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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2011-32411

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 28, 2011
- **Citation:** 76 FR 81562

## Text

FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 0, 1, 20, 36, 51, 54, 61, 64, and 69
[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:

Final rule; policy statement.

SUMMARY:

In a rule published November 29, 2011, the Federal Communications Commission (Commission) comprehensively reformed and modernized 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. The Commission adopted fiscally responsible, accountable, incentive-based policies to transition these outdated systems to the Connect America Fund, ensuring fairness for consumers and addressing the communications infrastructure challenges of today and tomorrow. The Commission uses measured but firm glide paths to provide industry with certainty and sufficient time to adapt to a changed regulatory landscape, and establish a framework to distribute universal service funding in the most efficient and technologically neutral manner possible, through market-based mechanisms such as competitive bidding. This document provides additional information to the final rule document published on November 29, 2011.

DATES:

Effective December 29, 2011.

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 summary of the Commission's Report and Order (R&O) in 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, released on November 18, 2011. The executive summary of the R&O, and the final rules adopted by the R&O were published in the
Federal Register
on November 29, 2011, 76 FR 73830. The full text of this document is available for public inspection during regular business hours in the FCC Reference Center, Room CY-A257, 445 12th Street SW., Washington, DC 20554. Or at the following Internet address:
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-161A1.pdf
.

I. Adoption of a New Principle for Universal Service

1. In November 2010, the Federal-State Joint Board on Universal Service (Joint Board) recommended that the Commission “specifically find that universal service support should be directed where possible to networks that provide advanced services, as well as voice services,” and adopt such a principle pursuant to its 47 U.S.C. 254(b)(7) authority. The Joint Board believes that this principle is consistent with 47 U.S.C. 254(b)(3) and would serve the public interest. The Commission agrees. 47 U.S.C. 254(b)(3) provides that consumers in rural, insular and high-cost areas should have access to “advanced telecommunications and information services * * * that are reasonably comparable to those services provided in urban areas.” 47 U.S.C. 254(b)(2) likewise provides that “Access to advanced telecommunications and information services should be provided in all regions of the Nation.” Providing support for broadband networks will further all of these goals.

2. Accordingly, the Commission adopts “support for advanced services” as an additional principle upon which the Commission will base policies for the preservation and advancement of universal service, and thereby act on one of the Joint Board's 2010 recommendations. For the reasons discussed above, the Commission finds, per 47 U.S.C. 254(b)(7), that this new principle is “necessary and appropriate.” Consistent with the Joint Board's recommendation, the Commission defines this principle as: “Support for Advanced Services—Universal service support should be directed where possible to networks that provide advanced services, as well as voice services.”

II. Goals

3.
Discussion.
The Commission adopts five performance goals to preserve and advance service in high cost, rural, and insular areas through the Connect America Fund and existing support mechanisms. The Commission also adopts performance measures for the first, second, and fifth of these goals, and direct the Wireline Competition Bureau and the Wireless Telecommunications Bureau (Bureaus) to further develop other measures. The Commission delegates authority to the Bureaus to finalize performance measures as appropriate consistent with these goals.

4.
Preserve and Advance Voice Service.
The first performance goal is to preserve and advance universal availability of voice service. In doing so, the Commission reaffirms its commitment to ensuring that all Americans have access to voice service while recognizing that, over time, voice service will increasingly be provided over broadband networks.

5. As a performance measure for this goal, the Commission will use the telephone penetration rate, which measures subscription to telephone service. The telephone penetration rate has historically been used by the Commission as a proxy for network deployment and, as a result, will be a consistent measure of the universal service program's effects. The Commission will also continue to use the Census Bureau's Current Population Survey (CPS) to collect data regarding telephone penetration. Although CPS data does not specifically break out wireless, VoIP, or over-the-top voice options available to consumers, a better data set is not currently available. In recognition of the limitations of existing data, the Commission is considering revising the types of data it collects, and the Commission anticipates further Commission action in this proceeding, which may provide more complete information that can be used to evaluate this performance goal.

6.
Ensure Universal Availability of Voice and Broadband to Homes, Businesses, and Community Anchor Institutions.
The second performance goal is to ensure the universal availability of modern networks capable of delivering broadband and voice service to homes, businesses, and community anchor institutions as now defined in 47 CFR 54.5. All Americans in all parts of the nation, including those in rural, insular, and high-cost areas, should have access to affordable modern communications networks capable of supporting the necessary applications that empower them to learn, work, create, and innovate. The Commission uses the term “modern networks” because supported equipment and services are expected to change over time to keep up with technological advancements.

7. As an outcome measure for this goal, the Commission will use the number of residential, business, and community anchor institution locations

that newly gain access to broadband service. As an efficiency measure, the Commission will use the change in the number of homes, businesses, and community anchor institutions passed or covered per million USF dollars spent. To collect data, the Commission will use the National Broadband Map and/or Form 477. The Commission will also require CAF recipients to report on the number of community anchor institutions that newly gain access to fixed broadband service as a result of CAF support. Although these measures are imperfect, the Commission believes that they are the best available. Other options, such as the Mercatus Centers' suggestion of using an assessment of what might have occurred without the programs, are not administratively feasible at this time. But the Bureaus are directed to revisit these measures at a later point, and to consider refinements and alternatives.

8.
Ensure Universal Availability of Mobile Voice and Broadband Where Americans Live, Work, or Travel.
The third performance goal is to ensure the universal availability of modern networks capable of delivering mobile broadband and voice service in areas where Americans live, work, or travel. Like the preceding parallel goal, the third performance goal is designed to help ensure that all Americans in all parts of the nation, including those in rural, insular, and high-cost areas, have access to affordable technologies that will empower them to learn, work, create, and innovate. But the Commission believes that ensuring universal advanced mobile coverage is an important goal on its own, and that the Commission will be better able track program performance if the Commission measures it separately.

9. The Commission declines to adopt performance measures for this goal at this time but direct the Wireless Telecommunications Bureau to develop one or more appropriate measures for this goal.

10.
Ensure Reasonably Comparable Rates for Broadband and Voice Services.
The fourth performance goal is to ensure that rates are reasonably comparable for voice as well as broadband service, between urban and rural, insular, and high cost areas. Rates must be reasonably comparable so that consumers in rural, insular, and high cost areas have meaningful access to these services.

11. The Commission also declines to adopt measures for this goal at this time. Although the Commission proposed one outcome measure and asked about others in the
USF/ICC Transformation NPRM,
75 FR 26906, May 13, 2010, the Commission received only limited input on that proposal. The Mercatus Center agrees that “[t]he ratio of prices to income is an intuitively sensible way of defining `reasonably comparable'” but cautions that, again, the real challenge is crafting measures that distinguish how the programs affect rates apart from other factors. The Bureaus may seek to further develop the record on the performance and efficiency measures suggested by the Mercatus Center, the Commission's original proposals, and any other measures commenters think would be appropriate. In undertaking this analysis, the Commission directs the Bureau to develop separate measures for (1) broadband services for homes, businesses, and community anchor institutions; and (2) mobile services.

12.
Minimize Universal Service Contribution Burden on Consumers and Businesses.
The fifth performance goal is to minimize the overall burden of universal service contributions on American consumers and businesses. With this performance goal, the Commission seeks to balance the various objectives of 47 U.S.C. 254(b) of the Act, including the objective of providing support that is sufficient but not excessive so as to not impose an excessive burden on consumers and businesses who ultimately pay to support the Fund. As the Commission has previously recognized, “if the universal service fund grows too large, it will jeopardize other statutory mandates, such as ensuring affordable rates in all parts of the country, and ensuring that contributions from carriers are fair and equitable.”

13. As a performance measure for this goal, the Commission will divide the total inflation-adjusted expenditures of the existing high-cost program and CAF (including the Mobility Fund) each year by the number of American households and express the measure as a monthly dollar figure. This calculation will be relatively straightforward and rely on publicly available data. As such, the measure will be transparent and easily verifiable. By adjusting for inflation and looking at the universal service burden, the Commission will be able to determine whether the overall burden of universal service contribution costs is increasing or decreasing for the typical American household. As an efficiency measure, the Mercatus Center suggests comparing the estimate of economic deadweight loss associated with the contribution mechanism to the deadweight loss associated with taxation. The Commission anticipates that the Bureaus may seek further input on this option and any others commenters believe would be appropriate.

14.
Program Review.
Using the adopted goals and measures, the Commission will, as required by GPRA, monitor the performance of the universal service program as the Commission modernizes the current high-cost program and transition to the CAF. If the programs are not meeting these performance goals, the Commission will consider corrective actions. Likewise, to the extent that the adopted measures do not help us assess program performance, the Commission will revisit them as well.

III. Legal Authority

15.
47 U.S.C. 254.
The principle that all Americans should have access to communications services has been at the core of the Commission's mandate since its founding. Congress created this Commission in 1934 for the purpose of making “available * * * to all the people of the United States * * * a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.” In the 1996 Act, Congress built upon that longstanding principle by enacting 47 U.S.C. 254. Section 254 of the Act sets forth six principles upon which the Commission must “base policies for the preservation and advancement of universal service.” Among these principles are that “[q]uality services should be available at just, reasonable, and affordable rates,” that “[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation,” and that “[c]onsumers in all regions of the Nation * * * should have access to telecommunications and information services, including * * * advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas” and at reasonably comparable rates.

16. Under 47 U.S.C. 254, the Commission has express statutory authority to support telecommunications services that the Commission has designated as eligible for universal service support. Section 254(c)(1) of the Act defines “[u]niveral service” as “an evolving level of telecommunications services that the Commission shall establish periodically under this section, taking into account advances in telecommunications and information technologies and services.” As discussed more fully below, in this R&O, the Commission adopts the proposal to simplify how the Commission describes the various

supported services that the Commission historically has defined in functional terms (
e.g.,
voice grade access to the PSTN, access to emergency services) into a single supported service designated as “voice telephony service.” To the extent carriers offer traditional voice telephony services as telecommunications services over traditional circuit-switched networks, the authority to provide support for such services is well established.

17. Increasingly, however, consumers are obtaining voice services not through traditional means but instead through interconnected VoIP providers offering service over broadband networks. As AT&T notes, “[c]ircuit-switched networks deployed primarily for voice service are rapidly yielding to packet-switched networks,” which offer voice as well as other types of services.” The data bear this out. As the Commission observed in the
USF/ICC Transformation NPRM,
“[f]rom 2008 to 2009, interconnected VoIP subscriptions increased by 22 percent, while switched access lines decreased by 10 percent.” Interconnected VoIP services, among other things, allow customers to make real-time voice calls to, and receive calls from, the PSTN, and increasingly appear to be viewed by consumers as substitutes for traditional voice telephone services. Our authority to promote universal service in this context does not depend on whether interconnected VoIP services are telecommunications services or information services under the Communications Act.

