Skip Navigation

Federal Communications Commission

English Display Options

Commission Document

Notice to US JPML

Download Options

Released: December 13, 2011

NOTICE TO THE

UNITED STATES JUDICIAL PANEL ON MULTIDISTRICT LITIGATION

OF MULTICIRCUIT PETITIONS FOR REVIEW



Petitions for Review of the Federal


)

Communications Commission’s Connect


)
MDL No. ______

America Fund

, Report and Order and

)

Further Notice of Proposed Rulemaking,

)

FCC 11-161

(released Nov. 18, 2011),

)



76 Fed. Reg. 73830 (Nov. 29, 2011)

)



Pursuant to the provisions of 28 U.S.C. § 2112(a) and the Rules of Procedure of the
United States Judicial Panel on Multidistrict Litigation, the Federal Communications
Commission submits this Notice of Multicircuit Petitions filed for review of 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 an Unified
Intercarrier Compensation Regime; Federal-State Joint Board on Universal Service; Lifeline
and Link-Up; Universal Service Reform - Mobility Fund, WC Docket Nos. 10-90, 07-135, 05-
337, & 03-109; GN Docket Nos. 09-51; CC Docket Nos. 01-92, 96-45; WT Docket No. 10-208,
Report and Order and Further Notice of Proposed Rulemaking, FCC 11-161 (rel. Nov. 18, 2011).
A summary of the order on review was published in the Federal Register on November 29, 2011.
See 76 Fed. Reg. 73830 (2011).

As required by Panel Rule 25.2, we submit with this notice a schedule of those petitions
for review filed in the circuit courts of appeals within ten days after the publication of the agency
order in the Federal Register and received by the agency within that time period (Attachment A),
copies of each petition (Attachment B), and (3) the order the parties are appealing (Attachment
C). For purposes of calculating the 10-day period described in 28 U.S.C. § 2112(a)(1) and Panel

Rule 25.1, the Commission applied Section 1.13 of the agency’s rules, 47 C.F.R. § 1.13, and
Federal Rule of Appellate Procedure 26. Applying these rules, we have listed in Attachment A
all court-stamped petitions for review that the Commission received between November 29,
2011, and December 9, 2011, inclusive. In accordance with Panel Rule 25.3, the FCC is serving
this notice on the clerks of the courts where petitions for review have been filed as well as on the
parties.
Respectfully submitted,

Jacob M. Lewis
Associate General Counsel


/s/ Richard K. Welch

Richard K. Welch
Deputy Associate General Counsel

James M. Carr
Nandan M. Joshi
Counsel

Federal Communications Commission
445 12th Street, S.W.
Washington, D.C. 20554
Phone: (202) 418-1700
Fax: (202) 418-2822
FCClitigation@fcc.gov

December 13, 2011


2

ATTACHMENT A


A.
The date of Federal Register publication of the relevant agency order: November 29,
2011.
B.
Cases filed and received by the Commission between November 29, 2011, and December
9, 2011:

1.
Vermont Public Service Board v. FCC
Second Circuit, No. 11-5088
Filed: December 9, 2011
Received by FCC: December 9, 2011

2. Pennsylvania
Public
Utility Commission v. FCC
Third Circuit, No. 11-4324
Filed: December 5, 2011
Received by FCC: December 8, 2011

3.
Core Communications, Inc. v. FCC
Fourth Circuit, No. 11-2346
Filed: December 2, 2011
Received by FCC: December 6, 2011

4.
National Association of State Utility Consumer Advocates v. FCC
Fourth Circuit, No. 11-2347
Filed: December 8, 2011
Received by FCC: December 9, 2011

5.
National Telecommunications Cooperative Association v. FCC
Fourth Circuit, No. 11-2352
Filed: December 9, 2011
Received by FCC: December 9, 2011

6.
Cellular South, Inc. d/b/a C. Spire Wireless v. FCC
Fifth Circuit, No. 11-60840
Filed: December 8, 2011
Received by FCC: December 9, 2011

7.
Public Utilities Commission of Ohio v. FCC
Sixth Circuit, No. 11-4358
Filed: December 8, 2011
Received by FCC: December 9, 2011





8.
Choctaw Telephone Company v. FCC
Eighth Circuit, No. 11-3666
Filed: December 8, 2011
Received by FCC: December 9, 2011

9.
Direct Communications Cedar Valley, LLC, et al. v. FCC
Tenth Circuit No. 11-9581
Filed: December 8, 2011
Received by FCC: December 9, 2011

10.
AT&T Inc. v. FCC
D.C. Circuit, No. 11-1473
Filed: December 9, 2011
Received by FCC: December 9, 2011

11.
Halo Wireless, Inc. v. FCC
D.C. Circuit, No. 11-1474
Filed: December 9, 2011
Received by FCC: December 9, 2011

12.
Halo Wireless, Inc. v. FCC
D.C. Circuit, No. 11-1475
Filed: December 9, 2011
Received by FCC: December 9, 2011

13.
Transcom Enhanced Services, Inc. v. FCC
D.C. Circuit, No. 11-1476
Filed: December 9, 2011
Received by FCC: December 9, 2011








4

ATTACHMENT B



5






















































ATTACHMENT C






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


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

TABLE OF CONTENTS

Heading
Paragraph #
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
1


Federal Communications Commission


FCC 11-161


B. Broadband Service .............................................................................................................................. 86
1. 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

2




Federal Communications Commission


FCC 11-161


XI. MEASURES TO ADDRESS ARBITRAGE.................................................................................... 656
A. 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

3




Federal Communications Commission


FCC 11-161


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

4




Federal Communications Commission


FCC 11-161


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).

