# Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2011-31924

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** December 16, 2011
- **Citation:** 76 FR 78384

## Text

FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 54
[WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN Docket No. 09-51; CC Docket Nos. 01-92, 96-45; WT Docket No. 10-208; FCC 11-161]
Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support

AGENCY:

Federal Communications Commission.

ACTION:

Proposed rule.

SUMMARY:

In this document, the Federal Communications Commission (Commission) seeks comment on several issues related to Eligible Telecommunications Carriers obligations, the funding mechanisms for rate-of-return, price cap and mobile carriers, and a Remote Areas Fund. The Commission also seeks comment on several issues related to bill-and-keep, end user charges, IP-to-IP interconnection, and call signaling rules. This is information will help the Commission to comprehensively reform and modernize 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.

DATES:

Comments on the matters synopsized in paragraphs 1-303 of the
Supplementary Information
and proposed 47 CFR part 54, subparts L, M, and N are due on or before January 18, 2012 and reply comments on the matters synopsized in paragraphs 1-303 of the
Supplementary Information
and proposed 47 CFR part 54, subparts L, M, and N are due on or before February 17, 2012. Comments on the matters synopsized in paragraphs 304-406 of the
Supplementary Information
are due on or before February 24, 2012 and reply comments on the matters synopsized in paragraphs 304-406 of the
Supplementary Information
are due on or before March 30, 2012. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this FNPRM, you should advise the contact listed below as soon as possible.

ADDRESSES:

You may submit comments, identified by WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN Docket No. 09-51; CC Docket Nos. 01-92, 96-45; WT Docket No. 10-208; FCC 11-161, by any of the following methods:

•
Federal eRulemaking Portal:

http://www.regulations.gov.
Follow the instructions for submitting comments.

•
Federal Communications Commission's Web Site:

http://fjallfoss.fcc.gov/ecfs2/.
Follow the instructions for submitting comments.

•
People With Disabilities:
Contact the FCC to request reasonable accommodations (accessible format documents, sign language interpreters, CART, etc.) by
email:

FCC504@fcc.gov
or
phone:
(202) 418-0530 or
TTY:
(202) 418-0432.

For detailed instructions for submitting comments and additional information on the rulemaking process, see the
SUPPLEMENTARY INFORMATION
section of this document.

FOR FURTHER INFORMATION CONTACT:

Amy Bender, Wireline Competition Bureau, (202) 418-1469, Victoria Goldberg, Wireline Competition Bureau, (202) 418-7353, and Margaret Wiener, Wireless Telecommunications Bureau, (202) 418-2176 or
TTY:
(202) 418-0484.

SUPPLEMENTARY INFORMATION:

This is a synopsis of the Commission's Further Notice of Proposed Rulemaking (FNPRM) in 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, and WT Docket No. 10-208; FCC 11-161, released November 18, 2011. The complete text of this document is available for inspection and copying during normal business hours in the FCC Reference Information Center, Portals II, 445 12th Street SW., Room CY-A257, Washington, DC 20554. The document may also be purchased from the Commission's duplicating contractor, Best Copy and Printing, Inc., 445 12th Street SW., Room CY-B402, Washington, DC 20554, telephone (800) 378-3160 or (202) 863-2893, facsimile (202) 863-2898, or via the Internet at
http://www.bcpiweb.com.
It is also available on the Commission's Web site at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-161A1.pdf.

Pursuant to §§ 1.415 and 1.419 of the Commission's rules, 47 CFR 1.415, 1.419, interested parties may file comments and reply comments on or before the dates indicated on the first page of this document. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS).
See Electronic Filing of Documents in Rulemaking Proceedings,
63 FR 24121, May 1, 1998.

Electronic Filers:
Comments may be filed electronically using the Internet by accessing the ECFS:
http://fjallfoss.fcc.gov/ecfs2/.

Paper Filers:
Parties who choose to file by paper must file an original and one copy of each filing. If more than one docket or rulemaking number appears in the caption of this proceeding, filers must submit two additional copies for each additional docket or rulemaking number.

Filings can be sent by hand or messenger delivery, by commercial overnight courier, or by first-class or overnight U.S. Postal Service mail. All filings must be addressed to the Commission's Secretary, Office of the Secretary, Federal Communications Commission.

All hand-delivered or messenger-delivered paper filings for the Commission's Secretary must be delivered to FCC Headquarters at 445 12th St SW., Room TW-A325, Washington, DC 20554. The filing hours are 8 a.m. to 7 p.m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes and boxes must be disposed of
before
entering the building.

Commercial overnight mail (other than U.S. Postal Service Express Mail and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD 20743.

U.S. Postal Service first-class, Express, and Priority mail must be addressed to 445 12th Street SW., Washington DC 20554.

People with Disabilities: To request materials in accessible formats for people with disabilities (braille, large print, electronic files, audio format), send an email to
fcc504@fcc.gov
or call the Consumer & Governmental Affairs Bureau at (202) 418-0530 (voice), (202) 418-0432 (tty).

I. Further Notice of Proposed Rulemaking

A. Broadband Public Interest Obligations

i. Measuring Broadband Service

1. In the
USF/ICC Transformation Order,
adopted concurrently with the FNPRM, the Commission adopts a rule requiring that actual speed and latency be measured on the access network of each eligible telecommunications carriers (ETC) from the end-user interface to the nearest Internet access point, and requires that ETCs certify to and report the results to the Universal Service Administrative Company

(USAC) on an annual basis. The Commission seeks comment on whether it should adopt a specific measurement methodology beyond what is described in the
USF/ICC Transformation Order
and the format in which ETCs should report their results.

2. The
Measuring Broadband America Report
concludes that a standardized set of broadband measurements can be implemented across a range of ISPs and scaled to support detailed regional assessments of broadband deployment and performance. The Commission notes that commercial hardware and software as well as some free, non-commercial options are available. Should the Commission adopt a uniform methodology for measuring broadband performance? If so, should it be uniform across different technologies? The Commission notes that it has requested more information on measurement approaches for mobile broadband in
Comment Sought on Measurement of Mobile Broadband Network Performance and Coverage,
75 FR 33303, June 11, 2010, and seeks to incorporate that proceeding's record. How should wireless providers measure speed? Should the Commission require fixed funding recipients to install SamKnows-type white boxes at consumer locations to monitor actual performance in a standardized way?

3. Should the Commission specify a uniform reporting format? Should test results be recorded in a format that can be produced to USAC and auditable such that USAC or the state commissions may confirm that a provider is, in fact, providing broadband at the required minimum speeds?

4. Should providers be required to provide the underlying raw measurement data to USAC? Are there legitimate concerns with confidentiality if such data are made public? Is it sufficient to have a provider certify to USAC that its network is satisfying the minimum broadband metrics and retain the results of its own performance measurement to be produced on request in the course of possible future audits?

5. Should the Commission consider easing the performance measuring obligations on smaller broadband providers? If so, what would be the appropriate threshold for size of provider before granting relief for measuring broadband? If so, how can it ensure that their customers are receiving reasonably comparable service?

ii. Reasonably Comparable Voice and Broadband Services

6. In the
USF/ICC Transformation Order,
the Commission directs the Wireline Competition Bureau (WCB) and Wireless Telecommunications Bureau (WTB) (together, the Bureaus) to develop and conduct a survey of voice and broadband rates to compare urban and rural voice and broadband rates. The Commission seeks comment on the components of the survey.

7. With respect to determining reasonable comparability of voice service rates for universal service purposes, should the Commission separately collect data on fixed and mobile voice telephony rates? Should fixed and mobile voice services have different benchmarks for purposes of reasonable comparability?

8. In the landline context, the Commission has previously surveyed the basic R-1 voice rate. What would the equivalent basic offering be in the mobile context? How should the Commission take into account packages that offer varying numbers of minutes of usage and/or additional features such as texting?

9. With respect to determining reasonable comparability of broadband services, should the Commission separately collect data on fixed and mobile broadband pricing and capacity requirements (if any)? For purposes of that analysis, how should the Commission consider, if at all, data cards provided by mobile providers?

10. For fixed broadband offerings subject to the Commission's initial Connect America Fund (CAF) requirements of 4 Mbps downstream/1 Mbps upstream, should the Commission survey advertised rates for such service, or the closest available offering in urban areas? How should the Commission take into account promotional pricing that may require a specific contractual commitment for a period of time?

11. Should fixed and mobile broadband services have different or the same benchmarks for purposes of reasonable comparability?

12. The Commission also seeks comment on how to compare mobile broadband to fixed broadband as product offerings evolve over time.

13. In the
USF/ICC Transformation Order,
the Commission also determines that rural rates for broadband service would be reasonably comparable to urban rates under 47 U.S.C. 254(b)(3) if rural rates fall within a reasonable range of the national average urban rate for broadband service. The Commission seeks comment on how specifically to define that reasonable range for broadband.

14. The Commission notes that in the voice context, today it requires states to certify that basic R-1 voice rates for non-rural carriers are no more than two standard deviations above the national average R-1 rate. Would using two standard deviations be the appropriate measure for reasonable comparability in the broadband context, or should the Commission adopt a different methodology for establishing such a reasonable range? Do unregulated broadband prices show relatively small variations, making another methodology more appropriate? For example, would prices normalized to disposable income be appropriate?

15. Should the Commission adopt a presumption that if a given provider is offering the same rates, terms and conditions (including capacity limits, in any) to both urban and rural customers, that is sufficient to meet the statutory requirement that services be reasonably comparable?

iii. Additional Requirements

16. Some commenters propose to require CAF recipients to comply with certain interconnection requirements. The Commission seeks comment on whether the Commission should require CAF recipients to offer IP-to-IP interconnection for voice service, beyond whatever framework it adopts more broadly. If so, what would the scope and nature of any such requirement be? Should any obligations be based on the requirements of 47 CFR 251(a)(1), since, as ETCs, the providers subject to these requirements will be telecommunications carriers? How would any such obligations be enforced?

17. The Commission also seeks additional comment on the proposal of Public Knowledge and the Benton Foundation that CAF recipients be required to make interconnection points and backhaul capacity available so that unserved high-cost communities could deploy their own broadband networks. How would such a requirement operate? Is it sufficient to require CAF recipients to negotiate in good faith with community broadband networks to determine a point of interconnection? If there are disputes, who should resolve them? Should there be reporting requirements associated with such an obligation (
i.e.,
should CAF recipients be required to report annually on unfulfilled requests for interconnection from community broadband networks)? What benefits might such a requirement bring that the Commission's other universal service policies are not meeting? What would the costs of such a requirement be, on funding recipients and on administration of the requirement?

18. The Commission also seeks comment on the proposal of Public Knowledge and the Benton Foundation

that the Commission should create a fund for a Technology Opportunities Program to assist communities with deploying their own broadband networks. How much money should the Commission set aside for such a program? Are there any legal impediments to the Commission running such a pilot program out of the universal service fund? The Commission acknowledges the important role that WISPs, non-profits, and other small and non-traditional communications providers play in extending broadband in rural America, including in areas where traditional commercial providers have not deployed. Are there other things the Commission should be doing to enable such entities to further extend broadband coverage, particularly in currently unserved areas?

