Connect America Fund, ETC Annual Reports and Certifications, Developing a Unified Intercarrier Compensation Regime

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 51, 54, 65, and 69

[WC Docket Nos. 10-90, 14-58; CC Docket No. 01-92; FCC 16-33]

Connect America Fund, ETC Annual Reports and Certifications, Developing a Unified Intercarrier Compensation Regime

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

In this document, the Federal Communications Commission (Commission) adopts significant reforms to place the universal service program on solid footing for the next decade to “preserve and advance” voice and broadband service in areas served by rate-of-return carriers.

DATES:

Effective May 25, 2016, except for the amendments to §§ 51.917(f)(4), 54.303(b), 54.311(a), 54.313(a)(10), (e)(1), (e)(2) and (f)(1), 54.316(a)(b), 54.319(e), 54.903(a), 69.132, 69.311, 69.4(k), and 69.416 which contain new or modified information collection requirements that will not be effective until approved by the Office of Management and Budget. The Federal Communications Commission will publish a document in the

Federal Register

announcing the effective date for those sections.

FOR FURTHER INFORMATION CONTACT:

Alexander Minard, Wireline Competition Bureau, (202) 418-0428 or TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Report and Order, Order and Order on Reconsideration in WC Docket Nos. 10-90, 14-58; CC Docket No. 01-92; FCC 16-33, adopted on March 23, 2016 and released on March 30, 2016. The full text of this document is available for public inspection during regular business hours in the FCC Reference Center, Room CY-A257, 445 12th Street SW., Washington, DC 20554. Or at the following Internet address:

http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0330/FCC-16-33A1.pdf.

The Further Notice of Proposed Rulemaking (FNPRM) that was adopted concurrently with the Report and Order, Order and Order on Reconsideration are published elsewhere in this issue of the

Federal Register

.

I. Introduction

1. With this Report and Order, Order and Order on Reconsideration, and concurrently adopted Further Notice of Proposed Rulemaking (FNPRM), the Commission adopts significant reforms to place the universal service program on solid footing for the next decade to “preserve and advance” voice and broadband service in areas served by rate-of-return carriers. In 2011, the Commission unanimously adopted transformational reforms to modernize universal service for the 21st century, creating programs to support explicitly broadband-capable networks. In this Report and Order, Order, Order on Reconsideration, and concurrently adopted FNPRM, the Commission takes necessary and crucial steps to reform our rate-of-return universal service mechanisms to fulfill our statutory mandate of ensuring that all consumers “have access to . . . advanced telecommunications and information services.” In particular, after extensive coordination and engagement with carriers and their associations, the Commission modernizes the rate-of-return program to support the types of broadband offerings that consumers increasingly demand, efficiently target support to areas that need it the most, and establish concrete deployment obligations to ensure demonstrable progress in connecting unserved consumers. This will provide the certainty and stability that carriers seek in order to invest for the future in the years to come. The Commission welcomes ongoing input and partnership as the Commission moves forward to implementing these reforms.

2. Rate-of-return carriers play a vital role in the high-cost universal service program. Many of them have made great strides in deploying 21st century networks in their service territories, in spite of the technological and marketplace challenges to serving some of the most rural and remote areas of the country. At the same time, millions of rural Americans remain unserved. In 2011, the Commission unanimously concluded that extending broadband service to those communities that lacked any service was one of core objectives of reform. At that time, it identified a rural-rural divide, observing that “some parts of rural America are connected to state-of-the art broadband, while other parts of rural America have no broadband access.” The Commission focuses now on the rural divide that exists within areas served by rate-of-return carriers. According to December 2014 Form 477 data, an estimated 20 percent of the housing units in areas served by rate-of-return carriers lack access to 10 Mbps downstream/1 Mbps upstream (10/1 Mbps) terrestrial fixed broadband service. It is time to close the gap, and take action to bring service to the consumers served by rate-of-return carriers that lack access to broadband. The Commission needs to modernize comprehensively the rate-of-return universal service program in order to benefit rural consumers throughout the country.

3. For years, the Commission has worked with active engagement from a wide range of interested stakeholders to develop new rules to support broadband-capable networks. One shortcoming of the current high-cost rules identified by rate-of-return carriers is that support is not provided if consumers choose to drop voice service, often referred to as “stand-alone broadband” or “broadband-only” lines. In the

April 2014 Connect America FNPRM,

79 FR 39196, July 9, 2014, the Commission unanimously articulated four general principles for reform to address this problem, indicating that new rules should provide support within the established budget for areas served by rate-of-return carriers; 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; support broadband-capable networks in a manner that is forward looking; and ensure no double-recovery of costs. The package of reforms outlined below solve the stand-alone broadband issue and update the rate-of-return program consistent with those principles. The Commission also takes important steps to act on the recommendation of the Governmental Accountability Office to ensure greater accountability and transparency in the high-cost program.

4. The Report and Order establishes a new forward-looking, efficient mechanism for the distribution of support in rate-of-return areas. Specifically, the Commission adopts a voluntary path under which rate-of-return carriers may elect model-based support for a term of 10 years in exchange for meeting defined build-out obligations. The Commission emphasizes the voluntary nature of this mechanism; no carrier will be required to take model-based support. This action will advance the Commission's longstanding objective of adopting fiscally responsible, accountable and incentive-based policies to replace outdated rules and programs. The cost model, which has proven successful in distributing support for price cap carriers, has been adjusted in multiple ways over more than a year to take into account the circumstances of rate-of-return carriers. The Commission makes

all necessary decisions to finalize the Alternative Connect America Cost Model (A-CAM) and direct the Wireline Competition Bureau (Bureau) to publish support amounts for this new component of the Connect America Fund (CAF ACAM) and associated deployment obligations for potential consideration by rate-of-return carriers. The Commission will make available up to an additional $150 million annually from existing high-cost reserves to facilitate this voluntary path to the model over the next decade. This approach will spur additional broadband deployment in unserved areas, while preserving additional funding in the high-cost account for other high-cost reforms.

5. The Commission also makes technical corrections to modernize our existing interstate common line support (ICLS) rules to provide support in situations where the customer no longer subscribes to traditional regulated local exchange voice service,

i.e.

stand-alone broadband. Going forward, this reformed mechanism will be known as Connect America Fund Broadband Loop Support (CAF BLS). This simple, forward-looking change to the existing mechanism will provide support for broadband-capable loops in an equitable and stable manner, regardless of whether the customer chooses to purchase traditional voice service, a bundle of voice and broadband, or only broadband. This will create incentives for carriers to deploy modern networks and encourage adoption of broadband. The Commission expects this approach will provide carriers, including those that no longer receive high cost loop support (HCLS), with appropriate support going forward to invest in broadband networks, while not disrupting past investment decisions.

6. One of the core principles of reform since 2011 has been to ensure that support is provided in the most efficient manner possible, recognizing that ultimately American consumers and businesses pay for the universal service fund (USF). The Commission continues to move forward with our efforts to ensure that companies do not receive more support than is necessary and that rate of return carriers have sufficient incentive to be prudent and efficient in their expenditures, and in particular operating expenses. Therefore, the Commission adopts a method to limit operating costs eligible for support under rate-of-return mechanisms, based on a proposal submitted by the carriers. The Commission also adopts measures that will limit the extent to which USF support is used to support capital investment by those rate-of-return carriers that are above the national average in broadband deployment in order to help target support to those areas with less broadband deployment. Lastly, in order to ensure disbursed high-cost support stays within the established budget for rate-of-return carriers, building on proposals in the record, the Commission adopts a self-effectuating mechanism to control total support distributed pursuant to the HCLS and CAF-BLS mechanisms. The Commission recognizes that many carriers are eager to upgrade their existing broadband networks to provide service that exceeds the minimum standards that the Commission has established for recipients of high-cost support. But first, the Commission must ensure that our baseline service is truly universal. Each dollar spent on upgrading networks that already are capable of delivering 10/1 Mbps service is a dollar not available to extend service to those consumers that lack such service. Taken together, the Commission anticipates that these controls and limitations will encourage efficient spending by rate-of-return carriers, thereby enabling universal service support to be more effectively targeted to support investment in broadband-capable facilities in areas that remain unserved.

7. One of the core tenets of reform for the Commission in 2011 was to “require accountability from companies receiving support to ensure that public investments are used wisely to deliver intended results.” The Commission stated its expectation that rate-of-return carriers would deploy scalable broadband in their communities, but it declined at that time to adopt specific build-out milestones for rate-of-return carriers. Instead, it concluded that it would allow carriers to extend service upon reasonable request. Since that time, rate-of-return carriers have continued to extend service, with a 45 percent increase in availability of 10/1 Mbps service between 2012 and 2014. To build on that progress, the Commission now adopts specific broadband deployment obligations for all rate-of-return carriers, and not just for those that elect the voluntary path to the model. The Commission adopts deployment obligations for all rate-of-return carriers that can be measured and monitored, while tailoring those obligations to the unique circumstances of individual carriers. Those obligations will be individually sized for each carrier not electing model support, based on the extent to which it has already deployed broadband and its forecasted CAF BLS, taking into account the relative amount of depreciated plant and the density characteristics of individual carriers.

8. Another core tenet of reform adopted by the Commission in 2011, and unanimously reaffirmed in 2014, was to target support to areas that the market will not serve absent subsidy. To direct universal service support to those areas where it is most needed, the Commission adopts a rule prohibiting rate-of-return carriers from receiving CAF-BLS support in those census blocks that are served by a qualifying unsubsidized competitor. The Commission adopts a robust challenge process to determine which areas are in fact served by a qualifying unsubsidized competitor. The Commission does not expect the challenge process to be completed before the end of 2016, with support adjustments occurring no earlier than 2017. Carriers may elect one of several options for disaggregating support for those areas found to be competitive. Any support reductions resulting from implementation of this rule will be more effectively targeted to support existing and new broadband infrastructure in areas lacking a competitor.

9. Finally, the Commission takes action to modify our existing reporting requirements in light of lessons learned from their implementation. The Commission revises eligible telecommunications carriers' (ETC) annual reporting requirements to better align those requirements with our statutory and regulatory objectives. The Commission concludes that the public interest will be served by eliminating the requirement to file a narrative update to the five-year plan. Instead, the Commission adopts narrowly tailored reporting requirements regarding the location of new deployment offering service at various speeds, which will better enable the Commission to determine on an annual basis how high-cost support is being used to “improve broadband availability, service quality, and capacity at the smallest geographic area possible.”

10. In the Order and Order on Reconsideration, as part of our modernization of the rules governing rate-of-return carriers, the Commission represcribes the currently authorized rate of return from 11.25 percent to 9.75 percent. The rate of return is a key input in a rate-of-return incumbent local exchange carrier (LEC) revenue requirement calculation, which is the basis for both its common line and special access rates, and high-cost support as applicable. The current 11.25 percent rate of return is no longer consistent with the Act and today's

financial conditions. Relying primarily on the methodology and data contained in a Bureau Staff Report—with some minor corrections and adjustments—the Commission identifies a more robust zone of reasonableness and adopts a new rate of return at the upper end of this range. This reform will be phased in over six years. This change not only will improve the efficiency of the high-cost program, but also will lower prices for rate-of-return customers in rural areas.

11. The actions the Commission takes today, combined with the rate-of-return reforms undertaken in the past two years, will allow us to continue to advance the goal of ensuring deployment of advanced telecommunications and information services networks throughout “all regions of the nation.” Importantly, they build on proposals from and collaboration with the carriers and their associations. Through the coordinated reforms the Commission takes today, they will provide rate-of-return carriers with equitable and sustainable support for investment in the deployment and operation of 21st century broadband networks throughout the country, providing stability for the future. Achieving universal access to broadband will not occur overnight, but today marks another step on the path toward that goal.

II. Report and Order

A. Voluntary Path to the Model

1. Discussion

12. In this section, the Commission adopts a voluntary path for rate-of-return carriers to elect to receive model-based support in exchange for deploying broadband-capable networks to a pre-determined number of eligible locations. By creating a voluntary pathway to model-based support, the Commission will spur new broadband deployment in rural areas, which will help close the digital divide among rate-of-return carriers. As noted above, there is a wide disparity among rate-of-return study areas regarding the extent of coverage meeting the Commission's minimum standard of 10/1 Mbps service: Based on December 2014 FCC Form 477 data, an estimated 20 percent of housing units in census blocks served by rate-of-return carriers lack access to 10/1 Mbps terrestrial fixed broadband service, while other rate-of-return carriers have deployed 10/1 Mbps to nearly all of their study area. The option of receiving model-based support will provide the opportunity for carriers that have made less progress in their broadband deployment than other rate-of-return carriers to “catch up.” By creating defined performance and deployment obligations for specific and predictable support amounts, the Commission is completing the framework envisioned by the Commission in the 2011

USF/ICC Transformation Order,

76 FR 73830, November 29, 2011. The Commission also is taking additional steps to fulfill the Commission's longstanding objective of providing support based on forward-looking efficient costs. And finally, the model path may well be a viable option for high-cost companies that no longer receive HCLS due to the past operation of the indexed cap on HCLS, often referred to as the “cliff effect.” The Commission took steps to address this problem in December 2014 by modifying the methodology used to adjust HCLS to fit within the existing cap, but that did not restore HCLS to those companies that previously had fallen off the cliff.

13. As discussed more fully below, the election of model-based support places those carriers in a different regulatory paradigm. They no longer will be subject to rate-of-return regulation for common line offerings, and they no longer will participate in the National Exchange Carrier Association's (NECA's) common line pool. Effectively, the carriers that choose to take the voluntary path to the model are electing incentive regulation for common line offerings.

14.

Term of Support.

The Commission adopts a 10-year term for rate-of-return carriers electing to receive model-based support. Carriers electing this option will have the certainty of receiving specific and predictable monthly support amounts over the 10 years. Predictable support will enhance the ability of these carriers to deploy broadband throughout the term. In year eight, the Commission expects they will conduct a rulemaking to determine how support will be determined after the end of the 10-year period. The Commission expects that prior to the end of the 10-year term, the Commission will have adjusted its minimum broadband performance standards for all ETCs, and other changes may well be necessary then to reflect marketplace realities at that time.

15.

Broadband Speed Obligations.

In December 2014, the Commission adopted a minimum speed standard of 10/1 Mbps for price-cap and rate-of-return carriers receiving high-cost support. As a result, price cap carriers accepting model-based support are required to offer at least 10/1 Mbps broadband service to the requisite number of high-cost locations by the end of a six-year support term. And rate-of-return carriers were required to offer at least 10/1 Mbps broadband service upon reasonable request. At that time, the Commission also decided that 10/1 Mbps should not be our end goal for the 10-year term for providers awarded support through the Connect America Phase II bidding process.