5




Federal Communications Commission


FCC 11-161


recovery and long-term economic health, particularly in small towns, rural and insular areas, and Tribal
lands.
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).

6




Federal Communications Commission


FCC 11-161


grants and loans to expand broadband deployment and adoption in unserved and underserved areas. We
also 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).

7




Federal Communications Commission


FCC 11-161


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).

8




Federal Communications Commission


FCC 11-161


We have also sought to phase in reform with measured but certain transitions, so companies affected by
reform 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).


9




Federal Communications Commission


FCC 11-161


where it is lacking, to better meet the needs of their consumers.15 Therefore, we do not seek to modify the
existing 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.

10




Federal Communications Commission


FCC 11-161


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.

11




Federal Communications Commission


FCC 11-161


definition. Carriers accepting the state-level commitment will be obligated to meet rigorous broadband
service 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

12




Federal Communications Commission


FCC 11-161


dollars. The providers receiving support through the CAF Phase II competitive bidding process will also
be 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.

13




Federal Communications Commission


FCC 11-161


states in designating ETCs and in monitoring that ETCs within their jurisdiction are using universal
service 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

14




Federal Communications Commission


FCC 11-161


will facilitate predictability and stability. First, we require carriers to cap most ICC rates as of the
effective 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.

15




Federal Communications Commission


FCC 11-161


offset lost ICC revenues will be required to use the money to advance our goals for universal voice and
broadband.
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.

16




Federal Communications Commission


FCC 11-161


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).

17




Federal Communications Commission


FCC 11-161


mobility for all Americans.27 Moreover, performance goals and measures may assist in identifying areas
where 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).

18




Federal Communications Commission


FCC 11-161


used by the Commission as a proxy for network deployment33 and, as a result, will be a consistent
measure 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.

19




Federal Communications Commission


FCC 11-161


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…)

20




Federal Communications Commission


FCC 11-161


will jeopardize other statutory mandates, such as ensuring affordable rates in all parts of the country, and
ensuring 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).

21




Federal Communications Commission


FCC 11-161


has reaffirmed its strong interest in ubiquitous deployment of high speed broadband communications
networks: 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.

22




Federal Communications Commission


FCC 11-161


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…)

23




Federal Communications Commission


FCC 11-161


the policy Congress set forth in section 254(b) of “ensuring access to advanced telecommunications and
information 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.

24




Federal Communications Commission


FCC 11-161


– offer broadband capabilities to consumers.78 We conclude that this approach is sufficient to ensure
access 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).

25




Federal Communications Commission


FCC 11-161


investment and by promoting competition in the telecommunications market.”83 The Commission has
found 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”).

26




Federal Communications Commission


FCC 11-161


be more competitive, and thus will provide greater benefits to consumers, as a result of our decision to
support 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.

27




Federal Communications Commission


FCC 11-161


regions of the Nation.”97 When Congress enacted the 1996 Act, most consumers accessed the Internet
through 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.”

28




Federal Communications Commission


FCC 11-161


and 214, including the requirement that such providers be designated as eligible to receive support, either
from 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.

29




Federal Communications Commission


FCC 11-161


functionalities as voice telephony services,110 while others oppose the change, arguing that the current list
of 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…)

30




Federal Communications Commission


FCC 11-161


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.

31




Federal Communications Commission


FCC 11-161


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.

32




Federal Communications Commission


FCC 11-161


areas.128 All Americans should have access to broadband that is capable of enabling the kinds of key
applications 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.

33




Federal Communications Commission


FCC 11-161


upload speeds, latency, and usage limits (if any) for providers’ broadband must be reasonably comparable
to 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).

34




Federal Communications Commission


FCC 11-161


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…)

35




Federal Communications Commission


FCC 11-161


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/.

36




Federal Communications Commission


FCC 11-161


provide guidance by noting that a usage limit significantly below these current offerings (e.g., a 10 GB
monthly 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.

37




Federal Communications Commission


FCC 11-161


funding –remain the same for this class of carriers. We will monitor and review the public interest
obligations 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…)

38




Federal Communications Commission


FCC 11-161


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.

39




Federal Communications Commission


FCC 11-161


Figure 1

Component of

Broadband Performance

Obligation

CAF

Characteristics

Price Cap CAF

• Speed of at least 4 Mbps/1
Extend broadband to areas lacking
(Phase I)
Mbps to a specified number of
768 kbps according to National
locations, depending on level of Broadband Map and carrier’s best
(Incremental
incremental support
knowledge; can’t use for areas
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/1
Extend 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/256

terrestrial
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 and

Phase 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

106.
Because most of these funding mechanisms are aimed at immediately narrowing
broadband deployment gaps, both fixed and mobile, their performance benchmarks reflect technical

40




Federal Communications Commission


FCC 11-161


capabilities and user needs that are expected at this time to be suitable for today and the next few years.172
However, 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.).

