminating such calls”).
1333 We acknowledge that it is also possible that in some instances, the efficient termination rates of preceding
models would not allow overall cost recovery. In that case, while the efficient cost-covering termination rate could
lie above incremental cost, we also conclude that it is more efficient to ensure cost recovery via direct subsidies,
such as the CAF, than by distorting usage prices.
1334 See, e.g., Verizon USF/ICC Transformation NPRM Comments at 13-16.
1335 We would expect that these handoffs would recognize the same engineering principles that govern current
network configurations. To the extent that one party to the interconnection agreement desired to deviate from those
(continued…)
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755.Bill-and-Keep Is Appropriate Even If Traffic Is Imbalanced. The Commission initially
permitted states to impose bill-and-keep arrangements on providers, but did so with the caveat that traffic
should be roughly in balance.1336 At the time, the Commission reasoned that carriers incur costs for
terminating traffic, and bill-and-keep may not enable the recovery of such costs from other carriers.1337
The Commission also expressed concern that, in a reciprocal compensation arrangement, bill-and-keep
may “distort carriers’ incentives, encouraging them to overuse competing carriers’ termination facilities
by seeking customers that primarily originate traffic.”1338
756.
In light of technological advancements and our rejection of the calling party network
pays model in favor of a model that better tracks cost causation principles, we revisit the Commission’s
prior concerns and conclusions supporting the “balanced traffic limitation.”1339 First, we reject claims
that, as a policy matter, bill-and-keep is only appropriate in the case of roughly balanced traffic.1340
Concerns about the balance of traffic exchanged reflect the view that the calling party’s network should
bear all the costs of a call. Given the understanding that both the calling and called party benefit from a
call, the “direction” of the traffic—i.e., which network is originating or terminating the call—is no longer
as relevant.1341 Under bill-and-keep, “success in the marketplace will reflect a carrier’s ability to serve
customers efficiently, rather than its ability to extract payments from other carriers.”1342 Additionally,
bill-and-keep is most consistent with the models used for wireless and IP networks, models that have
flourished and promoted innovation and investment without any symmetry or balanced traffic
requirement.1343
757.
Second, as already explained, we reject the assertion that bill-and-keep does not enable
cost recovery. Although a bill-and-keep approach will not provide for the recovery of certain costs via
(Continued from previous page)
standards, the interconnection agreement could establish the amount, if any, the deviating entity should compensate
the other carrier. We seek comment on these and other possible issues related to traffic dumping in the attached
FNPRM. See supra Section XVII.N.
1336 47 C.F.R. § 51.713(b) (“A state commission may impose bill-and-keep arrangements if the state commission
determines that the amount of telecommunications traffic from one network to the other is roughly balanced with the
amount of telecommunications traffic flowing in the opposite direction, and is expected to remain so, and no
showing has been made pursuant to § 51.711(b) [permitting asymmetrical rates based on a cost study]”).
1337 Local Competition First Report and Order, 11 FCC Rcd at 16055, para. 1112.
1338 Id; but see ISP Remand Order, 16 FCC Rcd at 9183-85, paras. 71-74.
1339 As such, we revise the relevant rules as described in Appendix A below.
1340 See COMPTEL USF/ICC Transformation NPRM Comments at 33-34; Cincinnati Bell USF/ICC Transformation
NPRM Reply at 11-12; Cbeyond et al. USF/ICC Transformation NPRM Comments at 14-15; EarthLink USF/ICC
Transformation NPRM Reply at 9; PAETEC et al. USF/ICC Transformation NPRM Reply at 17; Letter from Jeffrey
S. Lanning, Ass’t Vice President – Federal Regulatory Affairs, CenturyLink, to Marlene H. Dortch, Secretary, FCC,
WC Docket Nos. 10-90, 07-135, 06-122, 05-337, 04-36, 03-109, CC Docket Nos. 01-92, 99-200, 99-68, 96-98, 96-
45, GN Docket No. 09-45 at 3 (filed Oct. 21, 2011) (CenturyLink Oct. 21, 2011 Ex Parte Letter). We also discuss
below certain arguments that, in the context of reciprocal compensation under the section 251 and 252 framework,
bill-and-keep only may be lawfully imposed in the context of roughly balanced traffic. See infra XII.A.2.
1341 See supra paras. 744-747.
1342 Intercarrier Compensation FNPRM, 20 FCC Rcd at 4787, App. C.
1343 For instance, commenters suggest that “eventually most traffic will flow over VoIP” and “the only barriers to
such migration are the antiquated ICC regimes.” MetroPCS August 3 PN Comments at 8.
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intercarrier compensation, it will still allow for cost recovery via end-user compensation and, wherenecessary, explicit universal service support.1344 We find that although the statute provides that each
carrier will have the opportunity to recover its costs, it does not entitle each carrier to recover those costs
from another carrier, so long as it can recover those costs from its own end users and explicit universal
service support where necessary.
758.
As a result, we depart from the Commission’s earlier articulated concern that bill-and-
keep distorts carriers incentives. To the contrary, we conclude, based on policy and economic theory, that
bill-and-keep best addresses the significant arbitrage incentives inherent in today’s system.1345
759.
These conclusions are consistent with the Commission’s more recent consideration of
bill-and-keep arrangements in the context of ISP-bound traffic. Specifically, in the ISP Remand Order,
the Commission stated that its initial “concerns about economic inefficiencies associated with bill and
keep missed the mark” because they incorrectly assumed that the “calling party was the sole cost causer
of the call.”1346 The Commission tentatively concluded that bill-and-keep would provide a viable solution
to the market distortions caused by ISP-bound traffic.1347 Indeed, the Commission’s experience with ISP-
bound traffic suggests that a bill-and-keep approach may be most efficient where the traffic is not
balanced because the obligation to pay reciprocal compensation in such situations may give rise to
uneconomic incentives.1348 We therefore conclude it is appropriate to repeal section 51.713 of our
rules.1349
2.
Legal Authority
760.Our statutory authority to implement bill-and-keep as the default framework for the
exchange of traffic with LECs flows directly from sections 251(b)(5) and 201(b) of the Act.1350 Section
251(b)(5) states that LECs have a “duty to establish reciprocal compensation arrangements for the
transport and termination of telecommunications.”1351 Section 201(b) grants the Commission authority to
“prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions
of this Act.”1352 In AT&T Corp. v. Iowa Utilities Board, the Supreme Court held that “the grant in
§ 201(b) means what it says: The FCC has rulemaking authority to carry out the ‘provisions of this Act,’
1344 See infra Section XIII.
1345 We find that the adoption of a bill-and-keep methodology will help address long-term arbitrage problems while
access stimulation and phantom traffic rules adopted today will address arbitrage in the near term. See supra
Section XI.
1346 See Intercarrier Compensation for ISP-Bound Traffic, CC Docket Nos. 96-98, 99-68, Order on Remand and
Report and Order, 16 FCC Rcd 9151 at 9183-83, paras. 71-74 (2001) (ISP Remand Order), remanded but not
vacated by WorldCom, Inc. v. FCC, 288 F.3d 429 (D.C. Cir. 2002).
1347 See id. at 9155, para. 6.
1348 As discussed above, bill-and-keep avoids the incentives for arbitrage that can arise from excessive intercarrier
compensation rates without imposing the regulatory costs of other regimes. See supra paras. 752-754.
1349 See 47 C.F.R. § 51.713. See supra Appendix A.
1350 We have additional statutory authority under section 332 to regulate interconnection arrangements involving
CMRS providers. See infra paras. 834-836.
1351 47 U.S.C. § 251(b)(5).
1352 47 U.S.C. § 201(b).
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which include §§ 251 and 252.”1353 As discussed below, we may exercise this rulemaking authority todefine the types of traffic that will be subject to section 251(b)(5)’s reciprocal compensation framework
and to adopt a default compensation mechanism that will apply to such traffic in the absence of an
agreement between the carriers involved.
761.
The Scope of Section 251(b)(5). Section 251(b)(5) imposes on all LECs the “duty to
establish reciprocal compensation arrangements for the transport and termination of telecommunications.”
The Commission initially interpreted this provision to “apply only to traffic that originates and terminates
within a local area.”1354 In the 2001 ISP Remand Order, however, the Commission noted that its initial
reading is inconsistent with the statutory terms.1355 The Commission explained that section 251(b)(5)
does not use the term “local,”1356 but instead speaks more broadly of the transport and termination of
“telecommunications.”1357 As defined in the Act, the term “telecommunications” means the
“transmission, between or among points specified by the user, of information of the user’s choosing,
without change in the form or content of the information as sent and received”1358 and thus encompasses
communications traffic of any geographic scope (e.g., “local,” “intrastate,” or “interstate”) or regulatory
classification (e.g., “telephone exchange service,”1359 “telephone toll service,”1360 or “exchange
access”1361). The Commission reiterated this interpretation of section 251(b)(5) in its 2008 Order and
ICC/USF FNPRM,1362 and we proposed in the ICC/USF Transformation NPRM to make clear that section
251(b)(5) applies to “all telecommunications, including access traffic.”1363
762.
After reviewing the record, we adopt our proposal and conclude that section 251(b)(5)
applies to traffic that traditionally has been classified as access traffic. Nothing in the record seriously
calls into question our conclusion that access traffic is one form of “telecommunications.” By the express
terms of section 251(b)(5), therefore, when a LEC is a party to the transport and termination of access
traffic, the exchange of traffic is subject to regulation under the reciprocal compensation framework.
763.
We recognize that the Commission has not previously regulated access traffic under
section 251(b)(5). The reason, as the Commission has previously explained,1364 is section 251(g).1365
1353 AT&T v. Iowa Utils. Bd., 525 U.S. 366, 378 (1999).
1354 Local Competition First Report and Order, 11 FCC Rcd at 16013 para. 1034.
1355 See generally ISP Remand Order, 16 FCC Rcd 9151 (2001).
1356 ISP Remand Order, 16 FCC Rcd at 9166-67 para. 34.
1357 ISP Remand Order, 16 FCC Rcd at 9165-66 para. 31-32.
1358 47 U.S.C. § 153(43).
1359 See id. at § 153(47).
1360 See id. at § 153(48).
1361 See id. at § 153(16).
1362 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6479, paras. 7-8.
1363 USF/ICC Transformation NPRM, 26 FCC Rcd at 4712-13, para. 514.
1364 ISP Remand Order, 16 FCC Rcd at 9165-66 para. 31; 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6483,
para. 16.
1365 47 U.S.C. § 251(g).
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Section 251(g) is a “transitional device”1366 that requires LECs to continue “provid[ing] exchange access,information access, and exchange services for such access to interexchange carriers and information
service providers in accordance with the same equal access and nondiscriminatory interconnection
restrictions and obligations (including receipt of compensation)” previously in effect “until such
restrictions and obligations are explicitly superseded by regulations prescribed by the Commission.”1367
Section 251(g) thus preserved the pre-1996 Act regulatory regime that applies to access traffic, including
rules governing “receipt of compensation,” and thereby precluded the application of section 251(b)(5) to
such traffic “unless and until the Commission by regulation should determine otherwise.”1368
764.
In this Order, we explicitly supersede the traditional access charge regime and, subject to
the transition mechanism we outline below, regulate terminating access traffic in accordance with the
section 251(b)(5) framework. Consistent with our approach to comprehensive reform generally and the
desire for a more unified approach, we find it appropriate to bring all traffic within the section 251(b)(5)
regime at this time, and commenters generally agree.1369 Doing so is key to advancing our goals of
encouraging migration to modern, all IP networks; eliminating arbitrage and competitive distortions; and
eliminating the thicket of disparate intercarrier compensation rates and payments that are ultimately borne
by consumers. Even though the transition process detailed below is limited to terminating switched
access traffic and certain transport traffic, we make clear that the legal authority to adopt the bill-and-keep
methodology described herein applies to all intercarrier compensation traffic. As noted below, we seek
comment on the transition and recovery for originating access and transport in the accompanying
FNPRM.
765.
We reject arguments that section 251(b)(5) does not apply to intrastate access traffic.
Like other forms of carrier traffic, intrastate access traffic falls within the scope of the broad term
“telecommunications” used in section 251(b)(5). “Had Congress intended to exclude certain types of
telecommunications traffic,” such as “local” or “intrastate” traffic, “from the reciprocal compensation
framework, it could have easily done so by using more restrictive terms to define the traffic subject to
section 251(b)(5).”1370 Nor do we believe that section 2(b) of the Act, which generally preserves state
authority over intrastate communications, bears on our interpretation of section 251(b)(5).1371 As the
Supreme Court noted, “[s]uch an interpretation [of section 2(b)] would utterly nullify the 1996
amendments, which clearly ‘apply’ to intrastate services, and clearly confer ‘Commission jurisdiction’
1366 WorldCom v. FCC, 288 F.3d 429, 430 (D.C. Cir. 2002), cert. denied, 538 U.S. 1012 (2003); see also
Competitive Tel. Ass’n v. FCC, 309 F.3d 8, 15 (D.C. Cir. 2002).
1367 47 U.S.C. § 251(g).
1368 ISP Remand Order, 16 FCC Rcd at 9169, para. 39.
1369 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4711, para. 512. See generally id. at 4710-15, paras. 509-
22 (seeking comment on the Commission’s legal authority to accomplish comprehensive intercarrier compensation
reform). See AT&T USF/ICC Transformation NPRM Comments at 38-43; CBeyond et al. USF/ICC
Transformation NPRM Comments at 7-11; Comcast USF/ICC Transformation NPRM Comments at 6-8; MetroPCS
USF/ICC Transformation NPRM Comments at 9-12; Time Warner Cable USF/ICC Transformation NPRM
Comments at 3-5; but see NARUC USF/ICC Transformation NPRM Comments at 10-12.
1370 USF/ICC Transformation NPRM, 26 FCC Rcd at 4712, para. 513; see NARUC USF/ICC Transformation
NPRM Comments at 10.
1371 See Massachusetts DTC USF/ICC Transformation NPRM Comments at 20; New York Commission USF/ICC
Transformation NPRM Comments at 12; State Members USF/ICC Transformation NPRM Comments at 143;
NASUCA August 3 PN Comments at 30.
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over some matters.”1372 Indeed, if section 2(b) limited the scope of section 251(b)(5), we could not applythe reciprocal compensation framework even to local traffic between a CLEC and an ILEC—the type of
traffic that has been subject to our reciprocal compensation rules since the Commission implemented the
1996 Act. We see no reason to adopt such an absurd reading of the statute.
766.
We also reject arguments that sections 251(g) and 251(d)(3) somehow limit the scope of
the “telecommunications” covered by section 251(b)(5).1373 Whatever protections these provisions
provide to state access regulations, it is clear that those protections are not absolute. As noted above,
section 251(g) preserves access charge rules only during a transitional period, which ends when we adopt
superseding regulations. Accordingly, to the extent section 251(g) has preserved state intrastate access
rules against the operation of section 251(b)(5) until now, this rulemaking Order supersedes that
provision.1374
767.
Section 251(d)(3) states that “[i]n prescribing and enforcing regulations to implement the
requirements of this section, the Commission shall not preclude the enforcement of any regulation, order,
or policy of a State commission that— (A) establishes access and interconnection obligations of local
exchange carriers; (B) is consistent with the requirements of this section; and (C) does not substantially
prevent implementation of the requirements of this section and the purposes of this part.”1375 As the
Commission has previously observed, “section 251(d)(3) of the Act independently establishes a standard
1372 AT&T v. Iowa Utils. Bd., 525 U.S. at 380.
1373 See Massachusetts DTC USF/ICC Transformation NPRM Comments at 20-21; NARUC USF/ICC
Transformation NPRM Comments at 12; State Members USF/ICC Transformation NPRM Comments at 143-144;
see also Ohio Commission USF/ICC Transformation NPRM Comments at 58.
1374 Commenters have different views on whether section 251(g) preserves the intrastate as well as interstate access
regime. Compare Massachusetts DTC USF/ICC Transformation NPRM Comments at 20-21; Arizona Commission
USF/ICC Transformation NPRM Reply at 4-5 with Nebraska Rural Companies August 3 PN Comments at 19. If
section 251(g) does not apply to state access regulations, it is unclear what other provision of the Act would prevent
section 251(b)(5) from directly applying to intrastate access traffic, given that section 251(d)(3) does not speak to
the preemptive effect of the statute. As we noted in the Local Competition First Report and Order, “although
section 251(g) does not directly refer to intrastate access charge mechanisms, it would be incongruous to conclude
that Congress was concerned about the effects of the potential disruption to the interstate access charge system, but
had no such concerns about the effects on analogous intrastate mechanisms.” Local Competition First Report and
Order, 11 FCC Rcd at 15869, para. 732. See also, e.g., Competitive Telecomms. Ass’n v. FCC, 117 F.3d 1068, 1072
(8th Cir. 1997) (Competitive Telecomms. Ass’n) (finding it “clear from the Act that Congress did not intend all
access charges to move to cost-based pricing, at least not immediately. The Act plainly preserves certain rate
regimes already in place.”). Moreover, as we explained in the USF/ICC Transformation NPRM, “[t]he court order
accompanying the AT&T consent decree made clear that the decree required access charges to be used in both the
interstate and intrastate jurisdictions: ‘Under the proposed decree, state regulators will set access charges for
intrastate interexchange service and the FCC will set access charges for interstate interexchange service.’ AT&T,
552 F. Supp. at 169 n.161. Because both the interstate and intrastate access charge systems were created by the
same consent decree, it is reasonable to conclude that both systems were preserved by section 251(g).” USF/ICC
Transformation NPRM, 26 FCC Rcd at 4712 n.750. We need not resolve this issue, however, because all traffic
terminated on a LEC will, going forward, be governed by section 251(b)(5) regardless of whether section 251(g)
previously covered the state intrastate access regime.
1375 47 U.S.C. § 251(d)(3). We note that section 261(c) likewise preserves state authority to “impos[e] requirements
on a telecommunications carrier for intrastate services that are necessary to further competition in the provision of
telephone exchange service or exchange access, as long as the State’s requirements are not inconsistent with this
part or the Commission’s regulations to implement this part.” 47 U.S.C. § 261(c) (emphasis added).
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very similar to the judicial conflict preemption doctrine,”1376 and “[i]ts protections do not apply when thestate regulation is inconsistent with the requirements of section 251, or when the state regulation
substantially prevents implementation of the requirements of section 251 or the purposes of sections 251
through 261 of the Act.”1377 Moreover, “in order to be consistent with the requirements of section 251
and not ‘substantially prevent’ implementation of section 251 or Part II of Title II, state requirements
must be consistent with the FCC’s implementing regulations.”1378 In other words, section 251(d)(3)
instructs the Commission not to preempt state regulations that are consistent with and promote federal
rules and policies, but it does not protect state regulations that frustrate the Act’s policies or our
implementation of the statute’s requirements.1379 As discussed in this Order, we are bringing all
telecommunications traffic terminated on LECs, including intrastate switched access traffic, into the
section 251(b)(5) framework to fulfill the objectives of section 251(b)(5) and other provisions of the
Act.1380 Consequently, we find that, to the extent section 251(d)(3) applies in this context, it does not
prevent us from adopting rules to implement the provisions of section 251(b)(5) and applying those rules
to traffic traditionally classified as intrastate access.1381
768.
Finally, we reject the view of some commenters that the pricing standard set forth in
1376 BellSouth Telecommunications, Inc. Request for Declaratory Ruling that State Commissions May Not Regulate
Broadband Internet Access Services by Requiring BellSouth to Provide Wholesale or Retail Broadband Services to
Competitive LEC UNE Voice Customers, WC Docket No. 03-251, Memorandum Opinion and Order and Notice of
Inquiry, 20 FCC Rcd 6830 at 6839, para. 19 (2005) (footnote references omitted).
1377 Id. at 6842, para. 23 (emphasis in original).
1378 Local Competition First Report and Order, 11 FCC Rcd at 15550, para. 103.
1379 In light of our interpretation of section 251(d)(3), we need not resolve whether “[t]he word ‘access’ in section
251(d)(3) . . . refers not to access charge obligations, but to unbundled network element requirements.” See ABC
Plan Proponents August 3 PN Reply at 22-23.
1380 See supra Section XII.A.
1381 We also disagree with commenters’ claims that the timing requirements of section 251(d)(1) mean that, if the
Commission had authority to supersede existing intrastate access regulations, such authority expired “fifteen years
ago.” See State Members USF/ICC Transformation NPRM Comments at 144. Section 251(d)(1) provides that
“[w]ithin 6 months after [February 8, 1996,] the Commission shall complete all actions necessary to establish
regulations to implement the requirements of this section.” 47 U.S.C. § 251(d)(1). However, the actions that were
“necessary” to implement section 251 at the time of the 1996 Act do not constitute the entire universe of regulations
that may be necessary or appropriate to implement those provisions in the future. Thus, although the Commission
adopted initial regulations implementing section 251(b)(5) in the Local Competition First Report and Order, it has
modified them since. See, e.g., ISP Remand Order, 16 FCC Rcd 9151 (2001). Our interpretation also is reinforced
by the historical relationship between access charges as implicit subsidy mechanisms and the goal of universal
service. Although Congress provided a six month deadline for the initial implementation of section 251, it did not
provide a similar deadline for implementing the universal service requirements of section 254. As the Eighth Circuit
recognized, if access charges moved immediately to the section 251(b)(5) framework, it potentially could threaten
universal service given the lack of a six month deadline for the establishment of explicit universal service support
mechanisms. See Competitive Telecomms. Ass’n, 117 F.3d at 1073-76. We note that the Commission did, in fact,
assert authority to address intrastate access charges in the Local Competition First Report and Order, 11 FCC Rcd at
15869, paras. 732-33, although that action was reversed by this same Competitive Telecomms. Ass’n decision. See
Competitive Telecomms. Ass’n, 117 F.3d at 1075 n.5. That decision preceded the Supreme Court’s holding that the
Commission has rulemaking authority under section 201(b) to implement the requirements of section 251 of the Act.
See Iowa Utils. Bd. v. FCC, 525 U.S. 366, 377-86 (1999).
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section 252(d)(2)(A) limits the scope of section 251(b)(5).1382 As the Commission explained in the 2008Order and ICC/USF FNPRM, section 252(d)(2)(A)(i) “deals with the mechanics of who owes what to
whom, it does not define the scope of traffic to which section 251(b)(5) applies.”1383 The Commission
noted that construing “the pricing standards in section 252(d)(2) to limit the otherwise broad scope of
section 251(b)(5)”1384 would nonsensically suggest that “Congress intended the tail to wag the dog.”1385
We reaffirm that conclusion here.
769.
Authority To Adopt Bill-and-Keep as a Default Compensation Standard. We conclude
that we have the statutory authority to establish bill-and-keep as the default compensation arrangement for
all traffic subject to section 251(b)(5). That includes traffic that, prior to this Order, was subject to the
interstate and intrastate access regimes, as well as traffic exchanged between two LECs or a LEC and a
CMRS carrier.
770.
Section 201(b) states that “[t]he Commission may prescribe such rules and regulations as
may be necessary in the public interest to carry out the provisions of this Act.”1386 As the Supreme Court
held in Iowa Utilities Board, section 201(b) of the Act “means what it says: The FCC has rulemaking
authority to carry out the ‘provisions of this Act,’ which include §§ 251 and 252.”1387 Moreover, section
251(i) of the Act states that “[n]othing in this section [section 251] shall be construed to limit or otherwise
affect the Commission’s authority under section 201.”1388 Section 251(i) “fortifies [our] position” that we
have authority to regulate the default compensation arrangement applicable to traffic subject to section
251(b)(5).1389
771.
We conclude that we have statutory authority to establish bill-and-keep as a default
compensation mechanism with respect to interstate traffic subject to section 251(b)(5).1390 Section 201
has long conferred authority on the Commission to regulate interstate communications to ensure that
“charges, practices, classifications, and regulations” are “just and reasonable” and not unreasonably
discriminatory.1391 Indeed, the D.C. Circuit recently upheld the Commission’s authority under section
1382 See NARUC USF/ICC Transformation NPRM Comments at 10-11; New York Commission USF/ICC
Transformation NPRM Comments at 10-11.
1383 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6481, para. 12.
1384 Id. at 6480, para. 11.
1385 Id.
1386 47 U.S.C. § 201(b).
1387 AT&T v. Iowa Utilities Bd., 525 U.S. at 378.
1388 47 U.S.C. § 251(i).
1389 Core Commc’ns. Inc. v. FCC, 592 F.3d 139, 143 (D.C. Cir. 2010) (Core).
1390 Some commenters argue that the Commission may prescribe a rate for interstate services only if it undertakes
the rate prescription process set forth in Section 205 of the Act. See 47 U.S.C. § 205. See EarthLink August 3 PN
Comments at 28 (citing AT&T Co. v. FCC, 487 F.2d 865 (2d Cir. 1973) (AT&T)); see also Core USF/ICC
Transformation NPRM Comments at 8-9; SureWest USF/ICC Transformation NPRM Comments at 14-22. We
disagree. In AT&T, the Second Circuit held that the Commission may not require a carrier to seek permission to file
a tariff effecting a rate increase, but instead must process such a tariff in accordance with the procedures set forth in
sections 203 to 205 of the Act. Nothing in that decision calls into question our authority to adopt rules to define
what constitutes a just and reasonable rate for purposes of section 201. See, e.g., Cable & Wireless, PLC v. FCC,
166 F.3d 1224 (D.C. Cir. 1999).
1391 47 U.S.C. § 201; see also, e.g., NARUC v. FCC, 746 F.2d 1492, 1498 (D.C. Cir. 1984).
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201 to establish interim rates for ISP-bound traffic, which the Commission had found to also be subject tosection 251(b)(5).1392
772.
In any event, we conclude that we have authority, independent of our traditional interstate
rate-setting authority in section 201, to establish bill-and-keep as the default compensation arrangement
for all traffic subject to section 251(b)(5), including intrastate traffic. Although section 2(b) has
traditionally preserved the states’ authority to regulate intrastate communications, after the 1996 Act
section 2(b) has “less practical effect” because “Congress, by extending the Communications Act into
local competition, has removed a significant area from the States’ exclusive control.”1393 Thus, “[w]ith
regard to the matters addressed by the 1996 Act,” Congress “unquestionably” “has taken the regulation of
local telecommunications competition away from the States,”1394 and, as the Supreme Court has held, “the
administration of the new federal regime is to be guided by federal-agency regulations.”1395 Our
rulemaking authority in section 201(b) “explicitly gives the FCC jurisdiction to make rules governing
matters to which the 1996 Act applies”1396 and thereby authorizes our adoption of rules to implement
section 251(b)(5)’s directive that LECs have a “duty to establish reciprocal compensation arrangements
for the transport and termination of telecommunications.”1397
773.
We reject the argument of some commenters that sections 252(c) and 252(d)(2) limit our
authority to adopt bill-and-keep.1398 Section 252(c) provides that states conducting arbitration
proceedings under section 252 shall “establish any rates for interconnection, services, or network
elements according to” section 252(d).1399 Section 252(d)(2), in turn, states in relevant part that “[f]or the
purposes of compliance by an incumbent local exchange carrier with section 251(b)(5), a State
commission shall not consider the terms and conditions for reciprocal compensation to be just and
reasonable” unless they: (i) “provide for the mutual and reciprocal recovery by each carrier of costs
associated with the transport and termination on each carrier’s network facilities of calls that originate on
the network facilities of the other carrier;” and (ii) determine such costs through a “reasonable
approximation of the additional costs of terminating such calls.”1400 Section 252(d)(2) also states that the
pricing standard it sets forth “shall not be construed . . . to preclude arrangements . . . that waive mutual
1392 See Core, 592 F.3d 139; see also 2008 Order and USF/ICC FNPRM, 24 FCC Rcd at 6481, paras. 11-12 (finding
that the “Commission has authority under section 201(b) to adopt rules to fill [] gap[s]” in section 252). In the 2008
Order and ICC/USF FNPRM the Commission observed that sections 201 and 251(i), when read together, “preserve
the Commission’s authority to address new issues that fall within its section 201 authority over interstate traffic,
including compensation for the exchange of ISP-bound traffic.” 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at
6484-85, para. 21
1393 AT&T v. Iowa Utilities Board, 525 U.S. at 381-82 n.8.
1394 Id. at 378-79 n.6.
1395 Id. (emphasis in original).
1396 Id. at 380.
1397 47 U.S.C. § 251(b)(5).
1398 See COMPTEL USF/ICC Transformation NPRM Comments at 33-34; NASUCA USF/ICC Transformation
NPRM Comments at 94, 103-05; Rural Associations USF/ICC Transformation NPRM Comments at 22, 26; Pac-
West USF/ICC Transformation NPRM Comments at 11; CenturyLink Oct. 21, 2011 Ex Parte Letter at 2.
1399 47 U.S.C. § 252(c)(2).
1400 47 U.S.C. § 252(d)(2)(A) (emphasis added).
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recovery (such as bill-and-keep arrangements).”1401 Although the Supreme Court made clear that theCommission may, through rulemaking, establish a “pricing methodology” under section 252(d) for states
to apply in arbitration proceedings,1402 the Eighth Circuit has held that “[s]etting specific [reciprocal
compensation] prices goes beyond the FCC’s authority to design a pricing methodology and intrudes on
the states’ right to set the actual rates pursuant to § 252(c)(2).”1403 Commenters who cite section 252(d)
as a limitation on the Commission’s authority to adopt bill-and-keep argue that bill-and-keep intrudes on
states’ rate-setting authority by effectively setting a compensation rate of zero.1404
774.
We disagree for two reasons. First, the pricing standard in section 252(d) simply does
not apply to most of the traffic that is the focus of this Order – traffic exchanged between LECs and IXCs.
Section 252(d) applies only to traffic exchanged with an ILEC, so CLEC-IXC traffic is categorically
beyond its scope. Even with respect to traffic exchanged with an ILEC, section 252(d) applies only to
arrangements between carriers where the traffic “originate[s] on the network facilities of the other
carrier,” i.e., the carrier sending the traffic for transport and termination. IXCs, however, typically do not
originate (or terminate) calls on their own network facilities but instead transmit calls that originate and
terminate on distant LECs. Accordingly, to the extent our bill-and-keep rules apply to LEC-IXC traffic,
the rules do not implicate any question of the states’ authority under section 252(c) or (d) or the Eighth
Circuit’s interpretation of those provisions.1405
775.
Second, and in any event, bill-and-keep is consistent with section 252(d)’s pricing
standard. Section 252(d)(2)(B) makes clear that “arrangements that waive mutual recovery (such as bill-
and-keep arrangements)” are consistent with section 252(d)’s pricing standard.1406 As explained in the
Local Competition First Report and Order, this provision precludes any argument that “the Commission
and states do not have the authority to mandate bill-and-keep arrangements” or that bill-and-keep is
permissible only if it is voluntarily agreed to by the carriers involved.1407 Bill-and-keep also ensures
“recovery of each carrier of costs” associated with transport and termination.1408 The Act does not specify
from whom each carrier may (or must) recover those costs and, under the approach we adopt today, each
carrier will “recover” its costs from its own end users or from explicit support mechanisms such as the
1401 47 U.S.C. § 252(d)(2)(B).
1402 AT&T v. Iowa Utilities Board, 525 U.S. at 384.
1403 Iowa Utilities Board v. FCC, 219 F.3d 744, 757 (8th Cir. 2000).
1404 See NASUCA USF/ICC Transformation NPRM Reply at 120-23.
1405 Opponents of bill-and-keep argue that the language in the bill-and-keep “savings clause” in section
252(d)(2)(B)(i) implies the requirement that traffic be roughly in balance for a bill-and-keep arrangement to be
appropriate. See XO USF/ICC Transformation NPRM Comments at 24; EarthLink USF/ICC Transformation
NPRM Reply at 9. We disagree. Although our rules currently require a rough balance of traffic flows before a state
may impose bill-and-keep in an arbitration proceeding, 47 C.F.R. § 51.713, as explained below, we reject that
restriction as a matter of policy. See supra paras. 755-759. For present purposes, it is sufficient to note that nothing
in section 252(d)(2) requires that traffic be balanced before bill-and-keep may be imposed on carriers.
1406 47 U.S.C. § 252(d)(2)(B)(i).
1407 Local Competition First Report and Order, 11 FCC Rcd at 16054, para. 1111 (explaining that section 252(d)(2)
“would be superfluous if bill-and-keep arrangements were limited to negotiated agreements, because none of the
standards in section 252(d) apply to voluntarily-negotiated agreements.”); see also 47 U.S.C. § 252(a)(1).
1408 Although bill-and-keep by definition “waive[s] mutual recovery” (47 U.S.C. § 252(d)(2)(B)(i)) in that carriers
do not pay each other for transporting and terminating calls, a bill-and-keep framework provides for “reciprocal”
recovery because each carrier exchanging traffic is entitled to recover their costs through the same mechanism, i.e.,
through the rates they charge their own customers.
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federal universal service fund.1409 Thus, bill-and-keep will not limit the amount of a carrier’s costrecovery, but instead will alter the source of the cost recovery – network costs would be recovered from
carriers’ customers supplemented as necessary by explicit universal service support, rather than from
other carriers.1410
776.
Finally, even assuming section 252(d) applies, our adoption of bill-and-keep as a default
compensation mechanism would not intrude on the states’ role to set rates as interpreted by the Eighth
Circuit. To the extent the traffic at issue is intrastate in nature and subject to section 252(d)’s pricing
standard, states retain the authority to regulate the rates that the carriers will charge their end users to
recover the costs of transport and termination to ensure that such rates are “just and reasonable.”1411
Moreover, states will retain important responsibilities in the implementation of a bill-and-keep
framework. An inherent part of any rate setting process is not only the establishment of the rate level and
rate structure, but the definition of the service or functionality to which the rate will apply.1412 Under a
bill-and-keep framework, the determination of points on a network at which a carrier must deliver
terminating traffic to avail itself of bill-and-keep (sometimes known as the “edge”) serves this function,
and will be addressed by states through the arbitration process where parties cannot agree on a negotiated
outcome.1413 Depending upon how the “edge” is defined in particular circumstances, in conjunction with
how the carriers physically interconnect their networks, payments still could change hands as reciprocal
compensation even under a bill-and-keep regime where, for instance, an IXC pays a terminating LEC to
transport traffic from the IXC to the edge of the LEC’s network.1414 Consistent with their existing role
1409 The economic premise of a bill-and-keep regime differs from the calling party network pays (CPNP) philosophy
of cost causation. Under CPNP thinking the party that initiated the call is receiving the most benefit from that call.
Under the bill-and-keep methodology the economic premise is that both the calling and the called party benefit from
the ability to exchange traffic, i.e., being interconnected. This is consistent with policy justifications for bill-and-
keep described in the Intercarrier Compensation NPRM in which the Commission said “there may be no reason why
both LECs should not recover the costs of providing these benefits directly from their end users. Bill-and-keep
provides a mechanism whereby end users pay for the benefit of making and receiving calls.” Intercarrier
Compensation NPRM, 16 FCC Rcd at 9625, para. 37 (emphasis in original).
1410 “Carriers would need to turn to their own customers (supplemented, in appropriate cases, by explicit universal
service support) to recoup their network costs, rather than to other carriers and, ultimately, those carriers’
customers.” AT&T USF/ICC Transformation NPRM Reply at 23.
1411 47 U.S.C. § 252(d)(2)(A).
1412 See, e.g., Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87–313, Report and Order
and Second Further Notice of Proposed Rulemaking, 4 FCC Rcd 2873, 3051-56, paras. 359-68 (1989) (discussing
the need for, and definition of, baskets and bands of services for purposes of price cap regulation of AT&T);
Amendment of Sections 64.702 of the Commission's Rules and Regulations (Third Computer Inquiry); and Policy
and Rules Concerning Rates for Competitive Common Carrier Services and Facilities Authorizations Thereof
Communications Protocols under Section 64.702 of the Commission's Rules and Regulations, CC Docket No. 85–
229, Report and Order, 104 FCC 2d 958, paras. 214-17, 220-22 (1986) (requiring the identification and tariffing of
certain Basic Service Elements underlying enhanced services). See also, e.g., 47 C.F.R. § 61.2(a) (“In order to
remove all doubt as to their proper application, all tariff publications must contain clear and explicit explanatory
statements regarding the rates and regulations.”); 47 C.F.R. § 61.54(j) (“The general rules (including definitions),
regulations, exceptions, and conditions which govern the tariff must be stated clearly and definitely.”).
1413 In the FNPRM we seek comment on relying on that approach to defining the “edge” for purposes of bill-and-
keep more generally, or whether additional Commission guidance or rules would be appropriate. See infra Section
XVII.N.
1414 This statement does not suggest any particular outcome with respect to the definition of the “edge,” which is an
issue we seek comment on below. See infra Section XVII.N.
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under sections 251 and 252, which we do not expand or contract, states will continue to have theresponsibility to address these issues in state arbitration proceedings, which we believe is sufficient to
satisfy any statutory role that the states have under section 252(d) to “determin[e] the concrete result in
particular circumstances” of the bill-and-keep framework we adopt today.1415
777.
Originating Access. Some parties contend that the Commission lacks authority over
originating access charges under section 251(b)(5) because that section refers only to transport and
termination.1416 Other commenters urge the Commission to act swiftly to eliminate originating access
charges.1417 Although we conclude that the originating access regime should be reformed, at this time we
establish a transition to bill-and-keep only with respect to terminating access charge rates. The concerns
we have with respect to network inefficiencies, arbitrage, and costly litigation are less pressing with
respect to originating access, primarily because many carriers now have wholesale partners or have
integrated local and long distance operations.
778.
As discussed above, section 251(g) provides for the continued enforcement of certain
pre-1996 Act obligations pertaining to “exchange access” until “such restrictions and obligations are
explicitly superseded by regulations prescribed by the Commission.”1418 Exchange access is defined to
mean “the offering of access to telephone exchange services or facilities for the purpose of the origination
or termination of telephone toll services.”1419 Thus, section 251(g) continues to preserve originating
access until the Commission adopts rules to transition away from that system. At this time, we adopt
transition rules only with respect to terminating access and seek comment in the FNPRM on the ultimate
transition away from such charges as part of the transition of all access charge rates to bill-and-keep.1420
In the meantime, we will cap interstate originating access rates at their current level, pending resolution of
the issues raised in our FNPRM.1421
779.
Section 332 and Wireless Traffic. With respect to wireless traffic exchanged with a LEC,
we have independent authority under section 332 of the Act to establish a default bill-and-keep
methodology that will apply in the absence of an interconnection agreement. Although we have not
previously exercised our authority under section 332 to reform intercarrier compensation charges paid by
or to wireless providers, we have clear authority to do so, and this authority extends to both interstate and
intrastate traffic.1422 The Eighth Circuit has construed the Act to authorize the Commission to set
reciprocal compensation rates for CMRS providers.1423 In reaching that decision, the court relied on:
1415 AT&T v. Iowa Utilities Board, 525 U.S. at 384.
1416 Compare CBeyond et al. USF/ICC Transformation NPRM Comments at 10-11 with Global Crossing USF/ICC
Transformation NPRM Comments at 12-13.
1417 See iBasis August 3 PN Comments at 1-2.
1418 47 U.S.C. § 251(g).
1419 47 U.S.C. § 153(16) (emphasis added).
1420 See supra Section XVII.M.
1421 See infra Section XII.C.
1422 We note that the Commission relied on its section 332 authority to adopt rules prohibiting LECs from imposing
compensation obligations on CMRS carriers for non-access traffic pursuant to tariff. See Developing a Unified
Intercarrier Compensation Regime; T-Mobile et al. Petition for Declaratory Ruling Regarding Incumbent LEC
Wireless Termination Tariffs, Declaratory Ruling and Report and Order, 20 FCC Rcd 4855, 4863-64, para. 14
(2005) (T-Mobile Order); see also infra Sections XII.C.5 and XV.
1423 Iowa Utils. Bd. v. FCC, 120 F.3d 753, 800 n.21 (8th Cir. 1997), vacated and remanded in part in other grounds
sub nom. AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999).
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(a) section 332(c)(1)(B), which obligates LECs to interconnect with wireless providers “pursuant to theprovisions of section 201;”1424 (b) section 2(b), which provides that the Act should not be construed to
apply or to give the Commission jurisdiction with respect to charges in connection with intrastate
communication service by radio “[e]xcept as provided in . . . section 332;”1425 and (c) the preemptive
language in section 332(c)(3)(A), which prohibits states from regulating the entry of or the rates charged
by CMRS providers.1426 The D.C. Circuit likewise recently acknowledged the Commission’s authority in
this regard, observing that the Commission historically had elected to leave intrastate access rates
imposed on CMRS providers to state regulation, and recognizing: “That the FCC can issue guidance does
not mean it must do so.”1427 Accordingly, we conclude that we have separate authority under sections 201
and 332(c) to establish rules governing the exchange of both intrastate and interstate traffic between LECs
and CMRS carriers.
780.
Section 254(k). We also reject the claims of some commenters that a bill-and-keep
approach would violate section 254(k) of the Act.1428 Section 254(k) of the Act states that a
telecommunications carrier “may not use services that are not competitive to subsidize services that are
subject to competition,” and that the Commission “shall establish any necessary cost allocation rules,
accounting safeguards, and guidelines to ensure that services included in universal service bear no more
than a reasonable share of the joint and common costs of facilities used to provide those services.”1429
Some parties express concern that, under a bill-and-keep regime, retail voice telephone services subject to
universal service support would bear more than “a reasonable share of the joint and common costs.”1430
781.
The United States Court of Appeals for the Eighth Circuit previously considered and
rejected similar arguments concerning the reallocation of loop costs between end users and IXCs.1431
Specifically, the court considered whether the recovery of joint and common costs must be borne
mutually by end-users and by IXCs, and whether a shift in cost recovery from IXCs to end-users violated
section 254(k) of the Act.1432 As to the first provision of section 254(k), the court found that “[s]ection
254(k) was not designed to regulate the apportionment of loop costs between end-users and IXCs because
this allocation does not involve improperly shifting costs from a competitive to a non-competitive
1424 47 U.S.C. § 332(c)(1)(B).
1425 Id. § 152(b).
1426 Id. § 332(c)(3)(A).
1427 MetroPCS California, LLC v. FCC, 644 F.3d 410, 414 (D.C. Cir. 2011) (MetroPCS California v. FCC)
(emphasis in original). See also id. (noting the Commission’s position in the North County v. MetroPCS decision
“that ‘[w]hether to depart so substantially from such long-standing and significant Commission precedent [and to
proceed to regulate intrastate rates on this basis] is a complex question better suited to a more general rulemaking
proceeding’”). We find this rulemaking proceeding the appropriate context to address this issue.
1428 See, e.g., Nebraska Rural Companies USF/ICC Transformation NPRM Comments at 31; State Members
USF/ICC Transformation NPRM Comments at 150; SureWest USF/ICC Transformation NPRM Reply at 8.
1429 47 U.S.C. § 254(k).
1430 For example, commenters contend that “long distance toll carriers and other service providers, along with their
end users, benefit from the utilization of expensive RLEC networks to originate, transport and terminate calls” and
that bill-and-keep “would prohibit a reasonable allocation of costs to these other carriers that reflects a rational
measure of their use of RLEC networks.” Rural Associations USF/ICC Transformation NPRM Comments at 23-24.
See also Nebraska Rural Companies USF/ICC Transformation NPRM Comments at 31.
1431 See Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523, 559 (8th Cir. 1998).
1432 See id.
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service,” even if “a LEC allocates all of its local loop costs to the end-user.”1433 Further, the courtdisagreed that an increase in the SLC price cap violates the second part of 254(k) by causing services
included in the definition of universal service to bear more than a reasonable share of the joint and
common costs of facilities used to provide those services. The court explained that the “SLC is a method
of recovering loop costs, not an allocation of costs between supported and unsupported services” 1434 in
violation of section 254(k). We concur with the Eighth Circuit’s analysis and conclude that it applies
equally in this context. A bill-and-keep framework resolves whether a carrier will recover its costs from
its end users or from other carriers; the underlying service whose costs are being recovered is the same,
however, so no costs are being improperly shifted between competitive and non-competitive services for
purposes of section 254(k).1435
3.
Other Proposals Considered
a.Low Uniform Per-Minute Rate
782.Several parties have suggested that the Commission adopt a low uniform per-minute
access charge rather than a bill-and-keep approach.1436 For example, some stakeholders propose an end
state of $0.0007 for terminating switched and certain terminating transport elements.1437 Although we
recognize that a low uniform rate would result in substantially reduced intercarrier compensation rates,
we find several difficulties with this approach.
1433 Id.
1434 Id.
1435 We find the bill-and-keep methodology consistent with section 254(k). As to the first provision of section
254(k), we find this approach more consistent with the statute than the previous regime. Access charges were
designed to include a subsidy of the local network. See, e.g., 2008 Order and USF/ICC FNPRM, 24 FCC Rcd at
6569-70, 6574-75, App. A at paras. 165-66, 173-75; USF/ICC Transformation NPRM, 26 FCC Rcd at 4706, 4722,
paras. 501, 540. Given the historical under-allocation of costs to non-regulated services that use the local network,
the use of access charges—which are not subject to competition—to subsidize the local network would, in effect,
subsidize such services, which can be subject to competition. See USF/ICC Transformation NPRM, 26 FCC Rcd at
4573, 4732, paras. 52, 569. See also, e.g., CALLS Order, 15 FCC Rcd at 13001, para. 98 (“To date, we are not
aware of any incumbent LECs that have allocated any loop costs to ADSL services.”). See Petition of Qwest
Corporation For Forbearance Pursuant to 47 U.S.C. § 160(c) in the Phoenix, Arizona Metropolitan Statistical
Area, WC Docket No. 09-135, Memorandum Opinion and Order, 25 FCC Rcd 8622, 8664, para. 79 & n.238 (2010).
See, e.g., Section 272(f)(1) Sunset of the BOC Separate Affiliate and Related Requirements; 2000 Biennial
Regulatory Review Separate Affiliate Requirements of Section 64.1903 of the Commission's Rules; Petition of AT&T
Inc. for Forbearance Under 47 U.S.C. § 160(c) with Regard to Certain Dominant Carrier Regulations for In-
Region, Interexchange Services, WC Docket Nos. 02-112, 06-120, CC Docket No. 00-175, Report and Order and
Memorandum Opinion and Order, 22 FCC Rcd 16440, 16460-61, para. 39 (2007) (finding that AT&T and Verizon
lack classical market power with respect to certain mass market services, including bundled local and long distance
voice telephone service); id. at 16466, para. 49 (concluding the same with respect to certain retail enterprise
services). Further, as to the second provision of section 254(k), we explain above why we conclude that bill-and-
keep best advances the relevant policy considerations. To the extent that our adoption of bill-and-keep results in an
additional allocation of joint and common costs to services supported by universal service, we find that to be
reasonable based on those policy considerations. See 47 U.S.C. § 254(k) (directing the Commission “to ensure that
services included in the definition of universal service bear no more than a reasonable share of the joint and common
costs of facilities used to provide those services.”).
1436 See, e.g., Verizon USF/ICC Transformation NPRM Comments at 7-13; Level 3 USF/ICC Transformation
NPRM Comments at 8-9.
1437 See ABC Plan, Attach 1 at 9.
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783.Relationship to All-IP Networks. We believe that an end point of a low uniform per-
minute rate perpetuates the use of TDM networks, whereas our goal is to facilitate the transition to an all-
IP network and to promote IP-to-IP interconnection.1438 Some commenters claim that the existing
intercarrier compensation regime is consistent with investment in IP networks, citing LECs’ investments
in softswitches for example,1439 but they do not rebut the conclusion that per minute charges are
inconsistent with the exchange of traffic on an IP-to-IP basis.1440 Nor do they cite evidence that carriers
that historically have relied heavily on per-minute intercarrier compensation charges—typically
incumbent LECs—have nonetheless interconnected on an IP-to-IP basis.1441 The record affirms the
USF/ICC Transformation NPRM’s suggestion that per-minute intercarrier compensation charges are an
impediment to IP-to-IP interconnection.1442
784.
Use in Agreements. Some commenters observe that members of the industry have
entered into negotiated agreements for the exchange of traffic at a $0.0007 rate. 1443 But selected parties’
use of a rate in interconnection agreements1444 does not necessarily support enacting that rate for an entire
industry.1445 The Commission has recognized that the reasonableness of a negotiated rate cannot be
1438 See supra Section XVII.P.
1439 See, e.g., COMPTEL USF/ICC Transformation NPRM Comments at 4-5; PAETEC et al. USF/ICC
Transformation NPRM Comments at 6-7, n. 16.
1440 See, e.g., Letter from Ad Hoc Telecommunications Users Committee et al., to Julius Genachowski, Chairman,
FCC, et al., WC Docket Nos. 10-90, 07-135, 05-337, 03-109, 06-122; GN Docket No. 09-51; CC Docket Nos. 01-
92, at 9 (filed Aug. 18, 2011) (Ad Hoc et al. Aug. 18, 2011 Ex Parte Letter) (“IP-to-IP traffic today is often
exchanged based upon capacity or ports, not per-minute as is the case with circuit-switched TDM traffic. IP
network charges are generally driven by peak hour network utilization levels, which are poorly reflected by per-
minute charges.”).
1441 Rather, the record reveals that incumbent LECs generally have been reluctant to interconnect on an IP-to-IP
basis. See Global Crossing USF/ICC Transformation NPRM Comments at 7; XO USF/ICC Transformation NPRM
Reply at 12-13.
1442 See, e.g., XO USF/ICC Transformation NPRM Comments at 22.
1443 “The $0.0007 per minute rate is also consistent with the rates contained in certain recently negotiated
agreements between ILECs and CLECs. For example, Verizon recently entered into a commercial agreement with
Bandwidth.com for the exchange of VoIP traffic at $0.0007 per minute.” See ABC Plan, Attach. 5 at pp. 34-35;
Verizon USF/ICC Transformation NPRM Comments at 12-13.
1444 Some commenters also question the extent to which the $0.0007 rate actually is employed in voluntarily
negotiated agreements. See, e.g., Cablevision and Charter Section XV Reply at 8 (“The fact that the market has
been almost universally unwilling to provide Verizon with agreements at its preferred rate (with the exception of one
small provider that serves PBX customers) is the reason it is asking the Commission to impose such a rate, and
should readily dispel any contention that $0.0007 represents a rate for the exchange of IP-originated or IP terminated
traffic set by the ‘market.’”) (emphasis in original).
1445 A number of commenters argue that $0.0007 cannot be enacted for the entire industry because no cost basis has
been offered in the record to justify the rate. Rather, some commenters have provided data taking various
approaches to estimating cost that yield different rates higher than $0.0007 per minute. See Letter from James
Bradford Ramsay, Counsel to the State Members of the Federal State Joint Board on Universal Service, to Marlene
H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN
Docket No. 09-51, at 2 (filed July 14, 2011) (“there is NO record evidence – no empirical data – no actual cost
studies – to support imposing a single industry-wide $0.0007 rate as compensatory”) (emphasis in original). Other
commenters believe that the $0.0007 rate is higher than the cost of termination under other measures, especially as
more and more providers move to IP technology. See Sprint Section XV Comments at 18, n.32 (“The $.0007 rate
(continued…)
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evaluated in isolation, but must be considered in the context of the agreement as a whole.1446 Thesuggestion to take a rate that appears in some interconnection agreements1447 in isolation from the other
rates, terms, and conditions in that agreement and apply it more broadly therefore conflicts with the
Commission’s policies regarding interconnection agreements.1448
785.
For these reasons, we decline to adopt a positive per-minute rate as the end point to
reform though we implement $0.0007 per-minute as part of the transition to bill-and-keep, as described
below.1449
b.
Flat-Rated Charges
786.The USF/ICC Transformation NPRM also sought comment on the use of flat-rated
charges as an alternative pricing methodology.1450 The possible use of flat-rated charges is a hold over
suggestion made prior to the explosion of bundled offerings and the decline of per-minute long-distance
calling rates. This approach received limited support in the record, and we decline to adopt it.1451 Flat-
rated charges would continue the present opaque system where customers of one network subsidize
customers of another,1452 and would in all likelihood, result in arbitrary prices being assigned to different
interconnecting carriers. Considerable questions remain as to how flat-rated charges would be calculated
and structured. Given the potential variability of these rates, we believe such charges would fail to
(Continued from previous page)
was computed some 12 years ago, and Sprint believes that the economic cost of terminating a minute today,
particularly using current IP technology, is even lower.”).
1446 See Implementation of Section 224 of the Act; A National Broadband Plan for Our Future, WC Docket No. 07-
245; GN Docket No. 09-51, 26 FCC Rcd at 5336-37 paras. 217-19. The fact that an agreement was negotiated
among companies with roughly comparable bargaining power may be a good reason to judge that agreement as
establishing just and reasonable rates, terms and conditions between those two parties. See id. at 5334-36, paras.
215-16.
1447 In the ISP Remand Order, the $0.0007 rate was selected as a transitional rate on the glide path to the recovery of
costs from end-users based on evidence that some carriers had agreed to this rate in interconnection agreement
negotiations. See ISP Remand Order, 16 FCC Rcd at 9190-91, para. 85. In the 2008 Order and ICC/USF FNPRM,
the Commission decided to “maintain the $.0007 cap and the mirroring rule pursuant to its section 201 authority.
These rules shall remain in place until we adopt more comprehensive intercarrier compensation reform.” 2008
Order and ICC/USF FNPRM, 24 FCC Rcd at 6489 para. 29.
1448 In particular, the Commission replaced its previous “pick and choose” rule that permitted carriers to opt-in to
isolated provisions of existing interconnection agreements with the “all or nothing” rule that required carriers to opt-
in to interconnection agreements as a whole. See generally, Review of the Section 251 Unbundling Obligations of
Incumbent Local Exchange Carriers, CC Docket No. 01-338, Second Report and Order, 19 FCC Rcd 13494 (2004);
see also Letter from James M. Tobin, Counsel for Pac-West, to Marlene H. Dortch, Secretary, FCC, CC Docket
Nos. 96-45, 01-92; WC Docket No. 99-68, Attach. at 5 (filed Oct. 6, 2008) (“The $0.0007 rate was just one element
in negotiated interconnection agreements that, like any negotiation, necessarily involved various tradeoffs in other
areas, and has no precedential effect when taken in isolation.”); Letter from Thomas Jones, Counsel for twtelecom
inc. and One Communications Corp., to Marlene H. Dortch, Secretary, FCC, CC Docket Nos. 01-92, 96-45; WC
Docket Nos. 05-337, 99-68, 04-36, Attach., at 3 (filed Oct. 6, 2008).
1449 See infra Section XII.C.
1450 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4719 para. 531.
1451 See, e.g., COMPTEL USF/ICC Transformation NPRM Comments at 34-35; GVNW USF/ICC Transformation
NPRM Comments at 24.
1452 See supra para. 657.
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address the arbitrage and marketplace distortions described above that arise from the fact that intercarrierrates are currently above incremental cost.1453 Nor would a transition to such flat-rated charges address
the marketplace distortions that arise from the differential application of intercarrier compensation rules
to different providers and different types of traffic.1454 To the extent that flat-rated charges were based on
something other than per-minute rates, the regulatory and implementation costs of setting the rates could
be significant.1455 Flat-rated charges applied to TDM traffic could also continue to hinder the transition to
all-IP networks. We agree that if some carriers require other carriers to convert their IP traffic to TDM to
complete a call, “merely substituting a flat-rated intercarrier compensation regime for a per minute system
is not going to accelerate the deployment of IP networks or speed the transition away from the circuit-
switched PSTN.”1456 We find such approaches less consistent with cost causation principles and the goal
of ensuring more appropriate pricing signals to end users than the bill-and-keep methodology we adopt.
c.
More Limited Rate Reductions
787.Other parties advocate that the Commission initiate reforms to only the highest
intercarrier charges and then reassess whether further reform is necessary. The Rural Associations, for
instance, propose that RLEC intrastate switched access rates be reduced to interstate levels by individual
carriers at the direction of state commissions in tandem with the creation of a federal restructure
mechanism.1457 Carriers would have access to the restructure mechanism if they make certain service and
rate reduction commitments.1458 We have several concerns with the RLEC Plan: There is no mandate for
action, action to reduce non-intrastate rates would be delayed for three to five years, and the Plan would
not result in uniformity of rates. We find that such a conservative approach to reform would do little to
address the multitude of issues described in the USF/ICC Transformation NPRM that plague the current
intercarrier compensation systems. Again, we find bill-and-keep to be the best option to accomplish
comprehensive intercarrier compensation reform.
B.
Federal/State Roles in Implementing Bill-and-Keep
788.We turn now to the transition and implementation issues surrounding our move to a bill-
and-keep framework, beginning in this section with the threshold question of respective federal and state
roles. In the USF/ICC Transformation NPRM, we outlined two possible approaches for working with the
states to advance sustainable intercarrier compensation reform, given a uniform, national methodology as
the end point for reform.1459 Under the first approach, the states would set the transition and recovery
mechanism for intrastate access charges, while the Commission would do so for interstate charges,
including providing universal service support to offset carriers’ reduced interstate revenues, as
required.1460 The Commission also sought comment on providing incentives for states to implement their
transitions expeditiously, for example by making limited federal universal service funds available to assist
with intrastate recovery, while setting a firm backstop for states that failed to act. Under the second
approach, the Commission would set the transition path and recovery mechanism for all traffic, including
1453 See supra paras. 662-666.
1454 See supra id.
1455 See supra 742-743.
1456 COMPTEL USF/ICC Transformation NPRM Comments at 35.
1457 See RLEC Plan at 12-22.
1458 See id.
1459 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4721-28, paras. 537-55.
1460 See id.
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intrastate calls, while assuming the burden of USF recovery, as necessary, for both interstate andintrastate revenues reduced as a result of reform.1461
789.
In response, we received proposals supporting both approaches. Some states supported
the bifurcated approach in which they would manage the transition and recovery for intrastate rates while
the majority of industry stakeholders supported a more predictable, nationally uniform approach.1462 The
State Members of the Federal State Joint Board, meanwhile, submitted an alternative plan under which
states would be responsible for reforming intrastate access charges, even as the federal jurisdiction
assumed the primary burden for intrastate revenue recovery through SLC increases up to the current SLC
caps and explicit support from the federal universal service fund.1463 In contrast, other stakeholders
proposed that the Commission adopt a uniform, national framework for reductions in interstate and
intrastate access charges, as well as recovery from the federal jurisdiction.1464 The August 3 Public Notice
sought additional comment on these approaches as well as possible modifications.1465
790.
We now conclude that a uniform, national framework for the transition of intercarrier
compensation to bill-and-keep, with an accompanying federal recovery mechanism, best advances our
policy goals of accelerating the migration to all IP networks, facilitating IP-to-IP interconnection, and
promoting deployment of new broadband networks by providing certainty and predictability to carriers
and investors. Although states will not set the transition for intrastate rates under this approach, we do
follow the State Member’s proposal regarding recovery coming from the federal jurisdiction. Doing so
takes a potentially large financial burden away from states. States will also help implement the bill-and-
keep methodology: They will continue to oversee the tariffing of intrastate rate reductions during the
transition period as well as interconnection negotiations and arbitrations pursuant to sections 251 and 252,
and will have responsibility for determining the network “edge” for purposes of bill-and-keep.1466
791.
Today, intrastate access rates vary widely. In many states, intrastate rates are
significantly higher than interstate rates; in others, intrastate and interstate rates are at parity; and in still
other states, intrastate access rates are below interstate levels.1467 The varying rates have created
1461 See id.
1462 See, e.g., AT&T USF/ICC Transformation NPRM Comments at 31, 38-43 (urging federal framework); CTIA
USF/ICC Transformation NPRM Comments at 40-42 (same); California Commission USF/ICC Transformation
NPRM Comments at 19-20 (urging current jurisdictional roles); New York Commission USF/ICC Transformation
NPRM at 7-12 (same).
1463 See State Members USF/ICC Transformation NPRM Comments at 153-55.
1464 See ABC Plan at 11-13; Joint Letter at 2-3.
1465 Further Inquiry Into Certain Issues in the Universal Service-Intercarrier Compensation Transformation
Proceeding, WC Docket Nos. 10-90, 07-135, 05-337, 03-109; CC Docket Nos. 01-92, 96-45; GN Docket No. 09-51,
Public Notice, DA 11-1348 at 10-13 (WCB rel. Aug. 3, 2011) (August 3 PN). The August 3 PN sought comment on
the ABC Plan, which proposed for the Commission to unify all rates consistent with the second option from the
USF/ICC Transformation NPRM. Comment was also sought on an alternative whereby states would act to reform
intrastate access during an initial three year period, following which the Commission would bring intrastate traffic
under section 251(b)(5), consistent with the first option. Id. at 12.
1466 See supra para. 776; infra paras. 1321, 1370.
1467 Letter from Joe A. Douglas, Vice President, Government Relations, NECA, to Marlene H. Dortch,
Secretary, FCC, CC Docket Nos. 96-45, 80-286, Attach. (filed Dec. 29, 2010) (NECA Dec. 29, 2010 Ex Parte
Letter) (providing a report showing average intrastate access rates per state for NECA common line 2010 pool
members from as low as 1.98 cents per minute to as high as 13.5 cents per minute).
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incentives for arbitrage and pervasive competitive distortions within the industry.1468 Equally important,consumers may not receive adequate price signals to make economically efficient choices because local
and long-distance rates do not necessarily reflect the underlying costs of their calls. Depending on their
regulatory classification, some carriers charge and collect intercarrier compensation charges, while other
carriers do not. A bill-and-keep system will ultimately eliminate the competitive distortions and
consumer inequities that arise today when different carriers that use differing technologies (wireline,
wireless, VoIP) to perform the same function – complete a call – are subject to different regulatory
classifications and requirements.
792.
Providing a uniform national transition and recovery framework, to be implemented in
partnership with the states, will achieve the benefits of a uniform system and realize the goals of reducing
arbitrage and promoting investment in IP networks as quickly as possible. By transitioning all traffic in a
coordinated manner, we will minimize opportunities for arbitrage that could be presented by disparate
intrastate rates.1469 For example, our approach will reduce the potential for arbitrage that could result
from a widening gap between intrastate and interstate rates if the Commission were to initially reduce
interstate rates only.1470 In addition, a coordinated transition involving both intrastate and interstate traffic
will help to align principles of cost causation and provide appropriate pricing signals to end users.
Whether completing an interstate or intrastate call, consumers will benefit from a unified system in which
arbitrage opportunities that inequitably shift costs among consumers are reduced.
793.
By moving in a coordinated manner to address the intercarrier compensation system for
all traffic, we will also help to ensure that there is no disruption in the transition to more efficient forms of
all IP networks. The record suggests that a “federally managed, geographically neutral” intercarrier
compensation regime that eliminates incentives for arbitrage will allow service providers to deploy
resources in more productive ways.1471 In addition, a unified approach for all ICC traffic will help
remove obstacles to progress toward all-IP networks where jurisdictional boundaries become less
relevant.1472 In sum, our approach helps to ensure that the intercarrier compensation modernization effort
will continue apace without unnecessary delays needed to harmonize disparate state actions.
794.
Although several states have sought to reform intrastate access rates, significant
challenges remain that could impede our comprehensive reform efforts absent a uniform, national
transition.1473 Under the direction of both state commissions and legislatures, states have taken a variety
1468 See, e.g., AT&T USF/ICC Transformation NPRM Comments at 13; see also NASUCA USF/ICC
Transformation NPRM Comments at 73 (describing a patchwork of rates).
1469 See AT&T USF/ICC Transformation NPRM Comments at 13; CBeyond et al. USF/ICC Transformation NPRM
Comments at 8-9; AT&T et al. August 3 PN Reply at 4.
1470 CBeyond et al. USF/ICC Transformation NPRM Comments at 8-9.
1471 See TIA August 3 PN Comments at 10; see also AT&T USF/ICC Transformation NPRM Comments at 14;
Google USF/ICC Transformation NPRM Comments at 5.
1472 See Google USF/ICC Transformation NPRM Comments at 5; Global Crossing USF/ICC Transformation NPRM
Comments at 6-7; Ad Hoc et al. Aug. 18, 2011 Ex Parte Letter, at 2.
1473 USF/ICC Transformation NPRM, 26 FCC Rcd at 4723-24, para. 543 (highlighting efforts of states including
Nebraska, Iowa, and Maine); see also Alaska Commission USF/ICC Transformation NPRM Comments at 26-27;
IUB USF/ICC Transformation NPRM Comments at 4-5; Kansas Commission April 18 USF/ICC Transformation
NPRM Comments at 15; Massachusetts DTC USF/ICC Transformation NPRM Comments at 19, Attachs. 1 & 2;
Michigan Commission USF/ICC Transformation NPRM Comments at 10-13; Missouri Commission USF/ICC
Transformation NPRM Comments at 17; New Jersey Board USF/ICC Transformation NPRM Comments at 5; Ohio
Commission USF/ICC Transformation NPRM Comments at 55-57; Washington Commission USF/ICC
Transformation NPRM Comments at 8-11; Letter from James Bradford Ramsay, General Counsel, NARUC, to
(continued…)
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of approaches to reform.1474 In some states, these efforts have resulted in intrastate access rate levelscoming to parity with interstate levels.1475 In other states, reform has led to reductions in intrastate rate
levels, but rates remain above interstate levels.1476 Although many states may genuinely desire to advance
additional reforms, the challenges posed by a state-by-state process would likely result in significant
variability and unpredictability of outcomes.1477 Moreover, some state commissions lack authority to
address intrastate access reform,1478 and we are concerned that many states will be unable to complete
reforms in a timely manner or will otherwise decline to act. Indeed, the Missouri Commission endorsed a
section 251(b)(5) approach because “states should not be allowed to delay access reform.”1479 The lack of
certainty and predictability for the industry without a uniform framework is a significant concern.