16. Similarly, here, the Commission recognizes that their minimum requirements for rate-of-return carriers will likely evolve over the next decade. NTCA argues that a universal service program premised upon achieving speeds of 10/1 Mbps risks locking rural America into lower service levels. The Commission agrees that our policies should take into account evolving standards in the future. At the same time, the Commission recognizes that it is difficult to plan network deployment not knowing the performance obligations that might apply by the end of the 10-year term. The Commission finds that establishing speed and other performance requirements now for carriers electing model-based support is preferable to doing so at some point mid-way through the 10-year term, as it will provide more certainty for carriers electing this voluntary path. Rate-of-return carriers that comply with the performance requirements the Commission establishes today for the duration of the 10-year term will be deemed in compliance even if the Commission subsequently establishes different standards that are generally applicable to the high-cost support mechanisms before the end of the 10-year term.

17. The Commission concludes that rate-of-return carriers electing model support will be required to maintain voice and existing broadband service and to offer at least 10/1 Mbps to all locations “fully funded” by the model, and at least 25/3 Mbps to a certain percentage of those locations, by the end of the support term. The Commission adopts with minor modifications ITTA and USTelecom's proposal to require carriers with a state-level density of more than ten locations per square mile to offer at least 25/3 Mbps to at least 75 percent of the fully funded locations in the state by the end of the 10-year term. For administrative convenience, the Commission will determine these density thresholds based on housing units, rather than locations in the model, because other density measures adopted in this Order will rely on U.S. Census data for housing units. The Commission concludes that carriers with a state-level density of ten or fewer, but more than five, housing units per square mile will be required to offer at least 25/3 Mbps to at least 50 percent

of the fully funded locations in the state by the end of the 10-year term, and carriers with five or fewer housing units per square mile will be required to offer at least 25/3 Mbps to at least 25 percent of the fully funded locations, as suggested by WTA and other commenters. The density of each carrier's study area or study areas in a state will be determined using the final 2015 study area boundary data collection information submitted by carriers, and the number of locations will be determined using U.S. Census data. The Commission directs the Bureau to publish a list showing the state-level density for each carrier prior to issuing the public notice announcing the final version of the adopted model, so carriers will know in advance of the timeframe for electing model-based support which deployment obligations will be applicable.

18. In addition, the Commission establishes defined requirements for making progress towards extending broadband to capped locations within their service areas. Specifically, carriers electing model support will be required to offer at least 4/1 Mbps to a defined number of locations that are not fully funded (

i.e.

, with a calculated average cost above the “funding cap”). The Commission adopts a modified version of ITTA's proposal, again using housing units to determine density. The Commission will require carriers with a state-level density of more than 10 housing units per square mile to offer at least 4/1 Mbps to 50 percent of all capped locations in the state by the end of the 10-year term. Carriers with a state-level density of 10 or fewer housing units per square mile will be required to offer at least 4/1 Mbps to 25 percent of all capped locations in the state by the end of the 10-year term The remaining capped locations will be subject to the reasonable request standard, and the Commission will monitor progress in connecting these locations as well. The Commission encourages carriers electing the voluntary path to the model to identify any census blocks where they expect not to extend broadband, so that such census blocks may be included in an upcoming auction where parties, including the current provider, may bid for support. The Bureau will announce a date by public notice, no sooner than 60 days after elections are finalized, by which carriers electing model-support may identify any such census blocks. Our goal is to ensure that all consumers have an opportunity to receive service within a reasonable timeframe. If carriers know that support provided through the voluntary path to the model will be insufficient to reach certain parts of their territories within 10 years, identifying these territories now, rather than 10 years from now, will enable the Commission to find another, more timely path to bring broadband to consumers in these areas. Carriers that provide the Commission notice within the requisite time would not be required to provide service upon reasonable request in the identified areas.

19.

Usage and Latency.

In the

April 2014 Connect America FNPRM,

the Commission proposed to apply the same usage allowances and latency standards that the Bureau previously had adopted for price cap carriers accepting model-based support to rate-of-return carriers that are subject to broadband performance obligations. The Commission now adopts a usage threshold for rate-of-return carriers electing model support that should ensure that consumers in these areas have access to an evolving level of service over the 10-year term: The Commission requires them to offer a minimum usage allowance of 150 GB per month, or a usage allowance that reflects the average usage of a majority of consumers, using Measuring Broadband America data or a similar data source, whichever is higher. The first prong of the usage requirement—the 150 GB usage allowance—is similar to the approach adopted by the Bureau for price cap carriers to set an evolving level of service over the term of support: The Commission requires them to offer a usage allowance that meets or exceeds the usage level of 80 percent of cable or fiber-based fixed broadband subscribers, whichever is higher, according to the most current publicly available Measuring Broadband America usage data. According to the Commission's 2015 Measuring Broadband America data, 80 percent of cable broadband subscribers used 156 GB or less per month. For simplicity, the Commission adopts a monthly usage allowance of 150 GBs for rate-of-return carriers electing to receive CAF-ACAM support. The second prong of the usage requirement—to provide a usage allowance that will allow consumers to use their connections in a way similar to usage of a majority of consumers nationwide—ensures that consumers served by rate-of-return carriers will be not be offered service that is significantly different than what is available in urban areas over the full 10-year term. The Commission expects that carriers accepting model-based support will have economic incentives irrespective of these mandates to provide consumers with an evolving array of service offerings, and adopt this second prong as a regulatory backstop to ensure that this happens.

20. In addition, the Commission adopts our proposal to require rate-of-return carriers accepting model-based support to certify that 95 percent or more of all peak period measurements of network round-trip latency are at or below 100 milliseconds. No party objected to adopting this standard for public interest obligations for rate-of-return carriers. This latency standard will apply to all locations that are fully funded. As discussed below, the Commission recognizes there may be need for relaxed standards in areas that are not fully funded, where carriers may use alternative technologies to meet their public interest obligations.

21.

Deployment Obligations.

The Commission require rate-of-return carriers accepting the offer of model-based support to offer at least 10/1 Mbps broadband service to the number of locations identified by the model where the average cost is above the funding benchmark and below the funding per location cap, and at least 25/3 Mbps to a subset of those locations. These are the locations that are “fully funded” with model-based support. In contrast to the approach taken in price cap areas, where the Commission did not provide support to locations above an extremely high-cost threshold, in rate-of-return areas the Commission will provide support to all census blocks with average costs above the funding benchmark. However, each location within census blocks where the average cost exceeds the funding cap will receive the same amount of support. This funding for locations above the funding cap should be sufficient to preserve existing service and allow carriers to extend broadband service to a defined number of the capped locations, and to the remaining locations upon reasonable request, using alternative technologies where appropriate. If a carrier identifies census blocks that it will not be able to serve by the date specified by public notice, as discussed above, its support will be reduced to reflect the fewer number of locations, and it will not be subject to the reasonable request standard for those locations if another provider wins those areas in an auction.

22. The Commission declines to adopt an approach that would base a company's build-out obligations solely on the extent to which its model-based support exceeds its legacy support. The Commission agrees with proponents of such an approach that the locations to which a company will be required to

deploy broadband should be based on the A-CAM modeled cost characteristics of each company, but the Commission finds that our approach is preferable and more consistent with the overall framework of providing model-based support. Like CAM, A-CAM estimates “

the full average monthly cost of operating and maintaining an efficient, modern network,

” and includes both capital and operating costs. Although actual costs may differ from forward-looking economic costs at any particular point in time, allowing monthly recovery of the model's levelized cost means, on average, all carriers will earn an amount that would allow them to maintain the specified level of service going forward over the longer term.

23. The Commission is not persuaded by the argument that they should tie broadband deployment obligations only to the supplemental support in excess of legacy support and determine the extent of new broadband deployment obligations based on modeled capital costs. Our methodology is based on modeled capital and operating costs for each census block and provides the entire support amount calculated for areas above the funding benchmark and below the per-location funding cap; that is, these locations will be “fully funded” by the model under our method.

24.

Interim Deployment Milestones.

The Commission adopts evenly spaced annual interim milestones over the 10-year term for rate-of-return carriers electing model-based support, as proposed by ITTA, NTCA, USTelecom, and WTA with a minor modification. The Commission adopts enforceable milestones beginning in year four, whereas the enforceable milestones proposed by the rural associations would begin in year five. As shown in the chart below, the Commission requires carriers receiving model-based support to offer to at least 10/1 Mbps broadband service to 40 percent of the requisite number of high-cost locations in a state by the end of the fourth year, an additional 10 percent in subsequent years, with 100 percent by the end of the 10-year term. The Commission does not set interim milestones for the deployment of broadband speeds of 25/3 Mbps; the Commission requires carriers receiving model-based support to offer to at least 25/3 Mbps broadband service carriers to 25 percent or 75 percent of the requisite locations by the end of the 10-year term, depending upon the state-level density discussed above.

Deployment Milestones for Rate-of-Return Carriers Receiving Model-Based Support

Percent

Year 1 (2017)

**

Year 2 (2018)

**

Year 3 (2019)

**

Year 4 (2020)

40

Year 5 (2021)

50

Year 6 (2022)

60

Year 7 (2023)

70

Year 8 (2024)

80

Year 9 (2025)

90

Year 10 (2026)

100

25. The Commission also concludes that rate-of-return carriers receiving model-based support should have some flexibility in their deployment obligations to address unforeseeable challenges to meeting these obligations. When the Commission adopted flexibility in deployment obligations for price cap carriers accepting model-based support, they recognized that the “facts on the ground” when they are deploying facilities may necessitate some flexibility regarding the number of required locations. Because rate-of-return carriers electing model-based support may face similar circumstances, the Commission finds that providing the same flexibility and allowing deployment to less than 100 percent of the requisite locations is equally appropriate for these carriers as well. The Commission therefore will permit them to deploy to 95 percent of the required number of locations by the end of the 10-year term. To the degree an electing carrier deploys to less than 100 percent of the requisite locations, the remaining percentage of locations would be subject to the deployment obligations for the carrier's capped locations. The Commission does not require rate-of-return carriers to refund support if they deploy to at least 95% of the required locations, but not 100%, because they will use that support to maintain service and deploy new broadband to unserved customers under the standard for capped locations adopted above. And, as noted above, to the extent the electing carrier does not foresee being able to serve some fraction of the remaining five percent of locations in any way, not even with alternative technologies, the Commission encourages them to identify such census blocks for inclusion in an upcoming auction.

26. The Commission also notes that the customer location data utilized in the model reflect location data at a particular point in time. The precise number of locations in some funded census blocks is likely to change for a variety of reasons, which in some circumstances would make it impossible for a carrier to meet its deployment obligations. Carriers that discover there is a widely divergent number of locations in their funded census blocks as compared to the model should have the opportunity to seek an adjustment to modify the deployment obligations. Consistent with our action for Phase II in price cap territories, the Commission delegates authority to the Bureau to address these discrepancies by adjusting the number of funded locations downward and reducing associated funding levels.

27. The Commission is not persuaded that they should decline to impose intermediate deployment milestones for small rate-of-return carriers serving 10,000 or fewer locations in a state, as proposed by WTA. WTA argues that a 5,000 line carrier that is 60 percent built out and needs to extend broadband to 2,000 more locations cannot economically build out to 200 new locations each year, and that the most efficient way to proceed is to construct all 2,000 locations during one or two construction seasons. The deployment milestones the Commission adopts do not require evenly spaced new deployment each year, as WTA appears to assume. For instance, the carrier could fully complete its deployment obligation in years 5 and 6, if it found it more efficient to do the whole project over two construction seasons. The Commission would be concerned if such a hypothetical carrier were to wait until years 8 and 9 to begin extending broadband to its unserved customers; they would expect to see some progress toward deploying new broadband after receiving eight years of model-based support. Moreover, carriers that feel uncomfortable with intermediate deadlines may prefer to stay on legacy mechanisms.

28.

A-CAM.

The Commission makes the following decisions regarding the final version A-CAM that will be used to calculate support for carriers that voluntarily elect to receive model-based support. The Commission adopts the model platform and current input values in version 2.1 for purposes of calculating the cost of serving census blocks in rate-of-return areas, with a modification regarding updates to the broadband coverage data. Consistent with the rate represcription decision below, the Commission adopts an input value of 9.75 percent for the cost of money in the model for rate-of-return carriers, which is higher than the input value used for price cap carriers.

29. The Commission also makes all necessary decisions to calculate support

amounts for rate-of-return carriers electing to receive model-based support. The model will utilize a $200 per-location funding cap to provide support for all locations above a funding benchmark of $52.50, which is subject to reduction if necessary to meet demand for model-based support. In addition, the Commission will exclude from support calculations those census blocks where the incumbent or any affiliated entity is providing 10/1 Mbps or better broadband using either FTTP or cable technologies. The Commission concludes that they will update the broadband coverage for unsubsidized competitors in the model to reflect the recently released June 2015 FCC Form 477 data, which will be subject to a streamlined challenge process. The Commission directs the Bureau to take all necessary steps to release the adopted version of the model for purposes calculating support amounts for rate-of-return carriers electing to receive model support.

30. As noted above, over the past year, the Bureau has been continually working on refining the model so that it would be more suitable for use in rate-of-return areas. During this time, rate-of-return carriers and their associations have actively participated in this process, providing input on ways further to improve the model. For instance, the Bureau received and included certain data from nearly half of the approximately 1,100 study areas to better reflect their costs. As a result of this feedback and the resulting adjustments detailed below, the Commission believes that the final version of A-CAM will sufficiently estimate the costs of serving rate-of-return areas and that further adjustments are not necessary.

31. The first version of A-CAM, released in December 2014, was fundamentally the same as CAM 4.2 to provide a baseline for subsequent modifications. Although the cost model was originally developed for use in price cap areas, it always has included a size adjustment factor—based on rate-of-return company data—to scale operating expenses for “small, x-small, and xx-small” companies, and has reflected cost differences based on density. Thus, even though the model estimates the forward-looking costs of an efficient provider, it takes into account the higher operating expenses of small rate-of-return carriers operating in rural areas.