18. Section 254 grants the Commission the authority to support not only voice telephony service but also the facilities over which it is offered. Section 254(e) makes clear that “[a] carrier that receives such [universal service] support shall use that support only for the provision, maintenance, and upgrading of
facilities and services
for which the support is intended.” By referring to “facilities” and “services” as distinct items for which federal universal service funds may be used, the Commission believes Congress granted the Commission the flexibility not only to designate the types of telecommunications services for which support would be provided, but also to encourage the deployment of the types of facilities that will best achieve the principles set forth in 47 U.S.C. 254(b) and any other universal service principle that the Commission may adopt under 47 U.S.C. 254(b)(7). For instance, under the longstanding “no barriers” policy, the Commission allows carriers receiving high-cost support “to invest in infrastructure capable of providing access to advanced services” as well as supported voice services. That policy furthers the policy Congress set forth in 47 U.S.C. 254(b) of “ensuring access to advanced telecommunications and information services throughout the nation.” While this policy was enunciated in an Order adopting rule changes for rural incumbent carriers, by its terms it is not limited to such carriers. The “no-barriers” policy has applied, and will continue to apply, to all eligible telecommunications carriers (ETCs), and the Commission codifies it in the rules. Section 254(e) thus contemplates that carriers may receive federal support to enable the deployment of broadband facilities used to provide supported telecommunications services as well as other services.

19. The Commission further concludes that the authority under 47 U.S.C. 254 allows the Commission to go beyond the “no barriers” policy and require carriers receiving federal universal service support to invest in modern broadband-capable networks. Nothing in 47 U.S.C. 254 requires the Commission simply to provide federal funds to carriers and hope that they will use such support to deploy broadband facilities. To the contrary, the Commission has a “mandatory duty” to adopt universal service policies that advance the principles outlined in 47 U.S.C. 254(b), and the Commission has the authority to “create some inducement” to ensure that those principles are achieved. Congress made clear in 47 U.S.C. 254 that the deployment of, and access to, information services—including “advanced” information services—are important components of a robust and successful federal universal service program. Furthermore, the Commission adopts the recommendation of the Federal-State Joint Board on Universal Service to establish a new universal service principle pursuant to 47 U.S.C. 254(b)(7) that universal service support should be directed where possible to networks that provide advanced services, as well as voice services.” In today's communications environment, achievement of these principles requires, at a minimum, that carriers receiving universal service support invest in and deploy networks capable of providing consumers with access to modern broadband capabilities, as well as voice telephony services. Accordingly, as explained in greater detail below, the Commission will exercise the authority under 47 U.S.C. 254 to require that carriers receiving support—both CAF support, including Mobility Fund support, and support under the existing high-cost support mechanisms—offer broadband capabilities to consumers. The Commission concludes that this approach is sufficient to ensure access to voice and broadband services and, therefore, the Commission does not, at this time, add broadband to the list of supported services, as some have urged.

20.
47 U.S.C. 1302.
The Commission also has independent authority under 47 U.S.C. 1302 of the Telecommunications Act of 1996 to fund the deployment of broadband networks. In 47 U.S.C. 1302, Congress recognized the importance of ubiquitous broadband deployment to Americans' civic, cultural, and economic lives and, thus, instructed the Commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.” Of particular importance, Congress adopted a definition of “advanced telecommunications capability” that is not confined to a particular technology or regulatory classification. Rather, “`advanced telecommunications capability' is defined, without regard to any transmission media or technology, as high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video communications using any technology.” Section 1302 of the Act further requires the Commission to “determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion” and, if the Commission concludes that it is not, to “
take immediate action
to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” The Commission has found that broadband deployment to all Americans has not been reasonable and timely and observed in its most recent broadband deployment report that “too many Americans remain unable to fully participate in our economy and society because they lack broadband.” This finding triggers the duty under 47 U.S.C. 1302(b) to “remov[e] barriers to infrastructure investment” and “promot[e] competition in the telecommunications market” in order to accelerate broadband deployment throughout the Nation.

21. Providing support for broadband networks helps achieve 47 U.S.C. 1302(b)'s objectives. First, the Commission has recognized that one of the most significant barriers to investment in broadband infrastructure

is the lack of a “business case for operating a broadband network” in high-cost areas “[i]n the absence of programs that provide additional support.” Extending federal support to carriers deploying broadband networks in high-cost areas will thus eliminate a significant barrier to infrastructure investment and accelerate broadband deployment to unserved and underserved areas of the Nation. The deployment of broadband infrastructure to all Americans will in turn make services such as interconnected VoIP service accessible to more Americans.

22. Second, supporting broadband networks helps “promot[e] competition in the telecommunications market,” particularly with respect to voice services. As the Commission has long recognized, “interconnected VoIP service `is increasingly used to replace analog voice service.'” Thus, the Commission previously explained that requiring interconnected VoIP providers to
contribute
to federal universal service support mechanisms promoted competitive neutrality because it “reduces the possibility that carriers with universal service obligations will compete directly with providers without such obligations.” Just as “we do not want contribution obligations to shape decisions regarding the technology that interconnected VoIP providers use to offer voice services to customers or to create opportunities for regulatory arbitrage,” the Commission does not want to create regulatory distinctions that serve no universal service purpose or that unduly influence the decisions providers will make with respect to how best to offer voice services to consumers. The “telecommunications market”—which includes interconnected VoIP and by statutory definition is broader than just telecommunications services—will be more competitive, and thus will provide greater benefits to consumers, as a result of the decision to support broadband networks, regardless of regulatory classification.

23. By exercising the authority under 47 U.S.C. 1302 in this manner, the Commission furthers Congress's objective of “accelerat[ing] deployment” of advanced telecommunications capability “to all Americans.” Under the approach, federal support will not turn on whether interconnected VoIP services or the underlying broadband service falls within traditional regulatory classifications under the Communications Act. Rather, the approach focuses on accelerating broadband deployment to unserved and underserved areas, and allows providers to make their own judgments as to how best to structure their service offerings in order to make such deployment a reality.

24. The Commission disagrees with commenters who assert that the Commission lacks authority under 47 U.S.C. 1302(b) to support broadband networks. While 47 U.S.C. 1302(a) imposes a general duty on the Commission to encourage broadband deployment through the use of “price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment,” 47 U.S.C. 1302(b) is triggered by a specific finding that broadband capability is not being “deployed to all Americans in a reasonable and timely fashion.” Upon making that finding (which the Commission has done), 47 U.S.C. 1302(b) requires the Commission to “take immediate action to accelerate” broadband deployment. Given the statutory structure, the Commission reads 47 U.S.C. 1302(b) as conferring on the Commission the additional authority, beyond what the Commission possesses under 47 U.S.C. 1302(a) or elsewhere in the Act, to take steps necessary to fulfill Congress's broadband deployment objectives. Indeed, it is hard to see what additional work 47 U.S.C. 1302(b) does if it is not an independent source of statutory authority.

25. The Commission also rejects the view that providing support for broadband networks under 47 U.S.C. 1302(b) conflicts with 47 U.S.C. 254, which defines universal service in terms of telecommunications services. Information services are not excluded from 47 U.S.C. 254 because of any policy judgment made by Congress. To the contrary, Congress contemplated that the federal universal service program would promote consumer access to both advanced telecommunications and advanced information services “in all regions of the Nation.” When Congress enacted the 1996 Act, most consumers accessed the Internet through dial-up connections over the PSTN, and broadband capabilities were provided over tariffed common carrier facilities. Interconnected VoIP services had only a nominal presence in the marketplace in 1996. It was not until 2002 that the Commission first determined that one form of broadband—cable modem service—was a single offering of an information service rather than separate offerings of telecommunications and information services, and only in 2005 did the Commission conclude that wireline broadband service should be governed by the same regulatory classification. Thus, marketplace and technological developments and the Commission's determinations that broadband services may be offered as information services have had the effect of removing such services from the scope of the explicit reference to “universal service” in 47 U.S.C. 254(c). Likewise, Congress did not exclude interconnected VoIP services from the federal universal service program; indeed, there is no reason to believe it specifically anticipated the development and growth of such services in the years following the enactment of the 1996 Act.

26. The principles upon which the Commission “shall base policies for the preservation and advancement of universal service” make clear that supporting networks used to offer services that are or may be information services for purposes of regulatory classification is consistent with Congress's overarching policy objectives. For example, 47 U.S.C. 254(b)(2)'s principle that “[a]ccess to advanced telecommunications and
information services
should be provided in all regions of the Nation” dovetails comfortably with 47 U.S.C. 1302(b)'s policy that “advanced telecommunications capability [be] deployed to all Americans in a reasonable and timely fashion.” Our decision to exercise authority under 47 U.S.C. 1302 does not undermine 47 U.S.C. 254's universal service principles, but rather ensures their fulfillment. By contrast, limiting federal support based on the regulatory classification of the services offered over broadband networks as telecommunications services would exclude from the universal service program providers who would otherwise be able to deploy broadband infrastructure to consumers. The Commission sees no basis in the statute, the legislative history of the 1996 Act, or the record of this proceeding for concluding that such a constricted outcome would promote the Congressional policy objectives underlying 47 U.S.C. 254 and 1302.

27. Finally, the Commission notes the limited extent to which the Commission is relying on 47 U.S.C. 706(b) in this proceeding. Consistent with the longstanding policy of minimizing regulatory distinctions that serve no universal service purpose, the Commission is not adopting a separate universal service framework under 47 U.S.C. 1302(b). Instead, the Commission is relying on 47 U.S.C. 1302(b) as an alternative basis to 47 U.S.C. 254 to the extent necessary to ensure that the

federal universal service program covers services and networks that could be used to offer information services as well as telecommunications services. Carriers seeking federal support must still comply with the same universal service rules and obligations set forth in 47 U.S.C. 254 and 214, including the requirement that such providers be designated as eligible to receive support, either from state commissions or, if the provider is beyond the jurisdiction of the state commission, from this Commission. In this way, the Commission ensures that exercise of 47 U.S.C. 1302(b) authority will advance, rather than detract from, the universal service principles established under 47 U.S.C. 254 of the Act.

IV. Public Interest Obligations

A. Voice Service

28.
Discussion.
The Commission determines that it is appropriate to describe the core functionalities of the supported services as “voice telephony service.” Some commenters support redefining the voice functionalities as voice telephony services, while others oppose the change, arguing that the current list of functionalities remains important today, the term “voice telephony” is too vague, and such a modification may result in a lower standard of voice service. Given that consumers are increasingly obtaining voice services over broadband networks as well as over traditional circuit switched telephone networks, the Commission agrees with commenters that urge the Commission to focus on the functionality offered, not the specific technology used to provide the supported service.