Carriers and investors need predictability to make investment and deployment decisions and lack of
certainty regarding intrastate access rates or recovery hampers these efforts. In addition some parties
warned that it would be “extremely costly” to participate in “the multitude” of state commission
proceedings that would follow from an approach relying on dozens of different state transitions and
recovery frameworks.1480
(Continued from previous page)
Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC
Docket Nos. 01-92, 96-45, Attach. A (filed Sept. 21, 2011); Letter from Brian J. Benison, Director – Federal
Regulatory, AT&T, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, WC Docket No. 05-337, GN
Docket No. 09-51, Attach. 1, 2 (filed Oct. 25, 2010) (AT&T Oct. 25, 2010 Ex Parte Letter); Petition of Sprint to
Reduce Intrastate Access Rates of Incumbent Local Exchange Carriers in North Carolina, Interim Report of the
Access Charges Working Group, Docket P-100, Sub 167 (filed Oct. 14, 2010), cited in NASUCA USF/ICC
Transformation NPRM Comments at 73 n.214. Since the release of the USF/ICC Transformation NPRM, we note
that there have been additional intrastate access reform efforts. See, e.g., 2011 Tenn. Pub. Acts 068 (codified at
TENN. CODE. ANN. § 65-5-301 et seq.); Investigation Regarding Intrastate Access Charges and IntraLATA Toll
Rates of Rural Carriers and the Pennsylvania Universal Service Fund, Docket No. I-00040105, Opinion and Order,
(Pa. PUC rel. July 18, 2011).
1474 See, e.g., Michigan Commission USF/ICC Transformation NPRM Comments at 10; New Jersey Board
USF/ICC Transformation NPRM Comments at 5; Board’s Investigation and Review of Local Exchange Carrier
Intrastate Access Rates, Docket No. TX08090830, Telecommunications Order, 27 (NJ Bd. of Pub. Utils. Feb. 1,
2010); 2011 Tenn. Pub. Acts 068 (codified at TENN. CODE. ANN. § 65-5-301 et seq.).
1475 See, e.g., Kansas Commission USF/ICC Transformation NPRM Comments at 15; Massachusetts DTC USF/ICC
Transformation NPRM Comments at 19.
1476 See, e.g., Missouri Commission USF/ICC Transformation NPRM Comments at 17.
1477 The record indicates that, in some cases, state reform efforts have taken well over a decade, sometimes with
little result. See Verizon USF/ICC Transformation NPRM Reply at 57-66 (describing the length of reform efforts in
states including Minnesota and Arizona and noting that South Dakota recently completed a six year proceeding that
resulted in a rule capping CLEC rates “at a remarkably high six cents per minute”).
1478 See Florida Commission USF/ICC Transformation NPRM Comments at 5; Montana Commission USF/ICC
Transformation NPRM Reply at 5.
1479 Missouri Commission USF/ICC Transformation NPRM Comments at 19 (“One option is for states to remain
responsible for reforming intrastate access charges while the second option relies on the FCC to establish a
methodology which states would then work with the FCC to implement. The MoPSC prefers the second option.
Assuming the FCC’s initial goal of intercarrier compensation reform is for parity between intrastate and interstate
rates then the FCC should set a schedule for achieving that objective. States should be allowed to accelerate
intrastate reform; however, a state should not be allowed to delay access reform.”); see also Wisconsin Commission
August 3 PN Comments at 5.
1480 CBeyond et al. USF/ICC Transformation NPRM Comments at 8.
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795.In addition, as noted above, adopting a uniform federal transition and recovery
mechanism will free states from potentially significant financial burdens. Our recovery mechanism will
provide carriers with recovery for reductions to eligible interstate and intrastate revenue. As a result,
states will not be required to bear the burden of establishing and funding state recovery mechanisms for
intrastate access reductions, while states will continue to play a role in implementation. Furthermore, the
Residential Rate Ceiling adopted as part of our recovery mechanism will help ensure that consumer
telephone rates remain affordable, and will also recognize so-called “early adopter” states that have
already undertaken reform of intrastate access charges and rebalanced rates.1481
796.
Some commenters argued that the uniform approach we take today is inappropriate
because states should be allowed to pursue tailored intrastate access reforms.1482 We appreciate and
respect the expertise and on-the-ground knowledge of our state partners concerning intrastate
telecommunications. Indeed, as we have said, states will have responsibility for implementing the bill-
and-keep methodology adopted herein and will continue to oversee the tariffing of intrastate rates during
the transition period and interconnection negotiations and arbitrations pursuant to section 252, as well as
determine the network “edge” for purposes of bill-and-keep.1483 With respect to the ultimate ICC
framework and the intervening transition, however, we find that a uniform national approach will best
create predictability for carriers and promote efficient pricing and new investment to the benefit of
consumers.
797.
We also conclude that a uniform transition to bill-and-keep is preferable to the plan of
State Members of the Universal Service Joint Board that would set a positive per-minute ICC rate per
carrier that could be higher than existing reciprocal compensation rates.1484 In particular, the State
Members suggest that the Commission set a single rate per provider for all purchasers in a single location,
and then provide states the option of adopting this proposal or not.1485 If a state adopts the single rate per
provider option it would require “that each telecommunications carrier in the State would establish a
maximum intercarrier per-minute termination rate that is no higher than the lower of its own current per-
minute interstate termination rate and its average intercarrier compensation terminating rate.”1486 Under
this plan, however, states could choose not to adopt the single rate per provider option and therefore could
maintain existing intrastate rates in perpetuity, preserving all the associated problems with the current
system.
C.
Transition
798.In light of our decision to adopt a uniform federal transition to bill-and-keep, in this
section we set out a default transition path for terminating end office switching and certain transport rate
elements to begin that process. We also begin the process of reforming other rate elements by capping all
interstate rate elements as of the effective date of the rules adopted pursuant to this Order,1487 and capping
terminating intrastate rates for all carriers. Doing so ensures that no rates increase during reform, and that
1481 See infra paras. 913 - 916.
1482 See, e.g., Kansas Commission USF/ICC Transformation NPRM Comments at 36-39; Michigan Commission
USF/ICC Transformation NPRM Comments at 9.
1483 See supra para. 776; infra paras. 1321, 1370.
1484 See State Members USF/ICC Transformation NPRM Comments at 153-55.
1485 See id. See also Cincinnati Bell USF/ICC Transformation NPRM Comments at 15-16 (supporting the State
Members’ Plan as a possible alternative).
1486 State Members USF/ICC Transformation NPRM Comments at 154.
1487 The effective date of the rules will be 30 days after the rules are published in the Federal Register.
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carriers do not shift costs between or among other rate elements, which would be counter to the principleswe adopt today. And, this transition will help minimize disruption to consumers and service providers by
giving parties time, certainty, and stability as they adjust to an IP world and a new compensation regime.
799.
In the USF/ICC Transformation NPRM, we sought comment on the transition away from
existing intercarrier compensation rates to facilitate carriers’ movement to IP networks, including the
sequencing and timing of rate reductions that would allow carriers to plan appropriately.1488 The record
contains a variety of recommendations for the length of the transition period and the rates that would be
affected during different phases of the transition.1489 Some of these proposals would begin the reform
process by reducing intrastate switched access rates, and in some cases, reciprocal compensation rates,
down to interstate rate levels over three to five years.1490 Other proposals would reduce both interstate
and intrastate rates to bill-and-keep or another end-point in the same amount of time.1491 Parties also
supported different transition periods by carrier type. For example, some parties submit that rate-of-
return carriers should be given longer to reduce their rates than price cap carriers because the costs and
rates of rate-of-return carriers generally are significantly higher than those of price cap carriers.1492 Some
parties suggest that competitive LECs should be given more time than other carriers to transition their
rates.1493
800.
Balancing these considerations, we set forth our transition path for terminating end office
switching and certain transport rate elements and reciprocal compensation charges in Figure 9. In brief,
our transition plan first focuses on the transition for terminating traffic, which is where the most acute
intercarrier compensation problems, such as arbitrage, currently arise. We believe that limiting reductions
at this time to terminating access rates will help address the majority of arbitrage and manage the size of
the access replacement mechanism. We also take measures today to start reforming other elements as
well by capping all interstate switched access rates in effect as of the effective date of the rules, including
originating access and all transport rates. Absent such action, rate-of-return carriers could shift costs
between or among other rate elements and rates to interconnecting carriers could continue to increase as
they have been in the past years, which is counter to the reform we adopt today. Even so, we do not
1488 USF/ICC Transformation NPRM, 26 FCC Rcd at 4720-28, paras. 533-55. This is consistent with the National
Broadband Plan, which observed that “[s]udden changes in USF and ICC could have unintended consequences that
slow progress” and that “[s]uccess will come from a clear road map for reform, including guidance about the timing
and pace of changes to existing regulations, so that the private sector can react and plan appropriately.” National
Broadband Plan at 141.
1489 See, e.g., AT&T USF/ICC Transformation NPRM Comments at 30-32; California Commission USF/ICC
Transformation NPRM Comments at 18-20; CBeyond et al. USF/ICC Transformation NPRM Comments at 4-7;
Comcast USF/ICC Transformation NPRM Comments at 3-6; CTIA USF/ICC Transformation NPRM Comments at
37-39; Earthlink USF/ICC Transformation NPRM Comments at 11; Frontier USF/ICC Transformation NPRM
Comments at 5, 7-8; Global Crossing USF/ICC Transformation NPRM Comments at 14; Kansas Commission
USF/ICC Transformation NPRM Comments at 39-41; Level 3 USF/ICC Transformation NPRM Comments at 6-8;
MetroPCS USF/ICC Transformation NPRM Comments at 6-7; MoSTCG USF/ICC Transformation NPRM
Comments at 10; T-Mobile USF/ICC Transformation NPRM Comments at 27-28.
1490 See, e.g., CBeyond et al. USF/ICC Transformation NPRM Comments at 4, Earthlink USF/ICC Transformation
NPRM Comments at 11, Frontier USF/ICC Transformation NPRM Comments at 5, 7-8, Global Crossing USF/ICC
Transformation NPRM Comments at 14, and Level 3 USF/ICC Transformation NPRM Comments at 6-8.
1491 AT&T USF/ICC Transformation NPRM Comments at 30.
1492 Rural Associations August 3 PN Comments at 35-39.
1493 See, e.g., COMPTEL August 3 PN Comments at 20-22.
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specify the transition to reduce these rates further at this time. Instead, we seek comment regarding thetransition and recovery for such other rate elements in the FNPRM.1494
801.
Thus, at the outset of the transition, all interstate switched access and reciprocal
compensation rates will be capped at rates in effect as of the effective date of the rules.1495 We cap these
rates as of the effective date of the Order, as opposed to a future date such as January 1, 2012,1496 to
ensure that carriers cannot make changes to rates or rate structures to their benefit in light of the reforms
adopted in this Order. For price cap carriers, all intrastate rates will also be capped, and, for rate-of-return
carriers, all terminating intrastate access rates will also be capped. Consistent with many proposals in the
record, our transition plan provides rate-of-return carriers, whose rates typically are higher, additional
time to transition as appropriate. Specifically, we conclude that a six-year transition for price cap carriers
and competitive LECs that benchmark to price cap carrier rates and a nine-year transition for rate-of-
return carriers and competitive LECs that benchmark to rate-of-return carrier rates to transition rates to
bill-and-keep strikes an appropriate balance that will moderate potential adverse effects on consumers and
carriers of moving too quickly from the existing intercarrier compensation regimes.1497
Intercarrier Compensation Reform Timeline
Effective Date
For Price Cap Carriers and CLECs that
For Rate-of-Return Carriers and
benchmark access rates to price capCLECs that benchmark access rates to
carriers1498rate-of-return carriers1499
Effective Date
All intercarrier switched access rate
All interstate switched access rate
of the rules
elements, including interstate and intrastate
elements, including all originating and
originating and terminating rates and
terminating rates and reciprocal
reciprocal compensation rates are capped.
compensation rates are capped. Intrastate
terminating rates are also capped.
1494 We do, however, cap price cap interstate and intrastate originating access rates to combat potential arbitrage and
other efforts designed to increase or otherwise maximize sources of intercarrier revenues during the transition.
1495 Although the ABC Plan and Joint Letter proposed that rates should be capped on January 1, 2012, ABC Plan at
11, Joint Letter at 3, we cap such rates as of the effective date of the rules. This will ensure that carriers do not seek
to inflate their access charges in advance of our reforms. Specifically, we cap all rate elements in the “traffic
sensitive basket” and the “trunking basket” as described in 47 C.F.R. §§ 61.42(d)(2)-(3) unless a price cap carrier
made a tariff filing increasing any such rate element prior to the effective date of the rules and such change was not
yet in effect.
1496 See ABC Plan, Attach. 1 at 11; Joint Letter at 3 & n.1.
1497 As a baseline, we adopt the transition proposed in the ABC Plan and Joint Letter with the addition of an extra
year to allow each set of carriers to complete a transition to bill-and-keep. See id.
1498 ABC Plan, Attach. 1 at 11. We note that CMRS providers are subject to mandatory detariffing. Nonetheless,
CMRS providers are included in the transition to the extent their reciprocal compensation rates are inconsistent with
the reforms we adopt here.
1499 Joint Letter at 3 & n.1. We note that carriers remain free to make elections regarding participation in the NECA
pool and tariffing processes during the transition. See 47 C.F.R. § 69.601 et seq. At the same time, we decline to
adopt the Rural Associations’ proposal to require carriers that withdraw from NECA association tariffs for switched
access elements to continue to contribute to the pool as if they had remained part of the NECA pool. See Letter
from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC
Docket Nos.10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45, Attach. at 25
(filed Oct. 17, 2011). Such a requirement would frustrate efficiencies generated by our reforms and could
unnecessarily burden carriers with costs that are no longer necessary.
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July 1, 2012Intrastate terminating switched end
Intrastate terminating switched end
office1500 and transport rates,1501 originating office1503 and transport rates,1504
and terminating dedicated transport,1502 and originating and terminating dedicated
reciprocal compensation rates, if above the
transport,1505 and reciprocal compensation
carrier’s interstate access rate, are reduced
rates, if above the carrier’s interstate
by 50 percent of the differential between
access rate, are reduced by 50 percent of
the rate and the carrier’s interstate access
the differential between the rate and the
rate.
carrier’s interstate access rate.
July 1, 2013
Intrastate terminating switched end office
Intrastate terminating switched end office
and transport rates and reciprocal
and transport rates and reciprocal
compensation, if above the carrier’s
compensation, if above the carrier’s
interstate access rate, are reduced to parity
interstate access rate, are reduced to parity
with interstate access rate.
with interstate access rate.
July 1, 2014
Terminating switched end office and
Terminating switched end office and
reciprocal compensation rates are reduced
reciprocal compensation rates are reduced
by one-third of the differential between end by one-third of the differential between
office rates and $0.0007.*
end office rates and $0.005. *
July 1, 2015
Terminating switched end office and
Terminating switched end office and
reciprocal compensation rates are reduced
reciprocal compensation rates are reduced
by an additional one-third of the original
by an additional one-third of the original
differential to $0.0007.*
differential to $0.005.*
July 1, 2016
Terminating switched end office and
Terminating switched end office and
reciprocal compensation rates are reduced
reciprocal compensation rates are reduced
to $0.0007.*
to $0.005.*
July 1, 2017
Terminating switched end office and
Terminating end office and reciprocal
reciprocal compensation rates are reduced
compensation rates are reduced by one-
to bill-and-keep. Terminating switched end third of the differential between its end
office and transport are reduced to $0.0007
office rates ($0.005) and $0.0007.*
for all terminating traffic within the tandem
serving area when the terminating carrier
owns the serving tandem switch.
July 1, 2018
Terminating switched end office and
Terminating switched end office and
transport are reduced to bill-and-keep for
reciprocal compensation rates are reduced
all terminating traffic within the tandem
by an additional one-third of the
serving area when the terminating carrier
differential between its end office rates as
owns the serving tandem switch.
of July 1, 2016 and $0.0007.*
July 1, 2019
Terminating switched end office and
reciprocal compensation rates are reduced
to $0.0007. *
July 1, 2020
Terminating switched end office and
reciprocal compensation rates are reduced
to bill-and-keep.*
1500 See App. A, 47 C.F.R. § 51.903(d).
1501 See App. A, 47 C.F.R. § 51.903(i).
1502 See App. A, 47 C.F.R. § 51.903(c).
1503 See App. A, 47 C.F.R. § 51.903(d).
1504 See App. A, 47 C.F.R. § 51.903(i).
1505 See App. A, 47 C.F.R. § 51.903(c).
* Transport rates remain unchanged from the previous step.
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Figure 9802.
We believe that these transition periods strike the right balance between our commitment
to avoid flash cuts and enabling carriers sufficient time to adjust to marketplace changes and
technological advancements, while furthering our overall goal of promoting a migration to modern IP
networks.1506 We find that consumers will benefit from this regulatory transition, which enables their
providers to adapt to the changing regulatory and technical landscape and will enable a faster and more
efficient introduction of next-generation services.
803.
The transition we adopt is partially based on a stakeholder proposal,1507 with certain
modifications, including the adoption of a bill-and-keep methodology as the end state for all traffic. As
explained further below, states will play a key role in implementing the framework we adopt today. In
particular, states will oversee changes to intrastate access tariffs to ensure that modifications to intrastate
tariffs are consistent with the framework and rules we adopt today. For example, states will help guard
against carriers improperly moving costs between or among different rate elements to reap a windfall
from reform.
804.
Since intercarrier compensation charges are constrained by the transition glide path that
we adopt, we will be monitoring to ensure that carriers do not shift costs to other rate elements that are
not specifically covered, such as special access or common line. We also clarify that, in cases where a
provider’s interstate terminating access rates are higher than its intrastate terminating access rates,
intrastate rate reductions shall begin to occur at the stage of the transition in which interstate rates come to
parity with intrastate rate levels.1508
805.
The transition imposes a cap on originating intrastate access charges for price cap carriers
at current rates as of the effective date of the rules. The transition does not cap originating intrastate
access charges for rate-of-return carriers. Rate-of-return carriers suggested that it would not be viable for
them to reduce terminating switched rates, while at the same time reducing originating rates without
overburdening the Universal Service Fund.1509 In the meantime, rate-of-return carriers indicate that the
wholesale long distance market will constrain originating rates.1510 Given our commitment to control the
1506 We decline to adopt a “tribal carve-out” for ICC reform as proposed by Gila River. See Letter from Tom W.
Davidson, Counsel to Gila River Telecommunications, Inc., to Marlene H. Dortch, Secretary, FCC, GN Docket No.
09-51, WC Docket Nos. 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45 at 2 n.2 (filed Oct. 21, 2011). There
is insufficient evidence in the record demonstrating that any such carve-out is necessary; nor is there any evidence
that the recovery mechanism we adopt below, coupled with the Total Earnings Review process for additional
recovery described below, is somehow insufficient for Tribal carriers. Moreover, we are concerned that such a
carve-out could invite arbitrage opportunities that we are seeking to curtail in this Order.
1507 See ABC Plan, Attach. 1 at 11; Joint Letter at 3 & n.1.
1508 See App. A, 47 C.F.R. §§ 51.907, 909. As we describe above, in most cases intrastate terminating access rates
are higher than intrastate rates (see supra para. 791), and we believe that initially focusing our reforms to address
this disparity is appropriate. But see Letter from Tina Pidgeon et al., General Communication, Inc., to Marlene H.
Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos.
01-92, 96-45 at 2 (filed Oct. 6, 2011) (proposing that the higher of interstate or intrastate access rates be reduced
during the first two years).
1509 Rural Associations August 3 PN Comments at 40.
1510 Id. at 41 (“[I]f originating access rates are not reduced . . . then the interexchange carriers upon which RLECs
rely to provide retail toll service will likely increase their wholesale rates . . . . Another likely outcome is that some
IXCs may simply exit rural markets and no longer provide wholesale services to RLECs.”).
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size of the CAF and minimize burdens on consumers, we do not cap intrastate originating access chargesfor rate-of-return carriers at this time. As noted above, we have placed priority on reform of terminating
access charges and we are mindful of the compromises that must be made to accomplish meaningful
reform in a measured and timely manner. In the FNPRM, we seek comment on the transition of all
originating access charges to bill-and-keep, including originating intrastate access charges for rate-of-
return carriers.
806.
CMRS Providers. As noted above, CMRS providers will be subject to the transition
applicable to price cap carriers. Although CMRS providers are subject to mandatory detariffing, these
providers are included to the extent their reciprocal compensation rates are inconsistent with the reforms
we adopt here.1511 In section XV, we also address compensation for non-access traffic exchanged
between LECs and CMRS providers. As we detail in that section, we immediately adopt bill-and-keep as
the default compensation methodology for non-access traffic exchanged between LECs and CMRS
providers under section 20.11 of our rules and Part 51.
807.
Competitive LECs. To ensure smooth operation of our transition, we provide competitive
LECs that benchmark their rates a limited allowance of additional time to make tariff filings during the
transition period. Application of our access reforms will generally apply to competitive LECs via the
CLEC benchmarking rule.1512 For interstate switched access rates, 1513 competitive LECs are permitted to
tariff interstate access charges at a level no higher than the tariffed rate for such services offered by the
incumbent LEC serving the same geographic area (the benchmarking rule).1514 There are two exceptions
to the general benchmarking rule. First, rural competitive LECs offering service in the same areas as non-
rural incumbent LECs are permitted to “benchmark” to the access rates prescribed in the NECA access
tariff, assuming the highest rate band for local switching (the rural exemption). Second, as explained in
Section XI.A above, competitive LECs meeting the access revenue sharing definition are required to
benchmark to the lowest interstate switched access rate of a price cap LEC in the state.1515 Because we
retain the CLEC benchmark rule during the transition, we allow competitive LECs an extra 15 days from
the effective date of the tariff to which a competitive LEC is benchmarking to make its filing(s). We
emphasize that the rates that are filed by the competitive LEC must comply with the applicable
benchmarking rate. As is the case now, we decline to adopt rules governing the rates that competitive
LECs may assess on their end users.
1511 See supra note 1498.
1512 In cases where more than one incumbent LEC operates within a competitive LEC’s service area and those
incumbent LECs are both price cap and rate-of-return regulated, a question may arise as to the appropriate transition
track for the competitive LEC. See Access Charge Reform; Reform of Access Charges Imposed by Competitive
Local Exchange Carriers, CC Docket No. 96-262, Eighth Report and Order and Fifth Order on Reconsideration, 19
FCC Rcd 9108, 9131-32, paras 46-48 (2004). If the competitive LEC tariffs a benchmarked or average rate in such
circumstances, that competitive LEC shall adopt the transition path applicable to the majority of lines capable of
being served in its territory. For example, if price cap carriers serve 70 percent of a competitive LEC’s service
territory and rate-of-return carriers serve 30 percent of the service territory, then the competitive LEC using a
blended rate should follow the price cap transition.
1513 References to access services and access rate elements in our rules or otherwise does not presuppose the
application of access charge regulation.
1514 See 47 C.F.R. § 61.26; see also CLEC Access Reform Order, 16 FCC Rcd at 9925, para. 3.
1515 See infra para. 679.
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808.We decline to adopt a separate and longer transition period for competitive LECs, as
suggested by some commenters. 1516 For one, competitive LEC rates are already at or near parity for
many if not all access rates. Due to the operation of the Commission’s CLEC benchmark rules,
competitive LEC tariffed access rates are largely already at parity with incumbent LEC rates. And, in a
large number of states, competitive LEC intrastate access rates are at or near parity to those of the
incumbent LEC, as well.1517 Thus, we do not find a sufficient basis for creating a separate transition for
competitive LECs. Moreover, the transition periods of six and nine years are sufficiently long to permit
advance planning and represent a careful balance of the interests of all stakeholders. As a result, we
conclude that a uniform approach for all LECs is preferable and do not find compelling evidence to depart
from the important policy objectives underlying the CLEC benchmarking rule. Further, new arbitrage
opportunities could arise and increased regulatory oversight would be necessary were we to abandon the
CLEC benchmarking rule.
1.
Authority To Specify the Transition
809.Specifying the timing and steps for the transition to bill-and-keep requires us to make a
number of line-drawing decisions. Although we could avoid those decisions by moving to bill-and-keep
immediately, such a flash cut would entail significant market disruption to the detriment of consumers
and carriers alike. As the D.C. Circuit has recognized, “[w]hen necessary to avoid excessively burdening
carriers, the gradual implementation of new rates and policies is a standard tool of the Commission,” and
the transition “may certainly be accomplished gradually to permit the affected carriers, subscribers and
state regulators to adjust to the new pricing system, thus preserving the efficient operation of the interstate
telephone network during the interim.”1518 Thus, “[i]t is reasonable for the FCC to take into account the
ability of the industry to adjust financially to changing policies,” and “[i]nterim solutions may need to
consider the past expectations of parties and the unfairness of abruptly shifting policies.”1519 In such
circumstances, “the FCC should be given ‘substantial deference’ when acting to impose interim
regulations.”1520
810.
In our judgment, the framework we adopt carefully balances the potential industry
disruption for both payers and recipients of intercarrier compensation as we transition to a new
intercarrier compensation regime more broadly. It is particularly appropriate for the Commission to
exercise its authority to craft a transition plan in this context, where the Commission is acting, as it has in
prior orders, to reconcile the “implicit tension between” the Act’s goals of “moving toward cost-based
1516 See, e.g., COMPTEL August 3 PN Comments at 20-22; TDS Metrocom August 3 PN Reply at 4-5. But see
Northern Telephone & Data Corp. Ex Parte Comments at 2-3 (filed Oct. 20, 2011) (“Any plan adopted by the
Commission cannot treat ILECs and CLECs differently; and similarly, must recognize than [sic] many rural CLECs,
such as NTD, should receive the same treatment as rural ILECs under the transition.”).
1517 See, e.g., Verizon New England, Inc., et al., for Investigation under Chapter 159, Section 14, of the Intrastate
Access Rates of Competitive Local Exchange Carriers, D.T.C. 07-9, Order, (Mass. D.T.C. June 22, 2009), aff’d,
Order on Motion for Reconsideration and Clarification (Dec. 7, 2009); DEL. CODE ANN. tit. 26 § 707(e) (2008); MO.
ANN. STAT. § 392.370 (2008); 66 PA. CONS. STAT. ANN. § 3017(c) (2004); 20 VA. ADMIN. CODE § 5-417-50(E)
(2007); WASH. ADMIN. CODE § 480-120-540(2) (2007).
1518 Nat’l Ass’n of Regulatory Util. Comm’rs v. FCC, 737 F.2d 1095, 1135-36 (D.C. Cir. 1984).
1519 MCI Telecommc’ns Corp. v. FCC, 750 F.2d 135, 141 (D.C. Cir. 1984).
1520 Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1106 (D.C. Cir. 2009); see also ACS of Anchorage, Inc. v. FCC,
290 F.3d 403, 410 (D.C. Cir. 2002); Competitive Telecommc’ns Ass’n v. FCC, 117 F.3d 1068, 1073-75 (8th Cir.
1997); MCI, 750 F.2d at 141.
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rates and protecting universal service.”15212.
Implementation Issues
811.We now address a number of ancillary issues surrounding implementation of the
transition. First, we describe the continuing role of tariffs during the transition. Next, we discuss price
cap conversions and the impact of our reforms on existing agreements. Finally, we address pending
petitions that are mooted by the changes adopted as part of the transition.
812.
Role of Tariffs. Under today’s intercarrier compensation system, carriers typically tariff
their access charges. To avoid disruption of these well-established relationships,1522 we preserve a role for
tariffing charges for toll traffic during the transition.1523 Pursuant to the transition set forth above, we
permit LECs to tariff the default charges for intrastate toll traffic at the state level, and for interstate toll
traffic with the Commission, in accordance with the timetable and rate reductions set forth above.1524 At
the same time, carriers remain free to enter into negotiated agreements that differ from the default rates
established above, consistent with the negotiated agreement framework that Congress envisioned for the
251(b)(5) regime to which access traffic is transitioned. As an interim matter, this new regime will
facilitate the benefits that can arise from negotiated arrangements, while also allowing for revenue
predictability that has been associated with tariffing.1525 In some respects our allowance of some tariffing
may be similar to the wireless termination tariffs for non-access traffic addressed in the Commission’s
2005 T-Mobile Order.1526 In that decision, the Commission prohibited the filing of state tariffs governing
the compensation for terminating non-access CMRS traffic because they were inconsistent with the
negotiated agreement framework contemplated by Commission precedent and by Congress when it
enacted section 251.1527 We do not, however, believe that the policies underlying the prohibition of
wireless termination tariffs for non-access traffic in the T-Mobile Order precludes our allowance of
certain tariffing of intercarrier compensation for toll traffic.1528 Finally, during the transition, traffic that
historically has been addressed through interconnection agreements will continue to be so addressed.
1521 Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523, 538 (8th Cir. 1998).
1522 See Letter from Mary McManus, Comcast Corporation, to Marlene H. Dortch, Secretary, FCC, WC Docket
Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45, at 2 (filed Oct. 5, 2011)
(Comcast Oct. 5, 2011 Ex Parte Letter).
1523 In the FNPRM, we seek comment on whether the Commission needs to forbear from tariffing requirements in
section 203 of the Act and part 61 of our rules to enable carriers to negotiate alternative arrangements pursuant to
this Order. See infra para. 1322.
1524 Although we do not require a “fresh look” to open existing contracts, we recognize that the framework we adopt
today encourages carriers to enter into contracts in lieu of the tariffing framework. If two carriers do not have a
reciprocal compensation rate today or are otherwise unable to agree to a rate through negotiations, we make clear
that state commissions will continue to have a role in establishing rates for non-access traffic where those rates had
not been previously established. States may initially establish such rates on the basis of the Commission’s existing
cost methodology (TELRIC) consistent with section 51.715 or on the basis of the Commission’s new cost
methodology, i.e., bill-and-keep. After such rates are initially established, they shall be subject to the transition set
forth above.
1525 See infra para. 961.
1526 T-Mobile Order, 20 FCC Rcd at 4860, para. 9.
1527 See id. As provided in Section XIV, we do not disrupt the regulatory approach applicable to CMRS providers,
which are subject to detariffing.
1528 See infra paras. 964-965.
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813.Because carriers will be revising intrastate access tariffs to reduce rates for certain
terminating switched access rate elements, and capping other intrastate rates,1529 states will play a critical
role implementing and enforcing intercarrier compensation reforms. In particular, state oversight of the
transition process is necessary to ensure that carriers comply with the transition timing and intrastate
access charge reductions outlined above. Under our framework, rates for intrastate access traffic will
remain in intrastate tariffs.1530 As a result, to ensure compliance with the framework and to ensure
carriers are not taking actions that could enable a windfall and/or double recovery, state commissions
should monitor compliance with our rate transition; review how carriers reduce rates to ensure
consistency with the uniform framework; and guard against attempts to raise capped intercarrier
compensation rates, as well as unanticipated types of gamesmanship. Consistent with states’ existing
authority, therefore, states could require carriers to provide additional information and/or refile intrastate
access tariffs that do not follow the framework or rules adopted in this Order. Moreover, state
commissions will continue to review and approve interconnection agreements and associated reciprocal
compensation rates to ensure that they are consistent with the new federal framework and transition.
Thus, we will be working in partnership with states to monitor carriers’ compliance with our rules,
thereby ensuring that consumers throughout the country will realize the tremendous benefits of ICC
reform.
814.
Price Cap Conversions. The Commission has regulated the provision of interstate access
services by incumbent LECs, pursuant to either rate-of-return regulation or price cap regulation. The
Commission has previously described the benefits that flow from the adoption of price cap regulation,1531
and has allowed carriers to convert from rate-of-return to price cap regulation.1532 The Commission
continues to encourage carriers to undergo such conversions. The application of our reforms to proposed
conversions will be addressed in the context of those proceedings based on the individualized situation of
the carrier seeking to convert to price cap regulation.1533
815.
Existing Agreements. With respect to the impact of our reforms on existing agreements,
we emphasize that our reforms do not abrogate existing commercial contracts or interconnection
agreements or otherwise require an automatic “fresh look” at these agreements.1534 As the Commission
1529 We do not cap intrastate originating access for rate-of-return carriers in this Order. We note that states remain
free to do so, provided states support any recovery that may be necessary, and such a result would promote the goals
of comprehensive reform adopted today.
1530 As we describe in Section XIII, we require carriers to file with their interstate tariffs all data, including as
relevant intrastate rates and MOU, necessary to verify eligibility for ARC replacement funding.
1531 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Second Report and Order, 5
FCC Rcd 6786, 6790-91 para. 33 (1990).
1532 See, e.g., CenturyTel, Inc. Petition for Conversion to Price Cap Regulation and Limited Waiver Relief, WC
Docket No. 08-191, Order, 24 FCC Rcd 4677 (WCB 2009); Windstream Petition for Conversion to Price cap
Regulation and for Limited Waiver Relief, WC Docket No. 07-171, Order, 23 FCC Rcd 5294 (2008).
1533 Similarly, transition issues related to rate-of-return affiliates of price cap holding companies, see supra para.
271, will be addressed in the context of such proceedings as well.
1534 In the past, several commenters have requested that the Commission give them a fresh look at existing contracts
in the context of comprehensive reform. See, e.g., Letter from Richard R. Cameron and Teresa D. Baer, Counsel for
Global Crossing, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 08-152, 99-68; CC Docket Nos. 01-92,
96-45 at 2 (filed Sept. 18, 2008) (asking that the Commission “provide an 18-month window within which carriers
can reconfigure their interconnection facilities without incurring reconfiguration charges or early termination
liabilities under existing transport contracts”); Sage Telecom 2008 ICC/USF FNPRM Comments at 13 (“The
Commission should be aware that wholesale agreements for local service (unbundled network element platform
replacement agreements) often contain rates for transport and termination of traffic . . . . While these agreements
(continued…)
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has recognized, both telecommunications carriers and their customers often benefit from long-termcontracts—providers gain assurance of cost recovery, and customers (whether wholesale or end-users)
may receive discounted and stable prices—and we try to avoid disrupting such contracts.1535 Indeed,
giving carriers or customers an automatic fresh look at existing commercial contracts or interconnection
agreements could result in a windfall for entities that entered long-term arrangements in exchange for
lower prices, as compared to other entities that avoided the risk of early termination fees by electing
shorter contract periods at higher prices.1536 Accordingly, we decline to require that these existing
arrangements be reopened in connection with the reforms in this Order, and leave such issues to any
change-of-law provisions in these arrangements and commercial negotiations among the parties.1537 We
do, however, make clear that our actions today constitute a change in law, and we recognize that existing
agreements may contain change-of-law provisions that allow for renegotiation and/or may contain some
mechanism to resolve disputes about new agreement language implementing new rules.
816.
Dismissal as Moot of Pending Petitions. The reforms adopted today render moot a
petition filed by Embarq in 2008 and a petition filed by Michigan CLECs in 2010.1538 The Embarq
petition sought waivers that would allow it to unify its switched access rates by making reductions to its
intrastate rates and offsetting increases to its interstate rates.1539 The actions taken in this Order, which set
forth a comprehensive intercarrier compensation plan, render the Embarq petition moot and, we further
note that CenturyLink has subsequently filed a letter seeking to withdraw the petition.1540 The Michigan
CLECs filed a petition asking the Commission to preempt Michigan’s 2009 access restructuring law,
(Continued from previous page)
were of course ‘negotiated,’ they were negotiated under particular assumptions regarding the applicable regulatory
defaults, and under circumstances of asymmetrical bargaining power. The Commission should consider whether
such provisions will adversely affect competition and thus should be subject to a fresh look.”).
1535 See, e.g., Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, CC Docket
Nos. 01-338, 96-98, 98-147, Report and Order and Order on Remand and Further Notice of Proposed Rulemaking,
18 FCC Rcd 16978, 17400, 17402–03, paras. 692, 697–99 (2003) (Triennial Review Order); see also, e.g., AT&T
2005 ICC FNPRM Reply at 17–20 (arguing against giving end users a fresh look at existing contracts). To the
extent that there is evidence that particular termination penalties are inappropriate, the Commission can resolve such
a matter through an enforcement proceeding. See Triennial Review Order, 18 FCC Rcd at 17403, para. 698.
1536 See Triennial Review Order, 18 FCC Rcd at 17403, para. 699.
1537 This situation is thus different from cases where the Commission found that certain contract provisions might
adversely affect competition or where end-user customers would be denied the benefits of new Commission policy
absent a fresh look opportunity. See, e.g., Local Competition First Report and Order, 11 FCC Rcd at 16044, para.
1094; Expanded Interconnection with Local Telephone Company Facilities, CC Docket No. 91-141, Second
Memorandum Opinion and Order on Reconsideration, 8 FCC Rcd 7341, 7350, para. 21 (1993) (allowing a fresh
look at agreements in “situations where excessive termination liabilities would affect competition for a significant
period of time”); Competition in the Interstate Interexchange Marketplace, CC Docket No. 90-132, Report and
Order, 6 FCC Rcd 5880, 5906, para. 151 (1991) (giving customers of AT&T 90 days to terminate their contracts
without penalty to let them “tak[e] advantage of 800 number portability when it arrives”).
1538 See Petition for Waiver of Embarq Pleading Cycle Established, WC Docket No. 08-160, Public Notice, 23 FCC
Rcd 11914 (2008); Pleading Cycle Established for Comments on Joint Michigan CLEC Petition for Declaratory
Ruling and Motion for Temporary Relief, WC Docket No. 10-45, Public Notice, 25 FCC Rcd 1807 (2010).
1539 See Petition for Waiver of Embarq Local Operating Companies of Sections 61.3 and 61.44-61.48 of the
Commission’s Rules, and any Associated Rules Necessary to Permit it to Unify Switched Access Charges Between
Interstate and Intrastate Jurisdictions, WC Docket No. 08-160 (filed Aug. 1, 2008).
1540 See Letter from Jeffrey Lanning, Assistant Vice President – Regulatory Affairs, CenturyLink, to Marlene H.
Dortch, Secretary, FCC, WC Docket No. 08-160 (filed June 23, 2011).
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which mandated intrastate access rate reductions and created an access restructuring mechanism that wasunavailable to CLECs.1541 Here, again, the actions we take in this Order, which include bringing
intrastate access traffic within section 251(b)(5) and subjecting that traffic to the above transition, address
many of the access rates elements at issue in the Michigan CLECs’ petition.1542 We therefore dismiss the
petition as the reforms in this Order and the accompanying FNPRM will render it moot.
3.
Other Rate Elements
817.Originating Access. We find that originating charges also should ultimately be subject to
the bill-and-keep framework. Some commenters urge that originating charges be retained, at least on an
interim basis.1543 Other parties express concerns with the retention of originating access charges.1544 The
legal framework underpinning our decision today is inconsistent with the permanent retention of
originating access charges. In the Local Competition First Report and Order, the Commission observed
that section 251(b)(5) does not address charges payable to a carrier that originates traffic and concluded,
therefore, that such charges were prohibited under that provision of the Act.1545 Accordingly, we find that
originating charges for all telecommunications traffic subject to our comprehensive intercarrier
compensation framework should ultimately move to bill-and-keep.
818.
Notwithstanding this conclusion, we take immediate action to cap all interstate
originating access charges and intrastate originating access charges for price cap carriers. Although we
do not establish the transition for rate reductions to bill-and-keep in this Order, we seek comment in the
FNPRM on the appropriate transition and recovery mechanism for ultimately phasing down originating
access charges.1546 Meanwhile, we prohibit carriers from increasing their originating interstate access
rates above those in effect as the effective date of the rules.1547 A cap on interstate originating access
represents a first step as part of our measured transition toward comprehensive reform and helps to ensure
that our initial reforms to terminating access are not undermined. Thus, interstate originating switched
access rates will remain capped and may not exceed current levels until further action by the Commission
addressing the appropriate transition path for this traffic.
1541 See Joint Petition for Expedited Declaratory Ruling that the State of Michigan’s Statute 2009 PA 182 is
Preempted Under Sections 253 and 254 of the Communications Act, WC Docket No. 10-45 (filed Feb. 12, 2010).
1542 To the extent that states have established rate reduction transitions for rate elements not reduced in this Order,
nothing in this Order impacts such transitions. See, e.g., Letter from John R. Liskey, Executive Director, MITA, to
Marlene H. Dortch, Secretary, FCC, CC Docket Nos. 01-92, 96-45, WC Docket Nos. 10-90, 07-135, 05-337, 03-
109, GN Docket No. 09-51 at 2 (filed Oct. 17, 2011). Nor does this Order prevent states from reducing rates on a
faster transition provided that states provide any additional recovery support that may be needed as a result of a
faster transition.
1543 See, e.g., ABC Plan, Attach. 1 at 11; Cincinnati Bell August 3 PN Comments at 3.
1544 iBasis Retail, Inc. August 3 PN Comments at 2; CRUSIR August 3 PN Comments at 11-13; Texas Telephone
August 3 PN Comments at 7-8.
1545 See Local Competition First Report and Order, 11 FCC Rcd at 16016, para. 1042.
1546 See supra Section XVII.M.
1547 This prohibition on increasing access rates also applies to any remaining Primary Interexchange Carrier Charge
in section 69.153 of the Commission’s rules, the per-minute Carrier Common Line charge in section 69.154 of the
Commission’s rules, and the per-minute Residual Interconnection Charge in section 69.155 of the Commission’s
rules. 47 C.F.R. §§ 69.153, 69.154, 69.155. Price cap carriers and CLECs that benchmark to price cap rates are also
prohibited from increasing their originating intrastate access rates.
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819.Transport. Similarly, the transition path set forth above begins the transition for
transport elements, including capping such rates, but does not provide the transition for all transport
charges for price cap or rate-of-return carriers to bill-and-keep. For price cap carriers, in the final year of
the transition, transport and terminating switched access shall go to bill-and-keep levels where the
terminating carrier owns the tandem. However, transport charges in other instances, i.e., where the
terminating carrier does not own the tandem, are not addressed at this time. Meanwhile, under the
transition for rate-of-return carriers, which is consistent with the transition path put forward by the Joint
Letter, interstate and intrastate transport charges will be capped at interstate levels in effect as of the
effective date of the rules through the transition.1548
820.
Ultimately, we agree with concerns raised by commenters that the continuation of
transport charges in perpetuity would be problematic.1549 For example, the record contains allegations of
“mileage pumping,” where service providers designate distant points of interconnection to inflate the
mileage used to compute the transport charges.1550 Further, Sprint alleges that current incumbent LEC
tariffed charges for transport are “very high and constitute a sizeable proportion of the total terminating
access charges ILECs impose on carriers today.”1551 More fundamentally, if transport rates are allowed to
persist, it gives incumbent LECs incentives to retain a TDM network architecture and therefore likely
serves as a disincentive for incumbent LECs to establish more efficient interconnection arrangements
such as IP.1552 As a result, commenters suggest that perpetuating high transport rates could undermine the
Commission’s reform effort and lead to anticompetitive behavior or regulatory arbitrage such as access
stimulation.1553 We therefore seek comment on the appropriate treatment of, and transition for, all tandem
switching and transport rates in the FNPRM.1554
821.
Other Rate Elements. Finally, we note that the transition set forth above caps rates but
does not provide the transition path for all rate elements or other charges, such as dedicated transport
charges.1555 In our FNPRM, we seek comment on what transition should be set for these other rate
elements and charges as part of comprehensive reform, and how we should address those elements.
4.
Suspension or Modification Under Section 251(f)(2)
822.Section 251(f)(2) provides that a LEC with fewer than two percent of the country’s
subscriber lines may petition its state commission for a suspension or modification of the application to it
of a requirement or requirements of section 251(b) or (c), and that the state commission shall grant such
1548 See ABC Plan, Attach. 1 at 11; Joint Letter at 3.
1549 See, e.g., COMPTEL August 3 PN Comments at 14-20; NCTA August 3 PN Comments at 19-20; Sprint August
3 PN Comments at 11-16; T-Mobile August 3 PN Comments at 8.
1550 See AT&T Section XV Comments at 5, 30-37; Letter from John T. Nakahata, Counsel to Level 3, to Marlene H.
Dortch, Secretary, FCC, CC Docket Nos. 01-92, 96-45, WC Docket Nos. 10-90, 07-135, 03-109, GN Docket No.
09-51, Attach at 2 (filed Sept. 16, 2011).
1551 Sprint August 3 PN Comments at 13.
1552 Sprint August 3 PN Comments at 15; NCTA August 3 PN Comments at 20.
1553 See CBeyond et al. August 3 PN Comments at 15-18; NCTA August 3 PN Comments at 20; T-Mobile August 3
PN Comments at 7; Time Warner Cable August 3 PN Comments at 7; see also Section XVII.M.
1554 See supra Section XVII.M.
1555 See Level 3 August 3 PN Comments at 11-12; COMPTEL August 3 PN Comments at 18-20; Letter from
Charles W. McKee, VP, Federal and State Regulatory, Sprint, to Marlene H. Dortch, Secretary, FCC, WC Docket
Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51, at 2 (filed Oct. 3, 2011).
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petition where it makes certain determinations.1556 That provision further states that the state commissionmust act on the petition within 180 days and “may suspend enforcement of the requirement or
requirements to which the petition applies” pending action on the petition.1557 Parties aggrieved by a state
commission decision under section 251(f) may seek review of that decision in federal district court –
under section 252(e)(6) of the Act, if the decision is rendered in the course of arbitrating an
interconnection agreement,1558 or under general “federal question” jurisdiction if the decision arises
outside of the arbitration context.1559
823.
In Iowa Utilities Board v. FCC, the Eighth Circuit held that state commissions had
“exclusive authority” to make decisions under section 251(f) and that the FCC lacked authority to
prescribe “governing standards for such determinations.”1560 On review, however, the Supreme Court
reversed the Eighth Circuit’s decision with regard to the Commission’s general authority to implement
Title II of the Act. The Court stated that “the grant in § 201(b) [of the Act] means what it says: The FCC
has rulemaking authority to carry out the ‘provisions of this Act,’ which include §§ 251 and 252.”1561
Accordingly, we find that this general grant of rulemaking authority recognized by the Court includes the
authority to adopt reasonable rules construing and implementing section 251(f).1562
824.
In light of the Supreme Court’s holding, we may adopt specific, binding prophylactic
rules that give content to, among other things, the “public interest, convenience, and necessity” standard
that governs states’ exercise of section 251(f)(2) authority to act on suspension/modification petitions.
We sought comment on specific rules in the ICC/USF Transformation NPRM and in the 2008 ICC
NPRM.1563 However, given the limited record we received in response, we decline to adopt specific rules
regarding section 251(f)(2) at this time. Nevertheless, we caution states that suspensions or modifications
of the bill-and-keep methodology we adopt today would, among other things, re-introduce regulatory
uncertainty, shift the costs of providing service to a LEC’s competitors and the competitor’s customers,
increase transaction costs for terminating calls, and undermine the efficiencies gained from adopting a
uniform national framework.1564 Accordingly, we believe it highly unlikely that any attempt by a state to
modify or suspend the federal bill-and-keep regime would be “consistent with the public interest,
convenience and necessity” as required under section 251(f)(2)(B), and we urge states not to grant any
1556 47 U.S.C. § 251(f)(2)(“The State commission shall grant such petition to the extent that, and for such duration
as, [it] determines that such suspension or modification -- (A) is necessary – (i) to avoid a significant adverse
economic impact on users of telecommunications services generally; (ii) to avoid imposing a requirement that is
unduly economically burdensome; or (iii) to avoid imposing a requirement that is technically infeasible; and “(B) is
consistent with the public interest, convenience, and necessity.”).
1557 Id.
1558 See, e.g., New Cingular Wireless PCS, LLC v. Finley, 2010 WL 3860384 at *1, *11-*14 (E.D. N.C. 2010);
Wireless World, L.L.C. v. Virgin Islands PSC, 2008 WL 5635107 at *2, *3-*12 (D. VI 2008).
1559 See 47 U.S.C. § 252(e)(6); 28 U.S.C. § 1331. See also, e.g., Midcontinent Commc’ns v. North Dakota PSC,
2009 WL 3722898 at *5-*9 (D. ND 2009).
1560 120 F.2d 753, 802 (8th Cir. 1997) (subsequent history omitted).
1561 AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 378 (1998).
1562 Id. at 385.
1563 See ICC/USF Transformation NPRM, 26 FCC Rcd at 4714, paras. 519–20; see also 2008 ICC/USF NPRM, 24
FCC Rcd at 6623–26, App. A, paras. 282–90.
1564 See supra Section XII.A (discussing the justification for adopting a bill-and-keep methodology).
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petitions seeking to modify or suspend the bill-and-keep provisions we adopt herein. We will monitorstate action regarding the reforms we adopt today, and may provide specific guidance for states’ review of
section 251(f)(2) petitions in the future.
5.
The Duty To Negotiate Interconnection Agreements
825.Because we move traffic from the access charge regime to the section 251(b)(5)
framework, where payment terms are agreed to pursuant to an interconnection agreement, incumbent
LECs have asked the Commission to make clear that they have the ability to compel other LECs and
CMRS providers to negotiate to reach an interconnection agreement. This is a concern for incumbent
LECs because under sections 251 and 252 of the Act, although LECs and CMRS providers can compel
incumbent LECs to negotiate in good faith and invoke arbitration if negotiations fail, incumbent LECs
generally lack the ability to compel other LECs and CMRS providers to negotiate for payment for traffic
that is not exchanged pursuant to a tariff. In particular, parties have asked the Commission to expand
upon the Commission’s findings in the 2005 T-Mobile Order, which found that incumbent LECs can
compel CMRS providers to negotiate to reach an interconnection agreement.
826.
After reviewing the record, we conclude it is appropriate to clarify certain aspects of the
obligations the Commission adopted in the 2005 T-Mobile Order. As a result, in this section, we reaffirm
the findings in the T-Mobile Order that incumbent LECs can compel CMRS providers to negotiate in
good faith to reach an interconnection agreement, and make clear we have authority to do so pursuant to
Sections 332, 201, 251 as well as our ancillary authority under 4(i). We also clarify that this requirement
does not impose any section 251(c) obligations on CMRS providers, nor does it extend section 252 of the
Act to CMRS providers.
827.
We decline, at this time, to extend the obligation to negotiate in good faith and the ability
to compel arbitration to other contexts. For example, the T-Mobile Order did not address relationships
involving competitive LECs or among other interconnecting service providers. Subsequently,
competitive LECs have requested that the Commission expand the scope of the T-Mobile Order and
require CMRS providers to negotiate agreements with competitive LECs under the section 251/252
framework, just as they do with incumbent LECs.1565 In addition, rural incumbent LECs urged the
Commission to “extend the T-Mobile Order to give ILECs the right to demand interconnection
negotiations with all carriers.”1566 We do not believe the record is currently sufficient to justify doing so,
but ask further questions about the policy implications as well as our legal authority to do so in the
FNPRM.1567
a.
Background
828.Regulated intercarrier compensation payments among carriers have been imposed in two
basic ways: through tariffs and through carrier-to-carrier agreements. The comprehensive intercarrier
compensation reforms we adopt supersede the preexisting access charge regime, bringing that traffic in to
the section 251(b)(5) reciprocal compensation framework subject to a transition to bill-and-keep. Under
that transitional framework, however, we permit carriers to negotiate alternative intercarrier compensation
1565 See, e.g., Pac-West Comments at 3; PAETEC et al. Section XV Reply at 23-24; Letter from Michael B.
Hazzard, counsel for Xspedius, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, Attach. at 7 (filed
Aug. 10, 2005); Supra Telecommunications and Information Systems Ex Parte Comments and Cross-Petition for
Limited Clarification, CC Docket No. 01-92 at 10 (filed July 14, 2005).
1566 NECA et al. Section XV Comments at 29 n.67, 30.
1567 See infra para. 1324.
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arrangements to the default rates specified in the tariffs.1568 In addition, the FNPRM seeks comment onthe appropriate long-term implementation framework, including whether even the transitional role for
tariffing should be replaced, with carriers relying solely on interconnection agreements.1569
829.
Notably, interconnection, and the associated intercarrier compensation, has evolved since
the passage of the 1996 Act in a manner different than originally anticipated. The Act contemplated that
competitive carriers would obtain reciprocal compensation arrangements with incumbent LECs by
request, leading to negotiation and, if necessary, arbitration.1570 The 1996 Act included an
implementation framework in section 252, which “introduced a mechanism by which CMRS providers
may compel LECs to enter into bilateral interconnection arrangements.”1571 The Act also provides
specific legal standards for reciprocal compensation that states are required to apply in resolving disputes,
and these statutory standards help to define the scope of the obligations in question.1572 Section 252 also
provides that parties may enter into arrangements without regard to these standards, but specifically
contemplates that such arrangements would be the product of a negotiation process.1573 Section 252 did
not expressly impose the same obligations on CMRS providers, or other non-incumbent LECs, to ensure
payment of the associated intercarrier compensation, however. With respect to intercarrier compensation
in particular, experience has not borne out prior views presuming a limited need for regulatory protections
for incumbent LECs. In particular, given mandatory interconnection and restrictions on blocking traffic,
LECs have been unable to avoid terminating traffic delivered to them even absent a compensation
agreement, and experience has shown that even incumbent LECs thus can be at a negotiating
disadvantage in particular circumstances.
830.
Consequently, the Commission found in the T-Mobile Order, terminating LECs had
difficulty getting other carriers, such as CMRS providers, to enter into agreements for compensation for
non-access traffic absent a legal compulsion for those carriers to do so.1574 Although certain states, in
response, allowed the filing of wireless termination tariffs, the Commission prohibited those on a
prospective basis as inconsistent with the framework established in sections 251 and 252 of the Act.1575
That prohibition of tariffs, standing alone, would have left incumbent LECs with no meaningful way to
obtain an arrangement for the receipt of compensation from CMRS providers that complied with the
relevant default requirements under the Act and Commission rules. Thus, the T-Mobile Order adopted
section 20.11(e) of the Commission’s rules, which authorizes incumbent LECs to request interconnection
and requires CMRS providers to comply with “the negotiation and arbitration procedures set forth in
section 252 of the Act.”1576 The T-Mobile Order also required CMRS providers to “negotiate in good
faith” and follow the Commission’s interim transport and termination pricing rules once a request for
1568 See supra Section XII.C (discussion of the transition period).
1569 See infra Section XVII.N (seeking comment on interconnection).
1570 See 47 U.S.C. §§ 251(b)(5), 252(a).
1571 T-Mobile Order, 20 FCC Rcd at 4861, para. 11.
1572 See 47 U.S.C. § 251(b)(5), 252(d)(2).
1573 47 U.S.C. § 252(a)(1).
1574 T-Mobile Order, 20 FCC Rcd at 4864, para. 15.
1575 T-Mobile Order, 20 FCC Rcd at 4863-64, para. 14.
1576 T-Mobile Order, 20 FCC Rcd at 4863-65, paras. 14-16. See also 47 C.F.R. § 20.11(e).
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interconnection is made.1577831.
Subsequently, the Rural Cellular Association (RCA) and the American Association for
Paging Carriers (AAPC) filed petitions asking the Commission to reconsider certain aspects of the T-
Mobile Order. RCA argues that the Commission exceeded its authority by directly applying sections
251(c) and 252 of the Act to CMRS carriers.1578 Specifically, it argues that the Commission cannot
require CMRS providers to interconnect directly with ILECs pursuant to section 251(c), or submit to
compulsory arbitration pursuant to section 252.1579 Likewise the American Association of Paging
Carriers argues that section 20.11(e) of the Commission’s rules is contrary to the Administrative
Procedures Act because the Commission failed to give notice of the proposed rule, and that section
20.11(e) contravenes Congressional intent by directly applying section 251(c) to CMRS providers.1580 In
addition, the Commission received several petitions seeking clarification regarding the operation of the T-
Mobile Order and the state of the law that existed prior to that decision.1581
b.
Petitions for Reconsideration of the T-Mobile Order
832.As described below, we resolve the challenges several parties have made to the
Commission’s authority to adopt sections 20.11(d) and (e). We conclude that the Commission has both
direct and ancillary authority to permit incumbent LECs to request interconnection from a CMRS
provider and invoke the negotiation and arbitration procedures of section 252 of the Act. Given this
clarification of the Commission’s exercise of its authority, we find that these requirements, codified in
section 20.11(e) of the Commission’s rules, are consistent with the Act. We also conclude that the
adoption of those requirements in the T-Mobile Order was procedurally proper, and we consequently
deny requests to reconsider that rule.
(i)
Authority To Adopt Section 20.11(e) of the Commission’s
Rules
In its petition for reconsideration, RCA claims that the Commission lacked authority to
adopt section 20.11(e) of the Commission’s rules arguing that the Commission cannot directly apply
section 251(c) of the Act to CMRS providers by requiring them to interconnect directly with ILECs, or
submit to compulsory arbitration pursuant to section 252 of the Act.1582 RCA misinterprets the nature of
the Commission’s action in the T-Mobile Order, however, viewing it as the direct application of sections
251(c) and 252 to CMRS providers.1583 Properly understood, the Commission did not apply sections
1577 47 C.F.R. § 20.11(e). The applicable rules for interim transport and termination pricing are found in section
51.715 of the Commission’s rules.
1578 RCA Petition for Clarification or, in the Alternative, Reconsideration, CC Docket No. 01-92 at 2-3 (filed Apr.
29, 2005).
1579 RCA Petition at 6-10.
1580 AAPC Petition for Reconsideration, CC Docket No. 01-92 at 4-6 (filed Apr. 29, 2005) (AAPC Petition).
1581 See, e.g., MetroPCS Petition; Missouri Small Telephone Company Group Petition for Reconsideration, CC
Docket No. 01-92 (filed Mar. 25, 2005) (MoSTCG Petition) (seeking clarification that small ILECs may opt in to
existing traffic termination arrangements that wireless carriers have with other rural ILECs); T-Mobile USA Petition
for Clarification or, in the Alternative, Reconsideration, CC Docket No. 01-92 (filed Apr. 29, 2005) (seeking
clarification on the pricing rules that apply during negotiations between wireless carriers and ILECs).
1582 RCA Petition at 6–10.
1583 Id.
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251(c) and 252 in that manner.1584 Rather, the T-Mobile Order obligations imposed on CMRS providers,codified in section 20.11(e) of the Commission’s rules, implement the Commission’s authority under
sections 201 and 332, and are reasonably ancillary to the implementation of our statutorily mandated
responsibilities under sections 201, 251(a)(1), 251(b)(5) and 332.
834.
Direct Authority Under Sections 201 and 332. Sections 201 and 332 of the Act provide a
basis for rules allowing an incumbent LEC to request interconnection, including associated compensation,
from a CMRS provider and invoke the negotiation and arbitration procedures set forth in section 252 of
the Act. Section 332(c)(1)(B) states that “[u]pon reasonable request of any person providing commercial
mobile service, the Commission shall order a common carrier to establish physical connections with such
service” pursuant to the provisions of section 201 of the Act.1585 Section 201(a) provides that “every
common carrier engaged in interstate or foreign communication by wire or radio” shall: (i) “furnish such
communication service upon reasonable request therefore;” and (ii) “in accordance with the orders of the
Commission, in cases where the Commission, after opportunity for hearing, finds such action necessary
or desirable in the public interest, to establish physical connections with other carriers, to establish
through routes and charges applicable thereto and the divisions of such charges, and to establish and
provide facilities and regulations for operating such through routes.”1586 We have long relied on these
provisions to regulate the terms of LEC-CMRS interconnection, including associated compensation.
835.
Historically, interconnection requirements imposed under these provisions were
understood to encompass not only the technical linking of networks, but also the associated
compensation. For example, intercarrier compensation under the access charge regime had, as its origin,
the need to “ensur[e] interconnection at reasonable rates, as required under Section 201 of the Act, 47
U.S.C. § 201.”1587 Likewise, the Commission previously has specified not only the intercarrier
1584 See infra Section XII.C.5.b(ii).
1585 47 U.S.C. § 332(c)(1)(B).
1586 47 U.S.C. § 201(a). Although section 201(a) requires an opportunity for hearing, our previous use of notice and
comment procedures to satisfy the section 201 hearing requirement was expressly confirmed by the U.S. Court of
Appeals for the Third Circuit. See Bell Telephone Co. v. FCC, 503 F.2d 1250, 1265 (3rd Cir. 1974) (holding that
section 201(a) permits procedures less formal and adversarial than an evidentiary hearing because, among other
things, courts have come to favor rulemaking over adjudication for the formulation of new policy), cert. denied, 422
U.S. 1026 (1974). As discussed below, the Commission provided notice and received comment here. See infra
para. 843. Consequently, we reject arguments that the Commission cannot rely on its section 201(a) authority to
require interconnection through a rulemaking proceeding. See, e.g., RCA Reply, CC Docket No. 01-92 at 4-5 (filed
July 11, 2005). For further discussion of the Commission’s authority under sections 332 and 201 to regulate LEC-
CMRS intercarrier compensation, see Section XV.
1587 American Telephone and Telegraph Company and the Bell System Operating Companies Tariff F.C.C. No. 8
(BSOC 8); Exchange Network Facilities for Interstate Access (ENFIA), CC Docket No. 78–371, Order on
Reconsideration, 93 FCC 2d 739, para. 33 (1983) (emph. added) (adopting certain tariffed charges as “inherently a
temporary measure, intended to provide a means of approximating costs that cannot be known with precision until a
more permanent access charge system can be put in place”). See also MTS and WATS Market Structure Inquiry
(Phase I), 93 FCC 2d 241, paras. 37-39 (1983) (concluding that “[s]ection 201(a) authorizes this Commission to
replace the industry-devised contractual arrangement with a Commission-devised formula” and adopting access
charge rules); Investigation of Access and Divestiture Related Tariffs; MTS and WATS Market Structure, CC Docket
No. 83–1145 Phase I, CC Docket No. 78–72 Phase I, Memorandum Opinion and Order, 98 FCC 2d 730 (1984)
(holding that “[p]ursuant to 47 U.S.C. §§ 154(i), 201(a), and 205(a), the Commission is authorized to establish
charges for carrier interconnections.”); Hawaiian Telephone Company Tariff F.C.C. No. 18, Exchange Network
Facilities for Interstate Access Hawaiian Telephone Company Tariff F.C.C. No. 19, Customer Indirect Network
Exchange Access Hawaiian Telephone Company Revisions to Tariff F.C.C. No. 11, Foreign Exchange Service,
Memorandum Opinion and Order, 85 FCC 2d 767, para. 6 (Com. Car. Bur. 1981) (observing that “a great deal of
(continued…)
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compensation required in conjunction with interconnection by, and with, CMRS providers, but also themechanism for implementing those compensation obligations. Even prior to the adoption of section 332
of the Act, the Commission relied on its section 201 authority to require LECs and CMRS providers to
negotiate interconnection agreements in good faith governing the physical interconnections among these
carriers, as well as the associated charges.1588 Following the adoption of section 332, the Commission
affirmed that “LECs [must] provide reasonable and fair interconnection for all commercial mobile radio
services,”1589 including “mutual compensation” by each interconnected carrier for “the reasonable costs
incurred by such providers in terminating traffic” that originated on the other carrier’s facilities.1590 At
that time the Commission retained its then-existing implementation framework, which primarily relied on
negotiated agreements with only a limited role expressly identified for tariffing, while observing that this
framework would be subject to “review and possible revision.”1591
836.
In the T-Mobile Order the Commission built upon the existing rules governing
interconnection and compensation for non-access traffic exchanged between LECs and CMRS providers,
incorporating the right of incumbent LECs to request interconnection with a CMRS provider, including
associated compensation, and adopting an implementation mechanism.1592 It established obligations
surrounding the pre-existing duty both CMRS providers and ILECs have to establish connections between
their respective networks, as well as exercising the Commission’s authority over the pre-existing tariffing
regime. We find, in light of the analysis and precedent above, that these actions are supported by the
Commission’s authority under sections 201 and 332 of the Act.1593
837.
Ancillary Authority. Ancillary authority also supports the T-Mobile Order requirement
that CMRS providers comply with the negotiation and arbitration procedures set forth in section 252 of
(Continued from previous page)
attention has been paid to compensation arrangements because of the legal obligation imposed upon local telephone
companies under Section 201 of the Communications Act, 47 U.S.C. § 201, to interconnect their local exchange
facilities with interstate services . . . . This right to interconnection is limited only by the duty to pay a fair and
reasonable sum to the local telephone companies for the service.” ).
1588 The Need to Promote Competition and Efficient Use of Spectrum for Radio Common Carrier Services,
Declaratory Ruling, 2 FCC Rcd 2910, 2912-13, paras. 17-21 (1987) (CMRS Interconnection Declaratory Ruling).
1589 Implementation of Sections 3(n) and 332 of the Communications Act; Regulatory Treatment of Mobile Services,
GN Docket No. 93-252, Second Report and Order, 9 FCC Rcd 1411, 1497-98, para. 230 (1994) (CMRS Second
Report and Order).
1590 CMRS Second Report and Order, 9 FCC Rcd at 1498, para. 232 (“LECs shall compensate CMRS providers for
the reasonable costs incurred by such providers in terminating traffic that originates on LEC facilities. Commercial
mobile radio service providers, as well, shall be required to provide such competition to LECs in connection with
mobile-originated traffic terminating on LEC facilities.”).
1591 CMRS Second Report and Order, 9 FCC Rcd at 1497, 1498, paras. 229, 235.
1592 T-Mobile Order, 20 FCC Rcd at 4864-65 para. 16; 47 C.F.R. § 20.11(e). See also T-Mobile Order, 20 FCC Rcd
at 4864, para. 15 n.61 (observing that, “given uncertainty as to the relationship between the arrangements
contemplated in section 20.11 and the section 251/252 agreements contained in the Act . . . the rights of LECs to
compel negotiations with CMRS providers are not entirely clear” and that “although CMRS providers may indeed
haven an existing legal obligation to compensate LECs for the termination of wireless traffic under section
20.11(b)(2) . . . the rules fail to specify the mechanism by which LECs may obtain this compensation”).
1593 See, e.g., CenturyTel Opposition, CC Docket No. 01-92 at 7 (filed June 30, 2005) (supporting the Commission’s
authority to adopt the relevant rules pursuant to sections 201 and 332 of the Act); CTIA Opposition, CC Docket No.
01-92 at 2 (filed June 30, 2005) (same); SBC Opposition, CC Docket No. 01-92 at 5 (filed June 30, 2005) (same).
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the Act.1594 Ancillary jurisdiction may be employed, at the Commission’s discretion, when twoconditions are satisfied: “(1) the Commission’s general jurisdictional grant under Title I of the Act covers
the regulated subject and (2) the regulations are reasonably ancillary to the Commission’s effective
performance of its statutorily mandated responsibilities.”1595 Both incumbent LECs and CMRS providers
are telecommunications carriers, over which we have clear jurisdiction. Further, to meaningfully
implement intercarrier compensation requirements established pursuant to sections 201, 332, and
251(b)(5) against the backdrop of mandatory interconnection and prohibitions on blocking traffic under
sections 201 and 251(a)(1), it was appropriate for the T-Mobile Order to impose requirements on CMRS
providers beyond those expressly covered by the language of section 252.
