[Federal Register Volume 76, Number 249 (Wednesday, December 28, 2011)]
[Rules and Regulations]
[Pages 81561-81664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32411]



[[Page 81561]]

Vol. 76

Wednesday,

No. 249

December 28, 2011

Part II





Federal Communications Commission





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47 CFR Parts 0, 1, 20, et al.





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

Federal Register / Vol. 76 , No. 249 / Wednesday, December 28, 2011 / 
Rules and Regulations

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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 0, 1, 20, 36, 51, 54, 61, 64, and 69

[WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN Docket No. 09-51; CC 
Docket Nos. 01-92, 96-45; WT Docket No. 10-208; FCC 11-161]


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

AGENCY: Federal Communications Commission.

ACTION: Final rule; policy statement.

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policies to transition these outdated systems to the Connect America 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

DATES: Effective December 29, 2011.

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

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order (R&O) in WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN 
Docket No. 09-51; CC Docket Nos. 01-92, 96-45; WT Docket No. 10-208; 
FCC 11-161, released on November 18, 2011. The executive summary of the 
R&O, and the final rules adopted by the R&O were published in the 
Federal Register on November 29, 2011, 76 FR 73830. The full text of 
this document is available for public inspection during regular 
business hours in the FCC Reference Center, Room CY-A257, 445 12th 
Street SW., Washington, DC 20554. Or at the following Internet address: 
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-161A1.pdf.

I. Adoption of a New Principle for Universal Service

    1. In November 2010, the Federal-State Joint Board on Universal 
Service (Joint Board) recommended that the Commission ``specifically 
find that universal service support should be directed where possible 
to networks that provide advanced services, as well as voice 
services,'' and adopt such a principle pursuant to its 47 U.S.C. 
254(b)(7) authority. The Joint Board believes that this principle is 
consistent with 47 U.S.C. 254(b)(3) and would serve the public 
interest. The Commission agrees. 47 U.S.C. 254(b)(3) provides that 
consumers in rural, insular and high-cost areas should have access to 
``advanced telecommunications and information services * * * that are 
reasonably comparable to those services provided in urban areas.'' 47 
U.S.C. 254(b)(2) likewise provides that ``Access to advanced 
telecommunications and information services should be provided in all 
regions of the Nation.'' Providing support for broadband networks will 
further all of these goals.
    2. Accordingly, the Commission adopts ``support for advanced 
services'' as an additional principle upon which the Commission will 
base policies for the preservation and advancement of universal 
service, and thereby act on one of the Joint Board's 2010 
recommendations. For the reasons discussed above, the Commission finds, 
per 47 U.S.C. 254(b)(7), that this new principle is ``necessary and 
appropriate.'' Consistent with the Joint Board's recommendation, the 
Commission defines this principle as: ``Support for Advanced Services--
Universal service support should be directed where possible to networks 
that provide advanced services, as well as voice services.''

II. Goals

    3. Discussion. The Commission adopts five performance goals to 
preserve and advance service in high cost, rural, and insular areas 
through the Connect America Fund and existing support mechanisms. The 
Commission also adopts performance measures for the first, second, and 
fifth of these goals, and direct the Wireline Competition Bureau and 
the Wireless Telecommunications Bureau (Bureaus) to further develop 
other measures. The Commission delegates authority to the Bureaus to 
finalize performance measures as appropriate consistent with these 
goals.
    4. Preserve and Advance Voice Service. The first performance goal 
is to preserve and advance universal availability of voice service. In 
doing so, the Commission reaffirms its commitment to ensuring that all 
Americans have access to voice service while recognizing that, over 
time, voice service will increasingly be provided over broadband 
networks.
    5. As a performance measure for this goal, the Commission will use 
the telephone penetration rate, which measures subscription to 
telephone service. The telephone penetration rate has historically been 
used by the Commission as a proxy for network deployment and, as a 
result, will be a consistent measure of the universal service program's 
effects. The Commission will also continue to use the Census Bureau's 
Current Population Survey (CPS) to collect data regarding telephone 
penetration. Although CPS data does not specifically break out 
wireless, VoIP, or over-the-top voice options available to consumers, a 
better data set is not currently available. In recognition of the 
limitations of existing data, the Commission is considering revising 
the types of data it collects, and the Commission anticipates further 
Commission action in this proceeding, which may provide more complete 
information that can be used to evaluate this performance goal.
    6. Ensure Universal Availability of Voice and Broadband to Homes, 
Businesses, and Community Anchor Institutions. The second performance 
goal is to ensure the universal availability of modern networks capable 
of delivering broadband and voice service to homes, businesses, and 
community anchor institutions as now defined in 47 CFR 54.5. All 
Americans in all parts of the nation, including those in rural, 
insular, and high-cost areas, should have access to affordable modern 
communications networks capable of supporting the necessary 
applications that empower them to learn, work, create, and innovate. 
The Commission uses the term ``modern networks'' because supported 
equipment and services are expected to change over time to keep up with 
technological advancements.
    7. As an outcome measure for this goal, the Commission will use the 
number of residential, business, and community anchor institution 
locations