B. Connect America Fund for Rate-of-Return Carriers

19. In response to the
USF/ICC Transformation NPRM,
75 FR 26906, May 13, 2010, the Rural Associations (NECA, NTCA, OPASTCO, ERTA, and WTA) proposed the creation of a new broadband-focused CAF mechanism that ultimately would entirely replace existing support mechanisms for rate-of-return carriers. Subsequently, the Rural Associations provided draft rules that provide additional context regarding the operation of their proposed CAF. The Commission now seeks focused comment on this proposal and asks whether and how it could be modified consistent with the framework adopted in the
USF/ICC Transformation Order
to provide a path forward for rate-of-return or carriers to invest in extending broadband to unserved areas. The Commission sets forth in Appendix G of the
USF/ICC Transformation Order
the draft rules, modified to take into account the rule changes adopted in the
USF/ICC Transformation Order,
and seeks comment on those draft rules. These rules, as modified, are not reproduced here, but are available in their entirety at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf.

20. Under the Rural Association Plan, loop costs would be allocated to the interstate jurisdiction based on the current 25 percent allocator or the individual carrier's broadband adoption rate, whichever is greater. This would have the practical effect of reducing over time the size of legacy support mechanisms, like HCLS, that offset some intrastate costs. The new interstate revenue requirement would also include certain key broadband-related costs (
i.e.,
middle mile facilities and Internet backbone access). In conjunction with this proposal, the Rural Associations also propose that their authorized rate-of-return be reduced from 11.25 percent to 10 percent. CAF support would be provided under this new mechanism for any provider's broadband costs that exceeded a specified benchmark representing wholesale broadband costs in urban areas. In particular, under this proposal, CAF funding would be computed by subtracting the product of an urban broadband transmission cost benchmark times the number of broadband lines in service, from the actual company broadband network costs (which would be the sum of last mile, second mile, middle mile, and Internet connection costs). The broadband transmission benchmark would have a fixed component that would increase from $19.25 in the first year to $24.75 in the eighth year, and a variable component that is tied to an individual company's broadband take rate. In addition, there would be certain provisions to mitigate the impact on companies that would receive reduced support under the modified mechanism. The purpose of the transitional stability mechanism would be to ensure that no study area would experience a reduction in total support of more than five percent, on an annual basis, which would be funded by carriers that receive a net increase in support.

21. The Rural Associations explain that their plan is calibrated to aim for a budget target of $2.05 billion in combined funding for USF and their suggested access restructure mechanism in the first year of implementation, and may grow to $2.3 billion by the sixth year. In the
USF/ICC Transformation Order,
the Commission adopts an overall budget target for rate-of-return companies of $2 billion over the next six years. Given that, how could the Commission best accommodate the Rural Association Plan within the Commission's budgetary framework? If savings are realized in other components of the CAF—for example, if competitive bidding leads to less support being disbursed through the CAF for price cap areas than has been budgeted for—should those savings be used to increase funding for rate-of-return carriers under the Rural Association Plan? Could the Commission more quickly transition existing support mechanisms to the framework proposed by the Rural Associations to stay within the overall budget? The Commission seeks year-by-year financial projections of any new mechanisms and the related impact on legacy support mechanisms, as well as the associated data and assumptions supporting those projections.

22. With respect to plan specifics, the Commission seeks comment on the benefits and the costs of providing support for middle mile facilities and access to the Internet backbone under the Rural Associations' proposal. On average for smaller carriers, approximately what proportion of the costs to deploy broadband networks and provide broadband services are attributable to middle mile and Internet backbone costs today? Commenters are encouraged to provide factual information to support any projections they submit into the record. Consistent with the overall framework adopted in the
USF/ICC Transformation Order
to impose reasonable limits on recovery of loop expenses, how could the Commission impose a constraint on the recovery of middle mile costs under this proposal?

23. The Rural Associations propose that costs be shifted to the interstate jurisdiction based on an individual carrier's Broadband Take Rate, which equals its total broadband lines divided by its total working access lines. Should this calculation be limited to residential lines? The Rural Associations define Broadband Line to include any line that supports voice and broadband, or only broadband, at a minimum speed of 256 Kbps downstream. The Commission seeks comment on that proposal, and asks whether broadband lines should be defined consistent with the broadband characteristics required in its public interest obligations. What would be the impact of a more stringent definition of a broadband line in this context? If the Commission were to adopt this proposal but shift costs to the interstate jurisdiction only for loops that provide speeds of at least 4 Mbps downstream and 1 Mbps upstream, how would that affect the financial projections regarding this proposal? Are there any legal, policy or practical implications to providing CAF support for lines where the end user customer does not subscribe to voice service from the ETC? The Rural Associations' Plan contemplates that rate-of-return carriers may offer standalone broadband; to the extent they do so, absent any other rule changes, what would be the impact on USF support for rate-of-return carriers? What rule changes would help provide appropriate incentives for investment in broadband-capable networks, while limiting unrestrained growth in support provided to rate-of-return companies?

24. How does the Rural Associations' proposal to alter the current 25 percent allocation of loop costs fit within, or inform, the Federal-State Joint Board on

Jurisdictional Separations' ongoing work to reform the separations process? Are there components of the Rural Association plan that should be referred to the Separations Joint Board and examined directly in that ongoing process?

25. In the
USF/ICC Transformation Order,
the Commission adopts a requirement that rate-of-return carriers offer speeds of 4 Mbps downstream and 1 Mbps upstream upon reasonable request. Should the Commission adopt a rule that rate-of-return carriers are not required to serve any location within their study area that is served by an unsubsidized competitor and will not receive support for those lines to the extent they choose to extend service to areas of competitive overlap? How would the Commission implement the Rural Associations' proposal in conjunction with such a rule? In particular, what would be the methodology for removing the broadband costs associated with areas of competitive overlap from the calculation of the proposed CAF support?

26. Is a broadband urban wholesale benchmark the right approach to determine support under a new rate-of-return mechanism, or would another approach be more in keeping with the statute and prior precedent? How does comparing wholesale urban costs relate to the Commission's obligation to ensure that rural retail rates are reasonable? Should such a benchmark be based on the wholesale cost of providing broadband, or another metric? Can wholesale broadband costs be calculated reliably, particularly where wholesale broadband services are not typically offered in urban areas? As an alternative, should the relevant benchmark be set based on the price of comparable retail services in a sample of urban areas?

27. The Rural Associations' benchmark proposal contemplates a fixed and variable component of the rural benchmark. How should the Commission establish the levels for those components, and should there be a company-specific component of the benchmark? If the benchmark is tied in any manner to the National Exchange Carrier Association (NECA) tariff rates or another industry metric, does that proposal bear any risks of gamesmanship by carriers to raise or lower individual rates to maximize universal service receipts?

28. What information would the Commission need to require from carriers to evaluate and implement that Rural Association proposal? Prior to implementation, should the Commission, for instance, require carriers to submit analyses showing their broadband adoption trends for service at varying speeds for the last five years for us to develop reasonable projections regarding broadband penetration in the future? What information should the Commission obtain regarding their middle mile costs to better understand the implications of the proposal to include middle mile costs in support calculations?

29. How would the proposed transitional stability plan mechanism operate? What would be the distributional impact of this proposal in terms of the number of companies that would see increases in support, compared to the number of companies that would see decreases in support?

30. The Rural Associations propose that incremental broadband build-out commitments would be tied to an individual company's ability to receive incremental CAF support for new investment, subject to prospective capital investment constraints and the budget target adopted by the Commission. If the Commission were to adopt such an approach, what specific metrics or build-out milestones should be established, and what reporting and certifications should be imposed to improve the Commission's ability to enforce such commitments? How should CAF associated with intercarrier compensation reform be incorporated into any rate-of-return CAF mechanism? Would the public interest obligations for CAF associated with intercarrier compensation reform be updated to reflect any new obligations? The Commission seeks comment more broadly on how its universal service policies can best accelerate broadband deployment to consumers served by rate-of-return carriers, many of whom reside in rural America. In the long term, should universal service support for rate-of-return carriers be distributed through separate mechanisms from the mechanisms used to distribute support for other types of carriers, or is a uniform national approach preferable to achieve its universal service objectives? The Commission seeks comment on any other proposals to transition areas served by rate-of-return carriers to CAF, or any other analysis or recommendations that could facilitate this process.

C. Interstate Rate of Return Represcription

31. As explained in the Order, rate-of-return carriers will continue to receive for some time a modified version of their legacy universal service support. The level of support they receive depends, in part, on the interstate rate of return allowed for plant in service. As a result, the Commission concluded it was necessary to evaluate the authorized interstate rate of return for rate-of-return carriers, which has not been updated in over 20 years. Three major associations representing rate-of-return carriers, as well as the State Members of the Federal-State Joint Board on Universal Service, have proposed a reduction in the current rate of return, which is currently set at 11.25 percent, in the context of overall reform. The Commission agrees that it is appropriate at this time to reexamine the rate of return as part of comprehensive reform of the universal service fund. The Commission seeks comment more generally on how this prescription fits within the broader reform framework for rate-of-return carriers, and specifically in what manner this prescription process should be linked to other proposals in this FNPRM, including the separate CAF support mechanism for rate-of-return carriers.

32. With respect to the prescription process itself, the Commission's statutory authority under 47 U.S.C. 205 provides the power to determine and prescribe those elements that make up the charge, including the interstate rate of return. The rate of return must be high enough to provide confidence in the financial integrity of the carrier, so that it can maintain its credit and attract capital. The return should also be commensurate with returns on investments in other enterprises having corresponding risks. On the other hand, the return should not be higher than necessary for this purpose.

33. The Commission last prescribed the authorized interstate rate of return in 1990, reducing it from 12 percent to 11.25 percent. The Commission believes fundamental changes in the cost of debt and equity since 1990 no longer allow it to conclude that a rate of return of 11.25 percent is necessarily just and reasonable as required by 47 U.S.C. 201(b). The rate-of-return carrier associations proposed a reduction in the interstate rate of return from the current 11.25 percent to 10 percent. The State Members of the Federal-State Joint Board proposed that the rate be reduced further to 8.5 percent. The State Members highlight that the interest rate on a three month Treasury Bill has fallen from 7.83 percent in 1990 to 0.15 percent in January 2011. Further, the Commission observes that the average 10-year treasury constant maturity rate has declined from approximately 8.1 percent in January 1991 to

approximately 2 percent in September 2011.

34. The Commission finds compelling evidence that its presently applied interstate rate-of-return, 11.25 percent, is no longer reflective of the cost of capital. The Commission believes updating the rate of return is necessary for rate-of-return carriers to both attract capital on reasonable terms in today's markets and encourage economically sound network investments. The Commission welcomes input from state regulators that may have insights from conducting intrastate rate of return represcriptions in recent years. The Commission also invites comment on how the Commission can ensure that the rate of return over time remains consistent with changes in the financial markets and cost of capital. The Commission seeks comment on means by which the rate of return can be adjusted automatically based on some set of financial triggers, and how any such triggers would operate.