838.
As discussed above, pursuant to the authority of sections 201 and 332, the Commission
required interconnected LECs and CMRS providers to pay mutual compensation for the non-access traffic
that they exchange.1596 Even if sections 201 and 332 were not viewed as providing direct authority to
require that CMRS providers negotiate interconnection agreements with incumbents LECs for the
exchange of non-access traffic under the section 252 framework, such action clearly is reasonably
ancillary to the Commission’s authority under those provisions, including the associated requirement to
pay mutual compensation. Likewise, although section 251(b)(5) does not itself require CMRS providers
to enter reciprocal compensation arrangements, the Commission brought intraMTA LEC-CMRS traffic
within that framework.1597 CMRS providers received certain benefits from this regime,1598 and the
Commission likewise anticipated that they would enter agreements under which they would both “receive
reciprocal compensation for terminating certain traffic that originates on the networks of other carriers,
and . . . pay such compensation for certain traffic that they transmit and terminate to other carriers.”1599
Further, when carriers are indirectly interconnected pursuant to section 251(a)(1), as is often the case for
LECs and CMRS providers, the carriers’ interconnection arrangements can be relevant to addressing the
appropriate reciprocal compensation, as the Commission recently recognized.1600
839.
Given that the Commission prohibited tariffing of wireless termination charges for non-
access traffic on a prospective basis, LECs needed to enter into agreements with CMRS providers
providing for compensation under those regimes. Because LEC-CMRS interconnection is compelled by
section 251(a)(1) of the Act, and section 201 of the Act also generally restricts carriers from blocking
1594 See, e.g., SBC Opposition, CC Docket No. 01-92 (filed June 30, 2005) (citing the Commission’s “authority
under 47 U.S.C. § 154(i) to ‘make such rules and regulations, and issue such orders, not inconsistent with this
chapter, as may be necessary in the execution of its functions’”).
1595 Comcast Corp. v. FCC, 600 F.3d 642, 646 (D.C. Cir. 2010) quoting Am. Library Ass’n v. FCC, 406 F.3d 689,
691-692 (D.C. Cir. 2005).
1596 See supra para. 834.
1597 See infra Section XV.
1598 See, e.g., Local Competition First Report and Order, 11 FCC Rcd at 16016, para. 1042 (“We therefore conclude
that section 251(b)(5) prohibits charges such as those some incumbent LECs currently impose on CMRS providers
for LEC-originated traffic. As of the effective date of this Order, a LEC must cease charging a CMRS provider or
other carrier for terminating LEC-originated traffic and must provide that traffic to the CMRS provider or other
carrier without charge.”).
1599 See, e.g., Local Competition First Report and Order, 11 FCC Rcd at 16018, para. 1045.
1600 Petition of CRC Communications of Maine, Inc. and Time Warner Cable Inc. for Preemption Pursuant to
Section 253 of the Communications Act, as Amended, et al., WC Docket No. 10-143, CC Docket No. 01-92, GN
Docket No. 09-51, Declaratory Ruling, 26 FCC Rcd 8259, 8270, para. 21 (2011) (Interconnection Clarification
Order).
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traffic,1601 experience revealed that incumbent LECs would have limited practical ability to ensure thatCMRS providers negotiated and entered such agreements because they could not avoid terminating the
traffic even in the absence of an agreement to pay compensation. To ensure that the balance of regulatory
benefits intended for each party under the LEC-CMRS interconnection and compensation regimes was
not frustrated, it was necessary for the Commission to establish a mechanism by which incumbent LECs
could request interconnection, and associated compensation, from CMRS providers, and ensure that those
providers would negotiate those agreements, subject to an appropriate regulatory backstop. Thus, the
Commission’s section 4(i) authority also supports the T-Mobile Order requirement that CMRS providers
negotiate interconnection agreements with incumbent LECs in good faith under the section 252
framework.
(ii)
Consistency with the Communications Act and the
Administrative Procedures Act
In response to the concerns of some Petitioners, we clarify that the negotiation and
arbitration requirements adopted for CMRS providers in the T-Mobile Order did not impose section
251(c) on CMRS providers.1602 As commenters observe, with one exception, the requirements of section
251(c) expressly apply to incumbent LECs, and nothing in the T-Mobile Order attempts to extend those
statutory requirements to CMRS providers.1603 Nor does the reference to “interconnection” in section
20.11(e) of the Commission’s rules apply to CMRS providers the statutory interconnection obligations
governing incumbent LECs under section 251(c)(2).1604 As the T-Mobile Order makes clear, the primary
focus of that rule is to provide a mechanism to implement mutual compensation for non-access traffic
between incumbent LECs and CMRS providers.1605 However, the Commission’s mutual compensation
rules were adopted in the context of addressing LEC-CMRS interconnection, against a backdrop where
“interconnection” regulations were understood to encompass not only the physical connection of
networks, but also the associated intercarrier compensation.1606 In addition, as the Commission recently
1601 Although the Commission’s prohibitions on blocking under section 201 generally apply to interstate traffic, see,
e.g., Call Blocking Declaratory Ruling, 22 FCC Rcd 11629, given LECs’ indirect interconnection with CMRS
providers, and the fact that CMRS providers’ telephone numbers are not tied to particular geographic locations, it is
unclear that a LEC that undertook to block intrastate CMRS traffic could avoid blocking interstate traffic.
1602 See generally AAPC Petition at 4; RCA Petition at 2, 5-6, 8-11. But see, e.g., MetroPCS Communications
Petition for Limited Clarification or Partial Reconsideration, CC Docket No. 01-92 at 2 n.8 (filed Apr. 29, 2005)
(MetroPCS Petition) (“The Order was not intended to impose upon other CMRS carriers the panoply of duties under
Section 251(c) of the Act - - e.g., the duty to provide direct interconnection under § 251(c)(2), the duty to provide
unbundled access under § 251(c)(3), the duty to offer resale under § 251(c)(4), the duty to provide notice of changes
under § 251(c)(4) or the duty to allow collocation under § 251(c)(5).”); T-Mobile Opposition and Comments, CC
Docket No. 01-92 at 5 (filed June 30, 2005) (“T-Mobile does not read the WTT Order as having imposed
interconnection obligations on CMRS providers pursuant to the Commission’s authority to implement Section
251(c) of the Communications Act.”).
1603 See, e.g., AllTel Opposition, CC Docket No. 01-92, at 2-3 (filed June 30, 2005); Leap Comments, CC Docket
No. 01-92 at 4 (filed June 30, 2005). Section 251(c)(1) also requires “requesting telecommunications carriers . . . to
negotiate in good faith the terms and conditions of” interconnection agreements. 47 U.S.C. § 251(c)(1).
1604 See, e.g., RCA Petition at 3, 5-6, 9.
1605 See, e.g., T-Mobile Order, 20 FCC Rcd at 4864-65, 15-16.
1606 See supra para 835. We thus conclude that the definition of “interconnection” in section 51.5 of the
Commission’s rules is not dispositive of the interpretation of that term here. See, e.g., RCA Petition at 4 (citing the
definition of “interconnection” in 47 C.F.R. § 51.5, which is focused on “the linking of two networks” and excluding
“transport and termination of traffic”). This rule was codified in Part 20, not Part 51.
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recognized, interconnection arrangements can bear on the resolution of disputes regarding reciprocalcompensation under the section 252 framework.1607 For example, while interconnection for the exchange
of access traffic does not currently implicate section 251(b), an interconnection agreement for the
exchange of reciprocal compensation traffic may contain terms relevant to determining appropriate rates
under the statute and Commission rules.1608 Moreover, section 20.11(e) of the Commission’s rules does
not supplant or expand the otherwise-applicable interconnection obligations for CMRS providers, as some
contend.1609 Thus, in response to a request by an incumbent LEC for interconnection under section
20.11(e), CMRS providers are not required to enter into direct interconnection, and may instead satisfy
their obligation to interconnect through indirect arrangements.
841.
Similarly, the Commission did not interpret section 252 as binding on CMRS providers
in the same manner as incumbent LECs.1610 Rather, the Commission exercised its authority under
sections 201, 332, 251 and 4(i) to apply to CMRS providers’ duties analogous to the negotiation and
arbitration requirements expressly imposed on incumbent LECs under section 252.1611 Although
Congress did not expressly extend these requirements this broadly in section 252 of the Act, our
1607 Petition of CRC Communications of Maine, Inc. and Time Warner Cable Inc. for Preemption Pursuant to
Section 253 of the Communications Act, as Amended, et al., WC Docket No. 10-143, CC Docket No. 01-92, GN
Docket No. 09-51, Declaratory Ruling, 26 FCC Rcd 8259, 8270, para. 21 (2011) (Interconnection Clarification
Order); Local Competition First Report and Order, 11 FCC Rcd at 15991, para. 997 (“we find that indirect
connection (e.g., two non-incumbent LECs interconnecting with an incumbent LEC’s network) satisfies a
telecommunications carrier’s duty to interconnect pursuant to 251(a)”).
1608 See, e.g., 47 U.S.C. §§ 251(b)(5), 252(d)(2)(A); 47 C.F.R. § 51.701(b)(1) (specifically excluding “interstate or
intrastate exchange access, information access, or exchange services for such access” from the scope of the
reciprocal compensation pricing rules); Local Competition First Report and Order, 11 FCC Rcd at 16012-25, paras.
1033-59; see also id.
1609 See, e.g., RCA Petition at 3, 5-6, 9. See also, e.g., Nextel Partners Comments and Opposition, CC Docket No.
01-92 at (filed June 30, 2005) (arguing that section 20.11(e) of the Commission’s rules should not be interpreted to
“impose new physical interconnection negotiations on CMRS providers”); Qwest Opposition, CC Docket No. 01-92
at 2 n.4 (filed June 30, 2005) (acknowledging that “ILECs do not have a statutory right to demand Section 251(b) or
(c) interconnection with CMRS carriers,” but that “they certainly have the right to demand interconnection with
CMRS providers pursuant to Sections 201(a) and 251(a) of the Act and to insist that the CMRS provider conduct
itself in good faith during the negotiation (and performance) phases of the agreement.”); Cingular Wireless Reply,
CC Docket No. 01-92 at 2-4 (filed July 11, 2005) (arguing that the T-Mobile Order should not be interpreted to
impose a new direct interconnection requirement on CMRS providers). For these same reasons, we reject the claim
that section 20.11(e) is in conflict with section 20.11(a) of the Commission’s rules, which grants CMRS providers
certain interconnection rights with respect to incumbent LECs. See RCA Petition at 5-6 (citing 47 C.F.R. §
20.11(a)). Nothing in section 20.11(e) of the Commission’s rules should be read to eliminate CMRS providers’
rights under section 20.11(a).
1610 See, e.g., T-Mobile Order, 20 FCC Rcd at 4864, para. 15 (observing that “LECs may not require CMRS
providers to negotiate interconnection agreements or submit to arbitration under section 252 of the Act”). As AAPC
observes, for example, “the ILEC’s receipt of a request for interconnection from another telecommunications carrier
is an explicit condition precedent” to a petition for arbitration under section 252. AAPC Petition at 4 (citing 47
U.S.C. § 252(b)(1)) (emphasis in original).
1611 See, e.g., CTIA Opposition, CC Docket No. 01-92 at 6 (filed June 30, 2005) (“Thus, the references to Section
252 in the Order and in the amended Section 20.11 were simply a shorthand way of generally describing the
procedures that the Commission intended to make available to the requesting ILECs in negotiating reciprocal
compensation agreements.”); T-Mobile Opposition and Comments, CC Docket No. 01-92 at 6 (filed June 30, 2005)
(“The Commission also should clarify that, as discussed above, any reference to negotiation and arbitration
procedures under Section 252 is solely a shorthand for procedures similar to those that the Commission has applied
under Section 252, rather than reliance upon Section 252 as its jurisdictional authority.”).
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subsequent experience with interconnection and intercarrier compensation, as described above,demonstrate the need for the duties imposed on CMRS providers in the T-Mobile Order.1612 Thus, the
Commission sensibly required CMRS providers to negotiate interconnection agreements with incumbent
LECs in good faith, subject to arbitration by the state or, where the state lacks authority1613 or otherwise
fails to act,1614 by the Commission.1615 This approach also is supported by the concept of cooperative
federalism, which is reasonably contemplated by sections 251 and 252 of the Act.1616 Because of the
cooperative federalism embodied by sections 251 and 252, and the role of the Commission in arbitrating
interconnection disputes under the section 252 framework when states lack authority or otherwise fail to
act, we also reject claims that the T-Mobile Order constituted an unlawful delegation to the states.1617
842.
We also do not interpret silence in certain provisions of the Act regarding the duties of
CMRS providers as precluding the Commission’s action in the T-Mobile Order. For one, we reject
requests that we ignore the Commission’s experience with interconnection and intercarrier compensation
and treat Congress’ silence regarding the rights of incumbent LECs to invoke negotiation and arbitration
in section 252 of the Act as equivalent to a statutory prohibition on extending such rights.1618 Nor are we
persuaded that the language of section 332(c)(1)(B) precludes the Commission’s extension of section
1612 See supra paras. 828-836.
1613 See, e.g., Petition of WorldCom, Inc. for Preemption of Jurisdiction of the Virginia State Corporation
Commission Pursuant to Section 252(e)(5) of the Telecommunications Act of 1996 and for Arbitration of
Interconnection Disputes With Verizon-Virginia, Inc., CC Docket No. 00-218, Memorandum Opinion and Order, 16
FCC Rcd 6224 (2001).
1614 See, e.g., Petition of Northland Networks, Ltd. For Preemption of the Jurisdiction of the New York Public
Service Commission Pursuant to Section 252(e)(5) of the Communications Act of 1934, as Amended, WC Docket
No. 03-242, Memorandum Opinion and Order, 19 FCC Rcd 2396 (Wir. Comp. Bur. 2004).
1615 See generally 47 C.F.R. Part 51, Subpart I.
1616 See, e.g., Core v. Verizon PA, 493 F.3d 333 (3d Cir. 2007); Centennial Puerto Rico License Corp. v. Telecom.
Reg. Bd. of Puerto Rico, 634 F.3d 17, 22 (1st Cir. 2011).
1617 See, e.g., AAPC Petition at 6; RCA Reply, CC Docket No. 01-92 at 7-9 (filed July 11, 2005). We also disagree
with RCA that a role for the states is at odds with the “uniform, national deregulatory environment for CMRS” that
“Congress sought to achieve.” RCA Reply, CC Docket No. 01-92 at 7-8 (filed July 11, 2005). As the D.C. Circuit
recently recognized, a state role in the context of LEC-CMRS interconnection issues can be “consistent with the
dual regulatory scheme assumed in the Communications Act” notwithstanding concerns about a resulting
“patchwork of regulatory schemes throughout the states [that could] undermine Congress’s understanding that
‘mobile services ... by their nature, operate without regard to state lines as an integral part of the national
telecommunications infrastructure.’” MetroPCS v. FCC, 644 F.3d 410, 413-14 (D.C. Cir. 2011). See also id. at 414
(“the FCC’s reasonable reading of the Communications Act and Rule 20.11(b) is not disturbed by MetroPCS’s wish
that the FCC do it all, which finds no expression in the statute”).
1618 Compare, e.g., RCA Reply, CC Docket No. 01-92 at 6 (filed July 11, 2005) (arguing that, because section 252
expressly imposes certain obligations on incumbent LECs, it is inconsistent with the Act to impose those
requirements on other carriers) with, e.g., SBC Opposition, CC Docket No. 01-92 at 5 (filed June 30, 2005) (arguing
that the focus on incumbent LECs in section 252 “by no means prohibits the Commission from adopting a rule
allowing ILECs to request negotiations”). RCA further observes that section 251(c)(1) expressly requires incumbent
LECs to negotiate interconnection agreements in good faith “in accordance with section 252,” while the good faith
negotiation requirement for requesting carriers does not specifically reference section 252. RCA Reply, CC Docket
No. 01-92 at 6 (filed July 11, 2005). This simply reflects the explicit focus on incumbent LECs in the text of section
252, however. Because we do not interpret the Act’s silence in section 252 regarding implementation procedures
governing non-incumbent LECs as precluding section 20.11(e) of the Commission’s rules, we likewise do not
interpret section 251(c)(1) in that manner.
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252-type procedures in this manner. RCA observes that section 332(c)(1)(B) only expressly discussesrequests by CMRS providers for interconnection, and contends that precludes rules that would enable
incumbent LECs to request interconnection from CMRS providers.1619 As a threshold matter, we observe
that CMRS providers are required to interconnect with other carriers under section 251(a) of the Act, and
that section 201 also provides the Commission authority to require CMRS providers to interconnect. We
thus disagree with RCA’s suggestion that section 332 should be read to preclude CMRS providers from
being subject to such requests.1620 With respect to the procedures for implementing such requests,
however, we note that the Commission previously has suggested “that the procedures of section 252 are
not applicable in matters involving section 251(a) alone.”1621 We find it appropriate to interpret the
obligations imposed on CMRS providers under section 20.11(e) in a manner consistent with the
Commission’s interpretation of the scope of the comparable requirements of section 252 from which it
was derived. We thus make clear that section 20.11(e) does not apply to requests for direct or indirect
physical interconnection alone, but only requests that also implicate the rates and terms for exchange of
non-access traffic.
843.
We further find that the rules adopted in the T-Mobile Order were procedurally proper,
contrary to the contentions of some petitioners.1622 The Commission’s 2001 Intercarrier Compensation
NPRM expressly sought “comment on the rules [the Commission] should adopt to govern LEC
interconnection arrangements with CMRS providers, whether pursuant to section 332, or other statutory
authority,”1623 and “on the relationship between the CMRS interconnection authority assigned to the
Commission under sections 201 and 332, and that granted to the states under sections 251 and 252.”1624
The T-Mobile petition was incorporated into the docket in that proceeding, and in response to the
Commission’s request for comment on that petition,1625 the issue of LECs being able to request
interconnection negotiations with CMRS carriers was raised in the record.1626 We thus are not persuaded
1619 RCA Reply, CC Docket No. 01-92 at 5 (filed July 11, 2005).
1620 See, e.g., Policy and Rules Concerning the Interstate Interexchange Marketplace; Implementation of Section
254(g) of the Communications Act of 1934, as Amended; Petitions for Forbearance, CC Docket No. 96-61,
Memorandum Opinion and Order, 14 FCC Rcd 391, 398, para. 15 (1998) (“the interconnection requirements of
section 251(a) clearly apply to CMRS providers”).
1621 Interconnection Clarification Order, 26 FCC Rcd at 8270, para. 21 & n.76.
1622 See, e.g., AAPC Petition at 4 (arguing that section 20.11(e) of the Commission’s rules “was adopted without
providing general notice of ‘either the terms or substance of the proposed rule’ in apparent disregard of the
Administrative Procedures Act”) (quoting 4 U.S.C. § 553(b)(3)).
1623 Intercarrier Compensation NPRM, 16 FCC Rcd at 9642, para. 90.
1624 Id. at 9641, para. 86.
1625 Comment Sought on Petitions for Declaratory Ruling Regarding Intercarrier Compensation for Wireless
Traffic, CC Docket No. 01-92, Public Notice, 17 FCC Rcd 19046 (2002); Intercarrier Compensation for Wireless
Traffic, 67 Fed. Reg. 64,120 (Oct. 17, 2002) (publishing the Public Notice in the Federal Register). See also T-
Mobile Opposition and Comments, CC Docket No. 01-92 at 7 (filed June 30, 2005) (“The Commission fully
complied with [notice and comment] requirements by issuing a public notice seeking comment on the reciprocal
compensation issues involving CMRS providers and incumbent LECs, as raised in the petition for declaratory ruling
filed by T-Mobile and other parties. This public notice was subsequently published in the Federal Register and
therefore satisfies the notice-and-comment requirements of the APA.”) (footnotes omitted).
1626 SBC Opposition, CC Docket No. 01-92, at 3 n.7 (filed June 30, 2005). See also, e.g., Alabama Rural Local
Exchange Carriers Reply, CC Docket No. 01-92 at 6 (filed Nov. 1, 2002) (The Commission should “revise its
existing rules to make it clear that ‘that CMRS providers have an affirmative obligation to negotiate and enter into
interconnection compensation agreements with independent LECs’ prior to terminating traffic to such LECs
(continued…)
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that parties lacked adequate notice and an opportunity to comment on the requirements ultimatelyimposed in section 20.11(e) of the Commission’s rules.
c.
Requests for Clarification
844.A number of petitions seek clarification regarding the operation of the T-Mobile Order
and/or the state of the law that existed prior to such decision.1627 Except insofar as discussed above,1628 or
in our actions regarding wireless intercarrier compensation generally,1629 we decline to provide such
clarification here. The Commission has discretion whether to issue a declaratory ruling, and rather than
addressing these requests here, we can address issues as they arise.1630
d.
Extending T-Mobile
to Other Contexts845.
We decline, at this time, to extend the obligations enumerated in the T-Mobile Order to
other contexts. As discussed above, the T-Mobile Order imposed on CMRS providers the duty to
negotiate interconnection agreements with incumbent LECs under the section 252 framework.1631
However, the T-Mobile Order did not address relationships involving competitive LECs or among other
interconnecting service providers. Subsequently, competitive LECs have requested that the Commission
expand the scope of the T-Mobile Order and require CMRS providers to negotiate agreements with
competitive LECs under the section 251/252 framework, just as they do with incumbent LECs.1632 In
addition, rural incumbent LECs urged the Commission to “give small carriers some legal authority to
demand a negotiated interconnection agreement,” and argued that “the Commission should extend the T-
Mobile Order to give ILECs the right to demand interconnection negotiations with all carriers.”1633
Policy and legal issues surrounding the possible extension of the T-Mobile Order are insufficiently
addressed in our current record, and as such we seek comment in the accompanying FNPRM on whether
to extend T-Mobile Order obligations to other contexts.1634
846.
However, this issue remains highly relevant notwithstanding our adoption of bill-and-
keep as the default for reciprocal compensation between LECs and CMRS providers under section
(Continued from previous page)
pursuant to arrangements with an RBOC.”) (quoting Frontier and Citizens Comments, CC Docket 01-92, at 8 (filed
Oct. 18, 2002).
1627 See, e.g., MetroPCS Petition; Missouri Small Telephone Company Group Petition for Reconsideration, CC
Docket No. 01-92 (filed Mar. 25, 2005) (MoSTCG Petition); T-Mobile USA Petition for Clarification or, in the
Alternative, Reconsideration, CC Docket No. 01-92 (filed Apr. 29, 2005).
1628 See supra Section XII.C.5.b.
1629 See infra Section XV.
1630 See 47 C.F.R § 1.2; Yale Broadcasting Co. v. FCC, 478 F.2d 594, 602 (D.C. Cir. 1973) (Commission did not
abuse its discretion by declining to grant a declaratory ruling).
1631 See supra XII.C.5.
1632 See, e.g., Pac-West Comments at 3; PAETEC et al. Section XV Reply at 23-24; Letter from Michael B.
Hazzard, counsel for Xspedius, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, Attach. at 7 (filed
Aug. 10, 2005); Supra Telecommunications and Information Systems Ex Parte Comments and Cross-Petition for
Limited Clarification, CC Docket No. 01-92 at 10 (filed July 14, 2005).
1633 NECA et al. Section XV Comments at 29 n.67, 30.
1634 See infra para. 1324
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251(b)(5).1635 Under a bill-and-keep methodology, carriers still will need to address issues such as the“edge” for defining the scope of bill-and-keep, subject to arbitration where they cannot reach
agreement.1636 These issues do not lend themselves well to one-size-fits-all approaches as would be
required under a tariffing regime. Imposing a duty to negotiate, subject to arbitration, will negate the
need for Commission intervention in this context and will facilitate more market-based solutions.1637
Because we also maintain our existing requirements regarding interconnection and prohibitions on
blocking traffic, our experience suggests that carriers under no legal compulsion to come to the table may
have no incentive to do so, thus frustrating the efforts of interconnected carriers to resolve open questions.
The section 252 framework—already in place in other contexts under the terms of the Act—may be a
reasonable mechanism to use to address these situations.
XIII.
RECOVERY MECHANISM
A.
Introduction
847.In this section, we adopt a transitional recovery mechanism to facilitate incumbent LECs’
gradual transition away from ICC revenues reduced as part of this Order. This mechanism allows LECs
to recover ICC revenues reduced as part of our intercarrier compensation reforms, up to a defined
baseline, from alternate revenue sources: incremental, and limited increases in end user rates and, where
appropriate, universal service support through the Connect America Fund. The recovery mechanism is
limited in time and carefully balances the benefits of certainty and a gradual transition with our goal of
keeping the federal universal service fund on a budget and minimizing the overall burden on end users.
848.
The recovery mechanism is not 100 percent revenue-neutral relative to today’s revenues,
but it eliminates much of the uncertainty carriers face under the existing ICC system, allowing them to
make investment decisions based on a full understanding of their revenues from ICC for the next several
years. Absent reform, price cap and rate-of-return carriers alike face an increasingly unpredictable
revenue stream from ICC, which will only get worse as demand for traditional telephone service
continues to decline. For price cap carriers, under the current system, access rates remain constant as
demand declines, so declining MOUs have led to rapid and significant revenue declines. Rate-of-return
carriers are experiencing similar declines in intrastate access revenues, because most states do not
perform regular true ups of intrastate access rates to reflect declining demand. And while rate-of-return
carriers’ interstate access rates do increase today as demand declines, in theory holding their interstate
access revenues constant, in practice the rapid decline in demand has caused large rate increases that
incent other communications providers to develop and use access avoidance schemes.1638 Such schemes,
along with phantom traffic, uncertainty about payment for VoIP, and resulting litigation, have placed
significant additional strain on the reliability of intercarrier compensation as a revenue stream for all types
1635 See supra XV. We hold above that the mutual compensation owed for purposes of section 20.11 of the
Commission’s rules is coextensive with the reciprocal compensation requirements between LECs and CMRS
providers, and we also adopt bill-and-keep as the default reciprocal compensation arrangement in this context. See
supra XV.C. For convenience, this discussion uses the phrases “mutual compensation” and “reciprocal
compensation” interchangeably, without prejudging the appropriate compensation level prior to this Order.
1636 See supra Sections XII.A and XV.
1637 See, e.g., RNK Communications Section XV Comments at 8 (citing benefits that can arise from a framework
that allows parties to negotiate mutually agreeable outcomes, rather than all parties being categorically bound to a
single regime); Verizon Section XV Comments at 13-14 (same); Bandwidth.com Reply at 11, 15-17 (same).
1638 See, e.g., Letter from Jerry Weikle, ERTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, 07-
135, 05-337, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45, at 1, 3 (filed July 8, 2011) (ERTA July 8, 2011
Ex Parte Letter)(describing arbitrage concerns with respect to Halo Wireless).
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of carriers. These trends are only likely to accelerate as communication options for consumers continueto proliferate beyond landline telephone calling.
849.
In establishing the framework for recovery, we conclude that carriers should first look to
limited recovery from their own end users, consistent with the principle of bill and keep and the model in
the wireless industry, and we take measures to ensure that phone rates remain affordable and reasonably
comparable among all Americans. Therefore, we adopt several safeguards to protect end users from
unreasonable or excessive increases, for example by adopting a Residential Rate Ceiling above which
consumer recovery through a federal Access Recovery Charge (ARC) is prohibited, and significantly
mitigating ICC recovery from residential consumers by balancing it with recovery from multi-line
businesses. We also adopt protections to ensure that multiline businesses do not see any unreasonable
increases by adopting a per-line total cap that includes both the federal SLC and the new federal ARC.
Additional recovery, when permitted, will be provided from the CAF. We also adopt safeguards to
ensure USF stays within our budget and to ensure that CAF ICC support serves to advance our goal of
universal voice and broadband, creating significant consumer benefits. We note that, during the transition
adopted in this Order, all LECs will continue to collect intercarrier compensation for originating access
and dedicated transport, providing continued revenue flows from those sources.
B.
Summary
850.Our recovery mechanism has two basic components. First, we define the revenue
incumbent LECs are eligible to recover, which we refer to as “Eligible Recovery.” Second, we specify
how incumbent LECs may recover Eligible Recovery through limited end-user charges and, where
eligible and a carrier elects to receive it, CAF support. Competitive LECs are free to recover reduced
revenues through end-user charges.
851.
Eligible Recovery.
·
Price cap incumbent LECs’ Baseline for recovery will be 90 percent of their Fiscal Year 2011
(FY2011)1639 interstate and intrastate access revenues for the rates subject to reform and net
reciprocal compensation revenues. For price cap carriers’ study areas that participated in the
Commission’s 2000 CALLS reforms, and thus have had interstate access rates essentially
frozen for almost a decade, Price Cap Eligible Recovery (i.e., revenues subject to our
recovery mechanism) will be the difference between: (a) the Price Cap Baseline, subject to 10
percent annual reductions; and (b) the revenues from the reformed intercarrier compensation
rates in that year, based on estimated MOUs multiplied by the associated default rate for that
year. For carriers that have more recently converted to price cap regulation and did not
participate in the CALLS plan, we phase in the reductions after five years, so that the initial 10
percent reduction occurs in year six. Estimated MOUs will be calculated as FY2011 minutes
for all price cap carriers, and will be reduced 10 percent annually for each year of reform to
reflect MOU trends over the past several years. Because such demand reductions have
applied equally to all price cap carriers, we do not make any distinction among price cap
carriers for purposes of this calculation. We adopt this straight line approach to determining
MOUs, rather than requiring carriers to report actual minutes each year, because it will be
more predictable for carriers and less burdensome to administer.
·
Rate-of-return incumbent LECs’ Baseline for recovery, which is somewhat more complex,
will be based on their 2011 interstate switched access revenue requirement (which is
recovered today through interstate access revenues and local switching support (LSS), if
1639 We define “fiscal year” 2011 for these purposes as October 1, 2010 through September 30, 2011.
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applicable), plus FY2011 intrastate terminating switched access revenues and FY2011 netreciprocal compensation revenue. Rate-of-Return Eligible Recovery will be the difference
between: (a) the Rate-of-Return Baseline, subject to five percent annual reductions; and (b)
the revenues from the reformed intercarrier compensation rates in that year, based on actual
MOUs multiplied by the associated default rate for that year. The annual Rate-of-Return
Baseline reduction used in the calculation of Rate-of-Return Eligible Recovery revenue
reflects two considerations. First, in recent years rate-of-return carriers’ interstate switched
access revenue requirements have been declining on average at approximately three percent
annually due to declining regulated costs, with corresponding declines in interstate access
revenues; such declines are projected to continue each year for the next several years.1640 In
addition, rate-of-return carriers’ intrastate revenues have been declining on average at 10
percent per year as MOU decline,1641 with state regulatory systems that typically do not have
annual, automatic mechanisms to increase rates to account for declining demand. Weighing
these considerations, we find it appropriate to reduce rate-of-return carriers’ Eligible
Recovery by five percent annually.1642 This approach to revenue recovery will put most rate-
of-return carriers in a better financial position—and will provide substantially more
certainty—than the status quo path absent reform, where MOU declines would continue to be
large and unpredictable and would significantly reduce intrastate revenues. This approach
also provides carriers with the benefit of any costs savings and efficiencies they can achieve
by enabling carriers to retain revenues even if their switched access costs decline. And it
avoids creating misaligned incentives for carriers to inefficiently increase costs to grow their
intercarrier compensation revenue requirement and thereby draw more access replacement
from the CAF.
852.
Recovery from End Users. Consistent with past ICC reforms, we permit carriers to
recover a limited portion of their Eligible Recovery from their end users through a monthly fixed charge
called an ARC. We take measures to ensure that any ARC increase on consumers does not impact
affordability of rates, including by limiting the annual increase in consumer ARCs to $0.50. We also
make clear that carriers may not charge an ARC on any Lifeline customers.1643 This charge is calculated
independently from, and has no bearing on, existing SLCs, although for administrative and billing
efficiencies we do permit carriers to combine the charges as a single line item on a bill.
1640 See Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary,
FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at
Attach. 3 at 1 (filed Sept. 9, 2011) (NTCA Sept. 9, 2011 Ex Parte Letter).
1641 See generally Letter from Regina McNeil, VP of Legal, General Counsel & Corporate Secretary, NECA to
Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51, CC Docket
No. 01-92 (filed April 6, 2011); Letter from Regina McNeil, VP of Legal, General Counsel & Corporate Secretary,
NECA to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51, CC
Docket No. 01-92 (filed May 11, 2011); Letter from Regina McNeil, VP of Legal, General Counsel & Corporate
Secretary, NECA to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No.
09-51, CC Docket No. 01-92 (filed May 25, 2011) (collectively NECA Data Filings) (based upon aggregation of
confidential data).
1642 We seek comment in the FNPRM asking whether we should change this reduction after five years by either
moving to a decline based on MOUs and/or increasing the decline by one percent per year up to a maximum of 10
percent annual baseline decline. See supra para. 1329.
1643 See, e.g., Letter from Chris Riley, Policy Counsel, Free Press, to Marlene H. Dortch, Secretary, FCC, WT
Docket No. 11-65, WC Docket Nos. 10-90, 05-337, 03-109, 11-42, GN Docket No. 09-51, CC Docket Nos. 01-92 at
1 (filed Oct. 14, 2011) (urging the Commission to exclude any Lifeline customers from any recovery charge adopted
as part of ICC reform).
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·Recovery Fairly Balanced Across All End Users. We do not, as some commenters urge, put
the entire burden of access recovery on consumers. Rather, consistent with the Commission’s
approach in past reforms, under which business customers also contributed to offset declines
in access charges, we balance consumer and single-line business recovery with recovery from
multi-line businesses. We also adopt additional measures to protect consumers of incumbent
LECs that elect not to receive CAF funding, by limiting the proportion of Eligible Recovery
that can come from consumers and single-line businesses based on a weighted share of a
carrier’s residential versus business lines.1644
·
Protections for Consumers Already Paying Rebalanced Rates. To protect consumers,
including in states that have already rebalanced rates through prior state intercarrier
compensation reforms, we adopt a Residential Rate Ceiling that prohibits imposing an ARC
on any consumer paying an inclusive local monthly phone rate of $30 or more.1645
·
Protections for Multi-Line Businesses. Although we do not adopt a business rate ceiling, nor
were there proposals in the record to do so, we do take measures to ensure that multi-line
businesses’ total SLC plus ARC line items are just and reasonable. The current multi-line
business SLC is capped at $9.20. Some carriers, particularly smaller rate of return and mid-
size carriers, are at or near the cap, while larger price cap carriers may have business SLCs as
low as $5.00. To minimize the burden on multi-line businesses, we do not permit LECs to
charge a multi-line business ARC where the SLC plus ARC would exceed $12.20 per line.
This limits the ARC for multi-line businesses for entities at the current $9.20 cap to $3.00.
We find this limitation for multi-line businesses consistent with the reasons we place an
overall limit on the residential ARCs discussed below.
·
To recover Eligible Recovery, price cap incumbent LECs are permitted to implement
monthly end user ARCs with five annual increases of no more than $0.50 for
residential/single-line business consumers, for a total monthly ARC of no more than $2.50 in
the fifth year; and $1.00 (per month) per line for multi-line business customers, for a total of
$5.00 per line in the fifth year, provided that: (1) any such residential increases would not
result in regulated residential end-user rates that exceed the $30 Residential Rate Ceiling; and
(2) any multi-line business customer’s total SLC plus ARC does not exceed $12.20. The
monthly ARC that could be charged to any particular consumer cannot increase by more than
$0.50 annually, and in fact we estimate that the average increase in the monthly ARC that
would be permitted across all consumer lines over the period of reform, based on the amount
of eligible recovery, is approximately $0.20 annually.1646 However, we expect that not all
1644 This limitation is only necessary for carriers that are not eligible or elect not to receive CAF funding because
carriers recovering from CAF will have the full ARC imputed to them.
1645 The Residential Rate Ceiling is based on the state basic local residential service rate plus the federal SLC and
the ARC; the flat rate for residential local service, mandatory extended area service charges, and state subscriber line
charges; per-line state high cost and/or access replacement universal service contributions; state E911 charges; and
state TRS charges. See infra paras. 913-916.
1646 FCC Staff Analysis. Using incumbent LECs’ filings in this docket, staff totaled each LECs’ access revenues
that are being reduced as a result of this Order, and then converted these aggregate dollar figures into a per line
amount by dividing by the carrier’s average lines in service for the most recent filing period. See Letter from Karen
Brinkmann, Counsel to Alaska Communications Systems, to Marlene H. Dortch, Secretary, FCC, CC Docket No.
01-92, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Attach. (filed Sept. 7, 2011); Letter from
Karen Brinkmann, Counsel to Hawaiian Telecom, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92,
WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Attach. (filed June 24, 2011); Letter from Karen
Brinkmann, Counsel to Fairpoint, CC Docket No. 01-92, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No.
(continued…)
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carriers will elect or be able to charge the ARC due in part to competitive pressures, and wetherefore predict the average actual increase across all consumers to be approximately $0.10-
$0.15 each year, peaking at approximately $0.50 to $0.90 after five or six years, and
declining thereafter.1647
·
To recover Eligible Recovery, rate-of-return incumbent LECs are permitted to implement
monthly end user ARCs with six annual increases of no more than $0.50 (per month) for
(Continued from previous page)
09-51 at Attach. (filed Apr. 19, 2011); Letter from Maggie McCready, Vice President, Federal Regulatory, Verizon,
to Marlene H. Dortch, Secretary, FCC, and Lynne Hewitt Engledow, Pricing Policy Division, Wireline Competition
Bureau, FCC, CC Docket No. 01-92, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at 2 (filed Apr.
14, 2011); Letter from Christopher Heimann, General Attorney, AT&T, to Marlene H. Dortch, Secretary, FCC, CC
Docket No. 01-92, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Attach. (filed Apr. 8, 2011);
Letter from Maggie McCready, Vice President, Federal Regulatory, Verizon, to Marlene H. Dortch, Secretary, FCC,
and Lynne Hewitt Engledow, Pricing Policy Division, Wireline Competition Bureau, FCC, CC Docket No. 01-92,
WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Ex. 1 (filed Mar. 24, 2011); Letter from Maggie
McCready, Vice President, Federal Regulatory, Verizon, to Marlene H. Dortch, Secretary, FCC, and Lynne Hewitt
Engledow, Pricing Policy Division, Wireline Competition Bureau, FCC, CC Docket No. 01-92, WC Docket Nos.
10-90, 07-135, 05-337, GN Docket No. 09-51 at Ex. 1 (filed Mar. 14, 2011); Letter from Melissa Newman, Vice
President-Federal Relations, Qwest, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92 at Attach. (filed
Jan. 18, 2011); CenturyLink, Response to FCC Data Request, CC Docket No. 01-92, WC Docket Nos. 10-90, 07-
135, 05-337, GN Docket No. 09-51 (filed Jan. 13, 2011); Letter from Michael D. Saperstein, Jr., Director of Federal
Regulatory Affairs, Frontier, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, WC Docket Nos. 10-90,
07-135, 05-337, GN Docket No. 09-51 at Attach. (filed Dec. 16, 2010); Letter from Malena Barzilai, Regulatory
Counsel & Director – Federal Regulatory Affairs, Windstream, to Marlene H. Dortch, Secretary, FCC, CC Docket
No. 01-92, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Attach. (filed Oct. 15, 2010)
(collectively ILEC Data Filings) (collectively, ILEC Data Filings); see also, Letter from Regina McNeil, Vice
President of Legal, General Counsel and Corporate Secretary, NECA, to Marlene H. Dortch, Secretary, FCC, and
Lynne Hewitt Engledow, Pricing Policy Division, Wireline Competition Bureau, FCC, CC Docket No. 01-92, WC
Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Attach. (filed May 25, 2011); Letter from Regina
McNeil, Vice President of Legal, General Counsel and Corporate Secretary, NECA, to Marlene H. Dortch,
Secretary, FCC, and Lynne Hewitt Engledow, Pricing Policy Division, Wireline Competition Bureau, FCC, CC
Docket No. 01-92, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51 at Attach. (filed May 11, 2011);
Letter from Joe A. Douglas, Vice President, Government Relations, NECA, to Marlene H. Dortch, Secretary, FCC,
CC Docket Nos. 01-92, 80-286 at Attach. (filed Dec. 29, 2010). Staff then trended this value over the period of
reform to reflect the excess MOU loss over expected line loss (annual declines of 10 percent and 7.5 percent
respectively), and applied the appropriate reduction to eligible recovery. This produced the approximate total
recovery need per line for the carrier over the course of reform. Staff then divided this value by the number of ARC
increases (5 for price cap, 6 for rate of return) to get an average ARC increase across all lines. Staff then adjusted
this average based on each carrier’s mix of residential and single line businesses to multiline businesses and the
carrier’s potential annual ARC increases, factoring in the annual caps of $0.50 and $1.00 on consumers and
multiline businesses respectively, the residential ceiling of $30 and the business ARC + SLC limit of $12.20 and the
exclusion of Lifeline lines, to estimate the average imputed consumer ARC increase.
1647 To estimate likely actual consumer ARC increase, staff applied a 25-50 percent reduction factor to the
theoretically permitted ARCs to reflect our expectation that competitive pressures will prevent carriers from
imposing the full charges on all consumers. Filings in the record support our prediction that carriers will not charge
the maximum permitted ARCs on all customers. See, e.g., Reply Comments of AT&T Inc. on the Missoula Plan for
Intercarrier Compensation Reform, CC Docket No. 01-92, filed Feb. 1, 2007, Exhibit 1 at n. 11. See also
http://www.phoenix-center.org/perspectives/Perspective11-06Final.pdf (suggesting carriers would realize as little as
40 percent ARC recovery). We recognize that these estimates are necessarily predictive and imprecise, however,
and we believe any burden on consumers will be significantly outweighed by the benefits of reform even if carriers
are able to charge the full permitted ARCs.
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residential/single-line business consumers, for a total ARC of no more than $3.00 in the sixthyear; and $1.00 (per month) per line for multi-line business customers for a total of $6.00 per
line in the sixth year, provided that: (1) such increases would not result in regulated
residential end-user rates that exceed the $30 Residential Rate Ceiling; and (2) any multi-line
business customer’s total SLC plus ARC does not exceed $12.20.
·
Competitive LECs, which are not subject to the Commission’s end-user rate regulations
today, may recover reduced intercarrier revenues through end-user charges.
853.
Explicit Support from the Connect America Fund. The Commission has recognized that
some areas are uneconomic to serve absent implicit or explicit support. ICC revenues have traditionally
been a means of having other carriers (who are now often competitors) implicitly support the costs of the
local network. As we continue the transition from implicit to explicit support that the Commission began
in 1997, recovery from the CAF for incumbent LECs will be provided to the extent their Eligible
Recovery exceeds their permitted ARCs. For price cap carriers that elect to receive CAF support, such
support is transitional, phasing out over three years beginning in 2017. This phase out reflects, in part,
the fact that such carriers will be receiving additional universal service support from the CAF that will
phase in over time and is designed to reflect the efficient costs of providing service over a voice and
broadband network. For rate-of-return carriers, ICC-replacement CAF support will phase down as
Eligible Recovery decreases over time, but will not be subject to other reductions.
·
All incumbent LECs that elect to receive CAF support as part of this recovery mechanism
will be subject to the same accountability and oversight requirements adopted in Section VIII
above. For rate-of-return carriers, the obligations for deploying broadband upon reasonable
request specified in the CAF section above apply as a condition of receiving ICC-replacement
CAF.1648 For price cap carriers that elect to receive ICC-replacement CAF support, we
require such support be used for building and operating broadband-capable networks used to
offer their own retail service in areas substantially unserved by an unsubsidized
competitor1649 of fixed voice and broadband services. Thus, all CAF support will directly
advance broadband deployment. This approach is consistent with carriers’ representations
that they currently use ICC revenues for broadband deployment.1650
·
Competitive LECs, which have greater freedom in setting rates and determining which
customers they wish to serve, will not be eligible for CAF support to replace reductions in
ICC revenues.1651
C.
Policy Approach to Recovery
854.As discussed above, our reforms seek to enable more widespread deployment of
broadband networks, to foster the transition to IP networks, and to reduce marketplace distortions. We
recognize that this transition affects different—but overlapping—segments of consumers in different
ways. We therefore seek to adopt a balanced approach to reform that benefits consumers as a whole.
1648 These are the same obligations, including latency, speed and usage levels, adopted for rate-of-return legacy
high-cost funding adopted above. See supra Section VI.
1649 Supra para. 103.
1650 See, e.g., CenturyLink USF/ICC Transformation NPRM Comments at 50; Nebraska Rural Independent
Companies USF/ICC Transformation NPRM Comments at 25; USTelecom USF/ICC Transformation NPRM
Comments at 3.
1651 We are not abrogating agreements in this Order, but observe that agreements may have relevant change of law
provisions. See supra para. 815.
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855.The overall reforms adopted in this Order will enable expanded build-out of broadband
and advanced mobile services to millions of consumers in rural America who do not currently have
broadband service. Our ICC reforms will fuel new investment by making incumbent LECs’ revenue
more predictable and certain. Indeed, incumbent LECs receiving CAF support as part of this recovery
mechanism will have broadband deployment obligations.
856.
In addition, as discussed above, we anticipate that reductions in intercarrier compensation
charges will result in reduced prices for network usage, thereby enabling more customers to use unlimited
all-distance service plans or plans with a larger volume of long distance minutes, and also leading to
increased investment and innovation in communications networks and services.1652 Moreover, consistent
with previous ICC reforms, which gave rise to substantial benefits from lower long distance prices, we
expect consumers to realize substantial benefits from this reform. This is especially true for customers of
carriers for which intercarrier compensation charges historically have been a significant cost, such as
wireless providers and long distance carriers.1653
857.
Today, carriers receive payments from other carriers for carrying traffic on their networks
at rates that are based on recovering the average cost of the network, plus expenses, common costs,
overhead, and profits, which together far exceed the incremental costs of carrying such traffic. The
excess of the payments over the associated costs constitutes an implicit annual subsidy of local phone
networks—a subsidy paid by consumers and businesses everywhere in the country. This distorts
competition, placing actual and potential competitors that do not receive these same subsidies at a market
disadvantage, and denying customers the benefits of competitive entry.
858.
As we pursue the benefits of reforming this system, we also seek to ensure that our
transition to a reformed intercarrier compensation and universal service system does not undermine
continued network investment—and thus harm consumers. Consequently, our recovery mechanism is
designed to provide predictability to incumbent carriers that had been receiving implicit ICC subsidies, to
mitigate marketplace disruption during the reform transition, and to ensure our intercarrier compensation
reforms do not unintentionally undermine our objectives for universal service reform. As the State
Members observe, for example, “[b]ankers and equity investors need to be able to see that both past and
future investments will be backed by long-term support programs that are predictable.”1654 Similarly, they
1652 An example of lower usage prices is lower per-minute prices within a bundle of cell-phone minutes (e.g.,
through larger numbers of minutes being added to the bundle). See, e.g., supra Section XII.A.1.
1653 See supra Section XII.A.1. In addition, economists have estimated that above-cost access charges reduced U.S.
economic welfare by an estimated $10–17 billion annually during the late 1980s, but that the annual welfare loss
declined substantially to between $2.5 billion and $7 billion following the Commission’s access charge reforms in
the 1980s and early 1990s. See Letter from Jerry Ellig, Senior Research Fellow, Mercatus Center, to Marlene H.
Dortch, Secretary, FCC, CC Docket Nos. 01-92, 96-45, WC Docket Nos. 08-183, 07-135, 05-337, 99-68 at 2 (filed
Sept. 22, 2008) (citing Robert W. Crandall, AFTER THE BREAKUP: U.S. TELECOMMUNICATIONS IN A MORE
COMPETITIVE ERA 141 (1991) and Robert W. Crandall & Leonard Waverman, WHO PAYS FOR UNIVERSAL SERVICE?
120 (2000)).
1654 State Members USF/ICC Transformation NPRM Comments at 5; see also, e.g., Kansas Commission USF/ICC
Transformation NPRM Comments at 3; Louisiana PSC August 3 PN Comments at 4; Verizon Section XV Reply at
19-20 (quoting Rebecca Arbogast et al., Stifel Nicolaus, FCC Looks To Shift USF-ICC Reform Drive into
Overdrive; August Order Eyed, at 1 (Mar. 15, 2011)); FCC Universal Service Fund and Intercarrier Compensation
Workshop, April 6, 2011, CC Docket No. 01-92 at 96-97, transcript available at
http://www.fcc.gov/events/universal-service-fundintercarrier-compensation-reform-workshop.
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note that “abrupt changes in support levels can harm consumers.”1655 Predictable recovery during theintercarrier compensation reform transition is particularly important to ensure that carriers “can
maintain/enhance their networks while still offering service to end-users at reasonable rates.”1656
Providing this stability does not require revenue neutrality, however.
859.
Ultimately, consumers bear the burden of the inefficiencies and misaligned incentives of
the current ICC system, and they are the ultimate beneficiaries of ICC reform. In structuring a reasonable
transition path for ICC reform, we seek to balance fairly the burdens borne by various categories of end
users, including consumers already paying high residential phone rates, consumers paying artificially low
residential phone rates, and consumers that contribute to the universal service fund. Given nationwide
disparities in local rates, it would be unfair to place the entire burden of the ICC transition on USF
contributors. Just as the Commission has undertaken some intercarrier compensation reforms since the
1996 Act, shifting away from implicit intercarrier subsidies to end-user charges and universal service for
recovery, some states have done so, as well. For example, Alaska has recently reformed its intrastate
access system, establishing a Network Access Fee of $5.75, and increasing the role of the Alaska USF in
subsidizing carriers’ intrastate revenues with a state USF surcharge of 9.4 percent.1657 Similarly, in
Wyoming, which has also rebalanced rates, many rural customers face total charges for basic residential
phone service in excess of $40 per month.1658 The Nebraska Companies note total out-of-pocket local
residential rates in that state already exceed $30 per month and should not be increased under any federal
reforms contemplated by the Commission.1659 Were we to place the entire burden of ICC recovery on
USF contributors, not only would consumers in each of these states be forced to contribute more, but
USF, which is also supported through consumer contributions, could not stay within the budget discussed
in Section VII.B above. Meanwhile, as discussed above, other states have retained high intrastate
intercarrier compensation rates to subsidize artificially low local rates—including some as low as $5 per
month—effectively shifting the costs of those local networks to long distance and wireless customers
across the country.1660 In this context, we find it reasonable to allow carriers to seek some recovery from
their own customers, subject to protection for consumers already paying rates for local phone service at or
near $30 per month. We also prevent carriers from charging an ARC on any Lifeline customers. We also
protect consumers by limiting any increases in consumer ARCs based upon actual or imputed increases in
ARCs for business customers.
860.
Some commenters argue that a variety of other regulatory considerations should alter the
Commission’s approach to recovery. For example, some express concerns about the level of existing
federal subscriber line charges (SLCs) and special access rates and the extent to which carriers use the
ratepayer- and universal service-funded local network to provide unregulated services.1661 Although we
1655 State Members USF/ICC Transformation NPRM Comments at 5-6; see also, e.g., Michigan PSC USF/ICC
Transformation NPRM Comments at 18.
1656 Michigan PSC USF/ICC Transformation NPRM Reply at 10. See also, e.g., Louisiana PSC August 3 PN
Comments at 3-4.
1657 Alaska Regulatory Commission USF/ICC Transformation NPRM Comments at 26-27.
1658 Wyoming PSC USF/ICC Transformation NPRM Reply at 5.
1659 Nebraska Rural Independent Companies USF/ICC Transformation NPRM Comments at 30 n.45 (“with the local
rate benchmarks required under the Nebraska USF program along with subscriber line charge and other surcharges,
total out-of-pocket local residential rates in the state already exceed $30 per month”).
1660 See supra Section VII.D.5.
1661 See, e.g., Free Press August 3 PN Comments at 10; NASUCA August 3 PN Comments at 62-63.
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address certain of those issues below, we are not persuaded that we should delay comprehensiveintercarrier compensation and universal reform pending resolution of those outstanding questions, given
the urgency of advancing the country’s broadband goals. Nor do we treat those issues as a static,
unchanging backdrop to the reforms we adopt here. In the FNPRM below we reevaluate existing SLCs,
including by seeking comment on whether SLCs today are set at an excessive level and should be
reduced.1662 To attempt to account for these concerns through reduced recovery here, particularly given
potential changes that the Commission might consider, would unduly complicate—and significantly
delay—badly needed reform that we believe will result in significant consumer benefits. Consequently,
we believe that the consumer protections incorporated in our recovery mechanism and the transitional
nature of the recovery strike the right balance for consumers as a whole.
861.
Although the preceding has been focused on the substantial benefits of our reform to
consumers, in crafting these reforms we also took account of costs and benefits to industry. Our reforms
are minimally burdensome to carriers, imposing only minor incremental costs (i.e., costs that would not
be otherwise incurred without our reforms). The incremental costs of reform arise primarily from
implementation, meaning that they are one-time costs of the transition that are not incurred on an ongoing
basis. Further, these costs are heavily outweighed by efficiency benefits that carriers, as well as other
industry participants and consumers, will experience. For carriers as well as end users, these benefits
include significantly more efficient interconnection arrangements. Carriers will provide existing services
more efficiently, make better pricing decisions for those services, and innovate more efficiently. Carriers’
incentives to engage in inefficient arbitrage will also be reduced, and carriers will face lower costs of
metering, billing, recovery, and disputes related to intercarrier compensation. Further, carriers, firms
more generally, and consumers, facing more efficient prices for voice services, will make more use of
voice services to greater effect, and more efficient innovation will result. In contrast to the transitional,
one-time costs of reform, these efficiency benefits are ongoing and will compound over time.
D.
Carriers Eligible To Participate in the Recovery Mechanism
862.The Commission sought comment in the USF/ICC Transformation NPRM on whether
recovery should be limited to certain carriers, or whether it should extend more broadly to all LECs.1663
We extend the recovery mechanisms adopted in this Order to all incumbent LECs because regulatory
constraints on their pricing and service requirements otherwise limit their ability to recover their costs.1664
1662 One commenter states that “the Commission concluded that approximately 82 percent of residential and single-
line business price-cap lines had forward-looking costs below $6.50.” Free Press USF/ICC Transformation NPRM
Comments at 7. In fact, rather than endorsing that cost estimate, the Commission concluded that “even the most
conservative estimate of forward-looking costs” for price cap carriers “shows that [the cost of] a substantial number
of lines exceeds both the current $5.00 SLC cap, and the ultimate $6.50 SLC cap.” Cost Review Proceeding for
Residential and Single-Line Business Subscriber Line Charge (SLC) Caps; Access Charge Reform; Price Cap
Performance Review for Local Exchange Carriers, CC Docket Nos. 96-262, 94-1, Order, 17 FCC Rcd 10868,
10871-72 para. 5 (2002). Notwithstanding that distinction, however, we find it appropriate to take a fresh look not
only at whether SLCs are set at appropriate levels under existing regulations, but, longer term, whether such charges
should be retained at all. See infra Section XVII.O.
1663 USF/ICC Transformation NPRM, 26 FCC Rcd at 4732-33, para. 571. See also, e.g., 2008 USF/ICC FNPRM,
24 FCC Rcd at 6632, 6637-39 App. A, paras. 302, 318-19; 2005 Intercarrier Compensation FNPRM, 20 FCC Rcd
at 4706, 4709-10, 4732, paras. 43, 50, 51, 104.
1664 If an incumbent LEC receives recovery of any costs or revenues that are already being recovered as Eligible
Recovery through ARCs or the CAF, that LEC’s ability to recover reduced switched access revenue from ARCs or
the CAF shall be reduced to the extent it receives duplicative recovery. Incumbent LECs seeking revenue recovery
will be required to certify as part of their tariff filings to both the FCC and to any state commission exercising
jurisdiction over the incumbent LEC’s intrastate costs that the incumbent LEC is not seeking duplicative recovery in
(continued…)
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All incumbent LECs have built out their networks subject to COLR obligations, supported in part byongoing intercarrier compensation revenues.1665 Thus, incumbent LECs have limited control over the
areas or customers that they serve, having been required to deploy their network in areas where there was
no business case to do so absent subsidies, including the implicit subsidies from intercarrier
compensation. At the same time, incumbent LECs generally are subject to more statutory and regulatory
constraints than other providers in the retail pricing of their local telephone service.1666 Thus, incumbent
LECs are limited in their ability to increase rates to their local telephone service customers as a whole to
offset reduced implicit subsidies.
863.
Proposals to limit the recovery mechanism to only some classes of incumbent LECs, such
as rate-of-return carriers,1667 neglect these considerations, and in particular ignore that price cap
incumbent LECs typically are also subject to regulatory constraints on end-user charges. We do,
however, recognize the differences faced by price cap and rate-of-return carriers under the status quo
absent reform, and therefore adopt different recovery mechanisms for price cap and rate-of-return
carriers, as explained below.
864.
Competitive LECs. We decline to provide an explicit recovery mechanism for
competitive LECs. 1668 Unlike incumbent LECs, because competitive carriers have generally been found
to lack market power in the provision of telecommunications services,1669 their end-user charges are not
subject to comparable rate regulation,1670 and therefore those carriers are free to recover reduced access
(Continued from previous page)
the state jurisdiction for any Eligible Recovery subject to the recovery mechanism. To monitor and ensure that this
does not occur, we require carriers participating in the recovery mechanism, whether ARC and/or CAF, to file data
annually. See infra paras. 921-923.
1665 See, e.g., CenturyLink USF/ICC Transformation NPRM Comments at 3, 9; SureWest USF/ICC Transformation
NPRM Comments at 10; Pend Orielle USF/ICC Transformation NPRM Comments at 7; Windstream Aug. 21, 2008
Comments, CC Docket Nos. 94-68, 01-92, 96-45; WC Docket Nos. 08-152, 07-135, 04-36, 06-122, 05-337, 99-68 at
7.
1666 This includes both Commission regulation of the federal SLC and, frequently, state regulation of retail local
telephone service rates as well.
1667 See, e.g., NCTA USF/ICC Transformation NPRM Reply at 8 (“Any access replacement support should be
limited to a very small number of truly rural providers that are subject to rate-of-return regulation, and should not be
available to make all incumbent LECs whole for every dollar of access charge revenue that is eliminated”).
1668 CMRS providers generally do not collect access charges for originating or terminating calls on their networks.
As they will generally not be losing access revenue and will see the elimination of most terminating access charges,
they are not entitled to recovery from the recovery mechanism. See generally USF/ICC Transformation NPRM, 26
FCC Rcd at 4718 n.787.
1669 Access Charge Reform; Reform of Access Charges Imposed by Competitive Local Exchange Carriers, CC
Docket No. 96-262, Seventh Report and Order and Further Notice of Proposed Rulemaking, 16 FCC Rcd 9923, at
9926, para. 8 (2001) (CLEC Access Charge Order) (“Competitive entrants into the exchange access market have
historically been subject to our tariff rules, but have been largely free of the other regulations applicable to
incumbent LECs.”) (citations omitted).
1670 For instance, the Commission has declined to regulate the SLCs of competitive LECs. See Cost Review
Proceeding for Residential and Single-Line Business Subscriber Line Charge (SLC) Caps; Price Cap Performance
Review for Local Exchange Carriers, CC Docket Nos. 96-262, 94-1, Order, 17 FCC Rcd 10868, 10870 n.8 (2002)
(subsequent history omitted); see also CLEC Access Charge Order, 16 FCC Rcd at 9955, para. 81 (stating that
competitive LECs competing with CALLS incumbent LECs are free to build into their end-user rates a component
equivalent to the incumbent LEC’s SLC).
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revenue through regular end-user charges.1671 Some competitive LECs have argued that their rates areconstrained by incumbent LEC rates (as supplemented by regulated end-user charges and CAF
support);1672 to the extent this is true, we would expect this competition to constrain incumbent LECs’
ability to rely on end-user recovery as well. Moreover, competitive LECs typically have not built out
their networks subject to COLR obligations requiring the provision of service when no other provider will
do so,1673 and thus typically can elect whether to enter a service area and/or to serve particular classes of
customers (such as residential customers) depending upon whether it is profitable to do so without
subsidy.
865.
In light of those considerations, we disagree with parties that advocate making the
recovery mechanism we adopt today available to all carriers, both incumbent and competitive, or to all
carriers that currently receive access charge revenues.1674 Competitive LECs are free to choose where and
how they provide service, and their ability to recover costs from their customers is generally not as
limited by statute or regulation as it is for incumbent LECs.1675
866.
We likewise decline to permit competitive LECs to reduce their access rates over a longer
period of time than incumbent LECs. Instead, we believe that the approach adopted in the CLEC Access
Charge Order, under which competitive LECs benchmark access rates to incumbent LECs’ rates, is the
better approach.1676 That benchmarking rule was designed as a tool to constrain competitive LECs’
access rates to just and reasonable levels without the need for extensive, ongoing accounting oversight
and detailed evaluation of competitive LECs’ costs.1677 Deviating from that framework for purposes of
the access reform transition would create new opportunities for arbitrage and require increased regulatory
oversight, notwithstanding the fact that competitive LECs’ access rates under the CLEC Access Charge
1671 Although some competitive LECs assert that their contracts with business customers would not readily allow
them to change intercarrier compensation rates under those contracts in the event of intercarrier compensation
reform, see, e.g., TDS Metrocom August 3 PN Reply at 6, those contracts reflect decisions made against the
backdrop of possible intercarrier compensation reforms being contemplated by the Commission.
1672 See e.g., EarthLink USF/ICC Transformation NPRM Comments at 11 (“Even where EarthLink has the ability
to modify rates, it may be prevented from increasing such rates because of competitive constraints (e.g., the
incumbent against who EarthLink competes may not raise rates either because it is vertically integrated and its
access charge savings offset its loses or it recovers a portion of its lost access revenue from a USF revenue recovery
mechanism).”).
1673 See supra paras. 82-83.
1674 See, e.g., XO USF/ICC Transformation NPRM Comments at 50; Verizon and Verizon Wireless USF/ICC
Transformation NPRM Comments at 50 (“All of these . . . proposed mechanisms, are designed to do the same
thing—to give carriers a soft landing following reductions in ICC rates. All should be treated alike.”); COMPTEL
USF/ICC Transformation NPRM Comments at 37; PacWest USF/ICC Transformation NPRM Comments at 9;
SouthEast Telephone USF/ICC Transformation NPRM Comments at 5; Letter from Bill Wade, General Manager,
Mid-Rivers Communications, to Julius Genachowski, Chairman, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-
109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 1-4 (filed Oct. 17, 2011).
1675 See, e.g., ITTA USF/ICC Transformation NPRM Comments at vi (“[C]ompetitors without COLR obligations
have defined their own service areas in a manner that allows them to serve only the lowest-cost customers in an
area.”).
1676 See generally CLEC Access Charge Order; see, also Letter from Karen Reidy, COMPTEL, to Marlene H.
Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket No. 01-92, 96-45, GN Docket
No. 09-51, at 3 (filed July 27, 2011).
1677 CLEC Access Charge Order, 16 FCC Rcd at 9924, para. 2.
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Order were not based on any demonstrated level of need associated with those carriers’ networks oroperations. Nor has any commenter provided sufficient evidence to warrant departure from the
benchmarking approach in this context. We therefore decline to adopt a separate transition path for
competitive LECs. Rather, consistent with the general benchmarking rule that had been used for
interstate access service, competitive LECs will benchmark to the default rates of the incumbent LEC in
the area they serve as specified under this Order.
E.
Determining Eligible Recovery
867.The first step in our recovery mechanism is defining the amount, called “Eligible
Recovery,” that incumbent LECs will be given the opportunity to recover.
1.
Establishing the Price Cap Baseline
868.Costs vs. Revenues. The USF/ICC Transformation NPRM sought comment on whether,
in adopting a recovery mechanism, the Commission should base recovery on carrier costs, carrier
revenues, or some combination thereof.1678 For the reasons set forth below, for price cap carriers, we will
provide recovery based upon Fiscal Year 2011 (“FY2011” or “Baseline”)1679 access revenues that are
reduced as part of the reforms we adopt today, plus FY2011 net reciprocal compensation revenues.
Selecting FY2011 ensures that gaming or any disputes or nonpayment that may occur after the release of
the Order does not impact carriers’ Baseline revenues. For rate-of-return carriers, we adopt a bifurcated
approach based on: (1) their 2011 interstate switched access revenue requirement;1680 and (2) their
FY2011 intrastate switched access revenues for services with rates to be reduced as part of the reforms we
adopt today, plus FY2011 net reciprocal compensation revenues. Carriers have not demonstrated here
that the existing intercarrier compensation revenues that we use as part of our Baseline calculations are
1678 AT&T USF/ICC Transformation NPRM Comments at 4730, para. 564, citing National Broadband Plan at 148.
1679 We will use Fiscal Year 2011 (i.e., October 1, 2010 through September 30, 2011) data to allow carriers a
reasonable amount of time to collect the data necessary for implementation of these reforms. We chose to use a full
12-month period, rather than, for example, annualizing a portion of 2011 data, to ensure that carriers with seasonal
calling patterns are not disproportionately affected. See, e.g., Petition of WorldCom, Inc. Pursuant to Section
252(e)(5) of the Communications Act for Preemption of the Jurisdiction of the Virginia State Corporation
Commission Regarding Interconnection Disputes with Verizon Virginia Inc., and for Expedited Arbitration, CC
Docket Nos. 00-218, 00-251, Memorandum Opinion and Order, 18 FCC Rcd 17722, 17866, para. 366 & n.958 (Wir.
Comp. Bur. 2003) (discussing seasonal variation in traffic and noting, for example, that “[r]esort communities
typically experience upwards of 60-75 percent of their total annual traffic during a 2 or 3 month vacation period”).
We note that, because annual USF funding is not as subject to the same seasonal variance as are calling patterns, we
use annualized figures for certain CAF purposes in this Order.