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that newly gain access to broadband service. As an efficiency measure, 
the Commission will use the change in the number of homes, businesses, 
and community anchor institutions passed or covered per million USF 
dollars spent. To collect data, the Commission will use the National 
Broadband Map and/or Form 477. The Commission will also require CAF 
recipients to report on the number of community anchor institutions 
that newly gain access to fixed broadband service as a result of CAF 
support. Although these measures are imperfect, the Commission believes 
that they are the best available. Other options, such as the Mercatus 
Centers' suggestion of using an assessment of what might have occurred 
without the programs, are not administratively feasible at this time. 
But the Bureaus are directed to revisit these measures at a later 
point, and to consider refinements and alternatives.
    8. Ensure Universal Availability of Mobile Voice and Broadband 
Where Americans Live, Work, or Travel. The third performance goal is to 
ensure the universal availability of modern networks capable of 
delivering mobile broadband and voice service in areas where Americans 
live, work, or travel. Like the preceding parallel goal, the third 
performance goal is designed to help ensure that all Americans in all 
parts of the nation, including those in rural, insular, and high-cost 
areas, have access to affordable technologies that will empower them to 
learn, work, create, and innovate. But the Commission believes that 
ensuring universal advanced mobile coverage is an important goal on its 
own, and that the Commission will be better able track program 
performance if the Commission measures it separately.
    9. The Commission declines to adopt performance measures for this 
goal at this time but direct the Wireless Telecommunications Bureau to 
develop one or more appropriate measures for this goal.
    10. Ensure Reasonably Comparable Rates for Broadband and Voice 
Services. The fourth performance goal is to ensure that rates are 
reasonably comparable for voice as well as broadband service, between 
urban and rural, insular, and high cost areas. Rates must be reasonably 
comparable so that consumers in rural, insular, and high cost areas 
have meaningful access to these services.
    11. The Commission also declines to adopt measures for this goal at 
this time. Although the Commission proposed one outcome measure and 
asked about others in the USF/ICC Transformation NPRM, 75 FR 26906, May 
13, 2010, the Commission received only limited input on that proposal. 
The Mercatus Center agrees that ``[t]he ratio of prices to income is an 
intuitively sensible way of defining `reasonably comparable''' but 
cautions that, again, the real challenge is crafting measures that 
distinguish how the programs affect rates apart from other factors. The 
Bureaus may seek to further develop the record on the performance and 
efficiency measures suggested by the Mercatus Center, the Commission's 
original proposals, and any other measures commenters think would be 
appropriate. In undertaking this analysis, the Commission directs the 
Bureau to develop separate measures for (1) broadband services for 
homes, businesses, and community anchor institutions; and (2) mobile 
services.
    12. Minimize Universal Service Contribution Burden on Consumers and 
Businesses. The fifth performance goal is to minimize the overall 
burden of universal service contributions on American consumers and 
businesses. With this performance goal, the Commission seeks to balance 
the various objectives of 47 U.S.C. 254(b) of the Act, including the 
objective of providing support that is sufficient but not excessive so 
as to not impose an excessive burden on consumers and businesses who 
ultimately pay to support the Fund. As the Commission has previously 
recognized, ``if the universal service fund grows too large, it will 
jeopardize other statutory mandates, such as ensuring affordable rates 
in all parts of the country, and ensuring that contributions from 
carriers are fair and equitable.''
    13. As a performance measure for this goal, the Commission will 
divide the total inflation-adjusted expenditures of the existing high-
cost program and CAF (including the Mobility Fund) each year by the 
number of American households and express the measure as a monthly 
dollar figure. This calculation will be relatively straightforward and 
rely on publicly available data. As such, the measure will be 
transparent and easily verifiable. By adjusting for inflation and 
looking at the universal service burden, the Commission will be able to 
determine whether the overall burden of universal service contribution 
costs is increasing or decreasing for the typical American household. 
As an efficiency measure, the Mercatus Center suggests comparing the 
estimate of economic deadweight loss associated with the contribution 
mechanism to the deadweight loss associated with taxation. The 
Commission anticipates that the Bureaus may seek further input on this 
option and any others commenters believe would be appropriate.
    14. Program Review. Using the adopted goals and measures, the 
Commission will, as required by GPRA, monitor the performance of the 
universal service program as the Commission modernizes the current 
high-cost program and transition to the CAF. If the programs are not 
meeting these performance goals, the Commission will consider 
corrective actions. Likewise, to the extent that the adopted measures 
do not help us assess program performance, the Commission will revisit 
them as well.