35. When it last initiated an interstate rate of return prescription proceeding in 1998, the Commission sought comment on the methods by which it could calculate incumbent LECs' costs of capital. The Commission seeks comment on the issues raised in the
1998 Prescription Notice
generally and asks parties to provide the data responsive to the previous requests. In particular, the Commission seeks comment on the following:

36.
WACC.
Weighted average cost of capital (WACC) identifies the rate of return required to maintain the current value of a firm; alternatively, it is the minimum rate of return the firm needs to offer to investors to maintain access to its current supply of capital. WACC is the key component for prescribing the rate of return. The Commission seeks comment on how to calculate the WACC for the relevant companies. The Commission asks whether the formula to determine the WACC in 47 CFR 65.301-305 is the proper framework for this represcription, and whether any modification or update to the formula or inputs is warranted or necessary. Specifically, the Commission's rules provide that WACC is the sum of the cost of debt, the cost of preferred stock, and the cost of equity, each weighted by its proportion in the capital structure. Does this remain the correct approach? Should the Commission augment, or replace, its WACC calculation with any other analysis or approaches? Looking to the WACC calculated for an entire company, rather than for a specific line of business, is appropriate, for example, when thinking about setting an allowed rate-of-return for an entire company. In contrast, this overall WACC would not in general inform a business as to whether to undertake a specific project. Typically, specific projects that have greater risk and therefore a greater cost of capital than the entire company are only undertaken when much higher rates of return are expected. Given that many rate-of-return companies have diversified beyond regulated voice services, for example to offer broadband, video, or wireless services, should the WACC be computed for only the regulated portion of the company's business, or at the level of the entire company? The Commission seeks comment on this analysis, and how, if at all, it should impact its rate-of-return calculation, and use of WACC for these purposes.

37.
Data.
The Commission seeks comment on the appropriate data and methodologies the Commission should use to calculate the WACC. The Commission notes that some of the formulas in the rules rely on ARMIS data, which are no longer collected. In the absence of ARMIS data, what additional data should the Commission require and rely upon, and who should be required to file the data? Are there other publicly available data that could provide the necessary information? Does the absence of any particular data necessitate a different approach to any of the necessary calculations?

38.
Capital Structure.
Under the Commission's WACC calculation, the estimated cost of debt, preferred stock, and equity of a company are all weighted relative to their proportion in the firm's capital structure. A firm's capital structure can be measured on a book basis or market basis. The Commission seeks comment on whether the formula in 47 CFR 65.304 based on book values remains the correct approach, and whether any modification to the formula or inputs is warranted or necessary. Are there other components of the cost of capital that should be included in the capital structure, and should any of the elements listed in the rules be excluded?

39.
Surrogates.
Because the vast majority of rate-of-return carriers are not publicly traded, the Commission must select an appropriate set of surrogate firms, for which financial data is available publicly, to use as a basis for the cost of capital analysis. To do so, the Commission must select a group of companies for which there is available financial data and that face similar risks to rate-of-return carriers. The Commission's rules provide that the proper group of surrogates is all local exchange carriers with annual revenues equal to or above the indexed revenue threshold, which is $146 million this year. In the
1998 Prescription Notice
the Commission sought comment on what group of companies should be selected as surrogates and tentatively concluded at that time that the Regional Bell Operating Companies' (RBOCs) risk most closely resembled the risk encountered by the rate-of-return carriers. The Commission seeks comment on whether that group should be used as surrogates here, or whether another group of providers, for example smaller publicly traded carriers, not including the RBOCs, would better serve this purpose. Should the surrogate group include publicly traded rate-of-return companies only, or a mixture of publicly traded rate-of-return companies and smaller price-cap companies? Commenters proposing a particular surrogate group should clearly define that group, identify the publicly available financial data for that group, and explain how that group best reflects the business risks and cost of capital of rate-of-return carriers.

40.
Cost of Debt.
A firm's cost of debt can be estimated by dividing its total annual interest expense by its average outstanding debt measured on a historic book basis, or alternatively, on a market basis using the current yield to maturity. The Commission seeks comment on the cost of debt formula in 47 CFR 65.302 of the Commission's rules based on book values. The Commission had previously noted that the book basis is more objectively ascertainable, but may not fully reflect current investor expectations. The Commission seeks comment on that assessment, and the relative weight either the book or market approach should be given in its calculations. The Commission's rules provide that this measurement should occur for the most recent two years. Is this the correct time period, or is a longer or shorter period warranted?

41.
Cost of Preferred Stock.
A firm's cost of preferred stock can be calculated by dividing the total annual preferred dividends by the total proceeds from the issuance of preferred stock. The Commission asks whether the formula in 47 CFR 65.303 remains the correct one, and whether any modification to the formula or inputs is warranted or necessary. The Commission's rules provide that this measurement should occur for the most recent two years. Is this the correct time period, or is a longer or shorter period warranted? Can the WACC calculation be simplified by ignoring the cost of preferred stock (and the amount of preferred stock in the capital structure) without significantly affecting the accuracy of the WACC?

42.
Cost of Equity.
A firm's cost of equity can be estimated using a number of different approaches. The Commission's rules do not provide a specific formula for determining the cost of equity. In 1990, the Commission relied heavily on the discounted cash flow (DCF) methodology, which assesses a firm's stock price and dividend rate and forecasted growth rates to determine the cost of equity. There are a number of different variations of DCF, including historic and classic calculations. Alternatively, a firm's cost of equity can be calculated using the capital asset pricing model (CAPM). To use the CAPM, estimates of the risk free rate, the market risk premium, and the correlation of surrogate companies' common stock returns with the returns of the entire market of securities (or betas) must be made. The Commission seeks comment on these approaches, and asks whether any other methodologies should be incorporated into its analysis. For instance, should the Commission rely upon any cost of equity calculations made in state proceedings addressing intrastate rate of return, or other benchmarks based on the stock market as a whole, or a subset of companies or industries? Proponents of any particular methodology should detail their preferred approach and the relevant data required to perform the necessary calculations. Commenters should also justify the relative weight any particular methodology or comparison should have in the Commission's ultimate calculation. The Commission also seeks comment on the need, if any, to make adjustments with respect to flotation costs (
i.e.,
costs of selling new securities in the market) or dividends.

43.
Zone of Reasonableness.
The cost of equity, based on different methodologies and sets of reasonable assumptions and input values, as well as the WACC calculation can be used to develop a range from which the Commission can prescribe the new authorized interstate rate of return. This zone of reasonableness allows the Commission to take into account additional policy considerations before finalizing the new rate of return. The Commission seeks comment on the factors the Commission should consider in determining the rate of return from within that zone of reasonableness. The Commission asks how infrastructure deployment, particularly broadband deployment, and today's reforms should be accounted for in its analysis. Is the deployment of broadband significantly more risky than the voice telephony business, and does it have a significantly greater cost of capital? The Commission notes, for instance, that voice telephony has nearly universal penetration, while broadband adoption is more than 65 percent nationally. If some or all of the surrogates on which the WACC estimates are based are large companies such as Verizon and AT&T, should unique competitive and market conditions for rate-of-return carriers be reflected, and should any differences in diversification in rate-of-return carrier offerings compared to large carrier offerings, which now may include voice, video, wireless, and data services, be reflected, if at all? Should any allowances made in 1990, or proposed in 1998, apply here? The Commission also seeks comment on the need to make any adjustments to capture changes in the telecommunications market generally, and ask commenters proposing any such adjustments to explain why they are necessary to prescribe the allowable rate of return for multi-use plant that can provide voice, data, video and other services, in particular, and how any such adjustments should be structured. Lastly, the Commission asks whether any of these policy considerations should also be reflected in any other components of the WACC calculation, and, if so, in what manner.

44.
Preliminary Analysis.
The Commission estimate, using recent public data, the WACC for AT&T and Verizon and find it in the range of 6 to 8 percent. This range is consistent with other analysts' estimates. The Commission finds a similar range when considering other mid-size and competitive carriers. Even if the interest rate were to increase by 1.5 percent, which seems unlikely in today's economy, the WACC would remain in the range of approximately 7 to 8 percent. This preliminary analysis would conservatively suggest that the authorized interstate rate of return should be no more than 9 percent. The Commission seeks comment on this analysis and note that this preliminary analysis does not prejudge the Commission's ability to select a higher or lower rate of return in this proceeding.

45.
Impact on Universal Service Funding.
The Commission proposes that any reduction in the rate of return be reflected in its universal service rules by reducing the HCLS cap by a corresponding amount, and repurposing that funding amount consistent with the CAF framework and budget. The Commission also proposes that ICLS support be reduced by a corresponding amount as well. The Commission seeks comment on these proposals and how to calculate any such reductions. The Commission seeks comment on whether any savings realized from reducing the rate of return should be used to establish a new CAF mechanism for rate of return companies that would support new broadband investment. How would a change in the rate of return impact the Rural Association's CAF proposal discussed in this FNPRM, and does this prescription process impact the timing or operation of that proposal or any other transition of rate-of-return carriers to CAF-based support? In the alternative, the Commission seeks comment on the potential benefits of retaining the HCLS cap at the same amount even if the rate of return is reduced, which would have the effect of allowing funding to be redistributed to lower cost rate-of-return carriers that are ineligible for HCLS support today. Are there any other changes to other universal service distribution mechanisms that should be made to reflect a change to the rate of return?

46.
Tribally-Owned and Operated Carriers.
The Commission seeks comment on how to account for Tribally-owned and operated carriers in this prescription, and whether a different rate of return is warranted for these carriers. Tribal governments, and by extension, Tribally-owned and operated carriers, play a vital role in serving the needs and interests of their local communities, often in remote, low-income, and underserved regions of the country. Tribally-owned and operated carriers serve cyclically impoverished communities with a historical lack of critical infrastructure. Reservation-based economies lack fundamental similarities to non-reservation economies and are among the most impoverished economies in the country. Tribal Nations also cannot collateralize trust land assets, and as a result, have more limited abilities to access credit and capital. The Commission seeks comment on how such considerations should be reflected in its analysis.

47.
Other Considerations.
Finally, the Commission asks commenters to address any other changes that are needed to: (1) The data used in the prescription process; or (2) the calculations the Commission must perform to prescribe a new interstate rate of return. The Commission also invites commenters to provide any other relevant evidence or studies that could assist in this represcription.

D. Eliminating Support for Areas With an Unsubsidized Competitor

48. In the
USF/ICC Transformation Order,
the Commission concludes that it will phase out all high-cost support

received by incumbent rate-of-return carriers over three years in study areas where an unsubsidized competitor, or combination of unsubsidized competitors, offering voice and broadband service that meets its performance obligations serves 100 percent of the residential and business locations in the incumbent's study area. The Commission seeks comment on a proposed methodology for determining the extent of overlap, a process for preliminary determinations of such overlap, a process for the affected ETC to challenge the accuracy of the purported overlap, with input from the relevant state commission and the public, and how to adjust support levels in situations with less than 100 percent overlap.