29. The decision to classify the supported services as voice telephony should not result in a lower standard of voice service: Many of the enumerated services are universal today, and the Commission requires eligible providers to continue to offer those particular functionalities as part of voice telephony. Rather, the modified definition simply shifts to a technologically neutral approach, allowing companies to provision voice service over any platform, including the PSTN and IP networks. This modification will benefit both providers (as they may invest in new infrastructure and services) and consumers (who reap the benefits of the new technology and service offerings). Accordingly, to promote technological neutrality while ensuring that the new approach does not result in lower quality offerings, the Commission amends 47 CFR 54.101 of the Commission rules to specify that the functionalities of eligible voice telephony services include voice grade access to the public switched network or its functional equivalent; minutes of use for local service provided at no additional charge to end users; toll limitation to qualifying low-income consumers; and access to the emergency services 911 and enhanced 911 services to the extent the local government in an eligible carrier's service area has implemented 911 or enhanced 911 systems. The Commission finds that changes in the marketplace allow for the elimination of the requirements to provide single-party service, operator services, and directory assistance.

30. Today, all ETCs, whether designated by a state commission or this Commission, are required to offer the supported service—voice telephony service—throughout their designated service area. ETCs also must provide Lifeline service throughout their designated service area. In the
USF/ICC Transformation FNPRM,
the Commission seeks comment on modifying incumbent ETCs' obligations to provide voice service in situations where the incumbent's high-cost universal service funding is eliminated, for example as a result of a competitive bidding process in which another ETC wins universal support for an area and is subject to accompanying voice and broadband service obligations. (Throughout this R&O, unless otherwise specified, the term “ETC” does not include ETCs that are designated only for the purposes of the low income program.)

31. As a condition of receiving support, the Commission requires ETCs to offer voice telephony as a standalone service throughout their designated service area, meaning that consumers must not be required to purchase any other services (
e.g.,
broadband) in order to purchase voice service. As indicated above, ETCs may use any technology in the provision of voice telephony service.

32. Additionally, consistent with the 47 U.S.C. 254(b) principle that “[c]onsumers in all regions of the Nation * * * should have access to telecommunications and information services * * * that are available at rates that are reasonably comparable to rates charged for similar services in urban areas,” ETCs must offer voice telephony service, including voice telephony service offered on a standalone basis, at rates that are reasonably comparable to urban rates. The Commission finds that these requirements are appropriate to help ensure that consumers have access to voice telephony service that best fits their particular needs.

33. The Commission declines to preempt state obligations regarding voice service, including COLR obligations, at this time. Proponents of such preemption have failed to support their assertion that state service obligations are inconsistent with federal rules and burden the federal universal service mechanisms, nor have they identified any specific legacy service obligations that represent an unfunded mandate that make it infeasible for carriers to deploy broadband in high-cost areas. Carriers must therefore continue to satisfy state voice service requirements.

34. That said, the Commission encourages states to review their respective regulations and policies in light of these changes and revisit the appropriateness of maintaining those obligations for entities that no longer receive federal high-cost universal service funding, just as the Commission intends to explore the necessity of maintaining ETC obligations when ETCs no longer are receiving funding. For example, states could consider providing state support directly to the incumbent LEC to continue providing voice service in areas where the incumbent is no longer receiving federal high-cost universal service support or, alternatively, could shift COLR obligations from the existing incumbent to another provider who is receiving federal or state universal service support in the future.

35.
Voice Rates.
The Commission will consider rural rates for voice service to be “reasonably comparable” to urban voice rates under 47 U.S.C. 254(b)(3) if rural rates fall within a reasonable range of urban rates for reasonably comparable voice service. Consistent with the existing precedent, the Commission will presume that a voice rate is within a reasonable range if it falls within two standard deviations above the national average.

36. Because the data used to calculate the national average price for voice service is out of date, the Commission directs the Wireline Competition Bureau and the Wireless Telecommunications Bureau to develop and conduct an annual survey of voice rates in order to compare urban voice rates to the rural voice rates that ETCs will be reporting to us. The results of this survey will be published annually. For purposes of conducting the survey, the Bureaus should develop a methodology to survey a representative sample of facilities-based fixed voice service providers taking into account the relative categories of fixed voice providers as determined in the most recent FCC Form 477 data collection. In the

USF/

ICC Transformation FNPRM,

the Commission seeks comment on whether to collect separate data on fixed and mobile voice rates and whether fixed and mobile voice services should have different benchmarks for purposes of determining reasonable comparability.

B. Broadband Service

37. As a condition of receiving federal high-cost universal service support, all ETCs, whether designated by a state commission or the Commission, will be required to offer broadband service in their supported area that meets certain basic performance requirements and to report regularly on associated performance measures. Although the Commission does not at this time require it, the Commission expects that ETCs that offer standalone broadband service in any portion of their service territory will also offer such service in all areas that receive CAF support. By standalone service, the Commission means that consumers are not required to purchase any other service (
e.g.,
voice or video) in order to purchase broadband service. ETCs must make this broadband service available at rates that are reasonably comparable to offerings of comparable broadband services in urban areas.

38. In developing these performance requirements, the Commission seeks to ensure that the performance of broadband available in rural and high cost areas is “reasonably comparable” to that available in urban areas. All Americans should have access to broadband that is capable of enabling the kinds of key applications that drive efforts to achieve universal broadband, including education (
e.g.,
distance/online learning), health care (
e.g.,
remote health monitoring), and person-to-person communications (
e.g.,
VoIP or online video chat with loved ones serving overseas).

1. Broadband Performance Metrics

39. Broadband services in the market today vary along several important dimensions. As discussed more fully below, the Commission focuses on speed, latency, and capacity as three core characteristics that affect what consumers can do with their broadband service, and the Commission therefore includes requirements related to these three characteristics in defining ETCs' broadband service obligations.

40. For each of these characteristics, the Commission requires that funding recipients offer service that is reasonably comparable to comparable services offered in urban areas. By limiting reasonable comparability to “comparable services,” the Commission is intending to ensure that fixed broadband services in rural areas are compared to fixed broadband services in urban areas and mobile broadband services in rural areas are compared to mobile broadband services in rural areas. The actual download and upload speeds, latency, and usage limits (if any) for providers' broadband must be reasonably comparable to the typical speeds, latency, and usage limits (if any) of comparable broadband services in urban areas. Funding recipients may use any wireline, wireless, terrestrial, or satellite technology, or combination of technologies, to deliver service that satisfies this requirement.

41.
Speed.
Users and providers commonly refer to the bandwidth of a broadband connection as its “speed.” The bandwidth (speed) of a connection indicates the rate at which information can be transmitted by that connection, typically measured in bits, kilobits (kbps), or megabits per second (Mbps). The speed of consumers' broadband connections affects their ability to access and utilize Internet applications and content. To ensure that consumers are getting the full benefit of broadband, the Commission requires funding recipients to provide broadband that meets performance metrics for actual speeds, measured as described below, rather than “advertised” or “up to” metrics.

42. In the past two Broadband Progress Reports, the Commission found that the availability of residential broadband connections that actually enable an end user to download content from the Internet at 4 Mbps and to upload such content at 1 Mbps over the broadband provider's network was a reasonable benchmark for the availability of “advanced telecommunications capability,” defined by the statute as “high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.” This conclusion was based on the Commission's examination of overall Internet traffic patterns, which revealed that consumers increasingly are using their broadband connections to view high-quality video, and want to be able to do so while still using basic functions such as email and web browsing. The evidence shows that streaming standard definition video in near real-time consumes anywhere from 1-5 Mbps, depending on a variety of factors. This conclusion also was drawn from the National Broadband Plan, which, based on an analysis of user behavior, demands this usage places on the network, and recent experience in network evolution, recommended as a national broadband availability target that every household in America have access to affordable broadband service offering actual download speeds of at least 4 Mbps and actual upload speeds of at least 1 Mbps.

43. Given the foregoing, other than for the Phase I Mobility Fund, the Commission adopts an initial minimum broadband speed benchmark for CAF recipients of 4 Mbps downstream and 1 Mbps upstream. Broadband connections that meet this speed threshold will provide subscribers in rural and high cost areas with the ability to use critical broadband applications in a manner reasonably comparable to broadband subscribers in urban areas. Requiring 4 Mbps/1 Mbps to be provided to all locations, including the more distant locations on a landline network and regardless of the served location's position in a wireless network, implies that customers located closer to the wireline switch or wireless tower will be capable of receiving service in excess of the this minimum standard.

44. Some commenters, including DSL and mobile wireless broadband providers, observe that the 1 Mbps upload speed requirement in particular could impose costs well in excess of the benefits of 1 Mbps versus 768 kilobits per second (kbps) upstream. In general, the Commission expects new installations to provide speeds of at least 1 Mbps upstream. However, to the extent a CAF recipient can demonstrate that support is insufficient to enable 1 Mbps upstream for all locations, temporary waivers of the upstream requirement for some locations will be available. The Commission delegates authority to the Wireline Competition Bureau and Wireless Telecommunications Bureau to address such waiver requests. The Commission expects that those facilities that are not currently capable of providing the minimum upstream speed will eventually be upgraded, consistent with the build-out requirements adopted below, with scalable technology capable of meeting future speed increases.

45.
Latency.
Latency is a measure of the time it takes for a packet of data to travel from one point to another in a network. Because many communication protocols depend on an acknowledgement that packets were received successfully, or otherwise involve transmission of data packets back and forth along a path in the network, latency is often measured by round-trip time in milliseconds. Latency affects a consumer's ability to use real-time applications, including interactive

voice or video communication, over the network. The Commission requires ETCs to offer sufficiently low latency to enable use of real-time applications, such as VoIP. The Commission's broadband measurement test results showed that most terrestrial wireline technologies could reliably provide latency of less than 100 milliseconds.

46.
Capacity.
Capacity is the total volume of data sent and/or received by the end user over a period of time. It is often measured in gigabytes (GB) per month. Several broadband providers have imposed monthly data usage limits, restricting users to a predetermined quantity of data, and these limits typically vary between fixed and mobile services. The terms of service may include an overage fee if a consumer exceeds the monthly limit. Some commenters recommended the Commission specifies a minimum usage limit.

47. Although at this time the Commission declines to adopt specific minimum capacity requirements for CAF recipients, the Commission emphasizes that any usage limits imposed by an ETC on its USF-supported broadband offering must be reasonably comparable to usage limits for comparable broadband offerings in urban areas (which could include, for instance, use of a wireless data card if it can provide the performance characteristics described herein). In particular, ETCs whose support is predicated on offering of a fixed broadband service—namely, all ETCs other than recipients of the Phase I Mobility Funds—must allow usage at levels comparable to residential terrestrial fixed broadband service in urban areas. The Commission defines terrestrial fixed broadband service as one that serves end users primarily at fixed endpoints using stationary equipment, such as the modem that connects an end user's home router, computer or other Internet access device to the network. This term includes fixed wireless broadband services (including those offered over unlicensed spectrum).