41




Federal Communications Commission


FCC 11-161


Figure 2176

Forecast for typical downstream speed


30

25


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

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.
178 See infra para. 585.

42




Federal Communications Commission


FCC 11-161


addition, as part of the federal-state partnership for universal service, we expect and encourage states to
assist 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
Figure 3
Basic Wired Network Structure


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).

43




Federal Communications Commission


FCC 11-161



(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 4
Basic Wireless Network Structure


1
2
3
4
5a
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

44




Federal Communications Commission


FCC 11-161


to provider network
(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)

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).

45




Federal Communications Commission


FCC 11-161


more fully below.188 We also encourage input from the states and other stakeholders as the Bureaus
develop 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.

46




Federal Communications Commission


FCC 11-161


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).

47




Federal Communications Commission


FCC 11-161


accountability in USF, and our estimates of the funding necessary for components of the 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 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).

48




Federal Communications Commission


FCC 11-161


framework to ensure that carriers that warrant additional funding have the opportunity to petition for such
relief. 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

128.
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.

49




Federal Communications Commission


FCC 11-161


additional support to such carriers, distributed through the mechanism described below;201 we call this
component 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…)

50




Federal Communications Commission


FCC 11-161


definition of a rural telephone company and are eligible for HCLS, while others do not and are eligible for
HCMS. 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.

51




Federal Communications Commission


FCC 11-161


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,
(continued…)

52




Federal Communications Commission


FCC 11-161


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.

53




Federal Communications Commission


FCC 11-161


determine the support amounts and selecting any necessary data sources for that task.218 The Bureau will
announce 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
(continued…)

54




Federal Communications Commission


FCC 11-161


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.

55




Federal Communications Commission


FCC 11-161


calculates the cost of deploying broadband to unserved locations on a census block basis.226 Commission
staff 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).

56




Federal Communications Commission


FCC 11-161


estimate of an interim performance obligation for this one-time support. We also emphasize that CAF
Phase 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
(continued…)

57




Federal Communications Commission


FCC 11-161


carrier’s current capital improvement plan did not already include plans to complete broadband
deployment 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.

58




Federal Communications Commission


FCC 11-161


the incremental support provided, and then meets its full deployment obligation associated with that
support 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
(continued…)

59




Federal Communications Commission


FCC 11-161


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…)

60




Federal Communications Commission


FCC 11-161


carriers expect to raise their SLCs, presubscribed interexchange carrier charges, or other interstate rates as
a 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.

61




Federal Communications Commission


FCC 11-161


a state. We therefore believe that the reforms we adopt today will achieve the relief Hawaiian Telcom
seeks 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.

62




Federal Communications Commission


FCC 11-161


balance of these considerations. We also stress that these subsidies will go to carriers serving price cap
areas, 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. 0-107.

63




Federal Communications Commission


FCC 11-161


competitive bidding.262 However, if such a mechanism is not implemented by the end of the five-year
term 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.

64




Federal Communications Commission


FCC 11-161


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).

65




Federal Communications Commission


FCC 11-161


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.

66




Federal Communications Commission


FCC 11-161


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.

67




Federal Communications Commission


FCC 11-161


broadband that will meet our requirements over time. In addition, it is our predictive judgment that the
incumbent 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).

68




Federal Communications Commission


FCC 11-161


services over a large geographic area. The fact that incumbent LECs’ have had a long history of
providing 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.

69




Federal Communications Commission


FCC 11-161


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.

70




Federal Communications Commission


FCC 11-161


Members’ Plan, and the ABC Plan.298
182.
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).

71




Federal Communications Commission


FCC 11-161


territories, we do not adopt the CQBAT cost model proposed by the ABC Coalition, nor do we accept the
State 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.

72




Federal Communications Commission


FCC 11-161


granularity is important in capturing the forward-looking costs associated with deploying broadband
networks 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.

73




Federal Communications Commission


FCC 11-161


terrestrial fixed residential broadband offerings in urban areas.312 The National Broadband Plan modeled
the 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.

74




Federal Communications Commission


FCC 11-161


areas, the Bureau may maintain existing support levels, as modified in this Order, to any affected price
cap 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.

75




Federal Communications Commission


FCC 11-161


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.

76




Federal Communications Commission


FCC 11-161


affiliates will no longer receive HCLS as of January 1, 2012, we reduce downward the HCLS cap by the
amount 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).

77




Federal Communications Commission


FCC 11-161


for future years, but we expect carriers will deploy scalable broadband to their communities and will
monitor 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 more
support than necessary to serve their communities. The framework consists of benchmarks for prudent

326 See supra paras. 105-0 (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).

78




Federal Communications Commission


FCC 11-161


levels of capital and operating costs; these costs are used for purposes of determining high-cost support
amounts 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.