49. To determine what rate-of-return study areas have 100 percent overlap by an unsubsidized competitor, staff performed a preliminary analysis. The analysis relies on two sets of data: TeleAtlas Wire Center Boundaries (6/2010) and data from the State Broadband Initiative (SBI) program administered by NTIA as of December, 2010.

50. First, staff identified which census blocks are in each rate-of-return study area, including a census block in a study area if the centroid of that census block is within the TeleAtlas boundaries for a wire center associated with the study area. Next, staff identified study areas where a wired provider other than the incumbent local exchange carrier offered broadband service at speeds of at least 3 Mbps downstream/768 kbps upstream to all of the census blocks in the study area. Staff excluded all resellers as identified in the SBI data and included only xDSL, cable, and fiber technologies.

51. The Commission seeks comment on whether this is an appropriate methodology for determining areas of overlap, which will result in adjustments to support levels for the rate-of-return ETC.

52. The Commission's staff performed a preliminary analysis examining census blocks smaller than two square miles and identified 18 rate-of-return study areas with 99 percent or greater overlap; and an additional 19 with greater than 95 percent overlap (a total of 37 study areas with greater than 95 percent overlap).

53. This analysis has several potential limitations. TeleAtlas data may not represent the actual incumbent local exchange carrier footprint in all instances. In addition, TeleAtlas data generally assign all geographies to one incumbent provider's footprint or another; however, in reality, there are large, generally unpopulated areas not served by any incumbent carrier facilities. As such, this analysis may over-estimate the rate-of-return ETC's footprint and under-estimate the extent to which the populated portions of that footprint are completely overbuilt by competitive networks.

54. SBI data have their limitations as well, as the Commission acknowledged in its most recent Broadband Progress Report. In addition, SBI data only measure the availability of broadband capable of delivering at least 768 kbps downstream and 200 kbps upstream. There is no direct measure of the availability of voice service, but the Commission presumed that an unsubsidized xDSL, fiber, or cable competitor that has deployed a broadband network that meets the SBI standard also is offering voice services.

55. The Commission notes that small blocks could be reported as served if as few as one location in that block has service or could have service within a typical service interval. The Commission seeks comment on whether this could lead us to count areas as served by an unsubsidized competitor even if a meaningful number of locations are, in fact, not served.

56. The Commission seeks comment on how best to deal with data relating to large blocks. Since neither NTIA nor the Commission has access to the actual location of businesses or homes, SBI population estimates data relies on estimating home locations by random placement of locations along roads. While this will provide an accurate view of the fraction of large blocks that are served in aggregate, it will likely lead to over- or under-estimates in any small number of some large blocks. How can the Commission use such data to determine whether a large block is served or not?

57. The Commission seeks comment on a process for identifying areas with greater than 75 percent overlap. The Commission proposes that WCB identify areas with greater than 75 percent overlap, utilizing the finalized methodology, and then publish the results of that analysis. The Commission proposes that WCB provide the affected ETC an opportunity to challenge the accuracy of the purported overlap and to take public comment for a period of time, such as 45 days. The Commission seeks comment on this proposal.

58. Several commenters supported state involvement in a process to determine areas of overlap. How could state commissions play a role in determining the extent of overlap? For instance, after WCB performs the overlap analysis, should there be a period of time for the relevant state commission to comment on the analysis? What would be a reasonable time frame to request an evaluation from a state commission regarding such overlap? Alternatively, could the Commission establish a process in which state commissions advise us, by a date certain, which study areas served by rate-of-return carriers have unsubsidized facilities-based competitors, and therefore should be subject to potential adjustments in high-cost support?

59. The Commission also seeks comment on whether support levels would need to be adjusted in areas where there is less than 100 percent overlap by an unsubsidized facilities-based provider of terrestrial fixed voice and broadband service. To the extent support levels do need to be adjusted, the Commission seeks further comment on how to do so.

60. In the
August 3 Public Notice,
76 FR 49401, August 10, 2010, the Commission sought comment on how to allocate costs between the overlap areas and the ILEC-only areas, including whether the Commission should use a cost model to accomplish that allocation.

61. In response to the
August 3 Public Notice,
NCTA recommended that the Commission should identify study areas served by rate-of-return regulated incumbent LECs where (1) unsubsidized broadband providers serve more than 75 percent of homes; and (2) current high-cost support exceeds projected support under the cost model for the remaining areas by more than 10 percent. During the interim period, in any study area that meets those criteria, the Commission should provide notice to the carrier that support will be reduced to the level suggested by the cost model unless it can demonstrate that a higher amount is necessary. The Commission seeks comment on this proposal.

62. The Commission notes that in the
USF/ICC Transformation Order,
it directed WCB to develop and finalize a cost model for use in price cap territories. Would it be appropriate to use such a model, after appropriate public input, in the way described by NCTA to create a presumptive reduction in support levels for rate-of-return carriers? For purposes of determining whether model-determined support in the remaining areas (
i.e.,
the areas of no overlap) exceeded current support by more than 10 percent, would the Commission need to allocate the current high-cost support between the areas of overlap and the areas where there is no overlap? To the extent that support would need to be allocated between

areas of overlap and no overlap, what criteria or standards would govern any such allocation? Should there be a rebuttable presumption that all costs are divided pro rata among access lines, and allocated to the census block in which that access line is located, so that absent an appropriate showing the recipient would receive the same support amounts per line, but only for those lines that fall outside the area of overlap? Cablevision suggests that only costs solely attributable to the non-competitive area should be supported, and that most of the costs of overhead (which presumably are largely associated with customers in the areas where there is competitive overlap) should not be recoverable. Would that be a workable approach? How should the Commission allocate costs associated with cable and wire facilities, and central office equipment, between competitive and non-competitive areas?

63. NCTA suggests that there be a process in which a carrier subject to reductions could demonstrate that a higher amount is necessary. Should reductions commence within a specified time period, such as 120 days, absent a showing that additional support is necessary? What process should be established for rate-of-return carriers subject to potential support adjustments to contest any such adjustments? For instance, should they be required to show that the adjusted levels would be inadequate to continue to provide voice service to consumers, for example, using the criteria the Commission set forth
in the USF/ICC Transformation Order
for petitions for waiver? Should the Commission undertake a total company earnings review in those circumstances? Should the Commission seek input from the relevant state commission on whether support amounts should be adjusted, and how that would impact consumers in the relevant communities?

64. If the Commission were to adopt any of these proposals to adjust support levels, over what time period should support levels be transitioned to new levels in situations where there is less than 100 percent overlap?

E. Limits on Reimbursable Capital and Operating Costs for Rate-of-Return Carriers

65. In the
USF/ICC Transformation Order,
the Commission adopts a rule to use benchmarks for reasonable costs to impose limits on reimbursable capital and operating costs for high-cost loop support received by rate-of-return companies. A specific methodology for calculating individual company caps for HCLS is set forth in Appendix H of the
USF/ICC Transformation Order,
which is available in its entirety at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf,
and is summarized herein at section
I.E.
1. The Commission seeks comment on using this methodology to impose limits on reimbursement from HCLS and proposes to implement this methodology for support calculations beginning July 1, 2012.

66. Appendix H of the
USF/ICC Transformation Order
uses, the methodology of quantile regression analyses to generate a set of limits for each rate-of-return cost company study area. These would limit the values used in eleven of the twenty-six steps in NECA's Cost Company Loop Cost Algorithm, which is used to calculate the study area's total unseparated cost per loop, and ultimately its HCLS. The regression-derived limits are set at the 90th percentile of costs for each individual step in NECA's Cost Company Loop Cost Algorithm, compared to similarly situated companies for each individual step. In other words, a company whose actual costs for a particular step in the algorithm are above the 90th percentile, compared to similarly situated companies, would be limited to recovering amounts that correspond to the 90th percentile of cost,
i.e.
the amount of cost that ninety percent of similarly situated companies are at or below when they submit costs for that particular step in the algorithm. The Commission seeks comment on whether the 90th percentile is the appropriate dividing line to disallow recovery of cost, or whether the Commission should establish a lower or higher threshold, such as the 85th percentile or the 95th percentile.

67. For the dependent variable in the regression analysis, Commission staff limited its analysis to cost data filed by rural rate-of-return companies that submit cost data, and excluded cost data filed by price cap carriers. For the independent variables, staff used 2010 block-level Census data that it mapped to each study area. The independent variables included: 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 several 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). The analysis thereby recognizes that many smaller study areas (those with lower populations to serve) and more rural geographies (those with lower population densities) legitimately have higher costs per line (
i.e.,
compared to the national average cost per loop) than larger study areas that contain significant urban populations.

68. As explained more fully in Appendix H of the
USF/ICC Transformation Order,
quantile regression has several advantages over other statistical techniques for identifying outliers. Although the Commission finds that quantile regression is an appropriate technique to use in setting benchmarks on reimbursable investment and expenses, the Commission invites further comment on alternative statistical techniques.

69. This methodology utilized variables that are currently available to the Commission. The Commission acknowledges that in their analysis using proprietary cost data, the Nebraska Companies also included variables for frost index, wetlands percentage, soils texture, and road intersections frequency. As noted in the
USF/ICC Transformation Order,
the soils data from the Natural Resource Conservation Service (NRCS) that the Nebraska study used do not cover all the study areas used in its regressions (such as Puerto Rico, Guam, American Samoa, U.S. Virgin Islands, Northern Mariana Islands, and Alaska). The Commission seeks comment on sources of other soil data that completely cover all the study areas or how to deal with those study areas where the SSURGO data are missing or incomplete. To the extent any commenter advocates use of a methodology that includes additional independent variables, they should identify with specificity the data source and the completeness and cost of the additional data, if not publicly available.

70. In the
USF/ICC Transformation Order,
the Commission concludes that support will be redistributed to those carriers whose unseparated loop cost is not limited by operation of the benchmark methodology. Based on 2010 NECA data filed with the Commission, and using an estimate of $455 for the national average cost per loop, it estimates this proposed methodology would reduce HCLS payments to about 280 rural rate-of-return cost study areas by an estimated $110 million, with approximately $55 million redistributed to approximately 340 cost company study areas whose unseparated loop cost is not limited by operation of the benchmark methodology. The Commission thus estimates that more study areas could see increases in HCLS than would see decreases.

71. In the
USF/ICC Transformation Order,
the Commission concludes that it should also limit recovery of excessive

capital and operating costs through the interstate common line support mechanism. The Commission seeks comment on how specifically to implement such a limit for ICLS.

72. Although the Commission currently does not receive detailed cost data for determining ICLS, the Commission believes the best approach for calculating benchmarks to limit reimbursable capital and operating costs for ICLS would be to use a methodology similar to the one developed for HCLS, and seeks comment on this proposal. In the
USF/ICC Transformation Order,
the Commission modifies its rules to require NECA to provide to the Commission upon request underlying data collected from ETCs to calculate payments under the current support mechanisms, including ICLS. In the
USF/ICC Transformation Order,
the Commission directs NECA to file the detailed revenue requirement data it receives from carriers no later than thirty days after release of the
USF/ICC Transformation Order
so that WCB could evaluate whether it should adopt a methodology using these data.