48. In 2009, residential broadband users who subscribed to fixed broadband service with speeds between 3 Mbps and 5 Mbps used, on average, 10 GB of capacity per month, and annual per-user growth was between 30 and 35 percent. AT&T's DSL usage limit is 150 GB and its U-Verse offering has a 250 GB limit. Since 2008, Comcast has had a 250 GB monthly data usage threshold on residential accounts. Without endorsing or approving of these or other usage limits, the Commission provides guidance by noting that a usage limit significantly below these current offerings (
e.g.,
a 10 GB monthly data limit) would not be reasonably comparable to residential terrestrial fixed broadband in urban areas. (This should not be interpreted to mean that the Commission intends to regulate usage limits.) A 250 GB monthly data limit for CAF-funded fixed broadband offerings would likely be adequate at this time because 250 GB appears to be reasonably comparable to major current urban broadband offerings. The Commission recognizes, however, that both pricing and usage limitations change over time. The Commission delegates authority to the Wireline Competition Bureau and Wireless Telecommunications Bureau to monitor urban broadband offerings, including by conducting an annual survey, in order to specify an appropriate minimum for usage allowances, and to adjust such a minimum over time.

49. Similarly, for Mobility Fund Phase I, the Commission declines to adopt a specific minimum capacity requirement that supported providers must offer mobile broadband users. However, the Commission emphasizes that any usage limits imposed by a provider on its mobile broadband offerings supported by the Mobility Fund must be reasonably comparable to any usage limits for mobile comparable broadband offerings in urban areas.

50.
Areas with No Terrestrial Backhaul.
Recognizing that satellite backhaul may limit the performance of broadband networks as compared to terrestrial backhaul, the Commission relaxes the broadband public interest obligation for carriers providing fixed broadband that are compelled to use satellite backhaul facilities. The Regulatory Commission of Alaska reports that “for many areas of Alaska, satellite links may be the only viable option to deploy broadband.” Carriers seeking relaxed public interest obligations because they lack the ability to obtain terrestrial backhaul—either fiber, microwave, or other technology—and are therefore compelled to rely exclusively on satellite backhaul in their study area, must certify annually that no terrestrial backhaul options exist, and that they are unable to satisfy the broadband public interest obligations adopted above due to the limited functionality of the available satellite backhaul facilities. Any such funding recipients must offer broadband service speeds of at least 1 Mbps downstream and 256 kbps upstream within the supported area served by satellite middle-mile facilities. Latency and capacity requirements discussed above will not apply to this subset of providers. Buildout obligations—which are dependent on the mechanism by which a carrier receives funding—remain the same for this class of carriers. The Commission will monitor and review the public interest obligations for satellite backhaul areas. To the extent that new terrestrial backhaul facilities are constructed, or existing facilities improve sufficiently to meet the public interest obligations, the Commission requires funding recipients to satisfy the relevant broadband public interest obligations in full within twelve months of the new backhaul facilities becoming commercially available. This limited exemption is only available to providers that have no access in their study area to any terrestrial backhaul facilities, and does not apply to any providers that object to the cost of backhaul facilities. Similarly, providers relying on terrestrial backhaul facilities today will not be allowed this exemption if they elect to transition to satellite backhaul facilities.

51.
Community Anchor Institutions.
The Commission expects that ETCs will likely offer broadband at greater speeds to community anchor institutions in rural and high cost areas, although the Commission does not set requirements at this time, as the 4 Mbps/1 Mbps standard will be met in the more rural areas of an ETC's service territory, and community anchor institutions are typically located in or near small towns and more inhabited areas of rural America. There is nothing in this R&O that requires a carrier to provide broadband service to a community anchor institution at a certain rate, but the Commission acknowledges that community anchor institutions generally require more bandwidth than a residential customer, and expect that ETCs would provide higher bandwidth offerings to community anchor institutions in high-cost areas at rates that are reasonably comparable to comparable offerings to community anchor institutions in urban areas.

52. The Commission also expects ETCs to engage with community anchor institutions in the network planning stages with respect to the deployment of CAF-supported networks. The Commission requires ETCs to identify and report on the community anchor institutions that newly gain access to fixed broadband service as a result of CAF support. In addition, the Wireline Competition Bureau will invite further input on the unique needs of community anchor institutions as it develops a forward-looking cost model to estimate the cost of serving locations, including community anchor locations, in price cap territories.

53.
Broadband Buildout Obligations.
All CAF funding comes with obligations to build out broadband within an ETC's service area, subject to certain limitations. The timing and extent of these obligations varies across the different CAF mechanisms. However, all broadband buildout obligations for fixed broadband are conditioned on not spending the funds to serve customers in areas already served by an “unsubsidized competitor.” The Commission defines an unsubsidized competitor as a facilities-based provider of residential terrestrial fixed voice and broadband service. The best data available at this time to determine whether broadband is available from an unsubsidized competitor at speeds at or above the 4 Mbps/1 Mbps speed threshold will likely be data on broadband availability at 3 Mbps downstream and 768 kbps upstream, which is collected for the National Broadband Map and through the Commission's Form 477. Such data may therefore be used as a proxy for the availability of 4 Mbps/1 Mbps broadband. Depending on the anticipated reform to the Form 477 data collection, the Commission may have additional data in the future upon which the Commission may rely.

54. The Commission limits this definition to fixed, terrestrial providers because the Commission thinks these limitations will disqualify few, if any, broadband providers that meet CAF speed, capacity, or latency minimums for all locations within relevant areas of comparison, while significantly easing administration of the definition. For example, the record suggests that satellite providers are generally unable to provide affordable voice and broadband service that meets the minimum capacity requirements without the aid of a subsidy: Consumer satellite services have limited capacity allowances today, and future satellite services appear unlikely to offer capacity reasonably comparable to urban offerings in the absence of universal service support. Likewise, while 4G mobile broadband services may meet the speed requirements in many locations, meeting minimum speed and capacity guarantees is likely to prove challenging over larger areas, particularly indoors. And because the performance offered by mobile services varies by location, it would be very difficult and costly for a CAF recipient or the Commission to evaluate whether such a service met the performance requirements at all homes and businesses within a study area, census block, or other required area. A wireless provider that currently offers mobile service can become an “unsubsidized competitor,” however, by offering a fixed wireless service that guarantees speed, capacity, and latency minimums will be met at all locations with the relevant area. Taken together, these considerations persuade us that the advantages of limiting the definition of unsubsidized providers outweigh any potential concerns that the Commission may unduly disqualify service providers that otherwise meet the performance requirements. As mobile and satellite services develop over time, the Commission will revisit the definition of “unsubsidized competitor” as warranted. Recognizing the benefits of certainty, however, the Commission does not anticipate changing the definition for the next few years.

55. Because most of these funding mechanisms are aimed at immediately narrowing broadband deployment gaps, both fixed and mobile, their performance benchmarks reflect technical capabilities and user needs that are expected at this time to be suitable for today and the next few years. However, the Commission must also lay the groundwork for longer-term evolution of CAF broadband obligations, as the Commission expects technical capabilities and user needs will continue to evolve. The Commission therefore commits to monitoring trends in the performance of urban broadband offerings through the survey data the Commission will collect and rural broadband offerings through the reporting data the Commission will collect, and to initiating a proceeding no later than the end of 2014 to review the performance requirements and ensure that CAF continues to support broadband service that is reasonably comparable to broadband service in urban areas.

56. In advance of that future proceeding, the Commission relies on its predictive judgment to provide guidance to CAF recipients on metrics that will satisfy the expectation that they invest the public's funds in robust, scalable broadband networks. The National Broadband Plan estimated that by 2017, average advertised speeds for residential broadband would be approximately 5.76 Mbps downstream. Applying growth rates measured by Akamai, one finds a projected average actual downstream speed by 2017 of 5.2 Mbps, and a projected average actual peak downstream speed of 6.86 Mbps.

57. Based on these projections, the Commission establishes a benchmark of 6 Mbps downstream and 1.5 Mbps upstream for broadband deployments in later years of CAF Phase II.

2. Measuring and Reporting Broadband

58. The Commission will require recipients of funding to test their broadband networks for compliance with speed and latency metrics and certify to and report the results to the Universal Service Administrative Company (USAC) on an annual basis. These results will be subject to audit. In addition, as part of the federal-state partnership for universal service, the Commission expects and encourage states to assist us in monitoring and compliance and therefore require funding recipients to send a copy of their annual broadband performance report to the relevant state or Tribal government.

59. Commenters generally supported testing and reporting of broadband performance. While some preferred only certifications without periodic testing, the Commission finds that requiring ETCs to submit verifiable test results to USAC and the relevant state commissions will strengthen the ability of this Commission and the states to ensure that ETCs that receive universal service funding are providing at least the minimum broadband speeds, and thereby using support for its intended purpose as required by 47 U.S.C. 254(e).

60. The Commission adopts the proposal in the
USF/ICC Transformation NPRM
that actual speed and latency be measured on each ETC's access network from the end-user interface to the nearest Internet access point. The end-user interface end-point would be the modem, the customer premise equipment typically managed by a broadband provider as the last connection point to the managed network, while the nearest Internet access point end-point would be the Internet gateway, the closest peering point between the broadband provider and the public Internet for a given consumer connection. The results of Commission testing of wired networks suggest that “broadband performance that falls short of expectations is caused primarily by the segment of an ISP's network from the consumer gateway to the ISP's core network.”

61. In the
USF/ICC Transformation FNPRM,
the Commission seeks further comment on the specific methodology ETCs should use to measure the performance of their broadband services subject to these general guidelines, and the format in which funding recipients should report their results. The Commission directs the Wireline Competition Bureau, the Wireless Telecommunications Bureau, and the Office of Engineering and Technology to work together to refine the methodology

for such testing, which the Commission anticipates will be implemented in 2013.

3. Reasonably Comparable Rates for Broadband Service

62. As with voice services, for broadband services the Commission will consider rural rates to be “reasonably comparable” to urban rates under 47 U.S.C. 254(b)(3) if rural rates fall within a reasonable range of urban rates for reasonably comparable broadband service. However, the Commission has never compared broadband rates for purposes of 47 U.S.C. 254(b)(3), and therefore the Commission directs the Bureaus to develop a specific methodology for defining that reasonable range, taking into account that retail broadband service is not rate regulated and that retail offerings may be defined by price, speed, usage limits, if any, and other elements. In the
USF/ICC Transformation FNPRM,
the Commission seeks comment on how specifically to define a reasonable range.

63. The Commission also delegates to the Wireline Competition Bureau and Wireless Telecommunications Bureau the authority to conduct an annual survey of urban broadband rates, if necessary, in order to derive a national range of rates for broadband service. The Commission does not currently have sufficient data to establish such a range for broadband pricing, and are unaware of any adequate third-party sources of data for the relevant levels of service to be compared. The Commission therefore delegates authority to the Bureaus to determine the appropriate components of such a survey. By conducting its own survey, the Commission believes it will be able to tailor the data specifically to the need to satisfy the statutory obligation. The Commission requires recipients of funding to provide information regarding their pricing for service offerings, as described more fully below. The Commission also encourages input from the states and other stakeholders as the Bureaus develop the survey.