79




Federal Communications Commission


FCC 11-161


rural areas.341 In this regression the dependent variable was average annual operating expenses per
connection (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.

80




Federal Communications Commission


FCC 11-161


Specifically, the methodology uses NECA cost data and 2010 Census data to cap permissible expenses
for 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…)

81




Federal Communications Commission


FCC 11-161


relatively high compared to a national average – without regard to whether a lesser amount would be
sufficient 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.

82




Federal Communications Commission


FCC 11-161


for individual companies by multiplying (a) the ratio of accumulated loop depreciation to total loop plant
or (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.

83




Federal Communications Commission


FCC 11-161


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)

84




Federal Communications Commission


FCC 11-161


in 1998, based on 1995 cost data.368 In 2001, the formula was modified to reflect increases in Gross
Domestic 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.

85




Federal Communications Commission


FCC 11-161


Corporate Operations Expense Limit Formula: Current vs. Updated

Current Formula
Updated Formula
$45
$40
$35
r Loop
e

i
t

P

m $30
ons Li
erati $25
p
O
e

$20
rporat
o

Current Formula
l
y C
t
h
$15
n
o

Updated Formula

M

$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 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.”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.

86




Federal Communications Commission


FCC 11-161


Section 254 obligates states to share in the responsibility of ensuring universal service. We recognize
some 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

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).

87




Federal Communications Commission


FCC 11-161


Figure 5

Sample of Local Residential Service Monthly Rates

NECA Survey of 641 Respondents

















237. It is inappropriate to provide federal high-cost support to subsidize local rates beyond what
is 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,

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.”).

88




Federal Communications Commission


FCC 11-161


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
reductions will not flow to other carriers that receive HCLS, but rather will be used to fund other aspects
of 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 Ac

cess Lines
400
351
Figure 7
350
s
)

$15.62 (Av
2008 Averaerage
ge B  
aBasic Lo
sic Loc cal Residentia
al Residentia l Rate)
l Rate
n
d

30
s
a


0
u
o

235
25
n
 
th

0
219
203
193
s
 
(i

20
n
e

0
165
150
 
Li

150
Total
r
 
of


109
113
105
b
e

87
m
100
61
64

Nu

32 39
50
30 41 44
12
23
18
6
15
16
3
2 1 2 0
0 0 5
0
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, 2011

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.

89




Federal Communications Commission


FCC 11-161


Figure 7
1200000
1000000

Estimated Number of Access Lines Below Rate Floors

Source: NECA Carrier Survey
800000
s
e
i
n
L
600000
ss
ce
c
A
400000
200000
0
Less or equal to $10 rate
Less or equal to $14 rate

243. In addition, because we anticipate that the rate floor for the third year will be set at a figure
close 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.

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).

90




Federal Communications Commission


FCC 11-161


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
function of income), we do not observe prices correlating at all with median income levels in the given
study 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.












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.

91




Federal Communications Commission


FCC 11-161


Figure 8















246. 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

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-
(continued…)

92




Federal Communications Commission


FCC 11-161


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
6.

Safety Net Additive

248. Background. In 2001, as part of the Rural Task Force proceeding, the Commission adopted
the “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
(Continued from previous page)

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.
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.

93




Federal Communications Commission


FCC 11-161


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
additive because the rule is based on per-line investment. Accordingly, in the USF/ICC Transformation
NPRM
, 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

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.
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.

94




Federal Communications Commission


FCC 11-161


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
7.

Local Switching Support

253. Background. LSS allows rural incumbent LECs serving 50,000 access lines or fewer to
allocate 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

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
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.

95




Federal Communications Commission


FCC 11-161


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
255. Discussion. We agree with the Rural Associations that reforms to LSS should be integrated
with 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

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
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.

96




Federal Communications Commission


FCC 11-161


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
access lines.421 In recent years, with low inflation and loss of access lines, the annual cap for HCLS has
been 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.

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).
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.

97




Federal Communications Commission


FCC 11-161


b.

Study Area Waivers

(i)

Standards for Review

260. Background. A study area is the geographic territory of an incumbent LEC’s telephone
operations. 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
261. The Commission began applying the one-percent guideline in 1995 to limit the potential
adverse 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

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
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.

98




Federal Communications Commission


FCC 11-161


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
264. In the USF/ICC Transformation NPRM, we proposed to eliminate the one-percent guideline
as 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

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
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.

99




Federal Communications Commission


FCC 11-161


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 process
for 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
for waiver of sections 69.3(e)(11) (to include any acquired lines in the NECA pool) and 69.605(c) (to
remain 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 acquiring
exchanges 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

439 See id. at 4630, para. 219.
440 See id.; 47 C.F.R. §§ 63.03-04.
441 47 C.F.R. § 63.03.
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.

100




Federal Communications Commission


FCC 11-161


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
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 per
year 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

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.
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.

101




Federal Communications Commission


FCC 11-161


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
274. Discussion. After consideration of the record, we find it appropriate to implement
responsible 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

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.
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.

102




Federal Communications Commission


FCC 11-161


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
carriers to periodically re-validate any need for support above the cap. We also note that even if a carrier
can 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 the
country, “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

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.
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.

