Connect America Fund, ETC Annual Reports and Certifications, Establishing Just and Reasonable Rates for Local Exchange Carriers; Universal Service Reform-Mobility Fund; Developing an Unified Intercarrier Compensation Regime

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[WC Docket Nos. 10-90, 14-58, 07-135; WT Docket No. 10-208; CC Docket No. 01-92; FCC 14-54]

Connect America Fund, ETC Annual Reports and Certifications, Establishing Just and Reasonable Rates for Local Exchange Carriers; Universal Service Reform—Mobility Fund; Developing an Unified Intercarrier Compensation Regime

AGENCY:

Federal Communications Commission.

ACTION:

Proposed rule.

SUMMARY:

In this document, the Federal Communications Commission (Commission) proposes measures to update and further implement the framework adopted by the Commission in 2011. The Commission strives to adapt its universal service reforms to ensure those living in high-cost areas have access to services that are reasonably comparable to services offered in urban areas.

DATES:

Comments are due on or before August 8, 2014 and reply comments are due on or before September 8, 2014. If you anticipate that you will be submitting comments, but find it difficult to do so within the period of time allowed by this document, you should advise the contact listed below as soon as possible.

ADDRESSES:

You may submit comments, identified by either WC Docket No. 10-90, WC Docket No. 14-58, WC Docket No. 07-135, WT Docket No. 10-208, or CC Docket No. 01-92, by any of the following methods:

•

Federal eRulemaking Portal:

http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Federal Communications Commission's Web site:

http://fjallfoss.fcc.gov/ecfs2/.

Follow the instructions for submitting comments.

•

People with Disabilities:

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

FCC504@fcc.gov

or phone: (202) 418-0530 or TTY: (202) 418-0432.

For detailed instructions for submitting comments and additional information on the rulemaking process, see the

SUPPLEMENTARY INFORMATION

section of this document.

FOR FURTHER INFORMATION CONTACT:

Alexander Minard, Wireline Competition Bureau, or Suzanne Yelen, Wireline Competition Bureau, (202) 418-7400 or TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION:

This is a synopsis of the Commission's Further Notice of Proposed Rulemaking (FNPRM) in WC Docket Nos. 10-90, 14-58, 07-135, WT Docket No. 10-208, and CC Docket No. 01-92; FCC 14-54, adopted on April 23, 2014 and released on June 10, 2014. 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 St. SW., Washington, DC 20554 or at the following Internet address:

http://transition.fcc.gov/Daily_Releases/Daily_Business/2014/db0610/FCC-14-54A1.pdf.

The Report and Order, Declaratory Ruling, Order, Memorandum Opinion and Order and Seventh Order on Reconsideration that was adopted concurrently with the FNPRM are published elsewhere in this issue of the

Federal Register

.

Pursuant to §§ 1.415 and 1.419 of the Commission's rules, 47 CFR 1.415, 1.419, interested parties may file comments and reply comments on or before the dates indicated on the first page of this document. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS).

See Electronic Filing of Documents in Rulemaking Proceedings,

63 FR 24121, May 1, 1998.

Electronic Filers:

Comments may be filed electronically using the Internet by accessing the ECFS:

http://fjallfoss.fcc.gov/ecfs2/.

Paper Filers:

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

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

All hand-delivered or messenger-delivered paper filings for the Commission's Secretary must be delivered to FCC Headquarters at 445 12th St. SW., Room TW-A325, Washington, DC 20554. The filing hours are 8:00 a.m. to 7:00 p.m. All hand deliveries must be held together with rubber bands or fasteners. Any envelopes and boxes must be disposed of

before

entering the building.

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

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

People with Disabilities:

To request materials in accessible formats for people with disabilities (braille, large print, electronic files, audio format), send an email to

fcc504@fcc.gov

or call the Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-418-0432 (tty).

I. Introduction

1. With this Further Notice of Proposed Rulemaking (FNPRM) and concurrently adopted Report and Order, Declaratory Ruling, Order, Memorandum Opinion and Order, and Seventh Order on Reconsideration, the Commission takes significant steps to continue the implementation of the landmark reforms unanimously adopted by the Commission in 2011 to modernize universal service for the 21st century. The Commission builds on the solid foundation created in 2011, taking into account what they have learned to date and new marketplace developments, to fulfill our statutory mission to ensure that all consumers “have access to . . . advanced telecommunications and information services.”

2. A core component of the 2011 reforms was the creation of the Connect America Fund to preserve and advance voice and robust broadband services, both fixed and mobile, in high-cost areas of the nation that the marketplace would not otherwise serve. Today, the Commission adopts rules that build on the framework established by the Commission in the

USF/ICC Transformation Order

, 76 FR 73830, November 29, 2011, while proposing targeted adjustments that the Commission believes are necessary to ensure that it's best utilizing the funds that consumers and businesses pay into the universal service system. In particular, the Commission is mindful that technological innovation is occurring at a rapid pace, and the marketplace has continued to evolve in the intervening years. The Commission must ensure that the reforms it implements now are not predicated on outdated assumptions.

3. Meeting the infrastructure challenge of the 21st century will be a multi-year journey. It took the nation almost 50 years to bring electricity to 99 percent of rural farms; decades later, it took 35 years to complete the original portion of the interstate highway

system. In just two years, the Commission's reforms have set the nation on a path that will bring new fixed broadband services to more than 1.6 million Americans, new mobile services to historically unserved Tribal lands, and improved mobile coverage along our nation's roads. Achieving universal access to broadband will not occur overnight. Today, the Commission takes further steps to bring broadband service to every corner of the country.

4. In the FNPRM, the Commission proposes measures to update and implement further the framework adopted by the Commission in 2011. The Commission strives to adapt our universal service reforms to ensure those living in high-cost areas have access to services that are reasonably comparable to services offered in urban areas. Consistent with that goal, in the FNPRM the Commission proposes to revise our current broadband performance obligations to require minimum speeds of 10 Mbps downstream to ensure that the services delivered using Connect America funds are reasonably comparable to the services enjoyed by consumers in urban areas of the country. The FNPRM also proposes to apply uniformly the same performance obligations to all recipients of Phase II support and to rate-of-return carriers. In addition, the Commission seeks to further develop the record on the ability of Phase II recipients to satisfy their obligations using any technology or a combination thereof—whether wireline or wireless, fixed or mobile, terrestrial or satellite—that meets the performance standards for Phase II. The FNPRM also proposes to provide financial incentives for recipients of Phase II support to accelerate their network deployment.

5. To target our finite universal service funds most effectively, the FNPRM proposes to exclude from eligibility for Phase II support those areas that are served by

any

provider that offers voice and broadband services meeting the Commission's service obligations—whether those providers are subsidized or unsubsidized. The FNPRM seeks comment on the amount of frozen support to provide to incumbents that decline the offer of model-based support where no other provider wishes to serve, and on the obligations associated with such support. The FNPRM also proposes to define the public interest obligations that would apply to recipients of frozen support in the non-contiguous areas of the United States. The Commission also proposes several minor changes and clarifications regarding the implementation of the transition to model-based support to ease the administration of Connect America Phase II.

6. In addition, the FNPRM seeks comment on several proposals regarding eligible telecommunications carrier (ETC) designation. It proposes to require entities that are winning bidders for the offer of Phase II support in the competitive bidding process to apply for ETC designation within 30 days of public announcement of winning bidders. It also proposes to adopt a rebuttable presumption that a state commission lacks jurisdiction over an entity seeking ETC designation if it fails to initiate a proceeding within 60 days.

7. The FNPRM seeks comment on specific proposals for the design of the Phase II competitive bidding process that will occur in areas where price cap carriers decline model-based support. Through this public input, and what the Commission learns from the expressions of interest already submitted for rural broadband experiments, it should be prepared to make further decisions by the end of the year on the design of the competitive bidding process that will be used for Phase II in price cap territories where the price cap carrier declines the state-level commitment.

8. The FNPRM also addresses significant developments that have occurred since the adoption of the

USF/ICC Transformation Order

in the marketplace for mobile wireless services. Given the commercial deployment of 4G Long Term Evolution (LTE), the Commission proposes to retarget the focus of Mobility Fund Phase II. The Commission seeks comment on targeted measures that would address those areas of the country where LTE is not and, to the best of our knowledge, will not be available in the foreseeable future and would preserve existing mobile voice and broadband service where it would not otherwise exist without government support. The FNPRM also proposes to maintain existing support levels (i.e., 60 percent of baseline support) for wireless competitive ETCs for whom competitive ETC support exceeds one percent of their wireless revenues until a date certain after winning bidders are announced for the offer of Mobility Fund Phase II support, and to accelerate the phase-down for wireless competitive ETCs for whom high-cost support is one percent or less of their wireless revenues. The FNPRM seeks comment on whether to take a different approach for wireline competitive ETCs and asks whether their phase-down in support should be determined by the timing of the Phase II competitive bidding process. The FNPRM also proposes to freeze support for carriers serving remote areas in Alaska, as of December 31, 2014, and to begin their phase-down in support on a date certain after the Mobility Fund Phase II auction or Tribal Mobility Fund Phase II auction.

9. In the FNPRM, the Commission also focuses on developing and implementing a “Connect America Fund” for rate-of-return carriers. Specifically, they Commission seeks comment on reform proposals that would address a number of the identified shortcomings in the current support mechanisms that provide support to rate-of-return carriers. As a short term measure, the Commission proposes to apply the effect of the annual rebasing of the cap on support known as high-cost loop support (HCLS) equally on all recipients of HCLS, to address the problematic incentives of the current rule. As another near term reform, the Commission also proposes to prohibit recovery of new investment occurring on or after January 1, 2015, through either HCLS or interstate common line support (ICLS) in areas that are served by a qualifying competitor that offers voice and broadband service meeting the Commission's standards. As a longer term measure, the Commission seeks comment on limiting recovery of new investment through HCLS or ICLS as of a date certain, in conjunction with implementation of a Connect America Fund for rate-of-return carriers. The Commission proposes to adopt a stand-alone broadband support mechanism that meets defined parameters and seek to develop further the record on various industry proposals. Building on a proposal recently submitted by the Independent Telephone & Telecommunications Alliance (ITTA), the Commission proposes to provide rate-of-return carriers the option of participating in a two-step transition to Phase II model-based support and seek comment on alternative rate regulation measures and specific implementation issues. The Commission also seeks comment in the FNPRM on providing one-time funding for middle mile projects on Tribal lands in 2015. Such an approach could serve as a template for further implementation on a broader scale in subsequent years.

10. In today's decision, the Commission also revisits some fundamental assumptions regarding implementation of the Remote Areas Fund. Part of ensuring that the Commission use its universal service funding wisely is developing effective and targeted mechanisms to address the challenges of serving the most remote, high-cost areas. Rather than prejudging

which areas are appropriately served through the Remote Areas Fund, the Commission concludes that participants in the Phase II competitive bidding process should be permitted to bid on any area where the estimated cost is at or above the funding benchmark adopted for the offer of model-based support to price cap carriers in Phase II of the Connect America Fund. The Commission concludes it would be prudent to defer full implementation of the Remote Areas Fund until 2016, after completion of the Phase II competitive bidding process. Only then will the Commission be in a position to identify which specific areas are appropriately served by alternative technologies, potentially with relaxed performance standards.

11. Finally, the FNPRM proposes to codify a broadband certification requirement for recipients of funding that are subject to broadband performance obligations, seeks comment on specific levels of support reduction for non-compliance with service obligations, and proposes to modify our rules regarding reductions in support when parties miss filing deadlines in order to better calibrate the support reduction to coincide with the period of noncompliance.

12. With the actions the Commission takes today and those planned for later this year, it expects to move forward to implement the offer of Phase II model-based support by the end of the year, as they noted in January. The Commission also expects to take further action to implement the rural broadband experiments it adopted in their January

Tech Transitions Order,

79 FR 11327, February 28, 2014 and 79 FR 11366, February 28, 2014. Through these coordinated actions, the Commission expects to create incentives for both existing and new providers to extend robust, scalable next-generation voice and broadband networks that provide high-quality performance, whether through fiber, wireless, or other technology, as deep into high-cost areas as is feasible given the existing Connect America budget.

II. Further Notice of Proposed Rulemaking

A. Public Interest Obligations

13.

Evolving Speed Obligations.

Consistent with the Commission's authority in section 254(e) of the Communications Act, the Commission supports the deployment of voice and broadband-capable networks in furtherance of the section 254(b) objective that residents in all parts of the country, including rural and high-cost areas, have access to advanced telecommunications and information services. In the

USF/ICC Transformation Order,

the Commission committed to initiating a proceeding no later than the end of 2014 to review the broadband service performance requirements established for the Connect America Fund. Today, the Commission initiates that proceeding. In particular, the Commission proposes to increase the minimum broadband speeds that it seeks to achieve with universal service funding to 10 Mbps downstream. The Commission seeks comment on this proposal, as well as the consequences and tradeoffs involved in raising the standard, including the ability to preserve and advance broadband service for consumers within the Connect America budget. The Commission also seeks comment on whether to increase the upstream speed requirement to something higher than 1 Mbps. The new speed standards would apply generally to all recipients of high-cost support that are subject to broadband public interest obligations: ETCs that elect model-based Phase II support, ETCs that receive Phase II support through the competitive bidding process, and rate-of-return ETCs that receive support through legacy mechanisms and CAF-ICC support.

14. In the

USF/ICC Transformation Order,

the Commission established a speed benchmark for broadband of 4 Mbps/1 Mbps, with speeds for the later years of an anticipated 2012-2017 timeframe increasing to 6 Mbps downstream and 1.5 Mbps upstream (6 Mbps/1.5 Mbps). The marketplace for broadband has continued to evolve since the adoption of the

USF/ICC Transformation Order

. At the time of the adoption of the

USF/ICC Transformation Order,

Phase II model-based support was expected to begin in 2013 and run until 2017. With model-based support now likely to be disbursed in the 2015-2019 timeframe, it is appropriate to reevaluate the speed benchmark in light of the most recent data.

15. The Commission proposes a new downstream speed standard of 10 Mbps to further the statutory goal of ensuring that consumers in rural parts of the country have access to advanced telecommunications and information services that are reasonably comparable to those services available in urban areas. The most recent round of State Broadband Initiative (SBI) data show that nearly all persons living in urban areas have access to fixed broadband with downstream speeds of at least 10 Mbps. SBI data as of June 2013 indicate that only two percent of the population residing in urban census blocks lack access to fixed broadband with speeds of 10 Mbps downstream/768 kbps upstream. In contrast, the SBI data indicate that 33 percent of the population residing in rural census blocks lack access to fixed broadband providing 10 Mbps/768 kbps speeds.