III. Legal Authority

    15. 47 U.S.C. 254. The principle that all Americans should have 
access to communications services has been at the core of the 
Commission's mandate since its founding. Congress created this 
Commission in 1934 for the purpose of making ``available * * * to all 
the people of the United States * * * a rapid, efficient, Nation-wide, 
and world-wide wire and radio communication service with adequate 
facilities at reasonable charges.'' In the 1996 Act, Congress built 
upon that longstanding principle by enacting 47 U.S.C. 254. Section 254 
of the Act sets forth six principles upon which the Commission must 
``base policies for the preservation and advancement of universal 
service.'' Among these principles are that ``[q]uality services should 
be available at just, reasonable, and affordable rates,'' that 
``[a]ccess to advanced telecommunications and information services 
should be provided in all regions of the Nation,'' and that 
``[c]onsumers in all regions of the Nation * * * should have access to 
telecommunications and information services, including * * * advanced 
telecommunications and information services, that are reasonably 
comparable to those services provided in urban areas'' and at 
reasonably comparable rates.
    16. Under 47 U.S.C. 254, the Commission has express statutory 
authority to support telecommunications services that the Commission 
has designated as eligible for universal service support. Section 
254(c)(1) of the Act defines ``[u]niveral service'' as ``an evolving 
level of telecommunications services that the Commission shall 
establish periodically under this section, taking into account advances 
in telecommunications and information technologies and services.'' As 
discussed more fully below, in this R&O, the Commission adopts the 
proposal to simplify how the Commission describes the various