103




Federal Communications Commission


FCC 11-161


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
competitor (see infra Section VII.C). Likewise, we do not intend to continue to provide current levels of
high-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.

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.
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.

104




Federal Communications Commission


FCC 11-161


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

285. We agree with the Rural Associations that “there is … without question a need to modify
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.
The existing regulatory structure and competitive trends have placed many small carriers under financial
strain 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

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.
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).

105




Federal Communications Commission


FCC 11-161


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
consumers. Further, we believe strongly that carriers that invest and operate in a prudent manner will be
minimally 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

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).
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-
(continued…)

106




Federal Communications Commission


FCC 11-161


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
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
(Continued from previous page)

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
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”).

107




Federal Communications Commission


FCC 11-161


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
294. Additionally, carriers have not shown that elimination of USF support will result in
confiscatory 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 to
our 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

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.
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.

108




Federal Communications Commission


FCC 11-161


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
297. The interim cap slowed the growth in competitive ETC funding, but it did not address where
such 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

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
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.

109




Federal Communications Commission


FCC 11-161


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
starting in 2014, with an annual budget of $500 million.495 This dedicated support for mobile service
supplements 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 is
unavailable, 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

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.
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.

110




Federal Communications Commission


FCC 11-161


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
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 Authority
306.
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

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.
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).

111




Federal Communications Commission


FCC 11-161


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
authority to establish the Mobility Fund as described below.508 We reject those arguments for the reasons
stated 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

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.
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).

112




Federal Communications Commission


FCC 11-161


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
support; to the contrary, such use directly advances the policy goals set forth in section 254(b), our new
universal 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

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”).
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).

113




Federal Communications Commission


FCC 11-161


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
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

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).
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.

114




Federal Communications Commission


FCC 11-161


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
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

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
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).

115




Federal Communications Commission


FCC 11-161


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
resources with limited corresponding benefits to consumers.535 We note, however, that in certain limited
circumstances, 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

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.
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.

116




Federal Communications Commission


FCC 11-161


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
currently offers such service. We conclude that the public interest is best served by maximizing the
expansion 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

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.
544 See infra paras. 384-385.
545 Mobility Fund NPRM, 25 FCC Rcd at 14,723, para. 16.

117




Federal Communications Commission


FCC 11-161


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.
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.

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.
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.

118




Federal Communications Commission


FCC 11-161


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
businesses.554 Accordingly, we do not find that these examples demonstrate that small businesses are
unable 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,

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.
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.

119




Federal Communications Commission


FCC 11-161


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
process, the question of whether to use a minimum area for bidding like census tracts, as we had
proposed, 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

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.
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).

120




Federal Communications Commission


FCC 11-161


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
using the technologies noted in the Mobility Fund NPRM (i.e., EV-DO, EV-DO Rev A, UMTS/HSPA) or
better.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.

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.”)
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,
(continued…)

121




Federal Communications Commission


FCC 11-161


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.
Our goal is to accelerate expanded availability of mobile voice service over current-generation or better
networks 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
(Continued from previous page)

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.
572 Mobility Fund NPRM, 25 FCC Rcd at 14,724-25, para. 23.
573 WorldCall Mobility Fund NPRM Comments at 11-12.

122




Federal Communications Commission


FCC 11-161


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
federal executive department or agency in response to the carrier’s commitment to provide 3G or better
wireless 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,

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.
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).

123




Federal Communications Commission


FCC 11-161


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
administratively simple and efficient approach that, if used here, will permit us to begin distributing this
support 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

345.
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

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.
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.

124




Federal Communications Commission


FCC 11-161


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
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

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.
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.

125




Federal Communications Commission


FCC 11-161


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
straightforward nationwide applicability, so that the logic of those commenters is consistent with our
decision 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

354.
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

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.
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.

126




Federal Communications Commission


FCC 11-161


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
areas that are eligible for the program, and allow all unserved areas to compete for funding on an equal
footing. 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

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.
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.

127




Federal Communications Commission


FCC 11-161


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
available in urban areas.611 We detail below the mobile broadband service public interest obligations that
Mobility 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

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.
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.

128




Federal Communications Commission


FCC 11-161


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
requirement that supported providers must offer mobile broadband users. 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 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

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.

129




Federal Communications Commission


FCC 11-161


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.
(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

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.
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.

130




Federal Communications Commission


FCC 11-161


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.
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

630 Id.
631 AT&T Mobility Fund NPRM Comments at 17.
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.

131




Federal Communications Commission


FCC 11-161


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
preferable, many also agree that the Commission should not specify a minimum number of spaces for
collocation 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

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.”).
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.

132




Federal Communications Commission


FCC 11-161


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
funding supports.647 In light of the public interest in expanding coverage, we conclude that our roaming
requirements 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

646 AT&T Mobility Fund NPRM Comments at 15; Verizon Mobility Fund NPRM Comments at 19-20; CWA
Mobility Fund NPRM Reply at 5.
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.

133




Federal Communications Commission


FCC 11-161


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
Recipients’ service offerings will be subject to this requirement for a period ending five years after the
date 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.