16. SBI data also show that urban users have greater access to higher upstream speeds than rural users. Given the statutory goal of reasonable comparability, should the Commission set an upstream speed requirement for universal service purposes at a level higher than 1 Mbps, such as 2 Mbps? The Commission specifically seeks comment on whether 1 Mbps upstream will provide sufficient bandwidth for residential consumers to take advantage of applications and services that advance critical public purposes such as education and healthcare. In the recent Rural Broadband Workshop, some parties suggested that upload speeds higher than 1 Mbps were necessary to support certain telehealth applications. To the extent commenters argue that the Commission should set a different upstream benchmark than 1 Mbps for universal service purposes, they should provide specific examples of the applications and services that require such upstream capability for residential consumers.

17. In proposing to increase the current broadband downstream speed benchmark, the Commission is primarily focusing on the minimum standard for

new

deployments of broadband-capable infrastructure. Our goal is to ensure that Connect America funding is used efficiently, going forward, to deploy networks that are capable of scaling to higher speeds over time, as consumer demand warrants. By proposing a new speed benchmark, the Commission does not intend to suggest that ETCs must deliver such speeds immediately upon adoption of a new rule. Rather, consistent with the approach the Commission adopted for the current speed benchmark, it is proposing a standard that ETCs, current and future, would be expected to achieve over a period of years, as they utilize high-cost support to extend and upgrade networks in high-cost areas.

18. In the

USF/ICC Transformation Order,

the Commission adopted a requirement that ETCs develop five-year service improvement plans and provide annual updates regarding those plans. Likewise, in the

USF/ICC Transformation Order,

the Commission established a five-year time frame for recipients of model-based support to meet the deployment milestones for Phase II. The Commission thus

recognized that broadband-capable infrastructure would not, and realistically could not, be ubiquitously deployed overnight, but rather that it would be deployed over a period of time. As such, the Commission emphasizes that there is no immediate consequence, and in particular no loss of universal service support, to the extent an existing ETC is not currently offering speeds that meet the current 4 Mbps/1 Mbps benchmark throughout its entire service territory, nor would an ETC be immediately non-compliant with our rules if in the future it were to revise the downstream speed standard to, for instance, 10 Mbps in response to this FNPRM. Rather, our intent in proposing to revisit this standard is to establish a new minimum standard that the Commission build toward over time, recognizing that consumers increasingly will utilize applications and services that require greater bandwidth than our current standard.

19. As discussed in the concurrently adopted Report and Order, under the framework adopted by the Commission in the

USF/ICC Transformation Order,

a rate-of-return carrier is required to deploy broadband-capable infrastructure to a customer upon reasonable request. If the Commission were to revise its broadband performance obligations to require higher speeds, such as 10 Mbps downstream, such new deployments would be required to meet the new benchmark. But a rate-of-return carrier would only be required to meet that higher speed if the request for service was

reasonable

. A reasonable request is one where the carrier could cost-effectively extend a voice and broadband-capable network to that location. In determining whether a particular upgrade is cost effective, the carrier should consider not only its anticipated end-user revenues from the services to be offered over that network, both voice and retail broadband internet access, but also other sources of support, such as federal and, where available, state universal service funding. Under our proposal to increase the minimum downstream speed threshold, the Commission thus would not expect a rate-of-return carrier immediately to upgrade its entire existing infrastructure to provide 10 Mbps downstream and 1 Mbps upstream (10 Mbps/1 Mbps) to all current customers. Rather, the Commission proposes that rate-of-return carriers would take into account any revised speed standards when considering whether and where to upgrade existing plant in the ordinary course of business and would report on progress toward this goal in preparing annual updates to their five-year service improvement plans. The Commission seeks comment on this proposal. To the extent commenters believe it would take longer than five years to upgrade networks to meet the proposed new standard, they should specify what time frame they believe is realistic.

20. In addition, if commenters believe that it would make more requests for service unreasonable, therefore requiring carriers to scale back their deployment plans, the Commission seeks comment on how to ensure that consumers in those areas receive service. For example, if a request for a higher speed service would be unreasonable but a request that meets our current standard would be reasonable, the Commission seeks comment on permitting the deployment at the lower speed standard. The Commission also seeks comment on whether carriers should be allowed to self-identify territories that they would not be able to serve (either alone or through a voluntary partnership) so that the Commission could extend broadband service to those consumers through a different mechanism.

21. The Commission seeks comment on the costs and benefits of increasing the speed benchmark. Will it help or hinder our efforts to reach unserved consumers? Will the benefits gained by consumers in having access to higher speeds outweigh the increased cost of deploying a more robust network? What impact would it have on participation in the Phase II competitive bidding process and our ability to preserve and advance universal service in areas where a price cap carrier declines model-based support? Is it reasonable to assume that the same number of residents would be served in Phase II at speeds of 10 Mbps/1 Mbps as would be served at 4 Mbps/1 Mbps? The Commission directs the Bureau to publish information within 15 days of release of this FNPRM regarding the number of locations that would be eligible for the offer of model-based support if the revised speed benchmark were used to determine the presence of an unsubsidized competitor and the number of locations that would be above the extremely high-cost threshold. The Commission encourages parties to address in their comments how changing the speed standard would affect the number of consumers that could be served.

22. The Commission intends to take action on this proposed revision to the speed benchmark prior to extending the offer of support to price cap carriers so that they have clarity as to what is expected of them over the five-year Phase II term if they make state-level commitments to accept model-based support. Under the existing rules, Phase II state-level commitment funding recipients must provide broadband with speeds of 4 Mbps/1 Mbps to all locations and speeds of 6 Mbps/1.5 Mbps to a subset of locations as specified by the Bureau. If the Commission adopts our proposal to raise the minimum speed benchmark to 10 Mbps downstream, it proposes that the Bureau would no longer be required to specify a number of locations that would receive 6 Mbps downstream or 1.5 Mbps upstream for recipients of model-based support. The Commission seeks comment on this proposal.

23. If the Commission adopts the proposal to extend broadband downstream speeds to 10 Mbps, it seeks comment regarding whether it should provide a longer term for Connect America Phase II model-based support than the five-year term it adopted in the

USF/ICC Transformation Order

. For instance, should carriers accepting a state-level commitment for five years have the ability to extend that term for additional two years, assuming verification of specified deployment milestones to deliver service with 10 Mbps downstream speed.

24.

Usage and Latency Standards

. The Commission proposes to apply the same usage allowances and latency benchmarks that the Bureau implemented for price cap carriers that will accept the offer of model-based support in the state-level commitment process to ETCs that will receive support through a competitive bidding process. Under this proposal, all Phase II recipients would be required to offer at least one plan with an initial minimum usage allowance of 100 GB, adjusted over time to take into account trends in consumer usage, at a price that is reasonably comparable to similar fixed wireline offerings in urban areas. The Commission also proposes to require recipients of support through the competitive bidding process to provide a roundtrip provider network latency of 100 ms or less. This latency is suitable to allow for existing real time applications, such as VoIP. The Commission seeks comment on these proposals.

25. Parties that argue that standards should be relaxed for the Phase II competitive bidding process that will occur in areas where the price cap carrier declines model-based support should identify with specificity which standard should be relaxed and to what extent, and explain why relaxation of such standards is consistent with

achievement of our universal service objectives. For instance, to the extent parties argue that a 100 ms or less standard for roundtrip provider network latency is too stringent, they should identify what numerical standard should be used for the Phase II competitive bidding process. Likewise, to the extent parties argue that recipients of support through a competitive bidding process should not be required to offer at least one plan with a minimum usage allowance of 100 GB at a price that is reasonably comparable to comparable fixed wireline offerings in urban areas, they should identify what usage level instead would fulfill the statutory principle that consumers in high-cost areas should have access to “reasonably comparable services” at “reasonably comparable rates.”

26. In the

Phase II Service Obligations Order,

78 FR 70881, November 27, 2013, the Bureau stated that recipients of model-based support are permitted to offer their customers services other than those meeting the stated performance criteria. The Commission proposes a similar approach for ETCs awarded support in the competitive bidding process, so they would be free to offer an array of services, including those not meeting the proposed performance requirements, so long as at least one offering met all the necessary metrics. The Commission seeks comment on this proposal.

27. The Commission also proposes to apply these usage allowance and latency standards to rate-of-return ETCs that are subject to broadband performance obligations. This would ensure that consumers have access to the same baseline level of broadband service regardless of whether they reside in a price cap or rate-of-return study area. Again, the Commission emphasizes that it does not expect that rate-of-return carriers would only provide broadband offerings to customers that meet these requirements. Rather, they would be free to offer an array of services of varying speeds, usage, and price to meet customer demand. If commenters argue that rate-of-return carriers should either be exempted from or be subject to relaxed usage allowance and latency standards, the Commission specifically seeks comment on how it can ensure that consumers in rate-of-return areas are not relegated to substantially less robust services than consumers living in price cap areas.

28.

Role of Alternative Technologies in Phase II

. In reforming the universal service fund, the Commission established the Connect America Fund, focused on terrestrial, fixed broadband deployment, and the Mobility Fund, focused on mobile broadband deployment. Connect America Fund Phase II recipients were required to deploy networks capable of providing “broadband service that is reasonably comparable to terrestrial fixed broadband service in urban America.” The Commission did not explicitly prohibit the use of mobile or satellite technology in meeting Phase II obligations, as long as it provided performance comparable to terrestrial, fixed broadband. Relatedly, in providing funding for the Connect America Fund, the Commission excluded Phase II support for areas that were served by unsubsidized competitors; it limited the definition of unsubsidized competitor to terrestrial, fixed providers. The Commission stated that it would revisit this definition as satellite and mobile technologies developed over time.

29. The Commission seeks to develop more fully the record on allowing Phase II recipients to satisfy their obligations using any technology or combination thereof—whether wireline or wireless, fixed or mobile, terrestrial or satellite—that meets the performance standards for Phase II. Specifically, any Phase II recipient satisfying its obligations would be required to meet the Phase II requirements for speed, latency, usage allowance, and pricing, as they exist today or may be modified in the future in response to this FNPRM. The Commission emphasizes that wireless providers are free, and indeed encouraged, to participate in Connect America Phase II, and fixed wireless already is an option for the delivery of service in Phase II under the framework established by the Commission in the

USF/ICC Transformation Order

. What is important from the consumer's perspective is the quality of the user experience and the price of the service offering, not the specific technology used to deliver service. Given that, the Commission seeks comment on whether, for purposes of Phase II implementation, it should allow the use of mobile or satellite technology that meets the Phase II requirements, while maintaining the service and pricing standards established by the Bureau for the offer of model-based support.

30. In a similar vein, for the Phase II competitive bidding process, should the Commission exclude from eligibility for funding any area that is served by a competitor that meets the Commission's current standards for the offer of model-based support to price cap carriers, again presuming that the same service and pricing standards are met, regardless of technology? The Commission welcomes input on the extent to which mobile or satellite providers today meet those standards.

31. The Commission seeks comment on how to ensure that the end-user experience is functionally equivalent whether the connection is provided through fixed or mobile means. Should the Commission require, for instance, that providers allow consumers subscribing to the service to attach or tether their mobile connections to other devices? This will allow consumers to use their mobile connections on traditionally fixed platforms, such as desktop computers, thus allowing access to the same applications and functionalities as consumers served through fixed connections. The Commission also seeks comment on the ability of a mobile connection to support multiple devices. Should the Commission adopt requirements that the mobile service allow users to be able to use multiple devices simultaneously? To the extent that additional devices or subscriptions are required to support multiple devices, should the Commission consider that in determining reasonable price comparability? The Commission additionally seeks comment on whether any other requirements should attach to Phase II support for mobile or satellite technologies to ensure they provide the end user with the same service qualities obtained when a fixed service is purchased. For example, mobile service can have a far greater variation in service quality as compared to fixed services, with service quality not only changing based on location within a tower's footprint, but also even whether the service is being used indoors rather than outdoors. How should the Commission address these issues to ensure that networks supported with universal service funds provide consumers with high-quality broadband access regardless of the technology deployed? How should the Commission ensure that consumers are still able to use services that generally rely on fixed networks, such as medical monitoring or security systems? What would be the impact on businesses and anchor institutions if the Commission were to exclude from eligibility for Phase II support those areas that are served by mobile or satellite providers that meet the Phase II standards?

32.

Evolving Standards

. In the concurrently adopted Report and Order, the Commission adopts a term of support of ten years for those ETCs that are awarded Phase II through a competitive bidding process. It is likely that the public's expectations for connectivity will evolve substantially over the next decade. Should the

Commission adjust the Phase II obligations for the later years of the ten-year term of support? To plan a network, recipients of support need to know ahead of time what will be expected of them. What is a reasonable requirement for entities receiving ten years of support? For example, would requiring Connect America Phase II recipient to deploy broadband at a higher speed tier for a discrete subset of locations ensure that the evolving expectations of consumers are met? Should the Commission require Connect America Phase II participants to provide 20 Mbps downstream service to 20 percent of locations by year eight? Should the Commission set a higher (or lower) speed threshold? Should the Commission require recipients to meet the higher speed threshold at more or fewer locations? Or should the Commission decline to establish an additional concrete service obligation on Connect America Phase II recipients?

33. Alternatively, should the Commission require recipients of such support to provide an evolving level of service over the funding period based on trends in consumer usage? For instance, should the Commission use FCC Form 477 and other Commission data, such as the Measuring Broadband America results, to monitor the service available in urban markets and create an index that would enable the Commission to modify service obligations (speed, usage allowance, latency, and price) based on trends in urban offerings and usage for all ETCs receiving support with a ten-year term? The Commission seeks comment on what, if any, other data sources it should rely on if it were to establish an evolving benchmark. Should the evolving standard be based on an average or median consumer's usage? Would use of this approach with an evolving standard affect the incentives for providers to accept support with a ten-year term and, ultimately, affect the deployment of broadband to consumers?

34.