1680 For a rate-of-return carrier that participated in the NECA 2011 annual switched access tariff filing, its 2011
interstate switched access revenue requirement will be its projected interstate switched access revenue requirement
associated with the NECA 2011 annual interstate switched access tariff filing. For a rate-of-return carrier subject to
section 61.38 of the Commission’s rules that filed its own annual access tariff in 2010 and did not participate in the
NECA 2011 annual switched access tariff filing, its 2011 interstate switched access revenue requirement will be its
projected interstate switched access revenue requirement in its 2010 annual interstate switched access tariff filing.
For a rate-of-return carrier subject to section 61.39 of the Commission’s rules that filed its own annual switched
access tariff in 2011, its revenue requirement will be its historically-determined annual interstate switched access
revenue requirement filed with its 2011 annual interstate switched access tariff filing.
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confiscatory or otherwise unjustly or unreasonably low,1681 and we thus find them to be an appropriatestarting point for our calculations under the recovery mechanism.1682
869.
We conclude that, where the Commission lacks data, it is preferable to rely on revenues
for determining recovery, as most commenters suggest.1683 Defining carriers’ costs today would be a
burdensome undertaking that could significantly delay implementation of ICC reform. “Cost” would first
have to be defined for these purposes, which is a difficult and time-consuming exercise. Indeed, price cap
carriers’ access charges are not based on current costs,1684 and reliable cost information is not readily
available.1685 It is not clear that a reliable cost study based on current network configuration could be
completed without undue delay,1686 and doing so could be a complicated, time consuming, and expensive
process, nor is it clear that a regulatory proceeding could come up with a definition of “cost” appropriate
for recovery that is any better than the revenues approach we adopt today.
870.
Moreover, the Commission has long recognized that intercarrier compensation rates
include an implicit subsidy because they are set to recover the cost of the entire local network, rather than
the actual incremental cost of terminating or originating another call. Given our commitment to a gradual
transition with no flash cuts, our focus on revenues is appropriate to ensure carriers have a measured
transition away from this implicit support on which they have been permitted to rely for many years.
871.
For rate-of-return carriers, however, interstate switched access rates today are determined
based on their interstate switched access revenue requirement, which is calculated in a manner that
includes their “regulated interstate switched access costs” as the Commission has historically defined
them, plus a prescribed rate of return on the net book value of their interstate switched access investment.
Although rate-of-return carriers’ revenue requirement might not be based on the precise measure of cost
1681 Indeed, within the range of just and reasonable rates it is possible that rates could be set at levels lower than
those that generated the FY2011 revenues in certain cases, as discussed in greater detail below. See infra Section
XIII.G.
1682 To the extent that it subsequently is determined that an incumbent LEC’s rates during the Baseline time period
were not just and reasonable because they were too low, that carrier may seek additional recovery as needed through
the Total Cost and Earnings Review Mechanism. See infra Section XIII.G.
1683 See, e.g., ABC Plan at 9.
1684 See, e.g., Petition of AT&T Inc. for Forbearance Under 47 U.S.C. § 160(c) from Enforcement of Certain of the
Commission's Cost Assignment Rules, WC Docket No. 07-21, pp. 2-3 (filed Jan. 25, 2007) (“Under pure price cap
regulation, rates are subject to price ceilings that are determined without reference to costs. Indeed, a key premise of
price cap regulation is that consumers will benefit from increased efficiencies that will result from severing the
relationship between rates and costs.”).
1685 See, e.g., Petition of AT&T Inc. for Forbearance under 47 U.S.C. § 160 from Enforcement of Certain of the
Commission’s Cost Assignment Rules, WC Docket Nos. 07-21, 05-342, Memorandum Opinion and Order, 23 FCC
Rcd 7302 (2008), pet. for recon. pending, pet. for review pending, NASUCA v. FCC, Case No. 08-1226 (D.C. Cir.
filed June 23, 2008. In addition, the jurisdictional separations process has been frozen since 2001, and is currently
subject to a referral to the Separations Joint Board. See Jurisdictional Separations and Referral to the Federal-State
Joint Board, CC Docket No. 80-286, Report and Order, 26 FCC Rcd 7133 (2011); 47 C.F.R. Part 36.
1686 As the Commission noted in 2009, “Many carriers no longer have the necessary employees and systems in place
to comply with the old jurisdictional separations process and likely would have to hire or reassign and train
employees and redevelop systems for collecting and analyzing the data necessary to perform separations.”
Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order,
24 FCC Rcd 6162, 6166 at para. 12 (2009); see, e.g., Alexicon USF/ICC Transformation NPRM Comments at 2-4;
TCA USF/ICC Transformation NPRM Comments at 4; ITTA USF/ICC Transformation NPRM Comments at 5-6.
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we might otherwise adopt if we were starting anew, we believe that using those carriers’ interstaterevenue requirement is sensible for purposes of determining their Eligible Recovery. For one, this
information is readily available today.1687 In addition, use of the revenue requirement avoids
implementation issues surrounding disputed or uncollectable interstate access revenues, providing greater
predictability and substantially insulating small carriers from the harms of arbitrage schemes such as
phantom traffic.1688 This approach likewise prevents carriers that may have been earning in excess of
their permitted rate of return from locking in those revenues and continuing such overearnings in
perpetuity.
872.
Our approach is also consistent with the reforms to local switching support (LSS) we
adopt above. Historically, smaller carriers have received LSS as a subsidy for certain switching costs,
effectively satisfying a portion of their interstate switched access revenue requirement.1689 As discussed
above, defining Eligible Recovery based on carrier’s interstate switched access requirement allows us to
eliminate LSS as a separate universal service support mechanism for rate-of-return carriers. Eligible
Recovery will be calculated from carriers’ entire interstate switched access revenue requirement—
whether it historically was recovered through access charges or LSS. Thus, in essence, carriers receiving
LSS today will be eligible to receive support as part of their Eligible Recovery.
873.
At the same time, although rate-of-return carriers do track certain costs to establish their
interstate revenue requirement for switched access services, the same information is not readily
available—or necessarily relevant—for intrastate switched access services or net reciprocal
compensation. As a result, their Eligible Recovery will be based on their FY2011 intrastate switched
access revenues addressed as part of the reform adopted today plus FY2011 net reciprocal compensation
as of April 1, 2012.1690
874.
The USF/ICC Transformation NPRM also sought comment on whether, under a
revenues-based approach, to base carriers’ recovery on gross intercarrier revenue or alternatively to use
net intercarrier compensation, defined as “a company’s total intercarrier compensation revenue . . . less its
intercarrier compensation expense” including expenses paid by affiliates.1691 We received a mixed record
1687 We will carefully monitor material changes in cost allocation to categories where recovery remains based on
actual cost to ensure that carriers do not shift costs properly associated with switched access. We rely on the
revenue requirement information available at the time of the initial tariff filings required to implement this recovery
framework. This not only enables implementation of our recovery mechanism in the specified timeframes, but also
addresses possible incentives to engage in gaming if carriers were able to increase the Rate-of-Return Baseline
subsequently. If a carrier subsequently can demonstrate that it is materially harmed by the use of the projected,
rather than final, 2011 interstate revenue requirement, it may seek a waiver of the rule specifying the Rate-of-Return
Baseline to allow it to rely on an increased Rate-of-Return Baseline amount. Any such waiver would be subject to
the Commission’s traditional “good cause” waiver standard, rather than the Total Cost and Earnings Review
specified below. See 47 C.F.R. § 1.3.
1688 See, e.g., ERTA July 8, 2011 Ex Parte Letter. For price cap carriers, there is no revenue requirement to use for
this purpose. Consequently, we discuss below the extent to which price cap carriers will be able to include currently
disputed ICC revenues in their FY2011 baseline. See infra para. 880.
1689 47 C.F.R. § 69.106(b).
1690 Rate-of-return carriers may elect to have NECA or another entity perform the annual analysis. The underlying
data must be submitted to the relevant state commissions, to the Commission, and, for carriers that are eligible for
and elect to receive CAF, to USAC.
1691 USF/ICC Transformation NPRM, 26 FCC Rcd at 4731, para. 567.
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in response.1692 For the reasons described below, the approach we adopt is neither a pure net revenueapproach nor a pure gross revenue approach.
875.
Although we are sympathetic to requests to determine recovery based on net revenues,
we decline to do so for several reasons. Most importantly, we are committed to a gradual transition with
sufficient predictability to enable continued investment, and a net revenue approach could reduce that
predictability,1693 especially for non-facilities-based providers of long distance service who pay
intercarrier compensation expenses indirectly through their purchase of wholesale long distance service
from third parties.
876.
There also are other difficulties, substantive and administrative, involved in calculating
net revenues, which cannot be adequately addressed based on the information in the record. For example,
although reductions in an individual incumbent LEC’s ICC revenue is tied to a particular study area, its
affiliated IXC or wireless carrier may operate across multiple study areas, and the record does not suggest
an administrable method for accurately identifying the cost savings associated with a particular incumbent
LEC. Moreover, determinations of which affiliates should be counted, whether they are fully owned by
the incumbent LEC or not, and to what extent, would be highly company-specific and could lead to
inequitable treatment of similarly-situated carriers.
877.
Such an approach also could create inefficient incentives during the transition regarding
the acquisition of exchanges with ICC revenue reductions. For example, if an incumbent LEC has a large
reduction in ICC revenue that is offset by affiliates’ ICC cost savings, other carriers that lack affiliates
with comparable ICC cost savings will be deterred from acquiring such exchanges if they would not be
able to obtain additional recovery once it acquired that exchange. Conversely, if a carrier that lacked
affiliates with comparable ICC cost savings would be entitled to new recovery if it acquired that
exchange, a net revenue recovery approach could create inefficient incentives to acquire such exchanges
given the potential for expanded CAF support (and thus also risk unconstrained growth in universal
service).
878.
Finally, although the record does not enable us to determine the precise extent to which
savings will be passed through from IXC to incumbent LEC, competition in the long distance market is
likely to lead IXCs to pass on significant savings to incumbent LECs, rendering 100 percent gross
revenues likely more generous than necessary for incumbent LECs.1694 This is further complicated by
incumbent LECs with affiliated IXCs that provide wholesale long distance service; counting the cost
savings associated with wholesale long distance service against the recovery need for the affiliated
1692 Compare, e.g., Nebraska Rural Independent Companies’ USF/ICC Transformation NPRM Comments at 30
(advocating a net approach); NASUCA USF/ICC Transformation NPRM Comments at 112-14 (same); COMPTEL
USF/ICC Transformation NPRM Comments at 36 (same) with, e.g., AT&T USF/ICC Transformation NPRM
Comments at 35-37 (arguing against a net approach); ITTA USF/ICC Transformation NPRM Comments at 29
(same); Kansas Corporation Commission USF/ICC Transformation NPRM Comments at 42 (arguing that a net
approach would have a minimal impact for many Kansas incumbent LECs).
1693 See supra Section VII.D.11.
1694 See, e.g., Testimony of Robert W. Quinn, Senior Vice President—Federal Regulatory, AT&T, at FCC Universal
Service Fund and Intercarrier Compensation Workshop, April 6, 2011, CC Docket No. 01-92 at 66, transcript
available at http://www.fcc.gov/events/universal-service-fundintercarrier-compensation-reform-workshop.; AT&T
USF/ICC Transformation NPRM Comments at 36; see also USF/ICC Transformation NPRM, 26 FCC Rcd at 4732-
33, para. 571, (citing DEBRA J. ARON, ET AL., AN EMPIRICAL ANALYSIS OF REGULATOR MANDATES ON THE PASS
THROUGH OF SWITCHED ACCESS FEES FOR IN-STATE LONG-DISTANCE TELECOMMUNICATIONS IN THE U.S. at 6-11,
30-31 (Oct. 14, 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1674082).
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incumbent LEC could create disincentives for the IXC to simultaneously pass through those cost savingsin lower wholesale long distance rates, thereby reducing the potential for lower retail long distance rates.
2.
Calculating Eligible Recovery for Price Cap Incumbent LECs
879.For price cap carriers, the recovery mechanism allows them to determine at the outset
exactly how much their Eligible Recovery will be each year. The certainty regarding this recovery will
enable price cap carriers to better manage the transition away from intercarrier compensation for
recovery. Our recovery approach will use historical trends regarding changes in demand to project future
changes in demand (typically MOU), in conjunction with the default rates specified by our reforms, to
determine Eligible Recovery.1695 Specifically, under our mechanism, Price Cap Eligible Recovery will be
calculated from a Baseline of 90 percent of relevant FY2011 revenues, reduced on a straight-line basis at
a rate of ten percent annually starting in year one (2012). This is consistent with the historical trajectory
of decreasing MOU,1696 with which price cap carriers’ intercarrier compensation revenues decline today.
We conclude this approach provides the necessary predictability for carriers1697 without reducing their
incentives to seek efficiencies or to maximize use of their network. We will not annually true-up actual
MOU for price cap carriers, instead likewise using a straight line decline of 10 percent relative to FY2011
MOU, which is a more predictable and administratively less burdensome approach. If MOU decline is
less than 10 percent, carriers will receive the benefit of additional revenues. Conversely, if MOU decline
accelerates, the risk of decreased revenues falls on the carriers. This allocation of risk incents carriers to
be more efficient and retain customers.
880.
Specifically, the Price Cap Baseline for price cap incumbent LECs’ recovery will be the
total switched access revenues that: (1) are being reduced as part of reform adopted today; (2) are billed
for service provided in FY2011; and (3) for which payment has been received by March 31, 2012. In
addition, the Baseline will include net reciprocal compensation revenues for FY2011, based on net
payments as of March 31, 2012. Carriers will be required to submit to the states data regarding all
FY2011 switched access MOU and rates, broken down into categories and subcategories corresponding to
the relevant categories of rates being reduced. With this information, states with authority over intrastate
access charges will be able to monitor implementation of the recovery mechanism and compliance with
our rules, and help guard against cost-shifting or double dipping by carriers.1698 A price cap incumbent
LEC that is eligible to receive CAF shall also file this information with USAC for purposes of
implementing CAF ICC support, and we delegate to the Wireline Competition Bureau authority to work
with USAC to develop and implement processes for administration of CAF ICC support.1699 These
1695 We recognize that our transitional intercarrier compensation framework sets default rates but leaves carriers free
to negotiate alternatives. Our approach to recovery relies on the default rates specified by our transition and will
impute those rates for purposes of determining recovery, even if carriers negotiate a lower ICC rate with particular
providers.
1696 See infra paras. 885-886.
1697 See, e.g., FCC Universal Service Fund and Intercarrier Compensation Workshop, April 6, 2011, CC Docket No.
01-92 at 97, transcript available at http://www.fcc.gov/events/universal-service-fundintercarrier-compensation-
reform-workshop. (comments of Paul Gallant, Senior Vice President and Telecom Analyst, MF Global, discussing
the importance of certainty of access revenue to continued investor support for broadband build-out).
1698 See supra paras. 812-813. Upon request, carriers will also be required to file these data with the Commission.
1699 USAC plays a critical role in the day-to-day administration of universal service support mechanisms, see, e.g.,
USF/ICC Transformation NPRM, 26 FCC Rcd at 4595, para. 116 n.192, including the ICC-replacement CAF
support that is part of our recovery mechanism.
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figures will establish the Base Minutes for each relevant category, and shall not include disputed revenuesor revenues otherwise not recovered, for whatever reason, or the MOU associated with such revenues.
Every carrier, in support of its annual access tariff filing, must also provide data necessary to justify its
ability to impose an ARC, including the potential impact of the ARC for residential and multi-line
business customers.
881.
In determining the recovery mechanism, we decline to provide 100 percent revenue
neutrality relative to today’s revenues. Rather, we adopt an approach that is informed in part based on the
status quo path facing price cap carriers today, where intercarrier compensation revenues decline as MOU
decline,1700 but also adopt some additional reductions for carriers that have had the benefit of interstate
rates essentially being frozen for almost a decade, rather than being reduced annually as would typically
occur under price cap regulation. Thus, for study areas of carriers that participated in the CALLS plan,
which is approximately 95 percent of all price cap lines, and 90 percent of all lines across the country, we
adopt a 10 percent initial reduction in price cap incumbent LECs’ Eligible Recovery to reflect the fact that
these carriers’ productivity gains have generally not been accounted for in their regulated rates for many
years. Incentive regulation typically provides a mechanism for sharing the benefits of productivity gains
with ratepayers.1701 Prior to the CALLS Order in 2000, the Commission included a productivity
adjustment to the price cap indices to ensure that savings would be shared.1702 The CALLS Order did not
include a productivity-related adjustment, however, providing instead a transitional “X-factor” designed
simply to target the lower rates specified in that reform plan.1703 After the targeted rates were achieved,
which occurred by 2002 for 96 percent of study areas for carriers participating in the CALLS plan, the X-
factor was set equal to inflation for the carriers originally subject to the CALLS plan and provided no
additional consumer benefit from any productivity gains.1704 As a result, study areas of price cap LECs
that participated in the CALLS plan have had no X-Factor reductions to their price cap indices (PCIs),
productivity-related or otherwise, for any PCI at least since 2004, and some price cap carriers’ X-Factor
reductions to their switched access-related PCIs stopped even earlier than that.1705
882.
The record supports the use of a productivity factor such as the X-factor previously
applied to price-cap carriers to reduce the amount carriers are eligible to recover through a recovery
1700 See infra paras. 885-886. Although we adopt rules to help address concerns about traffic identification and
establish a prospective intercarrier compensation framework for VoIP-PSTN traffic, absent our actions in this Order,
issues regarding compensation for that traffic would not have been resolved. Because we are considering the status
quo path absent reform, our recovery framework is based on historical declining demand notwithstanding reforms
that potentially could mitigate some of that decline.
1701 David E.M. Sappington, Price Regulation, in Handbook of Telecommunications Economics, Vol. I, 225, 231,
248-53 (Martin E. Cave et al. eds., 2002).
1702 See Access Charge Reform, CC Docket Nos. 96-262, 94-1, 99-249, 96-45, 18 FCC Rcd 14976 at 14997-98,
para. 35 (2003) (CALLS Remand Order).
1703 CALLS Order, 15 FCC Rcd at 13028-29, paras. 160-63.
1704 See id., 15 FCC Rcd at 13028-29, paras. 160-63.
1705 Because price cap carriers reached their target rates at different times, the inflation-only X-factor took effect at
different times for different price cap carriers. In the CALLS Remand Order, the Commission concluded that price
cap carriers serving 36 percent of total nationwide price cap access lines had achieved their target rates by their 2000
annual access filing. CALLS Remand Order, 18 FCC Rcd at 15002, para. 43, 15010-13, App. B. By the 2001
annual accessing filings the number grew to carriers serving 75 percent of total access lines, and by the 2002 annual
access filings, carriers serving 96 percent of total access lines had achieved their target rates. Id.
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mechanism.1706 A productivity factor would require recovery to decrease annually by a predeterminedamount designed to capture for consumers the efficiencies found to apply generally to the industry. For
example, if we had maintained a five percent annual X-factor, rates for carriers that had reached their
target rates would have been subject to caps reduced by five percent each year, so by today those rate caps
would have been reduced by approximately 30 percent. Although the record does not contain the detailed
analysis required to support a particular productivity factor that would apply on an ongoing basis,1707 we
find this initial 10 percent reduction for study areas of price cap LECs that participated in the CALLS Plan
to be a conservative approach given the absence of any sharing of productivity or other X-factor
reductions for a number of years, particularly when supplemented by other justifications for revenue
reductions that we do not otherwise account for in our standard recovery mechanism.1708
883.
We recognize, however, that the industry has changed significantly since the 2000
CALLS Order, with some price cap CALLS carriers merging with or acquiring carriers that did not
participate in the CALLS plan and/or newly converted price cap carriers acquiring study areas that did
participate in the CALLS plan. For this reason, we conclude it is necessary to apply the 10 percent
reduction on a study area basis for CALLS participants, which we collectively define as “CALLS study
areas.” Thus, we will apply the 10 percent reduction to all price cap study areas that participated in the
CALLS plan.1709
884.
We also recognize, however, some price cap LECs converted to price cap regulation from
rate-of-return regulation within the last five years and therefore such carriers did not participate in the
CALLS plan. Thus, not all price cap carriers have had the benefit of productivity gains associated with
reaching their target rates by 2002.1710 Indeed, there are a few study areas that have converted to price
cap regulation in the last two years and are still in the process of reducing their interstate rates to meet
their CALLS target rate. As a result, for non-price cap study areas that were not part of the CALLS plan,
we believe a more incremental approach is warranted.1711 In particular, for non-CALLS study areas, we
1706 See generally CRUSIR USF/ICC Transformation NPRM Comments at 8 (“An X-factor should be applied to
[price cap] carriers on an ongoing basis. Although productivity is one factor to note, so is the decreasing cost of the
optical transmission gear and switching equipment used by these carriers.”); Ad Hoc USF/ICC Transformation
NPRM Comments at 33-38; Free Press USF/ICC Transformation NPRM Comments at 8. But see AT&T USF/ICC
Transformation NPRM Reply at 38-39. (“In the 20th century, it was appropriate to impose such a productivity factor
on price-cap carriers to reflect the declining per-line costs of providing service, which resulted from both efficiency
improvements and steady increases in line counts . . . . Over the past decade, however, ILECs have hemorrhaged
access lines, and their per-line costs have—if anything—increased.”).
1707 See, e.g., USTA v. FCC, 188 F.3d 521, 525-530 (D.C. Cir. 1999) (reversing and remanding for further
explanation the Commission’s prescription of a 6.5 percent productivity factor).
1708 As discussed below, we consider these additional factors more specifically in the context of any Total Cost and
Earnings Review requested by an incumbent LEC to justify a greater recovery need. See infra Section XIII.G.
1709 All incumbent LECs subject to price cap regulation at the time of the CALLS Order elected to participate in the
CALLS plan. See, e.g., Iowa Telecom Forbearance Order, 17 FCC Rcd 24319 (2002). See also CALLS Remand
Order, 18 FCC Rcd at 15010-13, App. B (listing carriers subject to the CALLS Order).
1710 See supra note 1705.
1711 The Commission sought comment in the USF/ICC Transformation NPRM on whether any intercarrier
compensation reform recovery mechanism should differ depending upon the type of carrier. USF/ICC
Transformation NPRM, 26 FCC Rcd at 4732-33, para. 571. Likewise, carriers have advocated in this proceeding
that the Commission’s intercarrier compensation reforms accommodate the particular needs of carriers that
converted to price cap regulation subsequent to CALLS. See, e.g., ACS August 3 PN Reply at 4 (advocating
different treatment under any intercarrier compensation reform given its recent conversion to price cap regulation);
(continued…)
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will delay the implementation of the 10 percent reduction to Eligible Recovery for five years, which isapproximately the difference in time between when 96 percent of study areas of CALLS price cap carriers
reached their target rates in 2002 and when the non-CALLS price cap carriers began converting from rate-
of-return in 2007. We believe doing so enables carriers that more recently converted to price cap
regulation, carriers which are typically smaller, have additional time to adjust to the intercarrier
compensation rate reductions. In year six, the 10 percent reduction to Eligible Recovery will apply
equally to all price cap carriers.
885.
In addition, as discussed in the USF/ICC Transformation NPRM, Commission data and
the record confirm that carriers are losing lines and experiencing a significant and ongoing decrease in
minutes-of-use.1712 Incumbent LEC interstate switched access minutes have decreased each year since
2000,1713 as shown in the chart below.1714
(Continued from previous page)
Letter from Russell M. Blau, counsel for Consolidated, to Marlene H. Dorth, Secretary, FCC, WC Docket Nos. 10-
90, 07-135, 05-337, 03-109; CC Docket Nos. 01-92, 96-45; GN Docket No. 09-51 at 1 (filed Aug. 22, 2011)
(expressing concern with the impact of certain universal service and intercarrier compensation reform proposals
“especially those that recently and voluntarily converted to price cap regulation”); Windstream 2008 Order and
ICC/USF FNPRM Comments at 22 & n.49 (advocating intercarrier compensation reform and an accompanying
recovery mechanism that accommodates the needs of carriers that recently converted to price cap regulation); Letter
from Eric N. Einhorn, V.P. Federal Government Affairs, Windstream, to Marlene H. Dortch, Secretary, FCC, WC
Docket Nos. 05-337, 06-122, 08-152, 07-135; CC Docket Nos. 01-92, 96-45, 99-68 at 5 (filed Oct. 27, 2008)
(same).
1712 USF/ICC Transformation NPRM, 26 FCC Rcd at 4732, para. 570; Sept. 2010 Trends in Telephone Service, at
Table 7.1, Chart 10.1; 2010 Universal Service Monitoring Report at Table 8.1; Letter from Donna Epps, Vice
President – Federal Regulatory Affairs, Verizon, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, WC
Docket No. 07-135 at 1 (filed Oct. 28, 2010); see also PAETEC USF/ICC Transformation NPRM Comments at 33-
34.
1713 2010 Trends in Telephone Service, Table 10.1.
1714 Network Usage by Carrier, Annual Submission by NECA of Access Minutes of Use, available at
http://transition.fcc.gov/wcb/iatd/neca.html (Tier-1 NECA and Non-NECA Companies).
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Interstate Switched Access Minutes for Incumbent LECs (In Billions)
1715600.0
500.0
400.0
300.0
200.0
100.0
0.0
19851986 19871988 19891990 19911992 19931994 19951996 19971998 19992000 20012002 20032004 20052006 2007 20082009
Figure 10
886.
This represents an average annual decrease of over 10 percent and a total decrease of
over 36 percent since 2006.1716 Further, the percentage loss of MOU is accelerating—it increased each
year between 2006 and 2010, and exceeded 13 percent in 2010.1717 Based on the record, it is our
predictive judgment that significant declines in MOU will continue.1718 Accordingly, we will reduce
Price Cap Eligible Recovery by 10 percent annually for price cap carriers to reflect a conservative
prediction regarding the loss of MOU, and associated loss of revenue, that would have occurred absent
reform.
887.
As a result, for price cap carriers, Base Minutes will be reduced by 10 percent annually
beginning in 2012 to reflect decline in MOU. For example, Year One or “Y1” (2012) Intrastate Minutes
will be .9 x Intrastate Base Minutes; Y2 (2013) Intrastate Minutes will be .81 x Intrastate Base Minutes
(i.e., .9 x .9 x Intrastate Base Minutes); etc.
1715 See IATD, Wir. Comp. Bur., Universal Service Monitoring Report, Chart 8.1 (Dec. 2010).
1716 Network Usage by Carrier, Annual Submission by NECA of Access Minutes of Use, available at
http://transition.fcc.gov/wcb/iatd/neca.html (Tier-1 NECA and Non-NECA Companies); see also Letter from Stuart
Polikoff, Director of Government Relations, OPASTCO, to Marlene H. Dortch, Secretary, FCC, WC Docket No.
05-337, CC Docket Nos. 01-92, 96-45, Attach. at 12-13 (filed May 27, 2008) (providing a 2008 projection that, over
the subsequent three years, “intrastate access revenues will decline by between 5% and 12% per year (with 8% as
the most likely annual decline)”).
1717 Id.
1718 See, e.g., AT&T USF/ICC Transformation NPRM Comments at 54 (“The legacy POTS business model is
declining at an astonishing rate. Incumbent carriers are hemorrhaging customers to competitors….”); Verizon and
Verizon Wireless USF/ICC Transformation NPRM Comments at 20 (“[D]isbursements from the fund should take
into account the overall declining nature of switched access revenues.”).
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888.Price Cap Eligible Recovery. Price Cap Eligible Recovery in a given year is the
cumulative reduction in a particular intercarrier compensation rate since the base year multiplied by the
pre-determined minutes for that rate for that year, as defined above.
Price Cap Example
.1719 A price cap carrier has a 2011 intrastate terminating access rate fortransport and switching of $.0028, an interstate terminating access rate for transport and
switching of $.0020, and 10,000,000 Intrastate Base Minutes. Its Eligible Recovery for intrastate
switched access revenue would be determined as follows:
Year 1. Reduce intrastate terminating access rate for transport and switching, if above the
carrier’s interstate access rate, by 50 percent of the differential between the rate and the carrier’s
interstate access rate.
The carrier’s Year 1 (Y1) Minutes equal 9,000,000 (10,000,000 x .9). Its intrastate terminating
access rate for transport and switching, $.0028 in 2011, is reduced by $.0004 (($.0028-$.0020) x
50 percent)) to $.0024. Its Y1 Eligible Recovery is $3,600 ($.0004 x 9,000,000). For a CALLS
study areas, Eligible Recovery would be reduced by an additional 10 percent to $3,240 ($3,600 x
.9). For a non-CALLS study area, such reductions will begin in year six.
Year 2. Reduce intrastate terminating access rate for transport and switching, if above the
carrier’s interstate access rate, to the carrier’s interstate access rate.
The carrier’s Year 2 (Y2) Minutes equal 8,100,000 (9,000,000 x .9). Its intrastate terminating
access rate for transport and switching is reduced by an additional $.0004 from $.0024 to $.0020,
for a cumulative reduction of $.0008. Its Y2 Eligible Recovery is $6,480 ($.0008 x 8,100,000).
For a CALLS study area, Eligible Recovery would be reduced by an additional 10 percent to
$5,832 ($6,480 x .9). For a non-CALLS study area, such reductions will begin in year six.
889.
This Approach to Recovery for Price Cap Carriers Provides Certainty and Encourages
Efficiency. Under the Act, the Commission has “broad discretion in selecting regulatory tools, [which]
specifically includes ‘selecting methods . . . to make and oversee rates,’”1720 and is not compelled to
follow any “particular regulatory model.”1721 Our approach to defining Price Cap Eligible Recovery
continues to give those incumbent LECs incentives for efficiency while also providing greater
predictability for carriers and consumers. Under price cap regulation, incumbent LECs already have
significant incentives to control their costs associated with services provided to end-users, but have not
had the same incentives to limit the costs imposed on IXCs for terminating calls on the price cap
incumbent LECs’ networks. These costs are ultimately borne by the IXCs’ customers generally, rather
than by the price cap LECs’ customers specifically. By phasing out those termination charges and
1719 This is a simplified example of the calculation of Price Cap Eligible Recovery for a price cap carrier’s reduction
in intrastate terminating access resulting from the reforms we adopt for illustrative purposes only. It is not intended
to encompass all necessary calculations applicable in determining Price Cap Eligible Recovery in the periods
discussed in the example for all possible rates addressed by our Order.
1720 Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Further Notice of Proposed
Rulemaking, 3 FCC Rcd 3195, 3297-98, para. 194 (citations omitted) (1988). See also LEC Price Cap Order at
6836, paras. 401-03.
1721 Id. Consequently, we disagree with commenters that suggest we lack authority to adopt such an approach. See,
e.g., Blooston Rural Carriers USF/ICC Transformation NPRM Comments at 23-36. Some of these commenters
object to particular ways of implementing recovery that they view as problematic. See, e.g., Alexicon USF/ICC
Transformation NPRM Comments at 33 & Exh. D. Because the recovery mechanism adopted here differs from
those envisioned by those commenters, those filings do not dissuade us from taking this approach.
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providing recovery in part through limited end-user charges, our reform will provide price cap LECsincentives to minimize such costs as they transition to broadband networks.
890.
We have considered a number of alternative proposals regarding the elimination of
intercarrier terminating switched access charges and find that the approach we adopt today constitutes a
hybrid of a variety of proposals that best protects consumers while facilitating the reasonable transition to
an all-broadband network. Some commenters have argued that no additional recovery should be allowed
absent a specific showing that denying recovery would constitute a taking.1722 Based upon the record in
this proceeding, we conclude that such a denial would represent a flash-cut for price cap LECs, which is
inconsistent with our commitment to a gradual transition and could threaten their ability to invest in
extending broadband networks. We also find that denying any recovery pending the adjudication of a
request for an exogenous low-end adjustment under our price cap rules1723 would be unduly burdensome
for carriers and for the Commission because of the number of claims the carriers would be required to file
and the Commission would be required to adjudicate.1724 Our definition of Price Cap Eligible Recovery
for both CALLS and non-CALLS study areas gives predictability not only to price cap carriers, but also to
consumers and universal service contributors, given the fluctuations that could result from a true-up
approach for these large carriers.1725
3.
Calculating Eligible Recovery for Rate-of-Return Incumbent LECs
891.For rate-of-return incumbent LECs, we adopt a recovery mechanism that provides more
certainty and predictability than exists today, while also rewarding carriers for efficiencies achieved in
switching costs. Specifically, the recovery mechanism will allow interstate rate-of-return carriers to
determine at the outset of the transition their total ICC and recovery revenues for all transitioned rate
elements, for each year of the transition: Eligible Recovery will be adjusted as necessary with annual true
ups to ensure that rate-of-return carriers have the opportunity to receive their Baseline Revenue,
notwithstanding changes in demand for their intercarrier compensation rates being capped or reduced
under our Order. We find that providing this greater degree of certainty for rate-of-return carriers, which
are generally smaller and less able to respond to changes in market conditions than are price cap carriers,
is necessary to provide a reasonable transition from the existing intercarrier compensation system.1726
892.
As the starting point for calculating the Rate-of Return-Baseline, we will use a rate of
return carrier’s 2011 interstate switched access revenue requirement, plus FY2011 intrastate switched
access revenues and FY2011 net reciprocal compensation revenues.1727 We will then adjust this Baseline
1722 See, e.g., Free Press USF/ICC Transformation NPRM Comments at 3, NASUCA USF/ICC Transformation
NPRM Comments at 20.
1723 See 47 C.F.R. § 69.3(b)
1724 Unlike some proposals in the record, see, e.g., ABC Plan, Attach. 1 at 11-12, we require carriers to seek
recovery first from all their customers—residential and single-line business customers as well as multi-line business
customers—rather than from residential customers only. This will reduce the burden on residential customers and
the CAF.
1725 See, e.g., T-Mobile August 3 PN Comments at 19-20; Comcast August 3 PN Comments at 15.
1726 See e.g., Letter from Lawrence Zawalick, Senior Vice President, Rural Telephone Finance Cooperative, to
Julius Genachowski, Chairman, FCC, WC Docket Nos. 10-90, 07-135, 05-337 and 03-109, GN Docket No. 09-51
and CC Docket Nos. 01-92 and 96-45, Attach. at 10 (noting that, for rate-of-return carriers, the “[c]apital markets
and private lenders would react positively to regulatory certainty and cash flow stability”).
1727 Average schedule carriers will use projected settlements associated with 2011 annual interstate switched access
tariff filing.
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over time to reflect trends in the status quo absent reform. Under the interstate regulation that hashistorically applied to them, rate-of-return carriers were able to increase interstate access rates to offset
declining MOU, which has averaged 10 percent per year, and consequently had insufficient incentive to
reduce costs despite rapidly decreasing demand.1728 However, the record indicates that, in the aggregate,
rate-of-return carriers’ interstate switched access revenue requirement has been declining approximately
three percent each year, reflecting declines in switching costs.1729 As a result, interstate switched access
revenues have been declining at approximately three percent annually. NECA and a number of rate-of-
return carriers project that the revenue requirement will continue to decline at approximately three percent
a year over the next five years, because switching costs are declining dramatically given the availability
of IP-based softswitches, which are significantly less costly and more efficient than the TDM-based
switches they replace.1730 Similarly, the record reveals that legacy LSS, which is being incorporated in
our recovery mechanism for rate-of-return carriers, is projected to decline approximately two percent per
year, likewise resulting in reduced interstate revenues for carriers receiving LSS.1731
893.
In the intrastate jurisdiction, moreover, the majority of states do not have an annual true-
up mechanism; intrastate rates generally do not automatically increase as demand declines and as a result,
most rate-of-return carriers have been experiencing significant annual declines in intercarrier
1728 See supra paras. 885-886.
1729 Letter from Jeffrey E. Dupree, Vice President—Government Relations, NECA, to Marlene H. Dortch, Secretary,
FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109; CC Docket Nos. 01-92, 96-45; GN Docket No. 09-51,
Attach. 2, at 1 (filed Aug. 29, 2011) (“Preliminary RLEC CAF Computations”) (NECA et al. Aug. 29, 2011 Ex
Parte Letter).
1730 See supra para. 752. Softswitches are modular general-purpose hardware programmed to control voice calls
across TDM- and IP-based networks. See William Stallings, Data and Computer Communications, 8th ed., at 307,
Pearson Prentice Hall, Upper Saddle River NJ, 2007. The use of softswitches permits carriers to reduce capital and
operating costs for a range of reasons. As a straight replacement for a legacy specialized Class 5 central office
switch, a softswitch is said to save 70 percent in space, 60 percent in power, and up to 50 percent operating expenses
in certain situations. See, e.g., id.; Google August 3 PN Comments at 8 n.28; Franklin D. Ohrtman, Jr, Softswitch:
Architecture for VoIP, McGraw-Hill, New York, NY, 2003 (Chapter 11 passim, compare with page 57: “A Class 5
switch can cost tens of thousands of dollars and require at least half a city block in real estate.”);
http://www.genband.com/Home/Solutions/Fixed/Network-Transformation-Large-Office.aspx; and
http://www.metaswitch.com/wireline/Local-Exchange-Evolution.aspx and
http://www.ericsson.com/res/docs/whitepapers/efficient_softswitching.pdf. Costs are also reduced when
softswitches are used to gain the efficiencies of IP technologies. In addition, open softswitch software architectures
allow carriers to expand service offerings, spreading fixed costs over more services. See, e.g, , Jr., Softswitch:
Architecture for VoIP, McGraw-Hill, New York, NY, 2003, especially chapter 11; Florida PSC USF/ICC
Transformation NPRM Comments at 7-8; see also Letter from Jason J. Dandridge, CEO, Palmetto Rural Telephone
Cooperative, to Albert M. Lewis, Chief, Pricing Policy Division, Wireline Competition Bureau, at 5 (filed Sept. 9,
2009) (“The new softswitch will help to position the Cooperative to use VoIP if it chooses to do so in the future,
which will generate substantial cost savings for Palmetto.”). We therefore reject concerns raised by the rate-of-
return carriers that the recovery mechanism disincents investment in softswitches. See, Letter from Michael R.
Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90,
07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 2 (filed October 17, 2011); Letter
from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC
Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 5 (filed Oct.
19, 2011). To the contrary, evidence overwhelmingly indicates that such switches are significantly more efficient
and carriers that reap the benefits of efficiencies, including for example by sharing a softswitch, will be able to retain
additional revenues. See, e.g., Viearo Wireless August 3 PN Comments, Exh. 2 at 17, 39-40, 45-46.
1731 NTCA Sept. 9, 2011 Ex Parte Letter, Attach. 3 at 1.
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compensation revenue.1732 In particular, aggregate data from more than 600 rate-of-return carriers revealsan average decline in intrastate MOUs of approximately 11 percent, and an average decline in intrastate
access revenues of approximately 10 percent annually.1733 Our recovery mechanism accounts for this
existing revenue loss, which would continue to occur under the status quo path absent reform, as
illustrated in the figure below.1734
1732 We are aware of only a few states conduct some form of annual review to allow incumbent LECs to modify
intrastate intercarrier compensation in response to changes in demand or to otherwise replace those revenues through
other processes in whole or in part. See, e.g., Alaska Exchange Carrier’s Ass’n v. Regulatory Comm’n of Alaska,
No. S-13528, 2011 WL 4715209 (Alaska rel. Oct. 7, 2011); Fourteen Small Incumbent Local Exchange Carriers
and the California High Cost Fund-A Administrative Committee Fund, Resolution T-17298, 2011 WL 660558 (Cal.
PUC rel. Jan. 27, 2011); Implementation of House Bill 168, Docket No. 32235, Order Implementing House Bill 168,
2010 WL 4925826 (Ga. Pub. Serv. Comm’n rel. Nov. 23, 2010); KAN. STAT. ANN. § 66-2005(c). The record does
not indicate that most states have such a process. Rather, in other states, there are not automatic annual true-ups,
whether because carriers instead must request permission to increase rates through a formal rate case or a less formal
process, because rates are specified by statute, or because interstate rate-of-return carriers are subject to some
alternative form of regulation at the state level. See, e.g., ABC Plan Proponents August 3 PN Comments at 5;
Florida PSC USF/ICC Transformation NPRM Comments at 5; Cincinnati Bell 2008 Order and ICC/USF FNPRM
Comments at 15-16; Investigation Into Streamlining the Procedures and Filing Requirements For Intrastate Access
Tariffs that Implement or Maintain Parity with Interstate Tariffs, Cause No. 44004, Order, 2011 WL 2908623 (Ind.
Util. Reg. Comm’n rel. July 13, 2011); Application of Highland Telephone Cooperative, Inc. for an Adjustment of
Rates, Case No. 2010-00227, Order, 2011 WL 2678154 (Ky. Pub. Serv. Comm’n rel. July 7, 2011); Intrastate
Access Charge Policies, Application No. C-4145/NUSF-74/PI-147, Order, 2010 WL 2650347 (Ne. Pub. Serv.
Comm’n rel. Apr. 20, 2010); Investigation into the Earnings of Citizens Telephone Company of Higginsville,
Missouri, Case No. IR-2005-0024, Order Approving Stipulation and Agreement, 2004 WL 1855412 (Mo. Pub. Serv.
Comm’n rel. Aug. 12, 2004); Illinois Independent Telephone Association, Docket 01-0808, Order, 2003 WL
23234577 (Il Commerce Comm’n rel. Nov. 25, 2003); 65-407 ME CODE Ch. 280 § 8; Mich. Comp. Laws ch.
484.2310 § 310(12); 2007 Nevada Laws Ch. 216 (A.B. 518); Tenn. Code Ann. § 65-5-302; Wis. Stat. § 196.212;
Wy Stat. § 37-15-203(j); see also James C. Bonbright, et al., PRINCIPLES OF PUBLIC UTILITY RATES at 96, 198 (2d
ed. 1988) (discussing regulatory lag as a common feature of rate regulation); W. Kip Viscusi, et al., Economics of
Regulation and Antitrust at 432-33 (4th ed. 2005) (discussing regulatory lag and its effects).
1733 Letter from Regina McNeil, VP of Legal, General Counsel & Corporate Secretary, NECA to Marlene H.
Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51, CC Docket No. 01-92
(filed May 25, 2011).
1734 NECA Dec. 29, 2010 Ex Parte Letter; NECA May 25, 2011 Ex Parte Letter; NECA Aug. 29, 2011 Ex Parte
Letter; FCC staff analysis of data available at http://www.usac.org/hc/tools/disbursements/default.aspx. For
purposes of this chart, trends in reciprocal compensation MOUs are assumed to follow trends for intrastate access
MOUs.
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Rate of return ICC projected revenue under status quoICC recip comp net (5% decline)
$, in billions
ICC intrastate revenue (10% decline)
1.3
1.26
ICC interstate revenue (3% decline)
1.2
1.18
LSS revenue (2% decline)
1.10
1.1
1.03
1.0
0.97
0.91
0.9
0.85
0.80
0.8
0.75
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
2009
2010
2011
2012
2013
2014
2015
2016
2017
Figure 111735
894.
Accounting for both the declining interstate revenue requirement and the ongoing loss of
intrastate revenue with declining MOU, the record establishes a range of reasonable potential annual
reductions in the Baseline from which Rate-of-Return Eligible Recovery is calculated; within that range
we initially adopt a five percent annual decrease. At the lower end of the range, an annual decrease of
three percent would represent rate-of-return carriers’ approximate annual interstate revenue decline absent
reform.1736 Limiting our Baseline adjustment to three percent would make these carriers substantially
better off with respect to their intrastate access revenues, however. As discussed above, carriers in many
states do not have annual true-ups under state access rate regulations so as MOU decline, intrastate access
revenues decline as well. Data indicate that this intrastate access revenue decline has been approximately
10 percent.1737 Combining these interstate and intrastate declines weighted by the relative portion of
aggregate rate-of-return revenues subject to the mechanism attributable to each category could justify a
1735 According to NECA, intrastate access is approximately 56 percent of these revenues, interstate access is
approximately 28 percent of these revenues, and LSS is approximately 16 percent of these revenues. See Letter
from Joe A. Douglas, Vice President, Government Relations, NECA, to Marlene H. Dortch, Secretary, FCC, CC
Docket Nos. 96-45, 80-286, GN Docket No. 09-51 at Attach. (filed Dec. 30, 2010) (providing revenue figures);
NTCA Sept. 9, 2011 Ex Parte Letter Attach. 3 at 1 (providing revenue and LSS change projections). Using a 10
percent annual decline for intrastate access revenues, 3 percent annual decline for the interstate access revenue
requirement, and 2 percent annual decline for LSS yields a weighted annual decline of approximately 7 percent.
1736 See NTCA Sept. 9, 2011 Ex Parte Letter Attach. 3 at 1. We note that this revenue requirement includes a
prescribed rate of return of 11.25 percent. Although the rate-of-return carriers proposed a 10 percent rate of return
as part of their reform proposal, rate represcription is addressed in the FNPRM and is not part of this analysis. See
infra Section XVII.C.
1737 Letter from Regina McNeil, VP of Legal, General Counsel & Corporate Secretary, NECA to Marlene H.
Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51, CC Docket No. 01-92
(filed May 25, 2011).
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possible Baseline reduction of approximately seven percent annually.1738 Because we recognize that ourapproach to recovery may require adjustments by rate-of-return carriers, we initially adopt a conservative
approach and limit the decline in the Baseline amount from which Rate-of-Return Eligible Recovery is
calculated to five percent annually.1739
895.
Moreover, we note that the annual five percent decline does not include the proposal in
the USF/ICC Transformation NPRM and from the Rural Associations to apply the corporate operations
expense limitation to LSS.1740 LSS offsets a portion of rate-of-return carriers’ interstate switched access
revenue requirement. Applying the corporate operations expense limitations to LSS, or more generally to
the entire switched access interstate revenue requirement, would have resulted in one-time reduction of
almost three percent.1741 By foregoing this reduction before setting the Baseline, we ensure that the five
percent decline is appropriately conservative, while still consistent with our overall goals to encourage
efficiency and cost savings.
896.
Rate-of-return carriers will receive each year’s Baseline revenue amount from three
sources. First, they will continue to have an opportunity to receive intercarrier compensation revenues,
pursuant to the rate reforms described above. Second, they will have an opportunity to collect ARC
revenue from their customers, subject to the consumer protection limitations set forth below. Third, they
will have an opportunity to collect any remaining Baseline revenue from the CAF. Together, the second
and third sources comprise the Rate-of-Return Eligible Recovery.
897.
Specifically, Rate-of-Return Eligible Recovery will be calculated from the Rate of Return
Baseline by subtracting an amount equal to each carrier’s opportunity to collect ICC from the rate
elements reformed by this Order. In each year, this ICC opportunity will be calculated as actual demand
for each reformed rate element times the default intercarrier compensation rate for that element in that
year. The intercarrier glide path adopted above sets default transitional ICC rates, and permits carriers to
negotiate alternatives.1742 In computing the opportunity to collect ICC, we will use the default rates rather
than any actual rate to prevent carriers from negotiating low rates simply to prematurely shift intercarrier
compensation revenues to the CAF. Thus, in the event that a carrier negotiates intercarrier compensation
1738 See supra note 1735.
We note that some commenters have projected an 8 percent decline in intrastate access MOUs. See NTCA Sept. 9,
2011 Ex Parte Letter, Attach. 4 (“RLEC RM Price-Out by State and Interstate Component”) (8 percent estimate).
Although we find the trend based on actual historical results more reliable, even if we instead used that lower
projected MOU loss as a proxy for associated intratstate revenue loss (i.e., an 8 percent revenue loss), this still
would yield a weighted annual decline of approximately 6 percent.
1739 We seek comment in the FNPRM asking whether we should change this baseline reduction after five years by
either moving to a decline based on MOUs or increasing the decline by one percent per year up to a 10 percent
decline. See infra para. 1329.
1740 See USF/ICC Transformation NPRM, 26FCC Rcd at 4624, para. 198. See Letter from Joshua Seidemann,
Director of Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90; GN Docket No. 09-51;
WC Docket Nos. 07-135, 05-377; CC Docket No. 01-92, Attach. at 1 (filed Aug. 26, 2011).
1741 Staff analysis of local switching support data provided by NECA (submitted by NECA as confidential). See,
NECA Data Filings.
1742 See infra Section XII.C.
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rates lower than those specified, we will still impute the full default rates, for the purpose of computingthe amount each carrier has an opportunity to collect from ICC.1743
898.
Carriers will annually estimate their anticipated MOU for each relevant intercarrier
compensation rate capped or reduced by this Order. We note that carriers already use forecasts today in
their annual access filings to determine interstate switched access charges and we are requiring carriers to
use similar methodology to forecast intercarrier compensation for use in determining Rate-of-Return
Eligible Recovery. Because estimated minutes likely will differ from actual minutes, there will be a true-
up in two years to adjust the carrier’s Rate-of-Return Eligible Recovery for that year to account for the
difference between forecast MOU and actual MOU in the year being trued-up.1744 These data on MOU
will establish the Base Minutes for each relevant category, and shall not include MOU for which revenues
were not recovered, for whatever reason.1745 Rate-of-return carriers will be required to submit to the
states the data used in these calculations,1746 allowing state regulators to monitor implementation of the
recovery mechanism.1747 A rate-of-return incumbent LEC that is eligible to receive CAF shall also file
this information with USAC, and we delegate to the Wireline Competition Bureau authority to work with
to USAC to develop and implement processes for administration of CAF ICC support.1748 In support of
the carriers’ annual access tariff filing, each carrier will provide the necessary data used to justify any
ARC to the Commission.
899.
Rate-of-Return Eligible Recovery. A rate-of-return carrier’s baseline for recovery (“Rate-
of-Return Baseline”) is its 2011 interstate switched access revenue requirement, plus its FY20111749
intrastate switched access intercarrier compensation revenues for rates capped or reduced by this Order,
plus its FY2011 net reciprocal compensation revenues. A rate-of-return carrier’s Eligible Recovery
(“Rate-of-Return Eligible Recovery”), in turn, is: (a) its Rate-of-Return Baseline reduced by five percent
each year; less (b) its ICC recovery opportunity for that year, defined as: (i) its estimated MOU for each
1743 To do so, carriers are required to file data annually to ensure that carriers do not recover more than they are
entitled under the recovery mechanism we adopt today.
1744 In the FNPRM we seek comment on when the true-up process should end, and what the appropriate replacement
should be. See infra para. 1329.
1745 Carriers may, however, request a waiver of our rules defining the Baseline to account for revenues billed for
terminating switched access service or reciprocal compensation provided in FY2011 but recovered after the March
31, 2012 cut-off as the result of the decision of a court or regulatory agency of competent jurisdiction. The adjusted
Baseline will not include settlements regarding charges after the March 31, 2012 cut-off, and any carrier requesting
such modification to its Baseline shall, in addition to otherwise satisfying the waiver criteria, have the burden of
demonstrating that the revenues are not already included in its Baseline, including providing a certification to the
Commission to that effect. Any request for such a waiver also should include a copy of the decision requiring
payment of the disputed intercarrier compensation. Any such waiver would be subject to the Commission’s
traditional “good cause” waiver standard, rather than the Total Cost and Earnings Review specified below. See 47
C.F.R. § 1.3.
1746 See supra paras. 812-813. Upon request, carriers will also be required to file this data with the Commission.
1747 As discussed above, rate-of-return carriers may elect to have NECA or another entity perform and submit the
annual analysis. See supra note. 1690.
1748 USAC plays a critical role in the day-to-day administration of universal service support mechanisms, see, e.g.,
USF/ICC Transformation NPRM, 26 FCC Rcd at 4595, para. 116 n.192, including the ICC-replacement CAF
support that is part of our recovery mechanism.
1749 I.e., October 1, 2010 through September 30, 2011.
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rate element subject to reform times; (ii) the default transition rate for that rate element for that year; plus(3) any necessary true-ups based on the prior year’s actual MOUs.
Rate of Return Example
.1750 A rate-of-return carrier has a 2011 interstate switched accessrevenue requirement of $200,000, FY2011 intrastate switched access revenues of $50,000, and
net reciprocal compensation revenues of $5,000. Its Eligible Recovery would be determined as
follows:
Year 1. The carrier is entitled to collect $242,250 ($255,000 x .95). The carrier will subtract
from this total its ICC recovery opportunity from switched access charges capped or reduced in
this Order (both intrastate and interstate) and net reciprocal compensation, defined as its forecast
MOU times the default rates specified by this Order. The remainder is Eligible Recovery.
Year 2. Prior to adjustment for any under- or over-estimation of minutes in Year 1, the carrier is
entitled to recover $230,137.50 ($242,250 x .95). This figure is adjusted up or down in the
annual true-up to reflect any difference between forecast minutes in Year 1 and actual minutes in
Year 1. For example, if the carrier had fewer minutes than estimated in Year 1, such that its ICC
recovery opportunity was $500 less than forecast, its recovery in Year 2 would be adjusted
upward by $500 and it would be permitted to recover $230,637.50 in Year 2 ($230,137.50 +
$500). Conversely, if the carrier had a higher number of MOU than had been forecast and
provided the carrier an opportunity for $500 more ICC recovery, its recovery in Year 2 would be
adjusted downward to $229,637.50 ($230,137.50 - $500). The carrier will then subtract from
this total its Year 2 ICC recovery opportunity, based on its Year 2 forecast minutes and the Year
2 default rates specified by this Order. The remainder is Eligible Recovery.
900.
This Approach to Recovery for Interstate Rate-of-Return Carriers Provides Certainty,
Minimizes Burdens to Consumers, and Constrains the Size of USF. Exercising our flexibility under the
Act to design specific regulatory tools,1751 we adopt an approach to Rate-of-Return Eligible Recovery that
takes interstate rate-of-return carriers off of rate-of-return based recovery specifically for interstate
switched access revenues,1752 but provides them more predictable recovery than exists under the status
quo.1753 Price cap carriers today already the bear the risk that costs increase and have no true up
1750 This is a simplified example of the calculation of Rate-of-Return Eligible Recovery for a rate-of-return carrier’s
reduction in intrastate terminating access resulting from the reforms we adopt for illustrative purposes only. It is not
intended to encompass all necessary calculations applicable in determining Rate-of-Return Eligible Recovery in the
periods discussed in the example for all possible rates addressed by our Order.
1751 See supra para. 889.
1752 In addition, to the extent that any interstate rate-of-return carriers also are subject to rate-of-return regulation at
the state level, our recovery mechanism for switched access services replaces that, as well. We observe that our
recovery mechanism otherwise leaves unaltered the preexisting rate regulations for these carriers’ other services,
such as common line (as modified by Sections VIII.C and D. of this Order) and special access. Nonetheless, we
recognize that this approach represents a potentially significant regulatory change for those carriers and adopt a
longer transition for these carriers for this reason. In addition to the benefits of the standard recovery mechanism
discussed below, the Total Cost and Earnings Review mechanism we adopt today will ensure that this recovery
mechanism will not deprive any carrier of the opportunity to earn a reasonable return.
1753 See, e.g., Mo STCG USF/ICC Transformation NPRM Reply at 10 (“[A]ny changes to small rate-of-return
ILEC’s revenue streams must be accompanied by a predictable and sufficient replacement mechanism.”); FCC
Universal Service Fund and Intercarrier Compensation Workshop, April 6, 2011, CC Docket No. 01-92 at 97,
transcript available at http://www.fcc.gov/events/universal-service-fundintercarrier-compensation-reform-workshop
(comments of Paul Gallant, Senior Vice President and Telecom Analyst, MF Global, discussing the importance of
certainty of access revenue to allow continued investor support for broadband build-out).
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mechanism for declines in demand. For this reason, the recovery mechanism we adopt for rate-of-returncarriers is different than the recovery mechanism we adopt for price cap carriers. Although rate-of-return
carriers have a true up process to the Eligible Recovery for actual demand, this is akin to how such
carriers are regulated today.1754 At the same time, however, we decline to conduct true-ups with regard to
rate-of-return carriers’ switched access costs; accordingly, carriers will have incentives to become more
efficient and to reduce switching costs, including by investing in more efficient technology and by sharing
switches. Carriers that are more efficient will be able to retain the benefits of the cost savings. We
believe the rural LEC forecast with regard to reduced switched access costs is conservative, and carriers
will have additional opportunities to recognize efficiencies with regard to these costs. We discuss these
issues in greater detail below.
901.
As discussed above, incumbent LECs are experiencing consistent, substantial, and
accelerating declines in demand for switched access services.1755 The effect of current interstate rate
regulation is to insulate rate-of-return carriers from revenue loss due to competitive pressures that result
in declining lines and MOU, but rapidly increasing access rates have exacerbated these carriers’ risk of
revenue uncertainty due to arbitrage,1756 and carriers themselves project declining costs—and thus
declining revenues—under the status quo. In the intrastate jurisdiction, as described above, carriers are
often unable to automatically increase rates as they experience a decline in demand caused by competition
and changing consumer usage, leading to declining intrastate revenues.1757
902.
Our framework allows rate-of-return carriers to profit from reduced switching costs and
increased productivity, ultimately benefitting consumers.1758 We note in this regard that the transition to
broadband networks affords smaller carriers opportunities for efficiencies not previously available. For
example, small carriers may be able to realize efficiencies through measures such as sharing switches,
measures that preexisting regulations, such as the thresholds for obtaining LSS support, may have
deterred.1759 Under the new recovery framework, carriers that realize these efficiencies will not
experience a resulting reduction in support. In addition, our new recovery framework—in conjunction
1754 The true-up process also protects carriers resulting from changes with regard to, for example, reforms related to
various arbitrage schemes. The record does not allow us to quantify with precision the impact of these arbitrage-
related reforms on rate-of-return carriers.
1755 See supra paras. 885-856.
1756 See, e.g., Letter from Michael R. Romano, Sr. V.P. – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC,
Docket No. 01-92, Attach. (filed July 18, 2011); Letter from Gregory W. Whiteaker, Herman & Whiteaker, LLC, to
Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-
45, GN Docket No. 09-51, Attach. at 3 (filed Sept. 23, 2011) (NECA et al. Sept. 23, 2011 Ex Parte Letter).
1757 See supra para. 893.
1758 Our analysis is informed by the Commission’s prior findings regarding the advantages that can arise from
regulatory frameworks that encourage more efficient investment. See, e.g., Policy and Rules Concerning Rates for
Dominant Carriers, CC Docket No. 87-313, Second Report and Order, 5 FCC Rcd 6786, 6789, para. 21 (1990)
(LEC Price Cap Order). “[A] properly-designed system of incentive regulation will be an improved form of
regulation, generating greater consumer benefits . . . .” Id. at 5 FCC Rcd 6786, para. 1. Not only have carriers been
denied the benefits of increased efficiency under the current system, in some instances our rules actively discourage
efficiencies. See, e.g., 47 C.F.R. § 36.125(f). Competition is not a precondition for incentive-based regulation; the
Commission previously has concluded that where there is limited competition there is “little incentive to become
more productive. Applying incentive regulation to LECs is arguably a more significant regulatory reform in terms
of its ability to generate consumer benefits than applying incentive regulation to a carrier or industry that faces
substantial competition.” LEC Price Cap Order, 5 FCC Rcd at 6790-91, para. 33.
1759 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4565, para. 21.
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with the overall reforms adopted in this Order—provides revenue certainty, stability, and predictablesupport,1760 as well as promoting continued investment,1761 consistent with advantages some historically
have associated with rate-of-return regulation.1762
903.
Importantly, our approach also avoids the risk of unconstrained escalation in the burden
on end-user customers and universal service contributors. We agree with commenters that, absent
incentives for efficiency, determining recovery based on the historical approach to these carriers’ rate
regulation could cause the Connect America Fund to grow significantly and without constraint.1763 This
prediction is consistent with the Commission’s past recognition that rate-of-return regulation can create
incentives for inefficient investment, which would flow through to our recovery mechanism.1764
Although some commenters contend that Commission accounting regulations and oversight adequately
protect against inefficient investment,1765 the effectiveness of Commission accounting regulations and
oversight is limited in certain respects,1766 as the Commission itself previously has recognized.1767 More
1760 See supra para. 858.
1761 See supra Section VI.B.
1762 See, e.g., MAG Order, 16 FCC Rcd at 19705, para. 220; Multi-Association Group (MAG) Plan for Regulation of
Interstate Services of Non-Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, First Order
on Reconsideration, CC Docket No. 00-256, Twenty-Fourth Order on Reconsideration, CC Docket No. 96-45,
Report and Order, 17 FCC Rcd 5635, 5636, para. 2 (2002). We also observe that carriers will be able to continue to
participate in NECA pooling. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4741-42, para. 597 (citing the
benefits of NECA pooling as a risk sharing mechanism for rate-of-return carriers).
1763 See, e.g., Ad Hoc August 3 PN Comments at 24 & n.39; CTIA August 3 PN Comments at 19 ; XO August 3 PN
Comments at 15-16; Viaero Wireless August 3 PN Comments at 15-17 & Exh. 2. at 10-12, 15-20, 36-40, 43-51;
Verizon USF/ICC Transformation NPRM Reply at 55; Letter from David L. Sieradzki, counsel for Alltel, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 05-337, CC Docket Nos. 01-92, 96-45, RM-10822, at 1-2 &
Attach. (filed Mar. 6, 2007); Mercatus Center Intercarrier Compensation FNPRM Comments at 15, 22-23; Western
Wireless Feb. 13, 2004 Comments, CC Docket No. 96-45, RM-10822 at Attach. As the Commission observed in
the USF/ICC Transformation NPRM, “[o]ver time, aggregate high-cost support for rate-of-return carriers has
increased, while such support for carriers that have chosen to move to price cap regulation has declined.” USF/ICC
Transformation NPRM, 26 FCC Rcd at 4611-12, para. 166 & Figure 7.
1764 The Commission has found, for example, that because both decreases and increases in company costs are passed
on to consumers, a rate-of-return regulated carrier has little incentive to manage inputs efficiently. See, e.g., LEC
Price Cap Order, 5 FCC Rcd at 6789, para. 22; Policy and Rules Concerning Rates for Dominant Carriers, CC
Docket No. 87-313, Report and Order and Second Further Notice of Proposed Rulemaking, CC Docket No. 87–313,
4 FCC Rcd 2873, 2889-90, para. 30 (1989) (AT&T Price Cap Order); Policy and Rules Concerning Rates for
Dominant Carriers, CC Docket No. 87-313, Notice of Proposed Rulemaking, 2 FCC Rcd 5208 (1987); Further
Notice of Proposed Rulemaking, CC Docket No. 87–313, 3 FCC Rcd 3195, 3218-19, 3222, paras. 38, 43 (1988)
(Price Cap Further Notice). The Commission also has observed that if the authorized rate-of-return exceeds the
carrier’s actual cost of capital, it may have an incentive to expand its rate base uneconomically. See, e.g., Price Cap
Further Notice, 3 FCC Rcd at 3219-20, paras. 39-40; AT&T Price Cap Order, 4 FCC Rcd at 2889-90, para. 30. In
addition, as the USF/ICC Transformation NPRM observed, other regulators likewise have trended away from rate-
of-return regulation in recent years. USF/ICC Transformation NPRM, 26 FCC Rcd at 4740, para. 596 & n.888.
1765 See, e.g., Rural Broadband Alliance August 3 PN Comments at 23-24.
1766 See, e.g., Viaero Wireless August 3 PN Comments, Exh. 2. at 15-16 (citing backward-looking nature of
regulatory constraints on investment, the relative information disparity between carriers and regulators, and the
potential for cost-shifting or other actions that seek to evade constraints on certain costs); id., Exh. 2 at 37-38
(“While it is possible to adopt a variety of constraints that would apply to specific expenditures, it is impossible to
ascertain the effectiveness of those constraints absent an external benchmark”).
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broadly, as commenters observe, retaining rate-of-return regulation as historically employed by theCommission risks “perpetuat[ing the] isolated, ILEC-as-an island operation,” thus increasing the costs
subject to recovery to the extent that, for example, each individual incumbent LEC purchases its own
facilities, rather than sharing infrastructure with other carriers where efficient.1768 Of particular relevance
here, as one commenter observes, under the preexisting regulatory framework “there is little evidence of
shared investment in local switching, even though such sharing would be engaged in by rational carriers
subject to market incentives,” while, “[i]n contrast, there is evidence of at least some efforts to engage in
joint ventures to invest in transport and tandem switching assets for which there are fewer regulatory
incentives for rate-of-return carriers to invest in their own equipment and facilities.”1769 We are
committed to constraining the growth of the CAF, and the recovery mechanism we adopt for interstate
rate-of-return carriers advances that goal. To this end, states that have jurisdiction over intrastate access
rates should monitor intrastate tariffs filed pursuant to the rules and reforms adopted in this Order to
ensure carriers do not shift costs from services subject to incentive regulation to services still subject to
rate-of-return regulation.
904.
We decline to adopt the recovery mechanism proposed by associations of rate-of-return
carriers.1770 Although these carriers contend that their approach would allow intercarrier compensation
reform for rate-of-return carriers that would limit the burdens placed on the CAF, we are not persuaded by
a number of the assumptions that lead them to this conclusion. The rate-of-return carriers project that
their revenue requirement for switched access will decline three percent annually for the next five
years.1771 Our approach locks in this historical trend, adjusted to account for the intrastate status quo. In
the absence of locking in this historical trend, however, we have concerns about whether such declines in
(Continued from previous page)
1767 For example, where regulated prices reflect reported costs, a carrier may have an incentive to exaggerate costs to
secure higher prices. See, e.g., LEC Price Cap Order, 5 FCC Rcd at 6789, para. 22 (“Under rate of return, carriers
are allowed to set their rates based on the costs—investment and expense—of providing a service. Carriers are given
fairly wide latitude in the costs they can claim as the basis for their rates.”) (citation omitted); see also, e.g., LEC
Price Cap Order, 5 FCC Rcd at 6790, paras. 29-30; AT&T Price Cap Order, 4 FCC Rcd at 2889-90, paras. 30-31.
Rate-of-return regulation also can enable carriers to shift some of the costs of their non-regulated, competitive
services to the customers of their rate-of-return regulated services. See, e.g., Price Cap Further Notice, 3 FCC Rcd
at 3223-24, para. 48.
1768 See, e.g., Viaero Wireless August 3 PN Comments, Exh. 2. at 18-19; see also id., Exh. 2 at 19-20 (discussing
discouragement of efficient consolidation among carriers).