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
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).

134




Federal Communications Commission


FCC 11-161


(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
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

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.
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.

135




Federal Communications Commission


FCC 11-161


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.
(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)

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.
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).

136




Federal Communications Commission


FCC 11-161


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,
and asked if other spectrum bands would be appropriate.673 The Commission also asked whether it should
require 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

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.
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
).

137




Federal Communications Commission


FCC 11-161


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
support. Given that Mobility Fund Phase I provides non-recurring support, applicants for Phase I funds
need 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.

677 Mobility Fund NPRM at 14,733, para. 54.
678 Id.
679 Id.
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.

138




Federal Communications Commission


FCC 11-161


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.
(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

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.
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.

139




Federal Communications Commission


FCC 11-161


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
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,

691 GCI Mobility Fund NPRM Comments at 9.
692 Id.
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.

140




Federal Communications Commission


FCC 11-161


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
industry structure, as asserted by one commenter. For all these reasons, we would be inclined to
implement 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
(Continued from previous page)

698 NE Colorado Cellular Mobility Fund NPRM Reply at 1.
699 T-Mobile Mobility Fund NPRM Comments at 16.
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).

141




Federal Communications Commission


FCC 11-161


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
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.

704 AT&T Mobility Fund NPRM Comments at 8-9.
705 Mobility Fund NPRM, 25 FCC Rcd at 14,735-37, paras. 63-74.
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.

142




Federal Communications Commission


FCC 11-161


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
reserve prices and anticipate that, as detailed procedures for a Mobility Fund Phase I auction are
established 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

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.
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.

143




Federal Communications Commission


FCC 11-161


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
Mobility Fund Phase I auction will be conducted in a single round. Furthermore, we address how we will
deal 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.

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.
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.

144




Federal Communications Commission


FCC 11-161


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
establishing the necessary FCC application form(s). RCA notes that “onerous” application requirements
will 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,

724 Id. at 14,739, paras. 79-81.
725 Id.
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).

145




Federal Communications Commission


FCC 11-161


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
capable of supporting mobile broadband, and leasing arrangements can be subject to wide variety of
conditions 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

730 See supra para. 730.
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.

146




Federal Communications Commission


FCC 11-161


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
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

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.
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.

147




Federal Communications Commission


FCC 11-161


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
amount of the first one-third of the support associated with the unserved census tract that will be
disbursed 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

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).

148




Federal Communications Commission


FCC 11-161


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.
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

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.
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.

149




Federal Communications Commission


FCC 11-161


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
(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

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.
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).

150




Federal Communications Commission


FCC 11-161


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
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.

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).
762 See 47 C.F.R. § 1.21004(c).
763 See 47 C.F.R. § 54.1006(f).

151




Federal Communications Commission


FCC 11-161


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.
(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.

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.

152




Federal Communications Commission


FCC 11-161


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
wireless service. For this reason, to qualify for the second installment of support, a recipient will be
required 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

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.
771 See supra para. 28.
772 Verizon Mobility Fund NPRM Comments at 18-19.

153




Federal Communications Commission


FCC 11-161


(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
choosing to fulfill their Mobility Fund reporting requirements in an annual report filed under section
54.313 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.

773 Mobility Fund NPRM, 25 FCC Rcd at 14,731, para. 44.
774 See infra paras. 576-614.
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.

154




Federal Communications Commission


FCC 11-161


(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
Mobility Fund Phase I.780 We find that the new retention period will be adequate to facilitate audits of
Mobility 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

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).
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.

155




Federal Communications Commission


FCC 11-161


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
(3) a possible mechanism to reflect Tribal priorities for competitive bidding. The Public Notice also
sought 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

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.
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.

156




Federal Communications Commission


FCC 11-161


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
confirm that the particular challenges in deploying telecommunications services on Tribal lands remain.796
As 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

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
).
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.

157




Federal Communications Commission


FCC 11-161


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
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

800 See infra para. 494.
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).

158




Federal Communications Commission


FCC 11-161


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
While road miles generally best reflect the value of mobility, there are compelling concerns raised here
that 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

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
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.

159




Federal Communications Commission


FCC 11-161


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.
The preference will act as a “reverse” bidding credit that will effectively reduce the bid amount of a
qualified 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

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.
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.

160




Federal Communications Commission


FCC 11-161


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.
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

818 See discussion infra; see also Tribal Mobility Fund Public Notice, 26 FCC Rcd at 5998-99.
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.

161




Federal Communications Commission


FCC 11-161


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
alternative.824
497.
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 “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.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

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).
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

162




Federal Communications Commission


FCC 11-161


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
501. In 2010, 446 competitive ETCs, owned by 212 holding companies, received funding under
the 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.

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;
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.

163




Federal Communications Commission


FCC 11-161


Total 2010 CETC Funding

Verizon Wireless &
Sprint*

$292M

AT&T & T-Mobile

$579M

Wireline CETCs

$319M

Other Wireless (small

$23M
to 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
the current rule fails to efficiently target support where it is needed, we reiterate the conclusion that this
rule 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

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.