32. The Commission recognized the importance of accurate study area boundaries in using a model to calculate support for rate-of-return carriers. Whereas CAM used a commercial data source, GeoResults, to determine study area boundaries for the price cap carriers, the Commission directed the Bureau to incorporate the results of the Bureau's study area boundary data collection into A-CAM. From November 2014 to April 2015, the Bureau undertook a four-step process for adapting the study area boundary data for use in the model. The first step determined study area boundaries for purposes of the A-CAM by addressing overlaps that remained after the Bureau provided an opportunity to resolve overlaps and voids in the data originally submitted. The second step aligned the exchanges submitted by rate-of-return carriers (or state commissions on behalf of the incumbent) in the study area data collection with the study area boundaries to be used in the model and modified the exchanges to match the edges of the study area boundary where the submitted boundary of the exchanges differed from the modified study area boundary. The third step determined the potential locations to be used in the model for the placement of the central office (“Node0” in A-CAM) within each exchange. The final step ensured that each exchange was associated with a single Node0 location. In April 2015, the Bureau posted on the Commission's Web site the A-CAM map based on the study area boundary and exchange data that had been certified by the carriers and submitted to the Bureau.

33. Proposed corrections to study area and service area boundaries and Node0 locations were submitted by parties to the proceeding over the next several months. Recognizing that it would take several months to evaluate and incorporate study area boundary and Node0 locations submitted by interested parties in A-CAM, the Bureau continued to work on updating the model in other ways. In addition, with subsequent versions of the model the Bureau released illustrative results so that interested parties could better understand and evaluate how different assumptions used in calculating support impact the potential support calculated for a particular study area.

34. A-CAM contains two modules: A cost module that calculates costs for all areas of the country, and a support module, which calculates the support for each area based on those costs. The support module allows users to “filter” the cost data to focus on specific geographic areas, such as census blocks that are not served by an unsubsidized competitor. Support amounts depend on the funding benchmark that determines which areas are funded: Areas with an average cost below the funding benchmark are not funded because it is assumed that end user revenues are sufficient to cover the cost of serving such areas. Support amounts also depend on the mechanism utilized to keep total support calculated under the model within a given budget.

35. In March 2015, the Bureau released A-CAM version 1.0.1, which incorporated changes to broadband coverage using a minimum speed standard of 10/1 Mbps to determine the presence of a cable or fixed wireless competitor. The Bureau also released illustrative results under seven scenarios illustrating how different assumptions used in calculating support impact the potential support calculated for a particular study area. Five of the seven scenarios used a funding benchmark of $52.50, the same benchmark used to calculate support for price cap carriers. Two of these scenarios used an extremely high-cost threshold as the mechanism to keep total calculated support with the total budget for rate-of-return carriers. A third scenario utilized a different approach to keep total calculated support within the total budget for rate-of-return carriers: A per-location funding cap. Two scenarios used a $60 funding benchmark, which was suggested by parties to the proceeding as a mechanism to keep total support within the budget. This approach presumed that areas with an average cost per location less than $60 are competitively served by cable operators and therefore should be ineligible for support, which reduced support evenly across all locations in order to meet the budget. These two scenarios and two additional scenarios all exceeded the rate-of-return budget, however, but were published by the Bureau so that parties could consider alternative measures to maintain overall support within the budget, such as a dollar amount reduction in support per location, a percentage reduction in support per location, or a cap on support per location.

36. In May 2015, the Bureau published a revised A-CAM study area boundary map that updated the data used to identify a small number of Node0 locations, which improved the default locations if carriers did not propose any corrections, and provided additional time for carriers to submit Node0 locations. In July 2015, the Bureau announced upcoming modifications to A-CAM, including a code change to enable the use of company-specific plant mix (aerial, buried, and conduit) input values, instead of the state-wide default values, and invited parties to submit plant mix values for individual study areas. The

plant mix values (aerial, buried, and conduit) are broken out separately for urban, suburban, and rural areas, for feeder, distribution, and interoffice facilities. In response to parties filing study area specific plant mix values, the Bureau posted a table showing the classification of census block groups as rural, suburban, and urban used in A-CAM.

37. On August 31, 2015, the Bureau released A-CAM version 1.1, which updated the model to reflect FCC Form 477 broadband deployment data as of December 31, 2014. The prior version of A-CAM (v1.0.1) used SBI/NBM data as of June 30, 2013. FCC Form 477 data offers several advantages over the SBI/NBM data. The Form 477 data collection is mandatory, and Form 477 filers must certify to the accuracy of their data. The Bureau also released illustrative results produced using A-CAM v1.1 under three scenarios that illustrate how different per-location funding caps used in calculating support impact the potential support calculated for each rate-of-return study area in the country.

38. On October 8, 2015, the Bureau released A-CAM version 2.0, which incorporated the results of the Bureau's study area boundary data collection and further updated the model for use in rate-of-return areas. After months of review by the Bureau, A-CAM v2.0 incorporated updated exterior study area boundaries, interior service area boundaries, and/or Node0 locations for approximately 400 study areas. The network topology was updated to reflect these changes, and to address the fact that American Samoa and some coastal islands are served by a rate-of-return carriers. The middle mile network topology was updated to include an undersea route for American Samoa and submarine routes for service areas not connected by roads within the continental United States. To reflect the fact that rate-of-return carriers may have higher middle mile costs, A-CAM v2.0 added two connections from each regional access tandem ring to an Internet access point to account for the cost of connecting to the public Internet.

39. Previous versions of A-CAM included five size categories for investments related to land and buildings associated with central offices, and the smallest size central office was for those with fewer than 1,000 lines. Because some service areas in A-CAM have fewer than 250 locations, the updated capital expenditures input table created a new size category for central offices serving fewer than 250 locations, with lower land and building investment for these very small areas than exchanges with 250 to 1,000 locations. A-CAM v2.0 also was modified to incorporate study-area specific plant mix values, but because the Bureau was still reviewing these carrier submissions at that time, they were not reflected in this version of the model.

40. The Bureau also released A-CAM version 2.0 results that illustrate how three different per-location funding caps impact potential support. Although illustrative results for previous versions of A-CAM showed support using a per-location funding cap, A-CAM users could only approximate the Bureau's estimates. In A-CAM v2.0 and subsequent versions of the model, support can be calculated and reported using either an extremely high-cost threshold or a per-location funding cap. Support in A-CAM v2.0 is calculated using the average cost at the census block level for each study area (

i.e.,

costs are averaged at the census block level), meaning all locations in a census block within a carrier's study area are either funded or not funded. This version of the model calculates cost at the sub-block level only in cases where a census block crosses a study area boundary.

41. On December 17, 2015, the Bureau released A-CAM v2.1, which incorporated study area-specific plant mix values submitted by rate-of-return carriers, updated broadband coverage data to address issues raised by rate-of-return commenters regarding reported competitive coverage, and provided an alternative coverage option that excludes from support calculations census blocks served with either FTTP or cable, as requested by one industry association. The Bureau also released results that illustrate how the two different coverage assumptions used in calculating support impact the potential support calculated for a particular study area; both sets of results are calculated using a $200 per-location funding cap. On February 17, 2016, the Bureau released additional illustrative results utilizing input values reflecting a 9.75 percent cost of money. Raising the cost of money increased costs for all study areas.

42. As directed, the Bureau incorporated the study area data and made other appropriate adjustments to A-CAM over the past year. The Commission finds that these modifications are sufficient for purposes of calculating support amounts for rate-of-return carriers electing to receive model support. A forward-looking cost model is designed to capture the costs of an efficient provider and does not generally use company-specific inputs values. As noted above, however, the A-CAM model takes into account the higher operating expenses of small, rate-of-return carriers operating in rural areas with a company size adjustment factor for operating expenses and cost differences based on density. The most significant modification is the incorporation of the study area boundary data. Although the commercial data set was an appropriate source for price cap carriers, the Commission recognizes that they serve significantly larger study areas than any of the more than 1,100 rate-of-return study areas. Because rate-of-return carriers serve smaller areas, it also was appropriate to provide for company-specific plant mix values if carriers found that the state-specific default values did not reflect their outside plant. The Commission notes that the average calculated A-CAM loop cost is greater than the largest embedded loop cost reported to NECA over the last fifteen years for the more than 500 study areas that submitted plant mix values.

43. As discussed in detail below, as part of our modernization of the framework for rate-of-return carriers for both high-cost support and special access ratemaking, the Commission represcribes the currently authorized rate of return from 11.25 percent to 9.75 percent. The Commission primarily relies on the methodology and data contained in the Wireline Competition Bureau's Staff Report, with some minor corrections and adjustments, identifies a more robust zone of reasonableness between 7.12 percent and 9.75 percent, and adopts a new rate of return at the upper end of this range. A-CAM currently uses an input value for the cost of money of 8.5 percent. The Bureau relied on the same methodology when it adopted that value for use in CAM, but focused solely on data from price cap carriers to select the input value for the price-cap carrier model. Consistent with the Commission's decision below regarding the authorized rate of return for rate-of-return carriers, now adopt an input value of 9.75 percent for the cost of money in A-CAM, thereby reflecting our consideration of the circumstances affecting rate-of-return carriers.

44. The Commission directs the Bureau to calculate support using a $200 per-location funding cap, rather than an extremely high-cost threshold. The Commission concludes that this methodology is preferable because it provides some support to all locations above the funding threshold. Even though the locations at or above the funding cap are not “fully funded” with model support, carriers will receive a significant amount of funding—

specifically, $200 per month for each of the capped locations—which will permit them to maintain existing voice service and expand broadband in these highest-cost areas to a defined number of locations depending on density, or upon reasonable request, using alternative, less costly technologies where appropriate. This will allow significantly more high-cost locations to be served than if the Commission were to use a lower funding cap. The Commission notes that a $200 per-location funding cap is significantly higher than what was adopted for purposes of the offer of support to price cap carriers: Price cap carriers only receive a maximum amount of $146.10 in support per location ($198.60 minus the $52.50 funding benchmark), while the approach the Commission adopts for rate-of-return areas will provide full support for locations where the average cost is $252.50 per location.

45. The Commission adopts a funding benchmark of $52.50, which is the same benchmark the Bureau adopted in its final version of CAM for purposes of making the offer of model-based support to price cap carriers. Based on the extensive record in the Connect America Phase II proceeding, the Bureau adopted a methodology for establishing a funding benchmark based on reasonable end user revenues. The Bureau adopted a blended average revenue per user (ARPU) of $75 that reflected revenues a carrier could reasonably expect to receive from each subscriber for providing voice, broadband, or a combination of those services. At the time, the speed standard was 4/1 Mbps, and the Bureau relied on information in the record regarding service offerings at or close to that speed. Now, the carriers electing model-based support will be required to offer 10/1 Mbps service, and 25/3 Mbps service to some subset of their customers, and therefore may earn higher revenues from their broadband services. The Bureau also adopted an expected subscription rate of 70 percent for purposes of estimating the amount of revenues a carrier may reasonably recover from end-users, and by extension, the funding benchmark. Applying an assumed ARPU of $75 and the 70 percent expected subscription rate, the funding benchmark is $52.50 per location. The record before the Bureau for CAM contained varying estimates and the Bureau acknowledged that forecasting potential ARPU for recipients of model-based support and the expected subscription rate necessarily requires making a number of predictive judgments. Nothing in the record before us now persuades us that consumers in rate-of-return carriers are less likely to subscribe to broadband where it is available than consumers served by price cap carriers.

46. The Commission is not persuaded that they should establish a different funding benchmark for purposes of making the offer of model-based support to rate-of-return carriers. During the A-CAM development process, the Bureau has released 15 versions of illustrative results and all but two used a funding benchmark of $52.50. Two versions used a $60 benchmark because commenters had suggested that a higher benchmark may be an alternative method for excluding areas served by an unsubsidized competitor. These and other commenters now support using a per-location funding cap rather than a higher benchmark.

47. One commenter argues that a subscription rate of 70 percent is too high and that the Commission should use 50 percent, because the adoption rate for the 10 Mbps speed tier in rural areas was only 47 percent in the

2015 Broadband Progress Report.

Given the increasing demand for higher broadband speeds, the Commission does not find that a 47 percent adoption rate is a realistic prediction of adoption rates in rural areas over the 10-year term. One reason that subscription rates are lower, on average, in rural areas today is the fact that 10/1 Mbps broadband service is not available to the same extent as urban areas. As broadband service is deployed more widely in high-cost areas with assistance from the federal high-cost program, as well as additional funding from state programs, the Commission would expect subscription rates in rural areas to become more similar to rates in urban areas. In addition, carriers will be required to provide broadband to some locations receiving capped funding, so the Commission expects carriers will be receiving broadband revenue from these customers, as well as any voice revenues. A 50 percent subscription rate would result in a funding benchmark of only $35, a much lower per-location funding cap, and would reduce the amount of support going to the highest-cost areas given that the amount of money across carriers electing the model will be finite. The Commission declines to adopt a measure that would have the effect of skewing support so drastically to the companies that are, relatively speaking, lower cost compared to other rate-of-return carriers.

48. The Commission also concludes that it should prioritize model support to those areas that currently are unserved and direct the Bureau to exclude from the support calculations those census blocks where the incumbent rate-of-return carrier (or its affiliate) is offering voice and broadband service that meets the Commission's minimum standards for the high-cost program using FTTP or cable technology. For purposes of implementing this directive, the Bureau shall utilize June 2015 FCC Form 477 data that has been submitted and certified to the Commission prior to the date of release of this order; carriers may not resubmit their previously filed data to reduce their reported FTTP or cable coverage. While the Commission recognizes that these deployed census blocks require ongoing funding both to maintain existing service and in some cases to repay loans incurred to complete network deployments, it concludes that it is appropriate to make this adjustment to the model in order to advance our policy objective of advancing broadband deployment to unserved customers. Our decision to exclude from support calculations this subset of census blocks in no way indicates a belief that once networks are deployed, they no longer require support; rather, the Commission assumes that the carriers that have already deployed FTTP or cable broadband have done so within the existing legacy support framework. They will continue to receive HCLS and support through the reformed ICLS mechanism, and thus there is no need for a new mechanism to support their existing deployment. Those carriers are not required to elect model-based support and therefore this decision does not drastically reduce their support, as some allege.

49. When the Commission directed the Bureau “to undertake further work to update the Connect America Cost Model to incorporate the study area boundary data, and such other adjustments as may be appropriate,” the Commission did not envision revisiting the fundamental decisions made by the Bureau in developing CAM, such as the decision to develop a FTTP model. Adopting a significantly different model, such as a digital subscriber line (DSL) model for use in rate-of-return areas, would have significantly delayed this process and would have been backwards looking. The Commission concludes the changes adopted above should provide sufficient support for carriers interested in the model and account for most of the unique circumstances of different rate-of-return carriers. Therefore, the Commission declines to make further changes to data

sources or model design as requested by some commenters.