1769 Viaero Wireless August 3 PN Comments, Exh. 2. at 17 n.11; see also id., Exh. 2 at 39-40, 45-46.
1770 Letter from Walter B. McCormick, Jr., United States Telecom Ass’n, Robert S. Quinn, Jr., Senior Vice
President—Federal Regulatory, AT&T, Melissa Newman, Vice President—Federal Regulatory Affairs,
CenturyLink, Michael T. Skrivan, Vice President—Regulatory, FairPoint Communications, Kathleen Q. Abernathy,
Chief Legal Officer and Executive Vice President—Regulatory and Government Affairs, Frontier, Kathleen Grillo,
Senior Vice President—Federal Regulatory Affairs, Verizon, Michael D. Rhoda, Senior Vice President—
Government Affairs, Windstream, Shirley Bloomfield, Chief Executive Officer, National Telecommunications
Cooperative Association, John Rose, President, OPASTCO, Kelly Worthington, Executive Vice President, Western
Telecommunications Alliance, to Chairman Genachowski, Commissioner Copps, Commissioner McDowell, and
Commission Clyburn, at 2 (filed Jul. 29, 2011). (Submitted attached to Letter from Jonathan Banks, USTelecom, to
Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92; WC Docket Nos. 05-337, 07-135, 10-90; GN Docket
No. 09-51; CC Docket No. 96-45; WC Docket No. 06-122; CC Docket Nos. 99-200, 96-98, 99-68; WC Docket No.
04-36 (filed July 29, 2011)).
1771 NECA et al. Aug. 29, 2011 Ex Parte Letter), Attach. 2 at 1 (Preliminary RLEC CAF Computations;
Assumptions and Computations).
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the revenue requirement actually will occur. As commenters observe, because ICC costs will be shiftedprimarily to the CAF to make rate-of-return carriers whole, carriers would face incentives for inefficient
investment, and such incentives could be heightened to the extent that carriers seek to offset the effects of
intercarrier compensation rate reductions.1772 A more realistic view of the assumptions underlying the
associations’ projections suggests that the financial impact on the CAF of the associations’ proposal is
likely far greater than they project. Consequently, adopting their proposal appears likely to lead to one of
two results—the CAF would grow significantly, or intercarrier compensation reform would stop once
CAF demands outstripped the available budget.1773
F.
Recovering Eligible Recovery
905.We now explain the two-step mechanism by which carriers will be allowed to recover
their Eligible Recovery. First, incumbent LECs will be permitted to recover Eligible Recovery through
limited end-user charges. If these charges are insufficient, carriers will be entitled to CAF support equal
to the remaining Eligible Recovery.1774 Because we view our recovery mechanism as a transitional tool,
we implement several measures to ensure it is truly temporary in nature. First, the Eligible Recovery that
incumbent LECs are permitted to recover phases down over time, based on a predetermined glide path for
price cap carriers and a more gradual framework for rate-of-return carriers. Second, ICC-replacement
CAF support for price cap carriers is subject to a defined sunset date. Finally, in the FNPRM, we seek
further comment on the timing for eliminating the recovery mechanism—including end-user recovery—
in its entirety. Carriers recovering eligible recovery will be required to certify annually that they are
entitled to receive the recovery they are claiming and that they are complying with all rules pertaining to
such recovery.
1.
End User Recovery
906.The USF/ICC Transformation NPRM sought comment on the role that interstate SLCs
should play in intercarrier compensation reform and the ongoing relevance of the SLC as the marketplace
moves to IP networks.1775 The subsequent Public Notice sought further comment on particular
1772 See, e.g., CTIA August 3 PN Comments at 18; Free State Foundation August 3 PN Comments at 4; US Cellular
August 3 PN Comments at 10-11.
1773 As stated in the Joint Letter: “To the extent, however, that sufficient funding is not expected for any reason to be
available to provide the necessary levels of high-cost support and/or intercarrier compensation restructuring for
carriers in any given year, any and all reductions in intercarrier compensation rates shall be deferred until such
sufficient funding is confirmed to be available.” Joint Letter at 2-3. Similar concerns would arise from other
proposals that rely on rate of return-based recovery in conjunction with more limited intercarrier compensation rate
reforms. See, e.g., NECA et al. USF/ICC Transformation NPRM Comments at 12-27; see also, Letter from Colin
Sandy, Government Relations Counsel, NECA, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-
135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 1-2 (filed Oct. 21, 2011).
1774 Carriers electing to forego recovery from the ARC or the CAF must indicate their intention to do so in their
2012 tariff filing. Carriers may also elect to forgo CAF reform in any subsequent tariff filing. A carrier cannot,
however, elect to receive CAF funding after a previous election not to do so. Notwithstanding a carrier’s election to
forego recovery from the ARC or the CAF, tariff filings may require carriers to provide the information necessary to
justify the rates and terms in the tariff.
1775 USF/ICC Transformation NPRM, 26 FCC Rcd at 4736, para. 579; see also, e.g., 2008 USF/ICC FNPRM, 24
FCC Rcd at 6497, App. A, paras. 298-310 (seeking comment on a recovery mechanism that would rely on certain
SLC increases); Intercarrier Compensation FNPRM, 20 FCC Rcd at 4706-4734, paras. 42, 49, 51, 53, 54, 56, 59,
88, 101-02, 106, 108, 111 (seeking comment on recovery alternatives that would rely on SLC increases or other new
end-user charges).
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alternatives for using SLCs as part of any recovery mechanism.1776 Although the record reveals a widevariety of proposals, most parties commenting on the matter supported an increase in end-user charges as
a necessary part of ICC reform.1777 In developing the recovery mechanism, we seek to balance the
interests of both end-user customers and USF contributors. We thus agree that it is appropriate to first
look to customers paying lower rates for some limited, reasonable recovery, and adopt a number of
safeguards to ensure that rates remain affordable and that consumers are not required to contribute an
inequitable share of lost intercarrier revenues.
907.
In addition to balancing the needs of ratepayers and USF contributors, we also account
for differences among different ratepayers, adopting particular protections for consumers. For example,
some proposals in the record would require that end-user recovery be borne in the first instance by
consumers.1778 Instead, acknowledging that all end users benefit from the network, and consistent with
the Commission’s approach to end-user recovery in prior intercarrier compensation reform, we conclude
that all end users should contribute to reasonable end-user recovery from the beginning of ICC reform.1779
908.
We adopt a transitional ARC that is subject to three important constraints. First, in no
case will the monthly ARC increase more than $0.50 per year for a residential or single-line business
customer, or more than $1.00 (per line) per year for a multi-line business customer. Price cap incumbent
LECs are allowed to increase ARCs for no more than five years; rate-of-return incumbent LECs for no
more than six years.1780 Second, in no case will the consumer ARC increase if that increase would result
in certain residential end-user rates exceeding the Residential Rate Ceiling, which we discuss below.
Third, ARCs can only be charged in a particular year to recover an incumbent LEC’s Eligible Recovery
for that year; total revenue from ARCs cannot exceed Eligible Recovery. Thus if a carrier’s Eligible
Recovery decreases from one year to the next, the total amount of ARCs it may charge its end users will
also decrease. Importantly, carriers also are not required to charge the ARC.1781
1776 August 3 PN at 10-16.
1777 See, e.g., Cbeyond et al. USF/ICC Transformation NPRM Comments at 15-16; CenturyLink USF/ICC
Transformation NPRM Comments at 67, 69; Comcast USF/ICC Transformation NPRM Comments at 20;
COMPTEL USF/ICC Transformation NPRM Comments at 36; Cox USF/ICC Transformation NPRM Comments at
14-15; Fidelity USF/ICC Transformation NPRM Comments at 13; ICore USF/ICC Transformation NPRM
Comments at 21-22; Madison Telephone USF/ICC Transformation NPRM Comments at 14; Michigan PSC
USF/ICC Transformation NPRM Comments at 18; Nebraska Rural Independent Companies USF/ICC
Transformation NPRM Comments at 41; Sprint USF/ICC Transformation NPRM Comments at 13; T-Mobile
USF/ICC Transformation NPRM Comments at 27; Vitelco USF/ICC Transformation NPRM Comments at 17;
Wheat State USF/ICC Transformation NPRM Comments at 14; XO USF/ICC Transformation NPRM Comments at
49. But see Ad Hoc USF/ICC Transformation NPRM Comments at 56-62.
1778 See, e.g., ABC Plan Proponents August 3 PN Comments at 34-35.
1779 See, e.g., Access Charge Reform Order, 12 FCC Rcd at 16005 para. 58-60; CALLS Order, 15 FCC Rcd at
12978, para. 41; MAG Order, 16 FCC Rcd at 19634-35, paras. 43-44.
1780 We believe that the consumer ARC adopted here, which, even if fully imposed, represents a smaller percentage
increase than SLC increases adopted by the Commission in prior reforms, strikes the proper balance. CALLS Order,
15 FCC Rcd at 12991, 13004, paras. 76, 105-06; MAG Order, 16 FCC Rcd at 19634, 19638, paras. 42, 51.
1781 Incumbent LECs may be unable to charge ARCs in whole or in part based on competitive constraints or other
considerations, or may choose not to. See, e.g., Letter from Jonathan Banks, USTelecom, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90; GN Docket No. 09-51; WC Docket No. 07-135; WC Docket No. 05-337;
CC Docket No. 01-92; CC Docket No. 96-45; WC Docket No. 04-36 at 1 (filed Oct. 17, 2011). Although we will
impute the full permitted ARC revenues to those carriers for purposes of evaluating the need for additional recovery
of Eligible Recovery, some commenters have suggested that carriers facing competition may choose to refrain from
(continued…)
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909.To minimize the consumer burden, we limit increases in the monthly consumer ARC to
$0.50 per year.1782 Furthermore, while some commenters advocate end-user charges only for residential
and single-line business customers, we reject requests to place the entire recovery burden on consumers.
We provide for increases in the monthly ARC for multi-line business customers of $1.00 (per line) per
year, and we will require potential revenue from such increases to be imputed to carriers, reducing the
total amount of consumer ARCs they may charge. Doing so is consistent with the Commission’s prior
intercarrier compensation reforms, which recognized that “universal service concerns are not as great for
multi-line business lines.”1783 Consequently, in previous reforms, the Commission has adopted higher
increases in end-user charges for multi-line business customers than for consumers, and on a more
accelerated timeline. For example, in the Access Charge Reform Order, the Commission did not raise the
SLC cap for primary residential and single-line business users,1784 but concluded that universal service
concerns were not as great for multi-line business users, for example, and raised the SLC caps for such
users from $6.00 to $9.00 per line.1785 In the 2008 ICC/USF Order and NPRM, the Commission proposed
increasing the residential and single-line business and the non-primary residential line SLC by $1.50 and
the multi-line business SLC by $2.30.1786 In the USF/ICC Transformation NPRM the Commission sought
comment on those amounts again.1787 Commenters supported this increase.1788 In fact, some commenters
advocated for a higher SLC increase.1789 The ARC adopted today, which is lower on an annual basis than
the annual SLC increase proposed in 2008, balances the burdens on consumers and businesses. However,
we have taken measures to ensure that charges for multi-line businesses remain just and reasonable. In
particular, to ensure that multi-line businesses’ total SLC plus ARC line items are just and reasonable and
to minimize the burden on businesses, we limit the maximum SLC plus ARC fee to $12.20.1790 This
limits the ARC for multi-line businesses for entities at the current $9.20 cap to $3.00, comparable to the
overall limit on residential ARCs.
(Continued from previous page)
charging the ARC, and we preserve carriers’ flexibility to do so. See, e.g., AT&T USF/ICC Transformation NPRM
Comments at 32.
1782 We also make clear that carriers may not charge any Lifeline customers an ARC. As a result, incumbent LECs’
calculation of ARCs for purposes of the recovery mechanism must identify and exclude such customers. Given that
our intercarrier compensation reforms also do not alter the operation of the existing SLC, these intercarrier
compensation reforms will not affect the Lifeline universal service support mechanism.
1783 MAG Order, 16 FCC Rcd at 19638-39, para. 52.
1784 Access Charge Reform Order, 12 FCC Rcd at 16010-11 para. 73.
1785 Access Charge Reform Order, 12 FCC Rcd at 16005 para. 58-60.
1786 See 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6630, para. 298
1787 See USF/ICC Transformation NPRM, 26 FCC Rcd at 4737, para. 582.
1788 See, e.g., Frontier 2008 Order and ICC/USF FNPRM Comments at 6; GVNW 2008 Order and ICC/USF
FNPRM Comments at 9; Cbeyond, et al. USF/ICC Transformation NPRM Comments at 15; Frontier USF/ICC
Transformation NPRM Comments at 10; XO USF/ICC Transformation NPRM Comments at 49.
1789 See OPASTCO 2008 Order and ICC/USF FNPRM Comments at 9-11.
1790 Several commenters urged the Commission to adopt some sort of cap on the overall multi-line business charges
from the existing SLC and any new recovery charge. See e.g., Letter from Henry Hultquist, VP, Federal Regulatory,
AT&T Services, Inc. to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN
Docket No. 09-51; CC Docket Nos. 01-92, 96-45 (filed Oct. 21, 2011); Letter from Michael R. Romano, Senior
Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337,
03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 4 (filed Oct. 17, 2011).
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910.We permit carriers to determine at the holding company level how Eligible Recovery will
be allocated among their incumbent LECs’ ARCs.1791 By providing this flexibility, carriers will be able to
spread the recovery of Eligible Recovery among a broader set of customers, minimizing the increase
experienced by any one customer.1792 This also will enable carriers to more fully recover Eligible
Recovery from end-users with rates below the $30 Residential Rate Ceiling, limiting the potential impact
on the CAF.1793 For carriers that elect to receive CAF support, we will impute to each carrier the full
ARC revenues they are permitted to collect, regardless of whether they actually collect any or all such
revenues. If the imputed amount is insufficient to cover all their Eligible Recovery, they are permitted to
recover the remainder from CAF ICC support.
911.
In the event a carrier elects not to receive CAF ICC support,1794 we take measures to limit
the burden on residential and single-line business customers. Absent doing so, carriers potentially could
use their holding company-level flexibility to target their ARC recovery primarily or exclusively to
residential and single-line business customers, rather than larger multi-line business customers. We
therefore require that a carrier allocate its Eligible Recovery by a proportion of a carrier’s mix of
residential versus business lines. However, because line counts alone would not reflect the fact that there
is a lower cap on ARC increases for residential and single-line business lines ($0.50 per line) than for
multi-line business lines ($1.00 per line), we adopt a double-weighting of multi-line business lines for
purposes of this calculation. The percentage of ARC revenues a carrier is eligible to recover from
residential and single-line business customers cannot exceed the percentage of total residential lines
assessed a SLC by such customers where multi-line business lines are given double weight.1795 For
example, if a carrier had 1000 residential and single-line business lines and 200 multi-line business lines,
and Eligible Recovery of $600 monthly, under our limitation, it would be permitted to collect no more
than 71.43 percent of that amount—approximately $429—from residential and single line business
1791 See, e.g., ABC Plan, Attach. 1 at 12. The ARC’s modest and capped size, its interim nature, and the
requirement to impute revenue from charging ARCs to multi-line business customers as well as to consumers,
together with the $30 Residential Rate Ceiling, will ensure that overall rates remain affordable and set at reasonable
levels. Further, while it may be that holding companies will allocate ARC amounts to markets where their
incumbent LECs face less competitive pressure, those markets would likely be ones that are relatively costly to
serve. See Letter from Chris Miller, Assistant General Counsel, Verizon, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, GN Docket No. 09-51, WC Docket No 07-135, WC Docket No. 05-337, CC Docket No. 01-
92, CC Docket No. 96-45, WC Docket No. 03-109, WC Docket No. 04-36, at 1-2 (filed Oct. 20, 2011).
1792 In the USF/ICC Transformation NPRM we sought comment on allowing carriers to vary the end-user charges
based upon network usage, and on further differentiating the magnitude of end-user recovery beyond the categories
of customers associated with existing SLC caps. We also sought comment regarding the National Broadband Plan’s
suggestion that the Commission consider whether to deregulate end user charges in areas where states have
deregulated local service rates. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4737, para. 583. There was
little support for such changes. Particularly given the minimal record support, as well as the possibility for
consumer confusion resulting from too many variations of SLCs and potential burdens on end users, we find our
approach to recovery more appropriate.
1793 We decline to adopt other flexibility proposals in the record. For instance, in the August 3 Public Notice, we
sought comment on the ABC Plan proposal that price cap carriers be allowed to choose between different SLC
options depending on whether or not they choose to take ICC revenue recovery from the CAF in addition to end-
user charges. See August 3 Public Notice , 26 FCC Rcd at 11124-28. We do not find a basis in the record for such
differential treatment of customers, and instead adopt a uniform approach for price cap carriers.
1794 The decision to elect not to receive ICC replacement CAF support, discussed below, is distinct from the decision
to assess the full authorized ARC.
1795 In addition, this calculation will exclude lines for Lifeline customers because we prevent carriers from assessing
an ARC on any Lifeline customer.
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customers based on the calculation: 1000 residential and single line business lines/(1000 residential andsingle-line business lines + 2 x 200 multi-line business lines) = 71.43 percent.
912.
We decline to implement end user recovery through increases to the pre-existing SLC, as
some commenters suggest.1796 SLCs today are designed to recover common line revenues as defined by
Commission regulation. We are not formally recategorizing any costs or revenues to be included in that
regulatory category, and the calculation of Eligible Recovery for purposes of the reforms we adopt today
is completely independent of SLC rate calculations. As a result, we leave current SLCs unmodified for
now.1797 Instead, the new ARC will be separately calculated, reduced over time, and separately tariffed
and reported to the Commission to enable monitoring to ensure carriers are not assessing ARCs in excess
of their Eligible Recovery.1798 Moreover, we find that it is appropriate to reevaluate our SLC rules, and
do so in the attached FNPRM.1799
913.
Residential Rate Ceiling. In the Public Notice, we sought comment on the appropriate
level and operation of a ceiling to limit rate increases in states that already had undertaken some
intercarrier compensation reforms.1800 To ensure that consumer telephone rates remain affordable and to
recognize states that have already undertaken reform, we adopt a Residential Rate Ceiling of $30 per
month for all incumbent LECs, both price cap and rate-of-return. Although the Residential Rate Ceiling
does not generally limit rates carriers can charge, it prevents carriers from charging an ARC on residential
consumers already paying $30 or more.
914.
For purposes of comparison with the Residential Rate Ceiling, we consider the rate for
basic local service, including additional charges that a consumer actually pays each month in conjunction
with that service (referred to collectively as rate ceiling component charges). The rate ceiling component
charges consist of the federal SLC and the ARC; the flat rate for residential local service,1801 mandatory
extended area service charges, and state subscriber line charges; per-line state high cost and/or access
replacement universal service contributions;1802 state E911 charges; and state TRS charges. Carriers are
not permitted to charge ARCs to the extent that ARCs would result in rate ceiling component charges
exceeding the Residential Rate Ceiling for any residential customer. For example, a consumer in Parsons,
1796 See, e.g., Alexicon USF/ICC Transformation NPRM Reply at 8; ABC Plan, Attach. 1 at 11-12. See also, e.g.,
USF/ICC Transformation NPRM, 26 FCC Rcd at 436-38, paras. 579-84
1797 Carriers whose current SLCs are below the caps are not otherwise permitted to increase their SLCs to recover
revenues reduced by interstate and intrastate access charge reforms, i.e., we are not permitting carriers to raise their
SLCs beyond the level they are currently authorized to charge, even if that level is below the relevant regulatory
SLC cap. We seek comment in the accompanying FNPRM regarding whether existing regulation of SLCs is
appropriate, including whether SLCs should be reduced or phased-out over time. See infra paras. 1330-1333.
1798 The ARC can, however, be combined in a single line item with the SLC on the customer’s bill.
1799 See infra paras. 1330-1333; NASUCA USF/ICC Transformation NPRM Comments at 98; Free Press August 3
PN Comments at 12-13.
1800 Further Inquiry Into Certain Issues in the Universal Service-Intercarrier Compensation Transformation
Proceeding, 26 FCC Rcd 11112 at 11122-23 (2011) (August 3 Public Notice) (discussing proposals ranging from
$25-30, and their associated implementation).
1801 This is sometimes known as the “1FR” or “R1” rate. See, e.g., Letter from the Supporters of the Missoula Plan
to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, Attach. 1 at 3 (filed Jan. 30, 2007) (Missoula Plan
Corrected Jan. 30 Ex Parte Letter) (referencing “the basic residential local rate (1FR or equivalent)”).
1802 ABC Plan, Attach. 1 at 12 (describing the rates used for the benchmark comparison).
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Kansas may have a rate of $13.90,1803 a SLC of $6.40, a mandatory contribution to the Kansas UniversalService Fund of $6.75, a mandatory EAS charge of $1.70, and a TRS charge of $1.00—his or her
aggregate rate ceiling component charges before the ARC would be $29.75. Accordingly, a carrier could
only charge this consumer an ARC of $0.25 before reaching the $30 Residential Rate Ceiling.1804 (The
carrier could still charge multi-line business customers a $1.00 per line ARC, provided that any multi-line
business customer’s total SLC plus ARC does not exceed $12.20). After the ARC, any additional
Eligible Recovery would have to be recovered from the CAF rather than from end-users.
915.
The Residential Rate Ceiling particularly helps protect consumers in states that have
already begun state intercarrier compensation reform.1805 As part of such reform, some states are
rebalancing rates, with local rate increases phasing in over time, including potentially after January 1,
2012.1806 These local rate increases will be included in the calculation of end-users rates for comparison
to the Residential Rate Ceiling. Further, as part of our universal service reforms, we are adopting an
intrastate rate minimum benchmark designed to avoid over-subsidizing carriers whose intrastate rates are
not minimally reasonable.1807 To ensure that states are not disincented from rebalancing artificially low
local retail rates after January 1, 2012, and to ensure that our Residential Rate Ceiling continues to protect
consumers in those states, we will use the higher of the relevant rates in effect on January 1, 2012 or of
January 1 in the year in which the ARC is to be charged for comparison to the Residential Rate Ceiling,
thus accounting for possible increases in consumer rates over time.1808
916.
We find the $30 Residential Rate Ceiling will help ensure that consumer rates remain
affordable and set at reasonable levels by preventing any ARC increases to consumers who already pay
$30 or more.1809 Although some commenters propose using a $25 (or lower) rate,1810 we note that several
1803 See U.S. General Accounting Office, Telecommunications: Federal and State Universal Service Programs and
Challenges to Funding, at 52 (GAO-02-187, Feb. 4, 2002), http://www.gao.gov/new.items/d02187.pdf (“GAO
Report”).
1804 Consistent with the goal of the Residential Rate Ceiling, because non-primary residential SLC lines are charged
to residential customers we limit carriers’ ARC for non-primary residential SLC lines to an amount equal to the
ARC charged for such consumers’ primary residential lines. Thus, to the extent that the Residential Rate Ceiling
limits the ARC that can be assessed on residential customers’ primary lines, it effectively will limit the ARC that
can be charged on their non-primary lines, as well.
1805 See, e.g., Letter from Joel Shifman, Maine Public Utilities Commission, to Marlene H. Dortch, Secretary, FCC,
WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 1 (filed
October 14, 2011) (urging the Commission to recognize early adopter states that have already undertaken intrastate
access reform and rate rebalancing).
1806 See, e.g., Pennsylvania PUC August 3 PN Comments at 17.
1807 See supra Section VII.
1808 See ABC Plan Proponents August 3 PN Comments at 21-22. Because this approach protects consumers in states
that are in the process of rebalancing local rates, we believe it is preferable to the “snapshot” approach others have
proposed. See, e.g., ABC Plan, Attach. 1 at 12; Joint Letter at n.1. Although states are free to lower intrastate
access rates more quickly than specified by our reform, doing so would not increase the ARC or ICC-replacement
CAF support available to carriers in such states. If it accomplished that reform by rebalancing local rates, however,
those increased local rates would be accounted for in our Residential Rate Ceiling.
1809 We note that we also adopt a “local rate benchmark” as part of universal service reform of HCLS and HCMS.
See supra Section VII.D.5. The CAF benchmark serves a different purpose and has a different function from the
Residential Rate Ceiling. The CAF benchmark is focused on ensuring that universal service does not overly
subsidize carriers with artificially low local rates. As a result, it focuses more narrowly on the specific rates of
concern, especially flat-rated local service charges, state SLCs, and state USF contributions and sets a lower bound
to encourage carriers to charge reasonably comparable local rates. HCLS and HCMS are federal universal service
(continued…)
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states that have rebalanced rates already have rates above $30, suggesting that this rate is affordable andset at reasonable levels.1811 To the extent that prior surveys of urban rates yielded an average of
approximately $25, we observe that the surveys encompassed a more limited set of charges than our
Residential Rate Ceiling.1812 As demonstrated by the rates in a number of states that have undertaken
significant intercarrier compensation reform—which we find to be a more relevant data set in this context
than average urban rates—rates including the full ranges of charges can be close to or more than $30.1813
We also decline to adopt separate rate ceilings for different carriers, and instead agree with commenters
that it would “be inappropriate—and inconsistent with Section 254—for the Commission to adopt
different benchmarks for different geographic areas or providers.”1814 Such an approach would mandate
rate disparities between geographic areas, contrary to the Commission’s goal of promoting reasonably
comparable rates throughout the country.1815 We thus conclude that the $30 Residential Rate Ceiling
(Continued from previous page)
mechanisms that pick up intrastate loop costs, and we will not use limited universal service funding to subsidize
artificially low rates. The CAF benchmark therefore serves as a floor.
We do not use the Residential Rate Ceiling for other purposes, such as an imputed level of revenue to limit a
carrier’s recovery from the CAF, as some commenters suggest. See, e.g., NASUCA August 3 PN Comments at 60.
The CAF benchmark includes an imputation and imputing those same revenues twice could be problematic.
Moreover, the ICC Residential Rate Ceiling acts as a cap on any federal ARC increases resulting from intercarrier
compensation reform, ensuring that overall consumer rates remain affordable. The Residential Rate Ceiling thus
considers a wider range of end-user charges and is set at a higher level than the CAF benchmark. Although the
Residential Rate Ceiling also helps target end-user rate increases for recovering Eligible Recovery to consumers in
states with the lowest rates, those increases alone do not ensure that consumers in those states will ultimately pay
rates more comparable to other areas. Thus, the HCLS/HCMS rate benchmark plays a complementary role.
1810 See, e.g., NECA et al. August 3 PN Comments at 46; Letter from Michael R. Romano, Senior Vice President –
Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket
No. 09-51, CC Docket Nos. 01-92, 96-45 at 4 (filed Oct. 17, 2011).
1811 See, e.g., supra para. 859; see also, e.g., Letter from Brian J. Benison, Director-Federal Regulatory, AT&T, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 05-337, CC Docket No. 01-92, GN Docket No. 09-51, Attach.
2 (filed Oct. 25, 2010); Missoula Plan Corrected Jan. 30 Ex Parte Letter, Attach. 2 at 1-2 (identifying 27 states
estimated to receive proposed universal service funding where “Residential Revenues Per Line” already were
greater than $25).
1812 For example, it did not include state universal service contributions. See, e.g., IATD, WCB, Reference Book of
Rates, Price Indices, and Household Expenditures for Telephone Service, App. at 1 (rel. Aug. 2008) (describing
information collected in 2007 urban rate survey).
1813 See supra para. 859.
1814 Time Warner Cable August 3 PN Comments at 14, 15.
1815 Nor are we persuaded that other considerations justify such disparate treatment of customers based on whether
they obtain service from a price cap carrier or a rate-of-return carrier. For example, some commenters contend that
rate-of-return carriers have smaller local calling areas, and therefore fewer of their calls are encompassed by local
retail rates. See, e.g., MoSTCG USF/ICC Transformation NPRM Comments at 10; North Dakota PSC USF/ICC
Transformation NPRM Comments at 3. As an initial matter, the record contains no reliable data regarding relative
local calling area sizes for rate-of-return and price cap carriers generally. In addition, the retail residential rates
encompassed by the Residential Rate Benchmark cover both telephone exchange service (i.e., the ability to make
calls within a given local calling area) and exchange access (i.e., the ability to connect to an IXC to make long
distance calls).
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strikes the right balance between ensuring that consumers pay their fair share of recovery and protectingconsumers in states that already have undertaken substantial reforms.1816
2.
CAF Recovery
917.The Commission has recognized that, as we move away from implicit support, some high
cost, rural areas may need new explicit support from the universal service fund. Consequently, in the
USF/ICC Transformation NPRM, the Commission sought comment on the appropriate role of universal
service support to offset some intercarrier revenues lost through reform.1817 We agree with the many
commenters advocating that transitional recovery should, in part, come through the CAF. In particular,
the limits on ARCs and the Residential Rate Ceiling we adopt above place important constraints on end
user recovery. Consequently, we anticipate that end user recovery alone will not provide the full recovery
permitted by our mechanism for many incumbent LECs, particularly rate-of-return carriers. Given our
desire to ensure a measured, predictable transition, we thus find it appropriate to supplement end user
recovery with transitional ICC-replacement CAF support.
918.
To that end, as part of the new CAF universal service mechanism, we permit incumbent
LECs to recover Eligible Recovery that they do not have the opportunity to recover through permitted
ARCs.1818 The same oversight and accountability obligations we adopt above apply to CAF support
received as part of the recovery mechanism.1819 In addition, all rate-of-return CAF ICC recipients,
whether a current recipient of high cost universal service support or not, must satisfy the same public
interest obligations as carriers receiving high-cost universal service support. All price cap CAF ICC
recipients must use such support for building and operating broadband-capable networks used to offer
1816 Some commenters express concerns that our rate ceiling will not absolutely guarantee that states will not have
rates that exceed the $30 Residential Rate Ceiling. To the extent that commenters express concern that states
subsequently might increase local rates and/or state universal service fund contributions, see, e.g., Kansas
Commission August 3 PN Reply at 5-7, we note that our rate ceiling will account for future increases in local rates
and per line universal service contributions, counting those higher amounts toward the benchmark. The Kansas
Corporation Commission also observes that some states have deregulated basic local phone service rates, and thus “a
carrier may face no constraint whatsoever in increasing basic local rates.” Kansas Commission August 3 PN Reply
at 6. If carriers were unconstrained in their ability to increase particular rates, it is not clear why they would not
already have set them at the profit-maximizing level, such that further increases would not be profitable. States also
remain free to reconsider their regulatory approach if problems arise with respect to particular rates.
1817 See, e.g., USF/ICC Transformation NPRM, 26 FCC Rcd at 4738-41, paras. 585-94. See also, e.g., 2008 Order
and ICC/USF FNPRM, 24 FCC Rcd at 6634-41, App. A, paras. 311-25; 2005 Intercarrier Compensation FNPRM,
20 FCC Rcd at 4706-4734, paras. 42-44, 51, 53, 55, 58, 59, 101, 104, 109-11.
1818 The ICC-replacement CAF support for carriers that are eligible and elect to receive it is the remainder of
Eligible Recovery not recovered through ARCs. As a result, those same data will enable USAC to calculate CAF
support as well. Thus, we direct carriers to file those same data with USAC for purposes of CAF distribution under
our recovery mechanism. We note that although incumbent LECs will experience intercarrier compensation
reductions on a study area-by-study area basis, they have flexibility at the holding company level to determine
where and how to charge ARCs. Thus, USAC needs an approach to attributing those revenues to particular study
areas to determine the amount of CAF funding to provide to each such area. In this regard, we note that one benefit
of our universal service reform is the greater accountability associated with the CAF support mechanism. Given
that, we direct USAC to attribute ARC revenue to all of the holding company’s study areas in proportion to the
Eligible Recovery associated with that study area. This will ensure that some study areas are not insulated from the
CAF accountability measures by having sufficient ARC revenue attributed to meet their entire Eligible Recovery
need.
1819 These obligations are subject to waiver pursuant to the Total Cost and Earnings Review. See infra Section
XIII.G.
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their own retail broadband service in areas substantially unserved by an unsubsidized competitor of fixedvoice and broadband services.1820 We believe it is appropriate to adopt slightly different obligations for
receipt of CAF ICC support for price cap and rate-of-return carriers. For one, the price cap CAF support
is transitional, and phasing out completely over time as we have adopted a long-term phase II CAF
support for areas served by price cap carriers. Thus, we have a mechanism to advance our goal of
universal voice and broadband to areas served by price cap carriers that are unserved today. For rate-of-
return carriers, however, we have not adopted a different long-term approach for receipt of universal
service support. Therefore, we believe it is appropriate to impose the same obligations that such carriers
have for receipt of all universal service support that we adopt above, which requires carriers to extend
broadband upon reasonable request 1821 Finally, we allow a carrier to elect not to receive ICC replacement
CAF support (and therefore to avoid the obligations that accompany support) even if it would otherwise
be entitled to do so under the Eligible Recovery calculation.1822
919.
Providing CAF recovery is consistent with our mandate under section 2541823 and the
Commission’s use of universal service funding as a component of prior intercarrier compensation
reforms.1824 In light of the broadband obligations we adopt, our decision to establish this funding
mechanism is also consistent with our general authority under section 4(i) of the Act1825 and section 706
of the 1996 Act,1826 because it furthers our universal service objectives and promotes the deployment of
advanced services. 1827
1820 Consistent with our discussion of obligations associated with frozen high-cost support for price cap carriers in
Section VII.C.1 above, while we expect CAF ICC recipients to use support in areas without an unsubsidized
competitor, to the extent support is used to serve any geographic area that is partially served by an unsubsidized
competitor, the recipient must certify that at least 50 percent of the locations served are in census blocks shown as
unserved by an unsubsidized competitor, as shown on the National Broadband Map. See supra note 168. See also
Letter from Jonathan Banks, USTelecom, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90; GN
Docket No. 09-51; WC Docket No. 07-135; WC Docket No. 05-337; CC Docket No. 01-92; CC Docket No. 96-45;
WC Docket No. 04-36 at 1-2 (filed Oct. 21, 2011).
1821 CAF ICC support must also be used to support the speed, latency and usage levels adopted above. See supra
Section VII.D.
1822 The election to decline CAF support will be made in the carrier’s July 1, 2012 tariff filing. A carrier that elects
not to receive CAF cannot subsequently change this election. A carrier can, however, initially elect to receive CAF
support but elect to end that support at any time. Moreover, like forgone ARC recovery, forgone CAF will be
imputed to a carrier seeking any additional recovery under the Total Cost and Earnings Review, discussed below.
See infra Section XIII.G.
1823 47 U.S.C. § 254(i) (requiring that “[t]he Commission and the States should ensure that universal service is
available at rates that are just, reasonable, and affordable”); 47 U.S.C. §254(b)(1) (stating that “[q]uality services
should be available at just, reasonable, and affordable rates”).
1824 See, e.g., CALLS Order, 15 FCC Rcd at 12971, para. 24; MAG Order, 16 FCC Rcd at 19669–70, para. 132.
1825 Section 4(i) provides that the Commission may “perform any and all acts, make such rules and regulations, and
issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.” 47
U.S.C. § 154(i). Prior to the enactment of section 254 (as part of the 1996 Act), sections 1 and 4(i) provided
authority for the Commission’s adoption of a universal service fund. See Rural Telephone Coalition v. FCC, 838
F.2d 1307 (D.C. Cir. 1988). See also New England Telephone and Telegraph Co. v. FCC, 826 F.2d 1101, 1107
(D.C. Cir. 1987) (describing section 4(i) as a “wide-ranging source of authority”), cert. denied, 490 U.S. 1039
(1989).
1826 47 U.S.C. § 1302.
1827 See supra Section V.
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920.For price cap carriers that elect to receive ICC-replacement CAF support, such support is
transitional and phases out in three years, beginning in 2017.1828 Although we do not adopt a similar
sunset for rate-of-return carriers’ ICC-replacement CAF support in this Order, we seek comment on
alternatives in this regard in the FNPRM.1829
3.
Monitoring Compliance with Recovery Mechanism
921.To monitor compliance with this Order, we require all incumbent LECs that participate in
the recovery mechanism, including by charging any end user an ARC, to file data on an annual basis
regarding their ICC rates, revenues, expenses, and demand for the preceding fiscal year.1830 All such
information may be filed under protective order and will be treated as confidential.
922.
These data are necessary to monitor compliance with the provisions of this Order and
accompanying rules, including to ensure that carriers are not charging ARCs that exceed their Eligible
Recovery and that ARCs are reduced as Eligible Recovery decreases. The data are also needed to
monitor the impact of the reforms we adopt today and to enable the Commission to resolve the issues teed
up in the FNPRM regarding the appropriate transition to bill-and-keep and, if necessary, the appropriate
recovery mechanism for rate elements not reduced in this Order, including originating access and many
transport rates. Such data will enable the Commission to determine the impact that any transition would
have on a particular carrier or group of carriers, and to evaluate the trend of ICC revenues, expenses, and
minutes and compare such data uniformly across all carriers.
923.
To minimize any burden, filings will be aggregated at the holding company level, limited
to the preceding fiscal year, and will include data carriers must monitor to comply with our recovery
mechanism rules. For carriers eligible and electing to receive CAF ICC support, we will ensure that the
data filed with USAC is consistent with our request, so that carriers can use the same format for both
filings. To ensure consistency and further minimize any burden on carriers, we delegate to the Wireline
Competition Bureau the authority to adopt a template for submitting the data, which should be done in
conjunction with the development of data necessary to be filed with USAC for receipt of CAF ICC
support, which has also been delegated to the Wireline Competition Bureau.1831 Given that carriers must
be monitoring these data to comply with our revised tariff rules, we require incumbent LECs to file
electronically annually at the same time as their annual interstate access tariff filings.
G.
Requests for Additional Support
924.Although we provide an opportunity for revenue recovery to promote an orderly
transition away from terminating access charges, we decline to adopt a revenue-neutral approach as
advocated by some commenters.1832 Rather, we agree with commenters who maintain that the
1828 See, e.g., ABC Plan, Attach. 1 at 12-13.
1829 See infra para. 1328.
1830 We also encourage, but do not require, all competitive LECs and CMRS providers to similarly file such data.
1831 Although the Commission requested such data in the USF/ICC Transformation NPRM, such submission was
often incomplete and not filed in the same format by all carriers. See USF/ICC Transformation NPRM, 26 FCC Rcd
at 4733, para. 572 and n.853.
1832 See, e.g., CenturyLink USF/ICC Transformation NPRM Comments at 63 (“All carriers should have an
opportunity to replace all ICC revenue lost as a result of rate reform.”); Mississippi Public Commission USF/ICC
Transformation NPRM Comments at 15 (“[W]ireline carriers, incurring both intrastate and interstate access
reductions, should be ‘made whole.’”); Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to
(continued…)
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Commission has no legal obligation to ensure that carriers recover access revenues lost as a result ofreform, absent a showing of a taking.1833 We establish a rebuttable presumption that the reforms adopted
in this Order, including the recovery of Eligible Recovery from the ARC and CAF, allow incumbent
LECs to earn a reasonable return on their investment. We establish a “Total Cost and Earnings Review,”
through which a carrier may petition the Commission to rebut this presumption and request additional
support. 1834 We identify below certain factors in addition to switched access costs and revenues that may
affect our analysis of requests for additional support, including: (1) other revenues derived from regulated
services provided over the local network, such as special access; (2) productivity gains; (3) incumbent
LEC ICC expense reductions and other cost savings, and (4) other services provided over the local
network.1835 Particularly given these factors, it is our predictive judgment that the limited recovery
permitted will be more than sufficient to provide carriers reasonable recovery for regulated services, both
as a matter of the constitutional obligations underlying our rate regulation and as a policy matter of
providing a measured transition away from incumbent LECs’ historical reliance on intercarrier
compensation revenues to recovery that better reflects today’s marketplace.1836 Nonetheless, we also
adopt a Total Cost and Earnings Review to allow individual carriers to demonstrate that this rebuttable
presumption is incorrect and that additional recovery is needed to prevent a taking.
925.
To show that the standard recovery mechanism is legally insufficient, a carrier would
face a “heavy burden,”1837 and need to demonstrate that the regime “threatens [the carrier’s] financial
integrity or otherwise impedes [its] ability to attract capital.”1838 As the Supreme Court has long
(Continued from previous page)
Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC
Docket Nos. 01-92, 96-45 at 3 (filed Oct. 18, 2011).
1833 Ad Hoc USF/ICC Transformation NPRM Comments at 51; AT&T USF/ICC Transformation NPRM Comments
at 32; NASUCA USF/ICC Transformation NPRM Reply at 12; Letter from Scott Bergman, CTIA, to Marlene H.
Dortch, Secretary, FCC GN Docket No. 09-51; WC Docket Nos. 96-45, 05-337, 10-90; CC Docket No. 01-92 (filed
Sept. 9, 2011).
1834 We believe the Total Cost and Earnings Review procedure alone is sufficient to meet our legal obligations with
regard to recovery.
1835 See infra Section XIII.G. See also USF/ICC Transformation NPRM, 26 FCC Rcd at 4729, para. 562 (seeking
comment on the extent of the Commission’s legal obligation to provide a recovery mechanism); id. at 4730, para.
563 (the relationship with jurisdictional separations considerations); id. at 4731, para. 567 (the relevant revenues to
include for recovery purposes); id. at 4731-32, paras. 568-69 (the implications for recovery of other services
provided using the same multi-purpose networks); id. at 4732, para. 570 (the appropriate baseline, including
disputed revenues); id. at 4732-33, para. 571 (the role of cost savings); see also August 3 Public Notice, 26 FCC Rcd
at 11125-26 (seeking comment on an approach that would incorporate specified reductions in the recovery baseline,
allowing carriers to realize the benefits of reduced costs and/or greater efficiency); id. at 16 (whether carriers
seeking recovery should have to demonstrate need based on their operations more broadly); 2008 Order and
ICC/USF FNPRM, 24 FCC Rcd at 6640, App. A, para. 324 (seeking comment on a recovery mechanism that would
consider all a carrier’s costs and revenues when evaluating the need for recovery); 2005 Intercarrier Compensation
FNPRM, 20 FCC Rcd at 4730-31, paras. 99-100 (seeking comment on the scope of any legal obligation to provide a
recovery mechanism, including the relevance of revenues from a carrier’s other services and of cost savings).
1836 See Time Warner Entertainment Co., L.P. v. F.C.C., 240 F.3d 1126, 1133 (D.C. Cir. 2001) (“Substantial
evidence does not require a complete factual record-we must give appropriate deference to predictive judgments that
necessarily involve the expertise and experience of the agency.”) citing Turner II, 520 U.S. at 196, Federal
Communications Commission v. National Citizens Comm. for Broadcasting, 436 U.S. 775 at 814 (1978).
1837 Hope Natural Gas, 320 U.S. at 602.
1838 Illinois Bell Telephone Co. v. FCC, 988 F.2d 1254, 1263 (D.C. Cir. 1993).
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recognized, when a regulated entity’s rates “enable the company to operate successfully, to maintain itsfinancial integrity, to attract capital, and to compensate its investors for the risks assumed,” the company
has no valid claim to compensation under the Takings Clause, even if the current scheme of regulated
rates yields “only a meager return” compared to alternative rate-setting approaches.1839 For the reasons
described above, we believe that our recovery mechanisms provide recovery well beyond any
constitutionally-required minimum, and we find no convincing evidence in the record here that the
standard recovery mechanism will yield confiscatory results.
926.
Specifically, a carrier can petition for a Total Cost and Earnings Review to request
additional CAF ICC support and/or waiver of CAF ICC support broadband obligations.1840 In analyzing
such petitions, the Commission will consider the totality of the circumstances, to the extent permitted by
law.1841 Our analysis will consider all factors affecting a carrier and its ability to earn a return on its
relevant investment, including the factors described below. As a result of this analysis of costs and
revenues, the Commission will be able to determine the constitutionally required return and will not be
bound by any return historically used in rate-setting nor any specific return resulting from the intercarrier
compensation recovery mechanism adopted in this Order,1842 or possible rate represcription as discussed
in the FNPRM.1843
927.
As we seek to protect consumers from undue rate increases or increases in contributions
to USF, we will conduct the most comprehensive review of any requests for additional support allowed
by law. Our recovery mechanism goes beyond what might strictly be required by the constitutional
takings principles underlying historical Commission regulations. Therefore, although our standard
recovery mechanism does not seek to precisely quantify and address all considerations relevant to
resolution of a takings claim, carriers will need to address these considerations to the extent that they seek
to avail themselves of the Total Cost and Earnings Review procedure based on a claim that recovery is
legally insufficient.1844
928.
Revenues Derived from Other Regulated Services Provided Over the Local Network. We
agree with those who argue that it is appropriate for the Commission to consider the implications of
services other than switched access that are provided using supported facilities,1845 to the extent
1839 FPC v. Hope Natural Gas Co., 320 U.S. 591, 605 (1944).
1840 See supra para. 918.
1841 See, e.g., Comcast August 3 PN Comments at 16-19 (claiming that “there is no Congressional or FCC
prohibition against the Commission’s consideration of unregulated revenues when determining the appropriate level
of subsidies for regulated services”).
1842 Given the extensive discussion of reform proposals over the years, a carrier could not reasonably “rely
indefinitely” on the existing system of intercarrier compensation, “but would simply have to rely on the
constitutional bar against confiscatory rates” in the event the Commission revised its compensation rules. Verizon
Communications Inc. v. FCC, 535 U.S. 467, 528 (2002).
1843 See infra Section XVII.C.
1844 See infra Section XIII.G.
1845 See, e.g., ITTA USF/ICC Transformation NPRM Comments of at 38 (“It is, of course, reasonable to require
CAF recipients to account for the expected revenues from supported services.”); CBeyond et al. USF/ICC
Transformation NPRM Comments at 16. But see NECA et al. USF/ICC Transformation NPRM Comments at 18
(“any decision by the Commission to take into consideration the extent to which RLECs or other regulated carriers
earn revenues from non-regulated services would appear to represent a dramatic about-face in Commission
regulatory policy, which has for more than forty years emphasized the importance of keeping regulated and non-
regulated costs and revenues separate. This principle has been one of the cornerstones of the Commission’s
regulatory policy, on which its Part 64 Joint Cost Rules and numerous orders dealing with activities as diverse as
(continued…)
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constitutionally permitted.1846 Notwithstanding our intercarrier compensation reform, carriers willcontinue to receive revenues from other uses of the local network. For example, although the reforms
adopted in this Order will bring many intercarrier compensation rates into a bill-and-keep framework,
other intercarrier compensation rates will be subject to minimal—or no—reforms at this time.1847
Consequently, incumbent LECs will continue to collect intercarrier compensation for originating access
and dedicated transport, providing continued revenue flows—including the underlying implicit
subsidies—from those sources during the transition outlined in this Order, although we have determined
that such rates ultimately will reach bill-and-keep as well. Carriers acknowledge that the subsidies in
these remaining intercarrier compensation rates are used for investment in their network to provide
regulated services such as special access service. In addition, there was debate in the record regarding
whether, and how, to consider special access revenues in this regard.1848 At this time we do not prescribe
general rules considering such revenue, but, as with other services that rely on the local network, we will
consider such earnings and may reconsider this decision if warranted upon conclusion of the
Commission’s ongoing special access proceeding.1849
929.
Productivity Gains. As discussed above, although incentive regulation commonly
involves sharing the benefits of productivity gains between carriers and ratepayers, such a mechanism has
not been in place for many years.1850 Our standard recovery mechanism adopts a 10 percent reduction in
CALLs price cap incumbent LECs’ baseline revenues, initially for CALLS price cap study areas, and after
five years for non-CALLS price cap study areas to reflect this. However, because we believe that is a
conservative approach, we find it appropriate to consider efficiency gains for particular price cap carriers
on an individual basis in our Total Cost and Earnings Review, as well.
930.
LEC Cost Savings and Increased Revenue. Currently, carriers are frequently embroiled
in costly litigation over payment, jurisdiction, and type of traffic.1851 The reforms we adopt today should
substantially reduce such disputes,1852 and we anticipate that comprehensive intercarrier compensation
(Continued from previous page)
Yellow Pages advertising to Video Dialtone Services to wireline broadband Internet access services rest.” (footnotes
omitted)).
1846 See, e.g., Hope Natural Gas, 320 U.S. at 602 (when performing a takings analysis, it is necessary to consider
“the total effect” of the challenged regulation); see also, e.g., Baltimore & Ohio Railroad Co. v. United States, 345
U.S. 146, 148 (1953); Puget Sound Traction, Light & Power Co. v. Reynolds, 244 U.S. 574, 579-81 (1917);
Consolidated Edison Co. v. Pataki, 292 F.3d 338, 351 (2d Cir. 2002).
1847 See supra Section XII.A.
1848 Compare, e.g., Ad Hoc USF/ICC Transformation NPRM Comments at 51-53; NASUCA August 3 PN Reply at
151 with, e.g., CenturyLink USF/ICC Transformation NPRM Comments at 68; ITTA August 3 PN Reply at 11.
1849 See generally Special Access Rates for Price Cap Local Exchange Carriers, WC Docket No. 05-25, RM-
10593, Order and Notice of Proposed Rulemaking, 20 FCC Rcd 1994 (2005).
1850 See supra para. 881.
1851 See, e.g., Letter from Paul Kouroupas, Vice President, Regulatory Affairs, Global Crossing North America, Inc.,
to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92 at 1 (filed Dec. 17, 2010) (Global Crossing Dec. 17,
2010 Ex Parte Letter) (estimating that disputes regarding intercarrier compensation may represent $450,000,000
annually).
1852 See Sections XI.A and B, XIV, and XV. See also USF/ICC Transformation NPRM, 26 FCC Rcd at 4702, 4710,
paras. 493, 507.
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reform will further reduce carriers’ costs of administering intercarrier compensation.1853 Likewise, ouractions regarding phantom traffic and intercarrier compensation for VoIP traffic may increase the
proportion of traffic for which intercarrier compensation can be collected. Finally, we note that our
reforms should result in expense savings in other lines of business, such as the provision of long distance
services. Although we do not adopt a “net revenues” approach as part of our standard recovery
mechanism,1854 in appropriate circumstances we believe an analysis of intercarrier expenses could be
warranted in the examination of an individual carrier’s claim under the more fact- and carrier-specific
Total Costs and Earnings Review mechanism.1855 We will consider these factors to the extent legally
permissible, including but not limited to the following categories:
·
Revenue for Exchanging VoIP Traffic. A number of carriers have alleged that they are not receiving
compensation for exchanging VoIP traffic.1856 In this Order we adopt rules clarifying the obligation
of VoIP traffic to pay intercarrier compensation charges during the transition to bill and keep.1857 The
decisions we adopt today will provide LECs, including incumbent LECs, with more certain revenue
throughout the transition, and will also allow them to avoid the litigation expense associated with
attempts to collect access charges for VoIP traffic.1858
·
Reduced Phantom Traffic. Similarly, the rules adopted in this Order will enable carriers to identify
and bill for phantom traffic.1859 These rules thus should enable carriers to collect intercarrier
compensation charges throughout the transition that they are not currently able to collect. We also
anticipate that incumbent LECs will be able to reduce administrative and litigation costs associated
with such traffic.1860
·
Other Reduced Litigation Costs and Administrative Expenses. In addition to reduced litigation costs
and administrative expense associated with VoIP and phantom traffic as a result of the reforms we
adopt in this Order, the record indicates that carriers will benefit more generally from the clarity and
1853 See, e.g., USF/ICC Transformation NPRM, 26 FCC Rcd at 4732, para. 570 (seeking comment on the
appropriate baseline, including disputed revenues); 2005 Intercarrier Compensation FNPRM, 20 FCC Rcd at 4730-
31, paras. 99-100 (seeking comment on the scope of any legal obligation to provide a recovery mechanism,
including the relevance of revenues from a carrier’s other services and of cost savings); id. at 4767, para. 193
(discussing benefits to small entities from ICC reform due to reduced administrative expenses and disputes).
1854 See supra paras. 874-878.
1855 See, e.g., Section 272(f)(1) Sunset of the BOC Separate Affiliate and Related Requirements; 2000 Biennial
Regulatory Review Separate Affiliate Requirements of Section 64.1903 of the Commission’s Rules, WC Docket No.
02-112; CC Docket No. 00-175, Report and Order and Memorandum Opinion and Order, 22 FCC Rcd 16440 (2007)
(permitting certain incumbent LECs to integrate their LEC and IXC operations without becoming subject to
dominant carrier regulation of those interexchange services); Petition of AT&T Inc. for Forbearance under 47
U.S.C. § 160 from Enforcement of Certain of the Commission's Cost Assignment Rules, WC Docket Nos. 07-21, 05-
342, Memorandum Opinion and Order, 23 FCC Rcd 7302, 7312-13, para. 19 n.71 (2008) (quoting AT&T Reply
comments stating that “a price cap ILEC raising a confiscation claim may find it more difficult to prove such a claim
without separated cost data”).
1856 See infra Section XIV.B.
1857 See infra Section XIV.C.
1858 See infra paras. 937-939.
1859 See supra Section XI.B.
1860 See supra paras.705.
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relative simplicity of the rules we adopt today. We anticipate that this will be reflected in additionalsavings in litigation and administration costs.1861
·
Other Services Provided Over the Local Network. In addition to regulated services provided over the
local network, many carriers also provide unregulated services, such as broadband and video.
Although parties have identified some uncertainty regarding the Commission’s ability to consider
revenues from such services in calculating a carrier’s return on investment in the local network,1862
the Commission will, at a minimum, carefully scrutinize the allocation of costs associated with such
services. As one commenter states, “[i]t simply no longer makes any sense (if it ever did) for the
agency to allow rural carriers to spend as much as they can on their networks, earning a rate of return
on these historical costs while only considering the small sliver of regulated local telephony revenues
earned using these USF subsidized networks.”1863
931.
We note that some carriers argued that the Commission should not rely on revenue from
unregulated services to offset a carrier’s defined eligible revenue, but that if it did, it should only use net
unregulated revenue, considering both the costs and revenues from those services.1864 In addition,
although there are a range of possible approaches for allocating many types of costs, a number of
commenters recognized that historical accounting underlying intercarrier compensation rates and other
charges fail to reflect the marketplace reality of the number and types of services provided over the local
network.1865 For example, the record revealed concerns about the extent to which loop costs have been
allocated to regulated services such as voice telephone service versus services such as broadband Internet
access service.1866 Consequently, we will give appropriate consideration to these services as part of the
Total Cost and Earnings Review, including an analysis of both the revenue generated by such other
services and whether the cost of such services, both regulated and unregulated, have been properly
allocated.
932.
Cost Allocation. The USF/ICC Transformation NPRM sought comment on the
implications of the jurisdictional separations process, including ongoing reform efforts, on intercarrier
1861 See Global Crossing Dec. 17, 2010 Ex Parte Letter at 2 (filed Dec. 17, 2010) (“Global Crossing spends
approximately 2,290 man hours per month managing the inter-carrier compensation regime. Bill reconciliation and
disputes constitutes approximately 750 man-hours per month. Management of the inter-carrier compensation regime
through contract negotiation, routing, costing, pricing, and product support constitutes an additional 1,540 man-
hours per month. Time and resources devoted to inter-carrier compensation is time and resources that cannot be
devoted to customer service and network management.”).
1862 See, e.g., Alexicon August 3 PN Comments at 9. But see California PUC USF/ICC Transformation NPRM
Comments at 20.
1863 Free Press USF/ICC Transformation NPRM Comments at 8. See also, e.g., NASUCA USF/ICC Transformation
NPRM Reply at 154-155 (“[T]argeting the SLC for rate increases is not appropriate, especially if such an increase is
pursued outside of a full evaluation of the regulated and non-regulated operations of the LEC.”).
1864 NECA et al. USF/ICC Transformation NPRM Comments at 19; CenturyLink USF/ICC Transformation NPRM
Comments at 68.
1865 See, e.g., Comcast USF/ICC Transformation NPRM Comments at 19 (in assessing the need for high-cost
support in the future, the Commission should look at the carriers’ regulated and non-regulated revenues as well as
technological advances and the efficiencies that companies realize when they provide multiple services over a single
network”).
1866 See, e.g., Ad Hoc USF/ICC Transformation NPRM Comments at 51-52; Free Press USF/ICC Transformation
NPRM Comments at 8; NASUCA August 3 PN Comments at 70-71.
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compensation reforms.1867 The jurisdictional separations process, which has been frozen for some time, iscurrently the subject of a referral to the Separations Joint Board.1868 Any carrier seeking additional
recovery will be required to conduct a separations study to demonstrate the current use of its facilities.
Although this is a burdensome requirement, it is not unduly so given the importance of protecting
consumers and the universal service fund.
XIV.
INTERCARRIER COMPENSATION FOR VOIP TRAFFIC
933.Under the new intercarrier compensation regime, all traffic—including VoIP-PSTN
traffic—ultimately will be subject to a bill-and-keep framework. As part of our transition to that end
point, we adopt a prospective intercarrier compensation framework for VoIP traffic. In particular, we
address the prospective treatment of VoIP-PSTN traffic by adopting a transitional compensation
framework for such traffic proposed by commenters in the record.1869 Under this transitional framework:
·
We bring all VoIP-PSTN traffic within the section 251(b)(5) framework;
·
Default intercarrier compensation rates for toll VoIP-PSTN traffic are equal to interstate access rates;
·
Default intercarrier compensation rates for other VoIP-PSTN traffic are the otherwise-applicable
reciprocal compensation rates; and
·
Carriers may tariff these default charges for toll VoIP-PSTN traffic in the absence of an agreement
for different intercarrier compensation.
We also make clear providers’ ability to use existing section 251(c)(2) interconnection
arrangements to exchange VoIP-PSTN traffic pursuant to compensation addressed in the
providers’ interconnection agreement, and address the application of Commission policies
regarding call blocking in this context.
934.
Although we adopt an approach similar to that proposed by some commenters, our
approach to adopting and implementing this framework differs in certain respects. For one, we are not
persuaded on this record that all VoIP-PSTN traffic must be subject exclusively to federal regulation, and
as a result, to adopt this prospective regime we rely on our general authority to specify a transition to bill-
and-keep for section 251(b)(5) traffic.1870 As a result, tariffing of charges for toll VoIP-PSTN traffic can
occur through both federal and state tariffs.1871 In addition, given the recognized concerns with the use of
telephone numbers and other call detail information to establish the geographic end-points of a call, we
decline to mandate their use in that regard, as proposed by some commenters.1872 We do, however,
recognize concerns regarding providers’ ability to distinguish VoIP-PSTN traffic from other traffic, and,
1867 USF/ICC Transformation NPRM, 26 FCC Rcd at 4730, para. 563. See also, e.g., 2008 Order and USF/ICC
FNPRM, 24 FCC Rcd at 6632, App. A, para. 304 (seeking comment on an approach that would refer certain
recovery questions to the Separations Joint Board give the cross-jurisdictional implications of the possible approach
to recovery).
1868 See, e.g., Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286,
Report and Order, 26 FCC Rcd 7133 (2011)
1869 ABC Plan, Attach. 1 at 10; Joint Letter at 3; NCTA July 29, 2011 Ex Parte Letter at 2; New York PSC August 3
PN Comments at 18-19; TCA August 3 PN Comments at 10-11.
1870 See infra paras. 954-955.
1871 See infra paras. 961-963.
1872 See infra para. 962.
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consistent with the recommendations of a number of commenters, we permit LECs to address this issuethrough their tariffs, much as they do with jurisdictional issues today.1873
935.
We believe that this prospective framework best balances the competing policy goals
during the transition to the final intercarrier compensation regime. By declining to apply the entire
preexisting intercarrier compensation regime to VoIP-PSTN traffic prospectively, we recognize the
shortcomings of that regime. At the same time, we are mindful of the need for a measured transition for
carriers that receive substantial revenues from intercarrier compensation. Although our action clarifying
the prospective intercarrier compensation treatment of VoIP-PSTN traffic does not resolve the numerous
existing industry disputes, it should minimize future uncertainty and disputes regarding VoIP
compensation, and thereby meaningfully reduce carriers’ future costs.1874
A.
Background
936.Questions regarding the appropriate intercarrier compensation framework for VoIP traffic
have been raised in a number of previous rulemaking notices from varying perspectives and in varying
levels of detail.1875 Most recently, in the USF/ICC Transformation NPRM the Commission sought
“comment on the appropriate treatment of interconnected VoIP traffic for purposes of intercarrier
compensation,” asking about “a range of approaches, including how to define the precise nature and
timing of particular intercarrier compensation payment obligations.”1876 To inform this analysis, the
Commission sought comment on how best to balance competing policy concerns, the possible need to
clarify or modify any aspects of existing law to enable the adoption of a particular VoIP intercarrier
compensation regime, and how any such regime would be administered, including the appropriate scope
of traffic that should be addressed by the Commission.1877 In addition, in the August 3 PN, we sought
comment on measures to clarify the operation of one proposed approach to intercarrier compensation for
VoIP-PSTN traffic.1878
B.
Widespread Uncertainty and Disagreement Regarding Intercarrier
Compensation for VoIP Traffic
As the Commission recognized in the USF/ICC Transformation NPRM, the lack of
clarity regarding the intercarrier compensation obligations for VoIP traffic has led to significant billing
1873 See infra para. 963.
1874 This Order does not address intercarrier compensation payment obligations for VoIP-PSTN traffic for any prior
periods. See, e.g., Letter from Grace Koh, Policy Counsel, Cox, to Marlene H. Dortch, Secretary, FCC, WC Docket
Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51, Attach. at 1 (filed July 1,
2011) (Cox July 1, 2011 Ex Parte Letter).
1875 See, e.g., Intercarrier Compensation NPRM, 16 FCC Rcd at 9613, 9621, 9629, para. 6 n.5, paras. 24, 52
(seeking comment on comprehensive intercarrier compensation reform, including issues presented by “IP
telephony”); IP-Enabled Services NPRM, 19 FCC Rcd at 4904-05, paras. 61-62 (seeking comment on the
application of intercarrier compensation charges to VoIP or other IP-enabled services); Intercarrier Compensation
FNPRM, 20 FCC Rcd at 4710, 4722, 4743-44, 4750, paras. 51, 80, 133 & n. 384, 148; 2008 Order and ICC/USF
FNPRM, 24 FCC Rcd at 6589-91, 6594, App. A, paras. 209-11, 218 n.703; id. at 6787-89, 6792, App. C, paras. 203-
06, 213 n.1844.
1876 USF/ICC Transformation NPRM, 26 FCC Rcd at 4745, para. 609.
1877 Id. at 4747-48, paras. 612-13.
1878 See August 3 Public Notice, 26 FCC Rcd at 11128. For instance, we sought comment on mechanisms for
distinguishing “toll” VoIP-PSTN traffic from other traffic, including possible alternatives to the use of call detail
information as proposed by the ABC Plan and Joint Letter. Id. at 11129.
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disputes and litigation.1879 Both state commissions and courts have been called upon to address disputesregarding intercarrier compensation for VoIP traffic in a range of contexts and with a range of outcomes.
For example, some states have held that the same intrastate access charges that apply in the context of
traditional telephone service also apply to at least some VoIP traffic.1880 Others have applied lower
intercarrier compensation charges in certain circumstances,1881 and still others have deferred to the
Commission.1882 Courts likewise have addressed disputes about the intercarrier compensation payments
associated with VoIP traffic, reaching divergent outcomes.1883 In a number of cases, the state
commission’s or court’s decision hinged in part on the language of particular tariffs or agreements.1884
Disputes also remain pending in a number of courts and state commissions.1885
1879 USF/ICC Transformation NPRM, 26 FCC Rcd at 4745-47, 4748, paras. 610-11, 614.
1880 See, e.g., Sprint v. Iowa Telecom, Docket No. FCU-2010-0001, Order (Ia. Util. Bd. rel. Feb. 4, 2011) (applying
intrastate access charges); Re Southwestern Bell Telephone Company dba AT&T Kansas, Docket No. 10-SWBT-
419-ARB, Order Adopting Arbitrator’s Determination of Unresolved Interconnection Agreement Issues Between
AT&T and Global Crossing (Kan. Corp. Comm’n rel. Aug. 13, 2010) (same); Palmerton v. Global NAPS, Docket
No. C-2009-2093336, Motion of Chairman James H. Cawley (Pa. PUC rel. Feb. 11, 2010) (same); Hollis Telephone,
Inc., Kearsarge Telephone Co., Merrimack County Tel. Co., and Wilton Telephone Co., DT 08-28, Order No.
25,043 (NH PUC Nov. 10, 2009) (same).
1881 See, e.g., Petition of UTEX Communications Corporation For Arbitration Pursuant to Section 252(b) of the
Federal Telecommunications Act and PURA for Rates, Terms, and Conditions of Interconnection Agreement With
Southwestern Bell Telephone Company, Docket No. 26381, Arbitration Award (Tx. PUC rel. Jan. 27, 2011) (holding
that AT&T may not charge for traffic covered by the ESP exemption, and that for other traffic compensation should
be paid pursuant to the interconnection agreement’s terms, as applicable). Other state commissions have held that
reciprocal compensation rates apply, but subsequent legislative actions have raised questions about those decisions.
Letter from VON et al, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 06-122, 05-337, 04-36, CC
Docket Nos. 01-92, 96-45, GN Docket No. 09-51 at 3 n.9 (filed Aug. 3, 2011) (VON et al. Aug. 3, 2011 Ex Parte
Letter) (discussing circumstances in Missouri and Wisconsin).
1882 See, e.g., Re Level 3 Communications, Docket UT-063006, Order 12 (Wa. UTC rel. June 7, 2007) (deferring to
the Commission); Re Level 3 Communications LLC, Docket Nos. 70043-TK-05-10, 70000-TK-05-1132,
Memorandum Opinion, Findings and Order, Record No. 9891 (Wy. PSC rel. Apr. 30, 2007) (same); Re Florida
Digital Network, Inc. dba FDN Communications, Docket No. 041464-TP, Order on Arbitration, PSC-06-0027-FOF-
TP (Fl. PSC rel. Jan. 10, 2006) (same).
1883 See, e.g., Global NAPS California v. Pub. Util. Comm’n of State of Calif., 624 F.3d 1225, 1231-32 (9th Cir.
2010) (affirming state commission decision that access charges apply); Central Tel. Co. of Va. v. Sprint
Communications Co. of Va., Civil Action No. 3:09cv720, Slip Op., 2011 WL 778402, *8 (E.D. Va. rel. Mar. 2,
2011) (holding that access charges apply); Manhattan Telecommunications Corp. v. Global NAPS, No. 08 Civ.