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supported services that the Commission historically has defined in 
functional terms (e.g., voice grade access to the PSTN, access to 
emergency services) into a single supported service designated as 
``voice telephony service.'' To the extent carriers offer traditional 
voice telephony services as telecommunications services over 
traditional circuit-switched networks, the authority to provide support 
for such services is well established.
    17. Increasingly, however, consumers are obtaining voice services 
not through traditional means but instead through interconnected VoIP 
providers offering service over broadband networks. As AT&T notes, 
``[c]ircuit-switched networks deployed primarily for voice service are 
rapidly yielding to packet-switched networks,'' which offer voice as 
well as other types of services.'' The data bear this out. As the 
Commission observed in the USF/ICC Transformation NPRM, ``[f]rom 2008 
to 2009, interconnected VoIP subscriptions increased by 22 percent, 
while switched access lines decreased by 10 percent.'' Interconnected 
VoIP services, among other things, allow customers to make real-time 
voice calls to, and receive calls from, the PSTN, and increasingly 
appear to be viewed by consumers as substitutes for traditional voice 
telephone services. Our authority to promote universal service in this 
context does not depend on whether interconnected VoIP services are 
telecommunications services or information services under the 
Communications Act.
    18. Section 254 grants the Commission the authority to support not 
only voice telephony service but also the facilities over which it is 
offered. Section 254(e) makes clear that ``[a] carrier that receives 
such [universal service] support shall use that support only for the 
provision, maintenance, and upgrading of facilities and services for 
which the support is intended.'' By referring to ``facilities'' and 
``services'' as distinct items for which federal universal service 
funds may be used, the Commission believes Congress granted the 
Commission the flexibility not only to designate the types of 
telecommunications services for which support would be provided, but 
also to encourage the deployment of the types of facilities that will 
best achieve the principles set forth in 47 U.S.C. 254(b) and any other 
universal service principle that the Commission may adopt under 47 
U.S.C. 254(b)(7). For instance, under the longstanding ``no barriers'' 
policy, the Commission allows carriers receiving high-cost support ``to 
invest in infrastructure capable of providing access to advanced 
services'' as well as supported voice services. That policy furthers 
the policy Congress set forth in 47 U.S.C. 254(b) of ``ensuring access 
to advanced telecommunications and information services throughout the 
nation.'' While this policy was enunciated in an Order adopting rule 
changes for rural incumbent carriers, by its terms it is not limited to 
such carriers. The ``no-barriers'' policy has applied, and will 
continue to apply, to all eligible telecommunications carriers (ETCs), 
and the Commission codifies it in the rules. Section 254(e) thus 
contemplates that carriers may receive federal support to enable the 
deployment of broadband facilities used to provide supported 
telecommunications services as well as other services.
    19. The Commission further concludes that the authority under 47 
U.S.C. 254 allows the Commission to go beyond the ``no barriers'' 
policy and require carriers receiving federal universal service support 
to invest in modern broadband-capable networks. Nothing in 47 U.S.C. 
254 requires the Commission simply to provide federal funds to carriers 
and hope that they will use such support to deploy broadband 
facilities. To the contrary, the Commission has a ``mandatory duty'' to 
adopt universal service policies that advance the principles outlined 
in 47 U.S.C. 254(b), and the Commission has the authority to ``create 
some inducement'' to ensure that those principles are achieved. 
Congress made clear in 47 U.S.C. 254 that the deployment of, and access 
to, information services--including ``advanced'' information services--
are important components of a robust and successful federal universal 
service program. Furthermore, the Commission adopts the recommendation 
of the Federal-State Joint Board on Universal Service to establish a 
new universal service principle pursuant to 47 U.S.C. 254(b)(7) that 
universal service support should be directed where possible to networks 
that provide advanced services, as well as voice services.'' In today's 
communications environment, achievement of these principles requires, 
at a minimum, that carriers receiving universal service support invest 
in and deploy networks capable of providing consumers with access to 
modern broadband capabilities, as well as voice telephony services. 
Accordingly, as explained in greater detail below, the Commission will 
exercise the authority under 47 U.S.C. 254 to require that carriers 
receiving support--both CAF support, including Mobility Fund support, 
and support under the existing high-cost support mechanisms--offer 
broadband capabilities to consumers. The Commission concludes that this 
approach is sufficient to ensure access to voice and broadband services 
and, therefore, the Commission does not, at this time, add broadband to 
the list of supported services, as some have urged.
    20. 47 U.S.C. 1302. The Commission also has independent authority 
under 47 U.S.C. 1302 of the Telecommunications Act of 1996 to fund the 
deployment of broadband networks. In 47 U.S.C. 1302, Congress 
recognized the importance of ubiquitous broadband deployment to 
Americans' civic, cultural, and economic lives and, thus, instructed 
the Commission to ``encourage the deployment on a reasonable and timely 
basis of advanced telecommunications capability to all Americans.'' Of 
particular importance, Congress adopted a definition of ``advanced 
telecommunications capability'' that is not confined to a particular 
technology or regulatory classification. Rather, ```advanced 
telecommunications capability' is defined, without regard to any 
transmission media or technology, as high-speed, switched, broadband 
telecommunications capability that enables users to originate and 
receive high-quality voice, data, graphics, and video communications 
using any technology.'' Section 1302 of the Act further requires the 
Commission to ``determine whether advanced telecommunications 
capability is being deployed to all Americans in a reasonable and 
timely fashion'' and, if the Commission concludes that it is not, to 
``take immediate action to accelerate deployment of such capability by 
removing barriers to infrastructure investment and by promoting 
competition in the telecommunications market.'' The Commission has 
found that broadband deployment to all Americans has not been 
reasonable and timely and observed in its most recent broadband 
deployment report that ``too many Americans remain unable to fully 
participate in our economy and society because they lack broadband.'' 
This finding triggers the duty under 47 U.S.C. 1302(b) to ``remov[e] 
barriers to infrastructure investment'' and ``promot[e] competition in 
the telecommunications market'' in order to accelerate broadband 
deployment throughout the Nation.
    21. Providing support for broadband networks helps achieve 47 
U.S.C. 1302(b)'s objectives. First, the Commission has recognized that 
one of the most significant barriers to investment in broadband 
infrastructure