50. Finally, the Commission rejects arguments in the record that the model should not be adopted because it produces support amounts that vary, in some cases significantly, from the amounts that particular carriers are currently receiving under the legacy mechanisms or that vary from actual costs of fiber-to-the-home construction. Some commenters cite a study conducted by Vantage Point comparing A-CAM results to FTTP engineering estimates and actual outside plant costs from 144 wire-center-wide projects to support their arguments that the model is not accurate. The Commission does not find that the Vantage Point analysis of variability between model results and its proprietary engineering data to be a useful comparison for several reasons. In particular, the Commission is not persuaded by the case study, node-by-node comparisons because the engineering data reflect a different network architecture than the network modeled in A-CAM. A-CAM assumes a Gigabit-Capable Passive Optical Network (GPON), with splitters in the field. Vantage Point's examples place the splitters in the central office, with one dedicated fiber for each end-user location. Instead of sharing one high-capacity fiber for up to 32 locations for some distance from the central office, the Vantage Point approach includes the cost for up to 32 fibers along the entire distance covered by outside plant. The Commission recognizes that placing splitters in the central office can lead to higher utilization and lower cost per location for splitters; however, they generally expect the higher cost for fiber materials and installation (including, for example, much greater splicing expense) greatly to outweigh any savings gained from better splitter utilization. Vantage Point did not provide enough information in its filings to quantify the impact of dedicated fibers in the feeder plant. In addition, Vantage Point's claim that the model shows consistent deviation based on cost per subscriber is misleading because Vantage Point uses cost per actual subscriber, whereas A-CAM uses cost per location passed. Even if there were no variation in cost, areas that would be more expensive on a per-subscriber basis would have lower A-CAM calculated costs unless the take rate were 100 percent.

51. As discussed above, A-CAM estimates the average monthly forward-looking economic cost of operating and maintaining an efficient, modern network, and is not intended to replicate the actual costs of a specific company at any particular point in time. Although one might expect forward-looking costs to capture greater efficiencies and, therefore, be lower than embedded costs, in fact, the forward-looking loop costs from A-CAM for most study areas are higher than embedded loop costs reported by rate-of-return carriers to NECA. In many cases, model-based support is less than legacy support, not because A-CAM calculates lower costs for a particular study area, but because the model excludes from support calculations those census blocks that are presumed to be served by an unsubsidized competitor offering voice and 10/1 Mbps service. This is consistent with the Commission's policy adopted in the

2011 USF/ICC Transformation Order

to condition Connect America Fund broadband obligations for fixed broadband on not spending the funds in areas already served by an unsubsidized a competitor. In other cases, model-based support is more than legacy support, not because the model overestimates the cost of serving an area, but because some companies serving high-cost areas previously have “fallen off the cliff” and lost HCLS due to the past operation of the indexed cap. Other companies may have underinvested in their networks. Providing model-based support to these carriers would not provide a “windfall,” as some have suggested, but rather would further the Commission's policy goal of providing appropriate incentives to extend broadband to unserved and underserved areas.

52.

Budget.

Given the benefits and certainty of the model, the Commission believes it is appropriate to use additional high-cost funding from the high-cost reserve account to encourage companies to elect model support. The Commission notes that the Commission previously instructed USAC that if contributions to support the high-cost support mechanisms exceed high-cost demand, excess contributions were to be credited to a Connect America Fund reserve account.

USF/ICC Transformation Order.

The Commission concludes there is no need to maintain a separate reserve account. To simplify the accounting treatment of high-cost reforms going forward, the Commission now directs USAC to eliminate the Connect America Fund reserve account and transfer the funds to the high-cost account. Going forward, USAC shall credit excess contributions to support the high-cost mechanism to the high-cost account and shall use funds from the high-cost account to reduce high-cost demand to $1.125 billion in any quarter that would otherwise exceed $1.125 billion.

USF/ICC Transformation Order,

26 FCC Rcd at 17847, para. 562. The Commission therefore adopts a budget of up to an additional $150 million annually, or up to $1.5 billion over the 10-year term, utilizing existing high-cost funds to facilitate the voluntary path to the model. By making this funding available to those carriers that are willing to meet concrete and defined broadband deployment obligations, including those who will see reductions in their support, the Commission will advance our objective of extending broadband to currently unserved consumers.

53. At this point it is difficult to predict the extent to which companies may be interested in the voluntary path to the model and what the overall budgetary impact might be of such carrier elections. Even so, the Commission predicts that such additional funding will be sufficient to cover significant deployment and support elections to the model, including for those who will receive transition payments for a limited time in addition to model-based support. The Commission recognizes that carriers may have a variety of reasons for electing model support. In general, those carriers for whom A-CAM produces a significant increase in support over legacy support are more likely to elect model support than those who see little increase or a decrease, assuming that they view the increase in support as sufficient to meet the associated deployment obligations. At the same time, the Commission does not expect that all carriers for whom model-based support is significantly greater than legacy support will make the election: Some companies may not be prepared to meet the specific defined broadband build-out obligations that come with such support, while others may not be ready at this time to move to incentive regulation for their common line offering. The Commission describes below how they will adjust the offer of support and obligations to meet the defined CAF-ACAM budget.

54. The first step in determining the budgetary impact is to identify the universe of carriers that will potentially elect model-based support. After the final A-CAM results implementing the decisions the Commission adopts today are released, carriers will indicate within 90 days whether they are interested in electing model-based support. The final released results for the adopted model effectively will create a ceiling—the maximum amount of CAF-ACAM support a carrier may receive with the maximum number of

associated locations. Once the carriers indicate their interest, the Bureau will total the amount of model-based support for electing carriers and determine the extent to which, in the aggregate, their model-based support plus transition payments exceed the total legacy support received for 2015 by that subset of rate-of-return carriers. For purposes of this calculation, the Bureau will sum the model-based support amounts and transition payments, if any, for carriers for whom model-based support is less than 2015 legacy HCLS and ICLS support. If that increase is $150 million or less, no adjustment to the offered support amounts or deployment obligations will be necessary, the Commission will not lower the $200 per location funding cap, and those carriers that indicated their interest will be deemed to have elected the voluntary path to the model. If demand can be met with the amounts adopted today, unused funding will remain in the high-cost account. The Commission at that time may consider whether circumstances warrant allocation of an additional $50 million in order to maintain the $200 per location funding cap. In either of these situations, the initial indication of interest is irrevocable. Absent an additional allocation, the Bureau will lower the per-location funding cap to a figure below $200 per location to ensure that total support for carriers electing the model remains within the budget for this path.

55. Reducing the funding cap per location would have the effect of reducing the number of fully funded locations that will be subject to defined broadband deployment obligations. Recognizing that these electing carriers may require more time to consider a revised offer, the Commission will require them to confirm their acceptance of the revised offer within 30 days.

56.

Election Process.

The Bureau will release a Public Notice showing the offer of model-based support for each carrier in a state, predicated upon a monthly funding cap per location of $200. In addition to support amounts for these carriers, the Bureau will identify their deployments obligations, including the number of locations that are “fully funded” and the number that would receive capped support. Carriers then will be required to make their elections.

57. The Commission adopts our proposal to require participating carriers to make a state-level election, comparable to what the Commission required of price cap carriers. Our approach prevents rate-of-return carriers from cherry-picking the study areas in a state where model support is greater than legacy support, and retaining legacy support in those study areas where legacy support is greater. Requiring carriers with multiple study areas in a state to make a state-level election will allow them to make business decisions about managing different operating companies on a more consolidated basis. Carriers considering this voluntary path to the model will need to evaluate on a state-level basis whether the support received for multiple study areas, on balance, is sufficient to meet the state-level number of locations that must be served.

58. Because the Commission intends that the model-based path spur additional broadband deployment in those areas lacking service, they conclude that they will not make the offer of model-based support to any carrier that has deployed 10/1 broadband to 90 percent or more of its eligible locations in a state, based on June 2015 FCC Form 477 data that has been submitted as of the date of release of this Order. This will preserve the benefits of the model for those companies that have more significant work to do to extend broadband to unserved consumers in high-cost areas, and will prevent companies from electing model-based support merely to lock in existing support amounts. The Commission recognizes that carriers that are fully deployed in some cases have taken out loans to finance such expansion and therefore may have significant loan repayment obligations for years to come. Carriers that have heavily invested in recent years are likely to be receiving significant amounts of HCLS, however, and will continue to receive HCLS as well as CAF BLS, which is essentially equivalent to ICLS. Therefore, they are not prejudiced by their inability to elect the voluntary path to the model.

59. Carriers should submit their acceptance letters to the Bureau at

ConnectAmerica@fcc.gov.

To accept the support amount for a state or states, a carrier must submit a letter signed by an officer of the company confirming that the carrier elects model-based support amount as specified in the Public Notice and commits to satisfy the specific service obligations associated with that amount of model support. A carrier may elect to decline funding for a given state by submitting a letter signed by an officer of the company noting it does not accept model-based support for that state. Alternatively, if a carrier fails to submit any final election letter by the close of the 90-day election period, it will be deemed to have declined model-based support.

60. As noted above, after receipt of the acceptances, the Bureau then will determine whether the model support of electing carriers exceeds the overall 10-year budget for the model path set by the Commission. If necessary, the Bureau will publish revised model-based support amounts and revised deployment obligations, available only to those carriers that initially indicated they would take the voluntary election of model-based support. Carriers will be required to confirm within 30 days of release of this Public Notice that they are willing to accept the revised final offer; if they fail to do so, they will be deemed to have declined the revised offer.

61. If the Commission proceeds to the second step of the election process, those carriers that initially accepted but subsequently decline to accept the revised offer will continue to receive support through the legacy mechanisms, as otherwise modified by this Order. If the carrier received more support from the legacy mechanisms in 2015 than it was offered by the final model run, the overall budget for all carriers that receive support through the rate-of-return mechanisms (HCLS and reformed ICLS) will be reduced by the difference between the carrier's 2015 legacy support amount and the final amount of model support offered to that carrier. That difference will already have been redistributed amongst the remaining model carriers.

62.

Broadband Coverage.

The current version of the model contains December 2014 Form 477 broadband deployment data and voice subscription data. The Commission recognizes that FCC Form 477 filers certifying that they offer broadband at the requisite speeds to a particular census block may not fully cover all locations in a census block. The Commission finds, however, that targeting the model-based support to the census blocks where no competitor has certified that it is offering service is a reasonable way to ensure that they do not provide support to census blocks that have some competitive coverage. Like our decision to exclude from model-support calculations those blocks where the incumbent already has deployed FTTP, the Commission seek to target support to areas of greater need.

63. The current version of A-CAM utilizes FCC Form 477 broadband deployment data as of December 31, 2014. While it is unlikely there has been a significant increase in broadband coverage in the intervening year by unsubsidized competitors in the specific blocks eligible for support in rate-of-

return areas,

i.e.

those that are higher cost, the Commission does want to take steps to ensure that support is not provided to overbuild areas where another provider already is providing voice and broadband service meeting the Commission's requirements. The Commission therefore adopts a streamlined challenge process. The Commission directs the Bureau to incorporate into the model the recently released June 2015 FCC Form 477 data, and to provide a final opportunity for commenters to challenge the competitive coverage contained in the updated version of the model. Comments to challenge the coverage data or provide other relevant information will be due 21 days from public notice of the updated version of the model. The Commission notes that Form 477 filers are under a continuing obligation to make corrections to their filings. Indeed, in the wake of releasing version 2.1 of the A-CAM, a number of carriers have submitted letters noting corrections in Form 477 filings. The Commission directs the Bureau to review and incorporate as appropriate any Form 477 corrections to June 2015 data that are received in this challenge process, so that these updates are reflected in the final version of the model that is released for purposes of the offer of support.

64.

Tiered Transitions.

The Commission adopts a three-tiered transition for electing carriers for whom model-based support is less than legacy support, based on the ITTA/USTelecom proposed glide path. In addition to model-based support, these carriers will receive a transition amount based on the difference between model support and legacy support. Based on our review of the record received in response to the concurrently adopted FNPRM, they now conclude that a tiered transition is preferable because it recognizes the magnitude of the difference in support for particular carriers. At the same time, the transition is structured in a way that prevents carriers for whom legacy support is greater than CAF-ACAM support from locking in higher amounts of support for an extended period of time.

65.

Tier 1.

If the difference between a carrier's model support and its 2015 legacy support is 10 percent or less, in addition to model-based support, it will receive 50 percent of that difference in year one, and then will receive model support in years two through ten.

66.

Tier 2.

If the difference between a carrier's model support and its 2015 legacy support is 25 percent or less, but more than 10 percent, in addition to model-based support, it will receive an additional transition payment for up to four years, and then will receive model support in years five through ten. The transition payments will be phased-down twenty percent per year, provided that each phase-down amount is at least five percent of the total legacy amount. If twenty percent of the difference between model support and legacy support is less than five percent of the total legacy amount, the carrier would transition to model support in less than five years.

67.

Tier 3.

If the difference between a carrier's model support and its 2015 legacy support is more than 25 percent, in addition to model-based support, it will receive an additional transition payment for up to nine years, and then will receive model support in year ten. The transition payments will be phased-down ten percent per year, provided that each phase-down amount is at least five percent of the total legacy amount. If ten percent of the difference between model support and legacy support is less than five percent of the total legacy amount, the carrier would transition to model support in less than ten years.

68. The Commission declines to adopt one commenter's proposed “safety net” that would limit a carrier's decrease in support in any year to five percent. The Commission concludes that a maximum of 10 years is sufficient time for electing carriers to transition down fully to their model-based support amount. By specifying in advance how this transition will occur, carriers will have all the information necessary to evaluate the possibility of electing model support. Carriers that find ten years insufficient time to transition to a lower amount remain free to remain on the reformed legacy mechanisms. The Commission requires rate-of-return carriers receiving transition payments in addition to model-based support to use the additional support to extend broadband service to locations that are fully-funded or that receive capped support.

69.

Oversight and Non-Compliance.

The Commission has previously adopted for “ETCs that must meet specific build-out milestones . . . a framework for support reductions that are calibrated to the extent of an ETC's non-compliance with these deployment milestones.” Today, the Commission adopts specific defined deployment milestones for rate-of-return carriers electing model-based support and therefore the previously adopted non-compliance measures will apply.

70. As established in the general oversight and compliance framework in the

December 2014 Connect America Order,

80 FR 4446, January 27, 2015, a default will occur if an ETC is receiving support to meet defined obligations and then fails to meet its high-cost support obligations. In section 54.320(d), the Commission has already set forth in detail the support reductions for ETCs that fail to meet their defined build-out milestones. The table below summarizes the regime previously adopted by the Commission for non-compliance with build-out milestones.

Non-Compliance Measures

Compliance gap

Non-compliance measure

5% to less than 15%

Quarterly reporting.

15% to less than 25%

Quarterly reporting + withhold 15% of monthly support.

25% to less than 50%

Quarterly reporting + withhold 25% of monthly support.