Connections to Schools, Libraries, and Health Care Providers

. In the

USF/ICC Transformation Order,

the Commission indicated its expectation that ETCs would offer broadband at speeds greater than 4 Mbps/1 Mbps to community anchor institutions in rural and high-cost areas and that they would provide such offerings “at rates that are reasonably comparable to comparable offerings to community anchor institutions in urban areas.” The Commission did not have a record before it at the time to specify what specific speeds are appropriate for anchor institutions. The Commission seeks to develop the record more fully, and thus invite comment on how best to ensure that this expectation is fulfilled by ETCs, with specific reference to institutions and the charges, terms, and conditions of service provided to those institutions.

35.

Incentives for Faster Deployment

. In the concurrently adopted Report and Order, the Commission adopts a term of ten years for funding Phase II projects through the competitive bidding process. The Commission already established a five-year term for Phase II recipients that receive support through the state-level commitment process. Phase II recipients are required to complete deployment to 85 percent of supported locations within three years of notification of funding authorization, with completion to all locations required within five years.

36. The Commission proposes to provide financial incentives for recipients of Phase II support to accelerate their network deployment. Specifically, funds could be disbursed on an accelerated timetable if a recipient completed its deployment ahead of the required timeframe. For instance, for price cap carriers making a state-level commitment, all or some fraction of the remaining support for the five-year term that has not yet been disbursed after network completion is validated could be paid out over six months. How could a similar proposal be implemented for ETCs awarded support through a competitive bidding process? If the Commission adopts such a system, how should it structure the accelerated payout? The Commission proposes that if it were to adopt such a system, accelerated payment would not be made until the Universal Service Administrative Company (USAC) has validated the completion of network deployment. The Commission seeks comment on this proposal.

B. Flexibility in Meeting Deployment Obligations

37. In developing the Connect America Cost Model, the Bureau concluded that census blocks shown as served on the National Broadband Map would be treated as presumptively served, and it determined that, for purposes of the Phase II challenge process, partially served census blocks would be treated as fully served. It did so primarily for administrative reasons, due to concern that conducting a challenge process at the sub-census block level would be time consuming and burdensome for all affected parties.

38. In the concurrently adopted Report and Order, the Commission recognized the need to provide recipients of Phase II support flexibility to serve areas where the average cost is equal to or above the Connect America Phase II funding benchmark. The Commission concluded that allowing funding recipients in the competitive bidding process to deploy to locations that would be above the extremely high-cost threshold would enable them to build integrated networks in adjacent census blocks as appropriate.

39. For similar reasons, the Commission now seeks comment on two potential measures that would provide all recipients of Phase II funding, both in the state-level commitment process and competitive bidding process, greater flexibility to satisfy their deployment obligations.

40. First, the Commission seeks comment on to permitting Phase II recipients (both price cap carriers accepting the state-level commitment and winners in a competitive bidding process) to specify they are willing to deploy to less than 100 percent of locations in their funded areas, with associated support reductions to the extent they elect to deploy to less than 100 percent of funded locations. If the Commission were to adopt such a proposal, it proposes to establish a minimum percentage of locations that must be served by a Phase II recipient. Would 95 percent of funded locations be an appropriate minimum? To the extent parties argue that the required percentage should be lower than 95 percent, they should identify with specificity the particular number. Should the Commission require the Phase II recipient to specify the number of locations it intends to deploy to at the time funding is first authorized, or should it provide it with flexibility to adjust its deployment commitments for some period of time after making a state-level commitment or being authorized to receive support through a competitive bidding process?

41. The Commission seeks comment on how to adjust the support a Connect America Phase II recipient should receive if it were to adopt this proposal. One way to reduce support would be in direct proportion to the number of locations left unserved within a given state. Another way would reduce a provider's support based on the support the model attributed to serving each location. Is one methodology superior to the other? Is one method more administrable or does either create better incentives for deployment? Would the method that reduces support based on model-determined support be appropriate for Phase II recipients that are awarded support through a competitive bidding process? Are there other methodologies that would better

serve our universal service goals if the Commission were to adopt this proposal?

42. Second, the Commission seeks comment on allowing Phase II recipients to substitute some number of unserved locations within partially served census blocks for locations within funded census blocks. Phase II funding recipients thus would have the option to deploy to some number of unserved locations within partially served census blocks in lieu of deploying to a number of locations in otherwise eligible census blocks. This approach could enable more effective network deployment and bring service to unserved consumers in those partially served census blocks. If the Commission were to adopt such an approach, should it establish a limit on the number of locations that could be substituted to meet the deployment obligation? For instance, should a price cap carrier or recipient of support through a competitive bidding process be able to substitute no more than five percent of its funded locations with unserved locations in partially served census blocks?

43. The Commission seeks comment on whether the benefits of allowing the flexibility to serve in partially served census blocks outweigh the costs imposed on those that have invested private capital to deploy service nearby. The Commission seeks comment on how the substitution process would work given that Connect America Phase II recipients are most likely to substitute locations when the costs of serving the new locations is lower than the cost of serving the locations originally designated in funded census blocks. For example, the simplest substitution metric would require that the number of new locations equal or exceed the number of old locations (i.e., one-for-one swaps). A more complicated substitution metric would require the modelled support for serving the new locations equal or exceed the modelled support for serving old locations. Is one methodology superior to the other? Is either more administrable or does either create better incentives for deployment? Are there other methodologies that would better serve our universal service goals if the Commission were to adopt this proposal?

44. The Commission emphasizes that it is not proposing to overturn the Bureau's decision not to entertain sub-census block challenges in the Phase II challenge process. That was a reasonable decision given the anticipated number of challenges that may be filed regarding the list of census blocks potentially eligible for the offer of model-based support. Partially served census blocks will continue to be treated the same as fully served census blocks, and excluded from calculations of the offer of model-based support. Rather, the Commission is proposing to give funding recipients the flexibility to deploy to unserved locations that within census blocks that are deemed served, after they are awarded support either through the offer of model-based support or the competitive bidding process, subject to reasonable limitations to ensure that no overbuilding occurs.

45. The Commission seeks comment on measures to ensure that this flexibility does not result in the overbuilding of those locations within such census blocks that are in fact served. For example, should the Phase II funding recipient be required to announce publicly the locations in any partially served census block it plans to deploy to, with sufficient specificity that would enable other providers to determine whether they serve such areas? Would it be sufficient to require an identification of the roads or addresses intended for deployment, or should the Commission also requires an announcement of the latitude/longitude coordinates for specific locations?

46. To minimize the burden of monitoring intended deployment plans on other potentially impacted parties, the Commission proposes that the price cap carrier would be required to identify locations outside of its funded census blocks intended for potential deployment on an annual basis during the five-year term. This could occur, for instance, in conjunction with filing the annual FCC Form 481. After making such an announcement, the funding recipient would be required to wait a period of time before commencing construction to those locations. Is 90 days a sufficient period of time? The Commission seeks comment on whether a 90-day notice process would enable any existing providers to inform the Phase II funding recipient that it already serves the locations in question with voice and broadband service meeting the Commission's standards. If no statement of service is received within 90 days, the funding recipient would be permitted to deploy to the locations. The funding recipient could disregard statements received after the 90-day window. What process should occur if another provider contends that it serves the locations, but the Phase II funding recipient wants to contest such assertions?

47. If the Commission were to adopt such a rule, should it specify a format for the announcement of the planned deployment or the statement of service? Would it be sufficient that the announcement be posted to the Phase II funding recipient's Web site, or should the Commission require that the announcement be posted to ECFS? Should the Commission require that a copy of the announcement of intended deployment plans be sent to any existing voice and broadband provider shown as serving the area on the National Broadband Map? Should the Commission require that the statement of service be made under penalty of perjury? Should such statements be posted to ECFS in lieu of or in addition to submitting them to the funding recipient? What other requirements should the Commission consider that will meet our objectives of providing service to unserved consumers in high-cost areas, regardless of their location, while ensuring that the Commission does not inadvertently fund deployment to areas that are in fact served?

C. Eligibility of Areas for Phase II Support

48.

Discussion.

The Commission now proposes to revisit the requirement that a competitor be “unsubsidized” to exclude a service area from receiving high-cost support, including Connect America support. The Commission asks whether it is the most efficient use of the Connect America budget to provide support in geographic areas where there is another facilities-based terrestrial provider of fixed residential voice and broadband services that meets our current requirements—whether that competitor is subsidized or not. Every dollar that is spent in such areas is a dollar not available to extend broadband to areas that lack it. The Commission therefore proposes to exclude from the offer of model-based support any census block that is served by a facilities-based terrestrial competitor offering fixed residential voice and broadband services that meet the Commission's service requirements. If the Commission adopts our proposal to increase the downstream benchmark to 10 Mbps, it proposes to exclude from Connect America Phase II those census blocks where there is a facilities-based terrestrial competitor offering fixed residential voice and broadband services meeting that new speed standard. The Commission seeks comment on these proposals.

49. The Commission also seeks comment on excluding from the Phase II competitive bidding process any area that is served by a price cap carrier that offers fixed residential voice and broadband meeting the Commission's requirements. Consequently, if the

Commission adopts our proposal to establish a new downstream speed benchmark of 10 Mbps, Phase II funds would only be available in a competitive bidding process for any area lacking 10 Mbps/1 Mbps. The Commission asks whether it would make sense to include in the competitive bidding process those areas where a price cap carrier already offers voice and broadband service meeting the requisite standards, either the current standard or any new standards it may adopt in response to this FNPRM. If the Commission were to adopt such an approach, and a price cap carrier declined to elect a state-level commitment, another provider could receive Phase II support through the competitive bidding process to overbuild a price cap carrier's existing network. The Commission is skeptical that this is an efficient use of the budget for Phase II.

50. If the Commission were to allow Connect America support to be used to overbuild the broadband network of a provider, even one that is subsidized, it would mean those support dollars would not be available to deploy broadband-capable infrastructure in areas that truly lack broadband. On the other hand, the Commission recognizes that excluding areas that currently may have fixed residential voice and broadband services may make it more difficult for bidders in a competitive process to develop bids for a network that is cost-effective to build; it is possible that the amount of support provided for the unserved census blocks alone may be insufficient to build out to those census blocks on a stand-alone basis. The Commission seeks comment on this analysis and how best to ensure that it extends broadband-capable infrastructure to those lacking it today.

51. The Commission seeks comment on whether it should exclude from Phase II support only those areas where the current provider certifies that it is able and willing to continue providing terrestrial fixed residential voice and broadband services meeting the Commission's requirements for a specified period of time, such as five years. Some parties argue that a subsidized provider may cease to provide service once support is phased out, leaving consumers in such areas without service. Rather than assuming that existing providers will not exit those markets that they currently serve, regardless of whether they receive legacy support in such areas or not, requiring a certification could provide an additional assurance that consumers will receive the same level of service that they otherwise would have if the area were not receiving Phase II support. If the current provider is unwilling to make such a certification, then the area would not be precluded from receiving Phase II support.

52. Finally, the Commission also seeks comment on the broader question of whether universal service funds are ever efficiently used when spent to overbuild areas where another provider has already deployed service. In this section, the Commission proposes to exclude support for areas already served by an existing provider meeting the requisite voice and broadband requirements; whether a provider receives universal service support should not necessarily be the determining factor. The Commission proposes to define such a provider that meets the voice and broadband requirements as a “qualifying competitor.” Second, the Commission seeks comment on whether our other rules that reduce or eliminate support in areas with unsubsidized competitors should be reframed as reducing or eliminating support in areas with qualifying competitors, whether subsidized or not. For example, should the 100 percent overlap rule apply only where unsubsidized competitors overlap an incumbent or also where any qualifying competitor overlaps the incumbent?

D. ETC Designation

53. As noted in the concurrently adopted Report and Order, only ETCs designated pursuant to section 214(e) of the Act “shall be eligible to receive specific Federal universal service support.” Section 214(e)(2) gives states the primary responsibility for ETC designation. However, section 214(e)(6) provides that this Commission is responsible for processing requests for ETC designation when the service provider is not subject to the jurisdiction of the state public utility commission.

54. Streamlining the process of seeking federal designation when states may lack jurisdiction is necessary for the efficient implementation of the Connect America Fund, so that the Commission may provide support for access to services in high-cost areas, including the most remote and costly areas of the nation, in an efficient and timely manner. The Commission believes that this can be accomplished within the Act's framework for state and federal action. Although the Commission has previously stated that it would act on ETC designation applications “only in those situations where the carrier can provide the Commission with an affirmative statement from the state commission or a court of competent jurisdiction that the carrier is not subject to the state commission's jurisdiction” and that the technology used (e.g., satellite service) “does not

per se

place the carrier outside the parameters of the state commission designation authority under section 214(e)(2),” the Commission tentatively concludes that a different approach is warranted to ensure successful implementation of the Connect America Fund, including the Remote Areas Fund.

55. In the concurrently adopted Order, the Commission permits entities to seek ETC designation

after

being selected for the offer of Phase II Connect America funding. Here, the Commission proposes to adopt a requirement that a winning bidder must submit an application to become an ETC within 30 days of public notice that it is the winning bidder for the offer of support in those areas where it has not already been designated an ETC. The Commission also proposes that an applicant for Phase II support that fails to submit such an application within 30 days would be deemed in default and therefore subject to default payments. The Commission proposes to require winning bidders to submit proof to the Commission that they have filed the requisite ETC designation application within the required timeframe to the extent filed with a state commission. The Commission seeks comment on these proposals.

56. Second, the Commission proposes to adopt a rebuttable presumption that a state commission lacks jurisdiction over an ETC designation petition for purposes of Connect America Phase II competitive bidding or Remote Areas Fund if it fails to initiate a proceeding on that petition within 60 days of receiving it. The Commission seeks comment on whether it should adopt a similar rebuttable presumption if a state commission fails to decide a petition within a certain period of time, such as 90 days of initiating a proceeding on it. Under this proposal, a carrier may file for ETC designation with the Commission and point to the lack of state action within the prescribed time period as evidence that the petitioner is not subject to the jurisdiction of a state commission. In determining whether a state commission lacks jurisdiction over the applicant, Commission staff would weigh any statements that a state commission submits during the notice-and-comment period against the lack of action and the arguments of the applicants. The Commission seeks comment on this proposal.