V. Establishing the Connect America Fund

A. The Budget

64.
Discussion.
For the first time, the Commission now establishes a defined budget for the high-cost component of the universal service fund. For purposes of this budget, the term “high-cost” includes all support mechanisms in place as of the date of this order, specifically, high-cost loop support, safety net support, safety valve support, local switching support, interstate common line support, high cost model support, and interstate access support, as well as the new Connect America Fund, which includes funding to support and advance networks that provide voice and broadband services, both fixed and mobile, and funding provided in conjunction with the recovery mechanism adopted as part of intercarrier compensation reform.

65. The Commission believes the establishment of such a budget will best ensure that the Commission has in place “specific, predictable, and sufficient” funding mechanisms to achieve the universal service objectives. The Commission is taking important steps to control costs and improve accountability in USF, and the estimates of the funding necessary for components of the CAF and legacy high-cost mechanisms represent its predictive judgment as to how best to allocate limited resources at this time. The Commission anticipates that it may revisit and adjust accordingly the appropriate size of each of these programs by the end of the six-year period the Commission budgets for today, based on market developments, efficiencies realized, and further evaluation of the effect of these programs in achieving the goals.

66. Importantly, establishing a CAF budget ensures that individual consumers will not pay more in contributions due to these reforms. Indeed, were the CAF to significantly raise the end-user cost of services, it could undermine the broader policy objectives to promote broadband and mobile deployment and adoption.

67. The Commission therefore establishes an annual funding target, set at the same level as the current estimate for the size of the high-cost program for FY 2011, of no more than $4.5 billion. The $4.5 billion budget includes only disbursements of support and does not include administrative expenses, which will continue to be collected consistent with past practices. Similarly, the $4.5 billion budget does not include prior period adjustments associated with support attributable to years prior to 2012. To the extent that those true-ups result in increased support for 2010, those disbursements would not apply to the budget discussed here.

68. This budgetary target will remain in place until changed by a vote of the Commission. The Commission believes that setting the budget at this year's support levels will minimize disruption and provide the greatest certainty and predictability to all stakeholders. The Commission does not find that amount to be excessive given the reforms the Commission adopts today, which expand the high-cost program in important ways to promote broadband and mobility; facilitate intercarrier compensation reform; and preserve universal voice connectivity. At the same time, the Commission does not believe a higher budget is warranted, given the substantial reforms the Commission concurrently adopts to modernize the legacy funding mechanisms to address long-standing inefficiencies and wasteful spending. The Commission concludes that it is appropriate, in the first instance, to evaluate the effect of these reforms before adjusting the budget.

69. The total $4.5 billion budget will include CAF support resulting from intercarrier compensation reform, as well as new CAF funding for broadband and support for legacy programs during a transitional period. As part of this budget, the Commission will provide $500 million per year in support through the Mobility Fund, of which up to $100 million in funding will be reserved for Tribal lands. Throughout this document, “Tribal lands” include any federally recognized Indian tribe's reservation, pueblo or colony, including former reservations in Oklahoma, Alaska Native regions established pursuant to the Alaska Native Claims Settlements Act (85 Stat. 688), and Indian Allotments, 47 CFR 54.400(e), as well as Hawaiian Home Lands—areas held in trust for native Hawaiians by the state of Hawaii, pursuant to the Hawaiian Homes Commission Act, 1920, Act July 9, 1921, 42 Stat. 108,
et seq.,
as amended. The Commission adopts a definition of “Tribal lands” that includes Hawaiian Home Lands, as the term was used in the
USF/ICC Transformation NPRM.
The Commission notes that Hawaiian Home Lands were not included within the Tribal definition in the 2007 order that adopted an interim cap on support for competitive eligible telecommunications carriers, with an exemption of Tribal lands from that cap. The Commission agrees with the State of Hawaii that Hawaiian Home Lands should be included in the definition of Tribal lands in the context of these comprehensive reforms for the universal service program.

70. The Commission will also provide at least $100 million to subsidize service in the highest cost areas. The remaining amount—approximately $4 billion—will be divided between areas served by price cap carriers and areas served by rate-of-return carriers, with no more than $1.8 billion available annually for price cap territories after a transition period and up to $2 billion available annually for rate-of-return territories,

including, in both instances, intercarrier compensation recovery. The Commission also institutes a number of safeguards in this new framework to ensure that carriers that warrant additional funding have the opportunity to petition for such relief. Although the Commission expects that in some years CAF may distribute less than the total budget, and in other years slightly more, the Commission adopts mechanisms later in this R&O to keep the contribution burden at no more than $4.5 billion per year, plus administrative expenses, notwithstanding variations on the distribution side. Meanwhile, the Commission will closely monitor the CAF mechanisms for longer-term consistency with the overall budget goal, while ensuring the budget remains at appropriate levels to satisfy the statutory mandates.

B. Providing Support in Areas Served by Price Cap Carriers

1. Immediate Steps To Begin Rationalizing Support Levels for Price Cap Carriers

71.
Discussion.
Effective January 1, 2012, the Commission freezes all support under the existing high-cost support mechanisms, HCLS, forward-looking model support (HCMS), safety valve support, LSS, IAS, and ICLS, on a study area basis for price cap carriers and their rate-of-return affiliates. On an interim basis, the Commission will provide this “frozen high-cost support” to such carriers equal to the amount of support each carrier received in 2011 in a given study area. Frozen high-cost support amounts will be calculated by USAC, and will be equal to the amount of support disbursed in 2011, without regard to prior period adjustments related to years other than 2011 and as determined by USAC on January 31, 2012. USAC shall publish each carrier's frozen high-cost support amount 2011 support, as calculated, on its Web site, no later than February 15, 2012. As a consequence of this action, rate-of-return operating companies that will be treated as price cap areas will no longer be required to perform cost studies for purposes of calculating HCLS or LSS, as their support will be frozen on a study area basis as of year-end 2011.

72. Frozen high-cost support will be reduced to the extent that a carrier's rates for local voice service fall below an urban local rate floor that the Commission adopts below to limit universal service support where there are artificially low rates. In addition to frozen high-cost support, the Commission will distribute up to $300 million in “incremental support” to price cap carriers and their rate of return affiliates using a simplified forward-looking cost estimate, based on the existing cost model.

73. This simplified, interim approach is based on a proposal in the record from several carriers. Support will be determined as follows: First, a forward-looking cost estimate will be generated for each wire center served by a price cap carrier. Our existing forward-looking cost model, designed to estimate the costs of providing voice service, generates estimates only for wire centers served by non-rural carriers; it cannot be applied to areas served by rural carriers without obtaining additional data from those carriers. The simplest, quickest, and most efficient means to provide support solely based on forward-looking costs for both rural and non-rural price cap carriers is to extend the existing cost model by using an equation designed to reasonably predict the output of the existing model for wire centers it already applies to, and apply it to data that are readily available for wire centers in all areas served by price cap carriers and their affiliates, including areas the current model does not apply to. Three price cap carriers submitted an estimated cost equation that was derived through a regression analysis of support provided under the existing high-cost model, and they submitted, under protective order, the data necessary to replicate their analysis. No commenter objected to the proponents' cost-estimation function. Following its own assessment of the regression analysis and the proposed cost-estimation function, the Commission concludes that the proposed function will serve the purpose well to estimate costs on an interim basis in wire centers now served by rural price cap carriers, and the Commission adopts it. That cost-estimation function is defined as:

ln(Total cost) = 7.08 + 0.02 * ln(distance to nearest central office in feet + 1)

−0.15 * ln(number of households + businesses in the wire center + 1)

+ 0.22 * ln(total road feed in wire center + 1)

+ 0.06 * (ln(number of households + businesses in wire center + 1)) ‸2

−0.01 * (ln(number of businesses in wire center + 1))^2

−0.07 * ln((number of households + businesses)/square miles) + 1)

74. The output of the cost-estimation function will be converted into dollars and then further converted into a per-location cost in the wire center. The resulting per-location cost for each wire center will be compared to a funding threshold, which, as explained below, will be determined by the budget constraint. Support will be calculated based on the wire centers where the cost for the wire center exceeds the funding threshold. Specifically, the amount by which the per-location cost exceeds the funding threshold will be multiplied by the total number of household and business locations in the wire center.

75. The funding threshold will be set so that, using the distribution process described above, all $300 million of incremental support potentially available under the mechanism would be allocated. The Commission delegates to the Wireline Competition Bureau the task of performing the calculations necessary to determine the support amounts and selecting any necessary data sources for that task. In the event the Wireline Competition Bureau concludes that appropriate data are not readily available for these purposes for certain areas, such as some or all U.S. territories served by price cap carriers, the Bureau may exclude such areas from the analysis for this interim mechanism, which would result in the carriers in such areas continuing to receive frozen support. The Bureau will announce incremental support amounts via Public Notice; the Commission anticipates the Bureau will complete its work and announce such support amounts on or before March 31, 2012. USAC will disburse CAF Phase I funds on its customary schedule.

76. The Commission intends for CAF Phase I to enable additional deployment beyond what carriers would otherwise undertake, absent this reform. Thus, consistent with the other reforms, the Commission will require carriers that accept incremental support under CAF Phase I to meet concrete broadband deployment obligations. The Commission acknowledges that the existing cost model, on which the distribution mechanism for CAF Phase I incremental funding is based, calculates the cost of providing voice service rather than broadband service, although the Commission is requiring carriers to meet broadband deployment obligations if they accept CAF Phase I incremental funding. The Commission finds that using estimates of the cost of deploying voice service, even though the Commission imposes broadband deployment obligations, is reasonable in the context of this interim support mechanism.

77. Specifically, the Bureau will calculate, on a holding company basis, how much CAF Phase I incremental support price cap carriers are eligible for. Carriers may elect to receive all, none, or a portion of the incremental support for which they are eligible. A

carrier accepting incremental support will be required to deploy broadband to a number of locations equal to the amount it accepts divided by $775. For example, a carrier projected to receive $7,750,000 will be permitted to accept up to that amount of incremental support. If it accepts the full amount, it will be required to deploy broadband to at least 10,000 unserved locations; if it accepts $3,875,000, it will be required to deploy broadband to at least 5,000 unserved locations. To the extent incremental support is declined, it may be used in other ways to advance the broadband objectives pursuant to the statutory authority. For instance, the funds could be held as part of accumulated reserve funds that would help minimize budget fluctuations in the event the Commission grants some petitions for waiver. Also, a number of parties have urged us to use high-cost funding to advance adoption programs. The Commission notes that the Commission has an open proceeding to reform the low income assistance programs, which specifically contemplates broadband pilots in the Lifeline and LinkUp programs. To the extent that savings were available from CAF programs, the Commission could reallocate that funding for broadband adoption programs, consistent with the statutory authority, while still remaining within the budget target. Alternatively, savings could be used to reduce the contribution burden.