50% or more

Quarterly reporting + withhold 50% of monthly support for six months; after six months withhold 100% of monthly support and recover percentage of support equal to compliance gap plus 10% of support disbursed to date.

71.

Reporting Requirements.

As discussed below, the Commission requires all rate-of-return carriers to submit the geocoded locations to which they have newly deployed facilities capable of delivering broadband meeting or exceeding defined speed tiers. The Commission directs the Bureau to work with USAC to develop an online portal that will enable electing carriers to submit the requisite information on a rolling basis throughout the year as construction is completed and service becomes commercially available, with any final submission no later than March 1st in the following year.

B. Reforms of Existing Rate of Return Carrier Support Mechanism

72. For rate-of-return carriers that do not elect to receive high-cost universal service support based on the A-CAM model, the Commission modernizes its embedded cost support mechanisms to encourage broadband deployment and support standalone broadband. Specifically, the Commission makes technical rule changes to our existing ICLS rules to support the provision of broadband service to consumers in areas with high loop-related costs, without regard to whether the loops are also used for traditional voice services. The Commission renames ICLS “Broadband Loop Support” as a component within the Connect America Fund (CAF BLS). Further, building on proposals in the record from the carriers, the Commission adopts operating expense limits, capital expenditure allowances, and budgetary controls that will be applicable to the HCLS and CAF BLS mechanisms to ensure efficient use of our finite federal universal service resources. These reforms together will better target support to advance the Commission's longstanding objective of closing the rural-rural divide in which some rural areas of the country have state-of-the-art broadband, while other parts of rural America have no broadband at all. The Commission expects that the combined effect of these measures will be to distribute support equitably and efficiently, and that all rate-of-return carriers will benefit from the opportunity to extend broadband service where it is cost-effective to do so.

1. Support for Broadband-Only Loop Costs for Rate-of-Return Carriers

73. The Commission now adopts technical changes to our existing ICLS rule to provide support for rate-of-return carriers' broadband-capable network loop costs, without regard to whether the loops are used to provide voice or broadband-only services. As explained above, although our existing HCLS and ICLS rules both support the loop costs associated with broadband-capable networks, they were developed specifically to support the costs of voice networks and do not provide cost recovery for loop costs associated with broadband-only services. After careful consideration of the various alternatives presented in the record, the Commission concludes that the simplest, most effective and administratively feasible means to address this concern is to expand the ICLS mechanism to permit recovery of consumer broadband loop costs. In a pending Petition for Reconsideration and Clarification of the

USF/ICC Transformation Order,

NECA, OPASTCO, and WTA argued, among other claims, that the Commission should adopt a Connect America Fund mechanism prior to imposing broadband obligations on rate-of-return carriers. Petition for Reconsideration and Clarification of the National Exchange Carrier Association, Inc.; Organization for the Promotion and Advancement of Small Telecommunications Companies; and Western Telecommunications Alliance, WC Docket 10-90, et al. at 2-6 (filed Dec. 29, 2011) (NECA et al. Petition). Our existing mechanisms have provided support for broadband-capable networks for more than a decade, and the Commission are now adopting changes to our rules to provide support explicitly for broadband-only lines. The Commission therefore denies the Petition as moot. As noted above, to recognize the scope of the expanded mechanism and fulfillment of our commitment to create a Connect America Fund for rate-of-return carriers, the Commission changes the name of ICLS to CAF BLS.

74. By providing support for the costs of broadband-only loops, while continuing to provide cost recovery for voice-only and voice-broadband loops, the expanded CAF-BLS mechanism will create appropriate incentives for carriers to deploy modern broadband-capable networks and to encourage consumer adoption of broadband services. The difference in loop-related expenses between broadband-only and traditional voice service over broadband-capable loops tends to be quite small, but the cost recovery varies significantly. Indeed, different treatment of loop cost recovery can be triggered by a customer's decision to drop the voice component of a voice-data bundle, without any other changes in service by the carrier. Similar changes to loop cost recovery occur if a carrier offers an IP-based voice service rather than a traditional voice service: only loops used to provide regulated local exchange voice service (including voice-data bundles) are eligible for high-cost universal service under our current rules. Supporting all consumer loops will minimize the discrepancies in treatment between those service offerings, while removing potential regulatory barriers to taking steps to offer new IP-based services in innovative ways. Thus, this step advances the statutory goal of providing access to advanced telecommunications and information services in all regions of the Nation, particularly in rural and high-cost areas, and the principle adopted in the

USF/ICC Transformation Order

that universal service support should be directed where possible to networks that provide advanced services, as well as voice services.

75. Implementing this expansion of the traditional ICLS mechanism requires several actions. As noted above, the current ICLS mechanism operates by providing each carrier with the difference between its interstate common line revenue requirement and its interstate common line revenues. Going forward, CAF-BLS also will provide cost recovery for the difference between a carrier's loop costs associated with providing broadband-only service, called the “consumer broadband-only loop revenue requirement” and its consumer broadband-only loop revenues. In this Order, the Commission adopts rules that define the consumer broadband-only loop costs as the same, on a per-line basis, as the costs that are currently recoverable for a voice-only or voice/broadband line in ICLS. To avoid double-recovery, an amount equal to the consumer broadband-only revenue requirement will also be removed from the special access cost category. Carriers will be required to certify to USAC, as part of their CAF-BLS data filings, that they have complied with our cost allocation rules and are not recovering any of the consumer broadband-only loop cost through the special access cost category. For consumer broadband-only loop revenue, CAF-BLS will initially impute the lesser of $42 per loop per month or its total consumer broadband loop revenue requirement. For true-up purposes, CAF BLS will impute the consumer broadband rate the carrier was permitted charge, if it is higher than the amount that would be imputed otherwise. As described below, the Commission also adopts today a budgetary constraint on the total aggregate amount of HCLS and CAF-BLS support provided for rate-of-return carriers to ensure that support remains within the established budget for rate-of-return territories. To the extent that budgetary constraint reduces CAF-BLS support in any given year, any CAF BLS provided will be first applied to ensure that each carrier's interstate common line revenue requirement is met. If, due to the application of the budgetary constraint, additional revenue is required to meet its consumer broadband loop revenue requirement, that revenue may be recovered through consumer broadband loop rates, even if that results in a carrier charging a broadband loop amount greater than $42 per loop per month.

76. This approach meets the four principles of reform that the Commission previously articulated in the

April 2014 Connect America Further Notice,

while also being simple and easy for affected carriers to understand and implement. The budget constraint ensures that the support amounts will remain within the existing rate-of-return budget. The CAF-BLS mechanism distributes support fairly and equitably among carriers. Consistent with our authority to encourage the deployment of the types of facilities that will best achieve the principles set forth in section 254(b), it will allow carriers to receive federal high-cost universal service support for their network investment regardless of what services are ultimately purchased by the customer. When combined with the capital expense and operational expense limitations adopted below, CAF BLS will help ensure that no carrier collects support for excessive expenditures. The CAF-BLS mechanism is forward-looking because it completes the Commission's modernization of the high-cost program to focus on broadband, consistent with the evolution of technology toward IP networks.

77. And finally, the reforms the Commission adopts today avoid double-recovery of costs by removing from special access the costs associated with broadband-only loops and then ensuring that the carriers' regulated revenues match their revenue requirements. The Commission finds this approach administratively preferable to alternative approaches. For example, one possibility would be to expand both ICLS and HCLS to include broadband-only loops. However, HCLS was designed to support local (

i.e.,

intrastate) voice rates and does not take into account the costs or revenues from broadband-only services. In addition, the schedule for developing HCLS amounts is incompatible with the schedule for developing wholesale transmission tariffs for broadband services. As a result, the Commission's principle of avoiding double recovery could not be met without making significant changes to either the HCLS rules or the tariff process. Alternatively, the Commission could adopt a separate mechanism to support broadband-only loops, as proposed by NTCA. In practice, the expanded CAF-BLS mechanism will be operationally similar to NTCA's proposed DCS mechanism. Both essentially provide support for broadband-only costs to the extent that they exceed an imputed revenue amount, but allow the carrier to recover additional revenues through tariffs to the extent that the budgetary constraint prevents them from meeting their revenue requirement. The Commission finds, however, that expanding the CAF-BLS mechanism to include broadband-only loops will further reduce unnecessary distinctions between the two categories of loops, which will advance our objective to move the existing program to broadband. Finally, the Commission considered the “bifurcated” approach developed in the record by USTelecom with significant input from other parties.

78. The latter approach would create a wholly new mechanism and bifurcate investment and associated expenses between old and new mechanisms. The Commission appreciates the good faith efforts of numerous parties to determine how such a mechanism might be implemented and to estimate its potential impact. While it had a number of merits, the Commission has come to the conclusion that the approach they adopt today is simpler and sufficient to accomplish our goals for reform. The Commission therefore chooses to build upon the framework of an existing rule that carriers are familiar with, which will not require significant changes to their internal existing accounting systems and other processes for the development of cost studies. Carriers should be able readily to estimate their future support flows under this revision to the existing rule.

79.

Consumer broadband loop revenue benchmark.

For the purpose of calculating CAF BLS, the Commission adopts a revenue imputation of $42 per loop per month, or $504 per loop per year for consumer broadband-only loops, except as described below. This amount is consistent with other recent estimates of reasonable end-user revenues, when adjusted for context. For example, in adopting a cost model to be used for the Phase II offer of support to price cap carriers, the Bureau based its support threshold for model-based support on an average revenue per user (ARPU) of $75. That ARPU, however, was an all-inclusive estimate of end-user revenues for broadband and voice services, while the benchmark the Commission adopts here presumes that carriers would still need additional end-user revenues to cover non-loop related costs, such as middle-mile costs. Similarly, for a broadband service of 10/1 Mbps and unlimited usage, the Commission's 2015 reasonable comparability benchmark was $77.81. NECA estimated a median non-loop cost of $34.95 per month to provide 10/1 Mbps for its member carriers that participate in its “DSL voice-data” tariff. Subtracting the monthly revenue associated with those non-loop revenues from the ARPU used for the model support threshold or the reasonable comparability benchmark for retail broadband Internet access suggests that $42 is an appropriate estimate for monthly end-user revenue for the consumer broadband loop costs, the remainder of which will be recovered through CAF BLS, subject to the budgetary constraint discussed below.

80. There are two cases in which the Commission will impute a different consumer broadband loop revenue amount than $42 per loop per month. First, when a carrier's consumer broadband loop revenue requirement is less than $42 per loop per month, CAF BLS will only impute the actual consumer broadband loop revenue requirement. For example, if a carrier has 1,000 consumer broadband-only loops with an average cost of $41 per month, its imputed annual revenue would be $492,000 ($41 * 1,000 * 12), rather than $504,000 ($42 * 1,000 * 12). Without this exception, consumer broadband loops could create “negative” CAF-BLS amounts for some carriers in its initial calculation. The effect of the negative CAF-BLS amounts would be to reduce overall CAF BLS and require above-cost consumer broadband rates to replace lost CAF BLS that would otherwise subsidize voice loops. This exception will prevent a cross-subsidy of voice service by consumer broadband-only service that may not otherwise be necessary.

81. The second exception is that, solely for the purpose of calculating true-ups, CAF BLS will impute the consumer broadband rate the carrier was permitted to charge, if it is higher than the amount that would be imputed otherwise. For example, if a carrier had 1,000 loops and, as a result of the operation of the budgetary constraint, its consumer broadband loop rate was $43 per month, the annual revenue imputation would be $516,000 ($43 * 1,000 * 12), rather than $504,000. Using actual revenues for true-ups in this way will recognize additional revenue that the carrier would have received and prevent duplication of cost recovery between CAF BLS and special access rates. This will result in a carrier having imputed consumer broadband-only revenue that exceeds its consumer broadband-only revenue requirement, but that is necessary to ensure that both its interstate common line revenue requirement and its consumer broadband loop revenue requirement are met even when the budgetary constraint is applied.

2. Operating Expense Limitation

82.

Discussion.

The Commission adopts the regression methodology submitted by industry representatives with a few modifications to conform the limits better to the nature of the data. The Commission defers implementation of this rule change for Alaska carriers pending Commission consideration of the unified plan for incentive regulation submitted by the Alaska Telephone Association on behalf of Alaska rate-of-return carriers and mobile wireless providers. The Commission finds that a mechanism to limit operating costs eligible for support under rate-of-return mechanisms, both HCLS and CAF BLS, will encourage efficient spending by rate-of-return carriers and will increase the amount of universal service support available for investment in broadband-capable facilities. These opex limits will apply to cost recovery under HCLS and CAF BLS and will be applied proportionately to the accounts used to determine a carrier's eligible operating expense for HCLS and CAF BLS. The Commission notes that a small number of carriers have not provided this information in the past. Carriers that do not provide study area level cost studies to NECA will have to provide USAC with data from the following four accounts: (1) Account 6310: Information origination/termination expenses; (2) Account 6510: Other property plant and equipment expenses; (3) Account 6610: Customer operations expense: Marketing; and (4) Account 6620: Customer operations expense: Services. For example, if the regression methodology determines that a carrier's eligible operating expense should be reduced by 10 percent, then each account used to determine that carrier's eligible operating expense shall be reduced by 10 percent.

83. Consistent with the general approach submitted by the industry associations, operating expense costs will be limited by comparing each study area's opex cost per location to the regression model-generated opex per location plus 1.5 standard deviations. The regression formula to be used is as follows:

Y = α + β

1

X

1

+ β

2

X

2

+ β

3

X

3

,

Y is the natural log of opex cost per housing unit,

α is the coefficient on the constant (

i.e.,

1) in the regression,

X

1

is the natural log of the number of housing units in the study area, with a regression coefficient β

1,

X

2

is the natural log of density (number of housing units per square mile), with a regression coefficient β

2,

and

X

3

is the square of the natural log of density, with a regression coefficient β

3

.

84. The Commission does not agree with commenters who argue that they should only limit operating expenses for carriers with costs above the two standard deviations. Indeed, the Commission notes that using two standard deviations would subject only an estimated 17 study areas to an opex limit. The Commission concludes that using 1.5 standard deviations—which they estimate, based on last year's data, would have impacted roughly 50 carriers—more appropriately advances the Commission's goal of providing better incentives for carriers to invest prudently and operate more efficiently. Because any support reductions associated with this limit will then be available to other rate-of-return carriers, our budget for high-cost support should enable more broadband deployment than if the Commission continued funding excessive operating expenses for certain companies at current levels.