57. The Commission notes that this streamlined framework would not preempt a state's designation authority under section 214(e)(2) but instead is intended to be consistent with the framework of the Communications Act, while ensuring that applications will not remain pending before state commissions for an undefined period of time while carriers wait for an affirmative statement that there is no state jurisdiction. Nor would this action make ETC designation “nationwide,” but instead would require approval by this agency on a case-by-case basis, based on reviewing the evidence of jurisdiction, as well as the fact that the individual state commission did not act within the requisite period. And the Commission recognizes that alternative technology service providers, such as satellite or fixed wireless service, have not traditionally been subject to state public utility commission regulations. If a state has a law expressly stating that it does not have jurisdiction over a relevant type of technology, Commission staff would consider such a statute relevant in its determination of Commission jurisdiction. To the extent states do assert jurisdiction over alternative technology service providers, given our shared commitment to expanding the availability of broadband to all Americans, the Commission expects that state commissions will act swiftly to conclude such proceedings in order to rule on the ETC application.

58. Third, the Commission seeks comment on sunsetting ETC designations tied to participation in the Connect America Phase II competitive bidding process or the Remote Areas Fund after the funding term has expired and the entity has fulfilled its build-out and public interest obligations. As WISPA has explained, “imposing continuing obligations that extend beyond the funding term would discourage participation by qualified companies that desire to compete for funding under the subject CAF program.” The Commission seeks comment on whether sunsetting those ETC designations is consistent with the Act. The Commission notes that a carrier may not discontinue voice service without receiving authorization pursuant to section 214 and that sunsetting an ETC designation for federal purposes would not impact state obligations such as carrier of last resort obligations to the extent applicable. The Commission seeks comment on this proposal. Under such a proposal, how would the Commission ensure that rates remain affordable for low-income consumers? Should those ETCs be required to maintain their ETC designation for purposes of the Lifeline program throughout the areas for which they receive support, subject to existing procedures for relinquishment?

59. At this time, the Commission does not propose to preempt state review of ETC designation applications or to deem applications granted after 30 days because there is nothing in the record before us that would warrant such a broad change from the existing framework. Rather, the Commission believes that the proposed changes to the current ETC process would be sufficient. The Commission seeks comment on this analysis.

E. Transitions to Phase II

60. In this section, the Commission seeks to develop further the record on several transition issues relating to implementation of Phase II in areas currently served by price cap carriers. First, the Commission seeks comment on the amount of support to be provided to the incumbent ETC in areas that no other provider wishes to serve, and the associated obligations that go with such funding. Second, the Commission seeks comment on performance obligations to be associated with frozen support elected by price cap carriers serving non-contiguous areas of the country. Third, the Commission proposes various minor changes and clarifications regarding the transition to Phase II.

1. Frozen Support in High-Cost Areas

61.

Discussion.

The Commission clarifies that its decision to eliminate frozen support when there is a winner of a competitive bidding process applies only with respect to the geographic area—however defined—where another provider is awarded Phase II support. The Commission needs a mechanism to determine the appropriate amount of frozen support to provide in those instances where a competitive ETC is awarded support to serve less than the entire area of the incumbent where the average cost exceeds the funding benchmark.

62. The Commission seeks comment on how to calculate the amount of frozen support that should be provided to the price cap carrier in situations where another ETC is awarded support through a competitive bidding process to serve a portion, but not all, of the area that is subject to the state-level commitment. The Commission also seeks comment on providing frozen support on an interim basis to price cap carriers, in those areas determined by the model to be extremely high-cost areas where there is no other voice provider, pending designation of other ETCs to serve such areas and further Commission proceedings.

63. The Commission proposes a simplified methodology to calculate the amount of support to provide at least on an interim basis in high-cost and extremely high-cost areas to the extent no other ETC is designated to serve such areas. In particular, the Commission proposes to use the Connect America Cost Model to develop a ratio of the cost of serving all blocks where the average cost per location is at or above the final funding benchmark adopted by the Bureau for determining the offer of model-based support to price cap carriers to the total cost of serving for the state. That ratio would then be multiplied by the total amount of Phase I frozen support for that carrier in the relevant state. Is this a reasonable interim methodology to use to calculate support to be provided for those areas that no other party wishes to serve? Are there other potential methodologies for providing a pro-rata amount of frozen high-cost support for such areas? What would be the budgetary impact of awarding such additional frozen support to incumbent providers in certain areas if the full Phase II budget is awarded through the combination of the offer of model-based support to price cap carriers and competitive bidding process?

64. The Commission proposes to eliminate or modify the current requirement that the price cap carrier certify that all of its frozen support in 2015 and thereafter “was used to build and operate-broadband-capable networks used to offer the provider's own retail broadband services in areas substantially unserved by an unsubsidized competitor.” The Commission seeks comment on whether, once the offer of model-based support is implemented, price cap carriers declining model-based support should instead be required to certify that they are using such support to continue to offer voice service in such high-cost and extremely high-cost areas that no other providers wish to serve. Should such frozen support be provided for a defined period of time, or until the occurrence of specific event, such as the designation of another ETC to serve the area in question? What would be an appropriate time frame to revisit both the nature of the obligations and the amount of frozen support to be provided to price cap carriers to serve such high-cost and extremely high-cost areas? In particular, should the Commission revisit these questions when it conducts further proceedings to determine next steps after the end of the term of Phase II support for those price cap carriers

that elect to receive model-based support?

65. Both landline and mobile voice services meet the definition of voice telephony and both have been supported through the federal high-cost and the Lifeline programs. In the

Tech Transitions Order,

the Commission noted that evolving technology transitions bring additional choices to consumers by supplementing the legacy copper circuit-switched voice services and consumers may choose to “cut-the-cord” by using wireless voice services. Information from the Tech Transition experiments will allow the Commission and the public to evaluate how customers are affected by the historic technology transitions that are transforming our nation's voice communications services. The Commission notes also that the Commission will begin collecting more data regarding mobile availability on FCC Form 477, although such data collection will not begin until June 30, 2014. The Commission does know that in some areas of the country these alternatives may not be available. The Commission is committed to preserving universal service, consistent with the statute.

66. The Commission asks commenters to provide specific data relating to the extent of mobile wireless coverage in the areas identified by the forward-looking cost model as high-cost or extremely high-cost. How would the Commission determine whether areas purportedly served by mobile voice providers are in fact served? What data sources should the Commission rely upon, if it were ultimately to conclude that interim frozen support is not necessary in areas where there is a mobile voice service provider? How should the Commission take into account the fact that mobile coverage may vary within a census block, with some customers receiving adequate coverage while other customers may not? Should the Commission refocus our vision for the Remote Areas Fund to preserve voice service for residential consumers in those price cap areas that do not have adequate signal strength for mobile service to be a reliable alternative?

2. Obligations of Incumbent LECs That No Longer Receive High-Cost Support

67.

Discussion.

The Commission seeks to further develop the record on how to apply this statutory framework to situations where an incumbent LEC ETC no longer receives high-cost universal service support for a given geographic area or where a non-incumbent carrier has been selected for support through the competitive bidding process. At the outset, the Commission notes that most incumbent LEC ETCs are receiving CAF-ICC support and will continue to do so for several years. And the Commission also notes that the obligations of being an ETC are distinct from the more general section 214 obligation to receive Commission approval before discontinuing voice service to a community.

68. The Commission seeks comment on whether ETCs should be deemed to only have a federal high-cost obligation for the geographic areas for which they receive support. Does such a reading comport with the statutory language in section 214—which specifies that ETCs “shall, throughout the service area for which the designation is received—offer the services that are supported by Federal universal service support mechanisms under section 254(c)”? The Commission notes that under such a statutory interpretation, if an incumbent LEC ETC no longer were receiving any form of high-cost support, it would effectively become Lifeline-only ETCs throughout its service territory with the continuing obligation to provide service to Lifeline customers, subject to existing ETC relinquishment procedures.

69. What specific ETC obligations would an incumbent LEC be relieved of under such an interpretation of the statute? To the extent an incumbent LEC receives CAF-ICC support, how should the Commission determine the specific geographic areas that would be associated with that support?

3. Obligations of Carriers Serving Non-Contiguous Areas That Elect Frozen Support

70.

Discussion.

The Commission proposes specific service obligations for non-contiguous carriers electing to continue to receive frozen support amounts. In the course of the model development process, the Bureau sought to develop the record on several of these issues. The Commission now invites parties to comment on specific proposals. The Commission also seeks comment on how it can monitor for compliance with these obligations.

71. The Commission proposes that non-contiguous carriers electing to receive frozen support be subject to the same public interest service standards as those receiving model-based support, however modified in response to this FNPRM. In this FNPRM, the Commission seeks comment on whether it should increase the minimum broadband speed requirement for carriers that elect model-based Phase II support to 10 Mbps downstream. If the Commission adopts this new standard, it proposes it should also apply to non-contiguous carriers that elect to continue to receive frozen support. To the extent non-contiguous carriers contend that they should be held to a lesser speed standard, they should propose with specificity the number or percentage of locations in their funded areas that would receive lesser service.

72. Consistent with the

USF/ICC Transformation Order,

the Commission also proposes requiring non-contiguous carriers who continue receiving frozen support to offer both voice and broadband service at rates reasonably comparable to those services offered in urban areas. As with carriers accepting model-based support, the Commission proposes that non-contiguous carriers receiving frozen support would have two options for showing reasonable comparability: Reasonable comparability benchmarks as announced by the Wireline Competition Bureau based on the annual urban rate survey or a certification by the carrier that it is offering services meeting our voice and broadband requirements for the same or lower prices in rural areas as urban areas. The Commission seeks comment on whether there are any challenges unique to these non-contiguous carriers that they would face in meeting this obligation and how the Commission should account for those challenges and also fulfill its statutory obligation to ensure reasonably comparable rates.

73. In addition to speed and price obligations, the Commission proposes that non-contiguous carriers continuing to receive frozen support be subject to the same usage allowance specified by the Bureau for price cap carriers receiving model-based support. Specifically, the Commission proposes that these non-contiguous carriers must initially offer at least one service option that provides a minimum usage allowance of 100 GB per month at a rate that either meets the reasonable comparability benchmark announced by the Bureau or at a rate that is the same or lower than rates for its fixed wireline services in urban areas. The Commission also proposes that this minimum initial usage allowance should be adjusted over time to reflect trends in consumer usage over time. The Bureau permitted price cap carriers accepting model-based support to make this determination based on the usage level of 80 percent of all of its broadband subscribers, including those subscribers that live outside of Phase II-funded areas, while concluding that 100 GB would serve as a floor, even if 80 percent of the carrier's subscribers used less than 100 GB. The Commission

seeks comment on whether—in light of the potentially unique circumstances in non-contiguous areas—it would be appropriate to relax the 100 GB minimum usage allowance for non-contiguous carriers and instead allow them to meet their usage requirements based on a comparison to 80 percent of their entire subscriber base.

74. The Commission also proposes that non-contiguous carriers be required to meet a roundtrip provider network latency of 100 milliseconds or less. The Bureau noted in the

Phase II Service Obligations Order

that latency determinations for carriers serving non-contiguous areas could be affected by the use of undersea cable, depending upon the type and length of cable. Therefore, it allowed carriers in non-contiguous areas of the United States who receive model-based support to conduct their latency network testing from the customer location to a point at which traffic is consolidated for transport to an Internet exchange point in the continental United States. The Commission proposes allowing non-contiguous carriers that choose to continue to receive frozen support to fulfill their latency requirements using the same measurement. The Commission previously recognized that satellite backhaul may limit the performance of broadband networks as compared to terrestrial backhaul, and it exempted fixed broadband providers that must rely on satellite backhaul facilities from the usage allowance and latency requirements as a result. The Commission proposes exempting non-contiguous carriers that choose to continue to receive frozen support from these requirements as well, provided they rely exclusively on satellite backhaul and certify annually that no terrestrial backhaul options exist.

75. The Commission proposes that non-contiguous carriers receiving frozen support must not use such support in any areas where there is a terrestrial provider of fixed residential voice and broadband service that meets our Phase II performance requirements. To the extent a non-contiguous carrier is unable to meet this requirement, the Commission proposes that it relinquish whatever amount of frozen support it is unable to use for the intended purpose. The Commission seeks comment on these proposals.

76. The Commission seeks comment on the specific build out obligations that non-contiguous carriers receiving frozen support would have in those census blocks that do not currently have broadband service meeting the Commission's requirements. Specifically, should non-contiguous carriers receiving frozen support be required to deploy voice and broadband-capable networks and offer services meeting the above performance metrics to all locations in those funded areas, consistent with the state-level commitments required of carriers receiving model-based support? In the alternative, should these carriers be allowed to serve some subset of locations within their respective service areas where the average cost equals or exceeds the funding benchmark established by the Bureau? Should they also be required to extend broadband-capable networks to serve some specified number of locations in census blocks determined by the model to be above the extremely high-cost threshold?

77. The Commission seeks comment on how to monitor and enforce compliance by non-contiguous carriers receiving frozen support once it has determined their specific service obligations. Are there any measures that must be in place to ensure that the Commission has the ability to monitor compliance with these service obligations? Are there any considerations specific to non-contiguous areas that the Commission should account for when determining whether these carriers have complied with their service obligations? Below, the Commission proposes potential support reductions for price cap carriers receiving model-based support that fail to fulfill their service obligations. The Commission proposes that non-contiguous carriers receiving frozen support would be subject to similar reductions in support for failing to fulfill their service obligations. Should any adjustments to that framework be made?

78. Finally, the Commission seeks comment on whether to specify a five-year term for those non-contiguous carriers that elect to receive frozen support, and whether there is a need to modify the term of support for such non-contiguous carriers. Are there any specific extenuating circumstances in non-contiguous areas that would require extending the term of frozen support for longer than five years?

79. Recognizing there may be differing circumstances for each of the non-contiguous carriers, the Commission asks whether it should adopt tailored service obligations for each one that chooses to elect frozen support. To the extent non-contiguous carriers contend that they could not meet one or more of the public interest service standards set forth above, they should submit specific alternatives. However, the Commission notes that, for certain non-contiguous carriers, the amount of frozen support they would receive is greater than the amount of model-based support they would receive. The Commission expects, therefore, that any alternatives proposed by these carriers would reflect this level of support and would be consistent with the Commission's goal of ensuring universal availability of modern networks capable of providing voice and broadband service to homes, businesses, and community anchor institutions.

4. Other Issues Relating to the Phase II Transition

80. The Commission proposes several minor changes and clarifications regarding the implementation of the transition to model-based support to ease the administration of Connect America Phase II. First, the Commission proposes to align the five-year term for model-based support provided to price cap carriers that elect to make a state-level commitment with calendar years, specifically, 2015 through 2019. Second, the Commission proposes that a carrier accepting state-level support pursuant to Connect America Phase II should receive the full amount of Phase II support in the initial year, rather than the transitional amount of support adopted in the

USF/ICC Transformation Order.