78. Our objective is to articulate a measurable, enforceable obligation to extend service to unserved locations during CAF Phase I. For this interim program, the Commission is not attempting to identify the precise cost of deploying broadband to any particular location. Instead, the Commission is trying to identify an appropriate standard to spur immediate broadband deployment to as many unserved locations as possible, given the budget constraint. In this context, the Commission finds that a one-time support payment of $775 per unserved location for the purpose of calculating broadband deployment obligations for companies that elect to receive additional support is appropriate.

79. To develop that performance obligation, the Commission considered broadband deployment projects undertaken by a mid-sized price cap carrier under the Broadband Initiatives Program (BIP). The average per-location cost of deployment for those projects—including both the public contribution and the company's own capital contribution—was $557, significantly lower than $775 per-location—which does not include any company contribution. Analysis indicated that the per-location cost for deployments funded through the BIP program varied considerably. In addition, the BIP program's requirements differ from these requirements. Specifically, carriers could obtain BIP funding for improving service to underserved locations as well as deploying to unserved locations, while carriers can meet their CAF Phase I deployment obligations only by deploying broadband to unserved locations. For these reasons, while the Commission finds this average per-location cost to be relevant, the Commission declines to set the requirement at a per-location cost of $557.

80. In addition, the Commission considered data from the analysis done as part of the National Broadband Plan. The cost model used in developing the National Broadband Plan estimated that the median cost of upgrading existing unserved homes is approximately $650 to $750, with approximately 3.5 million locations whose upgrade cost is below that figure.

81. Commission staff also conducted an analysis using the ABC plan cost model, which calculates the cost of deploying broadband to unserved locations on a census block basis. Commission staff estimated that the median cost of a brownfield deployment of broadband to low-cost unserved census blocks is $765 per location (
i.e.,
there are 1.75 million unserved, low-cost locations in areas served by price cap carriers with costs below $765); the cost of deploying broadband to the census block at the 25th percentile of the cost distribution is approximately $530 per location (under this analysis, there are 875,000 such locations whose cost is below $530). Although the Commission does not adopt the proposed cost model to calculate support amounts for CAF Phase II, these estimates provide additional data points to consider.

82. In addition, the Commission notes that several carriers placed estimates of the per-location cost of extending broadband to unserved locations in their respective territories into the record. While several carriers claim that the cost to serve unserved locations is higher than the figure the Commission adopts, those estimates did not provide supporting data sufficient to fully evaluate them.

83. Taking into account all of these factors, including the cost estimates developed in the course of BIP applications as well as the flexibility the Commission provides to carriers accepting such funding to determine where to deploy and the expectation that carriers will supplement incremental support with their own investment, the Commission concludes that the $775 per unserved location figure represents a reasonable estimate of an interim performance obligation for this one-time support. The Commission also emphasizes that CAF Phase I incremental support is optional—carriers that cannot meet the broadband deployment requirement may decline to accept incremental support or may choose to accept only a portion of the amount for which they are eligible.

84. The Commission find that, in this interim support mechanism, setting the broadband deployment obligations based on the costs of deploying to lower-cost wire centers that would not otherwise be served, even though the Commission bases support on the predicted costs of the highest-cost wire centers, is reasonable because the Commission is trying to expand voice and broadband availability as much and as quickly as possible. The Commission distributes support based on the costs of the highest-cost wire centers because the ultimate goal of the reforms is to ensure that
all
areas get broadband-capable networks, whether through the operation of the market or through support from USF. In this interim mechanism, the Commission distributes funding to those carriers that provide service in the highest-cost areas because these are the areas where the Commission can be most confident, based on available information, that USF support will be necessary in order to realize timely deployment. Thus, the Commission can be confident the Commission is allocating support to carriers that will need it to deploy broadband in some portion of their service territory. At the same time, to promote the most rapid expansion of broadband to as many households as possible, the Commission wishes to encourage carriers to use the support in lower-cost areas where there is no private sector business case for deployment of broadband, to the extent carriers also serve such areas. Although at this time the Commission lacks data sufficient to identify these areas, the Commission can encourage this use of funding by setting the deployment requirement based on the overall estimate of upgrade costs in lower cost unserved areas, while providing carriers flexibility to allocate funding to these areas, rather than the highest cost wire centers identified by the cost-estimation equation. Accordingly, while the Commission allocates CAF Phase I support on the basis of carriers' service to the highest-cost areas, the

Commission allows carriers to use that support in lower-cost areas, and sizes their deployment obligations accordingly. The Commission notes that, historically, carriers have always been able to use support in wire centers other than the ones for which support is paid, and nothing in the Act constrains that flexibility such that it applies only within state boundaries. Accordingly, in the context of this interim mechanism, the Commission will permit carriers to continue to have such flexibility.

85. Within 90 days of being informed of the amount of incremental support it is eligible to receive, each carrier must provide notice to the Commission, the Administrator, the relevant state or territorial commission, and any affected Tribal government, identifying the amount of support it wishes to accept and the areas by wire center and census block in which the carrier intends to deploy broadband to meet its obligation, or stating that the carrier declines to accept incremental support for that year. Carriers accepting incremental support must make the following certifications. First, the carrier must certify that deployment funded through CAF Phase I incremental support will occur in areas shown on the most current version of the National Broadband Map as unserved by fixed broadband with a minimum speed of 768 kbps downstream and 200 kbps upstream, and that, to the best of the carrier's knowledge, are, in fact, unserved by fixed broadband at those speeds. Second, the carrier must certify that the carrier's current capital improvement plan did not already include plans to complete broadband deployment to that area within the next three years, and that CAF Phase I incremental support will not be used to satisfy any merger commitment or similar regulatory obligation.

86. Carriers must complete deployment to no fewer than two-thirds of the required number of locations within two years, and all required locations within three years, after filing their notices of acceptance. Carriers must provide a certification to that effect to the Commission, the Administrator, the relevant state or territorial commission, and any affected Tribal government, as part of their annual certifications pursuant to new 47 CFR 54.313 of the rules, following both the two-thirds and completion milestones. To fulfill their deployment obligation, carriers must offer broadband service of at least 4 Mbps downstream and 1 Mbps upstream, with latency sufficiently low to enable the use of real-time communications, including VoIP, and with usage limits, if any, that are reasonably comparable to those for comparable services in urban areas. Carriers failing to meet a deployment milestone will be required to return the incremental support distributed in connection with that deployment obligation and will be potentially subject to other penalties, including additional forfeitures, as the Commission deems appropriate. If a carrier fails to meet the two-thirds deployment milestone within two years and returns the incremental support provided, and then meets its full deployment obligation associated with that support by the third year, it will be eligible to have support it returned restored to it.

87. Our expectation is that CAF Phase II will begin on January 1, 2013. However, absent further Commission action, if CAF Phase II has not been implemented to go into effect by that date, CAF Phase I will continue to provide support as follows. Annually, no later than December 15, the Bureau will announce via Public Notice CAF Phase I incremental support amounts for the next term of incremental support, indicating whether support will be allocated for the full year or for a shorter term. The Commission delegates to the Wireline Competition Bureau the authority to adjust the term length of incremental support amounts, and to pro-rate obligations as appropriate, to the extent Phase II CAF is anticipated to be implemented on a date after the beginning of the calendar year. The amount of incremental support to be distributed during a term will be calculated in the manner described above, based on allocating $300 million through the incremental support mechanism, but that amount will be reduced by a factor equal to the portion of a year that the term will last. Within 90 days of the beginning of each term of support, carriers must provide notice to the Commission, the relevant state commission, and any affected Tribal government, identifying the amount of support it wishes to accept and the areas by wire center and census block in which the carrier intends to deploy broadband or stating that the carrier declines to accept incremental support for that term, with the same certification requirements described above. For purposes of this R&O, a carrier accepting incremental support in terms after 2012 will be required to deploy broadband to a number of locations equal to the amount of incremental support it accepts divided by $775, similar to the obligation for accepting support in 2012.

88. CAF Phase I will also begin the process of transitioning all federal high-cost support to price cap carriers to supporting modern communications networks capable of supporting voice and broadband in areas without an unsubsidized competitor. Consistent with the goal of providing support to price cap companies on a forward-looking cost basis, rather than based on embedded costs, the Commission will, for the purposes of CAF Phase I, treat as price cap carriers the rate-of-return operating companies that are affiliated with holding companies for which the majority of access lines are regulated under price caps. That is, the Commission will freeze their universal service support and consider them as price cap areas for the purposes of the new CAF Phase I distribution mechanism. Effective January 1, 2012, the Commission requires carriers to use their frozen high-cost support in a manner consistent with achieving universal availability of voice and broadband. If CAF Phase II has not been implemented to go into effect on or before January 1, 2013, the Commission will phase in a requirement that carriers use such support for building and operating broadband-capable networks used to offer their own retail service in areas substantially unserved by an unsubsidized competitor.

89. Specifically, in 2013, all carriers receiving frozen high-cost support must use at least one-third of that support to build and operate broadband-capable networks used to offer the provider's own retail broadband service in areas substantially unserved by an unsubsidized competitor. For 2014, at least two-thirds of the frozen high-cost support must be used in such fashion, and for 2015 and subsequent years, all of the frozen high-cost support must be spent in such fashion. Carriers will be required to certify that they have spent frozen high-cost support consistent with these requirements in their annual filings pursuant to new 47 CFR 54.313 of the rules.

90. These interim reforms to the support mechanisms for price cap carriers are an important step in the transition to full implementation of the Connect America Fund. While the Commission intends to complete implementation of the CAF rapidly, the Commission finds that these interim reforms offer immediate improvements over the existing support mechanisms. First, existing support for price cap carriers will be frozen and no longer calculated based on embedded costs. Rather, the Commission begins the process of transitioning all high-cost support to forward-looking costs and

market-based mechanisms, which will improve incentives for carriers to invest efficiently. Second, these reforms begin the process of eliminating the distinction, for the purposes of calculating high-cost support, between price cap carriers that are classified as rural and those that are classified as non-rural, a classification that has no direct or necessary relation to the cost of providing voice and broadband services. In this way, the support mechanisms will be better aligned with the text of 47 U.S.C. 254, which directs us to focus on the needs of consumers in “rural, insular, and high cost
areas
” but makes no reference to the classification of the
company
receiving support. In addition, the Commission notes that the reforms the Commission adopts today, which include providing immediate support to spur broadband deployment, can be implemented quickly, without the need to overhaul an admittedly dated cost model that does not reflect modern broadband network architecture. Thus, although the simplified interim mechanism is imperfect in some respects, it will allow us to begin providing additional support to price cap carriers on a more efficient basis, while spurring immediate and material broadband deployment pending implementation of CAF competitive bidding- and model-based support for price cap areas.