85. The Commission declines to set different limits based on the separate density categories initially proposed by the industry because density is already taken into account as a variable in the regression analysis. The Commission sees no legal or economic justification for modifying the allowable opex expense a second time. Using density again in this fashion has the effect of arbitrarily raising the allowable opex expense limit for some rural carriers at the direct expense of the other carriers serving high-cost areas that are nearly as sparsely populated. Moreover, even if the Commission were inclined to do so, the proponents of this approach have failed to explain in the record why it would be appropriate to draw the line at 1.5 locations per square mile, as opposed to 2 locations per square mile, 4 locations per square mile, or some other figure. Therefore, the Commission adopts a uniform standard deviation formula for purposes of setting a limit based on the regression results.

86. In addition, unlike the industry's original proposal, the Commission includes corporate expenses (calculated according to the current limitation) within the regression. These expenses are a significant portion of carrier operating expenses, and the Commission concludes that they should be subject to limitation as well. Indeed, corporate expenses alone account for approximately 15 percent of the total costs assigned to the loop for rate-of-return cost companies. Moreover, the Commission is concerned that leaving corporate expenses outside of this overall limitation will provide an opportunity for inappropriate cost shifting from an account where they are above the limit to an account where they are below the limit.

87. NTCA has argued that “reasonable transitions” are necessary when implementing limitations on support. The Commission concludes that a transition is appropriate to allow carriers time to adjust their operating expenditures. Therefore, the Commission concludes that for the first year in which the opex cap is implemented, the eligible operating expense of those carriers subject to the cap will be reduced by only one-half of the percentage amount determined by the regression methodology. For example, if the regression methodology determines that a carrier's eligible operating expense should be reduced by 10 percent for the first year in which the opex cap is implemented, then each account used to determine that carrier's eligible operating expense shall be reduced by only 5 percent. However, in all subsequent years, the carrier's eligible operating expense shall be reduced by the full percentage amount determined by the regression methodology.

88. Within 30 days of the effective date of this Report and Order, the Commission directs NECA to submit to USAC a schedule of companies subject to limits under the adopted formula. The Commission directs NECA to exclude data for Alaska carriers when making these calculations. The Commission also directs NECA to provide USAC with the dollar amount of reductions in HCLS and CAF-BLS to which each carrier subject to limits under the adopted formula will be subject. USAC shall validate all calculations received from NECA before making disbursements subject to any such support reductions.

3. Capital Investment Allowances

89.

Discussion.

The Commission adopts the revised capex allowance proposed by the rate-of-return industry associations with minor modifications. The Commission defers implementation of this rule change for Alaska carriers pending Commission consideration of the unified plan for incentive regulation submitted by the Alaska Telephone Association on behalf of Alaska rate-of-return carriers and mobile wireless providers. The Commission believes that this mechanism will help target support to those areas with less broadband deployment so that carriers serving those areas have the opportunity to catch up to the average level of broadband deployment in areas served

by rate-of-return carriers. The Commission directs the Bureau to announce the updated weighted average broadband deployment for all rate-of-return carriers, and the relevant deployment figure for each individual carrier, based on the more recent June 2015 FCC Form 477 data for the initial implementation of this rule, and to publish similar figures reflecting current FCC Form 477 data on an annual basis. Although it is the Commission's goal to ensure broadband deployment throughout all areas, finite universal service resources must be used where they are most needed. Therefore, the Commission finds that on a going forward basis, directing increased support to those areas lagging behind the national average in broadband availability will ensure a more equitable distribution of deployment, thereby achieving one of the goals for reform articulated by the Commission in the

April 2014 Connect America FNPRM.

The Commission does, however, make several adjustments to the industry's proposal. Vantage Point Solutions argues that an inflation factor with a higher labor component would be more appropriate than the GDP-CPI because Vantage Point's experience shows that approximately 70% of construction costs in rural LEC areas are associated with labor. Letter from Larry D. Thompson, Vantage Point Solutions, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al. at 2 (filed Jan. 28, 2016). However, the Commission has used the GDP-CPI, which includes both capital and labor costs, in its HCLS calculations since 2001, and Vantage Point presents no compelling reason as to why an alternative inflation measure should be used here. To the extent any individual carrier has unique circumstances that might warrant an adjustment in its capex allowance, it is free to seek a waiver pursuant to section 1.3 of the Commission's rules.

90. First, the Commission uses the TALPI as the basis for calculating loop plant investment limitations for both HCLS and CAF-BLS, not just for HCLS. To ensure the most efficient use of limited universal service resources, the capital budget limitation must apply to HCLS, which supports the intrastate portion of the exchange loop, and CAF-BLS, which supports the interstate portion. Second, the Commission modifies the investment categories proposed by the associations to determine a carrier's TALPI so that they correspond to those used to determine a carrier's HCLS and CAF BLS. The Commission notes that a small number of carriers have not provided this information in the past. Carriers that do not provide study area level cost studies to NECA will have to provide USAC with data from the relevant categories and accounts. Amounts in excess of a carrier's AALPI will be removed from the relevant categories or accounts either on a direct basis when the amounts of the new loop plant investment can be directly assigned to a category or account, or on a pro-rata basis according to each category or account's proportion to the total amount in each of the above categories and accounts when the new loop plant cannot be directly assigned.

91. Third, the Commission refines the AALPI adjustment for areas covered by a pre-existing loan. The Commission concludes that the AALPI should only be adjusted for areas covered by a pre-existing loan for which a previously planned loan disbursement has been made and that loan disbursement was used to increase the annual loop expenditure for the year, or years, in which the AALPI adjustment is taken. The Commission makes this modification because an outstanding loan does not

per se

warrant an increase in a carrier's AALPI unless a previously planned disbursement of that loan leads to an increase in the carrier's loop plant investment.

92. Fourth, rather than adjusting the AALPI by only one half of a percentage point for every percentage point that a carrier's deployment differs from the target availability, the Commission adjusts the AALPI by one percentage point. The Commission finds that an adjustment of only one half of a percentage point will not have a sufficient impact to moderate expenditures by companies that are above average, and also will not provide a sufficient opportunity to catch up to those carriers that must increase their deployment. An increase of one percentage point will allow those carriers that must catch up to the target availability more funds with which to do so.

93. Within 30 days of the effective date of this Report and Order, and for each subsequent quarterly or annual data reporting period, the Commission directs NECA to submit to USAC the following information for each study area:

• Total Allowed Loop Plant Infrastructure

• AALPI for the Current Reporting Period (Current AALPI)

• Current AALPI Adjustment for Percent of Broadband Deployment

• Current AALPI Adjustment for Loan Disbursements

• Current AALPI Adjustment for Broadband Deployment Obligations

• AALPI Amounts Carried Forward from Previous Reporting Periods

• Total AALPI (Equals Current AALPI plus All Adjustments plus Carry Forward)

• Dollar amount of the reduction, if any, in capital expense eligible for HCLS and/or CAF-BLS due to the Total AALPI for the relevant reporting period

• Dollar amount of the reductions, if any, in HCLS and/or CAF BLS due to the carrier's capital expense reduction caused by the Total AALPI for the relevant reporting period

94. USAC shall validate all calculations received from NECA before making disbursements subject to any support reductions due to the Capital Investment Allowance.

4. Eliminating Subsidies in Areas Served by an Qualifying Competitor

95. In this section, the Commission takes further steps to target high-cost support efficiently to those areas that will not be served by private sector investment alone. First, the Commission prohibits rate-of-return carriers from receiving CAF BLS in areas that are served by a qualifying unsubsidized competitor. Second, the Commission adopts a challenge process to determine which areas are served by unsubsidized competitors building on proposals submitted in the record. Third, as proposed by several commenters, the Commission adopts several options to disaggregate support in areas determined to be served by qualifying competitors: Carriers will be free to elect one of several mechanisms to disaggregate their support. Fourth, the Commission adopts a phased reduction in disaggregated support for competitive areas, as suggested by USTelecom and NTCA. The net result of these changes will be to more effectively target CAF BLS to areas where support is needed to ensure consumers are served with voice and broadband services.

96.

Discussion.

In order to meet our objective of utilizing universal service funds to extend broadband to high-cost and rural areas where the marketplace alone does not currently provide a minimum level of broadband connectivity, the Commission has emphasized its desire to “distribute universal service funds as efficiently and effectively as possible.” Support should be used to further the goal of universal voice and broadband, and not to subsidize competition in areas where an unsubsidized competitor is providing service. Universal service is ultimately paid for by consumers and businesses

across the country. Providing support to a rate-of-return carrier to compete against an unsubsidized provider distorts the marketplace, is not necessary to advance the principles in section 254(b), and is not the best use of our finite resources.

97. To ensure that high-cost universal service support is used efficiently, consistent with the intent of providing universal service where it otherwise would be lacking, the Commission now adopts a rule to eliminate CAF BLS in competitive areas. Building on proposals submitted in the record by NTCA and USTelecom, and taking into account our experience implementing similar requirements in price cap areas and the 100 percent overlap rule in rate-of-return areas, a census block will be deemed to be “served by a qualifying competitor” for this purpose if the competitor holds itself out to the public as offering “qualifying voice and broadband service” to at least 85 percent of the residential locations in a given census block. For purposes of meeting the requirement to “offer” service, the competitor must be willing and able to provide qualifying voice and broadband service to a requesting customer within ten business days.

98. The first step in implementing such a rule is to conduct a process to determine which census blocks are competitively served. The Commission now adopts a challenge process building on lessons learned from both the challenge process utilized to finalize the offer of Phase II model-based support to price cap carriers and the process used to implement the 100 percent overlap rule for rate-of-return carriers. Under this process, the Bureau will publish a Public Notice with a link to a preliminary list of competitors serving specific census blocks according to FCC Form 477 data. As suggested by NTCA and USTelecom, in order for a challenge for a particular census block to go forward, those competitors will be required to certify that they are offering service to at least 85 percent of the locations in the census block, and must provide evidence sufficient to show the specific geographic area in which they are offering service. If they fail to submit such information in response to the Bureau's Public Notice, the block will not be deemed competitively served. To the extent the competitor provides the required filing in response to the Bureau's Public Notice, incumbents and any other interested parties such as state public utility commissions and Tribal governments will have the opportunity to contest those assertions. The ultimate burden of persuasion will rest on the competitor to establish that it offers service to at least 85 percent of the locations in the census block, based on all the evidence in the record. The challenge process will be conducted by the Bureau as set forth more fully below.

99. The Bureau will rely on Form 477 broadband deployment data to make the preliminary determination of which census blocks are served by providers offering broadband service. The Form 477 data collection is mandatory, and Form 477 filers must certify to the accuracy of their data. The Commission directs the Bureau to utilize the most recent publicly available data at the time it releases the initial Public Notice.

100. To be considered an unsubsidized competitor in a given census block, a fixed broadband provider must offer service in accordance with the Commission's current service obligations on speed, latency, and usage allowances. In December 2014, the Commission adopted a new minimum speed standard for carriers receiving high-cost support: They must offer actual speeds of at least 10/1 Mbps. Therefore, the Commission directs the Bureau to use 10/1 Mbps as the threshold for determining competitors when developing the preliminary list for the initial implementation of this rule.

101. The Commission is not persuaded by NTCA's proposal that the Commission utilize the current section 706 speed benchmark, at least 25 Mbps downstream and 3 Mbps upstream (25/3 Mbps), as the basis to identify locations where a competitor is present. Although the Commission has determined that 25/3 Mbps reflects “advanced” capabilities, the Commission has explained that “[b]y setting a lower baseline for Connect America funding, they establish a framework to ensure a basic level of service to be available for all Americans, while at the same time working to provide access to advanced services. The areas served by rate-of-return carriers encompass “many rural and remote areas of the country.” Similarly, the Commission is not persuaded by WTA's proposal that a competitor must be offering service with speeds at least as high as the highest speed service offering of the incumbent in order to be deemed a qualifying competitor. The Commission finds that using a 10/1 Mbps threshold at the present time for identification of competitors is consistent with the Commission's section 254 goal of ensuring that universal service funding is used in the most efficient and effective manner to provide consumers in rural and high-cost areas of the country with voice and broadband service.

102. The Commission currently does not collect comprehensive, block-level data on broadband latency or monthly usage allowances, as it does for broadband speed. However, data collected by the Commission through the Measuring Broadband America program suggest that the latencies associated with most fixed broadband services are low enough to allow for real time applications, including Voice over Internet Protocol. In addition, data from the Commission's urban rate survey indicate that many fixed broadband providers offer unlimited data usage or usage allowances well in excess of the 150 GBs per month that they now establish as our baseline requirement for purposes of implementing the competitive overlap rule. Therefore, the Commission concludes it is reasonable to presume that providers meeting the speed criteria also meet the latency and usage-allowance criteria, for purposes of preparing the preliminary list.

103. This is similar to the approach taken by the Bureau in the Connect America Fund Phase II challenge process. One of the lessons learned from the Phase II challenge process was that no party was able to demonstrate high latency by competitors, and very few providers prevailed in a challenge exclusively focused on a competitor's usage/price. This provides us with confidence that, as a general matter, it is reasonable to assume, for purposes of preparing the preliminary list, that a provider that in fact is in the area providing the requisite speed is also meeting the latency and usage requirements.

104. Under our existing rule, to be considered an unsubsidized competitor, a provider must be a facilities-based provider of residential fixed voice service, as well as fixed broadband. Form 477 provides the best data available on whether broadband providers also offer fixed voice service, but the data are not reported at the census block level. Therefore, to determine whether a broadband provider also offers voice service, for purposes of preparing the preliminary list, the Bureau will assume if a broadband provider reported any fixed voice connections in a state in its Form 477 filing, then it offers voice service throughout its entire broadband service area in that state. The Commission notes that in order to file Form 477, a VoIP provider must be offering interconnected VoIP, which means that the provider is required to provide E911 and comply with CALEA, among other things.

105. The Commission will exclude competitive Eligible

Telecommunications Carriers (CETCs) receiving universal service support, as well as affiliates of incumbent LECs, from the analysis undertaken to develop the preliminary list. CETCs that receive universal service support will be excluded from the preliminary determination because these providers are not “unsubsidized.” The Commission also concludes, for purposes of preparing the preliminary list that an affiliate that an incumbent LEC is using to meet its broadband public interest obligation in a given census block shall not be treated as an unsubsidized competitor. If the Commission were to conclude otherwise, a rate-of-return carrier would automatically be precluded from receiving support for new investment in census blocks wherever its affiliate is offering broadband and voice service as a condition of receiving high-cost support. To the extent the Form 477 data indicate that a particular rate-of-return carrier has deployed more than one technology in a given census block, the Commission will presume, for purposes of preparing the preliminary list, that the carrier is utilizing different technologies within a given census block to serve its customers.