3829(JSR), Slip Op., 2010 WL 1326095, *3-4 (S.D.N.Y. rel. Mar. 31, 2010) (holding that, as a matter of equity,
interstate access rates apply); Global NAPS Ill. v. Il. Commerce Comm’n, 749 F.Supp.2d 804, 814-16 (N.D. Il. 2010)
(upholding state commission decision applying intercarrier compensation charges even if traffic was VoIP);
PAETEC v. CommPartners, No. 08-0397, slip op., 2010 WL 1767193, *5 (D.D.C. Feb. 18, 2010) (finding that “the
access charge regime is inapplicable to VoIP originated traffic”).
1884 See, e.g., Global NAPS v. Pub. Util. Comm’n of State of Calif., 624 F.3d at 1231-32; Central Tel. Co. of Va. v.
Sprint, 2011 WL 778402, *8; Global NAPS v. Il. Commerce Comm’n, 749 F.Supp.2d at 814-16.
1885 XO Section XV Comments at 9-10 (citing cases and proceedings); Letter from J.G. Harrington, counsel for Cox,
to Sharon Gillett, Chief, Wireline Competition Bureau, FCC, CC Docket No. 01-92, Attach. (filed Sept. 29, 2011)
(same).
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938.In addition to formal litigation, the record reveals numerous informal disputes in this
area.1886 In some cases, carriers may receive some intercarrier compensation payments at something less
than the full intercarrier compensation rates charged in the case of traditional telephone service.1887 In
other cases, terminating carriers state that they receive no intercarrier compensation payments at all for
traffic that is, or is alleged to be, VoIP traffic.1888 Further, some providers cite asymmetries in payments,
where, for example, some VoIP providers’ wholesale carriers charge full access charges while refusing to
pay them to the terminating LEC.1889
939.
Against this backdrop, and the fact that the current uncertainty and associated disputes
are likely deterring innovation and introduction of new IP services to consumers, we find it appropriate to
address the prospective intercarrier compensation obligations associated with VoIP-PSTN traffic.
Indeed, despite the varied opinions in the record regarding the appropriate approach to VoIP-PSTN
intercarrier compensation, there is widespread agreement that the Commission needed to act to address
that issue now.1890
C.
Prospective Intercarrier Compensation Obligations for VoIP-PSTN Traffic
1.Scope of VoIP-PSTN Traffic
940.The prospective intercarrier compensation regime we adopt for a LEC’s exchange of
VoIP traffic with another carrier focuses on what we refer to as “VoIP-PSTN” traffic.1891 For purposes of
1886 In at least some cases, parties have reached negotiated resolutions regarding the intercarrier compensation
payments for VoIP traffic. For example, Verizon cites agreements it reached to exchange VoIP traffic at a rate of
$0.0007 per minute. Verizon Section XV Comments at 11; Verizon Reply at 10-11; see also XO Section XV
Comments at 33; Letter from John Nakahata, Counsel for Level 3, to Marlene H. Dortch, Secretary, FCC, CC
Docket No. 99-68, CC Docket No. 01-92, Attach. 1, Part B at 2 (filed Aug. 18, 2008) (Level 3 Aug. 18, 2008 Ex
Parte Letter); Re Level 3 Communications, ARB 665, Order No. 07-098 (Or. PUC rel. Mar. 14, 2007).
1887 See, e.g., Bright House Section XV Comments at 7; Frontier Section XV Comments at 7-8; Nebraska Rural
Independent Companies Section XV Comments at 5, 14-15; State Members of the USF Joint Board Comments at
21.
1888 GVNW Section XV Comments at 4; NECA et al. Section XV Comments at 6; State Members of the USF Joint
Board Comments at 21; Letter from Colin Sandy, Government Relations Counsel, NECA, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 04-36, CC Docket No. 01-92, at 1 & Attach. (filed Sept. 23, 2009); Letter from Joe
A. Douglas, Vice President, Government Relations, NECA, to Marlene H. Dortch, Secretary, FCC, WC Docket No.
04-36, CC Docket No. 01-92, Attach. at 2-4 (filed May 15, 2009).
1889 See, e.g., AT&T Section XV Comments at 26, 29-30; USF/ICC Transformation NPRM, 26 FCC Rcd at 4745-
46, para. 610 & n.920.
1890 “While there are choices that we would prefer, we frankly think that the industry can survive and thrive on any
of the likelier outcomes provided the Commission does act expeditiously and thoroughly.” TEXALTEL Section XV
Comments at 1. See also, e.g., AT&T Section XV Comments at 28-29; Cablevision-Charter Section XV Comments
at 3-13; Cbeyond et al. Section XV Comments at 4-16; NECA et al. Section XV Comments at 4-6, 8-13; Sprint
Section XV Comments at 2; Washington UTC Section XV Comments at 2-5. We are unpersuaded by commenters
expressing concern about the transitional VoIP-PSTN intercarrier compensation framework becoming effective
January 1, 2012, when the tariff changes to effectuate the broader intercarrier compensation rate reforms will not
take effect until July 1, 2012. See, e.g., EarthLink August 3 PN Comments at 14. Given the importance of
providing clarity regarding intercarrier compensation for VoIP-PSTN traffic going forward, we do not find it
appropriate to delay its effectiveness.
1891 We use the term “VoIP-PSTN” as shorthand. We recognize that carriers have been converting portions of their
networks to IP technology for years. See, e.g., IP-Enabled Services; E911 Requirements for IP-Enabled Service
Providers, WC Docket Nos. 04-36, 05-196, First Report and Order and Notice of Proposed Rulemaking, 20 FCC
(continued…)
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this Order, we adopt the definition of traffic proposed in the Joint Letter: “VoIP-PSTN traffic” is “trafficexchanged over PSTN facilities that originates and/or terminates in IP format.”1892 In this regard, we
focus specifically on whether the exchange of traffic between a LEC and another carrier occurs in Time-
Division Multiplexing (TDM) format (and not in IP format), without specifying the technology used to
perform the functions subject to the associated intercarrier compensation charges.1893
941.
Although the USF/ICC Transformation NPRM proposed focusing specifically on
interconnected VoIP services, we note that the Commission’s existing definition of interconnected VoIP
would exclude traffic associated with some VoIP services that are originated or terminated on the PSTN,
such as “one-way” services that allow end-users either to place calls to, or receive calls from, the PSTN,
but not both.1894 Although these one-way services do not meet the definition of interconnected VoIP,
carriers are likely to be providing origination or termination functions with respect to this traffic
comparable to that of “two-way” traffic that meets the existing definition of interconnected VoIP.
Moreover, intercarrier compensation disputes have encompassed all forms of what we define as VoIP-
PSTN traffic, and addressing this traffic more comprehensively helps guard against new forms of
arbitrage. Various commenters recommended including such traffic within the scope of our intercarrier
compensation framework for VoIP1895 or otherwise expressed support for the approach taken in the ABC
(Continued from previous page)
Rcd 10245, 10257-59, para. 24 & n.77 (2005) (IP-Enabled Services Order); Federal-State Joint Board on Universal
Service, CC Docket No. 96-45, Report to Congress, 13 FCC Rcd 11501, 11541-43, para. 84 (1998). Nonetheless,
many carriers today continue to rely extensively on circuit-switched technology particularly for the exchange of
traffic subject to intercarrier compensation rules. See, e.g., Cablevision-Charter Section XV Comments at 4;
Cbeyond et al. Section XV Comments at 12 n.35; TCA Section XV Comments at 2; Cox July 21, 2011 Ex Parte
Letter, Attach. at 1. Likewise the definition of “interconnected VoIP” uses the term “PSTN” as distinct from at least
certain types of VoIP services. See, e.g., 47 C.F.R. § 9.3. Thus, in the context of our VoIP-PSTN intercarrier
compensation rules, our reference to “PSTN” refers to the exchange of traffic between carriers in (Time Division
Multiplexing) TDM format. See ABC Plan, Attach. 1 at 10 n.9.
1892 Joint Letter at 3. See also ABC Plan, Attach. 1 at 10. Some commenters question the scope of traffic that
“originates and/or terminates in IP format.” See, e.g., CRUSIR August 3 PN Comments at 20; Level 3 August 3 PN
Comments at 12-13. Although our prospective VoIP-PSTN intercarrier compensation is not circumscribed by the
definition of “interconnected VoIP service” in section 3(25) of the Act (referencing section 9.3 of the Commission’s
rules) or the definition of “non-interconnected VoIP service” in section 3(36) of the Act, nonetheless, informed by
those definitions, we believe it is appropriate to focus on traffic for services that require “Internet protocol-
compatible customer premises equipment.” See 47 U.S.C. § 153(25) (referencing 47 C.F.R. § 9.3); 47 C.F.R. § 9.3
(subpart (3) in the definition of “interconnected VoIP”); 47 U.S.C. § 153(36)(A)(ii) (discussing services that
“require[] Internet protocol compatible customer premises equipment”). Sections 3(25) and 3(36) of the Act were
adopted in section 101 of the Twenty-First Century Communications and Video Accessibility Act of 2010, Pub. L.
No. 111-260, § 103(b), 124 Stat. 2751 (2010).
1893 See, e.g., NECA et al. USF/ICC Transformation NPRM Comments at 24-25 n.54; Letter from Matthew M.
Polka, President/CEO, ACA, and Michael K. Powell, President and CEO, NCTA, to Hon. Julius Genachowski,
Chairman, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No.
09-51, at 2 (Aug. 23, 2011). We discuss in greater detail below the issues regarding what particular charges
competitive LECs can impose in particular circumstances. See infra para. 942.
1894 See 47 C.F.R. § 9.3 (defining “interconnected VoIP service”). See also IP-Enabled Services Order, 20 FCC
Rcd at 10277, para. 58.
1895 See, e.g., Consolidated Section XV Comments at 10-11; Nebraska Rural Independent Companies Section XV
Comments at 3-4; XO Section XV Comments at 13. See also Letter from Christopher W. Savage, Counsel for
Bright House, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket
Nos. 01-92, 96-45, GN Docket No. 09-51, at 3 (filed May 27, 2011). XO also proposes that the intercarrier
compensation framework extend to “IP-enabled services that do not involve two-way voice communications, such
(continued…)
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Plan and Joint Letter.1896 Based on the foregoing considerations, we are persuaded to adopt thatapproach.1897
942.
We agree with concerns raised by NCTA and find it appropriate to adopt a symmetrical
framework for VoIP-PSTN traffic, under which providers that benefit from lower VoIP-PSTN rates when
their end-user customers’ traffic is terminated to other providers’ end-user customers also are restricted to
charging the lower VoIP-PSTN rates when other providers’ traffic is terminated to their end-user
customers. We thus decline to adopt an asymmetric approach that would apply VoIP-specific rates for
only IP-originated or only IP-terminated traffic, as some commenters propose.1898 The Commission has
recognized concerns about asymmetric payment associated with VoIP traffic today, including
marketplace distortions that give one category of providers an artificial regulatory advantage in costs and
revenues relative to other market participants.1899 An approach that addressed only IP-originated traffic
would perpetuate—and expand—such concerns. Commenters advocating a focus solely on IP-originated
(Continued from previous page)
as electronic fax-to-email services and IP-based voicemail services . . . because such traffic is indistinguishable from
two-way voice calling.” XO Section XV Comments at 13. However, XO does not clarify the precise definition that
would be needed to encompass the specific traffic at issue, given the possible breadth of services encompassed by
“IP-enabled services.” See, e.g., IP-Enabled Services NPRM, 19 FCC Rcd at 4869-79, 4886-90, paras. 8-22, 35-37.
We believe that our definition, which itself goes beyond the USF/ICC Transformation NPRM’s proposed focus on
interconnected VoIP, strikes the appropriate balance for purposes of the transitional intercarrier compensation
framework.
1896 See, e.g., ABC Plan, Attach. 1 at 10; Joint Letter at 3; NCTA July 29, 2011 Ex Parte Letter at 2; New York PSC
August 3 PN Comments at 18-19; TCA August 3 PN Comments at 10-11.
1897 We reject claims that applying our prospective VoIP-PSTN intercarrier compensation regime to this scope of
traffic is procedurally improper. See, e.g., Letter from Donna N. Lampert, Counsel for Google, et al., to Marlene H.
Dortch, Secretary, FCC, WC Docket No. 10-90, 07-135, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-
51, Attach. at 6 (filed Sept. 30, 2011) (Google et al. Sept. 30, 2011 Ex Parte Letter). The USF/ICC Transformation
NPRM specifically sought comment on the scope of any VoIP intercarrier compensation rules, including “whether
the proposed focus on interconnection VoIP is too narrow or whether the Commission should consider intercarrier
compensation obligations associated with other forms of VoIP traffic, as well.” USF/ICC Transformation NPRM,
26 FCC Rcd at 4747, para. 612. In response, commenters proposed approaches that would encompass the scope of
VoIP traffic covered by our prospective VoIP-PSTN intercarier compensation framework, and the Commission
sought comment on how it could implement such an approach. August 3 Public Notice, 26 FCC Rcd at 11128
(seeking comment “on the implementation of the ABC Plan’s proposal for VoIP intercarrier compensation”); id. at
17 n.57 (discussing the scope of VoIP traffic that would be encompassed by the ABC Plan’s proposal).
1898 See, e.g., Letter from Steven F. Morris and Jennifer K. McKee, NCTA, to Marlene H. Dortch, Secretary, FCC,
WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN Docket No. 09-51 Attach. at 4-
5 (filed July 29, 2011) (NCTA July 29, 2011 Ex Parte Letter); Comcast Section XV Comments at 4-7; ZipDX
Section XV Comments at 2. We note that our VoIP-PSTN intercarrier compensation framework only addresses
intercarrier compensation traditionally associated with intrastate and interstate traffic (i.e., access charges and
reciprocal compensation), and does not address other compensation associated with international calls. See Comcast
Section XV Comments at 4 n.4. A separate regulatory regime governs how U.S. carriers negotiate with foreign
carriers for the exchange of international traffic. See, e.g., International Settlements Policy Reform, et al., IB Docket
Nos. 11-80, 05-254, 09-10, RM-11322, Notice of Proposed Rulemaking, 26 FCC Rcd 7233, 7234-41, paras. 3-10
(2011).
1899 See supra note 1889. See also, e.g., NCTA July 29, 2011 Ex Parte Letter at 2.
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traffic implicitly recognize as much, noting that providers with IP networks could benefit relative toproviders with TDM networks under such an intercarrier compensation regime.1900
2.
Intercarrier Compensation Charges for VoIP-PSTN Traffic
943.We adopt a prospective intercarrier compensation framework that brings all VoIP-PSTN
traffic within the section 251(b)(5) framework. As discussed below, the Commission has authority to
bring all traffic within the section 251(b)(5) framework for purposes of intercarrier compensation,
including traffic that otherwise could be encompassed by the interstate and intrastate access charge
regimes,1901 and we exercise that authority now for all VoIP-PSTN traffic.
944.
We adopt transitional rules specifying, prospectively, the default compensation for VoIP-
PSTN traffic:
·
Default charges for “toll”1902 VoIP-PSTN traffic will be equal to interstate access rates applicable to
non-VoIP traffic, both in terms of the rate level and rate structure;
·
Default charges1903 for other VoIP-PSTN traffic will be the otherwise-applicable reciprocal
compensation rates;1904 and
·
LECs are permitted to tariff these default charges for toll VoIP-PSTN traffic in relevant federal and
state tariffs in the absence of an agreement for different intercarrier compensation.
945.
Our intercarrier compensation framework for VoIP-PSTN traffic will apply
prospectively, during the transition between existing intercarrier compensation rules and the new
regulatory regime adopted in this Order, and is subject to the reductions in intercarrier compensation rates
required as part of that transition. We do not address preexisting law, including whether or how the ESP
exemption might have applied previously, and we make clear that, whatever its possible relevance
historically, the ESP exemption is not relevant or applicable prospectively in determining the intercarrier
1900 See, e.g., Comcast Section XV Comments at 5-6 (arguing that the relative advantages for providers with IP
networks would create incentives for providers with TDM networks to convert to IP); Comcast Section XV Reply at
10 (same).
1901 See supra Section XII.A.2. Our transitional intercarrier compensation framework for VoIP-PSTN traffic applies
to all LECs, including LECs that are wholesale partners of VoIP providers.
1902 The Act defines “telephone toll service” as “telephone service between stations in different exchange areas for
which there is made a separate charge not included in contracts with subscribers for exchange service.” 47 U.S.C.
§ 153(55). The Commission previously has described toll services as “services that enable customers to
communicate outside of their local exchange calling areas,” and that, for wireless providers, this means outside the
customer’s plan-defined home calling area. See, e.g., Universal Service Contribution Methodology, WC Docket
Nos. 06-122, 04-36, CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 98-170, Report and Order and
Notice of Proposed Rulemaking, 21 FCC Rcd 7518 at 7543, para. 29 (Interim Universal Service Contribution
Methodology Order). Although the Commission has referred to toll services as “telecommunications services” in
some other contexts, see, e.g., id., our use of the term “toll” VoIP-PSTN traffic here does not prejudge the
classification of VoIP services.
1903 The default rate applicable to all non-toll VoIP-PSTN traffic is whatever rate applies to other section 251(b)(5)
traffic exchanged between the carriers.
1904 In addition to ISP-bound traffic, section 251(b)(5) traffic historically included all local traffic. In the case of
traffic both originated and terminated by a LEC, the local area is defined by the state. Local Competition First
Report and Order, 11 FCC Rcd at 16013-14, para. 1035. In the case of traffic to or from a CMRS network, section
251(b)(5) applies to traffic that originates and terminates in the same Major Trading Area (MTA). Id., at 16014,
para. 1036.
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compensation obligations for VoIP-PSTN traffic.1905a.
The Prospective VoIP-PSTN Intercarrier Compensation Framework
Best Balances the Relevant Policy Considerations
We believe that our prospective, intercarrier compensation regime for VoIP-PSTN traffic
best balances the relevant policy considerations of providing certainty regarding the prospective
intercarrier compensation obligations for VoIP-PSTN traffic while acknowledging the flaws with
preexisting intercarrier compensation regimes, and providing a measured transition to the new intercarrier
compensation framework. Our framework for VoIP-PSTN traffic will also reduce disputes and provide
greater certainty to the industry regarding intercarrier compensation revenue streams while also reflecting
the Commission’s move away from the pre-existing, flawed intercarrier compensation regimes that have
applied to traditional telephone service.1906
947.
Although commenters did not all agree on the treatment of VoIP-PSTN traffic, there was
widespread consensus among commenters that, whatever the outcome, it was essential that the
Commission address that issue now.1907 Our framework also seeks to facilitate discussions among the
providers exchanging VoIP-PSTN traffic, lessening the need for prescriptive Commission regulations. At
the same time, the USF/ICC Transformation NPRM recognized the disruptive nature of some providers’
unilateral actions regarding VoIP intercarrier compensation,1908 and we seek to prevent such actions here
going forward.
948.
We are not persuaded by the arguments of some commenters to subject VoIP traffic to
the pre-existing intercarrier compensation regime that applies in the context of traditional telephone
service, including full interstate and intrastate access charges.1909 For one, many of the advocates of such
1905 Compare, e.g., Letter from Charles McKee, Vice-President, Government Affairs, Sprint, to Marlene H. Dortch,
Secretary, FCC, WC Docket Nos. 10-90, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45 at 4-
6 (filed July 29, 2011) (Sprint July 29, 2011 Ex Parte Letter) with, e.g., AT&T Section XV Reply at 23-24. Because
we are bringing all traffic within section 251(b)(5), the ESP Exemption from interstate access charges does not
apply by its terms. Nonetheless, in this Order, we preserve the equivalent of the ESP Exemption outside of the
VoIP-PSTN traffic context. In light of the need for clarity on a prospective basis given the ongoing disputes
regarding VoIP intercarrier compensation, as well as the other policy considerations discussed below, we disagree
that, as a policy matter, we should adopt the equivalent of the ESP Exemption in this context. See, e.g., Google et
al. Sept. 30, 2011 Ex Parte Letter, Attach. at 8.
1906 As in prior Orders, we use the term “traditional telephone service” here colloquially as distinct from VoIP
service without reaching any conclusions regarding the classification of VoIP services. See, e.g., Telephone Number
Requirements for IP-Enabled Services Providers; et al., WC Docket Nos. 07-243, 07-244, 04-36, CC Docket No.
95-116, Report and Order, Declaratory Ruling, Order on Remand, and Notice of Proposed Rulemaking, 22 FCC Rcd
19531, 19547, para. 28 (2007) (recognizing that interconnected VoIP services increasingly are viewed by consumers
as a substitute for traditional telephone services).
1907 Supra para. 939 & note 1890.
1908 USF/ICC Transformation NPRM, 26 FCC Rcd at 4748, para. 614. See also, e.g., NECA et al. Section XV
Comments at 6; Letter from William A. Haas, Vice President of Public Policy and Regulatory, PAETEC et al., to
Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92 (filed Feb. 1, 2011).
1909 See generally, e.g., Cablevision-Charter Section XV Comments at 3; Cbeyond et al. Section XV Comments at 4-
6; Cox Section XV Comments at 8; NECA et al. Section XV Comments at 6; AT&T Section XV Reply at 21-22;
Consolidated Reply at 10-12.
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an approach subsequently endorsed the ABC Plan and Joint Letter.1910 Further, such an outcome wouldrequire the Commission to enunciate a policy rationale for expressly imposing that regime on VoIP-PSTN
traffic in the face of the known flaws of existing intercarrier compensation rules and notwithstanding the
recognized need to move in a different direction. Moreover, requiring payment of all existing intercarrier
compensation rates applicable to traditional telephone service traffic as part of a transitional regime for
VoIP-PSTN traffic would, in the aggregate, increase providers’ reliance on intercarrier compensation at
the same time the Commission’s broader reform efforts seek to move providers away from reliance on
intercarrier compensation revenues.1911 Nor are we persuaded that such an outcome is necessary to
advance competitive or technological neutrality.1912 As discussed above, our prospective regime for
VoIP-PSTN intercarrier compensation is symmetrical, and thus avoids the marketplace distortions that
could arise from an asymmetrical approach to compensation.1913 In particular, the record does not
demonstrate that our approach advantages in the aggregate providers relying on TDM networks relative to
VoIP providers or vice versa,1914 nor that it advantages in the aggregate certain IXCs relative to others.1915
Further, to the extent that particular carriers historically have relied on access revenues to subsidize local
services,1916 the record is clear that many providers did not pay the same intercarrier compensation rates
for VoIP traffic that would have applied to traditional telephone service traffic.1917 Additionally, our
1910 See, e.g., Joint Letter at 4 (indicating support by the USTelecom, AT&T, CenturyLink, Fairpoint, Frontier,
Verizon, Windstream, NTCA, OPASTCO, and WTA); NCTA July 29, 2011 Ex Parte Letter at 2 (noting NCTA’s
support for the VoIP proposal).
1911 See supra Section XII.C.
1912 See, e.g., Bright House Section XV Comments at 4; CenturyLink Section XV Comments at 13; Frontier Section
XV Comments at 9; NARUC Section XV Comments at 4-5; Pac-West Section XV Comments at 5; Cbeyond et al.
Section XV Reply at 4.
1913 See supra para. 942.
1914 The transitional VoIP-PSTN intercarrier compensation regime we adopt here can reduce both the intercarrier
compensation revenues and long distance and wireless costs associated with VoIP-PSTN traffic. The record does
not quantify the net effect of the revenue reduction and cost savings either for VoIP providers and their wholesale
carrier partners or for traditional LECs and their wholesale carrier partners. Thus, the record does not demonstrate
that, by virtue of our transitional VoIP-PSTN intercarrier compensation regime, VoIP or TDM providers or VoIP or
TDM technologies would be advantaged in the marketplace relative to one another.
1915 The record does not indicate that particular IXCs currently carry a disproportionately large or small portion of
VoIP-PSTN traffic today, nor that they would be precluded from competing to carry such traffic in the future. The
record thus does not demonstrate a disparate financial impact on particular IXCs from the transitional VoIP-PSTN
intercarrier compensation regime.
1916 See, e.g., Nebraska Rural Independent Companies Section XV Reply at 5. To the extent that high access rates
historically have been used to subsidize artificially low rates for other services, we thus are not persuaded that,
viewed in that light, access charges can be seen as “100 percent profit” as some contend. See, e.g., Sprint July 29,
2011 Ex Parte Letter at 2. Given the flexibility the Commission has under section 201(b), see, e.g., Access Charge
Reform, CC Docket Nos. 96-262, 94-1, 91-213, Second Order on Reconsideration and Memorandum Opinion and
Order, 12 FCC Rcd 16606, 16619–20, para. 44 (1997) (citing Competitive Telecomms. Ass'n v. FCC, 87 F.3d 522,
529 (D.C. Cir. 1996)), we also disagree that transitional rates above incremental cost are inherently unjust and
unreasonable under section 201(b), as some contend. See, e.g., Google et al. Sept. 30, 2011 Ex Parte Letter, Attach.
at 12-14.
1917 See supra paras. 937-938 (discussing current disputes and alleged non-payment or under-payment of intercarrier
compensation for VoIP traffic). See also, e.g., XO Section XV Comments at 34; GVNW Section XV Comments at
4; NECA et al. Section XV Comments at 6; State Members of the USF Joint Board Comments at 21.
(continued…)
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transitional VoIP-PSTN intercarrier compensation framework provides the opportunity for some revenuesin conjunction with other appropriate recovery opportunities adopted as part of comprehensive intercarrier
compensation and universal service reform.1918
949.
Many of these commenters also argue that comparable uses of the network should be
subject to comparable intercarrier compensation charges.1919 We agree with that policy principle, but
observe that the intercarrier compensation regime applicable to traditional telephone service—which they
seek to apply to VoIP-PSTN traffic—is at odds with that policy. The pre-existing intercarrier
compensation regime imposes significantly different charges for the same use of the network depending
upon, among other things, the jurisdiction of the traffic at issue.1920 A more uniform intercarrier
compensation framework for all uses of the network will arise from the end-point of reform adopted in
this Order. For purposes of the transition, we conclude that our approach best balances the relevant
policy considerations.1921
950.
We also are unpersuaded by concerns that an intercarrier compensation regime for VoIP-
PSTN traffic could lead to further arbitrage or undermine the Commission-established transition adopted
(Continued from previous page)
Some VoIP providers state that they believe that full intercarrier compensation rates have applied to IP-originated or
terminated traffic, see, e.g., Cablevision-Charter Section XV Comments at 2 n.2; although, depending upon the
nature of their wholesale agreements with long distance providers, VoIP providers might have limited direct
knowledge of what compensation was paid for their traffic in some cases, see, e.g., Intercarrier Compensation
NPRM, 16 FCC Rcd at 9644, para. 96 (discussing certain types of wholesale long distance agreements that
incorporate flat, negotiated rates that do not vary with the intercarrier compensation charges actually paid by the
IXC). Similarly, some LECs contend that full intercarrier compensation rates commonly have been paid for all
VoIP traffic, see, e.g., Apr. 6, 2011 Workshop Transcript, CC Docket No. 01-92 at 77-78 (filed Apr. 25, 2011);
although many LECs contend that there has been no mechanism by which they could reliably identify which traffic
was VoIP, see, e.g., NECA et al. Section XV Comments at 5; PAETEC et al. Section XV Comments at 31-33;
Windstream Section XV Comments at 7.
1918 “As one investment analyst has recognized, if rural and mid-size LECs ‘can achieve adequate new cost
recovery,’ then intercarrier compensation reform ‘could still be helpful by reducing regulatory uncertainties and
ameliorating the downside caused by already-eroding ICC revenues (principally access charges).’” Verizon Section
XV Reply at 19-20 (quoting Rebecca Arbogast et al., Stifel Nicolaus, FCC Looks To Shift USF-ICC Reform Drive
into Overdrive; August Order Eyed, at 1 (Mar. 15, 2011) (emphasis added)).
1919 See, e.g., Cablevision-Charter Section XV Comments at 12; Missouri Small Telephone Company Group Section
XV Comments at 3; Nebraska Rural Independent Companies Section XV Reply at 6-7, 9-10. Some commenters
observe that in the Access Charge Reform Order the Commission cited ESPs’ different usage of the local network
than IXCs in supporting continued application of the ESP exemption and contend that, by contrast, VoIP traffic uses
the network in a manner as other traffic that historically has been subject to intercarrier compensation charges. See,
e.g., Hawaiian Telcom Section XV Comments at 8-9. The framework we adopt for VoIP-PSTN traffic is
transitional, however, and such traffic will pay most of the same rates as all other traffic in the second year of
reform. See supra Section XII.C.
1920 See supra Section X.
1921 See, e.g., Southwestern Bell Tel. Co. et al. v. FCC, 153 F.3d 523 at 542 (8th Cir. 1998) (upholding Commission
intercarrier compensation rules and concluding that “the FCC has made a rational choice regarding the treatment of
ISPs from a number of alternatives that are each imperfect. When an agency has gone to considerable lengths to
amass information, sift through the record for pertinent facts, and reach a temporary conclusion, it has not acted
arbitrarily or capriciously.”).
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for intercarrier compensation reform more broadly.1922 An underlying assumption of those arguments isthat the carriers delivering traffic for termination will be able to unilaterally determine the portion of their
traffic to be subject to the VoIP-PSTN regime. As discussed in greater detail below, the implementation
mechanisms for our approach protect against that outcome, both through protections that can be
implemented in tariffs and through the option of negotiated agreements, subject to arbitration, regarding
the portion of traffic subject to the VoIP-PSTN intercarrier compensation regime. We also permit LECs
to include language in their tariffs to address the identification of VoIP-PSTN traffic, much as they do to
identify the jurisdiction of traffic today.1923
951.
States continue to play an important role under our prospective intercarrier compensation
framework for VoIP-PSTN traffic, including arbitration of disputes between carriers seeking to enter
alternative arrangements. However, we are not persuaded to leave regulation of intercarrier compensation
for intrastate toll VoIP-PSTN traffic entirely to the states. Our transitional framework for VoIP-PSTN
traffic reflects the fact that our comprehensive intercarrier compensation reforms are gradually moving
away from jurisdictionalized intercarrier compensation charges that have led to arbitrage and marketplace
distortions,1924 and reflects the importance of a uniform, predictable transition away from historical
intercarrier compensation regimes.1925 At the same time, our universal service reforms continue to
provide for an important state role, consistent with the basic underlying objectives of state
commenters.1926
952.
We also reject requests to immediately adopt a bill-and-keep methodology for VoIP
traffic.1927 Although this would clearly facilitate the Commission’s transition away from existing
intercarrier compensation regimes, we do not believe that the immediate adoption of bill-and-keep for all
forms of VoIP-PSTN traffic appropriately balances other competing policy objectives. In particular, our
approach to broader reform seeks a more measured transition away from carriers’ reliance on intercarrier
compensation as a significant revenue source.1928 The immediate adoption of bill-and-keep for all VoIP-
PSTN traffic would appear to be, in the aggregate, a more significant departure from the intercarrier
compensation payments for VoIP traffic that have been made in the recent past.1929 Our approach also
1922 See, e.g., Cablevision-Charter Section XV Comments at 5; PAETEC et al. Section XV Comments at 31-33;
EarthLink Section XV Comments at 3; Bright House Section XV Reply at 5 & n.9; Cox Section XV Reply at 2-4;
State Members July 14, 2011 Ex Parte Letter at 10.
1923 See infra Section XIV.C.2.c.
1924 In light of these concerns with intercarrier compensation charges that vary by jurisdiction, we thus disagree that
this approach is inherently inconsistent with the Commission’s treatment of VoIP in other contexts. See, e.g., State
Members July 14, 2011 Ex Parte Letter at 10.
1925 See supra Section XII.C.
1926 See supra Sections VII-IX. See also, Letter from James Bradford Ramsay, General Counsel, NARUC, to
Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC
Docket Nos. 96-45, 01-92 at 2 (filed Sept. 22, 2011); see generally NARUC Legislative Task Force Report on
Federalism and Telecom, July 2005, http://www.dps.state.ny.us/federalism_s0705.pdf.
1927 See, e.g., CTIA Section XV Comments at 11; Google Section XV Comments at 8; MegaPath-Covad Section XV
Comments at 5-8; Sprint Section XV Comments at 6-7; T-Mobile Section XV Comments at 9-12; VON Section XV
Comments at 3-5; Vonage Section XV Comments at 3-13.
1928 See supra Section XII.C.
1929 See supra note 1917.
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helps limit the initial burden that the intercarrier compensation reform recovery mechanism places on theUniversal Service Fund.1930
953.
Similarly, we conclude that other proposed VoIP-specific approaches to intercarrier
compensation do not advance the relevant policy objectives as well as our approach. For example, some
of the proposed approaches likely would be almost as significant a departure from the intercarrier
compensation payments for VoIP traffic that have been made in the recent past as a bill-and-keep
approach.1931 Nor are such approaches compelled by section 706 of the 1996 Act, as some contend.1932
Although we seek to ensure that our policies do not hinder the ongoing migration to all-IP networks, and
take many actions in this Order to advance the goals of section 706, we also weigh the need to transition
carriers away from reliance on intercarrier compensation revenues, which potentially help support some
providers’ deployment of broadband networks today. Other approaches, which would bring VoIP traffic
within the intercarrier compensation regime at a future point in the glide path,1933 would not increase
marketplace certainty in the near term to the same extent as our framework. In sum, we believe that our
transitional framework for VoIP-PSTN intercarrier compensation strikes the best balance among the
relevant policy goals during the reform transition, while accounting for the flaws in the preexisting
intercarrier compensation regimes and the overall direction of comprehensive intercarrier compensation
reform.
b.
Legal Authority
954.Authority To Address VoIP-PSTN Traffic Under Section 251(b)(5). Although the
Commission has not classified interconnected VoIP services or similar one-way services1934 as
“telecommunications services” or “information services,” VoIP-PSTN traffic nevertheless can be
encompassed by section 251(b)(5).1935 As discussed in greater detail above,1936 section 251(b)(5) includes
“the transport and termination of all telecommunications exchanged with LECs” with the exception of
“traffic encompassed by section 251(g) . . . except to the extent that the Commission acts to bring that
traffic within its scope.”1937 The Commission previously has recognized that interconnected VoIP
1930 See supra Section XIII.
1931 See, e.g., Verizon Section XV Comments at 15-19. Similarly, approaches that would adopt reciprocal
compensation charges for VoIP Traffic, see, e.g., Comcast Section XV Comments at 4, 13-14; XO Section XV
Comments at 14, 19, 22-24, effectively could have as significant a result for many carriers, given the number of
carriers exchanging reciprocal compensation traffic at $0.0007 today in light of the ISP-bound traffic rules, see 2008
Order and ICC/USF FNPRM, 24 FCC Rcd at 6486-89, paras. 23-29.
1932 See, e.g., Sprint July 29, 2011 Ex Parte Letter at 1-3 (arguing that imposing access charges on VoIP traffic
would be inconsistent with section 706); Google et al. Sept. 30, 2011 Ex Parte Letter, Attach. at 9-11 (same). See
also, e.g., Letter from Richard S. Whitt, Director and Managing Counsel, Telecom and Media Policy, Google, et al.,
to Marlene H. Dortch, Secretary, FCC, WC Docket No. 01-92 et al. at 2-6 (filed Oct. 18, 2011) (Google Oct. 28,
2011 Ex Parte Letter) (contending that requiring intercarrier compensation payment for VoIP traffic could
negatively impact certain providers’ business models).
1933 Public Knowledge USF/ICC Transformation NPRM Comments at 25 n.62.
1934 See supra Section XIV.C.1.
1935 We thus are not persuaded by claims that the prospective VoIP-PSTN intercarrier compensation regime must
categorically exclude traffic from VoIP services that are claimed to be information services. See, e.g.., Google Oct.
28, 2011 Ex Parte Letter at 6-7.
1936 See supra Section XII.A.2.
1937 2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6482-83, paras. 15-16.
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providers are providers of telecommunications.1938 Moreover, the Commission has previously concludedthat interconnected VoIP services involve “transmission of [voice] by aid of wire, cable, or other like
connection” and/or “transmission by radio,”1939 and went on to conclude that “[t]he telecommunications
carriers involved in originating or terminating a [VoIP] communication via the PSTN are by definition
offering ‘telecommunications.’”1940 Further, although classification questions remain regarding retail
VoIP services, commenters observe that the exchange of VoIP-PSTN traffic that is relevant to our
intercarrier compensation regulations typically occurs between two telecommunications carriers, one or
both of which are wholesale carrier partners of retail VoIP service providers.1941 Nor does anything in the
record persuade us that a different conclusion is warranted in the context of other VoIP-PSTN traffic.1942
955.
Authority To Adopt Transitional Rates for VoIP-PSTN Traffic. The legal authority that
enables us to specify transitional rates for comprehensive intercarrier compensation reform also enables
us to adopt our transitional VoIP-PSTN intercarrier compensation framework pending the transition to
bill-and-keep.1943 For one, the Commission’s pre-existing regimes for establishing reciprocal
compensation rates for section 251(b)(5) traffic have been upheld as lawful,1944 and can be applied to non-
toll VoIP-PSTN traffic as provided by our transitional intercarrier compensation rules. We also have
authority to adopt the transitional framework for toll VoIP-PSTN traffic based on our rulemaking
authority to implement section 251(b)(5).1945 As discussed above,1946 interpreting our rulemaking
authority in this manner is consistent with court decisions recognizing that avoiding “market disruption
pending broader reforms is, of course, a standard and accepted justification for a temporary rule.”1947
1938 Interim Universal Service Contribution Methodology Order, 21 FCC Rcd at 7539-40, para. 41.
1939 Id. (quoting VoIP 911 Order, 20 FCC Rcd at 10261-62, para. 28).
1940 Id.
1941 See, e.g., Cablevision-Charter Section XV Comments at 7-8; CenturyLink Section XV Comments at 5-6;
PAETEC et al. Section XV Comments at 37; Time Warner Cable Section XV Comments at 8; AT&T Section XV
Reply at 23; Bright House Section XV Reply at 3 n.6. Whether the service the carrier is providing as an input to the
retail VoIP service is an interexchange service or exchange access depends upon the particular facts. See, e.g.,
AT&T IP-in-the-Middle Order, 19 FCC Rcd at 7469-70, para. 19 n.80 (“Depending on the nature of the traffic,
carriers such as commercial mobile radio service (CMRS) providers, incumbent LECs, and competitive LECs may
qualify as interexchange carriers for purposes of [the access charge] rule.”).
1942 Because our prospective VoIP-PSTN intercarrier compensation rules typically involves traffic exchanged
between carriers, and because intercarrier compensation disputes have tended to involve all forms of VoIP traffic,
we are not persuaded that the Commission should draw additional distinctions among traffic associated with
different types of VoIP services, as some commenters recommend. See, e.g., Google et al. Sept. 30, 2011 Ex Parte
Letter, Attach. at 4-6 (arguing that there is significant variability among VoIP services’ features and functions, and
that intercarrier compensation should not apply to traffic associated with such services for example because of
historical policies that information services generally should remain unregulated and the provisions of section 230
regarding the preservation of “the Internet and other interactive computer services, unfettered by Federal or State
regulation”).
1943 See supra Section XII.A.2.
1944 See, e.g., AT&T v. Iowa Utilities Board, 525 U.S. 382, 384-85 (1999) (upholding the Commission’s authority to
adopt a pricing methodology for section 251(b)(5) traffic); Core Communications, Inc. v. FCC, 592 F.3d 139 (D.C.
Cir. 2010) (upholding the Commission’s reciprocal compensation regime for ISP-bound traffic).
1945 See supra Section XII.A.2.
1946 Id..
1947 Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1106 (D.C. Cir. 2009) (quoting Competitive Telecomm’s Ass’n v.
FCC, 309 F.3d 8, 14 (D.C. Cir. 2002)).
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Sections 201 and 332 provide additional legal authority specifically for interstate traffic and all trafficexchanged with CMRS providers.1948
956.
Application of Section 251(g). Additionally, as described above,1949 section 251(g)
supports our view that the Commission has authority to adopt transitional intercarrier compensation rules,
preserving the access charge regimes that pre-dated the 1996 Act “until [they] are explicitly superseded
by regulations prescribed by the Commission.”1950 We reject the claims of some commenters that VoIP-
PSTN traffic did not exist prior to the 1996 Act, and thus cannot be part of the access charge regimes
“grandfathered” by section 251(g).1951 This argument flows from a mistaken interpretation of section
251(g). The essential question under section 251(g) is not whether a particular service, or traffic
involving a particular transmission protocol,1952 existed prior to the 1996 Act.1953 Rather, the question is
whether there was a “pre-Act obligation relating to intercarrier compensation for” particular traffic
exchanged between a LEC and “‘interexchange carriers and information service providers.’”1954
957.
Pre-1996 Act Obligations. Regardless of whether particular VoIP services are
telecommunications services or information services, there are pre-1996 Act obligations regarding LECs’
1948 See supra Section XII.A.2.
1949 See supra paras. 763-766.
1950 47 U.S.C. § 251(g) (emphasis added).
1951 See, e.g., MegaPath-Covad Section XV Comments at 7; Sprint Section XV Comments at 5-6.
1952 VoIP traffic existed prior to the 1996 Act, although the record here does not reveal whether LECs were
exchanging IP-originated or IP-terminated VoIP traffic at that time. See, e.g., Consolidated Section XV Reply at 9
(noting a 1996 American Carrier’s Telecommunication Association (“ACTA”) petition seeking Commission
classification of VoIP telephony as a telecommunications service, which included a news report dated before the
1996 Act was enacted that “indicat[ed] that VoIP telephony had at that time been available for over a year”).
Because we otherwise reject the claim that intercarrier compensation for VoIP-PSTN traffic is categorically
excluded from section 251(g), we need not, and do not, consider further the nature and extent of VoIP traffic that
existed prior to the 1996 Act.
1953 Some commenters cite certain federal district court cases that reached a different conclusion than our statutory
analysis above. See, e.g., MegaPath-Covad Section XV Comments at 7 n. 15 (citing PAETEC Commc’ns, Inc. v.
CommPartners, LLC, CIV-A No. 08-0397, 2010 WL 1767193, at *3 (D.D.C. Feb. 18, 2010); Southwestern Bell
Tel., L.P. v. Missouri Pub. Serv. Comm’n, 461 F. Supp. 2d 1055, 1080 (E.D. Mo. 2006)). However, as other
commenters observe, these outcomes conflict with those reached in other decisions. See, e.g., Cablevision-Charter
Section XV Reply at 12-13 n.37 (citing state commission decisions). See also supra para. 937 (discussing different
decisions by state commissions and courts). In any event, we are not bound by those prior decisions, and find our
statutory analysis above to be most appropriate.
1954 WorldCom v. FCC, 288 F.3d 429, 433-34 (D.C. Cir. 2002) (citing 47 U.S.C. § 251(g)). Indeed, the contrary
interpretation would suggest that a wide range of traffic would have fallen outside the scope of access charges, and
have been exclusively subject to section 251(b)(5) today. See, e.g., NATIONAL BROADBAND PLAN at 76 (discussing
wireless technologies introduced since 1997); AT&T Inc. and BellSouth Corporation Application for Transfer of
Control, WC Docket No. 06-74, Memorandum Opinion and Order, 22 FCC Rcd 5662, 5698, para. 63 n.180 (2007)
(observing that carriers are migrating to Multiprotocol Label Switching (MPLS)). Cf. Cablevision-Charter Section
XV Reply at 13-14 (“No one could seriously contend, for example, that LECs upgrading their circuit-switches to
soft switches subsequent to the 1996 Act somehow lost their right to assess access charges. Indeed, the Commission
has made clear that the use of VoIP technology in and of itself does not exempt a service from access charges,
concluding that AT&T’s IP-in-the-middle service “‘is subject to interstate access charges.’”); GCI 2008 Comments
at 14 (“GCI has provided telecommunications services under tariff using a combination of its own copper and fiber
facilities, UNEs, and resale. More recently, GCI has also started offering the exact same tariffed services over its
cable platform.”).
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compensation for the provision of exchange access to an IXC or an information service provider.1955Indeed, the Commission has already found that toll telecommunications services transmitted (although
not originated or terminated) in IP were subject to the access charge regime,1956 and the same would be
true to the extent that telecommunications services originated or terminated in IP.1957 Similarly, to the
extent that interexchange VoIP services are transmitted to the LEC directly from an information service
provider, such traffic is subject to pre-1996 Act obligations regarding “exchange access,” although the
access charges imposed on information service providers were different from those paid by IXCs.1958
Specifically, under the ESP exemption, 1959 rather than paying intercarrier access charges, information
service providers were permitted to purchase access to the exchange as end users, either by purchasing
special access services or “pay[ing] local business rates and interstate subscriber line charges for their
switched access connections to local exchange company central offices.”1960 But although the nature of
the charge is different from the access charges paid by IXCs, the Commission has always recognized that
information-service providers providing interexchange services were obtaining exchange access from the
LECs.1961 Accordingly, because they were subject to these exchange access charges, interexchange
1955 Interexchange VoIP-PSTN traffic is subject to the access regime regardless of whether the underlying
communication contained information-service elements.
1956 Petition for Declaratory Ruling that AT&T’s Phone-to-Phone IP Telephony Services are Exempt from Access
Charges, WC Docket No. 02-361, Order, 19 FCC Rcd 7457, 7466-70, paras. 14-19 (2004) (IP-in-the-Middle
Order); Prepaid Calling Card Order, 21 FCC Rcd at 7300, para. 27.
1957 As commenters observe, those access charge obligations did not depend upon the transmission protocol
associated with the telecommunications service. See, e.g., Cablevision-Charter Section XV Reply at 13-14; ITTA
Section XV Reply at 410; GCI 2008 Comments at 13-14. Under Commission precedent, the presence of protocol
processing in a service certainly could be relevant to determining whether it is a telecommunications service or an
information service. See, e.g., 47 C.F.R. § 64.702(a) (defining enhanced services).
1958 47 U.S.C. § 251(g). See supra paras. 763-766.
1959 In developing the access charge regime, the Commission established a so-called “ESP exemption” because it
recognized that certain “users who employ exchange service for jurisdictionally interstate communications,
including enhanced service providers (ESPs), had “been paying the generally much lower business service rates”
and “would experience severe rate impacts were we immediately to assess carrier access charges up on them.” MTS
and WATS Market Structure, CC Docket No. 78-72, Phase I, Memorandum Opinion and Order, 97 FCC 2d 682,
715, para. 83 (1983) (First Reconsideration of 1983 Access Charge Reform Order); Amendments of Part 69 of the
Commission's Rules Relating to Enhanced Service Providers, CC Docket 87-215, Order, 3 FCC Rcd 2631, 2631,
para. 2 n.8 (1988) (ESP Exemption Order).
1960 ESP Exemption Order, 3 FCC Rcd at 2631, para. 2 n.8.
1961 See, e.g., Section 272(b)(1)’s “Operate Independently” Requirement for Section 272 Affiliates, WC Docket No.
03-228, CC Docket Nos. 96-149, 98-141, 96-149, 01-337, Report and Order, Memorandum Opinion and Order, 19
FCC Rcd 5102, 5111-12, para. 17 (2004); Deployment of Wireline Services Offering Advanced Telecommunications
Capability, CC Docket No. 98-147, Order on Remand, 15 FCC Rcd 385, 406, para. 45 (1999), aff’d in part and
rev’d in part on other grounds. WorldCom v. FCC, 246 F.3d 690 (D.C. Cir. 2001); Enhanced Telemanagement, Inc.
v. Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company, File Nos. E-89-183, E-
89-184, 11 FCC Rcd 19669, 19670-71, para. 3 (1996). Note that access services include both carrier’s carrier access
charges and the subscriber line charge. See, e.g., Petitions of Qwest Corporation for Forbearance Pursuant To 47
U.S.C. § 160(C) in the Denver, Minneapolis-St. Paul, Phoenix, and Seattle Metropolitan Statistical Areas, WC
Docket No. 07-97, Memorandum Opinion and Order, 23 FCC Rcd 11729, 11747-48, para. 25 (2008). We note that
the Commission at times has used the term “access charges” colloquially as synonymous with carrier’s carrier
access charges, notwithstanding the fact that access charges actually encompass a broader category of charges.
Compare, e.g., MTS and WATS Market Structure, CC Docket No. 78-72, Phase I, Third Report and Order, 93 FCC
2d 241, 249-50, para. 23 (1983) (“Terms such as access, access service and access charges will be used in this Third
(continued…)
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information service traffic was subject to the over-arching Commission rules governing exchange accessprior to the 1996 Act, and therefore subject to the grandfathering provision of section 251(g).
958.
The D.C. Circuit’s WorldCom decision, cited by some commenters, does not compel a
different result.1962 In WorldCom, the court considered whether dial-up, ISP-bound traffic was covered by
section 251(g)’s grandfathering provision. Consistent with the language of section 251(g), the court
focused on whether there was a “pre-Act obligation relating to intercarrier compensation for ISP-bound
traffic” and found it “uncontested—and the Commission declared in the Initial Order”—that there was
not.1963 Although the court also stated that “[t]he best the Commission can do” in indentifying a pre-1996
Act obligation “is to point to pre-existing LEC obligations to provide interstate access for ISPs,”1964 the
discussion in the initial ISP-Bound Traffic Order cited by the court emphasized the uncertainty at that
time regarding the regulatory classification of the functions provided by the carrier serving the ISP—i.e.,
whether it was providing local service, interexchange service, or exchange access.1965 As the D.C. Circuit
ultimately observed, the fact that the carrier serving the ISP was acting as a LEC—rather than an
interexchange carrier or information service provider—would be dispositive that compensation for that
traffic exchange could not be encompassed by section 251(g).1966 Here, by contrast, there is no evidence
that the exchange of toll VoIP-PSTN traffic inherently involves the exchange of traffic between two
LECs. Moreover, we note that to the extent VoIP-PSTN traffic is not “toll” traffic, it is subject to the
preexisting reciprocal compensation regime under section 251(b)(5) rather than the transitional
framework for toll VoIP-PSTN traffic that we adopt in this Order.
959.
Other Proposed Approaches. Based on the present record, and given the framework we
adopt, we do not rely on the contention that the Commission has legal authority to adopt this regime
because all VoIP-PSTN traffic should be treated as interstate.1967 Some commenters contend that, under
the analysis of the Vonage Order, VoIP services are subject to exclusive federal jurisdiction.1968 As a
(Continued from previous page)
Report and Order to encompass both end user and carrier’s carrier charges.”) with, e.g., Intercarrier Compensation
FNPRM, 20 FCC Rcd at 4688-89, para. 6 n.13 (“Although the access charge regime adopted in 1983 and contained
in the Commission’s Part 69 access charge rules includes charges that LECs impose on their subscribers, in this item
we generally use the term ‘access charges’ to mean charges imposed by a LEC on another carrier”).
1962 See, e.g., Sprint Section XV Comments at 5-6.
1963 WorldCom, 288 F.3d at 433-34.
1964 Id. Despite mentioning the ESP exemption in the ISP Remand Order, the Commission did not rely on those
exchange access regulations, including compensation obligations, that existed under that pre-1996 Act framework.
ISP Remand Order, 16 FCC Rcd at 9164, paras. 27-28. Rather, it held that the exchange of such traffic was
“information access” and encompassed by section 251(g) on that basis. ISP Remand Order, 16 FCC Rcd at 9171,
para. 44.
1965 Implementation of the Local Compensation Provisions in the Telecommunications Act of 1996; Intercarrier
Compensation for ISP-Bound Traffic, 14 FCC Rcd 3689 at 3695, para. 9 (1999).
1966 WorldCom, 288 F.3d at 433-34. See also, e.g., Consolidated Section XV Reply at 8.
1967 See, e.g., ABC Plan, Attach. 5 at 18 (proposing that the Commission find that “all VoIP traffic . . . is inseverable
and, therefore, interstate for jurisdictional purposes”). We do not prejudge how services might develop in the future,
and how this analysis might apply at that time. At the same time, nothing in this Order alters the status quo with
respect to the jurisdictional treatment of VoIP traffic or services under existing precedent.
1968 See, e.g., XO Section XV Comments at 14-18; Verizon Section XV Comments at 19-31, Verizon Section XV
Reply at 21.
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threshold matter, the Vonage Order addressed a retail VoIP service.1969 By contrast, VoIP-PSTNintercarrier compensation typically involves the exchange of traffic between two carriers, one (or both) of
which are providing wholesale inputs to a retail VoIP service—not the retail VoIP service itself.1970 In
addition, under the framework adopted here, most default rates actually paid for toll VoIP-PSTN traffic—
equal to interstate access rates—will be the same regardless of whether the VoIP-PSTN toll traffic were
considered to be solely interstate or both interstate and intrastate. Commenters likewise contend that it is
possible to make the distinctions necessary to implement such a framework, whether directly in some
cases1971 or through the use of proxies or factors or the like.1972
1969 Vonage Holdings Corporation Petition for Declaratory Ruling Concerning an Order of the Minnesota Public
Utilities Commission, WC Docket No. 03-211, Memorandum Opinion and Order, 19 FCC Rcd 22404, 22406-08,
paras. 4-9 (2004) (Vonage Order). Nothing in this Order impacts the holding of the Vonage Order. Nor does
anything in this item impact the holding of the Kansas/Nebraska Contribution Order. See Universal Service
Contribution Methodology; Petition of Nebraska Public Service Commission and Kansas Corporation Commission
for Declaratory Ruling or, in the Alternative, Adoption of Rule Declaring that State Universal Service Funds May
Assess Nomadic VoIP Intrastate Revenues, WC Docket No. 06-122, Declaratory Ruling, 25 FCC Rcd 15651, 15652-
53, para. 5 (2010) (Kansas/Nebraska Contribution Order). The Kansas/Nebraska Contribution Order performed
the relevant preemption analysis for the limited purposes of evaluating state universal service contribution
obligations for nomadic interconnected VoIP providers and, based on that analysis and considering that the
Commission had already adopted a safe harbor assuming [64.9 percent] of VoIP revenues were intrastate for
purposes of contributions to the federal universal service fund, concluded that they would not be preempted in
certain circumstances. See generally Kansas/Nebraska Contribution Order, 25 FCC Rcd 15651.
1970 See supra note 1941. For example, as cable operators explain, their retail VoIP provider partners with a LEC
for the exchange of traffic with other carriers. See, e.g., Cablevision-Charter Section XV Comments at 7-8; Time
Warner Cable Section XV Comments at 7-8; Bright House Section XV Reply at 3 n.6; Letter from Mary McManus,
Senior Director, FCC and Regulatory Policy, Comcast, et al., to Marlene H. Dortch, Secretary, FCC, CC Docket No.
01-92, WC Docket No. 07-135, GN Docket No. 09-51 at 2 (filed Oct. 24, 2011) (Comcast et al. Oct. 24, 2011 Ex
Parte Letter).
1971 Some commenters contend that the challenges in identifying the jurisdiction of VoIP traffic – particularly on a
call-by-call basis – arise to a greater extent for nomadic VoIP, while compliance with jurisdictionalized intercarrier
compensation charges is comparatively more straightforward for certain facilities-based VoIP services. See, e.g.,
Cbeyond et al. Section XV Reply at 9-10; Rural LEC Section XV Group Section XV Comments at 4-5; Bright
House August 3 PN Comments at 8.
1972 There appears to be broad support for the principle that VoIP providers and their wholesale carrier partners can
comply with an intercarrier compensation regime with charges that differ at least to some degree based on where the
calls originate and terminate. See, e.g., ABC Plan, Attach. 1 at 10 (proposing intercarrier compensation rules for
VoIP traffic that impose differing charges depending upon whether the traffic is toll traffic or traditional reciprocal
compensation traffic). Even beyond that, a number of commenters contend that factors or traffic studies have
proved workable in addressing the jurisdiction of other traffic and similar approaches can be used for VoIP-PSTN
traffic as well. See, e.g., AT&T Section XV Reply at 20; Cbeyond et al. Reply at 10; Nebraska Rural Independent
Companies Section XV Reply at 8; Pennsylvania PUC August 3 PN Comments at 22-23. We also note, for
example, that “[t]he Commission has long endorsed the use of [percentage of interstate usage (PIU) factors] to
determine the jurisdictional nature of traffic for access charge purposes.” Prepaid Calling Card Order, 21 FCC Rcd
at 7302, para. 32. We do not adopt a jurisdictional safe harbor based on the safe harbor for interconnected VoIP
providers’ universal service contributions, see, e.g., Cbeyond et al. August 3 PN Comments at 15, because that is
based on a percentage of revenues, rather than a percentage of traffic, and also does not further differentiate between
intrastate toll traffic and other intrastate traffic. Nor do we otherwise have data to justify setting an industry-wide
jurisdictional safe harbor.
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c.Implementation
960.As discussed below, carriers may tariff charges at rates equal to interstate access rates for
toll VoIP-PSTN traffic in federal or state tariffs but remain free to negotiate interconnection agreements
specifying alternative compensation for that traffic instead.1973 Other VoIP-PSTN traffic will be subject
to otherwise-applicable reciprocal compensation rates. Because telephone numbers and other call detail
information do not always reliably establish the geographic end-points of a call, we do not mandate their
use. However, to address concerns about identifying VoIP-PSTN traffic, we allow LECs to include tariff
language addressing that issue, much as they do to address jurisdiction questions today.
961.
Role of Tariffs. During the transition, we permit LECs to tariff reciprocal compensation
charges for toll VoIP-PSTN traffic equal to the level of interstate access rates.1974 Although we are
addressing intercarrier compensation for all VoIP-PSTN traffic under the section 251(b)(5) framework,
we are doing so as part of an overall transition from current intercarrier compensation regimes—which
rely extensively on tariffing specifically with respect to access charges—and a new framework more
amenable to negotiated intercarrier compensation arrangements. We therefore permit LECs to file tariffs
that provide that, in the absence of an interconnection agreement,1975 toll VoIP-PSTN traffic will be
subject to charges not more than originating1976 and terminating interstate access rates. This prospective
regime thus facilitates the benefits that can arise from negotiated arrangements1977 without sacrificing the
1973 Consistent with the ABC Plan’s proposal, nothing in our VoIP-PSTN intercarrier compensation framework
alters or supersedes the reciprocal compensation rules for CMRS providers, including the intraMTA rule. ABC
Plan, Attach. 1 at 10 n.6. See also Section XV.D.
1974 CMRS providers currently are subject to detariffing, and nothing in our intercarrier compensation framework
VoIP-PSTN traffic disrupts that regulatory approach. See Petitions of Sprint PCS and AT&T Corp. for Declaratory
Ruling Regarding CMRS Access Charges, WT Docket No. 01-316, Declaratory Ruling, 17 FCC Rcd 13192, 13198,
para. 12 (2002) (Sprint/AT&T Declaratory Ruling), petitions for review dismissed, AT&T Corp. v. FCC, 349 F.3d
692 (D.C. Cir. 2003). Under our permissive tariffing regime, providers likewise are free not to file federal and/or
state tariffs for VoIP-PSTN traffic, and instead seek compensation solely through interconnection agreements (or, if
they wish, to forgo such compensation).
1975 We use the term “interconnection agreement” broadly in this context to encompass agreements that might not
address all aspect of section 251’s requirements beyond intercarrier compensation, and regardless of the terminology
that the parties use to describe the arrangement. See, e.g., Texas Statewide Telephone Cooperative Aug. 19, 2002
Reply at 4 (describing a “template Transport and Termination Agreement . . . developed at the direction of the Texas
Public Utility Commission” that was an “abbreviated 251(b)(5) transport and termination agreement”).
1976 As the Commission has observed, “section 251(b)(5) refers only to transport and termination of
telecommunications, not to origination.” USF/ICC Transformation NPRM, 26 FCC Rcd at 4713-14, para. 517. The
Commission also has held that origination charges are inconsistent with section 251(b)(5). See, e.g., Local
Competition First Report and Order, 11 FCC Rcd at 16016, para. 1042 (“Section 251(b)(5) specifies that LECs and
interconnecting carriers shall compensate one another for termination of traffic on a reciprocal basis. This section
does not address charges payable to a carrier that originates traffic. We therefore conclude that section 251(b)(5)
prohibits charges such as those some incumbent LECs currently impose on CMRS providers for LEC-originated
traffic.”). Although we consequently do not believe that a permanent regime for section 251(b)(5) traffic could
include origination charges, on a transitional basis we allow the imposition of originating access charges in this
context, subject to the phase-down and elimination of those charges pursuant to a transition to be specified in
response to the FNPRM. See infra Section XVII.M. See also USF/ICC Transformation NPRM, 26 FCC Rcd at
4713-14, para. 517.
1977 Both the Commission and commenters previously have considered deviating from a pure tariffing regime in
favor of more expansive use of negotiated arrangements as part of intercarrier compensation reform. See, e.g.,
(continued…)
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revenue predictability traditionally associated with tariffing regimes.1978 For interstate toll VoIP-PSTNtraffic, the relevant language will be included in a tariff filed with the Commission, and for intrastate toll
VoIP-PSTN traffic, the rates may be included in a state tariff.1979 In this regard, we note that the terms of
an applicable tariff would govern the process for disputing charges.1980
962.
Contrary to some proposals, however, we do not require the use of particular call detail
information to dispositively distinguish toll VoIP-PSTN traffic from other VoIP-PSTN traffic, given the
recognized limitations of such information.1981 For example, the Commission has recognized that
telephone numbers do not always reflect the actual geographic end points of a call.1982 Further, although
our phantom traffic rules are designed to ensure the transmission of accurate information that can help
enable proper billing of intercarrier compensation, standing alone, those rules do not ensure the
transmission of sufficient information to determine the jurisdiction of calls in all instances.1983 Rather,
consistent with the tariffing regime for access charges discussed above, carriers today supplement call
detail information as appropriate with the use of jurisdictional factors or the like when the jurisdiction of
traffic cannot otherwise be determined.1984 We find this approach appropriate here, as well.
963.
We do, however, clarify the approach to identifying VoIP-PSTN traffic for purposes of
complying with this transitional intercarrier compensation regime. Although intercarrier compensation
rates for VoIP-PSTN traffic during the transition will differ from other rates for only a limited time, we
recognize commenters’ concerns regarding the mechanism to distinguish VoIP-PSTN traffic, and thus
(Continued from previous page)
Intercarrier Compensation NPRM, 16 FCC Rcd at 9656-57, para. 130. See also, e.g., AT&T USF/ICC
Transformation NPRM Comments at 30-31 (advocating detariffing of access charges); AT&T Section XV
Comments at 13-15; Verizon Intercarrier Compensation FNPRM Comments at 6-14.
1978 See, e.g., XO Section XV Comments at 32 (arguing that the Commission should ensure that terminating carriers
have the right to assess intercarrier compensation charges for VoIP-PSTN traffic “even in the absence of an
agreement so that VoIP providers cannot refuse to negotiate a reciprocal compensation agreement to avoid paying
any rate for termination of their traffic”); NECA et al. Section XV Reply at 6 (arguing that small carriers can have
difficulty getting larger carriers to come to the negotiating table at all).
1979 We note that the Commission has, in the past, regulated services that were offered through state tariffs. See,
e.g., Wisconsin Public Service Commission, 17 FCC Rcd 2051, 2060-71, paras. 31-65 (2002) (regulating BOCs’
state-tariffed payphone access line rates); Open Network Architecture Plans of the Bell Operating Companies, 4
FCC Rcd 1, 162-71, paras. 309-25 (1988) (regulating state-tariffed ONA services in various respects).
1980 See supra para. 700.
1981 See, e.g., ABC Plan, Attach. 1 at 10; Joint Letter at 3.
1982 See, e.g., Implementation of Sections 255 and 251(a)(2) of the Communications Act of 1934, as Enacted by the
Telecommunications Act of 1996: Access to Telecommunications Service, Telecommunications Equipment and
Customer Premises Equipment by Persons with Disabilities; Telecommunications Relay Services and Speech-to-
Speech Services for Individuals with Hearing and Speech Disabilities, WC Docket No. 04-36, WT Docket No. 96-
198, CG Docket No. 03-123 & CC Docket No. 92-105, Order, 23 FCC Rcd 5707, 5712-13, paras. 9-10 (CGB Oct.
9, 2007); ABC Plan, Attach. 5 at 22. See also, e.g., CRUSIR August 3 PN Comments at 20-21; Sprint August 3 PN
Comments at 17; CenturyLink Section XV Comments at 23; CTIA Section XV Comments at 9-10; TEXALTEL
Section XV Comments at 2; Verizon Section XV Comments at 24; ZipDX Section XV Comments at 4.
1983 See supra Section XI.B.
1984 See supra para.959. See also, e.g., Level 3 August 3 PN Comments at 25; NECA et al. August 3 PN Comments
at 50; Bright House Section XV Comments at 5 n.7; CenturyLink Section XV Comments at 23; CTIA Section XV
Comments at 10; XO Section XV Comments at 33; Letter from Charon Phillips, Verizon Wireless, to Marlene H.
Dortch, Secretary, FCC, CC Docket No. 01-92 at 1-2 (filed Mar. 13, 2007).
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sought specific comment on that issue.1985 In response, a number of commenters1986 argued that theindustry should be permitted to “work cooperatively”1987 to address this issue, recognizing that “[o]ver the
years, carriers have developed reasonable methods for distinguishing between calls for billing purposes . .
. and can be expected to do so here.”1988 We agree that, “to help manage the transition” LECs should be
permitted to incorporate specific tariff provisions in their intrastate tariffs1989 that “could, for example,
require carriers delivering traffic for termination to identify the percentage of traffic that is” subject to the
transitional VoIP-PSTN intercarrier compensation regime “and to support those figures with traffic
studies or other reasonable analyses that are subject to audit.”1990 Just as such a tariffing framework
already is used to address jurisdiction of traffic,1991 such an approach is a reasonable tool (in addition to
information the terminating LEC has about VoIP customers it is serving) to identify the relevant traffic
subject to the VoIP-PSTN intercarrier compensation regime. In addition, one commenter noted the
potential to rely on interconnected VoIP subscriber and wireline line count data from Form 477 to
develop a safe harbor.1992 Thus, as an alternative, we permit the LEC instead to specify in its intrastate
tariff that the default percentage of traffic subject to the VoIP-PSTN framework is equal to the percentage
of VoIP subscribers in the state based on the Local Competition Report, as released periodically,1993
1985 See August 3 PN at 17.
1986 See, e.g., AT&T et al. August 3 PN Comments at 36; Comcast August 3 PN Comments at 20; NECA et al.
August 3 PN Comments at 50-51; XO August 3 PN Comments at 10.