Third, the Commission proposes to clarify that for purposes of calculating the baseline for carriers in states where model-based support will be less than Phase I support, the baseline only includes Connect America Phase I frozen high-cost support, and not Phase I incremental support.

a. Aligning Connect America Phase II Funding and Calendar Years

81. Under the recordkeeping and reporting rules established by the Commission, many accountability requirements operate on a calendar year basis. Aligning the funding years of Connect America Phase II with the reporting and recordkeeping years established in sections 54.313 and 54.314 of the Commission's rules could lessen administrative burdens, for the Fund Administrator, states, and recipients.

82. At this juncture, the Commission anticipates that while the offer of support may be extended before the end of 2014, the deadline for acceptance will be in 2015, 120 days later. The Commission proposes to disburse a lump sum amount to those carriers for whom model-based support in a given state will be greater than Connect America Phase I support, representing the additional amount of model-based support that would accrue for the

beginning months of the year while the offer of support is under consideration, so that in calendar year 2015 those carriers will receive the appropriate yearly amount. Should such support be disbursed in the month after the acceptance of model-based support, or some other date? The Commission seeks comment on these proposals.

b. Transition Where Model-Based Support Is Greater Than Connect America Phase I Support

83. In the

USF/ICC Transformation Order,

the Commission specified that price cap carriers electing the state-level commitment would receive five years of model-based support and established a process for transitioning support from Connect America Fund Phase I to Phase II in states where model-based support is greater than frozen support. Specifically, for a carrier accepting the state-level 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 [incremental support] or the frozen amount plus the incremental amount if the carrier accepts Phase I [incremental support]); in the second year, each carrier accepting the state-wide commitment will receive the full CAF Phase II amount.” In a Public Notice, the Bureau sought to develop further the record on various issues regarding implementation of this transition.

84. The Commission now proposes to eliminate the transition year and disburse the full amount of model-based support in the initial year to those carriers for whom the amount of model-based support is greater than frozen support. The Commission expects this will reduce administrative burden on the Fund Administrator, as it will only need to program its systems once to disburse the appropriate monthly amounts over the five-year period, rather than first implementing a transition year, and then switching to the full model-determined amounts the second year. In addition, the Commission expects that this would provide greater certainty for carriers accepting a state-level commitment than deferring disbursement of part of the initial year's support until certain milestones are met, as suggested in the

Additional Phase II Public Notice,

78 FR 76789, December 19, 2013. Given that in all relevant circumstances, the carriers will be receiving a support level that is higher than their prior frozen support for that state, the Commission proposes that there is no need for a transition year, and the public interest and the purposes of section 254 of the Act will be served by disbursing the new, model-based level in the first year.

85. The Commission therefore proposes that, for a carrier accepting a state-level commitment, in the first year the carrier will receive 100 percent of the annualized amount the carrier will receive pursuant to Connect America Phase II, and no additional Connect America Phase I support. The Commission seeks comment on this proposal and our analysis.

c. Base Support Amount for Transition to Connect America Phase II

86. As described above, the Commission noted “[t]o the extent a carrier will receive less money from CAF Phase I than it will receive under frozen high-cost support, there will be an appropriate multi-year transition to the lower amount.” It is not clear from the language whether the Commission intended the reference to “CAF Phase I” to encompass Phase I incremental support.

87. The Commission proposes to clarify that for the purposes of transitioning from Connect America Phase I to Phase II, only Connect America Phase I frozen support is relevant. Specifically, the multi-year phase down in support that the Commission adopts in the concurrently adopted Report and Order would only apply to frozen support and would not include Phase I incremental support. Incremental support was provided to carriers on a one-time basis in exchange for specific build-out commitments, in contrast to the ongoing frozen support. The Commission is unaware of any policy justification for providing any fraction of the one-time support on a recurring basis under the guise of a transition to Connect America Phase II. The Commission seeks comment on this proposed clarification.

F. Interplay Between Rural Broadband Experiments and Offer of Model-Based Support

88. More than 1,000 expressions of interest in rural broadband experiments have been filed by a wide range of entities. Although the Commission has not yet established selection criteria or a budget for those experiments, it is likely that there will be a number of well-developed formal proposals. Such proposals provide strong evidence that at least some entities are prepared to extend robust broadband in a given high-cost area for an amount less than or equal to the amount of model-based support that would be provided to a price cap carrier through the state-level commitment process for that area. The Commission therefore seeks comment on whether such an indication of potential competitive entry through a formal proposal for an area should be grounds for removing that area from a carrier's state-level commitment (i.e., the carrier would not receive model-based support for that area and would have no obligation to meet the broadband performance obligations in that area).

89. The Commission seeks comment on what conditions a rural broadband experiment formal proposal would have to meet in order to remove a geographic area from a price cap carrier's state-level commitment. In particular, the Commission seeks comment on the broadband performance, amount of support requested, and other conditions a rural broadband formal proposal should meet before the area it covers would be removed from the price cap carrier's state-level commitment. For example, based on staff review thus far, it appears that the vast majority of the expressions of interest received to date are requesting one-time support, rather than recurring support. In order to remove a particular geographic area from the state-level commitment, should the amount of one-time support requested be annualized over a ten-year period, to provide an apples-to-apples basis for comparison to model-based support? Should the proposal be required to indicate a willingness to receive the amount of one-time support requested over a multi-year period, such as five or ten years? What other factors should the Commission consider before concluding a formal application is sufficiently meritorious to remove an area from a carrier's state-level commitment?

90. From an administrative perspective, how would the Commission implement the removal of an area from a carrier's state-level commitment? Should the Commission remove all areas that are covered by formal rural broadband experiment proposals that meet the conditions discussed above that the Commission does not fund through the rural broadband experiment? What other criteria could the Commission use to determine whether an area should be removed from a carrier's state level commitment? To the extent a formal rural broadband experiment proposal covers an area that is served in part by a rate-of-return carrier and in part by a price cap carrier, should the proposal be required to indicate that the applicant will proceed if only funded in the price cap portion of the proposed service area,

in order to be sufficient to remove an area from the price cap carrier state-level commitment?

91. If the Commission were to adopt such an approach, how would this affect the incentives of potential participants in the Phase II competitive bidding process to express their interest prior to the offer of support to price cap carriers? How would this affect the incentives of price cap carriers to accept or decline model-based support? How would it affect the timing and extent of the deployment of broadband-capable infrastructure in high-cost areas? Given that the vast majority of the expressions of interest proposing to extend fiber-based technologies propose to deploy fiber-to-the-premise, would removing such areas from the state-level commitment result in greater deployment of broadband to high-cost areas than would be the case under the current Connect America framework?

G. Phase II Competitive Bidding Process

92. In the concurrently adopted Report and Order, the Commission sets certain parameters for the Phase II competitive bidding process. In this section, the Commission seeks to develop further the record on additional issues relating to the competitive bidding process that will occur in Phase II.

93. In the

USF/ICC Transformation Order,

the Commission adopted rules to apply generally for competitive bidding to award universal service support, codified in Subpart AA of Part I. In the

USF/ICC Transformation FNPRM,

76 FR 78384, December 16, 2011, it proposed to use a reverse auction to distribute support to providers of voice and broadband services in price cap areas where the price cap carrier declined support. The Commission proposed to use such a mechanism to determine where services meeting the specified performance requirements can be offered “at the lowest cost per unit” with the relevant unit being the number of residential and business locations in a given census block. The Commission also sought comment on relaxing performance obligations and allowing bidders to offer to provide service with different performance characteristics, with the Commission considering these service quality attributes when it evaluates bids.

94. The Commission recognizes the importance of specifying in advance objective, well-defined, and measurable criteria for selecting among entities that seek funding in a competitive bidding process. The record received in response to the

USF/ICC Transformation FNPRM

is not sufficiently well developed on this issue, however, for us to make final decisions at this time. But the Commission is nevertheless determined to finalize the details of the competitive bidding process so that it can occur shortly after the model-based elections take place. In the concurrently adopted Report and Order, the Commission adopts certain rules with respect to participation, the term of support, and the ETC designation process, and the Commission seeks further comment on other aspects of those rules elsewhere. Here, the Commission focuses on the mechanics of the competitive bidding process and seek comment on specific proposals.

95.

First,

the Commission proposes that it adopts reserve prices based on the Connect America Cost Model so that the reserve price for a given geographic area in the competitive bidding (i.e., census tract or census block) equals the amount of support the model would have calculated for that same geographic unit in the state-level election process. To the extent the Commission ultimately decides that census tracts will be the minimum geographic unit for competitive bidding, it proposes that the reserve price for a given census tract would be the support associated with the requisite number of locations in census blocks within that tract that are eligible for funding. That support could be used to serve locations within census blocks where the average cost per location exceeds the extremely high-cost threshold established by the model. To the extent parties argue that the model should not be used to determine reserve prices either generally or in specific areas, they should articulate what instead should be used for a reserve price.

96.

Second,

the Commission proposes bidders may bid for a package of geographic areas, either census blocks or census tracts. The Commission believes that such package bidding is likely necessary so that bidders may construct efficient networks and are not left to serve certain high-cost tracts without the scale to do so effectively.

97.

Third,

the Commission proposes that the total of all bids accepted nationwide be no greater than the total Connect America Phase II budget that remains after the state-level election process. The Commission notes that because bidders can compete both for areas subject to the state-level election process as well as areas that are deemed extremely high-cost, there could be insufficient funds to support all bidders even if there is only one bid in each area. As such, the competitive bidding process is likely to result in both intra-area and inter-area competition for funding.

98.

Fourth,

the Commission proposes that the competitive bidding process use a multi-round auction so that competitive bidders have the opportunity to reevaluate their bids in light of the actions of others. A multi-round process may be especially important here so that bidders can reevaluate their deployment objectives in light of the demonstrated willingness of other bidders to build out broadband in an area.

99.

Fifth,

the Commission proposes that the competitive bidding process be implemented in a way that first identifies those provisionally winning bids that propose service that substantially exceeds the Commission's service standards, for an amount per location equal to or less than the model-determined amount of support for the relevant geographic areas. To the extent funding remains available, the Commission proposes that the next round of bidding would identify those bids proposing to provide service that meets the Commission's service standards, for an amount of support per location equal to or less than the model-determined amount. To the extent funding still remains available after these two determinations, the Commission proposes that the competitive bidding process would then identify winning bidders that are willing to provide service using relaxed performance standards for an amount of support equal to, or less than, the model-determined reserve price. The Commission seeks comment on the specific characteristics of services that would be deemed to be “substantially” exceeding the Commission's standards. In order to qualify for such a preference, must a bidder commit to offering service that substantially exceeds our standards to 100 percent of all funded locations, or some lesser percentage? In addition, the Commission seeks comment on whether it should adopt any other limits on the priorities discussed above. For instance, should the auction be designed so that the Commission select all bids that substantially exceed the Commission's standards before selecting any bids for service that meets or falls below the Commission's standards? Should the Commission allocate funding in a way that provides geographic coverage across various states? The Commission also seeks comment on how it might incorporate into our auction design consideration of the expressed preferences of the affected community for service of a particular type or quality. What would be an appropriate form for such an indication?

100. Rather than the multi-step approach proposed above, should the Commission consider bidding credits to effectuate priorities that advance our objectives? The Commission seeks to refresh the record on the use of bidding credits, including bidding credits for service to Tribal lands, and also ask whether to provide bidding credits to bidders that propose to offer service that substantially exceeds the Commission's standards.

101. The Commission also seeks comments on concerns that a reverse auction will result in bidders competing to provide the minimally acceptable level of service. How can the Commission best ensure that any competitive bidding process it ultimately adopts will bring an evolving level of broadband service to consumers, businesses, and anchor institutions in rural America? The Commission now seeks to refresh the record and seek more focused comment on what objective metrics should be used when the Connect America Phase II competitive bidding process is implemented nationwide in price cap territories to the extent the offer of model-based support is declined. Specifically, what criteria should be adopted that will determine who is awarded support?

102. Additionally, the Commission seeks comment on what specific rules and requirements must be in place before it makes the offer of model-based support to price cap carriers. As noted above, the Commission has already adopted rules for the award of universal service support through a competitive bidding process, codified in Subpart AA of Part 1. Those rules specify, among other things, that the following will be specified by public notice prior to the commencement of competitive bidding: (1) The dates and procedures for submitting applications to participate in the competitive bidding process; (2) the details of and deadlines for posting a bond or depositing funds with the Commission to provide funds to draw upon in the event of defaulting bids; (3) procedures for competitive bidding, including but not limited to whether package bidding will be allowed and reserve prices; and (4) the amount of default payments, not to exceed 20 percent of the amount of the defaulted bid amount. Typically, these matters would be specified only after the Commission knows the inventory of areas that will be subject to auction. The Commission seeks comment on which, if any, of these matters should be specified by public notice before it makes the offer of model-based support to price cap carriers. Are there other rules and requirements that should be specified in advance of the commencement of the Connect America Phase II competitive bidding process?

H. Mobility Fund Phase II

103. Since the

USF/ICC Transformation Order

was adopted, there has been significant commercial deployment of mobile broadband services. According to some sources, nearly 99.5 percent of the U.S. population today (and the road miles associated with that population) is covered by some form of mobile broadband technology. Verizon asserts that its 4G LTE network currently is available to 95 percent of the U.S. population—more than 500 markets covering approximately 303 million people. Similarly, AT&T has stated that at present its LTE deployment covers all major metropolitan areas, totaling nearly 280 million people, and it expects to cover approximately 300 million people by the summer of 2014.

104.

Discussion.

Based on these marketplace developments, the Commission proposes to target the funds set aside to support mobile services in Mobility Fund Phase II on preserving and extending service in those areas that will not be served by the market without governmental support. The Commission emphasized in the

USF/ICC Transformation Order

that it did not intend to provide ongoing support for service to areas that are likely to be served absent support. Given marketplace developments over the last few years, the Commission seeks comment on how to ensure that Mobility Fund Phase II is focused on preserving service that otherwise would not exist and expanding access to 4G LTE in those areas that the market will not serve.

105. Section 254(b) of the Act requires the Commission to base policies on the “preservation and advancement of universal service.” In recognition of this statutory directive, the Commission in the

USF/ICC Transformation Order

adopted specific performance goals to preserve and advance the universal availability of voice service, including ensuring the universal availability of modern networks capable of providing advanced mobile voice and broadband services. The Commission reaffirms this commitment and therefore seek to target the Mobility Fund Phase II funding in a way that preserves mobile service where it only exists today due to support from the universal service fund and to extend service to areas unserved by 4G LTE.