73. The Commission seeks comment on two other alternatives that would not use the detailed revenue data from NECA or require carriers to file additional data. First, the Commission could run a single regression using the total interstate revenue requirement for each carrier, but this approach does not distinguish between capital and operating costs. Second, the Commission could use the decrease in cost per loop resulting from the regressions used to limit HCLS to limit a carrier's interstate revenue requirement. While the Commission recognizes that there are some differences between the costs used to calculate unseparated loop costs and the common line revenue requirement, and between loops and access lines, the Commission seeks comment on whether they are equivalent enough for purposes of establishing benchmarks for reasonable costs.

74. The Commission seeks comment generally on whether network operation and investment by Tribally-owned and operated carriers is significantly different from non-Tribal conditions to warrant special treatment for purposes of establishing benchmarks for permissible capital and operating costs. The Commission seeks comment on whether the 90th percentile is the appropriate dividing line to disallow recovery of costs, or whether it should establish a lower or higher threshold, such as the 85th percentile or the 95th percentile. The Commission seeks comment here on whether a different percentile is appropriate for Tribally-owned and operated carriers, or whether it should otherwise alter the methodology to take into account the unique circumstances of Tribally-owned and operated carriers that are just beginning to serve their communities.

1. Modeling Limits on Reimbursable Operating and Capital Costs

75.
Overview.
This section summarizes the methodology set forth in Appendix H of the
USF/ICC Transformation Order,
which is available in its entirety at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf,
for determining carrier-specific limits on High Cost Loop Support (HCLS) payments to rate-of-return cost carriers with very high capital expenses (capex) and operating expenses (opex) relative to their similarly situated peers. The methodology operates within the current HCLS calculation algorithm, using information that is readily available to the Commission and to the public. This section describes both the econometric process used to establish carrier-specific limits to HCLS payments and the implementation process.

76. This work significantly extends the analyses submitted by the Nebraska Rural Independent Companies, which use ordinary least squares regression analysis to develop a framework to predict capital and operating expenditures. The Nebraska study examines data for a subset of rural rate-of-return carriers, and uses proprietary data not available to the Commission or to the public. In contrast, the proposed methodology described herein uses data currently available to the Commission and sets forth a detailed and implementable mechanism for examining all rural rate-of-return cost study areas and limiting HCLS payments in those study areas that have costs higher than the vast majority of their similarly-situated peers. The Commission uses quantile regression for parameter estimation rather than ordinary least squares for reasons set forth below. In addition, because directly implementing caps for capex and opex cannot be accomplished without fundamentally altering the way HCLS support payments are calculated today, the methodology described can be implemented quickly within the current HCLS framework.

77.
Methodology for Imposing Limits.
This methodology creates caps for 11 of the algorithm steps in NECA's 26-step Cost Company Loop Cost Algorithm. These algorithm steps are all functions of cost categories that are defined in NECA's Appendix B. The methodology calculates the maximum amount for each of the 11 algorithm steps as the 90th percentile cost for a similarly situated company. A company whose actual costs for a particular step in the algorithm are above the 90th percentile, compared to similarly situated companies, would be limited to recovering amounts that correspond to the 90th percentile of cost,
i.e.
the amount of cost that ninety percent of similarly situated companies are at or below when they submit costs for that particular step in the algorithm

78. The methodology involves a quantile regression analysis using data from nearly all the rural rate-of-return cost carriers for each algorithm step. The quantile regression parameter estimates are used to calculate a cap equal to the 90th percentile prediction for each carrier for that algorithm step. This is repeated for each of the rest of the examined algorithm steps. Once all the 90th percentile caps are calculated, the lesser of the company's capped algorithm step value and the original value is inserted into the appropriate algorithm step, which then flows into the later algorithm steps as before. The 11 algorithm steps in the analysis are identified below.

79. The Commission considered using an ordinary least squares-based analysis to set the caps, but decided that quantile regression was preferable for two reasons. First, error terms in bivariate OLS models of each algorithm step on the
loops
variable exhibit heteroscedasticity. While ordinary least squares-based analyses such as weighted least squares can certainly deal with heteroscedasticity, it complicates efforts to deal with other problems such as outliers and non-Gaussian error terms.

80. Further, ordinary least squares can produce biased parameter estimates in the presence of outliers. Ordinary least squares has methods available for dealing with outliers, such as excluding them from the analysis or using dummy variables to deal with them, but that requires exercise of judgment as to which observations are truly outliers. Also, given the data currently available to the Commission, distinguishing between study areas with high idiosyncratic costs (
i.e.,
those that truly are the most expensive-to-serve areas) and others with excessively high cost (
e.g.,
due to imprudent or unnecessarily large past investments) is challenging. Further complicating matters, some carriers may enjoy especially low costs compared to their peers for idiosyncratic reasons. While these observations would be outliers, they

would be masked by the virtue that they are somewhat “too low” and therefore it would be difficult to properly identify and deal with those outliers. Thus, simply looking only for observations that are too high may be insufficient. When using ordinary least squares, failing to account for all outliers (including the difficult-to-find outliers that are “too low”) could bias the regression coefficients which would then bias payments to carriers. Quantile regression solves this problem.

81.
Use of Quantile Regression.
Quantile regression, developed by Roger Koenker and Gilbert Basset in 1978, is a good solution to address these problems. It is similar to ordinary least squares regression, but where ordinary least squares minimizes the sum of squared residuals from the regression line, the median quantile regression minimizes the sum of absolute residuals from the regression line; for quantiles other than the median, quantile regression minimizes the sum of asymmetrically-weighted absolute residuals.

82. While ordinary least squares requires the error terms be homoscedastic, quantile regression makes fewer assumptions about the error term than ordinary least squares, and so there is no need to correct for heteroscedasticity. Thus the quantile regression methodology is robust to error structures that are non-Gaussian or violate the assumption of the normal distribution of errors required for unbiased estimation using ordinary least squares.

83. Quantile regression is also resistant to outliers, so the parameter estimates would be little changed by accounting for (or not) particular observations as outliers. That is, if one were to modify the analysis to account for any known outliers, then the Commission would not expect the list of study areas affected by the caps or the levels of those caps to change very much. Given the complexities of identifying outliers mentioned above, this is an attractive property.

84. Another significant advantage of quantile regression is that it allows the independent variables to have different effects on the study areas in the different quantiles. Thus, for illustrative purposes, if the number of housing units in a rural area increased while holding everything else constant, the size of the study area's cost increase could differ based on which quantile it is in. Hypothetically, the marginal effect of a change could even be positive for a carrier in one quantile (such as the 90th percentile) and negative for a carrier in another (such as the 10th percentile). This is not allowed in ordinary least squares, which assumes that the marginal effect is the same on all carriers. Given that the Commission is examining carriers with high costs relative to other carriers, this is an especially helpful property.

85.
Setting the Quantile Threshold.
This methodology uses the 90th percentile because carriers with costs exceeding 90 percent of their similarly-situated peers may raise questions about the prudence of such expenditures. In the Further Notice, the Commission seeks comment on whether to set the exact quantile to a lower or higher level such as the 85th percentile or the 95th percentile.

86. All of the regressions were log-log: all dependent and most independent variables were logged using the natural log. For those variables that were logged, the Commission added one before taking the log so that observations with values equaling zero could be included in the analysis.

87. While many of the measures of density are collinear, this is not problematic for this methodology because our goal is prediction, not statistical inference. Multicollinearity does not harm predictions.

88.
Dependent Variables.
Consistent with the idea of limiting reimbursements for capex, the Commission creates caps for algorithm steps 1, 2, 17 and 18. Algorithm steps 1 and 2 represent the two categories of gross plant. Algorithm steps 17 and 18 represent the depreciation and amortization associated with the plant represented in algorithm steps 1 and 2.

89. Consistent with the idea of limiting reimbursements for opex, the Commission creates caps for algorithm steps 7, 8, 13, 14, 15, 16, and 21. Algorithm steps 7 and 8 represent materials and supplies. Algorithm steps 13 and 14 represent maintenance. Algorithm steps 15 and 16 represent network support and general support expenses. Algorithm step 21 represents benefits other than corporate operations expenses. By creating caps for these 11 algorithm steps, the Commission limits the reimbursements for capex and opex expenditures that exceed those of the vast majority of similarly-situated carriers.

90. The Commissions excludes algorithm step 19 (corporate operations expense) from the regression analysis because limitations for that cost category have been separately adopted in the
USF-ICC Transformation Order,
and also excludes algorithm step 20 because it represents taxes. Additionally, the Commissions excludes algorithm step 22 (rents) because the regression fit is so poor. Because the regressions are run independently, the exclusion of algorithm step 22 from the methodology does not affect the other regressions.

91. As mentioned above, some of the early algorithm steps calculate factors (based on the reported cost categories) that flow into later algorithm steps. While the Commission does not directly modify algorithm steps 3, 4, 5, 6, 9, 10, 19, 20, and 22, the Commission allows changes in algorithm steps 1 and 2 to flow through to these algorithm steps. For example, algorithm steps 1 and 2 flow into algorithm step 20, which accounts for operating taxes to be assigned to loop costs. Thus, a reduction to algorithm step 1 and/or 2 could lead to a reduction in algorithm step 20, which would be in accordance with the approach of limiting HCLS payments to study areas with very high capital expenses.

92. As with the independent variables, the values of the algorithm steps in our analysis were logged to linearize the model. In two instances, a study area had a negative algorithm step value, which prevented us from taking the natural log for those two values. These two observations were omitted. The data from these two study areas were still included in all the other regressions. Where the algorithm step value was negative, the study area's original algorithm step value was retained.

93.
Independent Variables.
The independent variables in this study are those that the Commission believes correlate with each carrier's costs, are currently available to the Commission, and exist for all study areas in the regression analysis. The independent variables in the methodology are proxies for scale, density, and terrain. Other than the number of loops the study area serves, all the independent variables are from the 2010 United States census. As with the algorithm step variables, the Commission took the natural logs of all the independent variables to linearize the model.

94. Census block data were rolled up to study area boundaries using Tele Atlas data. There were 28 study areas without census block information that were excluded from this analysis. There are two significant advantages to using block-level census data. First, census blocks are most granular areas at which the Census Bureau publishes data, so using census blocks allows for the most accurate mapping of demographic data such as housing units to study areas. Second, census blocks are designated as being part of (in decreasing urbanness order) an urbanized area, urbanized

cluster or nonurban. In this fashion, the Commission allowed the nonurban (rural) independent variables to have different effects from the urban variables. For instance, the additional cost of serving an additional urban housing unit (holding all else constant) is likely to be different than the cost of serving an additional rural housing unit. Therefore, for each of the census-based independent variable in our analysis, the Commission rolled the data up based on whether they are in an urbanized area, urbanized cluster or rural area within the study area.