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is the lack of a ``business case for operating a broadband network'' in 
high-cost areas ``[i]n the absence of programs that provide additional 
support.'' Extending federal support to carriers deploying broadband 
networks in high-cost areas will thus eliminate a significant barrier 
to infrastructure investment and accelerate broadband deployment to 
unserved and underserved areas of the Nation. The deployment of 
broadband infrastructure to all Americans will in turn make services 
such as interconnected VoIP service accessible to more Americans.
    22. Second, supporting broadband networks helps ``promot[e] 
competition in the telecommunications market,'' particularly with 
respect to voice services. As the Commission has long recognized, 
``interconnected VoIP service `is increasingly used to replace analog 
voice service.''' Thus, the Commission previously explained that 
requiring interconnected VoIP providers to contribute to federal 
universal service support mechanisms promoted competitive neutrality 
because it ``reduces the possibility that carriers with universal 
service obligations will compete directly with providers without such 
obligations.'' Just as ``we do not want contribution obligations to 
shape decisions regarding the technology that interconnected VoIP 
providers use to offer voice services to customers or to create 
opportunities for regulatory arbitrage,'' the Commission does not want 
to create regulatory distinctions that serve no universal service 
purpose or that unduly influence the decisions providers will make with 
respect to how best to offer voice services to consumers. The 
``telecommunications market''--which includes interconnected VoIP and 
by statutory definition is broader than just telecommunications 
services--will be more competitive, and thus will provide greater 
benefits to consumers, as a result of the decision to support broadband 
networks, regardless of regulatory classification.
    23. By exercising the authority under 47 U.S.C. 1302 in this 
manner, the Commission furthers Congress's objective of 
``accelerat[ing] deployment'' of advanced telecommunications capability 
``to all Americans.'' Under the approach, federal support will not turn 
on whether interconnected VoIP services or the underlying broadband 
service falls within traditional regulatory classifications under the 
Communications Act. Rather, the approach focuses on accelerating 
broadband deployment to unserved and underserved areas, and allows 
providers to make their own judgments as to how best to structure their 
service offerings in order to make such deployment a reality.
    24. The Commission disagrees with commenters who assert that the 
Commission lacks authority under 47 U.S.C. 1302(b) to support broadband 
networks. While 47 U.S.C. 1302(a) imposes a general duty on the 
Commission to encourage broadband deployment through the use of ``price 
cap regulation, regulatory forbearance, measures that promote 
competition in the local telecommunications market, or other regulating 
methods that remove barriers to infrastructure investment,'' 47 U.S.C. 
1302(b) is triggered by a specific finding that broadband capability is 
not being ``deployed to all Americans in a reasonable and timely 
fashion.'' Upon making that finding (which the Commission has done), 47 
U.S.C. 1302(b) requires the Commission to ``take immediate action to 
accelerate'' broadband deployment. Given the statutory structure, the 
Commission reads 47 U.S.C. 1302(b) as conferring on the Commission the 
additional authority, beyond what the Commission possesses under 47 
U.S.C. 1302(a) or elsewhere in the Act, to take steps necessary to 
fulfill Congress's broadband deployment objectives. Indeed, it is hard 
to see what additional work 47 U.S.C. 1302(b) does if it is not an 
independent source of statutory authority.
    25. The Commission also rejects the view that providing support for 
broadband networks under 47 U.S.C. 1302(b) conflicts with 47 U.S.C. 