106. Given the experiences with Mobility Fund Phase I and Tribal Mobility Fund Phase I where demand for universal service support far exceeded the supply of available funding, the Commission recognizes that there is a need and desire on the behalf of providers to extend mobile service, consistent with our universal service goals. The Commission therefore proposes to focus competitive bidding for Mobility Fund Phase II support on extending mobile 4G LTE to the remaining U.S. population that will not have it available from either Verizon or AT&T. Consistent with this objective, the Commission proposes to distribute those funds within a defined budget so as to maximize the population that can be served with 4G LTE. The Commission proposes to identify areas eligible for support, i.e., areas where neither Verizon nor AT&T provide 4G LTE, but also seek comment below on whether this standard will preserve existing service in those situations where the network of a mobile provider covers both eligible and ineligible areas. The Commission also proposes to identify eligible areas using the most recently available data for this purpose as reported on Form 477. Our FCC Form 477 data collection was revised in June 2013; the Commission expects to begin collecting more granular data regarding mobile broadband service and new data regarding mobile voice service availability in September 2014. The Commission seeks comment on these proposals.

107. Based on technological developments in the industry, our proposal would require that recipients of Mobility Fund Phase II support deploy 4G LTE. Is there another deployment standard the Commission should use? For example, in the

USF/ICC Transformation Order,

the Commission allowed winners of Mobility Fund Phase I support to elect to deploy 3G or 4G, with a shorter deployment deadline for those that elected 3G. The Commission originally proposed requiring 4G deployment for Mobility Fund Phase II. For those parties who argue that the Commission should employ a deployment standard other than 4G LTE, please explain how using that standard would help us address the other issues the Commission identifies in this section and help us meet our goals of preserving and extending service in those areas that will not be served by the market without governmental support. In identifying eligible areas under our proposed standard, if there are areas where a portion of a network overlaps in part with an area that has LTE coverage provided by AT&T and/or Verizon, how

should the Commission treat the eligibility of those areas so as to promote the preservation of service in the portion that does not overlap? Similar to the process used for Auctions 901 and 902, which awarded Mobility Fund Phase I support, the Commission expects that proposed eligible areas would be identified publicly prior to the commencement of bidding for Mobility Fund Phase II support and would be subjected to a challenge process to add or subtract areas from the original proposed eligible areas. What is the best way to verify in such a process that proposed ineligible areas are in fact served by LTE and that proposed eligible areas are indeed eligible because they lack LTE? In addition, the Commission asks commenters to describe whether and, if so how, it should modify other aspects of the original proposals for Mobility Fund Phase II competitive bidding to conform to this proposed new approach.

108.

Size of Retargeted Mobility Fund Phase II.

Given marketplace developments, the areas requiring support to preserve and advance mobile services appear to be less extensive than the Commission anticipated in 2011. The Commission therefore proposes to adjust downward the budget for a retargeted Mobility Fund II. Based on February 2014 disbursement figures, the Commission estimates that wireless competitive ETCs currently are collectively receiving about $590 million in support on an annualized basis, with about $185 million of that support going to two of the largest national providers that have announced the commercial roll-out of LTE. Thus, the Commission estimates that about $400 million is going to smaller and regional wireless providers. This funding is not well-targeted, however, as it is supporting multiple networks with overlapping coverage in some areas, and in some areas supporting a network that overlaps with the coverage provided by one of the four national wireless providers that is not relying on federal universal service support to offer mobile services in that area. To the extent the Commission eliminates unnecessary support in such areas, it could target that support to those areas that will not be served with 4G LTE through commercial deployments.

109. The Commission seeks to further develop the record on how much of that $400 million in competitive ETC support provided today to smaller and regional wireless providers is covering ongoing operating expenses, and how much of it is being used to extend service to unserved areas. To the extent commenters contend that the current funding is necessary to preserve existing service, they should identify with particularity those amounts and specify the extent to which such subsidized service overlaps with the coverage areas of one of the four national providers. To what extent is existing frozen support being provided to areas that are not expected to receive 4G LTE from either Verizon or AT&T?

110. In re-evaluating the appropriate size of the Mobility Fund Phase II, should the Commission preserve the existing amount of funding dedicated to Tribal lands? In 2011, the Commission concluded that up to $100 million of the Mobility Fund Phase II budget should be targeted at Tribal lands throughout the nation, including remote areas in Alaska. Recognizing the continuing connectivity challenges facing Tribal lands, should the Commission proceed to conduct an auction to award up to $100 million in ongoing support to mobile providers on Tribal lands throughout the nation? To what extent are Tribal lands in the geographic areas where AT&T and Verizon do not intend to extend 4G LTE? Should the Commission implement such an auction first, before determining how to proceed more generally with respect to Mobility Fund Phase II?

111. If the Commission adjusts downward the budget for Mobility Fund Phase II, it proposes to reallocate those funds to the Remote Areas Fund or the competitive bidding process for Connect America Phase II. The Commission seeks comment on this proposal. The Commission expects wireless providers that meet the requisite service standards will participate in both the Remote Areas Fund and Connect America Fund. Wireless technology may well be the appropriate solution to serve many areas lacking broadband today, and the Connect America Phase II competitive bidding process and Remote Areas Fund will be implemented in a technologically neutral manner to allow the participation of as many entities as possible. Would re-allocating a portion of the Mobility Fund Phase II budget to either of these mechanisms be consistent with our overall reform objectives?

112. The Commission specifically asks commenters whether, instead of maintaining the $500 million budget for Mobility Fund Phase II, it should use a portion of that budget, potentially including undisbursed funds remaining from Mobility Fund Phase I, to provide one-time support to those providers willing to extend mobile LTE to eligible unserved areas. If the Commission were to adopt such an approach, how much funding should it reserve for recurring annual support under a more narrowly focused Mobility Fund Phase II?

113.

Proposed Rules.

The

USF/ICC Transformation FNPRM

included proposed rules for Phase II of the Mobility Fund. The Commission now seeks comment on revised proposed rules for Mobility Fund Phase II in light of the above proposals and the Commission's experience with administering Phase I of the Mobility Fund. The Commission seeks comment on these proposed rules in Appendix B.

114.

Timing of ETC Designation.

As described in the concurrently adopted Order, the Commission adopts new rules to enable participants in the Connect America Phase II competitive bidding process to seek designation as an eligible telecommunications carrier

after

winning competitive bidding for Connect America Phase II support. The Commission seeks comment on whether to adopt this approach for Mobility Fund Phase II or to maintain the Commission's practice that parties must have ETC designations, subject to certain exceptions,

before

applying to participate in Mobility Fund competitive bidding. Participants in Mobility Fund competitive bidding have been able to obtain new designations prior to applying to participate in competitive bidding. There may, however, be benefits to permitting parties to participate in competitive bidding for Mobility Fund Phase II prior to seeking a designation, such as increased competition in the bidding. The Commission seeks comment on whether a greater number of qualified parties would participate in Mobility Fund Phase II if it only required that they seek designation after winning competitive bidding.

I. Phase-Down of Identical Support

115. The Commission proposes to amend our identical support phase-down rules in several ways. First, for each wireless competitive ETC for which competitive ETC funding exceeds 1 percent of its wireless revenues, the Commission proposes to maintain existing support levels until a specified date after the announcement of winning bidders for Mobility Fund Phase II ongoing support, with that date depending on whether it is a winning bidder of such support. While the Commission is not convinced that maintaining existing support levels for these providers is necessary to ensure that consumers continue to have access to mobile service, it lacks sufficient data at this time to adopt a more tailored approach. Second, the Commission proposes to accelerate the phase-down for those wireless carriers that it

presumes are not relying on such support to maintain existing service. In particular, the Commission proposes to adopt a rule that would eliminate competitive ETC frozen support for providers for whom such funding represents 1 percent or less of their wireless revenues. Finally, the Commission proposes to freeze support for wireless providers serving remote areas in Alaska as of December 31, 2014, and to maintain those frozen support levels until a specified date after winning bidders are announced for ongoing support under Tribal Mobility Fund Phase II or Mobility Fund Phase II, with that date depending on whether wireless providers become winning bidders of such support.

116.

Discussion.

The Commission reaffirms the decision to eliminate the identical support rule. As the Commission stated at that time, the rule did not encourage the efficient deployment of service to areas that would otherwise be unserved and was therefore an ineffective use of universal service funds. Moreover, as discussed above, AT&T and Verizon's recent and ongoing mobile LTE deployments will reach the areas where the vast majority of all Americans live. Nevertheless, the Commission is concerned that some areas of the country may lose service if competitive ETC funding is further phased down before the rules for Mobility Fund Phase II are adopted. Thus, given our proposal to retarget Mobility Fund Phase II funds, for each wireless competitive ETCs for which competitive ETC support is more than 1 percent of its wireless revenues, the Commission proposes to maintain existing support levels (i.e., 60 percent of baseline support) until (1) the first month after the month in which its Mobility Fund Phase II ongoing support is authorized in the case of a winning bidder of such Mobility Fund Phase II support, or (2) the first month after the month in which a public notice announces winning bidders for Mobility Fund Phase II ongoing support in the case of a competitive ETC that is not a winning bidder of such Mobility Fund Phase II support. Support levels would then be reduced to 40 percent of the baseline for the next year, and then 20 percent of the baseline for the subsequent year. The Commission seeks comment on this proposal and any alternatives. For instance, should the Commission resume the phase-down in support upon adoption of rules establishing the framework for Mobility Fund Phase II? Should the Commission resume the phase-down in support for all competitive ETCs the first month after any bidder is authorized to receive funding from Mobility Fund Phase II? Should the Commission resume the phase-down in support for all recipients of frozen support when 50 percent of Mobility Fund Phase II funding has been authorized, regardless of whether a particular competitive ETC is a winning bidder or not?

117. Regardless of what the Commission ultimately adopts regarding the phase-down in frozen support for competitive ETCs, the Commission proposes to accelerate the phase-down for any wireless competitive ETC for whom high-cost support represents one percent or less of its wireless revenues, eliminating such support on December 31, 2014 or the effective date of the rule, whichever is later. A number of competitive ETCs currently are receiving very small amounts of support. Is it reasonable to assume that if a carrier's competitive ETC support is a tiny fraction of its revenues, that carrier is not relying on such support to maintain existing service? The Commission proposes to determine the requisite percentage based on reported revenues as submitted by the high-cost recipient or its affiliated holding company on the most recent FCC Form 499-A. The Commission seeks comment on this proposal. For purposes of implementing such a proposal for wireless competitive ETCs, should the Commission focus solely on reported wireless revenues or on total revenues reported on the FCC Form 499? The Commission notes that if it were to adopt this proposal, any provider could seek a waiver of the accelerated phase-down if the elimination of support would result in consumers losing access to existing service.

118. The Commission seeks comment on whether to take a different approach for resumption of the phase-down in frozen support for wireline competitive ETCs. For instance, should the Commission maintain existing frozen support levels (i.e., 60 percent of baseline support) for wireline competitive ETCs until winning bidders are announced in the Phase II competitive bidding process? Or, should the Commission revise our rules and continue the phase down of support for these wireline competitive ETCs upon the effective date of a rule, unless they are the only provider of voice and broadband service meeting our current broadband performance obligations in an area?

119. Finally, the Commission notes that because the

USF/ICC Transformation Order

froze their support at the study area level, most competitive ETCs stopped reporting line counts. However, the Commission delayed the phase-down by two years for remote areas in Alaska until June 30, 2014, or the implementation of Mobility Fund Phase II and Tribal Mobility Fund Phase II, whichever is later, to “preserve newly initiated service and facilitate additional investment in still unserved and underserved areas.”

120. The Commission now proposes to freeze the total amount provided to each competitive ETC serving remote areas in Alaska. This would simplify support calculations for the Administrator, while not disturbing existing support levels for existing competitive ETCs. Competitive ETCs would no longer be required to file line counts for remote areas of Alaska, thus alleviating the need for the Bureau to address on a case-by-case basis how competitive ETCs should report line counts in situations where the customer's billing address is either unavailable or does not accurately represent the location of where the service is actually provided. Under this proposal, the baseline for competitive ETC support in remote areas of Alaska would be set as of a date certain, such as December 31, 2014, or the effective date of the rule, whichever is later. The Commission seeks comment on this proposal.

121. Above, the Commission proposes to maintain existing support levels for wireless competitive ETCs until after it adopts rules for Mobility Fund Phase II. Consistent with the framework established by the Commission in 2011, the Commission proposes to maintain the baseline frozen support for each competitive ETC serving remote areas in Alaska until (1) the first month after the month in which its Mobility Fund Phase II or Tribal Mobility Fund Phase II ongoing support is authorized in the case of a winning bidder of such Mobility Fund Phase II support, or (2) the first month after the month in which a public notice announces winning bidders for ongoing support under Mobility Fund Phase II or the Tribal Mobility Fund Phase II, whichever is later, for a competitive ETCs that is not winning bidder of such Mobility Fund Phase II or Tribal Mobility Fund Phase II support. Upon that date certain, the phase-down in support would commence under the schedule originally adopted by the Commission: 80 percent of the baseline in the first year; 60 percent of the baseline in the second year; 40 percent of the baseline in the third year; and 20 percent of the baseline in the fourth year. The Commission seeks comment on this proposal. To the extent parties argue for a different approach, they should

specify when the phase-down in support in remote Alaska should begin. Should remote areas in Alaska or any other areas in the United States be subject to exceptions or other conditions with respect to the phase-down in frozen support?

J. Reforms in Rate-of-Return Study Areas

122. Rate-of-return carriers play a significant and vital role in the deployment of 21st century networks throughout the country. The Commission recognizes that telephone service would not exist today in many rural and remote areas of the country without the concerted efforts of local companies to serve their communities. As the Commission moves forward with the Connect America Fund Phase II for price-cap carriers, it remains cognizant of the fact that many of the same marketplace and technological forces that led to the development of the Connect America Fund for price cap carriers are also affecting rate-of-return carriers. Access lines are declining; residential customers increasingly are cutting the cord; and both consumers and businesses are demanding broadband. Rate-of-return carriers are not insulated from competitive pressures, and they must be prepared to shift their business models for a new era. In light of these realities, the Commission seeks here to renew a dialogue regarding the best way to encourage continued investment in broadband networks throughout rural America to ensure that all consumers have access to reasonably comparable services at reasonably comparable rates. In short, the Commission seeks to establish a “Connect America Fund” for rate-of-return carriers.