1987 AT&T et al. August 3 PN Comments at 36.
1988 NECA et al. August 3 PN Comments at 50. See also Vonage Section XV Reply at 14 (observing that although
“[t]o date, there has not been a business, regulatory or other reason to justify developing a universal method for
identifying VoIP traffic,” the industry likely will be able to identify “viable solutions that would make the
identification of VoIP traffic relatively easy without requiring onerous or costly billing system changes” once it
undertakes to do so).
1989 As Comcast observes, the only context where there is a default VoIP-specific intercarrier compensation rate is
with respect to intrastate toll VoIP-PSTN traffic. Comcast August 3 PN Comments at 20 n.57.
1990 AT&T et al. August 3 PN Comments at 36. See also, e.g., XO Section XV Comments at 33 (observing that
factors could be used to indicate the percentage of terminated traffic that is VoIP, much as is done in the industry for
jurisdictional purposes today); Verizon Section XV Reply at 24 (citing “standard and reliable traffic factoring
methods already used today for intercarrier compensation billing purposes” as well as “certifications” and “audits”);
Comcast Section XV Reply at 11 (providers could certify the percentage of traffic that is VoIP, subject to auditing);
XO August 3 PN Comments at 10 (asserting that “the Commission must ensure that LECs have the right to audit any
factors or percentages that are self-provided by carriers delivering VoIP traffic to ensure they are accurate”).
1991 As the Commission has observed, “in their tariffs, LECs require IXCs to report PIUs to identify the percentage
of interstate traffic on interconnection trunks.” Prepaid Calling Card Order, 21 FCC Rcd at 7306, para. 32; see also
Comcast August 3 PN Comments at 20. To the extent that the approach we adopt would not identify all variations in
traffic in real time, see Cox Section XV Reply at 3-4, the record does not demonstrate this to be a more significant
issue in the case of identification of VoIP-PSTN traffic than it would be with respect to the identification of the
jurisdiction of traffic for which such approaches are used today.
1992 Cox August 3 PN Comments at 7 (“Form 477 requires filers to identify their voice service lines by technology,
and the proportion of voice service lines served by a particular technology is a good proxy for the proportion of long
distance minutes served by that technology.”).
1993 In particular, under this approach, the default percentage of VoIP-PSTN traffic in a state would be the total
number of incumbent LEC and non-incumbent LEC VoIP subscriptions in a state divided by the sum of those
reported VoIP subscriptions plus incumbent LEC and non-incumbent LEC switched access lines. See, e.g., IATD,
Wir. Comp. Bur., Local Telephone Competition: Status as of December 31, 2010, Table 8 (rel. Oct. 2011). See also
(continued…)
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unless rebutted by the other carrier.1994 Further, although we do not mandate other approaches as part ofour tariffing regime, individual providers remain free to rely on signaling or call detail information,1995 or
other measures, to the extent that they enter alternative compensation arrangements through
interconnection agreements.1996 In particular, contrary to some suggestions, we do not require filing of
certifications with the Commission regarding carriers’ reported VoIP-PSTN traffic.1997 Such
certifications would be required from not only IXCs but also originating and terminating providers
nationwide, even though these issues may be of little or no practical concern in states with intrastate
access rates that already are at or near interstate rates. Given the likely significant overbreadth in the
burden that would impose, we decline to adopt such a requirement.
964.
Although we will allow tariffs during the transition to bill-and-keep, we reaffirm our
decision in the T-Mobile Order that good-faith negotiations generally are preferable to tariffing as a
means of implementing carriers’ compensation obligations.1998 In the T-Mobile Order, we addressed
wireless termination tariffs that applied only in the absence of interconnection agreements.1999 The
Commission found that such tariffs were not precluded by the Act or preexisting Commission rules, but
prohibited the use of such tariffs on a going-forward basis,2000 recognizing that the section 251 and 252
framework of the Act, which encompassed the traffic at issue there, reflected a clear preference for
negotiated arrangements.2001 Nonetheless, under the circumstances here, we do not believe that the
policies underlying the prohibition of wireless termination tariffs for non-access traffic in the T-Mobile
Order requires us to prohibit use of tariffs for toll VoIP-PSTN traffic during the transition. Although we
likewise are moving to facilitate negotiated arrangements for intercarrier compensation more broadly,
(Continued from previous page)
Cox August 3 PN Comments at 7 (noting the availability of state-specific data). In the event that data are not
available for the relevant state, the LEC may instead use the nationwide data.
1994 Although some commenters assert that there is significant variability in the volume of VoIP-PSTN traffic
carried provider-to-provider, see, e.g., AT&T et al. August 3 PN Comments at 36; XO August 3 PN Comments at
10, we observe that this “safe harbor” is optional on the part of the LEC imposing the charges, and also can be
rebutted by the other carrier. In addition, the magnitude of the variability could itself make rebuttal easier, at least in
some cases. See, e.g., Verizon Section XV Reply at 24 (noting that certain providers exclusively provide service
using VoIP).
1995 We recognize that signaling or call detail information could be a tool for identifying VoIP-PSTN traffic, and
that some providers have reached agreements to use it in this way. See, e.g., XO Section XV Comments at 33;
Vonage Section XV Comments at 13-14; InCharge Systems August 3 PN Comments at 1. Because there currently
are no industry standards in this regard, however, we decline to mandate this approach industry-wide. See, e.g.,
Level 3 August 3 PN Comments at 13-14.
1996 Thus, to the extent that some commenters are concerned about the burden of implementing particular
approaches or otherwise view them as undesirable, see, e.g., Time Warner USF/ICC Transformation NPRM
Comments at 16; Consolidated August 3 PN Comments at 22 n.30, EarthLink August 3 PN Comments at 15, they
are free to negotiate alternatives that they view as less burdensome or more appropriate.
1997 See, e.g., Verizon Section XV Reply at 24 (“[i]f there are additional concerns, the Commission could address
VoIP traffic identification through certifications”); Comcast August 3 PN Comments at 20 (“the Commission should
require providers to certify to the accuracy of the factors they supply for VoIP-originated traffic”).
1998 See supra Section XII.C.5
1999 T-Mobile Order, 20 FCC Rcd at 4862-63, para. 13.
2000 Id. at 4860-64, paras. 9-14.
2001 Id. at 4863-64, para. 14.
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significant portions of the legacy intercarrier compensation regime have traditionally relied on tariffs, andwe believe flash cutting the whole industry to a new regime would be unduly disruptive. Further, in place
of tariffing, the T-Mobile Order required CMRS providers to negotiate interconnection agreements in
good faith subject to section 252 negotiation and arbitration processes at the request of incumbent
LECs—a set of requirements that we have not extended more broadly.2002 Thus, maintaining a continuing
role for tariffs during the transition to a new intercarrier compensation framework is a reasonable
approach. Further, CMRS providers had expressed concerns about potentially excessive rates in wireless
termination tariffs.2003 Here, rates are ultimately subject to Commission oversight, including the
mandated reductions in those charges as part of comprehensive intercarrier compensation reform. We
thus conclude that this approach strikes the right balance here.
965.
Reliance on Interconnection Agreements and SGATs. As discussed above, our
transitional intercarrier compensation framework permits tariffing of charges for toll VoIP-PSTN traffic,
but permits carriers to negotiate agreements that reflect alternative rates.2004 In this regard, we note that
reciprocal compensation charges generally have been imposed through interconnection agreements or
state-approved statements of generally available terms and conditions (SGATs),2005 which carriers may
accept in lieu of negotiating individual interconnection agreements.2006 Various commenters also describe
the benefits that can arise from an interconnection and intercarrier compensation framework that allows
parties to negotiate mutually agreeable outcomes, rather than all parties being categorically bound to a
single regime.2007 Likewise, the interconnection and intercarrier compensation framework adopted in
sections 251 and 252 of the 1996 Act reflect a policy favoring negotiated agreements, where possible.
966.
We recognize the concerns of some commenters that instances of disparate negotiating
leverage can occur and that, absent an appropriate regulatory backstop, a regime purely relying on
commercial negotiations could systematically disadvantage providers with limited negotiating
2002 We deny requests to reconsider the T-Mobile Order above. See supra Section XII.C.5.b. Some commenters
also have asked the Commission to extend the T-Mobile Order requirement that parties negotiate and arbitrate
agreements pursuant to the section 252 framework to additional circumstances, and we seek comment on those
requests in the FNPRM. See supra para 1323.
2003 T-Mobile Order, 20 FCC Rcd at 4855-56, para. 1. See also T-Mobile USA, Inc. et al. Petition for Declaratory
Ruling: Lawfulness of Incumbent Local Exchange Carrier Wireless Termination Tariffs, CC Docket Nos. 01-92, 95-
185, 96-98, at 5-6 (filed Sept. 6, 2002).
2004 In the case of incumbent LECs, they must negotiate in good faith in response to requests for agreements
addressing reciprocal compensation for VoIP-PSTN traffic. See 47 U.S.C. § 251(c)(1).
2005 See, e.g., Application of Verizon New York Inc., Verizon Long Distance, Verizon Enterprise Solutions, Verizon
Global Networks Inc., and Verizon Select Services Inc., For Authorization to Provide In-Region, InterLATA Services
in Connecticut, CC Docket No. 01-100, Memorandum Opinion and Order, 16 FCC Rcd 14147, 14176, para. 67
(2001) (noting the inclusion of reciprocal compensation in the SGAT); Application of Bellsouth Corporation,
Bellsouth Telecommunications, Inc., and Bellsouth Long Distance, Inc., For Provision of In-Region, InterLATA
Services in Louisiana, CC Docket No. 98-121, Memorandum Opinion and Order, 13 FCC Rcd 20599, para. 300
(1998) (same).
2006 See, e.g., Core Communications, Inc. v. Verizon Maryland, Inc., Memorandum Opinion and Order, 18 FCC Rcd
7962, 7971, para. 24 (2003) (explaining that Core accepted the terms of Verizon’s Maryland SGAT; Core and
Verizon signed a schedule to the SGAT entitled “Request for Interconnection;” and, therefore, the Maryland SGAT
served as the parties’ interconnection agreement).
2007 See, e.g., RNK Communications Section XV Comments at 8; Verizon Section XV Comments at 13-14;
Bandwidth.com USF/ICC Transformation NPRM Reply at 11, 15-17. As discussed above, certain state
commissions also have relied on negotiated agreements for intercarrier compensation for the exchange of VoIP
traffic. See supra para. 937.
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leverage.2008 These concerns arise in part based on the variations in size and make-up of the customers ofdifferent networks, and in part based on certain underlying legal requirements, including the general
policy against blocking traffic and the lack of a statutory compulsion for certain entities to enter
interconnection agreements.2009
967.
Our transitional regime for VoIP-PSTN intercarrier compensation accommodates these
disparities in several ways. For one, the ability to tariff these charges ensures that LECs have the
opportunity to obtain the intercarrier compensation provided for by our rules. In addition, the section 252
framework applicable to interconnection agreements provides procedural protections. For example, it
provides carriers the opportunity, outside the tariffing framework, to specify a mutually-agreeable
approach for determining the amount of traffic that is VoIP-PSTN traffic.2010 To this end, carriers could
include an alternative approach in a state-approved SGAT or negotiate such an approach as part of an
interconnection agreement. To the extent that the parties pursue a negotiated agreement but cannot agree
upon the particular means of determining the amount of traffic that is VoIP-PSTN traffic, this can be
subject to arbitration. Although most incumbent LECs are subject to this duty by virtue of the Act, while
other carriers, such as competitive LECs, are not,2011 we note that the Commission’s rules already
2008 See, e.g., Cox Section XV Reply at 5 n.10; Nebraska Rural Independent Companies Section XV Reply at 16-17;
PAETEC et al. Section XV Reply at 18-19.
2009 See, e.g., NECA et al. Section XV Comments at 30; Cox Section XV Reply at 5 n.10; Nebraska Rural
Independent Companies Section XV Reply at 16-17; PAETEC et al. Section XV Reply at 18-19; XO USF/ICC
Transformation NPRM Comments at 27. For example, IXCs, which pay access charges today, are not compelled to
negotiate interconnection agreements subject to state arbitration under the terms of section 252 of the Act. See 47
U.S.C. § 252.
2010 The record reveals a variety of alternatives for how providers might identify such traffic, including some in
place in arrangements between particular providers today. For example, XO reports that, pursuant to some
agreements addressing intercarrier compensation for VoIP traffic, it uses the JIP field on the call record to identify
VoIP traffic. XO Section XV Comments at 33. See also Vonage Section XV Comments at 13-14 (noting possibility
of including an indicator in signaling or billing information to identify VoIP traffic); Intercarrier Compensation
FNPRM, 20 FCC Rcd at 4743-44, para. 133 n.384 (noting Level 3’s proposal to use “the Originating Line
Information (OLI), also known as ANI II, SS7 call set-up parameter to identify IP-enabled services traffic”).
Alternatively, commenters also identify the potential to use factors or ratios—much as is done for jurisdictional
purposes today—as a means of identifying the portion of overall traffic that is (or reasonably is considered to be)
VoIP-PSTN traffic. See, e.g., XO Section XV Comments at 33 (observing that factors could be used to indicate the
percentage of terminated traffic that is VoIP, much as is done in the industry for jurisdictional purposes today);
Verizon Section XV Reply at 24 (citing “standard and reliable traffic factoring methods already used today for
intercarrier compensation billing purposes” as well as “certifications” and “audits”); Comcast Section XV Reply at
11 (providers could certify the percentage of traffic that is VoIP, subject to auditing). To the extent that these
approaches would not identify all variations in traffic in real time, see Cox Section XV Reply at 3-4, the record does
not demonstrate this to be a more significant issue in the case of identification of VoIP-PSTN traffic than it would
be with respect to the identification of the jurisdiction of traffic today. Further, to the extent that some commenters
are concerned about the burden of implementing particular approaches, see, e.g., Time Warner Comments at 16,
they are free to negotiate alternatives that they view as less burdensome. See, e.g., Vonage Section XV Reply at 14
(observing that although “[t]o date, there has not been a business, regulatory or other reason to justify developing a
universal method for identifying VoIP traffic,” the industry likely will be able to identify “viable solutions that
would make the identification of VoIP traffic relatively easy without requiring onerous or costly billing system
changes” once it undertakes to do so).
2011 See, e.g., Petition of CRC Communications of Maine, Inc. and Time Warner Cable Inc. for Preemption Pursuant
to Section 253 of the Communications Act, as Amended et al., WC Docket No. 10-143, GN Docket No. 09-51, CC
Docket No. 01-92, Declaratory Ruling, 26 FCC Rcd 8259 (2011); 47 U.S.C. § 252 (expressly addressing only state
arbitration of interconnection agreements involving incumbent LECs).
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anticipate the possibility that two non-incumbent LECs might elect to bring a reciprocal compensationdispute before a state for arbitration under the section 252 framework.2012 To the extent that a state fails
to arbitrate a dispute regarding VoIP-PSTN intercarrier compensation, it will be subject to Commission
arbitration.2013
968.
Scope of Charges Imposed by Retail VoIP Providers’ LEC Partners. Some commenters
express concern that, absent Commission clarification, certain LECs that provide wholesale inputs to
retail VoIP services might not be able to collect all the same intercarrier compensation charges as LECs
relying entirely on TDM networks.2014 In particular, providers cite disputes arising from their use of IP
technology as well as the structure of the relationship between retail VoIP service providers and their
wholesale carrier partners.2015 For the reasons described above, we believe a symmetric approach to
VoIP-PSTN intercarrier compensation is warranted for all LECs.2016 One of the goals of our reform is to
promote investment in and deployment of IP networks. Although we believe that our comprehensive
reforms best advance this goal, during the transition we do not want to disadvantage providers that
already have made these investments. Consequently, we allow providers that have undertaken or choose
to undertake such deployment the same opportunity, during the transition, to collect intercarrier
compensation under our prospective VoIP-PSTN intercarrier compensation regime as those providers that
have not yet undertaken that network conversion.2017 Further, recognizing that these specific questions
have given rise to disputes, we believe that addressing this issue under our transitional intercarrier
compensation framework will reduce uncertainty and litigation, freeing up resources for investment and
innovation.2018 We therefore adopt rules clarifying LECs’ ability to impose charges in such circumstances
under our transitional regime, as discussed below.
969.
Our transitional VoIP-PSTN intercarrier compensation rules focus specifically on
whether the exchange of traffic occurs in TDM format (and not in IP format), without specifying the
technology used to perform the functions subject to the associated intercarrier compensation charges. We
thus adopt rules making clear that origination and termination charges may be imposed under our
transitional intercarrier compensation framework, including when an entity “uses Internet Protocol
facilities to transmit such traffic to [or from] the called party’s premises.”2019
2012 See, e.g., 47 C.F.R. § 51.711(a)(2) (“In cases where both parties are incumbent LECs, or neither party is an
incumbent LEC, a state commission shall establish the symmetrical rates for transport and termination based on the
larger carrier’s forward-looking costs.”) (emphasis added).
2013 See 47 C.F.R. §§ 51.801, 51.803.
2014 See, e.g., Comcast August 3 PN Comments at 5-8; NCTA August 3 PN Comments at 17-19; Time Warner Cable
August 3 PN Comments at 9-10.
2015 See, e.g., Comcast August 3 PN Comments at 5-8; NCTA August 3 PN Comments at 17-19; Time Warner Cable
August 3 PN Comments at 9-10.
2016 See supra para. 942.
2017 See, e.g., Level 3 August 3 PN Comments at 23; NCTA August 3 PN Comments at 17-19; Time Warner Cable
August 3 PN Comments at 9.
2018 See, e.g., Comcast August 3 PN Comments at 6; NCTA August 3 PN Comments at 18-19; Time Warner Cable
August 3 PN Comments at 9; Letter from Matthew A. Brill, counsel for Time Warner Cable, to Marlene H. Dortch,
Secretary, FCC, CC Docket No. 01-92; WC Docket Nos. 10-90, 07-135, 05-337; GN Docket No. 09-51 at 1-2 (filed
Sept. 21, 2011) (Time Warner Cable-Cox Sept. 21, 2011 Ex Parte Letter).
2019 Letter from Mary McManus, Comcast, to Marlene H. Dortch, Secretary, FCC, CC Docket Nos. 01-92, 96-45;
WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN Docket No. 09-51, Attach. 1 (Proposed Rule Revisions) at 2
(filed Sept. 22, 2011) (Comcast Sept. 22, 2011 Ex Parte Letter).
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970.With respect to the issue of whether particular functions are performed by the wholesale
LEC or its retail VoIP partner, we recognize that under the Commission’s historical approach in the
access charge context, when relying on tariffs, LECs have been permitted to charge access charges to the
extent that they are providing the functions at issue.2020 When multiple providers jointly provided access,
the Commission was concerned that, for example, permitting a single competitive LEC to impose via
tariff all the same charges as an incumbent LEC, regardless of the functions that competitive LEC
performs, could result in double billing.2021 In light of the policy considerations implicated here, we adopt
a different approach to address concerns about double billing.2022 As discussed above, we believe that a
symmetrical approach to VoIP-PSTN intercarrier compensation is the best policy,2023 and thus believe that
competitive LECs should be entitled to charge the same intercarrier compensation as incumbent LECs do
under comparable circumstances. Because the Commission has not broadly addressed the classification
of VoIP services, however, retail VoIP providers that take the position that they are offering unregulated
services therefore are not carriers that can tariff intercarrier compensation charges. Consequently, just as
retail VoIP providers rely on wholesale carrier partners for, among other things, interconnection, access to
numbers, and compliance with 911 obligations—a type of arrangement the Commission has endorsed in
the past2024—so too do they rely on wholesale carrier partners to charge tariffed intercarrier compensation
charges. Given these distinct circumstances, we adopt rules that permit a LEC to charge the relevant
2020 As the Commission held in the Eighth Report and Order, “our long-standing policy with respect to incumbent
LECs is that they should charge only for those services that they provide” and “[w]e believe that a similar policy
should apply to competitive LECs.” Access Charge Reform; Reform of Access Charges Imposed by Competitive
Local Exchange Carriers; Petition of Z-Tel Communications, Inc. for Temporary Waiver of Commission Rule
61.26(d) To Facilitate Deployment of Competitive Service in Certain Metropolitan Statistical Areas, CC Docket No.
96-262, CCB/CPD File No. 01-19, Eighth Report and Order and Fifth Order on Reconsideration, 19 FCC Rcd 9108,
9118-19, para. 21 (2004) (Eighth Report and Order). Thus, for example, the Commission clarified that “the
competing incumbent LEC switching rate is the end office switching rate when a competitive LEC originates or
terminates calls to end-users and the tandem switching rate when a competitive LEC passes calls between two other
carriers. Competitive LECs also have, and always had, the ability to charge for common transport when they
provide it, including when they subtend an incumbent LEC tandem switch. Competitive LECs that impose such
charges should calculate the rate in a manner that reasonably approximates the competing incumbent LEC rate.” Id.
2021 This is because each of the LECs potentially could impose the full transport and termination charges on IXCs—
even though each was providing only part of those functions—and because they are tariffed charges, the IXC has no
way to avoid them. Eighth Report and Order, 19 FCC Rcd at 9118-19, para. 21.
2022 As discussed above, we bring all access traffic within section 251(b)(5), and the Commission had not previously
addressed LECs’ rights to tariff such charges in that context. Nonetheless, for convenience, our transitional
intercarrier compensation framework builds upon rules, or rule language, from the access charge context in a
number of ways, and we therefore modify aspects of that language in the manner discussed above, based on the
record received on this issue. See, e.g., USF/ICC Transformation NPRM, 26 FCC Rcd at 4747-48, para. 613
(seeking comment on how to administer any approach to VoIP intercarrier compensation, including any aspect of
existing law that would need to be addressed); id. at 4748-49, para. 616 (seeking comment on how to administer an
approach adopting VoIP-specific intercarrier compensation rates).
2023 See supra paras. 942, 967.
2024 See, e.g., IP-Enabled Services Order, 20 FCC Rcd at 10267, para. 38. Given the Commission’s endorsement of
these arrangements, we find these circumstances distinguishable from those in the CMRS context, where the
Commission prohibited CMRS providers from partnering with competitive LECs to collect access charges in the
absence of a contract with the IXC. See, e.g., Time Warner Cable-Cox Sept. 21, 2011 Ex Parte Letter at 2. We thus
reject claims that there is no basis for distinguishing the historical treatment of CMRS providers from our actions in
this context. See, e.g., Letter from Robert W. Quinn, Jr., Senior Vice President, Federal Regulatory, AT&T, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 07-135; CC Docket No. 01-92; GN Docket No. 09-51, at 4-5
(filed Oct. 21, 2011) (AT&T Oct. 21, 2011 Ex Parte Letter).
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intercarrier compensation for functions performed by it and/or by its retail VoIP partner,2025 regardless ofwhether the functions performed or the technology used correspond precisely to those used under a
traditional TDM architecture.2026 However, our rules include measures to protect against double
billing,2027 and we also make clear that our rules do not permit a LEC to charge for functions performed
neither by itself or its retail service provider partner.2028
971.
Our approach is supported by the fact that we are bringing all traffic within section
251(b)(5). Under Commission precedent in that context, to the extent that a competitive LEC’s rates were
set based on the incumbent LEC’s reciprocal compensation charges, the Commission’s rules were not as
limiting regarding the scope of those reciprocal compensation charges as historically was the case in the
access charge context.2029 Indeed, in addition to tariffing, providers also remain free to negotiate
2025 Going back to dial-up ISP traffic, when two telecommunications carriers exchanged traffic subject to section
251(b)(5) this was subject to intercarrier compensation even though it was an input into a connection to the Internet.
See generally ISP Remand Order, 16 FCC Rcd 9151. Just as that order did not involve imposing intercarrier
compensation requirements on the Internet, we likewise reject claims that permitting the LEC partners of a retail
VoIP provider to charge the same intercarrier compensation as other LECs would be broadly imposing access
charges on the Internet. See, e.g., AT&T Oct. 21, 2011 Ex Parte Letter at 5-6.
2026 We note that, notwithstanding our rules, to the extent that these charges are imposed via tariff, a carrier may not
impose charges other than those provided for under the terms of its tariff. See, e.g., AT&T v. Ymax, 26 FCC Rcd
5742 (2011).
2027 See Appendix A. See also, e.g., Comcast Sept. 22, 2011 Ex Parte Letter, Attach. 1 at 2 (proposing limits to the
total charges that a LEC and an affiliated or unaffiliated provider assess for jointly transporting and terminating
traffic); id. (proposing limitations on when a competitive LEC could charge for certain services, depending on
whether it is listed in the Number Portability Administration Center database as providing the calling party or dialed
number); Comcast Oct. 5, 2011 Ex Parte Letter Attach. at 1 (same); Comcast et al. Oct. 24, 2011 Ex Parte Letter at
3 (discussing ways to protect against double billing or arbitrage).
2028 Cf. AT&T v. Ymax, 26 FCC Rcd at 5757, 5758-59, paras. 41, 44 & n.120; Level 3 August 3 PN Comments at 21
(distinguishing its proposed approach to symmetry for imposing access charges from the Ymax decision, which was
based on “the specific configuration of YMax’s network architecture”); Level 3 August 3 PN Comments at 23
(advocating that LECs should be precluded, “for example, from receiving end office compensation for service
provided to the calling or called party by another carrier”). Thus, although access services might functionally be
accomplished in different ways depending upon the network technology, the right to charge does not extend to
functions not performed by the LEC or its retail VoIP service provider partner. We thus reject claims that it is
unreasonable for an IXC to pay for the functions that are performed pursuant to the intercarrier compensation
framework, including the rate transition, we adopt in this Order. See, e.g., AT&T Oct. 21, 2011 Ex Parte Letter.
2029 See, e.g., Local Competition First Report and Order, 11 FCC Rcd at 16040-41, paras. 1085-86 (describing the
presumption of symmetry in reciprocal compensation rates); id. at 16040, para. 1085 (observing that this approach
“is consistent with section 252(d)(2)(B)(ii), which prohibits ‘establishing with particularity the additional costs of
transporting or terminating calls’”). Although state arbitrations could set reciprocal compensation rates that “that
vary according to whether the traffic is routed through a tandem switch or directly to the end-office switch,” id. at
16042, para. 1090, within that framework, the Commission did not more narrowly limit competitive LECs and
CMRS providers to charging only for the functions they provide to the same degree as in the access charge context.
See, e.g., id. (directing state commission to “consider whether new technologies (e.g., fiber ring or wireless
networks) perform functions similar to those performed by an incumbent LEC’s tandem switch and thus, whether
some or all calls terminating on the new entrant’s network should be priced the same as the sum of transport and
termination via the incumbent LEC’s tandem switch”); id. at 16042-43, para. 1091 (recognizing that carriers with
different network architectures than the incumbent LEC would charge the same rate as the incumbent LEC absent a
showing “that the costs of efficiently configured and operated systems are not symmetrical and justify different
compensation rates, instead of being based on competitors’ network architectures”).
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compensation arrangements for this traffic through interconnection agreements, and to define the scope ofcharges by mutual agreement or, if relevant, arbitration.
d.
Other Issues
(i)Interconnection and Traffic Exchange
972.Use of Section 251(c)(2) Interconnection Arrangements. Although we bring all VoIP-
PSTN traffic within section 251(b)(5), and permit compensation for such arrangements to be addressed
through interconnection agreements, we recognize that there is potential ambiguity in existing law
regarding carriers’ ability to use existing section 251(c)(2) interconnection facilities to exchange VoIP-
PSTN traffic, including toll traffic. Consequently, we make clear that a carrier that otherwise has a
section 251(c)(2) interconnection arrangement with an incumbent LEC is free to deliver toll VoIP-PSTN
traffic through that arrangement, as well, consistent with the provisions of its interconnection agreement.
The Commission previously held that section 251(c)(2) interconnection arrangements may not be used
solely for the transmission of interexchange traffic because such arrangements are for the exchange of
“telephone exchange service” or “exchange access” traffic – and interexchange traffic is neither.2030
However, as long as an interconnecting carrier is using the section 251(c)(2) interconnection arrangement
to exchange some telephone exchange service and/or exchange access traffic, section 251(c)(2) does not
preclude that carrier from relying on that same functionality to exchange other traffic with the incumbent
LEC, as well. This interpretation of section 251(c)(2) is consistent with the Commission’s prior holding
that carriers that otherwise have section 251(c)(2) interconnection arrangements are free to use them to
deliver information services traffic, as well.2031 Likewise, it is consistent with the Commission’s
interpretation of the unbundling obligations of section 251(c)(3), where it held that, as long as a carrier is
using an unbundled network element (UNE) for the provision of a telecommunications service for which
UNEs are available, it may use that UNE to provide other services, as well.2032 With respect to the
broader use of section 251(c)(2) interconnection arrangements, however, it will be necessary for the
interconnection agreement to specifically address such usage to, for example, address the associated
compensation.2033
973.
No Blocking. In addition to the protections discussed above to prevent unilateral actions
disruptive to the transitional VoIP-PSTN intercarrier compensation regime, we also find that carriers’
blocking of VoIP calls is a violation of the Communications Act and, therefore, is prohibited just as with
the blocking of other traffic.2034 As such, it is appropriate to discuss the Commission’s general policy
2030 Local Competition First Report and Order, 11 FCC Rcd at 15598-99, paras. 190-91.
2031 Id. at 15990, para. 995 (“We also conclude that telecommunications carriers that have interconnected or gained
access under sections 251(a)(1), 251(c)(2), or 251(c)(3), may offer information services through the same
arrangement, so long as they are offering telecommunications services through the same arrangement as well.”).
2032 Unbundled Access to Network Elements; Review of the Section 251 Unbundling Obligations of Incumbent Local
Exchange Carriers, WC Docket No. 04-313, CC Docket No. 01-338, Order on Remand, 20 FCC Rcd 2533, 2550,
para. 29 n.83 (2005) (Triennial Review Remand Order).
2033 For example, this would include provisions addressing the intercarrier compensation for any toll VoIP-PSTN
traffic delivered via a section 251(c)(2) interconnection arrangement. We note that some carriers appear to have
implemented such an approach already. See, e.g., Level 3 Aug. 18, 2008 Ex Parte Letter, Attach. 1, Part C at 2
(Level 3-Embarq interconnection agreement providing that: “After the Parties implement interconnection
arrangements for the exchange of Local Traffic, ISP-Bound Traffic, interLATA traffic and intraLATA traffic over
the same interconnection trunks, Level 3 may also send VOIP Traffic, as defined below, over those trunks”).
2034 See supra Section XI.B, para. 734.
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against the blocking of such traffic.2035 As the Commission has long recognized, permitting blocking orthe refusal to deliver voice telephone traffic,2036 whether as a means of “self-help” to address perceived
unreasonable intercarrier compensation charges or otherwise, risks “degradation of the country’s
telecommunications network.”2037 Consequently, “the Commission, except in rare circumstances[,] . . .
does not allow carriers to engage in call blocking”2038 and “previously has found that call blocking is an
unjust and unreasonable practice under section 201(b) of the Act.”2039 Although the Commission
generally has not classified VoIP services, as discussed above, the exchange of VoIP-PSTN traffic
implicating intercarrier compensation rules typically involves two carriers.2040 As a result, those carriers
are directly bound by the Commission’s general prohibition on call blocking with respect to VoIP-PSTN
traffic, as with other traffic.
974.
We recognize, however, that blocking also could be performed by interconnected VoIP
providers, or by providers of “one-way” VoIP service that allows customers to receive calls from, or place
calls to the PSTN, but not both. Just as call blocking concerns regarding interexchange carriers and
wireless providers arose in an effort to avoid high access charges, VoIP providers likewise could have
incentives to avoid such rates, which they would pay either directly or through the rates they pay for
wholesale long distance service.2041 If interconnected VoIP services or one-way VoIP services are
telecommunications services, they already are subject to restrictions on blocking under the Act. If such
services are information services,2042 we exercise our ancillary authority and prohibit blocking of voice
traffic to or from the PSTN by those providers just as we do for carriers.2043
2035 The Commission has sought comment on whether a shift from a tariffing regime to a regime relying on
commercial arrangements for intercarrier compensation could create incentives for blocking. Intercarrier
Compensation NPRM, 16 FCC Rcd at 9656-57, para. 130.
2036 By this, we mean “block[ing], chok[ing], reduc[ing] or restrict[ing] traffic in any way.” Call Blocking
Declaratory Ruling, 22 FCC Rcd 11629, 11631, para. 6.
2037 Access Charge Reform Seventh R&O and NPRM, 16 FCC Rcd at 9932-33 para. 24.
2038 Call Blocking Declaratory Ruling, 22 FCC Rcd at 11632, para. 7. As the Commission noted, the Call Blocking
Declaratory Ruling had “ no effect on the right of individual end users to choose to block incoming calls from
unwanted callers.” Id. at para. 7 n.21.
2039 Call Blocking Declaratory Ruling, 22 FCC Rcd at 11631, para. 5.
2040 See supra note 1969 and accompanying text.
2041 See, e.g., Call Blocking Declaratory Ruling, 22 FCC Rcd at 11629.
2042 We do not decide the classification of such services in this Order.
2043 For example, an interexchange carrier that is a wholesale partner of such a VoIP provider could evade our
directly-applicable restrictions on blocking under section 201 of the Act by having the blocking performed by the
VoIP provider instead. An IXC generally would be prohibited from refusing to deliver calls to telephone numbers
associated with high intercarrier compensation charges. If that IXC’s VoIP provider wholesale customer were free
to block calls to such numbers, the IXC thus could evade the directly-applicable restrictions on blocking (and the
VoIP provider would benefit from lower wholesale long distance costs to the extent that, for example, its agreement
provided for a pass-through of the intercarrier compensation charges paid by the IXC). In addition, blocking or
degrading of a call from a traditional telephone customer to a customer of a VoIP provider, or vice-versa, would
deny the traditional telephone customer the intended benefits of telecommunications interconnection under section
251(a)(1).
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(ii)Other Pending Matters
975.Our conclusions in this Order effectively address, in whole or in part, certain pending
petitions. For one, Global NAPS filed a petition for declaratory ruling regarding the manner and extent to
which VoIP traffic could be subject to access charges generally, and intrastate access charges in
particular.2044 AT&T also filed a petition requesting that, on a transitional basis, the Commission declare
that interstate and intrastate access charges may be imposed on VoIP traffic in certain circumstances, as
well as limited waivers that would enable it to offset forgone revenues from voluntary reductions in
intrastate terminating access charges.2045 In addition, Vaya Telecom (Vaya) filed a petition seeking a
declaration that “a LEC’s attempt to collect intrastate access charges on LEC-to-LEC VoIP traffic
exchanges is an unlawful practice.”2046 Because our transitional intercarrier compensation framework for
VoIP-PSTN declines to apply all existing intercarrier compensation regimes as they currently exist,
Global NAPS’s and Vaya’s petitions are granted in part and AT&T’s is denied in part.2047 To the extent
that AT&T proposes a specific approach for alternative rate reforms and revenue recovery, we find the
mechanisms adopted in this Order to be more appropriate for the reasons discussed above, and thus deny
its requests in that regard.2048 Further, Grande filed a petition seeking a Commission declaration that
carriers categorically may rely on a customer’s certification that traffic originated in IP and therefore is
enhanced and not subject to access charges.2049 To the extent that this would deviate from the regime we
adopt, the petition is denied.2050 We decline to address the classification of VoIP services generally at this
time, nor do we otherwise elect to grant the other requests for declaratory rulings raised by the Global
NAPS, Vaya, AT&T, and Grande petitions.2051
XV.
INTERCARRIER COMPENSATION FOR WIRELESS TRAFFIC
A.
Introduction
976.In this section, we address compensation for non-access traffic exchanged between LECs
and CMRS providers. As discussed further below, two compensation regimes currently apply to non-
access LEC-CMRS traffic. Under section 20.11, LECs have a duty to provide interconnection to CMRS
providers and LECs and CMRS providers must pay each other “reasonable compensation” in connection
with traffic that originates on the other’s network.2052 Under the reciprocal compensation regime in
2044 See Global NAPS Petition for Declaratory Ruling and for Preemption of the PA, NH and MD State
Commissions, WC Docket No. 10-60 (filed Mar. 5, 2010).
2045 See AT&T Petition for Interim Declaratory Ruling and Limited Waivers, WC Docket No. 08-152 (filed July 17,
2008).
2046 Petition of Vaya Telecom, Inc. Regarding LEC-to-LEC VoIP Traffic Exchanges, CC Docket No. 01-92 at 1
(filed Aug. 26, 2011).
2047 See generally supra Section XIV.C.1.
2048 See supra Section XIII.
2049 See Grande Petition for Declaratory Ruling, WC Docket No. 05-283 (filed Oct. 3, 2005).
2050 See generally paras. 964-966 (establishing an approach under which terminating carriers can use interconnection
agreements to obtain compensation for toll VoIP-PSTN traffic, including a means to identify VoIP-PSTN traffic).
2051 It is well-established that the Commission has broad discretion whether to issue such a ruling. See 47 C.F.R §
1.2; Yale Broadcasting Co. v. FCC, 478 F.2d 594, 602 (D.C. Cir. 1973) (Commission did not abuse its discretion by
declining to grant a declaratory ruling.).
2052 47 C.F.R. § 20.11.
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section 251(b)(5), LECs have an obligation to establish reciprocal compensation arrangements for thetransport and termination of telecommunications traffic,2053 and CMRS providers that have entered into a
reciprocal compensation arrangement with a LEC must compensate the LEC for terminating traffic
originating on the CMRS provider’s network.2054
977.
The Commission has not addressed the relationship between these two regimes and has
not clarified what “reasonable compensation” pursuant to 20.11 means. As a result, application of these
provisions has been a continuing and growing source of confusion and dispute. Moreover, following the
Commission’s 2009 North County Order, which addressed a competitive LEC’s complaint against a
CMRS provider seeking “reasonable compensation” under section 20.11, requests to clarify this area of
intercarrier compensation have increased.2055 The North County Order held that the state public utility
commission was the appropriate forum under the rule for determining a reasonable rate for termination of
the CMRS provider’s intrastate, intraMTA traffic, and also declined to establish any federal methodology
governing how the state should determine a reasonable rate.2056 CMRS providers have raised concerns
that as a result, costly litigation is proliferating and the incidence of intraMTA traffic stimulation is
growing.2057
978.
As part of our comprehensive ICC reform, we believe it is now appropriate for the
Commission to clarify the system of intercarrier compensation applicable to non-access traffic exchanged
between LECs and CMRS providers. Accordingly, as described herein, we clarify that the compensation
obligations under section 20.11 are coextensive with the reciprocal compensation requirements under
section 251. In addition, consistent with our overall reform approach, we adopt bill-and-keep as the
default compensation for non-access traffic exchanged between LECs and CMRS providers. To ease the
move to bill-and-keep for rural, rate-of-return regulated LECs we adopt an interim default rule limiting
their responsibility for transport costs for this category of traffic. We find that these steps are consistent
with our overall reform and will support our goal of modernizing and unifying the intercarrier
compensation system.
979.
We also address certain pending issues and disputes regarding what is now commonly
known as the intraMTA rule, which provides that traffic between a LEC and a CMRS provider that
originates and terminates within the same Major Trading Area (MTA) is subject to reciprocal
compensation obligations rather than interstate or intrastate access charges.2058 We resolve two issues that
have been raised before the Commission regarding the correct application of this rule to specific traffic
patterns. First, one wireless service provider claims that calls that it receives from other carriers, routes
through its own base stations, and passes on to third-party carriers for termination have “originated” at its
2053 47 U.S.C. § 251(b)(5); see also 47 C.F.R. § 51.703.
2054 See Local Competition First Report and Order, 11 FCC Rcd at 16016-18, paras. 1041-45. Specifically, the
Commission determined that, pursuant to section 251(b)(5), CMRS providers will “receive reciprocal compensation
for terminating certain traffic that originates on the networks of other carriers, and will pay such compensation for
certain traffic that they transmit and terminate to other carriers.” Id. at 16018, para. 1045.
2055 See North County Communications Corp. v. MetroPCS California, LLC, Order on Review, 24 FCC Rcd 14036
(2009) (North County Order), aff’d, MetroPCS California LLC v. FCC, 644 F.3d 410 (D.C. Cir. 2011).
2056 See North County Order, 24 FCC Rcd at 14036-37, para. 1, 14044, para. 21.
2057 See, e.g., CTIA Section XV Comments at 4.
2058 See Local Competition First Report and Order, 11 FCC Rcd at 16014, para. 1036; see also 47 C.F.R. §
24.202(a) (defining the term “Major Trading Area”).
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own base stations for purposes of applying the intraMTA rule.2059 As explained below, we disagree.Second, we affirm that all traffic routed to or from a CMRS provider that, at the beginning of a call,
originates and terminates within the same MTA, is subject to reciprocal compensation, without exception.
In addition to these clarifications, we also deny requests that the intraMTA rule be modified to encompass
a larger geographic license area, the regional economic area grouping, or REAG.2060
B.
Background
980.There are currently two regimes affecting intercarrier compensation for non-access traffic
exchanged between LECs and CMRS providers. Before the 1996 Act was passed, the Commission,
pursuant to section 332 and 201(a) of the Act, adopted rule 20.11 to govern LEC interconnection with
CMRS providers.2061 Section 20.11(a) required a LEC to provide the type of interconnection reasonably
requested by a CMRS provider, and section 20.11(b) required mutual and reasonable compensation for
the exchange of traffic between LECs and CMRS providers.2062 In particular, Section 20.11(b) required
the originating carrier, whether LEC or CMRS provider, to pay “reasonable compensation” to the
terminating carrier in connection with traffic that terminates on the latter’s network facilities.2063
981.
As noted elsewhere, section 251(b)(5), part of the 1996 Act, obligates LECs to establish
reciprocal compensation arrangements for the transport and termination of telecommunications.2064 In the
Local Competition First Report and Order, the Commission determined that, pursuant to that provision,
“traffic to or from a CMRS network that originates and terminates within the same MTA is subject to
[reciprocal compensation obligations] under section 251(b)(5) rather than interstate and intrastate access
charges.”2065
982.
At the same time, the Commission amended section 20.11 to provide that LECs and
CMRS providers “shall also comply with applicable provisions of part 51 of this chapter.”2066 Thus, the
“reasonable compensation” requirements under section 20.11 continued to apply in parallel with the new
2059 Letter from W. Scott McCollough, Counsel for Halo Wireless, Inc. 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, Attach. at 9 (filed Aug.
12, 2011) (Halo Aug. 12, 2011 Ex Parte Letter); Letter from W. Scott McCollough, Counsel for Halo Wireless, Inc.
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 (filed Oct. 17, 2011) (Halo Oct. 17, 2011 Ex Parte Letter). But see Letter from Michael R.
Romano, NTCA, to Marlene H. Dortch, Secretary, FCC, CC Docket 01-92, Attach. at 7 (filed July 18, 2011) (NTCA
July 18, 2011 Ex Parte Letter); ERTA July 8, 2011 Ex Parte Letter at 1, 3; NECA et al. Sept. 23, 2011 Ex Parte
Letter at 1.
2060 T-Mobile August 3 PN Comments at 11-14.
2061 See Implementation of Sections 3(n) and 332 of the Communications Act and Regulatory Treatment of Mobile
Services, GN Docket No. 93-252, Second Report and Order, 9 FCC Rcd 1411, 1499, paras. 231-32 (1994) (CMRS
Second Report and Order) (subsequent history omitted). Section 332(c)(1)(B) provides in part that “[u]pon
reasonable request of any person providing commercial mobile service, the Commission shall order a common
carrier to establish physical connections with such service pursuant to the provisions of section 201 of this Act.” 47
U.S.C. § 332(c)(1)(B).
2062 CMRS Second Report and Order, 9 FCC Rcd at 1498, paras. 231-32; see also 47 C.F.R. § 20.11(a), (b).
2063 47 C.F.R. § 20.11(b).
2064 47 U.S.C. § 251(b)(5); see Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996) (1996
Act). See also Local Competition First Report and Order, 11 FCC Rcd at 16016, para. 1041.
2065 Local Competition First Report and Order, 11 FCC Rcd at 16014, para. 1036; see also 47 C.F.R. § 51.701(b)(1).
2066 47 C.F.R. § 20.11(c).
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obligations under section 251(b)(5) and implementing rules in Part 51.2067 The Commission has not,however, clarified what “reasonable compensation” pursuant to section 20.11 means.
983.
The Commission’s decision not to interpret “reasonable compensation” has led to
disputes. In 2009, the Commission addressed a complaint brought by North County Communications
Corp. (North County), a competitive LEC, against MetroPCS California, LLC (MetroPCS), a CMRS
provider, alleging that although there was no compensation agreement between the parties, MetroPCS had
violated section 20.11(b) of the Commission’s rules by failing to pay reasonable compensation to North
County for terminating its traffic and asking the Commission to prescribe a termination rate and award
appropriate damages. 2068
984.
In an Order reviewing an earlier decision by the Enforcement Bureau, the Commission
affirmed the Bureau’s finding that the California PUC was the more appropriate forum for determining a
reasonable termination rate under section 20.11 for the intrastate traffic at issue and that the competitive
LEC therefore was required to obtain a rate determination by the state before its section 20.11 claim
before the Commission could proceed.2069 In declining to establish an applicable rate, the Commission
noted its previous decision to interpret section 20.11 to preserve state authority over intrastate traffic and
concluded that if the Commission decides to depart from this precedent, it should do so in “a more
general rulemaking proceeding.”2070 The Commission also declined to provide guidance to the California
PUC about how to establish a reasonable termination rate.2071 The U.S. Court of Appeals for the D.C.
Circuit upheld the Commission’s decision, finding that even if the Commission had authority under
sections 201 and 332 of the Act to regulate intrastate rates for mobile termination, the Commission was
not required to exercise this authority in every instance.2072 The court also noted with approval the
Commission’s determination to defer reconsideration of its policy under section 20.11 to a general
rulemaking proceeding.2073
985.
CMRS providers have argued that the Commission’s North County Order, by declining
to determine reasonable compensation under section 20.11 and deferring such determinations to the states
without providing any guidance, has caused the problem of traffic stimulation to grow. They argue that
the Commission’s decision has led to competitive LECs seeking terminating compensation rates far above
cost and to a dramatic increase in litigation as competitive LECs seek to establish or enforce termination
rates in state administrative and judicial forums.2074 They have asked the Commission to address the issue
as part of its comprehensive effort to reform the intercarrier compensation system.
2067 See 47 C.F.R. §§ 51.701-51.717; Developing a Unified Intercarrier Compensation Regime; T-Mobile et al.
Petition for Declaratory Ruling Regarding Incumbent LEC Wireless Termination Tariffs, CC Docket No. 01-92,
Declaratory Ruling and Report and Order, 20 FCC Rcd 4855, 4863, para. 14 (2005) (T-Mobile Order), petitions for
review pending, Ronan Tel. Co. et al. v. FCC, No. 05-71995 (9th Cir. filed Apr. 8, 2005). We address pending
petitions for reconsideration of these provisions elsewhere in this order.
2068 North County Order, 24 FCC Rcd at 14040, para. 12.
2069 Id.
2070 Id. at 14039, para. 10, 14042, para. 16 (internal quotations omitted).
2071 Id. at 14044, para. 21. The U.S. Court of Appeals for the D.C. Circuit subsequently upheld the Commission’s
decision. MetroPCS California v. FCC, 644 F.3d 410.
2072 MetroPCS California v. FCC, 644 F.3d at 412, 414.
2073 Id. at 414.
2074 See CTIA Section XV Comments at 4 (asserting that the North County Order has “reduced the LECs’ incentives
to negotiate reasonable agreements and created confusion among state commissions and federal courts, leading to an
(continued…)
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986.In the USF/ICC Transformation NPRM, we sought comment on a number of issues
relating to the reform of our rules regulating wireless termination charges. As part of a general reduction
of intercarrier compensation rates to eventually eliminate per-minute rates, we sought comment on
whether to set a specific rate for wireless termination charges, and whether we should address certain
pending compensation disputes, including disputes over the application of section 20.11.2075 We also
sought comment on allegations that traffic stimulation involving reciprocal compensation between CMRS
providers and competitive LECs was increasing,2076 and we sought comment on the steps that could be
taken to address this activity.2077 We also sought comment on the impact of the North County decisions
on traffic stimulation and asked whether, as an interim measure, we should adopt any procedural or
substantive rules governing competitive LEC-CMRS compensation arrangements under section 20.11 of
the Commission’s rules, such as establishing a default compensation rate.2078
987.
We also sought comment on the proper interpretation of the intraMTA rule, which
provides that traffic between a LEC and a CMRS provider that originates and terminates within the same
Major Trading Area (MTA) is subject to reciprocal compensation obligations rather than interstate or
intrastate access charges.2079 The Commission had previously sought comment on this question in 2005,
finding that rural LECs took the position that traffic between a LEC and a CMRS provider that must be
routed through an IXC should be treated as access traffic even if it is intraMTA, while CMRS providers
argued that all such traffic was subject to reciprocal compensation.2080 In the USF/ICC Transformation
NPRM, we invited parties to refresh the record, and sought comment on how issues involving the
intraMTA rule were affected by our broader proposals for intercarrier compensation reform.2081
C.
LEC-CMRS Non-Access Traffic
988.Given our adoption of a uniform, federal framework for comprehensive intercarrier
compensation reform, we believe it is now appropriate to clarify the system of intercarrier compensation
applicable to non-access traffic exchanged between LECs and CMRS providers. First, we clarify that the
scope of compensation obligations under section 20.11 are coextensive with the scope of the reciprocal
compensation requirements under section 251 of the Act. Next, we exercise our authority to set a pricing
(Continued from previous page)
upsurge in costly litigation”); Leap Section XV Comments at 5; MetroPCS Section XV Comments at 11-12
(asserting CMRS providers must “continuously monitor innumerable LEC and CLEC filings at the state level and be
compelled to defend themselves against unreasonable rates before 50 separate state utilities commissions); Sprint
Nextel Section XV Comments at 22 (between 2009 and 2010, charges for Sprint Nextel’s intraMTA traffic
terminating to Tekstar increased by 71 percent); Verizon Section XV Comments at 36-39 (“[T]raffic pumping
schemes have flourished in the wake of the North County Order, which opened the door to pumping of intraMTA
CMRS traffic by CLECs.”).
2075 USF/ICC Transformation NPRM, 26 FCC Rcd at 4721-22, paras. 539, 540.
2076 Id. at 4771, para. 672 (citing CTIA Aug. 26, 2010 Ex Parte Letter, Attach. at 5).
2077 Id.
2078 Id. at 4771, para. 673 (citing Letter from Tamara Preiss, Vice President, Federal Regulatory, Verizon, to
Marlene H. Dortch, Secretary, FCC, CC Docket no. 01-92, WC Docket No. 07-135 at 3 (filed June 28, 2010)
(Verizon June 28, 2010 Ex Parte Letter) (proposing an immediate rate of $0.0007/minute for all intraMTA CLEC-
CMRS traffic)).
2079 Id. at 4777, para. 684.
2080 See Intercarrier Compensation FNPRM, 20 FCC Rcd at 4744-46, paras. 134-38.
2081 Id. The Commission also sought comment in 2005 on whether to eliminate or modify the intraMTA rule. See
id.
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methodology for LEC-CMRS intraMTA traffic and adopt bill-and-keep as the immediately applicabledefault compensation methodology for non-access traffic between LECs and CMRS providers under
section 20.11 and Part 51 of our rules.
989.
As outlined above, two compensation regimes currently apply to non-access LEC-CMRS
traffic, and the Commission has not clarified the intersection between the two.2082 We conclude, based on
the record, that it is appropriate for the Commission to clarify the relationship between the obligations in
sections 20.11 and 251(b)(5).
990.
To bring the 20.11 and section 251 obligations in line, we first harmonize the scope of the
compensation obligations in section 20.11 and those in Part 51. We accordingly conclude that section
20.11 applies only to LEC-CMRS traffic that, since the Local Competition First Report and Order, has
been subject to the reciprocal compensation framework under section 251(b)(5) of the Act. Thus, section
20.11 does not apply to access traffic that, prior to this Order, was subject to section 251(g). Furthermore,
we clarify that the terms “mutual compensation” in section 20.11 and “reciprocal compensation” in
section 251(b)(5) and Part 51 are synonymous when applied to non-access LEC-CMRS traffic.2083
991.
Next, we find that it is in the public interest to establish a default federal pricing
methodology for determining reasonable compensation under section 20.11. Commenters urge the
Commission to address the current absence of guidance on compensation rates for traffic between
competitive LECs and CMRS providers and to address the growing problem of traffic stimulation.2084
They argue that the decision in the North County Order to defer setting of reasonable compensation under
section 20.11 for intrastate traffic to the states without providing any guidance has led to CLECs seeking
terminating compensation rates far above cost and to a dramatic increase in litigation as CLECs seek to
establish or enforce termination rates in state administrative and judicial forums.2085 They recommend
that the Commission resolve this problem by establishing a default federal termination rate for CLEC-
CMRS traffic of $0.0007 or by adopting a bill-and-keep methodology.2086
2082 See supra paras. 980-982.
2083 See 47 C.F.R. § 51.701(b)(2) (providing that traffic exchanged between a LEC and a CMRS provider is subject
to reciprocal compensation if “at the beginning of the call, [it] originates and terminates within the same Major
Trading Area”). Because they are coextensive, we use the terms “reciprocal compensation” and “mutual
compensation” synonymously.
2084 See CTIA Section XV Comments at 4-5; Sprint Nextel Section XV Comments at 22; Verizon Section XV
Comments at 35, 45. See also Leap Section XV Comments at 6 (traffic pumping involving reciprocal compensation
rates for traffic between CMRS providers and LECs is “indeed increasing”); MetroPCS Section XV Comments at 2
(traffic pumping is a “growing problem” for wireless services); T-Mobile Section XV Comments at 4 (“T-Mobile
has observed traffic stimulation involving intraMTA traffic, resulting from reciprocal compensation rates that
exceed the actual costs of terminating traffic.”).
2085 See CTIA Section XV Comments at 4 (asserting that North County has “reduced the LECs’ incentives to
negotiate reasonable agreements and created confusion among state commissions and federal courts, leading to an
upsurge in costly litigation”); Leap Section XV Comments at 5; MetroPCS Section XV Comments at 11-12
(asserting CMRS providers must “continuously monitor innumerable LEC and CLEC filings at the state level and be
compelled to defend themselves against unreasonable rates before 50 separate state utilities commissions); Sprint
Nextel Section XV Comments at 22 (between 2009 and 2010, charges for Sprint Nextel’s intraMTA traffic
terminating to Tekstar increased by 71 percent); Verizon Section XV Comments at 36-39 (“[T]raffic pumping
schemes have flourished in the wake of the North County Order, which opened the door to pumping of intraMTA
CMRS traffic by CLECs.”).
2086 See Verizon Section XV Comments at 45 (arguing that “the Commission must close, once and for all, the
longstanding gap in its intercarrier compensation regime and adopt rules to actually govern CMRS-CLEC intraMTA
compensation arrangements,” and proposing a default rate of $.0007); MetroPCS USF/ICC Transformation NPRM
(continued…)
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992.Currently, reciprocal compensation under the Part 51 rules is subject to a federal pricing
methodology. Reciprocal compensation under section 20.11, however, is not currently subject to a
federal pricing methodology. As we recently explained in the North County Order, we have instead
traditionally regarded state commissions as the “more appropriate forum for determining the reasonable
compensation rate [under section 20.11] for . . . termination of intrastate, intraMTA traffic,” and have to
date declined to provide guidance to the states on how to carry out that responsibility.2087 We have long
made clear, however, that we “would not hesitate to preempt any rates set by the states that would
undermine the federal policy that encourages CMRS providers and LECs to interconnect.”2088 And we
observed in the North County Order that the various “policy arguments” in favor of a greater federal role
in implementing section 20.11 were “better suited to a more general rulemaking proceeding,” citing this
proceeding in particular.2089
993.
We now conclude, based on the record in this proceeding, that we should establish a
federal methodology for implementing section 20.11’s reasonable compensation mechanism.2090
Although we believed in the North County Order that the interconnection process under section 20.11
would likely not be “procedurally onerous,”2091 the record shows that the absence of a federal
methodology has been a growing source of confusion and litigation.2092 MetroPCS, for example, states
that it is embroiled in disputes over traffic stimulation schemes in a number of jurisdictions and notes
other proceedings in New York and Michigan. The California commission, the state commission
implicated by the North County Order, also “recommends that the FCC provide guidance on what factors
should be considered in setting a ‘reasonable rate’ for such arrangements.”2093 Adoption of a federal
pricing methodology promotes the policy goals outlined in this Order of avoiding wasteful arbitrage
opportunities caused by disparate intercarrier compensation rates and modernizing and unifying the
intercarrier compensation system to promote efficiency and network investment.2094 It is also necessary
(Continued from previous page)
Comments at 22 (proposing immediate bill-and-keep for all traffic to or from wireless carriers); see also Sprint
Nextel Section XV Comments at 22 (arguing that CMRS-CLEC traffic should be subject to reciprocal compensation
regime, and that in the absence of an interconnection agreement, all traffic should be subject to bill-and-keep).
2087 North County Order, 24 FCC Rcd at 14040, para. 12, 14044, para. 21.
2088 MetroPCS California, LLC v. FCC, 644 F.3d 410, 413 (D.C. Cir. 2011) (citing Implementation of Sections 3(n)
and 332 of the Communications Act; Regulatory Treatment of Mobile Servs., GN Docket No. 93-252, Second
Report and Order, 9 FCC Rcd. 1411, 1497, para. 228 (1994)).
2089 North County Order, 24 FCC Rcd at 14042, para. 16 (internal quotation marks omitted).
2090 See FCC v. Fox Television Stations, Inc., 129 S. Ct. 1800, 1811 (2009) (holding that an agency need not show
that “reasons for the new policy are better than the reasons for the old one; it suffices that the new policy is
permissible under the statute, that there are good reasons for it, and that the agency believes it to be better, which the
conscious change of course adequately indicates”).
2091 See North County Order, 24 FCC Rcd at 14041-42, para. 15.
2092 See CTIA Section XV Comments at 4-5 & Attach. A; MetroPCS Section XV Comments at 9-10.
2093 CPUC Section XV Comments at 9.
2094 We note that North County, which argues that the Commission should continue to defer to the states to establish
a rate for section 20.11 claims, has itself noted in another proceeding that the overall process under section 20.11 as
a consequence of the current deferral to states is time-consuming and burdensome. See North County Order, 24
FCC Rcd at 14041-42, para. 15. See also California PUC Section XV Comments at 9 (recommending that the FCC
provide guidance on setting a “reasonable rate” for such arrangements); RNK Section XV Comments at 12-13 (the
Commission should provide a federal pricing methodology for reciprocal compensation between CMRS providers
and CLECs, and states should implement that methodology).
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to effectuate our decision to harmonize section 20.11 with section 251(b)(5), which, as noted, has longbeen governed by a federal pricing methodology.
994.
We have already concluded above that a bill-and-keep methodology for intercarrier
compensation, including reciprocal compensation, best serves our policy goals and requirements of the
Act.2095 Consistent with that determination and our clarification above that compensation obligations
under section 20.11 are coextensive with reciprocal compensation requirements, we conclude that bill-
and-keep should also be the default pricing methodology between LECs and CMRS providers under
section 20.11 of our rules.2096 Thus, we conclude that bill-and-keep should be the default applicable to
LEC-CMRS reciprocal compensation arrangements under both section 20.11 or Part 51. We reject claims
that a default rate set via a bill-and-keep methodology under any circumstances would be inadequate
because it would be less than the actual cost of terminating calls that originate with a CMRS provider.2097
As we explain above, a bill-and-keep regime requires each carrier to recover its costs from its own end-
users.2098
995.
We further conclude that, under either section 20.11 or the Part 51 rules, for traffic to or
from a CMRS provider subject to reciprocal compensation under either section 20.11 or the Part 51 rules,
the bill-and-keep default should apply immediately. Although we have adopted a glide path to a bill-and-
keep methodology for access charges generally and for reciprocal compensation between two wireline
carriers, we find that a different approach is warranted for non-access traffic between LECs and CMRS
providers for several reasons. First, we find a greater need for immediate application of a bill-and-keep
methodology in this context to address traffic stimulation. The record demonstrates there is a significant
and growing problem of traffic stimulation and regulatory arbitrage in LEC-CMRS non-access traffic.2099
In contrast, we find little evidence of such problems with regard to traffic between two LECs, where
traffic stimulation appears to be occurring largely within the access regime, rather than for traffic
currently subject to reciprocal compensation payments. This likely reflects in part the fact that the
applicable “local calling area” for CMRS providers within which calls are subject to reciprocal
2095 See supra Section XII.A.1.
2096 By default, we mean that bill-and-keep will satisfy terminating compensation obligations except where carriers
mutually agree to the contrary.
2097 North County Section XV Reply at 8, 9; see also, e.g., Core Section XV Comments at 13-14 (reciprocal
compensation rates are set by state commissions pursuant to TELRIC, and use of a lower rate would require carriers
to terminate traffic below cost, resulting in a windfall for originating carriers); Earthlink Section XV Reply at 11
(footnote omitted) (arguing that “a bill-and-keep arrangement does not ‘comply with the principles of mutual
compensation’ under FCC Rule 20.11(b)”); PAETEC Section XV Reply at 23 (arguing that “[t]he Commission
should not reverse rule 20.11 in this proceeding. Instead, the Commission should affirm the right to mutual
compensation at reasonable rates”).
2098 See supra para. 742.
2099 See, e.g., MetroPCS Section XV Comments at 8 (“Access stimulation . . . is not confined to the long-distance
market. The local terminating compensation market also has proven to be a troubling source of regulatory
arbitrage.”), 11-12; Sprint XV Comments at 22 (noting an increase in intraMTA traffic pumping); Verizon Section
XV Reply at 27 (“Verizon and other carriers have seen a large increase in intraMTA arbitrage in the wake of the
Commission’s North County Order”). See also Letter from Scott Bergman, CTIA-The Wireless Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket 07-135, CC Docket 01-92 (filed Nov. 24, 2010); see generally
Verizon June 28, 2010 Ex Parte Letter; Leap Wireless Access Stimulation NPRM Reply; MetroPCS Access
Stimulation NPRM Comments.
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compensation is much larger than it is for LECs.2100 Thus, what would be access stimulation if between aLEC and an IXC will in many cases arise under reciprocal compensation when a CMRS provider is
involved.2101 For similar reasons, CMRS providers are more likely to be exposed to traffic stimulation
that is not subject to the measures we adopt above to address this problem within the access traffic
regime. Further, although the record reflects that LEC-CMRS intraMTA traffic stimulation is growing
most rapidly in traffic terminated by competitive LECs,2102 we are concerned that absent any measures to
address traffic stimulation for intraMTA LEC-CMRS traffic, incumbent LECs that sought revenues from
access stimulation may quickly adapt their stimulation efforts to wireless reciprocal compensation. For
these reasons, we find addressing the traffic stimulation problem in reciprocal compensation is more
urgent for LEC-CMRS traffic, and the bill-and-keep default methodology we adopt today should
eliminate the opportunity for parties to engage in such practices in connection with such traffic.2103
996.
Although, as discussed above, we find that adopting a gradual glide path to a bill-and-
keep methodology for intercarrier compensation generally, including reciprocal compensation between
LECs, will help avoid market disruption to service providers and consumers, we conclude that an
immediate transition for reciprocal compensation traffic exchanged between LECs and CMRS providers
presents a far smaller risk of market disruption than would an immediate shift to a bill-and-keep
methodology for intercarrier compensation more generally. First, for reciprocal compensation between
CMRS providers and competitive LECs, we have until recently had no pricing methodology applicable to
competitive LEC-CMRS traffic, as reflected in the fact that the carriers in the recent North County Order
had specifically asked the Commission to establish one for the first time. Competitive LECs thus had no
basis for reliance on such a methodology in their business models, and we see no reason why, in setting a
methodology for the first time, we should not require competitive LECs to meet that methodology
immediately, particularly given that competitive LECs are not subject to retail rate regulation in the
manner of incumbents, and therefore have flexibility to adapt their businesses more quickly.
997.
Even for incumbent LECs, we are confident the impact is not significant, particularly
when balanced against the overall benefits of providing the clarification. For one, incumbent LECs and
2100 More specifically, the area within which a LEC-CMRS call is subject to reciprocal compensation rather than
access is the Major Trading Area (MTA), which is generally much larger than the applicable local calling area for
LEC-LEC calls. See TSR Wireless, LLC v. U.S. West Communications, Inc., 15 FCC Rcd 11166, 11178 para. 31
(2000) (noting MTAs typically are large areas that may encompass multiple LATAs, and often cross state
boundaries). Thus traffic that would be subject to access rules if exchanged between LECs falls under the reciprocal
compensation regime when exchanged with a CMRS provider.
2101 See Leap Wireless Access Stimulation NPRM Reply, at 9 (arguing against proposals that “fail to even consider
the circumstances in which the stimulated traffic is access traffic for landline carriers but intraMTA or ‘local’ traffic
for the wireless carrier that originates the traffic”).
2102 See, e.g., CTIA Access Stimulation NPRM Reply, at 4 (“CLECs now account for more traffic stimulation than
ILECs, as access stimulation schemes have shifted from ILECs to CLECs to avoid increased Commission oversight
of rural ILECs.”).
2103 See Leap Wireless Access Stimulation NPRM Reply, at 2 (asserting that traffic stimulation is a significant and
growing problem in both access and local traffic and proposing adoption of bill-and-keep to address the problem).
In light of our decision to adopt a default bill-and-keep methodology for traffic exchanged between LECs and
CMRS providers, we find it is not necessary to adopt special rules proposed by some commenters to curb traffic
stimulation with respect to such traffic. See, e.g., CTIA Section XV Comments at 7-8; AT&T Section XV
Comments at 21; Leap Section XV Comments at 6-7; MetroPCS Section XV Comments at 4-5, 10; T-Mobile
Section XV Comments at 8-9; Verizon Section XV Reply Comments at 31. Further, such measures would not be as
effective in eliminating regulatory arbitrage schemes, as we note above. See also Leap Wireless Access Stimulation
NPRM Reply, at 7 (“the only truly effectively global resolution of these issues is for the Commission to adopt bill
and keep compensation for all traffic”).