95. Not all the variables are significant in each regression, and there are some variables (such as the log of land area in urbanized clusters) that are not significant in any of the regressions. The Commission chose to use all the variables in all the regressions so long as the parent variable (such as land area) had at least one child variable (such as land area in a non-urbanized area) that was significant for at least one of the regressions in the analysis. While this meant that some regressions had many insignificant variables, this was not a problem because the goal of the regression was not to determine statistically significant correlations, but instead to generate 90th percentile predictions, which are unaffected by the addition of insignificant variables.

96. The Commission used two measures of scale,
loops
and
housing units.
The more loops the carrier is serving, the higher its expenses will be. The Commission uses the number of loops in NECA's October 2011 filing. The NECA data do not disaggregate loop data by urbanized clusters, urbanized areas or non-urban areas, so the Commission includes an additional scale variable with the urbanness breakout: housing units.

97. The Commission included two measures of density in our analysis, the
weighted housing unit density
and the
number of census blocks
in the study area. Because it is easier to wire businesses and homes when they are close to each other than when they are far apart, the Commission expects that costs will decrease with density. There are several ways one can measure density, however.

98. The simple method, which merely divides the study area's number of housing units by total area (or just land area) does not take into account the possibility that large swaths of land in a study area may have absolutely no homes or businesses. So the Commission calculated the weighted average density for each study area using census block data.

99. For each census block in each study area, the Commission calculated the block's density by dividing the number of housing units in the block by the area of the block. The Commission then set the weight for each block equal to the number of housing units in the block divided by the total number of housing units in the study area. Thus, blocks without any homes had no weight. Again, census data do not include the number of businesses in the block, so they could not be included in the density calculation.

100. The Commission included
land
and
percent water
in each study area as a rough indicator of terrain-driven costs. The Commission expects that holding everything else constant, the more land area that a carrier has in its territory, the more expensive it is to serve. Similarly, the more water area in the study area, the more expensive it should be to serve, because roads are typically routed around such water, so the natural pathways for the carrier's cabling are longer than they otherwise would be.

101.
Results.
The regression analysis was run for the four most recent years of data that NECA reported to the Commission: 2007-2010. The results for each year of data were very consistent with each other. The regression results from 2010 are available at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf.

102. Two versions of the quantile regression analysis are presented there: Table 1 includes the
weighted density
variable, and Table 2 excludes it. Perhaps surprisingly, weighted density was significant in only one of the regressions in Table 1. One may think weighted density is insignificant in this model because of the inclusion of the other density measures (the three blocks variables), but weighted density is still insignificant when the
blocks
variables are omitted. (Further, the pseudo R
2
drops when the Commission omits the
blocks
variables, so it keeps the
blocks
variables in the analysis and drops the
weighted density
variable.) The Commission therefore uses the model that excludes weighted density.

103. As expected, the
loops
variable was the most influential independent variable in predicting the values for the algorithm steps. The remaining variables are significant in many of the regressions (both when including and excluding the
weighted density
variable), and so they remain in the regressions.

104. As mentioned above, the study area's capped algorithm step values (or the original algorithm step values where they are lower than the capped algorithm step values) are inserted into the algorithm. These step values then flow into later algorithm steps that ultimately determine the Study Area Cost Per Loop value.

105. In addition, WCB has released additional relevant data at: at
http://fcc.gov/encyclopedia/rate-return-resources
under the heading “Connect America Fund FNPRM Appendix H Data [zip file].”

106.
Implementation.
This proposed methodology would be updated annually to establish limits on the Study Area Cost Per Loop values, which are used to determine eligibility for HCLS payments.

F. ETC Service Obligations

107. The Commission seeks comment on what action may be appropriate to adjust ETCs' existing service obligations as funding shifts to new, more targeted mechanisms. The Commission's aim is to ensure that obligations and funding are appropriately matched, while avoiding consumer disruption in access to communications services.

108. Under the new funding mechanisms established in the
USF/ICC Transformation Order
and proposed in the FNPRM, ETCs may receive reduced support in their existing service areas, and ultimately may no longer receive any federal high-cost support. The Commission seeks comment on whether such reductions should be accompanied by relaxation of those carriers' voice service obligations under 47 U.S.C. 214(e)(1) in some cases. For example, under the CAF Phase II process, an incumbent LEC that declines to undertake a state-level service commitment may lose some or all of its ongoing support in that state. Similarly, the Commission will gradually phase out all high-cost support received by incumbent rate-of-return carriers in study areas where an unsubsidized competitor—or a combination of unsubsidized competitors—offers voice and broadband service that meets the performance requirements for 100 percent of the residential and business locations in the incumbent's study area. Likewise, competitive ETCs that today receive support under the identical support rule will see funding in their existing service areas phased down over time as set forth in the
USF/ICC Transformation Order,
although those ETCs will be eligible for targeted funding to extend advanced mobile services through the Mobility Fund Phase I and Phase II. Some commenters have proposed that as these reductions occur, the Commission should relax or eliminate ETCs' voice service

obligations. The Commission seeks comment on this suggestion.

109. In addition, even in service areas where ETCs retain existing support levels or receive greater funding under the Connect America Fund, that funding will increasingly be targeted at the census block level, or to other precisely defined geographic areas. For example, in the
USF/ICC Transformation Order,
the Commission directed WCB to develop a cost model to estimate on a granular level, such as the census block, the amount of support necessary for deployment of a broadband-capable wireline network in high-cost areas above a specified threshold, and to use the output of that model to calculate the support that incumbent price cap companies would receive if they undertake state-level broadband service commitments. These price cap ETCs will still be subject to voice service obligations under 47 U.S.C. 214(e)(1), however, and the model-derived support amount will not include a separate estimate of support for the cost of providing voice service to locations below the specified threshold or those locations that will receive funding from the Remote Areas Fund that the Commission establishes in the
USF/ICC Transformation Order.
Likewise, competitive ETCs that bid for Phase I Mobility Fund support will be required to offer advanced mobile service in specific unserved census areas, but their state or federally-defined service territory may be substantially larger than their bid areas. The Commission seeks comment on whether, in situations such as these, some adjustment in affected ETCs' 47 U.S.C. 214(e)(1)obligation to offer service throughout their service area may be appropriate. Alternatively, the Commission seeks comment on whether it should adopt a federal framework for the process to be used in redefining service areas, by the states or the Commission, as appropriate. What specific modifications to 47 CFR 54.207 would be appropriate? Should there be uniform procedures for service area redefinition for ETCs that are incumbent carriers, regardless of whether the incumbent is classified as a rural carrier or a non-rural carrier in a particular study area?

110. The Commission proposes that existing ETC relinquishment and service area redefinition procedures, backstopped by the availability of forbearance from federal requirements, provide an appropriate case-by-case framework in which to address these issues in the near term, but the Commission also seeks comment on other approaches. To the extent that carriers find that the ETC relinquishment and service area redefinition procedures prove insufficient, the Commission proposes that case-by-case federal forbearance would provide an appropriate remedy in the near term, as the Commission gains experience under the new universal service mechanisms established in the
USF/ICC Transformation Order.
Under section 10 of the Act, 47 U.S.C. 160, the Commission must forbear from applying any regulation or any provision of the Act to a telecommunications carrier. The Commission has forborne from the 47 U.S.C. 214(e)(1) requirement that ETCs offer service using at least some of their own facilities and the 47 U.S.C. 214(e)(5) requirement that the service area of a competitive ETC conform to the service area of any rural telephone company service. The Commission sees no reason why it could not likewise forbear from the 47 U.S.C. 214(e)(1) requirement that carriers offer service throughout their service area if the statutory criteria for forbearance are met. In particular, the Commission notes that 47 U.S.C. 160 expressly grants it authority to tailor forbearance relief to any or some of telecommunications carriers' geographic markets, which the Commission believes would allow it forbear from enforcing a carrier's 47 U.S.C. 214(e)(1) obligations in some parts of its service area, while maintaining those obligations elsewhere. The Commission seeks comment on its interpretation of 47 U.S.C. 160, and on its proposal to use case-by-case forbearance to adjust carriers' 47 U.S.C. 214(e)(1) service obligations under its new funding mechanisms as necessary and in the public interest.

111. The Commission notes that some commenters have sought broader modifications to the 47 U.S.C. 214(e)(1) framework, and the Commission also seeks comment on these suggestions as alternatives or supplements to the case-by-case approach it proposed. In particular, some commenters suggest that the Commission adopt a rule under section 47 U.S.C. 201 or 47 U.S.C. 254(f) providing that an ETC's 47 U.S.C. 214(e)(1) service area should be limited to those specific geographies (
e.g.,
wire centers) where the ETC is receiving universal service support.

112. These commenters also suggest that the Commission grant blanket 47 U.S.C. 160 forbearance to the extent 47 U.S.C. 214(e)(1) requires ETCs to offer service in areas where they receive no universal service support. In the alternative, commenters suggest that the Commission reinterpret 47 U.S.C. 214(e)(1) to require the provision of service only in areas where those services actually are supported, contending that the requirement in 47 U.S.C. 214(e)(1) that ETCs offer the services that
are supported
suggests that the service obligation only attaches where support actually flows.

113. The Commission seeks comment on each of these proposals. In particular: Do these approaches appropriately balance federal and state roles in the designation and oversight of ETCs? Are they in tension with the requirement in 47 U.S.C.214(e)(4) that ETCs may only be allowed to relinquish their designations in areas served by more than one eligible telecommunications carrier,
i.e.,
areas where service will continue even if relinquishment is permitted? Are they in tension with the statutory language in 47 U.S.C. 214(e)(5) that the service area of a rural telephone company is its study area, unless the Commission and the states, establish a different definition? Are there ways to address this tension and ensure continued voice service to consumers in all areas of the country, while still taking steps to better align targeted funding with service obligations, as some commenters advocate? Is the proposed interpretation of 47 U.S.C. 214(e)(1) consistent with that section's requirement that carriers offer the services that are supported throughout the service area for which their ETC designation is received?

114. If the Commission were to establish a general rule that service obligations should only attach in the specific geographies (
e.g.,
wire centers) where the ETC is receiving universal service support, the Commission also seeks comment on what would be the appropriate geography to use. Should the Commission use geographies based on the actual network architectures of fund recipients, like wire centers? Or should the Commission pick technology-neutral geographies, such as census blocks, census tracts, or counties? How granular should the Commission's definition of the service requirement be? What would be the practical implications of an ETC having service obligations in certain census blocks and not others within a community (for instance having obligations outside of town, but not within the footprint of an unsubsidized provider that services only the town), and would that variation in obligation result in consumer confusion?

115. Finally, the Commission also seeks comment on how to ensure that low-income consumers across America continue to have access to Lifeline service, both in urbanized areas that

will not, going forward, receive support from the new CAF, and in rural areas that will, over time, receive support from the CAF. As a practical matter, how can the Commission ensure that low-income consumers that only wish to subscribe to voice service continue to have the ability to receive Lifeline benefits? The Commission emphasizes its ongoing commitment to ensuring that low-income consumers in all regions of the county have access to telecommunications and information services. Some commenters have suggested that the Commission create Lifeline-only ETCs. As a matter of federal policy, would it thwart achievement of the objectives established by Congress to relieve an existing ETC of the obligation to provide Lifeline if there was no other ETC in that particular area willing to offer Lifeline services?