1. Near-Term Reforms for Rate-of-Return Carriers

123. The Commission continues to have significant concerns regarding the structure and incentives created under the existing high-cost mechanisms for rate-of-return carriers, such as the “race to the top” incentives that exist under HCLS and the “cliff effect” of the annual adjustment of the HCLS cap. The structure of the current HCLS mechanism creates problematic incentives: Some companies operating in high-cost areas receive all of their incremental additional investment through the federal support mechanism, while other companies operating in high-cost areas receive no support whatsoever from HCLS due to how support is reduced to fall within the overall HCLS cap.

124. Support for rate-of-return carriers has been subject to the HCLS cap, which is rebased annually through a rural growth factor, for more than a decade. In 2001, the Commission modified the distribution of HCLS by rebasing the fund for rural telephone companies and retaining an indexed cap. Specifically, the Commission concluded that the total cap on HCLS would be adjusted annually by a rural growth factor equal to the sum of the annual percentage changes in the gross domestic product-chain priced index and the total number of working loops. Given decreases in working loops in rate-of-return study areas in recent years, resulting in reductions of the indexed cap, HCLS has been reduced substantially for many rate-of-return carriers while others incur almost no reduction. The Commission also adopted a rule that ensures that rural carriers receive the total amount of capped HCLS, regardless of the extent to which individual carriers' costs exceed the actual national average cost per-loop (NACPL) by the requisite percentages. Neither of these features of the HCLS rule was altered in the

USF/ICC Transformation Order.

125. As a near term measure that can be quickly implemented to mitigate both of these deficiencies, the Commission proposes to reduce support proportionally among all HCLS recipients by no longer adjusting the NACPL, but instead reducing the reimbursement percentages for all carriers. Under the proposed rule, reductions in support will be spread proportionally among all carriers, and carriers presently close to the NACPL will no longer run the risk of “falling off the cliff” in terms of their receipt of HCLS support. This rule could be implemented beginning January 1, 2015. The Commission seeks comment on this proposal and invite comment on other possible methods to address this issue.

126. The HCLS rules require adjusting the NACPL annually so that total HCLS support equals the indexed cap. Currently, HCLS rules reimburse 65 percent of the loop costs in excess of 115 percent, but less than 150 percent of the NACPL and 75 percent of loop costs in excess of 150 percent of the NACPL. Because the NACPL is adjusted each year, many carriers are precluded from receiving any HCLS, and those carriers with costs close to the NACPL that is used to determine HCLS experience large percentage reductions in support. This gives those carriers with the highest loop costs relative to the national average minimal incentive to reduce costs. To curtail this “race to the top,” the Commission proposes to freeze the NACPL that is used to determine support and instead to reduce HCLS proportionately among all HCLS recipients by reducing the 65 percent and 75 percent reimbursement percentages by equivalent amounts to maintain aggregate support at the indexed cap. This effectively would freeze the NACPL at the capped amount as of December 31, 2014, or the effective date of the rule, whichever is later. In conjunction with this “freezing” of the NACPL, the Commission also proposes to reduce the NACPL and continue to use the 65 percent and 75 percent reimbursement percentages whenever calculated support using the 65 and 75 percentages will not exceed the indexed cap for HCLS in the aggregate. Under the first part of the proposed rule, reductions in support would be spread proportionally among all recipients of HCLS, and carriers presently close to the now frozen NACPL would no longer run the risk of “falling off the cliff” in terms of their receipt of HCLS support. Under the second part of the proposed rule, if there are other changes that would otherwise result in a lowering of the NACPL, carriers will receive support based on the 65 and 75 percentage reimbursements.

127. The Commission proposes as another near-term measure to adopt a rule that no new investment after a date certain (i.e., December 31, 2014) may be recovered through HCLS and ICLS when such investment occurs in areas that are already served by a qualifying competitor. The Commission seeks comment on this proposal.

128. The Commission proposes measures to monitor and enforce compliance with such a rule. Price cap carriers today are precluded from using support in areas that are served by an unsubsidized competitor. Support may be used to serve geographic areas that are partially served by an unsubsidized competitor; however, price cap carriers must certify that, with respect to the support dollars subject to this obligation, a majority of the served locations are unserved by an unsubsidized competitor. For purposes of determining whether this requirement is met, price cap carriers must be prepared to provide asset records demonstrating the existence of facilities that serve locations in census blocks where there is no unsubsidized competitor. The Commission proposes to take a similar approach if it adopts a rule precluding recovery of new investment in areas served by competitors through our universal service support mechanisms.

129. In particular, to enforce a requirement that new investment recovered in whole or in part through

HCLS or ICLS not occur in areas where there is a competing provider, the Commission proposes that rate-of-return carriers be prepared to produce, in an audit or other inquiry, asset records and associated receipts to document that new investment for which recovery is sought through the federal support mechanisms, after a date certain, occurred only in census blocks that are not served by other providers. Recognizing concerns expressed in the record regarding the coverage indicated in the National Broadband Map, the Commission further proposes to create a safe harbor that would allow rate-of-return carriers to include new investment in cost studies used to determine HCLS or ICLS if they publicly post information on their Web site regarding deployment plans and wait a specified period of time, such as 90 days. If no competing provider notifies the rate-of-return carrier that it serves the areas in question, the rate-of-return carrier may presume no other provider is serving those locations, and new investment in such areas may be eligible for cost recovery, consistent with any applicable rules for existing or future support mechanisms. The Commission seeks comment on these proposals and any alternatives that would provide a mechanism to provide clarity as to which new investments would be applicable for cost recovery through universal service support mechanisms, without creating undue burden on either rate-of-return carriers or potential qualifying competitors in their service areas.

130. In the concurrently adopted Report and Order, the Commission codified the rules adopted by the Commission to eliminate support in study areas where there is a 100 percent overlap with an unsubsidized competitor. If the Commission adopts our proposal above to not provide support to areas with a “qualifying competitor,” should the Commission similarly modify the 100 percent overlap rule? The Commission also proposes to adopt a timeline for periodic determination of whether there is a 100 percent overlap, with the Bureau reviewing the study area boundary data in conjunction with data collected on the FCC Form 477 and the National Broadband Map every other year to determine whether and where 100 percent overlaps exist. The Commission also proposes to adjust the baseline for support reductions to be the amount of support received in the immediately preceding year before a determination is made that there is a 100 percent overlap, rather than 2010 support amounts. The Commission seeks comment on these proposals.

2. Longer-Term Reforms for Rate-of-Return Carriers

131. In the longer term, the Commission questions the continued viability of the HCLS and ICLS mechanisms in their current form and suggest that all affected stakeholders focus on creating a new Connect America Fund for cost recovery that will be consistent with the core principles for reform adopted by the Commission in 2011. For that reason, the Commission seeks comment on a rule under which no new investment would be included in cost studies used for the determination of HCLS and ICLS after a date certain, and HCLS and ICLS would become the mechanisms to recover only past investment occurring prior to that date certain. Over time, the amount recovered through HCLS and ICLS would diminish, and all new investment would be recovered through a new Connect America Fund for rate-of-return territories specifically designed to meet the Commission's overall objective to support voice and broadband-capable networks in areas that the marketplace would not otherwise serve and to ensure that consumers in rural, insular and high-cost areas have access to reasonably comparable services at reasonably comparable rates to consumers living in high-cost areas.

132. If the Commission were to adopt such a rule, it would not implement the limitation on recovery of new investment through the existing mechanisms until the new Connect America Fund was in place and operational. The Commission welcomes stakeholder proposals for the design of this Connect America Fund to make more efficient use of universal service funds and encourage the deployment of broadband-capable networks, working within the existing budget of $2 billion for rate-of-return territories. What timeline would be an appropriate target to set for the implementation of the Connect America Fund for rate-of-return territories and the limitation on recovery of investment in the old mechanisms? If the Commission were to wind down the existing HCLS and ICLS mechanisms and create a new Connect America Fund for use in rate-of-return territories, what action should the Commission then take in its pending rate represcription proceeding?

133. The Commission proposes to adopt a stand-alone broadband funding mechanism for rate-of-return carriers and provide specific guidance on the desired implementation of such an approach. The Commission proposes that such a mechanism be designed to (a) calculate support amounts that remain within the existing rate-of-return budget, (b) distribute support equitably and efficiently, so that all rate-of-return carriers have the opportunity to extend broadband service where it is cost-effective to do so, (c) distribute support based on forward-looking costs (rather than embedded costs), and (d) ensure that no double recovery occurs by removing the costs associated with the provision of broadband Internet access service from the regulated rate base. The Commission seek comments on how to implement such a proposal for rate-of-return carriers. The Commission specifically seeks comment on what rules or rule parts would need to change (e.g., how should Parts 32, 64 and/or 69 change to ensure that costs associated with the provision of broadband Internet access service are not included in the regulated rate base), and whether such a mechanism should be designed in a way that provides support based on locations or total network costs, rather than subscriber access lines. The Commission seeks comment on whether, for instance, it should modify our cost allocation rules to require that costs associated with multi-use facilities used to deliver broadband Internet access service be allocated between regulated and non-regulated activities based on an actual revenue allocator (or a potential revenues allocator), in such fashion that the amount removed from the regulated rate base would not exceed the amount of support received via a stand-alone broadband funding mechanism, or some other method. The Commission also seeks comment on whether such a mechanism should be designed to support lines where a consumer also subscribes to voice service, and whether the collected-but-not-yet-distributed support from the $2 billion annual budget for rate-of-return territories currently in the broadband reserve account should be used to kick start such a mechanism. The Commission believes that such a proposal is consistent with the Commission's stated policy goals, would create incentives for continued broadband deployment in rate-of-return territories, and would reduce incentives to skew customer purchasing decisions.

134. The Commission also seeks to develop further the record on other proposals. NTCA has presented its own stand-alone broadband proposal, which relies on complicated cost-calculations based on embedded costs. The proposal also does not appear to account for the fact that when a carrier's voice line is

lost, the following-year both its HCLS and ICLS will likely increase on a per-line basis because fixed costs are now recovered over a smaller number of lines. Further, the proposal states that stand-alone broadband support would be developed based on annual projected costs followed by a true-up to actual costs developed using the existing HCLS rules. However, HCLS payments, under the current rules, are based on costs incurred two years previously. How would NTCA's proposal avoid recovery of costs from both HCLS and a stand-alone broadband support mechanism, given this timing difference? Also, under NTCA's proposal, there would be no definitive way to determine how HCLS is affected by voice line migration to broadband-only lines until true-ups are reconciled two years later. What impact would that have on the size of the fund, and what incentives would that create for cost reporting?

135. The Commission also seeks to understand further the rationale for the assumed broadband subscriber line charge of $26 in NTCA's proposal. For the offer of model-based support in price cap territories, the Commission directed the Wireline Competition Bureau to set the funding threshold for model-based support taking into account “where the cost of service is likely to be higher than can be supported through reasonable end-user rates alone.” The Commission expects end user rates for broadband-only lines to be higher than $26. If the Commission were to provide support for stand-alone broadband offered by rate-of-return carriers, should it provide such support only for costs that exceed the $52.50 funding benchmark established for price cap territories? To the extent parties argue that a lower figure should be used in rate-of-return areas, they should provide a detailed analysis of what figures the Commission should assume are reasonable end user rates for retail broadband internet access.

136. The Commission also seeks comment on whether an approach that provides support for all costs over a pre-determined figure—whatever that dollar figure may be—would provide appropriate incentives for carriers to make efficient expenditures. By providing support for 100 percent of incremental costs to all study areas with costs above the proposed $26 per line per month threshold, what is the incentive on the part of recipients to be efficient as they make new investments in the future? Would a better approach be one that provides a set amount of Connect America support for voice and broadband-capable infrastructure in the study area, potentially with the amount per study area adjusted over time in a manner consistent with the growth in broadband-only subscription rates, rather than a per-line amount?

137. The Commission also seeks comment on how the proposal fits within the overall universal service support budget framework. Of the $4.5 billion budget for the Connect America Fund, the Commission concluded that “up to $2 billion,” including intercarrier compensation recovery would be available annually in rate-of-return territories. USAC's projected demand for rate-of-return carriers was at an annualized rate of $2.014 billion in 2013, with actual disbursements of $1.958 billion. According to NTCA's own projections, its stand-alone broadband proposal would result in support in excess of $2 billion flowing to rate-of-return carriers annually in 2015-2017 under a variety of assumptions.

138. Finally, the NTCA proposal does not appear to have a mechanism to ensure that universal service is not subsidizing new investment occurring in areas served by an unsubsidized competitor. The Commission therefore seeks further comment on this issue, and alternative proposals that would better meet our reform objectives.

139. In addition to its proposal concerning support for broadband-only lines, NTCA submitted a plan to establish an annual investment budget for individual rate-of-return carriers called the “Capital Budget Mechanism.” NTCA states that this mechanism is intended to promote fiscal responsibility while also providing more predictable and transparent planning for investment in rate-of-return carrier networks. It includes a four-step framework for determining a budget for high-cost supported future investment, as follows: (1) Determine current loop investment (i.e., total loop investment for each rate-of-return carrier study area), adjusted for inflation; (2) determine a “future allowable loop investment” for each rate-of-return carrier, based on the replacement of depreciated plant, precluding support to replace plant that is still used and useful; (3) use a trigger to identify alleged inefficiencies, which would enable prospective adjustment to a carrier's future allowable loop investment; and (4) establish an annual budget for each rate-of-return carrier by dividing each carrier's future allowable investment by a period of years to establish budget of supported additional investment each year. One critical shortcoming in the proposal as presented, however, is that there is no concrete plan for how the Commission would implement the trigger that “identifies alleged inefficiencies.” Absent specificity on this key point, the Commission is skeptical as to how the proposal could be put in place in the near term. The Commission therefore seeks to develop the record on this proposal and invite specific, actionable proposals for defining the relevant triggers. How would it work within the context of the Commission's current rules? How does this proposal fit within the budget for rate-of-return territories?