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CMRS providers that fail to pursue an interconnection agreement do not receive any compensation forintraMTA traffic today.2104 For incumbent LECs that do have agreements for compensation for intraMTA
traffic, most large incumbent LECs have already adopted $0.0007 or less as their reciprocal compensation
rate.2105 For rate-of-return carriers, there is no allegation in the record that reforming LEC-CMRS
reciprocal compensation obligations in this manner would have a harmful impact on them. And, in any
event, we have adopted mechanisms that should address any such impacts. First, we adopt a new
recovery mechanism, which includes recovery for net reciprocal compensation revenues, to provide all
incumbent LECs with a stable, predictable recovery for reduced intercarrier compensation revenues.2106
Second, we adopt an additional measure to further ease the move to bill-and-keep LEC-CMRS traffic for
rate-of-return carriers. Specifically, we limit rate-of-return carriers’ responsibility for the costs of
transport involving non-access traffic exchanged between CMRS providers and rural, rate-of-return
regulated LECs.
998.
Some commenters proposed a rule allocating the responsibility for transport costs for
non-access traffic to the non-rural terminating provider, stating that in the absence of such a rule, rural
LECs could be forced to incur unrecoverable transport costs at a time when ICC reforms may already
have a negative impact on network cost recovery.2107 We recognize that immediately moving to a default
bill-and-keep methodology for intraMTA traffic raises issues regarding the default point at which
financial responsibility for the exchange of traffic shifts from the originating carrier to the terminating
carrier.2108 Therefore, in the attached FNPRM, we seek comment on whether and how to address this
aspect of bill-and-keep arrangements.2109 We find it appropriate, however, to establish an interim default
rule allocating responsibility for transport costs applicable to non-access traffic exchanged between
CMRS providers and rural, rate-of-return regulated LECs to provide a gradual transition for such carriers.
Given our commitment to providing a measured transition, we believe it is appropriate to help ensure no
flash cuts for rate-of-return carriers. We note that price cap carriers did not raise concerns about transport
costs, and we conclude that no particular transition is required or warranted for traffic exchanged between
2104 See T-Mobile Order, 20 FCC Rcd at 4863-65, paras. 14-16. See also id. at 4863 n.57 (“Under the amended
rules, . . . in the absence of a request for an interconnection agreement, no compensation is owed for termination.”).
2105 See, e.g., T-Mobile Section XV Comments at n.16 (stating that “in T-Mobile’s experience, the vast majority of
RBOC agreements provide for terminating rates at or below $0.0007 per minute”).
2106 For a detailed description of the recovery mechanism, see supra Section XIII.
2107 See, e.g., NECA et al. August 3 PN Comments at 41-42 (proposing a “Rural Transport Rule”); see also Letter
from Michael Romano, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket 10-90, CC Docket 01-92, at 6
(filed Oct. 19, 2011); Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H.
Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC Docket Nos.
01-92, 96-45 at 2 (filed Oct. 20, 2011).
2108 AT&T USF/ICC Transformation NPRM Reply at 24-25. See also CTIA USF/ICC Transformation NPRM
Comments at 39 (proposing that the originating carrier would be responsible for assuming the costs of delivering a
call, including securing any necessary transport services, to the terminating carrier’s network edge).
2109 See infra Section XVII.N. We have previously sought comment on the allocation of transport costs for non-
access traffic on several occasions. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4774-76 paras. 680-82;
2008 Order and ICC/USF FNPRM, 24 FCC Rcd at 6619-20, App.C, para 270 (seeking comment on interconnection
proposal including “rural transport rule” that would have limited the transport and provisioning obligations of a rural
rate-of-return regulated incumbent LEC to its meet point when the non-rural terminating carrier’s point of presence
is located outside of the rural rate-of-return incumbent LEC’s service area); Intercarrier Compensation FNPRM, 20
FCC Rcd at 4727 para. 90, 4729 para. 93 (seeking comment on a proposal to require competitive carriers seeking to
exchange traffic with an incumbent LEC to be responsible for transport costs outside the incumbent’s local calling
area).
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CMRS providers and these carriers.999.
Specifically, for such traffic, the rural, rate-of-return LEC will be responsible for
transport to the CMRS provider’s chosen interconnection point2110 when it is located within the LEC’s
service area.2111 When the CMRS provider’s chosen interconnection point is located outside the LEC’s
service area, we provide that the LEC’s transport and provisioning obligation stops at its meet point and
the CMRS provider is responsible for the remaining transport to its interconnection point. Although we
do not prejudge our consideration of what allocation rule should ultimately apply to the exchange of all
telecommunications traffic, including traffic that is considered access traffic today, under a bill-and-keep
methodology, we believe that this rule is warranted for the interim period to help minimize disputes and
provide greater certainty until rules are adopted to complete the transition to a bill-and-keep methodology
for all intercarrier compensation.2112
1000. Beyond adopting these measures, we also emphasize that, although we establish bill-and-
keep as an immediately applicable default methodology, we are not abrogating existing commercial
contracts or interconnection agreements or otherwise allowing for a “fresh look” in light of our
reforms.2113 Thus, incumbent LECs may have an extended period of time under existing compensation
arrangements before needing to renegotiate subject to the new default bill-and-keep methodology. As a
result, while we are concerned that an immediate transition from reciprocal compensation to a bill-and-
keep methodology more generally would risk overburdening the universal service fund that underlies the
interim recovery mechanism, we think that the impact on the fund resulting from an immediate transition
for LEC-CMRS reciprocal compensation alone will not do so.2114 For the reasons discussed, we find that
an immediate transition away from reciprocal compensation to a bill-and-keep methodology in this
context is practical.
1001. As we found above, we believe that sections 251 and 252 affirmatively provide us
authority to establish bill-and-keep as the default methodology applicable to traffic within the scope of
section 251(b)(5), including for traffic exchanged between LECs and CMRS providers.2115 Further, as we
have concluded above that we have authority under section 332 to regulate intrastate access traffic
exchanged between LECs and CMRS providers and thus authority to specify a transition to bill-and-keep
for such traffic, we conclude for similar reasons that we have authority to regulate intrastate reciprocal
2110 See 47 C.F.R. § 51.701(c)(defining transport as “from the interconnection point between the two carriers to the
terminating carrier’s end office switch”).
2111 See 47 U.S.C § 214(e)(5)(defining “service area” in the context of universal service).
2112 We note that some commenters proposed a similar but broader rule that would have applied to traffic exchanged
between a rural, rate-of-return LEC and any other provider, CMRS or not. See NECA et al. August 3 PN Comments
at 41-42 (proposing a “Rural Transport Rule”); Letter from Michael R. Romano, Senior Vice President – Policy,
NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No.
09-51, CC Docket Nos. 01-92, 96-45 at 2 (filed Oct. 20, 2011). Because we adopt this as an interim rule to address
concerns arising from our immediate adoption of bill-and-keep for non-access traffic with CMRS providers, a
narrower rule that applies only to traffic between rural, rate-of-return LECs and CMRS providers is warranted.
2113 See supra para. 815.
2114 Adoption of bill-and-keep for this subset of traffic will also inform our understanding of the potential impact
that the larger transition to bill-and-keep will have and, although we do not envisions any concerns arising based on
the reforms adopted in this Order, would enable us, if necessary, to make any adjustments as part of that larger
transition. See MetroPCS Comments at 22-23 (arguing that “[m]oving just wireless traffic immediately to bill-and-
keep would provide a worthwhile reference without having a major disruptive effect on the intercarrier
compensation regime” and supporting immediate application of bill-and-keep to LEC-CMRS traffic).
2115 See supra Section XII.A.2.
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compensation between LECs and CMRS providers.2116 Indeed, in Iowa Utilities Board, the EighthCircuit specifically upheld Commission rules regulating LEC-CMRS reciprocal compensation based on
these provisions.2117
1002.
In the North County Order, the Commission found that any decision to reverse course
and regulate intrastate rates under section 20.11 at the federal level was more appropriately addressed in a
general rulemaking proceeding.2118 Now that we are considering the issue in the context of this
rulemaking proceeding, we find it appropriate to take this step for the reasons discussed above, and we
conclude that our decision to establish a federal default pricing methodology for termination of LEC-
CMRS intraMTA traffic as part of our broader effort in this proceeding to reform, modernize, and unify
the intercarrier compensation system is consistent with our authority under the Act.
D.
IntraMTA Rule
1003. In the Local Competition First Report and Order, the Commission stated that callsbetween a LEC and a CMRS provider that originate and terminate within the same Major Trading Area
(MTA) at the time that the call is initiated are subject to reciprocal compensation obligations under
section 251(b)(5), rather than interstate or intrastate access charges.2119 As noted above, this rule, referred
to as the “intraMTA rule,” also governs the scope of traffic between LECs and CMRS providers that is
subject to compensation under section 20.11(b). The USF/ICC Transformation NPRM sought comment,
inter alia, on the proper interpretation of this rule.
1004. The record presents several issues regarding the scope and interpretation of the intraMTA
rule. Because the changes we adopt in this Order maintain, during the transition, distinctions in the
compensation available under the reciprocal compensation regime and compensation owed under the
access regime, parties must continue to rely on the intraMTA rule to define the scope of LEC-CMRS
traffic that falls under the reciprocal compensation regime. We therefore take this opportunity to remove
any ambiguity regarding the interpretation of the intraMTA rule.
1005. We first address a dispute regarding the interpretation of the intraMTA rule. Halo
Wireless (Halo) asserts that it offers “Common Carrier wireless exchange services to ESP and enterprise
customers” in which the customer “connects wirelessly to Halo base stations in each MTA.”2120 It further
2116 See supra para. 779 .
2117 In Iowa Utilities Board v. FCC, the Eighth Circuit found that “[b]ecause Congress expressly amended section
2(b) to preclude state regulation of entry of and rates charged by [CMRS] providers . . . and because section
332(c)(1)(b) gives the FCC the authority to order LECs to interconnect with CMRS carriers, we believe that the
Commission has the authority to issue the rules of special concern to the CMRS providers.” Iowa Utils Bd. v. FCC,
120 F. 3d 753, 800 n.21 (8th Cir. 1997) (vacating the Commission’s pricing rules for lack of jurisdiction except for
“the rules of special concern to CMRS providers” based in part upon the authority granted to the Commission in 47
U.S.C. § 332(c)(1)(B)). See also Qwest v. FCC, 252 F.3d 462, 465-66 (D.C. Cir. 2001) (describing the Eighth
Circuit’s analysis of section 332(c)(1)(B) in Iowa Utils. Bd. v. FCC and concluding that an attempt to relitigate the
issue was barred by the doctrine of issue preclusion). On this basis, the court upheld several rules relating to
reciprocal compensation for LEC-CMRS traffic, including rules governing charges for intrastate traffic. For
example, the court upheld on this basis the adoption of section 51.703(b) of our rules, which prohibits LECs from
assessing charges on any other telecommunications carrier for non-access traffic that originates on the LEC’s
network. 47 C.F.R. § 51.703(b).
2118 North County Order, 24 FCC Rcd at 14039-40, para. 10, 14042, para. 16 (internal quotations omitted).
2119 Local Competition First Report and Order, 11 FCC Rcd at 16014, para. 1036; 47 C.F.R. § 51.701(b)(2). The
definition of an MTA can be found in section 24.202(a) of the Commission’s rules. 47 C.F.R. § 24.202(a).
2120 Halo Aug. 12, 2011 Ex Parte Letter, Attach. at 7; see also Halo Oct. 17, 2011 Ex Parte Letter. Halo is a
nationwide licensee of non-exclusive spectrum in the 3650-3700 MHz band.
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asserts that its “high volume” service is CMRS because “the customer connects to Halo’s base stationusing wireless equipment which is capable of operation while in motion.”2121 Halo argues that, for
purposes of applying the intraMTA rule, “[t]he origination point for Halo traffic is the base station to
which Halo’s customers connect wirelessly.”2122 On the other hand, ERTA claims that Halo’s traffic is
not from its own retail customers but is instead from a number of other LECs, CLECs, and CMRS
providers.2123 NTCA further submitted an analysis of call records for calls received by some of its
member rural LECs from Halo indicating that most of the calls either did not originate on a CMRS line or
were not intraMTA, and that even if CMRS might be used “in the middle,” this does not affect the
categorization of the call for intercarrier compensation purposes.2124 These parties thus assert that by
characterizing access traffic as intraMTA reciprocal compensation traffic, Halo is failing to pay the
requisite compensation to terminating rural LECs for a very large amount of traffic.2125 Responding to
this dispute, CTIA asserts that “it is unclear whether the intraMTA rules would even apply in that
case.”2126
1006.
We clarify that a call is considered to be originated by a CMRS provider for purposes of
the intraMTA rule only if the calling party initiating the call has done so through a CMRS provider.
Where a provider is merely providing a transiting service, it is well established that a transiting carrier is
not considered the originating carrier for purposes of the reciprocal compensation rules.2127 Thus, we
agree with NECA that the “re-origination” of a call over a wireless link in the middle of the call path does
not convert a wireline-originated call into a CMRS-originated call for purposes of reciprocal
compensation and we disagree with Halo’s contrary position.2128
1007. In a further pending dispute, some LECs have argued that if completing a call to a CMRS
provider requires a LEC to route the call to an intermediary carrier outside the LEC’s local calling
area,2129 the call is subject to access charges, not reciprocal compensation, even if the call originates and
2121 Halo Aug. 12, 2011 Ex Parte Letter, Attach. at 8.
2122 Id. Attach. at 9.
2123 ERTA July 8, 2011 Ex Parte Letter, at 3.
2124 NTCA July 18, 2011 Ex Parte Letter at 7.
2125 NTCA July 18, 2011 Ex Parte Letter at 1; ERTA Ex Parte Letter at 1, 3 (traffic from Halo includes “millions of
minutes of intrastate access, interstate access, and CMRS traffic originated by customers of other companies;” one
day study of Halo traffic showed traffic was originated by customers of “176 different domestic and Canadian LECs
and CLECs and 63 different Wireless Companies”).
2126 CTIA August 3 PN Comments at 9.
2127 See Texcom, Inc. d/b/a Answer Indiana v. Bell Atlantic Corp, Order on Reconsideration, 17 FCC Rcd 6275,
6276 para. 4 (2002) (“Answer Indiana’s argument assumes that GTE North receives reciprocal compensation from
the originating carrier, but our reciprocal compensation rules do not provide for such compensation to a transiting
carrier.”); TSR Wireless, LLC v. U.S. West Communications, Inc., Memorandum Opinion and Order, 15 FCC Rcd
11166, 11177 n.70 (2000).
2128 See NECA Sept. 23, 2011 Ex Parte Letter Attach. at 1; Halo Aug. 12, 2011 Ex Parte Letter at 9. We make no
findings regarding whether any particular transiting services would in fact qualify as CMRS. See CTIA August 3
PN Comments at 9 & n.29 (“the information available does not reveal whether [Halo’s] offering is a mobile
service”).
2129 This occurs when the LEC and CMRS provider are “indirectly interconnected,” i.e. when there is a third carrier
to which they both have direct connections, and which is then used as a conduit for the exchange of traffic between
them.
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terminates within the same MTA.2130 One commenter in this proceeding asks us to affirm that such trafficis subject to reciprocal compensation.2131 We therefore clarify that the intraMTA rule means that all
traffic exchanged between a LEC and a CMRS provider that originates and terminates within the same
MTA, as determined at the time the call is initiated, is subject to reciprocal compensation regardless of
whether or not the call is, prior to termination, routed to a point located outside that MTA or outside the
local calling area of the LEC.2132 Similarly, intraMTA traffic is subject to reciprocal compensation
regardless of whether the two end carriers are directly connected or exchange traffic indirectly via a
transit carrier. 2133
1008. Further, in response to the USF/ICC Transformation NPRM, T-Mobile proposed that we
expand the scope of the intraMTA rule to reflect the fact that CMRS licenses are now issued for REAGs,
geographic areas that are larger than MTAs.2134 T-Mobile notes that the intraMTA rule was promulgated
2130 See, e.g., Letter from Sylvia Lesse, Counsel to the Missouri Companies, to William F. Caton, Acting Secretary,
Federal Communications Commission, WT Docket No. 01-316 and CC Docket No. 01-92, Attach. (filed Mar. 22,
2002) (Missouri Companies Mar. 22 Ex Parte Letter); Letter from W.R. England, III, Counsel for Citizen Telephone
Company of Missouri, et al, to Marlene H. Dortch, Secretary, FCC, CC Docket Nos. 01-92, 96-45, and 95-116 (filed
Oct. 31, 2003) (Citizen Oct. 31, 2003 Ex Parte Letter). See also Letter from Glenn H. Brown, Counsel to Great
Plains Communications, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 01-92, Attach. at 8 (filed Sept. 23,
2003) (stating that the local exchange is the incumbent LEC’s local service area rather than the MTA). We also
sought comment on this issue in 2005 but have not since taken action to address it. See Intercarrier Compensation
FNPRM, 20 FCC Rcd at 4745-46 paras. 137-38.
2131 T-Mobile August 3 PN Comments at 11.
2132 In a letter filed on Oct. 21, 2011, Vantage Point Solutions alleged “difficulties associated with the
implementation of intraMTA local calling” between LECs and CMRS providers, and, while not advocating repeal of
the rule, urged the Commission to “proceed with substantial caution” when “handling the rating and routing of
intraMTA calls” that involve an interexchange carrier. Letter from Larry D. Thompson, Vantage Point Solutions, to
Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109, GN Docket No. 09-51, CC
Docket Nos. 01-92, 96-45, at 1-2 (filed Oct. 21, 2011) (Vantage Point Oct. 21, 2011 Ex Parte Letter). We find that
the potential implementation issues raised by Vantage Point do not warrant a different construction of the intraMTA
rule than what we adopt above. Although Vantage Point questions whether the intraMTA rule is feasible when a
call is routed through interexchange carriers, many incumbent LECs have already, pursuant to state commission and
appellate court decisions, extended reciprocal compensation arrangements with CMRS providers to intraMTA traffic
without regard to whether a call is routed through interexchange carriers. See, e.g., Alma Communications Co. v.
Missouri Public Service Comm’n, 490 F.3d 619, 623-34 (8th Cir. 2007) (noting and affirming arbitration decision
requiring incumbent LEC to compensate CMRS provider for costs incurred in transporting and terminating land-line
to cell-phone calls placed to cell phones within the same MTA, even if those calls were routed through a long-
distance carrier); Atlas Telephone Co. v. Oklahoma Corp. Comm’n, 400 F.3d 1256 (10th Cir. 2005). Further, while
Vantage Point asserts that it is not currently possible to determine if a call is interMTA or intraMTA, Vantage Point
Oct. 21, 2011 Ex Parte Letter at 2-3, the Commission addressed this concern when it adopted the rule. See Local
Competition First Report and Order, 11 FCC Rcd at 16017, para. 1044 (stating that parties may calculate overall
compensation amounts by extrapolating from traffic studies and samples).
2133 See Sprint Nextel Section XV Comments at 22-23 (arguing that the Commission should reaffirm that all
intraMTA traffic to or from a CMRS provider is subject to reciprocal compensation). This clarification is consistent
with how the intraMTA rule has been interpreted by the federal appellate courts. See Alma Communications Co. v.
Missouri Public Service Comm’n, 490 F.3d 619 (8th Cir. 2007); Iowa Network Services, Inc. v. Qwest Corp., 466
F.3d 1091 (8th Cir. 2006); Atlas Telephone Co. v. Oklahoma Corp. Commission, 400 F.3d 1256 (10th Cir. 2005).
2134 See T-Mobile August 3 PN Comments at 11-14. T-Mobile’s proposal is also supported by MetroPCS. See
MetroPCS August 3 PN Reply at 6-7.
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at a time the MTA was the largest CMRS license area.2135 T-Mobile argues that the REAG is currentlythe largest license being used to provide CMRS and that this change would move more
telecommunications traffic under the reciprocal compensation umbrella pending the unification of all
intercarrier compensation rates.2136 We decline to adopt T-Mobile’s proposal. Given the long experience
of the industry dealing with the current rule, the very broad scope of the changes to the intercarrier
compensation rules being made in this Order that will, after the transition period, make the rule irrelevant,
and the limited support in the record for the suggested change even from CMRS commenters, we do not
believe it is either necessary or appropriate to expand the scope of this rule as proposed by T-Mobile.
XVI.
INTERCONNECTION
1009. Interconnection among communications networks is critical given the role of networkeffects.2137 Historically, interconnection among voice communications networks has enabled competition
and the associated consumer benefits that brings through innovation and reduced prices.2138 The voice
communications marketplace is currently transitioning from traditional circuit-switched telephone service
to the use of IP services, and commenters observe that many carriers “apparently are equipped to receive
IP voice traffic but are taking the position they will not use this equipment for years (until a prohibition
on current per-minute charges takes effect).”2139 These parties thus propose that in the immediate future
the Commission “should (a) encourage all TDM network operators to investigate the steps they need to
take to support IP-IP interconnection, and (b) put all TDM network operators on notice that they will be
likely required to support IP-IP interconnection before any phase down of current ICC rates is
complete.”2140
1010. We anticipate that the reforms we adopt herein will further promote the deployment and
use of IP networks. However, IP interconnection between providers also is critical. As such, we agree
with commenters that, as the industry transitions to all IP networks, carriers should begin planning for the
transition to IP-to-IP interconnection, and that such a transition will likely be appropriate before the
completion of the intercarrier compensation phase down. We seek comment in the accompanying
FNPRM regarding specific elements of the policy framework for IP-to-IP interconnection. We make
clear, however, that our decision to address certain issues related to IP-to-IP interconnection in the
FNPRM should not be misinterpreted to suggest any deviation from the Commission’s longstanding view
2135 See T-Mobile August 3 PN Comments at 12.
2136 Id. at 13.
2137 See, e.g., Applications of AT&T Wireless Services, Inc. and Cingular Wireless Corporation For Consent to
Transfer Control of Licenses and Authorizations, WT Docket Nos. 04-70, 04-254, 04-323, Memorandum Opinion
and Order, 19 FCC Rcd 21522, 21578, para. 143 (2004) (citing Carl Shapiro and Hal Varian, Information Rules,
Harvard Business School Press, Boston, 1999, at 13).
2138 See, e.g., Interconnection Clarification Order, 26 FCC Rcd at 8265-66, paras. 12-13; Local Competition First
Report and Order, 11 FCC Rcd at 15506, para. 4; Expanded Interconnection with Local Telephone Company
Facilities, CC Docket No. 91-141, Third Report and Order, Transport Phase II, 9 FCC Rcd 2718, 2724, para. 25
(1994).
2139 Sprint Nextel USF/ICC Transformation NPRM Comments at 28. See also, e.g., Letter from Howard J. Symons,
counsel for Cablevision, to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 10-90, 07-135, 05-337, 03-109,
CC Docket No. 01-92, 96-45, GN Docket No. 09-51, Attach. at 1-4 (filed Oct. 20, 2011); Letter from Thomas Jones,
counsel for Cbeyond et al., to Marlene H. Dortch, Secretary, FCC, WC Docket Nos. 11-119, 10-90, 07-135, 05-337,
03-109, CC Docket No. 01-92, 96-45, GN Docket No. 09-51, Attach. A at 5 (filed Oct. 3, 2011).
2140 Sprint Nextel USF/ICC Transformation NPRM Comments at 28.
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regarding the essential importance of interconnection of voice networks.21411011. In particular, even while our FNPRM is pending, we expect all carriers to negotiate in
good faith in response to requests for IP-to-IP interconnection for the exchange of voice traffic. The duty
to negotiate in good faith has been a longstanding element of interconnection requirements under the
Communications Act and does not depend upon the network technology underlying the interconnection,
whether TDM, IP, or otherwise. Moreover, we expect such good faith negotiations to result in
interconnection arrangements between IP networks for the purpose of exchanging voice traffic. As we
evaluate specific elements of the appropriate interconnection policy framework for voice IP-to-IP
interconnection in our FNPRM, we will be monitoring marketplace developments, which will inform the
Commission’s actions in response to the FNPRM.2142
XVII. FURTHER NOTICE OF PROPOSED RULEMAKING
A.
Broadband Public Interest Obligations
1012. In this section, we seek further comment on the public interest obligations of fundingrecipients.
1.
Measuring Broadband Service
1013. In the Order, we adopt a rule requiring that actual speed and latency be measured on eachETC’s access network from the end-user interface to the nearest Internet access point, and we require that
ETCs certify to and report the results to USAC on an annual basis. Here, we seek comment on whether
the Commission should adopt a specific measurement methodology beyond what is described in the
Order and the format in which ETCs should report their results.
1014. The Measuring Broadband America Report concludes that “a standardized set of
broadband measurements can be implemented across a range of ISPs and scaled to support detailed
regional assessments of broadband deployment and performance.”2143 We note that commercial hardware
and software as well as some free, non-commercial options are available. Should we adopt a uniform
methodology for measuring broadband performance? If so, should that methodology be uniform across
different technologies? We note that the Commission has requested more information on measurement
approaches for mobile broadband and seeks to incorporate that proceeding’s record with ours.2144 How
should wireless providers measure speed? Should we require fixed funding recipients to install
SamKnows-type white boxes at consumer locations in order to monitor actual performance in a
standardized way?
1015. Should we specify a uniform reporting format? Should test results be recorded in a
format that can be produced to USAC and auditable such that USAC or the state commissions may
confirm that a provider is, in fact, providing broadband at the required minimum speeds?
2141 See, e.g., Interconnection Clarification Order, 26 FCC Rcd at 8265-66, paras. 12-13; CLEC Access Charge
Order, 16 FCC Rcd at 9960, para. 92; Local Competition First Report and Order, 11 FCC Rcd at 15506, para. 4;
Expanded Interconnection with Local Telephone Company Facilities, CC Docket No. 91-141, Third Report and
Order, Transport Phase II, 9 FCC Rcd 2718, 2724, para. 25 (1994); MTS & WATS Market Structure, Report and
Third Supplemental Notice of Inquiry and Proposed Rulemaking, 81 FCC 2d 177 (1980); Lincoln Tel. & Tel. Co.,
Declaratory Order, 72 FCC 2d 724 (1979). See also infra Section XVII.P.1.
2142 See infra Section XVII.P.
2143 Measuring Broadband America Report at 28.
2144 Comment Sought on Measurement of Mobile Broadband Network Performance and Coverage, CG Docket No.
09-158, CC Docket No. 98-170, WC Docket No. 04-36, Public Notice, 25 FCC Rcd 7069 (2010).
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1016. Should providers be required to provide the underlying raw measurement data to USAC?Are there legitimate concerns with confidentiality if such data are made public? Is it sufficient to have a
provider certify to USAC that its network is satisfying the minimum broadband metrics and retain the
results of its own performance measurement to be produced on request in the course of possible future
audits?
1017. Should we consider easing the performance measuring obligations on smaller broadband
providers? If so, what would be the appropriate threshold for size of provider before granting relief for
measuring broadband? If we ease performance measuring obligations on smaller broadband providers,
how can we ensure that their customers are receiving reasonably comparable service?
2.
Reasonably Comparable Voice and Broadband Services
1018. In the Order, we direct the Wireline Competition Bureau and WirelessTelecommunications Bureau (the Bureaus) to develop and conduct a survey of voice and broadband rates
in order to compare urban and rural voice and broadband rates. Here, we seek comment on the
components of the survey.
1019. With respect to determining reasonable comparability of voice service rates for universal
service purposes, should we separately collect data on fixed and mobile voice telephony rates? Should
fixed and mobile voice services have different benchmarks for purposes of reasonable comparability?
1020. In the landline context, we have previously surveyed the basic R-1 voice rate. What
would the equivalent basic offering be in the mobile context? How should we take into account packages
that offer varying numbers of minutes of usage and/or additional features such as texting?
1021. With respect to determining reasonable comparability of broadband services, should we
separately collect data on fixed and mobile broadband pricing and capacity requirements (if any)? For
purposes of that analysis, how should we consider, if at all, data cards provided by mobile providers?
1022. In the Order, we conclude that services meeting our public interest standard should be
reasonably comparable to comparable offerings in urban areas in terms of pricing, speed, and usage limits
(if any).2145 For fixed broadband offerings subject to our initial CAF requirements of 4 Mbps
downstream/1 Mbps upstream, should we survey advertised rates for such service, or the closest available
offering in urban areas? How should we take into account promotional pricing that may require a specific
contractual commitment for a period of time?
1023. Should fixed and mobile broadband services have different or the same benchmarks for
purposes of reasonable comparability?
1024. We also seek comment on how to compare mobile broadband to fixed broadband as
product offerings evolve over time.
1025. In the Order, we also determine that rural rates for broadband service would be
“reasonably comparable” to urban rates under section 254(b)(3) if rural rates fall within a reasonable
range of the national average urban rate for broadband service. Here, we seek comment on how
specifically to define that reasonable range for broadband.
1026. We note that in the voice context, today we require states to certify that basic R-1 voice
rates for non-rural carriers are no more than two standard deviations above the national average R-1
2145 As explained in the Order, by limiting reasonable comparability to “comparable services,” we intend to ensure
that fixed broadband services in rural areas are compared with fixed broadband services in urban areas, and similarly
that mobile broadband services in rural areas are compared with mobile broadband services in urban areas.
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rate.2146 Would using two standard deviations be the appropriate measure for reasonable comparability inthe broadband context, or should we adopt a different methodology for establishing such a reasonable
range? Do unregulated broadband prices show relatively small variations, making another methodology
more appropriate? For example, would prices normalized to disposable income be appropriate?
1027. Should we adopt a presumption that if a given provider is offering the same rates, terms
and conditions (including capacity limits, in any) to both urban and rural customers, that is sufficient to
meet the statutory requirement that services be reasonably comparable?
3.
Additional Requirements
1028.Some commenters have proposed to require CAF recipients to comply with certain
interconnection requirements.2147 We seek comment on whether the Commission should require CAF
recipients to offer IP-to-IP interconnection for voice service, beyond whatever framework it adopts more
broadly.2148 If so, what would the scope and nature of any such requirement be? Should any obligations
be based on the requirements of section 251(a)(1), since, as ETCs, the providers subject to these
requirements will be telecommunications carriers? How would any such obligations be enforced?
1029.
We also seek additional comment on the proposal of Public Knowledge and the Benton
Foundation that CAF recipients be required to make interconnection points and backhaul capacity
available so that unserved high-cost communities could deploy their own broadband networks.2149 How
would such a requirement operate? Is it sufficient to require CAF recipients to negotiate in good faith
with community broadband networks to determine a point of interconnection? If there are disputes, who
should resolve them? Should there be reporting requirements associated with such an obligation (i.e.,
should CAF recipients be required to report annually on unfulfilled requests for interconnection from
community broadband networks)? What benefits might such a requirement bring that the Commission’s
other universal service policies are not meeting? What would the costs of such a requirement be, on
funding recipients and on administration of the requirement?
1030.
We also seek comment on the proposal of Public Knowledge and the Benton Foundation
that the Commission should create a fund for a Technology Opportunities Program in order to assist
communities with deploying their own broadband networks. How much money should the Commission
set aside for such a program? Are there any legal impediments to the Commission running such a pilot
program out of the Universal Service Fund? We acknowledge the important role that WISPs, non-profits,
and other small and non-traditional communications providers play in extending broadband in rural
America, including in areas where traditional commercial providers have not deployed. Are there other
things the Commission should be doing to enable such entities to further extend broadband coverage,
particularly in currently unserved areas?
2146 The standard deviation is a measure of dispersion. The sample standard deviation is the square root of the
sample variance. The sample variance is calculated as the sum of the squared deviations of the individual
observations in the sample of data from the sample average divided by the total number of observations in the
sample minus one. In a normal distribution, about 68 percent of the observations lie within one standard deviation
above and below the average and about 95 percent of the observations lie within two standard deviations above and
below the average.
2147 Public Knowledge and Benton USF/ICC Transformation NPRM Comments at 5-7; Hypercube August 3 PN
Comments at 12-13.
2148 See infra section XVII.P (IP-to-IP interconnection issues).
2149 Public Knowledge and Benton USF/ICC Transformation NPRM Comments at 5-7; Letter from John Bergmayer,
Public Knowledge, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et al. (filed July 28, 2001); Public
Knowledge and Benton August 3 PN Comments at 6-10.
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B.
Connect America Fund for Rate-of-Return Carriers
1031.In the Order, we establish the CAF and begin the transition of legacy high-cost universal
service support to a broadband-focused CAF.2150 We conclude that all universal high-cost support should
ultimately be distributed through CAF for all recipients. Starting in 2012, rate-of-return carriers will
receive CAF ICC support. In the near term, such carriers will receive the remainder of their universal
service support through existing high-cost support mechanisms, as reformed in the Order.
1032.
In response to the USF/ICC Transformation NPRM, the Rural Associations proposed the
creation of a new broadband-focused CAF mechanism that ultimately would entirely replace existing
support mechanisms for rate-of-return carriers. We sought comment in the August 3rd Public Notice on
this proposal, but received limited response.2151 Subsequently, the Rural Associations provided draft rules
that provide additional context regarding the operation of their proposed CAF.2152 We now seek focused
comment on this proposal and ask whether and how it could be modified consistent with the framework
adopted in the Order to provide a path forward for rate-of-return or carriers to invest in extending
broadband to unserved areas. We set forth in Appendix G draft rules, modified to take into account the
rule changes adopted in this Order, and seek comment on those draft rules.
1033.
Under the Rural Association Plan, loop costs would be allocated to the interstate
jurisdiction based on the current 25 percent allocator or the individual carrier’s broadband adoption rate,
whichever is greater. This would have the practical effect of reducing over time the size of legacy
support mechanisms, like HCLS, that offset some intrastate costs. The new interstate revenue
requirement would also include certain key broadband-related costs (i.e., middle mile facilities and
Internet backbone access). In conjunction with this proposal, the Rural Associations also propose that
their authorized rate-of-return be reduced from 11.25 percent to 10 percent. CAF support would be
provided under this new mechanism for any provider’s broadband costs that exceeded a specified
benchmark representing wholesale broadband costs in urban areas. In particular, under this proposal CAF
funding would be computed by subtracting the product of an urban broadband transmission cost
benchmark times the number of broadband lines in service, from the actual company broadband network
costs (which would be the sum of last mile, second mile, middle mile, and Internet connection costs). The
broadband transmission benchmark would have a fixed component that would increase from $19.25 in the
first year to $24.75 in the eighth year, and a variable component that is tied to an individual company’s
broadband take rate. In addition, there would be certain provisions to mitigate the impact on companies
that would receive reduced support under the modified mechanism. The purpose of the transitional
stability mechanism would be to ensure that no study area would experience a reduction in total support
of more than five percent, on an annual basis, which would be funded by carriers that receive a net
increase in support.2153
1034.
The Rural Associations explain that their plan is calibrated to aim for a budget target of
$2.05 billion in combined funding for USF and their suggested access restructure mechanism in the first
year of implementation, and may grow to $2.3 billion by the sixth year. In the Order, we adopt an overall
budget target for rate-of-return companies of $2 billion over the next six years. Given that, how could we
best accommodate the Rural Association Plan within the budgetary framework adopted today? If savings
are realized in other components of the CAF—for example, if competitive bidding leads to less support
2150 See supra Section VII.
2151 August 3 Public Notice, 26 FCC Rcd at 11112-11113.
2152 Letter from Michael R. Romano, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et al.
(filed Oct. 5, 2011).
2153 Rural Associations USF/ICC Transformation NPRM Comments at 27-36.
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being disbursed through the CAF for price cap areas than has been budgeted for—should those savings beused to increase funding for rate-of-return carriers under the Rural Association Plan? Could we more
quickly transition existing support mechanisms to the framework proposed by the Rural Associations in
order to stay within the overall budget? We seek year-by-year financial projections of any new
mechanisms and the related impact on legacy support mechanisms, as well as the associated data and
assumptions supporting those projections.
1035.
With respect to plan specifics, we seek comment on the benefits and the costs of
providing support for “middle mile” facilities and access to the Internet backbone under the Rural
Associations’ proposal. On average for smaller carriers, approximately what proportion of the costs to
deploy broadband networks and provide broadband services are attributable to middle mile and Internet
backbone costs today? Commenters are encouraged to provide factual information to support any
projections they submit into the record. Consistent with the overall framework adopted in the Order to
impose reasonable limits on recovery of loop expenses, how could we impose a constraint on the recovery
of middle mile costs under this proposal?2154
1036.
The Rural Associations propose that costs be shifted to the interstate jurisdiction based
on an individual carrier’s “Broadband Take Rate,” which equals its total broadband lines divided by its
total working access lines. Should this calculation be limited to residential lines? The Associations
define “Broadband Line” to include any line that supports voice and broadband, or only broadband, at a
minimum speed of 256 Kbps downstream. We seek comment on that proposal, and ask whether
broadband lines should be defined consistent with the broadband characteristics required in our public
interest obligations. What would be the impact of a more stringent definition of a broadband line in this
context? If we were to adopt this proposal but shift costs to the interstate jurisdiction only for loops that
provide speeds of at least 4 Mbps downstream and 1 Mbps upstream, how would that affect the financial
projections regarding this proposal? Are there any legal, policy or practical implications to providing
CAF support for lines where the end user customer does not subscribe to voice service from the ETC?2155
The Rural Associations Plan contemplates that rate-of-return carriers may offer standalone broadband; to
the extent they do so, absent any other rule changes, what would be the impact on USF support for rate-
of-return carriers? What rule changes would help provide appropriate incentives for investment in
broadband-capable networks, while limiting unrestrained growth in support provided to rate-of-return
companies?
1037.
How does the Rural Associations’ proposal to alter the current 25 percent allocation of
loop costs fit within, or inform, the Federal-State Joint Board on Jurisdictional Separations’ ongoing work
to reform the separations process?2156 Are there components of the Rural Association plan that should be
referred to the Separations Joint Board and examined directly in that ongoing process?
2154 See supra Section VII.D.3 and infra Section XVII.E.
2155 Today, incumbent local exchange carriers are required to allocate amounts recorded in their Part 32 accounts
between regulated and nonregulated activities. 47 C.F.R. § 64.901. The costs and revenues allocated to
nonregulated activities are excluded from the jurisdictional separations process. However, rate-of-return companies
offer broadband transmission as a Title II common carrier service through a NECA tariff. The cost of loops that
provide both voice and broadband is included in cost studies that determine whether and how much HCLS and ICLS
a rate-of-return company receives.
2156 Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Notice of
Proposed Rulemaking, 24 FCC Rcd 4227, 4229 (2009). Pursuant to section 36.154(a), 25 percent of the cost of
cable and wire facilities used to provide voice telephony is deemed interstate, and 75 percent is deemed intrastate.
Wholesale broadband transmission is considered a special access service, however, which is classified as 100
percent interstate.
(continued…)
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1038.In the Order, we adopt a requirement that rate-of-return carriers offer speeds of 4 Mbps
downstream and 1 Mbps upstream upon reasonable request. Should we adopt a rule that rate-of-return
carriers are not required to serve any location within their study area that is served by an unsubsidized
competitor and will not receive support for those lines to the extent they choose to extend service to areas
of competitive overlap? How would we implement the Rural Associations’ proposal in conjunction with
such a rule? In particular, what would be the methodology for removing the broadband costs associated
with areas of competitive overlap from the calculation of the proposed CAF support?
1039.
Is a broadband urban wholesale benchmark the right approach to determine support
under a new rate-of-return mechanism, or would another approach be more in keeping with the statute
and our prior precedent? How does comparing wholesale urban costs relate to our obligation to ensure
that rural retail rates are reasonable? Should such a benchmark be based on the wholesale cost of
providing broadband, or another metric? Can wholesale broadband costs be calculated reliably,
particularly where wholesale broadband services are not typically offered in urban areas? As an
alternative, should the relevant benchmark be set based on the price of comparable retail services in a
sample of urban areas?
1040.
The Rural Associations’ benchmark proposal contemplates a fixed and variable
component of the rural benchmark. How should the Commission establish the levels for those
components, and should there be a company-specific component of the benchmark? If the benchmark is
tied in any manner to NECA tariff rates or another industry metric, does that proposal bear any risks of
gamesmanship by carriers to raise or lower individual rates to maximize universal service receipts?
1041.
What information would we need to require from carriers in order to evaluate and
implement that Rural Association proposal? Prior to implementation, should we, for instance, require
carriers to submit analyses showing their broadband adoption trends for service at varying speeds for the
last five years in order for us to develop reasonable projections regarding broadband penetration in the
future? What information should we obtain regarding their middle mile costs in order to better
understand the implications of the proposal to include middle mile costs in support calculations?
1042.
How would the proposed “transitional stability plan” mechanism operate? What would
be the distributional impact of this proposal in terms of the number of companies that would see increases
in support, compared to the number of companies that would see decreases in support?
1043.
The Rural Associations propose that incremental broadband build-out commitments
would be tied to an individual company’s ability to receive incremental CAF support for new investment,
subject to prospective capital investment constraints and the budget target adopted by the Commission. If
the Commission were to adopt such an approach, what specific metrics or build-out milestones should be
established, and what reporting and certifications should be imposed to improve the Commission’s ability
to enforce such commitments? How should CAF associated with intercarrier compensation reform be
incorporated into any rate-of-return CAF mechanism? Would the public interest obligations for CAF
associated with intercarrier compensation reform be updated to reflect any new obligations? We seek
comment more broadly on how our universal service policies can best accelerate broadband deployment
to consumers served by rate-of-return carriers, many of whom reside in rural America. In the long term,
should universal service support for rate-of-return carriers be distributed through separate mechanisms
from the mechanisms used to distribute support for other types of carriers, or is a uniform national
approach preferable to achieve our universal service objectives? We seek comment on any other
proposals to transition areas served by rate-of-return carriers to CAF, or any other analysis or
recommendations that could facilitate this process.
(Continued from previous page)
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C.
Interstate Rate of Return Represcription
1044. As explained in the Order, rate-of-return carriers will continue to receive for some time amodified version of their legacy universal service support. The level of support they receive depends, in
part, on the interstate rate of return allowed for plant in service. As a result, we concluded it was
necessary to evaluate the authorized interstate rate of return for rate-of-return carriers, which has not been
updated in over 20 years.2157 Three major associations representing rate-of-return carriers, as well as the
State Members of the Federal-State Joint Board on Universal Service, have proposed a reduction in the
current rate of return, which is currently set at 11.25 percent, in the context of overall reform.2158 We
agree that it is appropriate at this time to reexamine the rate of return as part of comprehensive reform of
the universal service fund. We seek comment more generally on how this prescription fits within the
broader reform framework for rate-of-return carriers, and specifically in what manner this prescription
process should be linked to other proposals in this FNPRM, including the separate CAF support
mechanism for rate-of-return carriers.2159
1045.
With respect to the prescription process itself, our statutory authority under section 205
provides “the power to determine and prescribe those elements that make up the charge,” including the
interstate rate of return.2160 The rate of return must be high enough to provide confidence in the “financial
integrity” of the carrier, so that it can maintain its credit and attract capital.2161 The return should also be
“commensurate with returns on investments in other enterprises having corresponding risks.”2162 On the
other hand, “[t]he return should not be higher than necessary for this purpose.”2163
1046.
The Commission last prescribed the authorized interstate rate of return in 1990, reducing
it from 12 percent to 11.25 percent.2164 We believe fundamental changes in the cost of debt and equity
since 1990 no longer allow us to conclude that a rate of return of 11.25 percent is necessarily “just and
reasonable” as required by section 201(b).2165 The rate-of-return carrier associations propose a reduction
in the interstate rate of return from the current 11.25 percent to 10 percent.2166 The State Members of the
Federal-State Joint Board propose that the rate be reduced further to 8.5 percent.2167 The State Members
highlight that the interest rate on a three month Treasury Bill has fallen from 7.83 percent in 1990 to 0.15
2157 This prescription will be limited to interstate common line and special access services as the rules adopted in the
Order remove switched access services from rate-of-return regulation. See supra Section XIII.E.3.
2158 ABC Plan Joint Letter Attachs. 1, 2; State Members USF/ICC Transformation NPRM Comments at 36-37.
2159 See supra Section XVII.B.
2160 Nader v. FCC, 520 F.2d 182, 204 (D.C. Cir. 1975).
2161 U.S. v. FCC, 707 F.2d 610, 612 (D.C. Cir. 1983) (quoting Federal Power Comm’n v. Hope Natural Gas Co.,
320 U.S. 591, 603 (1944)).
2162 Illinois Bell Tel. Co. v. FCC, 988 F.2d 1254, 1260 (D.C. Cir. 1993) (quoting Hope Natural Gas Co., 320 U.S. at
603).
2163 U.S. v. FCC, 707 F.2d at 612 (citing Permian Basin Area Rate Cases, 390 U.S. 747, 791-92 (1968)).
2164 1990 Prescription Order, 5 FCC Rcd at 7532.
2165 “All charges, practices, classifications, and regulations for an in connection with such communication service,
shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable
is hereby declared to be unlawful . . . .” 47 U.S.C. § 201(b).
2166 Letter from Walter B. McCormick, Jr., US Telecom, to Chairman Genachowski, Commissioner Copps,
Commissioner McDowell, and Commission Clyburn, WC Docket No. 10-90, at 2 (filed Jul. 29, 2011).
2167 State Members USF/ICC Transformation NPRM Comments at 36-37.
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percent in January 2011.2168 Further, we observe that the average 10-year treasury constant maturity ratehas declined from approximately 8.1 percent in January 1991 to approximately 2 percent in September
2011.2169
1047. We find compelling evidence that our presently applied interstate rate-of-return, 11.25
percent, is no longer reflective of the cost of capital. We believe updating the rate of return is necessary
for rate-of-return carriers to both attract capital on reasonable terms in today’s markets and encourage
economically sound network investments. We welcome input from state regulators that may have
insights from conducting intrastate rate of return represcriptions in recent years. We also invite comment
on how the Commission can ensure that the rate of return over time remains consistent with changes in
the financial markets and cost of capital. We seek comment on means by which the rate of return can be
adjusted automatically based on some set of financial triggers, and how any such triggers would operate.
1048. When it last initiated an interstate rate of return prescription proceeding in 1998, the
Commission sought comment on the methods by which it could calculate incumbent LECs’ costs of
capital.2170 Today, we seek comment on the issues raised in the 1998 Prescription Notice generally and
ask parties to provide the data responsive to the previous requests. In particular, we seek comment on the
following:
1049. WACC. Weighted average cost of capital (WACC) identifies the rate of return required
to maintain the current value of a firm; alternatively, it is the minimum rate of return the firm needs to
offer to investors to maintain access to its current supply of capital. WACC is the key component for
prescribing the rate of return. We seek comment on how to calculate the WACC for the relevant
companies. We ask whether the formula to determine the WACC in sections 65.301-305 of the
Commission’s rules is the proper framework for this represcription, and whether any modification or
update to the formula or inputs is warranted or necessary.2171 Specifically, the Commission’s rules
provide that WACC is the sum of the cost of debt, the cost of preferred stock, and the cost of equity, each
weighted by its proportion in the capital structure.2172 Does this remain the correct approach? Should the
Commission augment, or replace, its WACC calculation with any other analysis or approaches? Looking
to the WACC calculated for an entire company, rather than for a specific line of business, is appropriate,
for example, when thinking about setting an allowed rate-of-return for an entire company. In contrast,
this overall WACC would not in general inform a business as to whether to undertake a specific project.
Typically, specific projects that have greater risk and therefore a greater cost of capital than the entire
company are only undertaken when much higher rates of return are expected. Given that many rate-of-
return companies have diversified beyond regulated voice services, for example to offer broadband,
video, or wireless services, should the WACC be computed for only the regulated portion of the
company’s business, or at the level of the entire company? We seek comment on this analysis, and how,
if at all, it should impact our rate-of-return calculation, and use of WACC for these purposes.
1050. Data. We seek comment on the appropriate data and methodologies the Commission
should use to calculate the WACC. We note that some of the formulas in the rules rely on ARMIS data,
2168 See id. at n.79.
2169 See 10-Year Treasury Constant Maturity Rate (GS10), Federal Reserve Bank of St. Louis, available at
http://research.stlouisfed.org/fred2/series/GS10 (last visited Oct. 21, 2011).
2170 See 1998 Prescription Notice, 13 FCC Rcd at 20563.
2171 47 C.F.R. §§ 65.301-.305.
2172 47 C.F.R. § 65.305.
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which are no longer collected.2173 In the absence of ARMIS data, what additional data should theCommission require and rely upon, and who should be required to file the data? Are there other publicly
available data that could provide the necessary information? Does the absence of any particular data
necessitate a different approach to any of the necessary calculations?
1051. Capital Structure. Under the Commission’s WACC calculation, the estimated cost of
debt, preferred stock, and equity of a company are all weighted relative to their proportion in the firm’s
capital structure. A firm’s capital structure can be measured on a “book” basis or “market” basis. We
seek comment on whether the formula in section 65.304 of the Commission’s rules based on book values
remains the correct approach, and whether any modification to the formula or inputs is warranted or
necessary.2174 Are there other components of the cost of capital that should be included in the capital
structure, and should any of the elements listed in the rules be excluded?
1052. Surrogates. Because the vast majority of rate-of-return carriers are not publicly traded,
the Commission must select an appropriate set of surrogate firms, for which financial data is available
publicly, to use as a basis for the cost of capital analysis. To do so, the Commission must select a group
of companies for which there is available financial data and that face similar risks to rate-of-return
carriers. The Commission’s rules provide that the proper group of surrogates is all local exchange
carriers with annual revenues equal to or above the indexed revenue threshold, which is $146 million this
year.2175 In the 1998 Prescription Notice the Commission sought comment on what group of companies
should be selected as surrogates and tentatively concluded at that time that the Regional Bell Operating
Companies’ (RBOCs) risk most closely resembled the risk encountered by the rate-of-return carriers.2176
We seek comment on whether that group should be used as surrogates here, or whether another group of
providers, for example smaller publicly traded carriers, not including the RBOCs, would better serve this
purpose. Should the surrogate group include publicly traded rate-of-return companies only, or a mixture
of publicly traded rate-of-return companies and smaller price-cap companies? Commenters proposing a
particular surrogate group should clearly define that group, identify the publicly available financial data
for that group, and explain how that group best reflects the business risks and cost of capital of rate-of-
return carriers.
1053. Cost of Debt. A firm’s cost of debt can be estimated by dividing its total annual interest
expense by its average outstanding debt measured on a historic “book” basis, or alternatively, on a
“market” basis using the current yield to maturity. We seek comment on the cost of debt formula in
section 65.302 of the Commission’s rules based on book values.2177 We have previously noted that the
“book” basis is more objectively ascertainable, but may not fully reflect current investor expectations.
We seek comment on that assessment, and the relative weight either the “book” or “market” approach
should be given in our calculations. The Commission’s rules provide that this measurement should occur
for the most recent two years.2178 Is this the correct time period, or is a longer or shorter period
warranted?
2173 See, e.g., Petition of Qwest Corporation for Forbearance from Enforcement of the Commission’s ARMIS and
492A Reporting Requirements Pursuant to 47 U.S.C. § 160(c), WC Docket No. 07-204, Memorandum Opinion and
Order, 23 FCC Rcd 18483 (2008).
2174 47 C.F.R. § 65.304.
2175 47 C.F.R. § 65.300.
2176 1998 Prescription Notice, 13 FCC Rcd at 20570-71, paras. 19-20.
2177 47 C.F.R. § 65.302.
2178 47 C.F.R. § 65.302.
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1054. Cost of Preferred Stock. A firm’s cost of preferred stock can be calculated by dividing thetotal annual preferred dividends by the total proceeds from the issuance of preferred stock. We ask
whether the formula in section 65.303 of the Commission’s rules remains the correct one, and whether
any modification to the formula or inputs is warranted or necessary. The Commission’s rules provide that
this measurement should occur for the most recent two years.2179 Is this the correct time period, or is a
longer or shorter period warranted?2180 Can the WACC calculation be simplified by ignoring the cost of
preferred stock (and the amount of preferred stock in the capital structure) without significantly affecting
the accuracy of the WACC?
1055. Cost of Equity. A firm’s cost of equity can be estimated using a number of different
approaches. The Commission’s rules do not provide a specific formula for determining the cost of equity.
In 1990, the Commission relied heavily on the discounted cash flow (DCF) methodology, which assesses
a firm's stock price and dividend rate and forecasted growth rates to determine the cost of equity.2181
There are a number of different variations of DCF, including historic and classic calculations.2182
Alternatively, a firm’s cost of equity can be calculated using the capital asset pricing model (CAPM).2183
To use the CAPM, estimates of the risk free rate, the market risk premium, and the correlation of
surrogate companies' common stock returns with the returns of the entire market of securities (or "betas")
must be made. We seek comment on these approaches, and ask whether any other methodologies should
be incorporated into our analysis. For instance, should we rely upon any cost of equity calculations made
in state proceedings addressing intrastate rate of return, or other benchmarks based on the stock market as
a whole, or a subset of companies or industries? Proponents of any particular methodology should detail
their preferred approach and the relevant data required to perform the necessary calculations.
Commenters should also justify the relative weight any particular methodology or comparison should
have in our ultimate calculation. We also seek comment on the need, if any, to make adjustments with
respect to flotation costs (i.e., costs of selling new securities in the market) or dividends.
1056.
Zone of Reasonableness. The cost of equity, based on different methodologies and sets of
reasonable assumptions and input values, as well as the WACC calculation using the inputs described
above, can be used to develop a range from which the Commission can prescribe the new authorized
interstate rate of return. This “zone of reasonableness” allows the Commission to take into account
additional policy considerations before finalizing the new rate of return.2184 We seek comment on the
factors the Commission should consider in determining the rate of return from within that “zone of
reasonableness.” We ask how infrastructure deployment, particularly broadband deployment, and today’s
reforms should be accounted for in our analysis. Is the deployment of broadband significantly more risky
than the voice telephony business, and does it have a significantly greater cost of capital? We note, for
instance, that voice telephony has nearly universal penetration, while broadband adoption is more than 65
percent nationally. If some or all of the surrogates on which the WACC estimates are based are large
companies such as Verizon and AT&T, should unique competitive and market conditions for rate-of-
return carriers be reflected, and should any differences in diversification in rate-of-return carrier offerings
compared to large carrier offerings, which now may include voice, video, wireless, and data services, be
reflected, if at all? Should any allowances made in 1990, or proposed in 1998, apply here? We also seek
2179 47 C.F.R. § 65.303.
2180 47 C.F.R. § 65.303.
2181 See 1990 Prescription Order, 5 FCC Rcd at 7508, para. 9.
2182 1998 Prescription Notice, 13 FCC Rcd at 20573-75, paras. 26-30.
2183 1998 Prescription Notice, 13 FCC Rcd at 20576, para. 33.
2184 1998 Prescription Notice, 13 FCC Rcd at 20578-80, paras. 39-42.
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comment on the need to make any adjustments to capture changes in the telecommunications marketgenerally, and ask commenters proposing any such adjustments to explain why they are necessary to
prescribe the allowable rate of return for multi-use plant that can provide voice, data, video and other
services, in particular, and how any such adjustments should be structured. Lastly, we ask whether any of
these policy considerations should also be reflected in any other components of the WACC calculation,
and, if so, in what manner.
1057. Preliminary Analysis. We estimate, using recent public data, the WACC for AT&T and
Verizon and find it in the range of 6 to 8 percent.2185 This range is consistent with other analysts’
estimates.2186 We find a similar range when considering other mid-size and competitive carriers.2187 Even
if the interest rate were to increase by 1.5 percent,2188 which seems unlikely in today’s economy,2189 the
WACC would remain in the range of approximately 7 to 8 percent. This preliminary analysis would
conservatively suggest that the authorized interstate rate of return should be no more than 9 percent. We
seek comment on this analysis and note that this preliminary analysis does not prejudge the Commission’s
ability to select a higher or lower rate of return in this proceeding.
1058. Impact on Universal Service Funding. We propose that any reduction in the rate of
return be reflected in our universal service rules by reducing the HCLS cap by a corresponding amount,
and repurposing that funding amount consistent with the CAF framework and budget adopted today. We
also propose that ICLS support be reduced by a corresponding amount as well. We seek comment on
these proposals and how to calculate any such reductions. We seek comment on whether any savings
realized from reducing the rate of return should be used to establish a new CAF mechanism for rate of
return companies that would support new broadband investment. How would a change in the rate of
return impact the Rural Association’s CAF proposal discussed in this FNPRM, and does this prescription
process impact the timing or operation of that proposal or any other transition of rate-of-return carriers to
CAF-based support?2190 In the alternative, we seek comment on the potential benefits of retaining the
HCLS cap at the same amount even if the rate of return is reduced, which would have the effect of
allowing funding to be redistributed to lower cost rate-of-return carriers that are ineligible for HCLS
support today. Are there any other changes to other universal service distribution mechanisms that should
be made to reflect a change to the rate of return?
1059. Tribally-Owned and Operated Carriers. We seek comment on how to account for
Tribally-owned and operated carriers in this prescription, and whether a different rate of return is
warranted for these carriers. Tribal governments, and by extension, Tribally-owned and operated carriers,
2185 AT&T, 2010 Annual Report, available at http://www.att.com/gen/investor-relations?pid=19234; Verizon, 2010
Annual Report, available at http://www22.verizon.com/investor/app_resources/interactiveannual/2010/index.html.
2186 See, e.g., Bernstein Research— US TELECOMMUNICATIONS AND CABLE & SATELLITE: CAPITAL PUNISHMENT,
(December 2010 and May 25, 2011).
2187 See, e.g., Windstream 2011 Annual Report, available at
http://investors.windstream.com/drip.aspx?iid=4121400 (visited Oct. 6, 2011); Frontier 2010 Annual Report,
available at http://corporate.frontier.com/default.aspx?m=4&p=4 (visited Oct. 6, 2011); TDS 2010 Annual Report,
available at http://media.corporate-ir.net/media_files/irol/67/67422/tds2010AR/index.html (visited Oct. 25, 2011);
Cincinnati Bell 2010 Annual Report, available at
http://investor.cincinnatibell.com/phoenix.zhtml?c=111332&p=irol-reportsAnnual (visited Oct. 25, 2011).
2188 McKinsey and Company, Farewell to cheap capital?, 6-8 (December 2010).
2189See Binyamin Appelbaum, Its Forecast Dim, Fed Vows to Keep Rates Near Zero,” N.Y. Times (August 9,
2011).
2190 See supra Section XVII.B.
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play a vital role in serving the needs and interests of their local communities, often in remote, low-income, and underserved regions of the country.2191 Tribally-owned and operated carriers serve cyclically
impoverished communities with a historical lack of critical infrastructure. Reservation-based economies
lack fundamental similarities to non-reservation economies and are among the most impoverished
economies in the country. Tribal Nations also cannot collateralize trust land assets, and as a result, have
more limited abilities to access credit and capital. We seek comment on how such considerations should
be reflected in our analysis.
1060. Other Considerations. Finally, we ask commenters to address any other changes that are
needed to: (1) the data used in the prescription process; or (2) the calculations the Commission must
perform to prescribe a new interstate rate of return. We also invite commenters to provide any other
relevant evidence or studies that could assist in this represcription.
D.
Eliminating Support for Areas with an Unsubsidized Competitor
1061. In the Order above, we conclude that we will phase out all high-cost support received byincumbent rate-of-return carriers over three years in study areas where an unsubsidized competitor, or
combination of unsubsidized competitors, offering voice and broadband service that meets our
performance obligations serves 100 percent of the residential and business locations in the incumbent’s
study area. 2192 In this FNPRM, we seek comment on a proposed methodology for determining the extent
of overlap, a process for preliminary determinations of such overlap, a process for the affected ETC to
challenge the accuracy of the purported overlap, with input from the relevant state commission and the
public, and how to adjust support levels in situations with less than 100 percent overlap.2193
1062. To determine what rate-of-return study areas have 100 percent overlap by an
unsubsidized competitor, staff performed a preliminary analysis as described below. The analysis relies
on two sets of data: TeleAtlas Wire Center Boundaries (6/2010) and data from the State Broadband
Initiative (SBI) program administered by NTIA as of December, 2010.2194
1063. First, staff identified which census blocks are in each rate-of-return study area, including
a census block in a study area if the centroid of that census block is within the TeleAtlas boundaries for a
wire center associated with the study area. Next, staff identified study areas where a wired provider other
than the incumbent local exchange carrier offered broadband service at speeds of at least 3 Mbps
2191 See Telecommunications Carriers Eligible for Universal Service Support; Standing Rock Telecommunications,
Inc. Petition for Designation as an Eligible Telecommunications Carrier; Petition of Standing Rock
Telecommunications, Inc. to Redefine Rural Service Areas; Petition for Reconsideration of Standing Rock
Telecommunications, Inc.’s Designation as an Eligible Telecommunications Carrier on the Standing Rock Sioux
Reservation , WC Docket No. 09-197, Memorandum Opinion and Order on Reconsideration, 26 FCC Rcd 9160,
9161 (2011) (Standing Rock Final ETC Designation Order).
2192 As discussed above, for purposes of this requirement, broadband service at speeds of at least 3 Mbps
downstream/768 kbps upstream, with capacity limits (if any) that are comparable to residential fixed broadband
offerings in urban areas, represents a reasonable proxy. See supra para. 103.
2193 We previously sought comment on proposals to utilize a challenge process to identify areas overlapped by
unsubsidized facilities-based competitors. See USF/ICC Transformation NPRM, 26 FCC Rcd at 4674, para. 391;
Aug. 3rd Public Notice, 26 FCC Rcd at 11117-11118.
2194 See National Broadband Map, Download Data, available at http://www.broadbandmap.gov/data-download. All
analysis was conducted using 2000 census geographies.
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downstream/768 kbps upstream to all of the census blocks in the study area. Staff excluded all resellersas identified in the SBI data and included only xDSL, cable, and fiber technologies.2195
1064. We seek comment on whether this is an appropriate methodology for determining areas
of overlap, which will result in adjustments to support levels for the rate-of-return ETC.
1065. As summarized in Figure 12 below, using this methodology, staff performed a
preliminary analysis examining census blocks smaller than two square miles and identified 18 rate-of-
return study areas with 99 percent or greater overlap; and an additional 19 with greater than 95 percent
overlap (a total of 37 study areas with greater than 95 percent overlap).2196
Number of study
Annual support
Number of lines
Percent overlap
areas(2010)
supported (2010)*
> 99%
18
$17.0 million
54,952
At least 95% and
19
$16.7 million
71,794
less than 99%
At least 80% and
511,91
51
$98.5 million
less than 95%
2
* Maximum number of lines supported by any high-cost universal service mechanism in 2010.
Figure 12
1066. This analysis has several potential limitations. TeleAtlas data may not represent the
actual incumbent local exchange carrier footprint in all instances.2197 In addition, TeleAtlas data generally
assign all geographies to one incumbent provider’s footprint or another; however, in reality, there are
large, generally unpopulated areas not served by any incumbent carrier facilities. As such, this analysis
may over-estimate the rate-of-return ETC’s footprint and under-estimate the extent to which the
populated portions of that footprint are completely overbuilt by competitive networks.
1067. SBI data have their limitations as well, as we acknowledged in our most recent
Broadband Progress Report.2198 In addition, SBI data only measure the availability of broadband capable
of delivering at least 768 kbps downstream and 200 kbps upstream. There is no direct measure of the
availability of voice service, but we presume that an unsubsidized xDSL, fiber, or cable competitor that
has deployed a broadband network that meets the SBI standard also is offering voice services.
2195 Specifically, staff used technology codes 10, 20, 40, 41, and 50 from the SBI data submission, excluding 30 to
reduce the possibility that the competitor would be a business-focused competitive LEC.
2196 Staff examined blocks smaller than two square miles because of the treatment of such small blocks in SBI data.
Small blocks are characterized as either having service at a given speed with a given technology or not. The
Commission has noted challenges with this binary treatment of small blocks and taken a lack of reporting about a
block as an indication that the block lacks service. See Inquiry Concerning the Deployment of Advanced
Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to
Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the
Broadband Data Improvement Act, GN Docket No. 10-159, Seventh Broadband Progress Report and Order on
Reconsideration, 26 FCC Rcd 8008, 8082-83, App. F. at paras. 9-13 (2011) (Seventh 706 Report). Reporting
for larger blocks is more complex, incorporating address- and street-segment level reporting. See id. at App. F, n.35.
2197 See, e.g., Letter from David Cosson, Counsel to Accipiter Communications Inc. to Marlene H. Dortch,
Secretary, FCC, CC Docket. No. 96-45, App. A (filed Mar. 11, 2011).
2198 See, e.g., Seventh 706 Report, 26 FCC Rcd at 8081-85, App. F (2011)
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1068. We note that small blocks could be reported as served if as few as one location in thatblock has service or could have service within a typical service interval.2199 We seek comment on
whether this could lead us to count areas as served by an unsubsidized competitor even if a meaningful
number of locations are, in fact, not served.
1069. We seek comment on how best to deal with data relating to large blocks. Since neither
NTIA nor the Commission has access to the actual location of businesses or homes, SBI population
estimates data relies on estimating home locations by random placement of locations along roads. While
this will provide an accurate view of the fraction of large blocks that are served in aggregate, it will likely
lead to over- or under-estimates in any small number of some large blocks. How can the Commission use
such data to determine whether a large block is served or not?
1070.
As stated in the Order, after receiving further public input on the proposed methodology,
the Wireline Competition Bureau will publish a finalized methodology for determining areas of overlap.
Using the methodology chosen, the Wireline Competition Bureau will then publish a list of companies for
which there is a 100 percent overlap.2200
1071. We seek comment on a process for identifying areas with greater than 75 percent overlap.
We propose that the Wireline Competition Bureau identify areas with greater than 75 percent overlap,
utilizing the finalized methodology, and then publish the results of that analysis. We propose that the
Bureau provide the affected ETC an opportunity to challenge the accuracy of the purported overlap and to
take public comment for a period of time, such as 45 days. We seek comment on this proposal.
1072. Several commenters supported state involvement in a process to determine areas of
overlap.2201 How could state commissions play a role in determining the extent of overlap? For instance,
after the Bureau performs the overlap analysis, should there be a period of time