91.
No Effect on Interstate Rates.
Historically, IAS was intended to replace allowable common line revenues that otherwise are not recovered through SLCs, while some carriers received frozen ICLS because, due to the timing of their conversion to price cap regulation, they could not receive IAS. The Commission notes that many price cap carriers did not object to the elimination of the IAS mechanism, as long is it did not occur before the implementation of CAF. The Commission has no indication that these price cap carriers expect to raise their SLCs, presubscribed interexchange carrier charges, or other interstate rates as a result of any reform that would eliminate IAS. For clarity, however, the Commission specifically notes that while carriers receive support under CAF Phase I, the amount of their frozen high cost support equal to the amount of IAS for which each carrier was eligible in 2011 as being received under IAS, including, but not limited to, for the purposes of calculating interstate rates will be treated as IAS for purposes of the existing rules. To the extent that a carrier believes that it cannot meet its obligations with the revenues it receives under the CAF and ICC reforms, it may avail itself of the total cost and earnings review process described below.

92.
Elimination of State Rate Certification Filings.
Under 47 CFR 54.316 of the existing rules, states are required to certify annually whether residential rates in rural areas of their state served by non-rural carriers are reasonably comparable to urban rates nationwide. As part of these reforms, however, the Commission requires carriers to file rate information directly with the Commission. For this reason, the Commission concludes that continuing to impose this obligation on the states is unnecessary, and the Commission relieves state commissions of their obligations under that provision.

93.
Hawaiian Telcom Petition for Waiver.
Hawaiian Telcom, a non-rural price cap incumbent local exchange carrier, previously sought a waiver of certain rules relating to the support to which it would be entitled under the high-cost model. As Hawaiian Telcom explained, it received no high-cost model support at all because support under the model was based not on the estimated costs of individual wire centers but rather the statewide average of the costs of all individual wire centers included in the model. In its petition, Hawaiian Telcom requested that its support under the model be determined on a wire center basis, without regard to the statewide average of estimated costs calculated under the high-cost model.

94. In light of these reforms for support to price cap carriers, the Commission denies the Hawaiian Telcom petition. These reforms are largely consistent with the thrust of Hawaiian Telcom's petition. Phase II support will not involve statewide averaging of costs determined by a model, but instead will be determined on a much more granular basis. In Phase I, the Commission adopts, on an interim basis, a new method for distributing support to price cap carriers. While the Commission freezes existing support, the Commission provides incremental support to price cap carriers through a mechanism that, consistent with Hawaiian Telcom's proposal, identifies carriers serving the highest-cost wire centers but does not average wire center costs in a state. The Commission therefore believes that these reforms will achieve the relief Hawaiian Telcom seeks in its waiver petition and that, to the extent they do not, Hawaiian Telcom may seek additional targeted support through a request for waiver.

2. New Framework for Ongoing Support in Price Cap Territories

a. Budget for Price Cap Areas

95. Within the total $4.5 billion annual budget, the Commission sets the total annual CAF budget for areas currently served by price cap carriers at no more than $1.8 billion for a five-year period. For purposes of CAF Phase II, consistent with the approach in CAF Phase I, the Commission will treat as price cap carriers the rate-of-return operating companies that are affiliated with holding companies for which the majority of access lines are regulated under price caps. A “price cap territory” therefore includes a study area served by a rate-of-return operating company affiliated with price cap companies.

96. In 2010, the most recent year for which complete disbursement data are available, price cap carriers and their rate-of-return affiliates received approximately $1.076 billion in support. Collectively, more than 83 percent of the unserved locations in the nation are in price cap areas, yet such areas currently receive approximately 25 percent of high-cost support.

97. The Commission concludes that increased support to areas served by price cap carriers, coupled with rigorous, enforceable deployment obligations, is warranted in the near term to meet the universal service mandate to unserved consumers residing in these communities. At the same time, the Commission seeks to balance many competing demands for universal service funds, including the need to extend advanced mobile services and to preserve and advance universal service in areas currently served by rate-of-return companies. Budgeting up to $1.8 billion for price cap territories, in the judgment, represents a reasonable balance of these considerations. The Commission also stresses that these subsidies will go to carriers serving price cap areas, not necessarily incumbent price cap carriers. Before 2018, the Commission will re-evaluate the need for ongoing support at these levels and determine how best to drive support to efficient levels, given consumer demand and technological developments at that time.

b. Price Cap Public Interest Obligations

98. Price cap ETCs that accept a state-level commitment must provide broadband service that is reasonably comparable to terrestrial fixed broadband service in urban America. Specifically, price cap ETCs that receive model-based CAF support will be required, for the first three years they receive support, to offer broadband at

actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications, such as VoIP, and with usage capacity reasonably comparable to that available in comparable offerings in urban areas. By the end of the third year, ETCs must offer at least 4 Mbps/1 Mbps broadband service to at least 85 percent of their high-cost locations—including locations on Tribal lands—covered by the state-level commitment, as described below. By the end of the fifth year, price cap ETCs must offer at least 4 Mbps/1 Mbps broadband service to all supported locations, and at least 6 Mbps/1.5 Mbps to a number of supported locations to be specified.

99. The Commission establishes the 85 percent third-year milestone to ensure that recipients of funding remain on track to meet their performance obligations. While a number of parties agreed generally with the concept of setting specific, enforceable interim milestones to safeguard the use of public funds, there are few concrete suggestions in the record on what those intermediate deadlines should be. The Commission agrees with the State Members of the Joint Board that there should be intermediate milestones for the required broadband deployment obligations. The Commission sets an initial requirement of offering broadband to at least 85 percent of supported locations by the end of the third year, and to all supported locations by the end of the fifth year. As set forth more fully below, recipients of funding will be required annually to report on their progress in extending broadband throughout their areas and must meet the interim deadline established for the third year, or face loss of support.

100. Before the end of the fifth year, the Commission expects to have reviewed the minimum broadband performance metrics in light of expected increases in speed, and other broadband characteristics, in the intervening years. Based on the information before us today, the Commission expects that consumer usage of applications, including those for health and education, may evolve over the next five years to require speeds higher than 4 Mbps downstream/1 Mbps upstream. For this reason, the Commission expects ETCs to build robust, scalable networks that will provide speeds of at least 6 Mbps/1.5 Mbps to a number of supported locations to be determined in the model development process, as set forth more fully below.

101. After the end of the five-year term of CAF Phase II, the Commission expects to be distributing all CAF support in price cap areas pursuant to a market-based mechanism, such as competitive bidding. However, if such a mechanism is not implemented by the end of the five-year term of CAF Phase II, the incumbent ETCs will be required to continue providing broadband with performance characteristics that remain reasonably comparable to the performance characteristics of terrestrial fixed broadband service in urban America, in exchange for ongoing CAF Phase II support.

c. Methodology for Allocating Support

102.
Discussion.
The Commission concludes that the Connect America Fund should ultimately rely on market-based mechanisms, such as competitive bidding, to ensure the most efficient and effective use of public resources. However, the CAF is not created on a blank slate, but rather against the backdrop of a decades-old regulatory system. The continued existence of legacy obligations, including state carrier of last resort obligations for telephone service, complicate the transition to competitive bidding. In the transition, the Commission seeks to avoid consumer disruption—including the loss of traditional voice service—while getting robust, scalable broadband to substantial numbers of unserved rural Americans as quickly as possible. Accordingly, the Commission adopts an approach that enables competitive bidding for CAF Phase II support in the near-term in some price cap areas, while in other areas holding the incumbent carrier to broadband and other public interest obligations over large geographies in return for five years of CAF support.

103. Specifically, the Commission adopts the following methodology for providing CAF support in price cap areas. First, the Commission will model forward-looking costs to estimate the cost of deploying broadband-capable networks in high-cost areas and identify at a granular level the areas where support will be available. Second, using the cost model, the Commission will offer each price cap LEC annual support for a period of five years in exchange for a commitment to offer voice across its service territory within a state and broadband service to supported locations within that service territory, subject to robust public interest obligations and accountability standards. Third, for all territories for which price cap LECs decline to make that commitment, the Commission will award ongoing support through a competitive bidding mechanism.

104. The Commission anticipates adoption of the selected model by the end of 2012 for purposes of providing support beginning January 1, 2013.

105.
Determination of Eligible Areas.
The Commission will use a forward-looking cost model to determine, on a census block or smaller basis, areas that will be eligible for CAF Phase II support. In doing so, the Commission will allocate the budget of no more than $1.8 billion for price cap areas to maximize the number of expensive-to-serve residences, businesses, and community anchor institutions that will have access to modern networks providing voice and robust, scalable broadband. Specifically, the Commission will use the model to identify those census blocks where the cost of service is likely to be higher than can be supported through reasonable end-user rates alone, and, therefore, should be eligible for CAF support. The Commission will also use the model to identify, from among these, a small number of extremely high-cost census blocks that should receive funding specifically set aside for remote and extremely high-cost areas, as described below, rather than receiving CAF Phase II support, in order to keep the total size of the CAF and legacy high-cost mechanisms within the $4.5 billion budget.

106. This methodology balances the desire to extend robust, scalable broadband to all Americans with the recognition that the very small percentage of households that are most expensive to serve via terrestrial technology represent a disproportionate share of the cost of serving currently unserved areas. In light of this fact, the State Members of the Joint Board propose that universal service support be limited to not more than $100 per high-cost location per month, which they suggest is somewhat higher than the prevailing retail price of satellite service. Similarly, ABC Plan proponents recommend an alternative technology benchmark of $256 per month based on the plan proponents' cost model—the CostQuest Broadband Analysis Tool (CQBAT)—which would limit support per location to no more than $176 per month ($256-$80 cost benchmark). The Commission agrees that the highest cost areas are more appropriately served through alternative approaches, and in the
USF/ICC Transformation FNPRM
the Commission seeks comment on how best to utilize at least $100 million in annual CAF funding to maximize the availability of affordable broadband in such areas. Here, the Commission adopts a methodology for calculating support that will target support to areas that exceed a specified cost benchmark, but not provide support for areas that

exceed an “extremely high cost” threshold.

107. The Commission delegates to the Wireline Competition Bureau the responsibility for setting the extremely high-cost threshold in conjunction with adoption of a final cost model. The threshold should be set to maintain total support in price cap areas within the up to $1.8 billion annual budget.