106. Once the preliminary list is published, the next step in the process will be for identified competitors to confirm that they are in fact offering voice and broadband service within the specific census block where they report broadband deployment on FCC Form 477. Based on the Phase II challenge experience, the Commission has learned that it is extremely difficult for an incumbent provider to prove a negative—that a competitor is not serving an area. Rather, the purported competitor is in a much better position to confirm that it is offering service in a given area.

107. Upon publication of the preliminary list, there will a comment period in which competitors must certify that they offer both voice and broadband meeting the requisite requirements in a particular census block in order for that block potentially to be subject to a competitive overlap determination. Specifically, as suggested by several parties, they must offer: (1) Fixed voice service at rates under the then applicable reasonable comparability benchmark, and (2) fixed terrestrial broadband service with actual downstream speed of at least 10 Mbps and actual upload speed of at least 1 Mbps; with latency suitable for real time applications, including Voice over Internet Protocol; with usage capacity that is reasonably comparable to offerings in urban areas; and at rates that are reasonably comparable to those in urban areas. To the extent the competitor is meeting the voice service obligation through interconnected VoIP, it will already be subject to requirements for E911 and CALEA, as noted above. The Commission also requires that the competitor be able to port telephone numbers in that census block, as suggested by several commenters. In order to make this certification, a competitor must have hold itself out to the public as offering service to at least 85 percent of the locations in the census block, and be willing and able to provide service to a requesting customer within ten business days. For purposes of this certification, the number of locations shall be based on the most recently available U.S. Census data regarding the number of housing units in a given census block. The Commission notes that our existing rule defines an unsubsidized competitor as a provider of fixed

residential

voice and broadband service. 47 CFR 54.5 (emphasis added). The Commission is mindful of the burden on the competitor but also need to ensure that information is sufficient for the Commission to evaluate any potential challenges. The Commission clarifies that a mere officer certification is insufficient to establish the presence of qualifying service. As noted above, competitors will be required to submit additional evidence in support of that certification clearly to establish where they are providing service. Even so, because the Commission is cognizant of the potential burden, they do not require competitors to submit geocoded locations but encourage competitors to submit as much information as possible, including neighborhoods served and, for cable companies, boundaries of their franchising agreement.

108. If the competitor fails to submit such a certification and any evidence, the block will be deemed non-competitive, and there will be no need for the incumbent to respond. If, however, the competitor submits the requisite certification that it is offering both qualifying voice and qualifying broadband service in the census block, with supporting information identifying with specificity the geographic areas served, the Commission will then accept submissions from the incumbent or other interested parties seeking to contest the showing made by the competitor. Examples of information that may be persuasive to establish that service is not being offered includes evidence that a provider's online service availability tool shows “no service available” for customers in the geographic area that the carrier certifies it serves or filings from consumers residing in the geographic area that the competitor has certified is served that they were unable to obtain service meeting the specified requirements from the purported competitor within the relevant time frame.

109. Consistent with the approach taken in the Phase II challenge process, the Commission will not consider any additional evidence or submissions filed by any party after the deadline for reply comments, absent extraordinary circumstances. The Commission thus adopts a procedural requirement that competitive overlap submissions for both purported competitors and incumbents must be complete as filed. After the conclusion of the comment cycle, the Bureau will make a final determination of which census blocks are competitively served, weighing all of the evidence in the record. The Commission delegates authority to the Bureau to take all necessary steps to implement the challenge process they adopts today.

110. The Commission is not persuaded by arguments that it may be premature for the Commission to implement a competitive overlap rule prior to full implementation of the 100 percent overlap rule. The Commission has learned a great deal through developing and implementing both the Phase II challenge process for price cap areas and the 100 percent overlap process. The Commission is adopting a challenge process that builds on lessons learned from both experiences. The Commission concludes that utilizing the procedural requirements adopted for the Phase II challenge process, coupled with putting the burden of proof on the competitor to establish that it serves a census block, will best meet the Commission's objectives for ensuring that support is not provided in areas where other providers are providing service without subsidies.

111. The Commission is not persuaded that it should require competitors to certify they serve 100 percent of the locations in a given census block in order for that census block to be considered “served.” Our experience with the implementation of the 100 percent overlap rule shows that such a standard will rarely, if ever be met, even though there may be a significant degree of competitive overlap. The Commission concludes that adopting an evidentiary showing that the competitor must certify that it serves 85 percent or more—a substantial majority—of residential locations in a census block are served strikes the right balance between the approach used in

the Phase II context (where a block was deemed served if the competitor only served as single location) and the 100 percent overlap rule (which required 100 percent coverage for all residential and business locations in all census blocks in the study area) and will serve our overarching policy objectives. Moreover, to the extent the competitor today only serves 85 percent of the requisite number of residential locations in a given census block, it may expand its footprint to serve the entire census block once it no longer is facing a subsidized competitor.

112. The Commission also declines to impose other requirements suggested in the record by WTA, such as requiring a competitor to have an interconnection agreement with the incumbent, be subject to section 251, offer Lifeline, own or lease all of the facilities needed to deliver service, not receive any other forms of federal or state support, including universal service support other than Lifeline, not charge any fees for site visits to determine if service can be provided, even if that fee is credited upon service installation, and comply with state service quality and other regulatory requirements applicable to the incumbent for voice service. WTA fails to provide any explanation of the policy rationale for each of these proposals, many of which seem intended to subject the competitor to the same regulatory requirements as the incumbent. In any event, the net result of these proposals would be to ensure that no entity ever could qualify as an unsubsidized competitor. Nor is the Commission persuaded by WTA's argument that only future new investment should be subject to a competitive overlap rule, and that no support should be reduced for existing investments. The Commission notes that they only are disaggregating and reducing CAF BLS in areas found to be served by unsubsidized competitors, rather than both HCLS and CAF BLS, which will lessen the impact of this rule on affected carriers.

113. As suggested by NTCA and USTelecom, the Commission will conduct the competitive overlap challenge process outlined above every seven years. This will ensure that the Commission periodically revisits the competitive overlap analysis, but not impose excessive burden on incumbents, potential competitors, or Commission staff. Re-examining the extent of competitive overlap in this time frame will provide stability and consistency for all interested stakeholders.

114. Upon the completion of the competitive overlap determination, the Commission concludes that carriers should be able to select one of several methods to disaggregate support between competitive and non-competitive areas, as suggested by several commenters. The Commission notes that the Commission took a similar approach when it allowed incumbents to disaggregate ICLS in 2001, allowing carriers to select one of several disaggregation paths subject to general parameters established by the Commission. The Commission agrees with commenters that they should utilize a disaggregation mechanism that ensures that sufficient support is provided to those areas where the incumbent is the sole provider of voice and broadband, and the Commission recognizes that competitive areas are likely to be lower cost and non-competitive areas are likely to be relatively higher cost. The Commission therefore adopts a rule to permit carriers, on their own election, to utilize one of the following methods suggested by commenters to disaggregate their CAF BLS between competitive and non-competitive areas. Providing carriers options will enable each carrier the flexibility to determine which approach best reflects the unique characteristics of their service territory. First, carriers may choose to disaggregate their CAF BLS based on the relative density of competitive and non-competitive areas. Second, carriers may choose to disaggregate their CAF BLS based on the ratio of competitive to non-competitive square miles in a study area, as proposed by Hargray. Third, carriers may choose to disaggregate their CAF BLS based on the ratio of A-CAM calculated for competitive areas compared to A-CAM support for the study area. The Commission outlines each of these disaggregation mechanisms below.

115. Consistent with the approach previously taken by the Commission for disaggregation of support, total support in a study area shall not exceed the support that otherwise would be available in the study area absent disaggregation. Similar to the former disaggregation rule, the Commission may, on its own motion, or in response to a petition from an interested party, examine the results of any one of the adopted disaggregation methods to ensure that it fulfills the Commission's intended objectives.

116. Carriers may choose to disaggregate their CAF BLS based on a methodology using the density of competitive and non-competitive areas, as proposed by NTCA/USTelecom. In particular, this method allocates the revenue requirement between competitive and non-competitive areas, based on the relative density of competitive and non-competitive areas. As explained by NTCA/USTelecom, “[t]he ratio of the calculated non-competitive area's revenue requirement to the sum of the calculated competitive and non-competitive revenue requirements is applied to the study area's actual revenue requirements to ensure the total actual revenue requirement is equal to the sum of the competitive and non-competitive areas' revenue requirements.”

117. The allocation between competitive and non-competitive areas is achieved by calculating a separate cost per loop for competitive and non-competitive areas based on the differing densities of the competitive and non-competitive areas. To calculate the disaggregated revenue requirements using these costs per loop, each cost per loop is multiplied by the number of loops in the corresponding (

i.e.

competitive or non-competitive) area. The number of loops in each area is calculated by multiplying the total number of loops by the density ratio for the study area. Although NTCA/USTelecom proposed that density for each area be calculated based on the sum of residential and business locations, the Commission is unaware of a publicly available source for business location data. Therefore, consistent with the approach taken for other rule changes adopted in this order that rely on density calculations, the Commission will use U.S. Census housing unit data for the density calculations required for this disaggregation method.

118. Carriers may also may choose to disaggregate their CAF BLS using a ratio of competitive to non-competitive square miles in a study area, as proposed by Hargray. Lower-cost areas are generally lower cost because of the presence of a dense cluster of consumers, which causes the cost per loop to be lower. Hargray submitted analysis into the record showing how support is reduced in a non-linear manner based on the rate of decline that would be expected if it were possible to specifically capture the loops and costs associated with non-competitive areas. As competitive overlap in a study area increases, utilizing this method CAF BLS would be reduced in a non-linear manner that accelerates as competitive overlap reaches 100 percent. In particular, under this disaggregation method, support would be reduced using the following schedule:

Competitive ratio %

Reduction ratio %

0-20

3.3

30

6.7

35

10.0

40

13.3

45

16.7

50

20.0

55

25.0

60

30.0

65

35.0

70

40.0

75

45.0

80

50.0

85

62.5

90

75.0

95

87.5

100

100

119. By utilizing this mechanism, carriers would not be required to undertake steps to ensure the accuracy of location data or undertake a census block by census block determination of density. Therefore, by selecting this mechanism, carriers will enjoy relative ease of administration.

120. As a third option, the Commission will permit carriers subject to a reduction in support for competitive overlap to elect to utilize an allocation derived from the A-CAM, as suggested by NTCA. In this Order, the Commission adopts a forward-looking cost model that has been modified for use to determine support amounts for rate-of-return carriers that voluntarily elect to receive universal service support. As the Commission explained, the A-CAM contains a support module, which calculates support on a per-location basis based on its calculation of the costs to serve the locations in every census block. For purposes of the voluntary offer of model-based support, support is only calculated for blocks that are not served by an unsubsidized competitor. The support module can be adjusted, however, to calculate support for the blocks that are competitively served, as well. Thus, support can be divided at the study area level between competitive and non-competitive census blocks. This ratio can be applied to CAF-BLS support to disaggregate support for competitive areas. The Commission notes that competitively served census blocks are likely to be the lower cost, more densely populated portions of the study area, in many instances where the model calculates little or even no support. In such cases, a carrier electing this method would see little to no support reduction using the A-CAM allocator, because the model provides support only for the higher cost areas.

121. The Commission agrees with commenters that support reductions associated with competitive areas should be phased in. As suggested by USTelecom and NTCA, the Commission adopts the following transition for reductions in CAF BLS in areas that are deemed to be competitively served: Where the reduction of CAF BLS from competitive census block(s) represents less than 25 percent of the total CAF BLS support the carrier would have received in the study area in the absence of this rule, disaggregated support associated with the competitive census blocks will be reduced 33 percent in the first year, 66 percent in the second year, with that support associated with the competitive census blocks fully phased-out by the beginning of the third year. Where the reduction of CAF BLS from competitive census blocks represents more than 25 percent of the total CAF BLS support the carrier would have received in the study area in the absence of this rule, disaggregated support associated with the competitive census blocks will be reduced 17 percent in the first year, 34 percent in the second year, 51 percent in the third year, 68 percent in the fourth year, 85 percent in the fifth year, and fully phased-out by the beginning of the sixth year. The Commission also emphasizes that carriers affected by implementation of this rule are free to seek a waiver of support reductions under our existing precedent.

5. Budgetary Controls

122. The Commission previously adopted an overall budget of $4.5 billion for the high-cost program, and a budget within that amount of $2 billion per year for high-cost support for rate-of-return carriers. It did not, however, adopt a method for enforcing the budget for rate-of-return carriers. The Commission now adopts a self-effectuating mechanism for controlling total support distributed pursuant to HCLS and CAF BLS to stay within the budget for rate-of-return carriers.

123. The components of the high-cost program other than those for rate-of-return carriers are structured in a fashion that ensures each stays within its respective portion of the $4.5 billion budget. Because ICLS and CAF ICC are not capped, there is no mechanism today to keep disbursements of high-cost funds to rate-of-return carriers within that $2 billion budget. Indeed, NECA forecasts that over the next several years, absent any further reforms, total high-cost support (that is, the sum of HCLS, ICLS, and CAF ICC) for the rate-of-return industry will exceed the $2 billion budget. It therefore is imperative that the Commission takes further steps now to ensure the budget is not exceeded, in the event growth in CAF BLS were to cause total rate-of-return support to exceed the defined budget. Adopting an overall budget control mechanism will provide a predictable and reliable method in the event that demand exceeds the available budget. The Commission notes, of course, that the budget control will only be implemented in the event total support is forecasted to exceed the budget in a given year.

124. In implementing measures to stay with the previously adopted budget, the Commission notes that the Tenth Circuit has affirmed the Commission's decision to set the rate-of-return budget at $2.0 billion. The court found reasonable the Commission's determination “that budgetary sufficiency for . . . rate-of-return carriers could be achieved through a combination of measures, including but not limited to: (1) Maintaining current USF funding levels while reducing or eliminating waste and inefficiencies that existed in the prior USF funding scheme; (2) affording carriers the authority to determine which requests for broadband service are reasonable; (3) allowing carriers, when necessary, to use the waiver process; and (4) conducting a budgetary review by the end of six years.” In this Order, the Commission retains each of these measures to safeguard the sufficiency of the budget. Though some parties have suggested in general terms that the budget should be increased, they have not provided the type of detailed information about why the overall budget is insufficient for the Commission to meet its goal of achieving universal service, nor have they presented individualized circumstances necessary to evaluate their claims. As discussed below, any carrier may seek waiver if it is necessary and in the public interest to ensure that consumers in the area continue to receive service.

125.

Budget Amount.