G. Ensuring Accountability

116. The Commission proposes various alternative remedies available to it in the event an ETC fails to comply with its rules regarding receipt of high-cost universal service support.

117.
Financial Guarantees.
The first alternative remedy the Commission proposes for non-compliance with its rules is a financial guarantee. The Commission proposes that a recipient of high-cost and CAF support should be required to post financial security as a condition to receiving that support to ensure that it has committed sufficient financial resources to complying with the public interest obligations required under its rules and that it does in fact comply with the public interest obligations set forth in Section VI of the
USF/ICC Transformation Order.
In particular, the Commission seeks comment on whether all ETCs should be required to obtain an irrevocable standby letter of credit (LOC) no later than January 1, 2013. The Commission's goal in proposing this requirement is to protect the integrity of the USF funds disbursed to the recipient and to secure return of those funds in the event of a default, even in the event of bankruptcy.

118. The Commission seeks comment on applying post-auction procedures, including performance guarantees, to ETCs that apply for funding after a competitive bidding process. The Commission seeks comment on adopting financial performance guarantee requirements for ETCs that receive funding through processes other than competitive bidding.

119. Should ETCs that will receive less than a specified amount of support be exempted from any requirement to provide an LOC? On what basis should the Commission adopt such a blanket exemption? For instance, should it be based on the aggregate amount of support provided on a study area basis, and at what dollar level should the Commission grant such an exemption?

120. The Commission seeks comment on how to determine the amount of the LOC necessary to ensure compliance with the public interest obligations imposed in the
USF/ICC Transformation Order,
as well as the length of time that the LOC should remain in place. For example, the amount of the LOC could be determined on the basis of the ETC's estimated annual funding amount. Should the amount of an initial LOC, or a subsequent LOC, also ensure the continuing maintenance and operation of the network? The Commission also recognizes that a recipient's failure to fulfill its obligations may impose significant costs on the Commission and, potentially, on the USF itself if there is a need to provide additional support to another ETC to serve the area. Should the amount of an initial LOC or a subsequent LOC include an additional amount that would serve as a default payment? Under what circumstances should the ETC be required to replenish the LOC? For how long should an ETC be required to keep the LOC in place? Is there a finite time after which the LOC will no longer be necessary to safeguard the Fund?

121. The Commission proposes that under the terms of the LOC, failure to satisfy essential terms and conditions upon which USF support was granted, 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 to recover that support and any default payment. The Commission, for example, would draw upon the LOC when the recipient fails to meet its required deployment milestone(s) or other public interest obligations. Are there any situations in which the Commission should deem non-compliance to be non-material, and therefore not warrant a draw on the letter of credit? Should recipients be provided a period of time to cure non-performance before drawing on the letter of credit? The Commission proposes that failure to comply will be evidenced by a letter issued by the Chief of either WTB or WCB or their designee, which letter, attached to an LOC draw certificate shall be sufficient for a draw on the LOC.

122.
Penalties.
The Commission seeks comment on alternatives to the financial guarantees including whether revocation of ETC designation, denial of certification resulting in prospective loss of support, or recovery of past support amounts is an appropriate remedy for failure to meet their public interest obligations. The Commission also seeks comment on the specific circumstances in which these alternatives might apply, if they are different than the specific circumstances in which financial guarantees would apply.

123. The Commission also seeks comment on what specific triggers might lead to support reductions, how much support should be reduced, how best to implement support reductions, and how the review and appeal process should be revised. If the Commission adopts a framework for partial withholding of support, should it establish levels of non-performance that would result in the loss of specific percentages of support? For example, should the Commission establish levels one through four of non-compliance, with corresponding loss of support of 25, 50, 75, and 100 percent? If so, what criteria would the Commission use to determine a carrier's level of non-performance?

124. USAC recovers support when recipients have received support to which they are not entitled, typically accomplishing the recovery through adjustments in future disbursements. Should the Commission adopt rules identifying what constitutes a material failure to perform, warranting recovery of past funding? For instance, should price cap companies be subject to a loss of prospective support for failure to meet intermediate build-out requirements? Should they be subject to recovery of past support amounts if they fail to meet the performance requirements at the end of the five-year term? Should there be a sliding scale for recovery of past amounts depending on the degree to which the carrier fails to meet a specified milestone? Should the Commission continue the current practice of offsetting any support adjustments against future disbursements?

125. Should the Commission adopt rules that create self-executing reductions in support that would be administered by USAC? The Commission notes that under its current rules, any party that disputes action by USAC may seek review by the Commission. What additional processes, if any, should the Commission put in place for ETCs to dispute any support adjustments for non-performance?

126. The Commission recognizes that, under 47 U.S.C. 214, ETC designation is a responsibility shared between the states and the Commission. The Commission welcomes input from its

state colleagues on the circumstances in which ETC designations have been revoked by states in the past, and what circumstances might warrant revocation under its reformed Connect America Fund. Should the Commission adopt a national framework for when ETC revocation is appropriate?

127. The State Members of the Universal Service Joint Board suggest that denial of certification—which today results in loss of support for the coming year—is a draconian remedy that should be available if necessary, but avoidable if possible. The Commission seeks comment on what circumstances would justify such a result. The State Members also proposed in their comments that carriers should be disqualified from receiving support during periods in which they fail to provide adequate information to verify continuing eligibility to receive support and adequate to perform support calculations. The Commission seeks comment on this proposal and welcomes input from its state partners on how it can ensure there are significant consequences for material non-compliance.

128. An alternative approach might be to separately count compliance with each public interest obligation established in Section VI of the
USF/ICC Transformation Order,
with non-compliance with each individual obligation resulting in the ETC losing a set percentage of support for each obligation it fails to meet. Must non-compliance with an obligation be material? If so, how will the Commission define material for these purposes?

H. Annual Reporting Requirements for Mobile Service Providers

129. In the
USF/ICC Transformation Order,
the Commission seeks to take several steps to harmonize and update its annual reporting requirements for recipients of USF support, including extending the current annual reporting requirements to all ETCs. All ETCs that receive high-cost support, except ETCs that receive support solely pursuant to Mobility Fund Phase I, which has separate annual reporting obligations, will be required to annually file the information required by new 47 CFR 54.313 with the Commission, USAC, and the relevant state commission, authority in a U.S. Territory, or Tribal government or authority, as appropriate. In the
USF/ICC Transformation Order,
the Commission also establishes new reporting requirements for the annual reports that will ensure that recipients are complying with the new broadband public interest obligations it adopts. Because Mobility Fund support will differ in some respects from support received under other USF high-cost support mechanisms, in the section of the
USF/ICC Transformation Order
adopting the first phase of the Mobility Fund, the Commission requires recipients of Mobility Fund support to file annual reports specific to that program. Mobility Fund recipients that receive support under other high-cost programs may file a separate Mobility Fund annual report or they may include the required information with respect to their Mobility fund support in a separate section of their annual reports filed pursuant to new 47 CFR 54.313.

130. The Commission seeks comment here on whether there are certain requirements in its new annual reporting rule for ETCs, new 47 CFR 54.313, that do not reflect basic differences in the nature and purpose of the support provided for mobile services. Specifically, the Commission seeks comment on whether it should revise 47 CFR 54.313 reporting requirements or adopt new reporting requirements that would apply to support an ETC receives to provide mobile services. For example, new 47 CFR 54.313 requires ETCs to include in their annual reports, beginning with their April 1, 2014 report, information regarding their progress on their five-year broadband build-out plan. What type of similar information would be appropriate to require of mobile service providers who receive support from Phase I or Phase II of the Mobility Fund? ETCs are currently required to report annually on the number of requests for service from potential customers within the ETC's service areas that were unfulfilled during the past year. Should the Commission continue to require this information from mobile service providers in view of the fact that the measure of performance for ETCs receiving Mobility Fund support is coverage of the supported areas, and not the number of subscribers to the supported service?

131. ETCs must also include in their annual reports detailed information on outages that meet certain minimum criteria described in the rule, including the geographic areas affected and the number of customers affected. For mobile service providers, how should the number of affected customers be counted? Should the number of affected customers be the number of customer billing addresses within the affected areas, the average number of customers served by the towers that are out-of-service during the outage, or some other measure?

132. The Commission seeks comment on the annual reporting issues and on any other aspects of its annual reporting requirements that commenters believe do not reflect the nature of mobile services being offered and the objectives of the USF support they receive and that require a new annual reporting rule specifically directed to mobile service providers.

I. Mobility Fund Phase II

133. The
USF/ICC Transformation Order
establishes an annual budget for Mobility Fund Phase II of $500 million, up to $100 million of which will be reserved to support Tribal lands, including Alaska. The Commission proposes rules to use the Mobility Fund Phase II to ensure 4G mobile wireless services in areas where such service would not otherwise be available, and seeks comment on certain alternative approaches.

i. Overall Design

134. The Commission proposes to use a reverse auction mechanism to distribute support to providers of mobile broadband services in areas where such services cannot be sustained or extended without ongoing support. The Commission proposes that the reverse auction be designed to support the greatest number of unserved road miles or other units within the overall Mobility Fund budget. Assigning support in this way would be consistent with its general decision to use market-driven policies to maximize the value of limited USF resources, and should enable us to identify those providers that will make most effective use of the budgeted funds, thereby benefiting consumers as widely as possible. The Commission discusses the proposed framework for the program and the auction mechanism and seeks comment on alternatives, including the use of a model to determine both the areas that would receive support and the level of support.

ii. Framework for Support Under Competitive Bidding Proposal

a. Identifying Geographic Areas Eligible for Support

135. The Commission seeks to provide funding only in geographic areas where there is no private sector business case to provide mobile broadband and high quality voice-grade service. The Commission proposes to identify such areas by excluding all areas where unsubsidized 3G or better services are available. The Commission proposes to use census blocks as the minimum size geographic unit for identifying eligible areas.

136.
Identifying Areas Eligible for Support.
The Commission proposes to identify areas eligible for support on a census block basis, which would permit us to target Phase II support more precisely than if the Commission were to use a larger area. As a proxy for identifying areas where private investment is likely to undertake to provide mobile broadband services, and thus, areas not eligible for support, the Commission proposes to use areas where an unsubsidized provider offers 3G or better service based upon the most recent available data prior to auction. Under this proposal, any census block where 3G or better service is available from at least one unsubsidized provider would not be eligible for support. Census blocks with 2G service available from an unsubsidized provider as well as census blocks where 3G service is provided only by subsidized provider(s) would be eligible. Specifically, the Commission would use American Roamer data to identify areas where there are mobile networks that offer service using EV-DO, EV-DO Rev A, UMTS/HSPA and HSPA+, LTE, and any other technologies offering equivalent speeds or better. The Commission may wish to prioritize support to areas that also lack 2G coverage, and American Roamer data could also be used for this purpose. As with Phase I, the Commission proposes to use the centroid method to establish whether service using particular technologies is available to a particular census block. Census blocks that do not have such service would be eligible for Phase II support. The Commission seeks comment on these proposals. In particular, the Commission seeks comment on whether there are other proxies for determining where private investment will deploy mobile broadband, other data sources, other technologies, or methods other than the centroid method that the Commission should consider in determining whether particular census blocks should be excluded from eligibility for support to promote its objectives.