164




Federal Communications Commission


FCC 11-161


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
may be attracting investment that could otherwise be directed elsewhere, including areas that are not
currently 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

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
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
(continued…)

165




Federal Communications Commission


FCC 11-161


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.
We believe that the package of reforms adopted in the Order targeting funding for broadband and
mobility, 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.
(Continued from previous page)

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.
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;
(continued…)

166




Federal Communications Commission


FCC 11-161


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
identical support rule does not provide an amount to any particular carrier that is reasonably calculated to
be 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 competitive
ETCs 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
(Continued from previous page)

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.
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
(continued…)

167




Federal Communications Commission


FCC 11-161


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
the number of reported lines as of year-end 2011, whichever is lower.854 Using a full calendar year of
support 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
(Continued from previous page)

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).
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.

168




Federal Communications Commission


FCC 11-161


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
expect that the Mobility Fund Phase I auction will occur in 2012, and that ongoing support through the
Mobility 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

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).
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
(continued…)

169




Federal Communications Commission


FCC 11-161


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
ETC’s support would fluctuate based on line growth or loss. We believe, on balance, that the additional
certainty 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
(Continued from previous page)

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.
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).

170




Federal Communications Commission


FCC 11-161


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
service on Tribal lands869 were lower than for the rest of the Nation, and we concluded that competitive
ETCs 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

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.
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
(continued…)

171




Federal Communications Commission


FCC 11-161


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,
arguments that carriers serving remote parts of Alaska,876 including Alaska Native villages, should have a
slower 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
(Continued from previous page)

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.
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.

172




Federal Communications Commission


FCC 11-161


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
Standing Rock Sioux Reservation.882 We recognize that Tribally-owned ETCs play a vital role in serving
their 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

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.
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).

173




Federal Communications Commission


FCC 11-161


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
532. We conclude that carriers that have sought to take advantage of the “own-costs” exception
to 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 our
commitment 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

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).
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.

174




Federal Communications Commission


FCC 11-161


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
forward-looking cost of wireline broadband service is greater than $256 per month, and that of these, only
approximately 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

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).
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.

175




Federal Communications Commission


FCC 11-161


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
maximum participation of providers able to serve these most difficult to reach areas. In addition, the
Commission 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 competitive
ETCs, 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.

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.
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.

176




Federal Communications Commission


FCC 11-161


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
existing loans and/or become insolvent. For mobile providers, we will consider as a factor specific
showings 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.

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.
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.

177




Federal Communications Commission


FCC 11-161


• 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
other service, then it must support its claim with the results of drive tests throughout the area
in 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

178




Federal Communications Commission


FCC 11-161


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
Commission staff. We will also welcome any input that the relevant state commission may wish to
provide 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 the
USF 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

906 See infra section XIII.

179




Federal Communications Commission


FCC 11-161


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 a
temporary 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
amending section 54.709(b) to permit it to provide alternative instructions to USAC in the future without
waiving 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

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.
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).

180




Federal Communications Commission


FCC 11-161


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,
predictable, and sufficient mechanisms established (not to be established) by the Commission to preserve
and 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

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).

915 RICA Corr Comments at 5 (emphasis in original).
916 Verizon Corr Comments at 5.
917 47 U.S.C. § 254(d).

181




Federal Communications Commission


FCC 11-161


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
be specific, predictable, and sufficient). When used in this way, the word “established” is not a word in
the 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

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.”).
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”).


182




Federal Communications Commission


FCC 11-161


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.
2.

Setting Quarterly Demand to Meet the $4.5 Billion Budget

557. Background. In the USF-ICC Transformation NPRM, the Commission sought comment on
setting 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

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).
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.
(continued…)

183




Federal Communications Commission


FCC 11-161


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
amount, USAC should reflect that higher forecast in its quarterly demand filing.928 USAC should no
longer 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
(Continued from previous page)

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.
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.

184




Federal Communications Commission


FCC 11-161


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 Commission
instructed 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
additional funding necessary for Phase I of the CAF for price cap carriers in 2012.933 Those actions
together 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 vital
communications 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

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.
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
(continued…)

185




Federal Communications Commission


FCC 11-161


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 a
partnership 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
that they use “support only for the provision, maintenance, and upgrading of facilities and services for
which 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 which
they 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
(Continued from previous page)

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.
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).

186




Federal Communications Commission


FCC 11-161


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
now establish a national framework for oversight that will be implemented as a partnership between the
Commission 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

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
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).

187




Federal Communications Commission


FCC 11-161


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
section 254(e) certification by the state commission (or ETC in the case of federally designated ETCs) by
October 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

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.
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.

188




Federal Communications Commission


FCC 11-161


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
received; and certifications of compliance with applicable service quality956 and consumer protection
standards 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.

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.
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.

189




Federal Communications Commission


FCC 11-161


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
584. We delegate to the Wireline Competition Bureau and Wireless Telecommunication Bureaus
the 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

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.
965 Section VI.B.2.
966 Section VI.B.

190




Federal Communications Commission


FCC 11-161


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
funding. ETCs that receive CAF support awarded through a competitive process will also be required to
file 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.