108. In determining the areas eligible for support, the Commission will also exclude areas where, as of a specified future date as close as possible to the completion of the model and to be determined by the Wireline Competition Bureau, an unsubsidized competitor offers affordable broadband that meets the initial public interest obligations that the Commission establishes in this R&O for CAF Phase I,
i.e.,
speed, latency, and usage requirements. The model scenarios submitted by the ABC Plan proponents excluded areas already served by a cable company offering broadband. State Members propose, at a minimum, excluding areas with unsubsidized wireline competition, and suggested that areas with reliable 4G wireless service could also be excluded. In an “Amended ABC Plan,” NCTA proposes to exclude areas where there is an unsupported wireline or wireless broadband competitor, and areas that received American Recovery and Reinvestment Act stimulus funding from Rural Utilities Service (RUS) or NTIA to build broadband facilities. The Commission concludes, on balance, that it would be appropriate to exclude any area served by an unsubsidized competitor that meets the initial performance requirements, and the Commission delegates to the Wireline Competition Bureau the task of implementing the specific requirements of this rule.

109.
State-Level Commitment.
Following adoption of the cost model, which the Commission anticipates will be before the end of 2012, the Bureau will publish a list of all eligible census blocks associated with each incumbent price cap carrier within each state. After the list is published, there will be an opportunity for comments and data to be filed to challenge the determination of whether or not areas are unserved by an unsubsidized competitor. Each incumbent carrier will then be given an opportunity to accept, for each state it serves, the public interest obligations associated with all the eligible census blocks in its territory, in exchange for the total model-derived annual support associated with those census blocks, for a period of five years. The model-derived support amount associated with each census block will be the difference between the model-determined cost in that census block, provided that cost is below the highest-cost threshold, and the cost benchmark used to identify high-cost areas. If the incumbent accepts the state-level broadband commitment, it shall be subject to the public interest obligations described above for all locations for which it receives support in that state, and shall be the presumptive recipient of the model-derived support amount for the five-year CAF Phase II period. In meeting its obligation to serve a particular number of locations in a state, an incumbent that has accepted the state-level commitment may choose to serve some census blocks with costs above the highest cost threshold instead of eligible census blocks (
i.e.,
census blocks with lower costs), provided that it meets the public interest obligations in those census blocks, and provided that the total number of unserved locations and the total number of locations covered is greater than or equal to the number of locations in the eligible census blocks.

110. Carriers accepting a state-level commitment will receive funding for five years. At the end of the five-year term, in the areas where the price cap carriers have accepted the five-year state level commitment, the Commission expects to use competitive bidding to award CAF support on a going-forward basis, and may use the competitive bidding structure adopted by the Commission for use in areas where the state-level commitment is declined.

111. The Commission concludes that the state-level commitment framework the Commission adopts is preferable to the right of first refusal approach proposed by the Commission in the
USF/ICC Transformation NPRM,
which would have been offered at the study area level, and to a right of first refusal offered at the wire center level, as proposed by some commenters. Both of these approaches would have allowed price cap carriers to pick and choose on a granular basis the areas where they would receive model-based support within a state. This would allow the incumbent to cherry pick the most attractive areas within its service territory, leaving the least desirable areas for a competitive process. This concern was greatest with the ABC proposal, under which carriers would have been able to exercise a right of first refusal on a wire center basis, but also applies to the study area proposal in the
USF/ICC Transformation NPRM.
Although for some price cap carriers, their study areas are their entire service area within a state, other carriers still have many study areas within a state. These carriers may have acquired various properties over time and chosen to keep them as separate study areas for various reasons, including potentially to maximize universal service support. Rather than enshrine such past decisions in the new CAF, the Commission concludes that it is more equitable to treat all price cap carriers the same and require them to offer service to all high-cost locations between an upper and lower threshold within their service territory in a state, consistent with the public interest obligations described above, in exchange for support. Requiring carriers to accept or decline a commitment for all eligible locations in their service territory in a state should reduce the chances that eligible locations that may be less economically attractive to serve, even with CAF support, get bypassed, and increase the chance such areas get served along with eligible locations that are more economically attractive.

112. In determining how best to award CAF support in price cap areas, the Commission carefully weighed the risks and benefits of alternatives, including using competitive bidding everywhere, without first giving incumbent LECs an opportunity to enter a state-level service commitment. The Commission concludes that, on balance, the approach the Commission adopts will best ensure continued universal voice service and speed the deployment of broadband to all Americans over the next several years, while minimizing the burden on the Universal Service Fund.

113. In particular, several considerations support the determination not to immediately adopt competitive bidding everywhere for the distribution of CAF support. Because the Commission excludes from the price cap areas eligible for support all census blocks served by an unsubsidized competitor, the Commission will generally be offering support for areas where the incumbent LEC is likely to have the only wireline facilities, and there may be few other bidders with the financial and technological capabilities to deliver scalable broadband that will meet the requirements over time. In addition, it is the predictive judgment that the incumbent LEC is likely to have at most the same, and sometimes lower, costs compared to a new entrant in many of these areas. The Commission also weighs the fact that incumbent LECs generally continue to have carrier of last resort obligations for voice services. While some states are beginning to re-evaluate those obligations, in many states the incumbent carrier still has the continuing obligation to provide voice service and cannot exit the marketplace

absent state permission. On balance, the Commission believes that that the approach best serves consumers in these areas in the near term, many of whom are receiving voice services today supported in part by universal service funding and some of whom also receive broadband, and will speed the delivery of broadband to areas where consumers have no access today.

114. The Commission disagrees with commenters who assert that the principle of competitive neutrality precludes the Commission from giving incumbent carriers an opportunity to commit to deploying broadband throughout their service areas in a state in exchange for five years of funding. The principle of competitive neutrality states that “[u]niversal service support mechanisms and rules should be competitively neutral,” which means that they should not “unfairly advantage nor disadvantage one provider over another, and neither unfairly favor nor disfavor one technology over another.” The competitive neutrality principle does not require all competitors to be treated alike, but “only prohibits the Commission from treating competitors differently in `unfair' ways.” Moreover, neither the competitive neutrality principle nor the other 47 U.S.C. 254(b) principles impose inflexible requirements for the Commission's formulation of universal service rules and policies. Instead, the “promotion of any one goal or principle should be tempered by a commitment to ensuring the advancement of each of the principles” in 47 U.S.C. 254(b).

115. As an initial matter, the Commission notes that the USF reforms generally advance the principle of competitive neutrality by limiting support to only those areas of the nation that lack unsubsidized providers. Thus, providers that offer service without subsidy will no longer face competitors whose service in the same area is subsidized by federal universal service funding. Especially in this light, the Commission concludes that any departure from strict competitive neutrality occasioned by affording incumbent LECs an opportunity to commit to deploying broadband in their statewide service areas is outweighed by the advancement of other 47 U.S.C. 254(b) principles, in particular, the principles that “[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation,” and that consumers in rural areas should have access to advanced services comparable to those available in urban areas. Although other classes of providers may be well situated to make broadband commitments with respect to relatively small geographic areas such as discrete census blocks, the purpose of the five-year commitment is to establish a limited, one-time opportunity for the rapid deployment of broadband services over a large geographic area. The fact that incumbent LECs' have had a long history of providing service throughout the relevant areas—including the fact that incumbent LECs generally have already obtained the ETC designation necessary to receive USF support throughout large service areas—puts them in a unique position to deploy broadband networks rapidly and efficiently in such areas. The Commission sees nothing in the record that suggests a more competitively neutral way of achieving that objective quickly, without abandoning altogether the goal of obtaining large-area build-out commitments or substantially ballooning the cost of the program.

116. Moreover, it is important to emphasize the limited scope and duration of the state-level commitment procedure. Incumbent LECs are afforded only a one-time opportunity to make a commitment to build out broadband networks throughout their service areas within a state. If the incumbent declines that opportunity in a particular state, support to serve the unserved areas located within the incumbent's service area will be awarded by competitive bidding, and all providers will have an equal opportunity to seek USF support, as described below. Furthermore, even where the incumbent LEC makes a state-level commitment, its right to support will terminate after five years, and the Commission expects that support after such five-year period will be awarded through a competitive bidding process in which all eligible providers will be given an equal opportunity to compete. Thus, the Commission anticipates that funding will soon be allocated on a fully competitive basis. In light of all these considerations, the Commission concludes that adhering to strict competitive neutrality at the expense of the state-level commitment process would unreasonably frustrate achievement of the universal service principles of ubiquitous and comparable broadband services and promoting broadband deployment, and unduly elevate the interests of competing providers over those of unserved and under-served consumers who live in high-cost areas of the country, as well as of all consumers and telecommunications providers who make payments to support the Universal Service Fund.

117.
Competitive Bidding.
In areas where the incumbent declines a state-level commitment, the Commission will use a competitive bidding mechanism to distribute support. In the
USF/ICC Transformation FNPRM,
the Commission proposes to design this mechanism in a way that maximizes the extent of robust, scalable broadband service subject to the budget. Assigning support in this way should enable us to identify those providers that will make most effective use of the budgeted funds, thereby extending services to as many consumers as possible. The Commission proposes to use census blocks as the minimum geographic unit eligible for competitive bidding and seek comment on ways to allow aggregation of such blocks. Although the Commission proposes using the same areas identified by the CAF Phase II model as eligible for support, the Commission also seeks comment on other approaches—for example, excluding areas served by any broadband provider, or using different cost thresholds. The Commission also seeks targeted comment on other issues, including bidder eligibility, auction design, and auction process.

118.
Transition to New Support Levels.
Support under CAF Phase II will be phased in, in the following manner. For a carrier accepting the state-wide commitment, in the first year, the carrier will receive one-half the full amount the carrier will receive under CAF Phase II and one-half the amount the carrier received under CAF Phase I for the previous year (which would be the frozen amount if the carrier declines Phase I or the frozen amount plus the incremental amount if the carrier accepts Phase I); in the second year, each carrier accepting the state-wide commitment will receive the full CAF Phase II amount. To the extent a carrier will receive less money from CAF Phase II than it will receive under frozen high-cost support, there will be an appropriate multi-year transition to the lower amount. It is premature to specify the length of that transition now, before the cost model is adopted, but it will be addressed in conjunction with finalization of the cost model that will be developed with public input.

119. For a carrier declining the state-wide commitment, the carrier will continue to receive support in an amount equal to its CAF Phase I support amount until the first month that the winner of any competitive process receives support under CAF Phase II; at that time, the carrier declining the state-wide commitment will cease to receive high-cost universal service support. No additional broadband obligations apply to funds received during the transition period. That is, carriers accepting the

state-wide commitment are obliged to meet the Phase II broadband obligations described above, while carriers declining the state-wide commitment will be required to meet their pre-existing Phase I obligations, but will not be required to deploy additional broadband in connection with their receipt of transitional funding.

d. Forward-Looking Cost Model

120.
Discussion.
Although the Commission agrees with both the State Members and the ABC Plan proponents that the Commission should use a forward-looking model to assist in setting support levels in price cap territories, the Commission does not adopt the CQBAT cost model proposed by the ABC Coalition, nor does the Commission accept the State Board's proposal that the Commission simply update the existing cost mod

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2011-32411. Public record. Not legal advice.