As noted above, the Commission has set a budget for rate-of-return support of $2 billion per year, but only one of the existing legacy high-cost mechanisms is subject to a defined cap. To calculate the amount of support that will be available for disbursement under HCLS and CAF BLS, the Universal Service Administrator will first determine total demand from rate-of-return carriers (both those that elected model-based support and those that remain on the reformed legacy support mechanisms). Then, USAC will deduct CAF-ICC support for rate-of-return carriers (not including affiliates of price cap carriers) as specified under Commission's rules.

Then, during the ten-year term of CAF-ACAM support, the Administrator will further deduct the amount of model-based support disbursements to those rate-of-return carriers choosing model-based support and transition payments, as applicable. The additional support provided to facilitate the voluntary path to the model is temporary, and after the end of the ten-year term, the budget control mechanism will apply to all rate-of-return carriers. The amount remaining will be the total support available to be disbursed under HCLS and CAF BLS. This amount will first be calculated as of July 2016, and will be recalculated on an annual basis to reflect changes in the CAF-ICC amounts paid to carriers.

126.

Budget Control Mechanism.

The budget control mechanism the Commission adopts is a variation on the NTCA budget control proposal that NTCA suggested should be applied solely to its DCS broadband-only mechanism. In essence, this proposal represents a compromise between carriers with relatively small numbers of lines but with very high costs and carriers with relatively more lines but with only moderately high costs. The Commission finds that it strikes a fair balance among differently-situated carriers.

127. Our budget control mechanism, as described in detail below, will be applied to forecasted disbursements each quarter. For this purpose, forecasted disbursements include payments made for HCLS, payments for CAF BLS based on forecasted data for current period, and true-ups associated with prior years but being disbursed during the current period. There will be no retroactive application of the budget control mechanism.

128. First, a target amount is identified for each mechanism—HCLS and CAF BLS—so that in the aggregate disbursements for the mechanisms equal the budgeted amount for rate-of-return carriers. This targeted amount is calculated by multiplying the forecasted disbursements for each mechanism by the ratio of the budgeted amount to the total calculated support for the mechanisms. In this case, disbursements include CAF BLS provided on a projected basis, as well as true ups of that mechanism that apply to prior periods. This target amount will be calculated for each mechanism once per year prior to the annual filing of the tariffs.

129. The reduction of support under each mechanism will be split between a per-line reduction and a pro rata reduction applied to each study area. The per-line reduction will be calculated by dividing one half the difference between the calculated support and the target amount for each mechanism by the total number of eligible loops in the mechanism. Because some study areas may have per-line support amounts that are less than the per-line reduction, the per-line reductions as applied may not precisely equal one-half the difference between the calculated support and the target amount. In that case, the remaining reductions will be achieved through the pro-rata reduction. The pro rata reduction will then be applied as necessary to achieve the target amount. For CAF-BLS, the per-line and pro rata reductions will calculated once per year, prior to the annual filing of tariffs. For HCLS, the per-line and pro rata reductions will be calculated quarterly, using the most recently announced target amount.

130.

HCLS Cap.

As the Commission has done previously when carriers have lost their eligibility for HCLS due to their status as affiliates of price-cap carriers, the Commission directs NECA to rebase the cap on HCLS to reflect the election of model-based support by HCLS-eligible rate-of-return carriers. In the first annual HCLS filing following the election of model-based support, NECA shall calculate the amount of HCLS that those carriers would have received in the absence of their election, subtract that amount from the HCLS cap, then recalculate HCLS for the remaining carriers using the rebased amount.

131.

Attribution of CAF BLS to Common Line and Consumer Broadband Loop Categories.

To permit carriers to submit tariffs that provide a reasonable opportunity to meet their revenue requirements, it is necessary to attribute the CAF BLS that a carrier receives, after any reductions due to the budgetary constraint, to various cost categories. Accordingly, a carrier will first apply the CAF BLS it receives to ensure that its interstate common line and consumer broadband revenue requirements are being met for the periods currently being trued up. For example, from July 1, 2019, to June 30, 2020, true-ups will be made with respect to the 2017 calendar year, and CAF BLS disbursements will first be attributed to the extent necessary to ensure their revenues meet their revenue requirements for 2017. Next, CAF BLS will be applied to meet the carrier's forecasted interstate common line revenue requirement for the current tariff year. This assignment of support plus the revenues from end-user charges will meet the carrier's interstate common line revenue requirement. A carrier will then apply the remainder of its CAF BLS to the forecasted revenue requirement for the new consumer broadband-only loop category during the current tariff year. Any remaining unmet consumer broadband loop revenue requirement will be met through the consumer broadband loop rate. This process will permit, in some cases, consumer broadband-only loop rates to rise above $42. The Commission notes that $42 is well below the reasonably comparable rate for retail broadband service of $77.81. FCC, Reasonable Comparability Benchmark Calculator,

https://www.fcc.gov/encyclopedia/reasonable-comparability-benchmark-calculator

(last visited Mar.4, 2016). On the whole, our actions in this Order will significantly reduce the retail rates paid by broadband-only subscribers, improving the reasonable comparability of rates. The Commission will, however, continue to monitor consumer broadband-only rates to ensure that our policies support reasonable comparability. On the whole, this process targets the budgetary constraint to the broadband-only component of the CAF-BLS mechanism, similar to NTCA's proposal to target the budgetary constraint to its broadband-only DCS mechanism.

6. Broadband Deployment Obligations

132. In this section, the Commission takes steps to promote “accountability from companies receiving support to ensure that public investments are used wisely to deliver intended results.” Specifically, the Commission adopts specific, defined deployment obligations that are a condition of the receipt of high-cost funding for those carriers continuing to receive support based on embedded costs. These measures will help ensure that “[c]onsumers in all regions of the Nation . . . have access to telecommunications and information services . . . that are reasonably comparable to those services provided in urban areas.” The Commission notes that USTelecom and NTCA recognize that defined buildout obligations are “essential to a broadband reform effort.”

133.

Discussion.

In this section, to ensure that the Commission makes progress towards achievement of universal service, consistent with the statute, they adopt defined performance and deployment obligations for rate-of-return carriers. The Commission's goal is to utilize universal service funds to extend broadband to high-cost and rural areas where the marketplace alone does not currently provide a minimum level of broadband connectivity, and “to distribute universal service funds as

efficiently and effectively as possible.” As noted above, in the

USF/ICC Transformation Order,

the Commission built upon the existing reasonable request standard, adopted a requirement to report unfulfilled service requests, and required carriers to develop a five-year plan to ensure that consumers in hard-to-serve areas have sufficient access to broadband, while also ensuring universal service support is utilized as effectively as possible. Through the adoption of rules to transform ICLS into the CAF-BLS mechanism, the Commission now builds on the foundation the Commission established in the

USF/ICC Transformation Order

to distribute support equitably and efficiently and advance the Commission's longstanding objective of closing the rural-rural divide.

134. The Commission concludes that it now is time to establish defined deployment obligations for every carrier to ensure it has a framework to achieve our goal of universal service. As noted above, ETCs are currently required to “describe with specificity proposed improvements or upgrades” to their network throughout their service area in their five-year plans.” The Commission did not specify specific numerical targets for those five-year plans, however, which has hampered our ability to judge whether carriers are in fact taking reasonable steps to extend broadband service. The Commission notes that although many rate-of-return carriers have aggressively deployed broadband service within their study areas, that progress has not been evenly distributed. Indeed, while some carriers have deployed 10/1 Mbps service to 99-100 percent of the census blocks within their study areas, other carriers have not deployed to any.

135. Given the lack of any deployment by some providers and extremely low levels of deployment by others, the Commission concludes that some concrete standards for deployment are necessary to achieve the Commission's goal of extending broadband to those areas of the country where it is lacking. Indeed, the Commission has seen little to no progress in deployment since the

USF/ICC Transformation Order

for some areas, and there is no evidence that consumers in those areas will receive access to broadband absent a more objective, measurable requirement to do so.

136. To ensure that universal service support is utilized as effectively as possible in furtherance of the Commission's goal to achieve universal service, the five-year plan must operate as a meaningful tool for Commission oversight and possess quantifiable objective goals that can be easily measured and monitored. In this Order, the Commission has replaced ICLS with Broadband Loop Support so that all rate-of-return carriers can receive support for broadband-only lines. The Commission is eager to see that this support results in more widespread deployment. Moreover, in this Order, the Commission sets allowances for capital expenses, which will result in a larger budget for carriers whose deployment is less than the national average. However, that reform, by itself, does not guarantee that a carrier will make the investments needed to connect unserved consumers. Accordingly, in conjunction with our adoption of the updated CAF-BLS mechanism and capital expense allowances, the Commission adopts refinements to the current five-year plan requirements designed to increase accountability and ensure the extension of broadband to those areas of the country where it is lacking. In particular, the Commission adopts a specific methodology to determine each carrier's deployment obligation over a defined five-year period, which will be used to monitor carrier performance.

137.

Methodology for Establishing Deployment Obligations.

In this section the Commission describes the specific methodology used to determine each carrier's deployment location obligation over a defined five-year period. The deployment obligation will be based on the carrier's forecasted CAF BLS, and a cost per location metric, using one of two methods, as suggested by commenters. To enable each carrier the flexibility to determine which approach best reflects the unique characteristics of their service territory, a carrier may choose to either have its deployment obligation determined based on (1) the average cost of providing 10/1 Mbps service, based on the actual costs of carriers with similar density that have widely deployed 10/1 service, or (2) the A-CAM's calculation of the cost of providing 10/1 Mbps service in the unserved census blocks in the carrier's study area. Carriers will be required to notify USAC which method they elect. USAC will perform the mathematical calculations and provide to the Bureau a schedule of broadband obligations for each carrier, which then will be published in a public notice. The Commission describes more fully each of these methods below.

138. Under the first step in this methodology, the Commission will develop a five-year forecast of the total CAF-BLS support for each rate-of-return carrier, which will include support for stand-alone broadband loops. The Commission directs NECA to prepare forecasts utilizing these assumptions in consultation with the Bureau and submit them to USAC within 60 days of the effective date of this Order. USAC is directed to validate any calculations submitted by NECA to ensure they are accurate and reflect the specified assumptions. The Commission agrees with commenters that knowing the level of anticipated support is helpful when developing any associated deployment obligations. Therefore, the Commission is confident that basing the new deployment obligation on a support forecast will give carriers the relative certainty they desire in their support going forward, allowing them to plan new investment. The Commission notes that if a carrier's CAF BLS is subsequently reduced based on the implementation of competitive overlap rule adopted above, USAC will then recalculate that carrier's deployment obligation based on a revised forecast of that carrier's CAF BLS. Carriers cannot use locations in areas determined to be competitive based on the competitive overlap determination to meet their deployment obligation.

139. Each rate-of-return carrier that continues to receive support based on the reformed legacy mechanisms will be required to target a defined percentage of its five-year forecasted CAF-BLS support to the deployment of broadband service where it is currently lacking. The percentage of support will be determined on a carrier-by-carrier basis for a five-year period. Specifically, consistent with the framework suggested by the rural associations, rate-of-return carriers with less than 20 percent deployment of 10/1 Mbps broadband service in their entire study area, based on June 2015 FCC Form 477 data, will be required to utilize 35 percent of their five-year forecasted CAF-BLS support specifically for the deployment of 10/1 Mbps broadband service where it is currently lacking. Rate-of-return carriers with more than 20 percent or greater but less than 40 percent deployment of 10/1 Mbps broadband service in their entire study areas, will be required to utilize 25 percent of their five-year forecasted CAF-BLS support specifically for the deployment of broadband service where it is currently lacking. Rate-of-return carriers with 40 percent or greater but less than 80 percent deployment of 10/1 Mbps broadband service in their entire study areas, will be required to utilize 20 percent of their five-year forecasted CAF-BLS support specifically for the

deployment of broadband service where it is currently lacking.

140. Deployment obligations will then be determined by dividing the dollar amount of the targeted CAF BLS by a cost-per-location figure. First, the Bureau will prepare a list of all rate-of-return carriers with at least 95 percent deployment of 10/1 Mbps broadband service within their study areas, based on the most recent publicly available FCC Form 477 data. The Commission believes it is reasonable to assume that if a rate-of-return carrier is nearly fully deployed with 10/1 Mbps broadband service, the carrier has recently upgraded its network and its current cost per loop is a reasonably good proxy for the cost per line associated with extending 10/1 Mbps broadband. The Bureau will sort the carriers into a number of groups based on the density of housing units per square mile, utilizing publicly available U.S. Census data. Any carriers subject to the current $250 per line per month cap and the newly adopted opex limits will be excluded from the analysis. The Bureau also may exclude any carrier whose costs appear to be an outlier within a given density grouping. Then, USAC will determine the weighted average cost per loop for the carriers that are 95 percent or greater deployed for each density grouping, based on NECA cost data. Carriers with 95 percent or greater deployment of 10/1 Mbps broadband are likely to have deployed broadband relatively recently, so the average should be generally reflective of the cost that carriers have incurred to upgrade their networks. The Commission finds that this process is reasonable because a carrier's weighted average cost per loop is based on its particular density grouping, thus taking into account costs for similarly-situated carriers. USAC also will determine the weighted average of the cost per loop for carriers in the same density band with a similar level of deployment, and then will increase that figure by 150 percent. This is similar to the approach advocated by NTCA and USTelecom, who suggested that the Commission use a figure that is “at least 150 percent of the average cost per loop” of those carriers with comparable density and deployment. It is reasonable to assume that many of the locations left unserved will have costs higher than the current average cost per loop, which by definition averages the lowest cost and the higher cost locations. Given that the carriers subject to the defined deployment are those that have deployed 10/1 Mbps broadband to less than 80% of their locations, it also is reasonable to assume that they would choose to meet their deployment obligations by extending service to their least costly unserved locations, and not the most expensive unserved locations. Therefore, the Commission concludes that a 150 percent increase above the weighted average cost per loop of companies with similar density and deployment levels is a reasonable approach that takes into account that costs will likely higher when carriers extend broadband into unserved areas.

141. If the 150 percent of the weighted average of companies with similar density and deployment is greater than the figure derived from companies of similar density that have deployed to 95 percent or more of locations, that larger figure will be the cost per location metric used to size the obligation to deploy 10/1 Mbps broadband service. USAC then will divide each carrier's specific five-year forecasted CAF-BLS support amount by the specific embedded cost per location figure. The quotient of this calculation will result in the exact number of locations a carrier electing this option is required to deploy 10/1 Mbps broadband service to pursuant to its five-year plan.

142. As an alternative to the approach outlined above, carriers may elect to have their deployment obligations determined based on the cost per loop for that carrier as reflected in the adopted version of the A-CAM, as suggested by NTCA and USTelecom. For this purpose, the relevant figure will be the calculated cost for those census blocks that are unserved with 10/1 Mbps, us

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