967 “Community anchor institutions” is defined above. See supra note 37.
968 See supra Section VII.D.2.

191




Federal Communications Commission


FCC 11-161


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
carrier received in 2014 was used in such fashion, and for 2016 and subsequent years, carriers must
certify 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-

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.

192




Federal Communications Commission


FCC 11-161


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.
597. We emphasize, however, that we may request additional information on a case-by-case basis
from all ETCs, both private and public, as necessary to discharge our universal service oversight
responsibilities.975

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.
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
(continued…)

193




Federal Communications Commission


FCC 11-161


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
in the usual course of business.976 In particular, because incumbent LECs are already required to maintain
their 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
(Continued from previous page)

Part 32 of the Commission’s rules or Generally Accepted Accounting Principles. See
http://www.bpu.state.nj.us/bpu/pdf/telecopdfs/TelcoAr.pdf.
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.

194




Federal Communications Commission


FCC 11-161


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
of way processes, land use permitting, facilities siting, environmental and cultural preservation review
processes; 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

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.
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
(continued…)

195




Federal Communications Commission


FCC 11-161


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 only
for 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
Commission in order to receive HCLS, SVS, SNA, HCMS, LSS, IAS, or ICLS,990 but the Commission
has 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
(Continued from previous page)

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
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.

196




Federal Communications Commission


FCC 11-161


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
611. Under our reformed rules, as before, some recipients of support may be designated by the
Commission 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.

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.

197




Federal Communications Commission


FCC 11-161


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
convenience, we consolidate all certifications into a single rule. Moreover, because the net effect of the
changes 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.

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.”).
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.

198




Federal Communications Commission


FCC 11-161


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 proposed
consequences 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
companies lose support to the extent such information is not provided in a timely fashion.1009 While we
need 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

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.
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).

199




Federal Communications Commission


FCC 11-161


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
of the Federal-State Joint Board on Universal Service,1015 who further note that revoking a carrier’s ETC
designation 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.

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.
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.

200




Federal Communications Commission


FCC 11-161


C.

Record Retention

619. Background. Without proper documentation, it is impossible to conduct effective audits and
assessments 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
clarify that these ten-year record retention requirements apply to all recipients of high-cost and CAF
support.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 to
improve USAC’s audit process to reduce improper payments and assess risks. We received only one set
of comments addressing this issue.1026

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).
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
(continued…)

201




Federal Communications Commission


FCC 11-161


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)
recover funds for rule violations; and (4) ensure equitable contributions to the USF. These compliance
audits 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
(Continued from previous page)

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.
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.

202




Federal Communications Commission


FCC 11-161


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
data that forms the basis for management’s certification of compliance with various requirements. This
list 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 data
collection 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

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.
1043 This includes audits and investigations conducted by the Commission and its Bureaus and Offices.

203




Federal Communications Commission


FCC 11-161


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
underlying existing and future analyses that USAC uses to determine the amount of federal universal
service 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

1044 See 47 C.F.R. § 54.901.
1045 USF/ICC Transformation NPRM at ¶¶ 467, 476.
1046 See Section XIII.

204




Federal Communications Commission


FCC 11-161


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;
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

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.
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.

205




Federal Communications Commission


FCC 11-161


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.
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

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.
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).

206




Federal Communications Commission


FCC 11-161


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
Although we have found it useful in the past to impose somewhat more detailed requirements in rate of
return 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.
(Continued from previous page)

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).
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”).

207




Federal Communications Commission


FCC 11-161


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
filing system, and the usual practice now of many parties to file documents electronically rather than on
paper, 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

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).
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).

208




Federal Communications Commission


FCC 11-161


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

647.
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
delete them without notice and comment.1080 We also make conforming changes to existing rules to
ensure 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

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.
1080 5 U.S.C. 553(b)(3)(B).
1081 See Appendix A.

209




Federal Communications Commission


FCC 11-161


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
result in more robust wireless service, more innovative offerings, and cost savings to consumers. Our
proposed 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

1082 See infra Appendix I.

210




Federal Communications Commission


FCC 11-161


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
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

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).

211




Federal Communications Commission


FCC 11-161


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
passing on the higher access costs directly to the customers making the calls to access stimulating
entities.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

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.
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).

212




Federal Communications Commission


FCC 11-161


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
expanding broadband services in rural and Tribal lands is important, we agree with other commenters that
how 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

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
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).

213




Federal Communications Commission


FCC 11-161


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-
inclusive.1103 Several commenters offered suggestions on how to revise the definitional language.1104

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).
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
(continued…)

214




Federal Communications Commission


FCC 11-161


669.
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,
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
(Continued from previous page)

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
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.

215




Federal Communications Commission


FCC 11-161


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.
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.

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).
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.

216




Federal Communications Commission


FCC 11-161


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
preceding year.”1125 The addition of a traffic measurement component to the access stimulation definition
creates 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

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.
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).

217




Federal Communications Commission


FCC 11-161


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.
The terminating-to-originating traffic ratio component will capture those current access stimulation
situations 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

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 Acc