3. Voluntary Transition of Rate-of-Return Carriers to Incentive Regulation

140. The Commission proposes to adopt rules that would allow rate-of-return ETCs to elect to participate in a voluntary, two-phase transition to model-based universal service support, including participation in the Connect America Fund Phase II. The Commission also seeks comment on whether rate-of-return carriers should be allowed to transition on a voluntary basis to an alternative rate regulation approach. As an initial matter, the Commission asks parties to address whether the voluntary path to model-based support and the alternative rate regulation approach are linked, or whether they should be considered independent of each other. The Commission proposes to adopt a transition framework for voluntary participation in Connect America Phase II for rate-of-return carriers and seek comment on alternative rate regulation approaches and specific implementation details below.

141. The Commission previously has sought comment in this docket on potential reforms that would provide support to rate-of-return carriers under mechanisms other than the current legacy mechanisms. The Bureau sought further to develop the record on facilitating voluntary participation in Phase II of the Connect America Fund in the

May 2013 Public Notice,

78 FR 34016, June 6, 2013.

142. ITTA has proposed the most comprehensive plan in the record for such a transition (ITTA Plan). The ITTA Plan calls for, among other things, a voluntary, two-phase transition to a model-based support framework for rate-of-return ETCs. ITTA argues that the plan is designed to provide a viable path for rate-of-return carriers to move to model-based support. Any rate-of-return carrier would be free to participate at any time during either of the two phases of the plan. A participating carrier would also have the discretion to opt-in to model-based support for all of its study areas, or for a subset of its study areas.

143. During the first phase of the ITTA Plan, an electing carrier's ICLS and HCLS would be frozen at current levels (i.e., as of December 31 of the year prior to that carrier's election). Existing service obligations for rate-of-return carriers, such as the requirement to offer broadband service meeting the Commission's current requirements, with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream “upon reasonable request” would remain in effect.

144. The second phase of the ITTA Plan for universal service support would begin after a rate-of-return carrier-specific support model is defined and established. According to ITTA, rate-of-return carriers that accept support under this model would assume the same service and public interest obligations as price cap carriers receiving Connect America Phase II model-based support. Model-based support would be made available for ten years to participating rate-of-return carriers. For those rate-of-return carriers choosing to participate in the second phase after it becomes operational, model-based support would be made available to such carriers for the remainder of the ten-year timeframe left for carriers who elected to participate at the beginning of the second phase.

145. The ITTA Plan proposes that rate-of-return carriers that decline support for certain study areas would be relieved of ETC status and obligations in those study areas where support is declined. Those study areas would then be opened up to a competitive bidding process similar to that used in areas where price cap carriers decline Connect America Phase II support. To the extent that the Phase II funding made available for a study area in the second phase is lower than frozen support, ITTA proposes that support would be transitioned down to the level determined appropriate by the rate-of-return-specific model over a five-year period.

146. The ITTA Plan proposes an alternative rate regulation approach for rate-of-return carrier intercarrier compensation (ICC), special access, and broadband internet access services. Carriers could elect participation in the proposed alternative rate regulation plan at any time by study area. Electing carriers would continue to implement ICC rate reductions pursuant to the timeline adopted in the

USF/ICC Transformation Order

for rate-of-return carriers and, if eligible, would continue to charge an Access Recovery Charge and receive CAF-ICC support. Electing carriers choosing to participate in the NECA pool for special access services would move to an alternative rate regulation approach for special access cost determination employing principles taken from the average schedule process and settle with the pool based on the interstate special access revenue requirement established by the retention ratio. Electing carriers with company-specific special access tariffs would use their most recent tariff filing data to initialize their rates and be allowed to “adjust their tariffs on a going-forward basis to take into account evolving circumstances.” The ITTA Plan does not describe the alternative rate regulation that would govern non-pooled special access services beyond saying that it would be a “price cap-like structure.” ITTA also does not indicate how common line rates of electing carriers would be affected going forward and whether such services would be subject to rate-of-return or an alternative regulatory mechanism. Finally, electing carriers that offer the transmission component of their broadband Internet access service as a Title II of the Act regulated service would have the option to elect to have that transmission component deregulated upon electing to participate in the ITTA Plan.

147.

Discussion.

The Commission proposes to adopt a transition framework for a voluntary election by rate-of-return carriers to receive model-based support. The Commission tentatively concludes that such a framework could achieve important universal service benefits, creating a framework that creates incentives for deployment of voice and broadband-capable infrastructure. The Commission seeks comment on how to implement such a framework in a way that furthers these important public policy objectives, while ensuring that it also meets our statutory directives under sections 201(b) and 202. The Commission also asks commenters to address specifically how other proposals in this FNPRM, if adopted, would affect the ITTA Plan and incentives for rate-of-return carriers to voluntarily move to model-based support.

148.

Time Frame for Implementation.

The ITTA Plan does not appear on its face to contemplate a specific time frame in which rate-of-return carriers would elect to participate in the voluntary plan. Should the Commission allow rate-of-return carriers to transition in any year for the remaining years of the model-based support, or should it only open a window for such transitions, i.e., allowing carriers to elect to transition in 2015 only? Under either approach, the Commission specifically proposes that an electing carrier's ICLS and HCLS would be frozen at the amount received for a given study area as of December 31 of the year prior to the election. The Commission seeks comment on this proposal.

149. Should the Commission adopt a specific deadline for rate-of-return carriers to elect this voluntary path to receive model-based support? For instance, should carriers be required to elect this path within 120 days of the Bureau adopting revisions to the Connect America Cost Model for use in determining support for rate-of-return carriers electing to receive model-based support? Put another way, should the Commission prohibit carriers from voluntarily transitioning to model-based support if they do not do so within a Commission-defined window? To the extent parties argue a longer time period to make the election is necessary, they should specify what time frame would be appropriate.

150.

Impact on HCLS Cap.

Consistent with the approach taken when the Commission transitioned price cap carriers and their rate-of-return affiliates to Connect America Phase I, the Commission proposes to rebase the high-cost loop cap to deduct the HCLS that electing rate-of-return carriers would have received in the year after their election, had they not made the voluntary election to transition to the Connect America Fund. Specifically the Commission proposes to direct NECA to submit a revised 2015 HCLS cap within 30 days of any deadline for the election by a rate-of-return carrier to pursue this voluntary path to model-based support, and to make similar adjustments in subsequent years to the extent it permits carriers to make elections to pursue this voluntary path to model-based support after 2015. The Commission seeks comment on this proposal.

151.

State-level Election.

The ITTA Plan proposes to allow participating rate-of-return carriers to make an election on a study area-by-study area basis. The Commission proposes instead that participating carriers be required to make a state-level election to receive model-based support, comparable to what is required of price cap carriers. Such an approach would prevent rate-of-return carriers from cherry picking the most attractive areas in their study areas, potentially those areas where model-support is greater than legacy support, leaving the least desirable areas for a competitive process. The Commission seeks comment on this proposal. Would requiring a state-level commitment have a material impact on the incentives of rate-of-return carriers to participate in this voluntary plan? If

the Commission were to adopt an approach, as proposed above, that would provide greater flexibility to Phase II participants regarding how they may meet their deployment obligations in funded areas, would that create a greater incentive for rate-of-return carriers to voluntarily elect to receive model-based support?

152.

Transition to Model-Based Support.

The ITTA Plan proposes that carriers for whom frozen support is more than model-based support would transition to the lower model-based amount over a five-year period. In the concurrently adopted Report and Order, the Commission adopted a four-year transition for price cap carriers for whom model-based support is lower in a given state. The Commission proposes a similar approach for rate-of-return carriers that voluntarily elect to receive model-based support. In particular, in the first year, the carrier would receive, in addition to its Phase II support, 75 percent of the difference between the annualized amount of Connect America Phase II support that it accepted and the amount of its frozen high-cost support; in the second year, it would receive 50 percent of the difference; in third year, it would receive 25 percent of the difference; and then in the fourth year, it would receive model-based support. The Commission seeks comment on this proposal. Would adopting a four-year transition, rather than a five-year transition as proposed by ITTA, have a material impact on the incentives of rate-of-return carriers to participate in this voluntary plan?

153.

Impact on Budget.

In the

USF/ICC Transformation Order,

the Commission adopted a $1.8 billion budget for price cap territories, and a $2 billion budget for rate-of-return territories. How would implementation of a voluntary plan for rate-of-return carriers to elect to receive model-based support impact rate-of-return carriers that do not participate in the voluntary plan, given the overall high-cost fund budget and the budget for rate-of-return areas in particular? Specifically, to the extent there are incentives for rate-of-return carriers to opt voluntarily into this plan only if model-based support is the same or greater than their current support under legacy mechanisms, would the net effect be to squeeze the remaining budget for rate-of-return territories that are served by rate-of-return carriers that do not opt into the plan? Are there any adjustments to the ITTA Plan or the Commission's proposal that could reduce any such squeeze? How would implementation of this plan meet the overall statutory principle of providing predictable and sufficient support and other statutory criteria such as the framework of section 214(e)? How could the Commission maintain the overall budget within a voluntary framework, with no way to determine how many carriers may elect to participate? Would one option be to allocate some defined amount from the existing broadband reserve account to the extent the voluntary election of certain carriers in rate-of-return territories to receive model-based support results in the overall support level for rate-of-return territories exceeding the budgeted amount of $2 billion? Do commenters recommend any other adjustments to the ITTA Plan to minimize concerns about the budget or how it is allocated among rate-of-return carriers?

154.

Adjustments to the Model.

In the concurrently adopted Declaratory Ruling, the Commission directed the Bureau to incorporate the results of the study area boundary data collection in the Connect America Cost Model and to make such other adjustments as appropriate for use of that model in rate-of-return territories. Here, the Commission asks commenters to address what specific changes should be implemented in the model before using it to calculate the offer of model-based support for rate-of-return carriers that voluntarily elect to receive model-based support.

155. The ITTA Plan also suggests that a competitive bidding process be designed for rate-of-return areas where support is declined under the second phase of the proposal. What timeframe would be realistic to assume for further model development, and how would that affect the overall timing of implementation of the ITTA proposal? What are the advantages and disadvantages of holding the competitive bidding process for areas not elected by the rate-of-return carriers at a date subsequent to the Phase II competitive bidding process that will occur after the offer of model-based support to price cap carriers?

156.

Cost determination for special access services under the ITTA Plan.

Rate-of-return carriers determine their interstate revenue requirement by allocating the costs assigned to the interstate jurisdiction by the separations procedures contained in Part 36 of the Commission's rules among the various access categories, one of which is special access, in accordance with the investment and expense allocation rules contained in Part 69 of the Commission's rules. As noted above, under the ITTA Plan, a rate-of-return carrier filing its own special access tariff would use the preceding year's special access data to initialize its costs and/or rates for participating in an alternative rate regulation plan. Parties should explain the scope and nature of any adjustments that would be allowed to take into account “evolving circumstances.” While a retention ratio would produce a dollar amount reflective of the year for which the calculation was made, the ITTA Plan does not explain how the retention ratio would be used going forward. Would it be a fixed percentage, or would it be adjusted each year to reflect special access growth, special access rate changes, or other factors? Parties should address how this approach could be implemented going forward, as well as identifying other approaches that could be considered in an alternative regulatory framework for rate-of-return carriers. Parties should address how the proposed ITTA Plan would produce projections of costs and/or rates that would remain reasonable over time, and propose specific measures to ensure that it meets the Commission's overall objectives.

157. The ITTA Plan allows carriers to elect participation by study area and to choose when to enter an alternative rate regulation plan. With this flexibility, the sensitivity of the retention ratio, or other costing determinant, to year-to-year differences could create the ability for carriers to time their election to maximize their retention ratio, or their cost base, to their benefit. Above the Commission proposes to require electing carriers to make a state-level election to receive model-based support. Would that lessen the incentive of participants to time strategically their elections to maximize their retention ratios or their cost base? Parties should comment on the sensitivity of any alternative costing measure and on means by which any gaming opportunities can be minimized. Parties should also address the need for any special conditions to check the ability of affiliated carriers to shift costs between study areas electing an alternative regulation plan and those that do not.

158.

Pricing for special access services under the ITTA Plan.

The costs determined pursuant to an alternative rate regulation plan must be translated into special access rates. A single retention ratio produces overall special access costs, but does not address the allocation of those costs among special access services. Parties should address what rules or principles should govern the development of special access rates, whether individually or within the NECA pool, to ensure that they are just and reasonable and not unjustly discriminatory pursuant to sections

201(b) and 202 of the Act, respectively. In particular, parties should address the degree of flexibility to adjust rates carriers electing an alternative rate regulation plan should be allowed. Are there specific mechanisms that could or should be built into the cost determination process that could facilitate the development of special access rates? Parties should consider whether the proposed rules or principles would produce different incentives depending on whether the carrier participates in the NECA traffic-sensitive pool or tariffs its own special access rates.

159.

NECA pooling issues.

The ITTA Plan would allow electing carriers to participate in the NECA traffic-sensitive pool. In light of the questions asked concerning the costing and pricing of special access services, the Commission invites parties to address the feasibility of pooling both carriers electing an alternative regulation plan and those remaining under traditional rate-of-return regulation within a single pool. What changes, if any, would need to be made to the pooling procedures to ensure that both groups of carriers were treated equitably? Parties should address how earning variations within the pool should be handled, whether pool entry and exit rules would need to be modified, and if there would be any effect on the banding processes that NECA uses to establish special access rates. Any party proposing that a carrier electing an alternative rate regulation plan should have additional flexibility to adjust rates should explain how that would be handled in the pooling process.

160.

Broadband internet access service deregulation.

Rate-of-return carriers today offer the transmission component of their broadband Internet access service as a Title II regulated service. The ITTA Plan proposes that rate-of-return carriers would have the option to elect to offer the transmission component of their broadband Internet access service on a deregulated Title I basis upon electing to participate in the ITTA Plan. What impact would this aspect of the proposal have on achievement of the Commission's goals?

161.

Switched access services.

The ITTA Plan proposes to continue the switched access transition and associated recovery mechanism for rate-of-return carriers unchanged. The Commission asks parties to comment on whether there are changes that should be made to the switched access transition process or recovery mechanism if changes similar to those proposed for common line or special access in the ITTA Plan were to be adopted. For example, should the five percent annual reduction in Base Period Revenue be accelerated, or should the CAF-ICC recovery of rate-of-return carriers be subjected to a phase-out at some point similar to that applicable to price cap carriers? To the extent parties disagree, they should identify the public interest rationale and specify the timing and amount of any such changes that they believe should be implemented.

162.

Other ratemaking issues.

The Commission requests ITTA and other parties to clarify how an alternative rate regulatio

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