137. The Commission also seeks comment on how a cost model could be used to identify areas for which providers would be able to seek support in a Phase II auction. The Commission notes that US Cellular and MTPCS have filed analyses based on cost models for the deployment of wireless services. Elsewhere, the Commission seeks comment on their submissions. In particular, the Commission discusses at greater length how a cost model could be used both to identify areas where support should be offered and, as an alternative to competitive bidding, to determine the amount of support to be offered. The Commission invites comment on the possibility of using a mobile wireless cost model only to identify the areas that would be eligible for Phase II support, with the actual award of support through a reverse auction. The Commission also seeks comment on using other criteria—such as the availability of unsubsidized services to refine a model-based definition of areas for which providers will be eligible to seek support in the auction. For example, the Commission could make ineligible for Phase II support areas with unsubsidized providers, or areas where any provider has made a public or regulatory commitment to provide unsubsidized service, even if a cost model indicates that costs are high.

138.
Minimum Size Unit for Bidding and Support.
The Commission proposes to identify eligible areas at the census block level and that the census block should be the minimum geographic building block for defining areas for which support is provided. Because census blocks are numerous and can be quite small, the Commission believes that the Phase II auction should provide for the aggregation of census blocks for purposes for bidding. The Commission could set out by rule a minimum area for bidding comprised of an aggregation of eligible census blocks. In addition, the auction procedures could provide for bidders to be able to make all-or-nothing package bids on combinations of bidding areas. Package bidding procedures could specify certain predefined packages, or could provide bidders greater flexibility in defining their own areas, here comprised of census blocks. The Commission seeks comment on possible approaches to aggregating census blocks.

139. Under the Census Tract Approach, the Commission would define a minimum aggregation of blocks by rule, for example by aggregating eligible census blocks based on the census tract in which they lie, so that bidders would bid for support for all eligible census blocks within that tract. Under the Bidder-Defined Approach, the Commission would not require a minimum aggregation of census blocks, but would establish package bidding procedures that would allow bidders to group the specific census blocks on which they wanted to bid.

140.
Census Tract Approach.
Under this approach the Commission would create a minimum unit for bidding that is larger than an individual block. For example, the Commission could use a census tract, so bidders would bid for support to serve all the eligible blocks within the census tract. The Commission asks for comment on whether tracts would be an appropriate unit here or whether there is some other minimum grouping of census blocks that would be preferable, such as block groups. Should the Commission use a different minimum geographic unit in areas where census blocks and/or census tracts are especially large? For example, if the Commission group blocks into tracts for bidding, should it consider making an exception if the particular tract is especially large, and use individual blocks or block groups for bidding in those cases, as the Commission has done in Alaska for Mobility Fund Phase I? Regardless of the minimum unit, there are a number of different auction designs that could be used. For example, one possibility would be to use a clock auction format with bidding on tracts. Without package bidding, bidders could manage aggregations of tracts through multiple rounds of bidding. For package bidding, the Commission could allow bidders to flexibly aggregate census tracts (or other units) of their choosing or it could allow bidders to place package bids on pre-defined packages of tracts. The Commission seeks comment on bidders' interest in and need for package bidding as it relates to its choice of a minimum unit for bidding and support. Under the Census Tract Approach bidders would be required to serve a specified percentage (
e.g.,
75 percent) of the units (or road miles, as proposed) in the unserved census blocks.

141.
Bidder-Defined Approach.
Under this approach, the Commission would not specify a minimum aggregation of census blocks but would provide bidders with considerable flexibility to aggregate the specific census blocks they proposed to serve. Bidders would be able to make bids that specify a set of census blocks to be covered, and a total amount of support needed. The Commission seeks comment on whether there should be a boundary on bids under such procedures—for example, would it be useful to have a rule that all the census blocks in a given bid must be within a cellular market area (CMA)? Under this approach, a bidder could be permitted to submit several bids, up to a limit that would be specified in the auctions procedures. Bids by that bidder that contained some geographic overlap would be treated as mutually exclusive,
i.e.,
only one could be awarded. Bids that do not overlap could win simultaneously. The Commission would use a computer optimization to identify the set of bids that maximizes the

number of eligible road miles (or other supported units) covered subject to the budget constraint. Under this general approach, there may be some limited scenarios where eligible road miles may be covered by multiple winners—
i.e.,
whenever the optimization determines that the set of winning bids that would maximize the total road miles or other units covered within the budget requires limited duplicative coverage, the Commission would permit that coverage. The Commission seeks comment on whether such an approach could be sufficiently contained to ensure that it is truly making the most efficient use of the fund given limited resources. The Commission also notes that allowing overlap among providers could reduce the revenues a bidder expects from customers, and therefore could increase the support a bidder would seek. The Commission seeks comment on whether this is a significant concern, and whether it could be addressed by allowing bidders to make bids contingent on the overlap being less than some percentage. In addition providers would be required to serve all the units in the census block.

142. In order to bid effectively, presumably bidders would need to match eligible census blocks to their business plans, and know the number of road miles (or other supported units) within each census block. Prior to an auction, WTB and WCB would provide information on the specific eligible census blocks and the units associated with each. The Commission could provide information through one or more bidder tools on its Web site. Those tools, for instance, could allow bidders to readily match up their own information on the geographic areas in which they are interested with the blocks available in the auction. Bidder tools could also make readily accessible to potential bidders various online data, including maps, regarding the unserved blocks in which they are interested—such as associated road mile or population (or other units) data so that bidders could consider potential per-unit bids for coverage of various possible geographic areas. Providing these tools could facilitate participation by small as well as large providers. The Commission seeks comment on whether there is additional information or help that the Commission should provide to bidders would need from the Commission or whether the tools needed for this matching and calculation can be developed by bidders.

143. The Commission invites comment on any other advantages and disadvantages of the Census Tract and Bidder-Defined approaches from a provider's perspective. Commenters should address the minimum scale at which providers may want to incorporate Phase II support into their existing networks; the simplicity of the auction mechanism; the ability of providers to capture efficiencies, and to formulate and implement bidding strategies; and ease of administration.

144.
Prioritizing Areas.
The Commission seeks comment on whether it should target areas currently without any mobile service for priority treatment under Phase II. For instance, should it provide a form of bidding credit that would promote the support of areas with no mobile service at all or only mobile service at lower than current generation or 3G levels?

145. The Commission also seeks comment on whether it should prioritize coverage to any areas in which previously provided support is being phased down. To the extent that parties believe there is a risk of meaningful loss of coverage, the Commission welcomes comments on how to define the areas at risk, and how to address the risk. Once the areas are defined, they could be prioritized, for example, by making available bidding credits for these areas.

b. Establishing Bidding and Coverage Units

146. The Commission proposes to base the number of bidding units and the corresponding coverage requirement on the number of road miles in each eligible geographic area. Requiring coverage of road miles directly reflects the Mobility Fund's goals of supporting
mobile
services, and indirectly reflects many other important factors—such as business locations, recreation areas, and work sites—since roads are used to access those areas. And while traffic data might be superior to simple road miles as a measure of actual consumer need for mobile coverage, the Commission has 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 Phase II, the Commission expects that support will tend to be disbursed to areas where there is greater traffic. The Commission seeks comment, however, on the use of other units for bidding and coverage—such as population and workplaces—instead of or in combination with road miles.

147. The Commission proposes to use the TIGER data collected by the Census Bureau to determine the number of road miles associated with each eligible geographic area. TIGER data is available nationwide on a standardized basis and can be disaggregated to the census block level. The Commission anticipates that the Bureaus would exercise their delegated authority to establish the units associated with each eligible census block and identify the specific road categories within TIGER considered—primary, secondary, local, etc.—to calculate the units associated with a given area. The Commission seeks comment on this proposal.

c. Maximizing Consumer Benefits

148. The Commission's goal is to maximize the coverage of mobile broadband services supported with its annual Mobility Fund Phase II budget. In contrast to the former rules, under which multiple providers are entitled to an award of portable, per-subscriber support for the same area, the Commission expects that to maximize coverage within its budget it will generally be supporting a single provider for a given geographic area. The Commission would support more than one provider in an area only if doing so would maximize coverage. The Commission seeks comment on whether allowing overlap among providers would unduly compromise its objective to maximize consumer benefits. The Commission plans to take into account its experience implementing Mobility Fund Phase I to ascertain whether there are ways to further minimize overlap during the implementation of Mobility Fund Phase II. The Commission is mindful that its statutory obligation runs to consumers, rather than carriers, and that it must target limited public funds in a way that expands and sustains the availability of mobile broadband services to maximize consumer benefits. To further protect consumer interests, the Commission also proposes to adopt certain terms and conditions to promote leveraging of publicly funded investment by other providers operating in the same areas as a recipient of support under Phase II of the Mobility Fund. The Commission invites comment on this approach, which is consistent with one the Commission has taken elsewhere with respect to universal service support.

149. The Commission also seeks comment on whether and to what extent recipients of Mobility Fund Phase II support should be permitted to partner with other providers to fulfill the public interest obligations associated with Phase II. For example, should the Commission permit eligible providers to seek support together, provided that they disclose any such arrangements when applying for a Mobility Fund

auction? The Commission invites comment on whether it should establish any limit on the number of geographic areas for which any one provider may be awarded Phase II support. If the Commission were to do so, what effect would this have on those mobile providers that focus on serving rural areas? Is there another basis on which it should limit the amount of Phase II support that goes to any one provider?

d. Term of Support

150. The Commission proposes a fixed term of support of 10 years and, in the alternative, seeks comment on a shorter term. In considering the optimal term for ongoing support, the Commission seeks to balance providing adequate certainty to carriers to attract private investment and deploy services while taking into account changing circumstances. How should the timeframes for deployment and private investment be synchronized with the pace of new technology? What is the minimum period for making deployment practicable? In light of possible improvements in technology, would it be more practicable to provide for a longer term and require an increase in performance during the term? Or, would it be more appropriate to provide for a shorter term that reflects the likely life cycle of existing technologies? The Commission seeks comment on this proposal and on the option for a shorter term.

151. The Commission also seeks comment on whether it is appropriate to establish any sort of renewal opportunity for support, and on what terms. For instance, should the Commission follow its licensing regime which allows for a renewal expectancy if buildout and service obligations have been met? Alternatively, should the Commission take into account the extent to which a recipient utilizes new technologies to exceed the minimum performance requirements established at the outset of the term of support? To what extent should the unforeseen development of new products and services in unsupported areas be taken into account w

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2011-31924. Public record. Not legal advice.