254, which defines universal service in terms of telecommunications 
services. Information services are not excluded from 47 U.S.C. 254 
because of any policy judgment made by Congress. To the contrary, 
Congress contemplated that the federal universal service program would 
promote consumer access to both advanced telecommunications and 
advanced information services ``in all regions of the Nation.'' When 
Congress enacted the 1996 Act, most consumers accessed the Internet 
through dial-up connections over the PSTN, and broadband capabilities 
were provided over tariffed common carrier facilities. Interconnected 
VoIP services had only a nominal presence in the marketplace in 1996. 
It was not until 2002 that the Commission first determined that one 
form of broadband--cable modem service--was a single offering of an 
information service rather than separate offerings of 
telecommunications and information services, and only in 2005 did the 
Commission conclude that wireline broadband service should be governed 
by the same regulatory classification. Thus, marketplace and 
technological developments and the Commission's determinations that 
broadband services may be offered as information services have had the 
effect of removing such services from the scope of the explicit 
reference to ``universal service'' in 47 U.S.C. 254(c). Likewise, 
Congress did not exclude interconnected VoIP services from the federal 
universal service program; indeed, there is no reason to believe it 
specifically anticipated the development and growth of such services in 
the years following the enactment of the 1996 Act.
    26. The principles upon which the Commission ``shall base policies 
for the preservation and advancement of universal service'' make clear 
that supporting networks used to offer services that are or may be 
information services for purposes of regulatory classification is 
consistent with Congress's overarching policy objectives. For example, 
47 U.S.C. 254(b)(2)'s principle that ``[a]ccess to advanced 
telecommunications and information services should be provided in all 
regions of the Nation'' dovetails comfortably with 47 U.S.C. 1302(b)'s 
policy that ``advanced telecommunications capability [be] deployed to 
all Americans in a reasonable and timely fashion.'' Our decision to 
exercise authority under 47 U.S.C. 1302 does not undermine 47 U.S.C. 
254's universal service principles, but rather ensures their 
fulfillment. By contrast, limiting federal support based on the 
regulatory classification of the services offered over broadband 
networks as telecommunications services would exclude from the 
universal service program providers who would otherwise be able to 
deploy broadband infrastructure to consumers. The Commission sees no 
basis in the statute, the legislative history of the 1996 Act, or the 
record of this proceeding for concluding that such a constricted 
outcome would promote the Congressional policy objectives underlying 47 
U.S.C. 254 and 1302.
    27. Finally, the Commission notes the limited extent to which the 
Commission is relying on 47 U.S.C. 706(b) in this proceeding. 
Consistent with the longstanding policy of minimizing regulatory 
distinctions that serve no universal service purpose, the Commission is 
not adopting a separate universal service framework under 47 U.S.C. 
1302(b). Instead, the Commission is relying on 47 U.S.C. 1302(b) as an 
alternative basis to 47 U.S.C. 254 to the extent necessary to ensure 
that the

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

IV. Public Interest Obligations

A. Voice Service

    28. Discussion. The Commission determines that it is appropriate to 
describe the core functionalities of the supported services as ``voice 
telephony service.'' Some commenters support redefining the voice 
functionalities as voice telephony services, while others oppose the 
change, arguing that the current list of functionalities remains 
important today, the term ``voice telephony'' is too vague, and such a 
modification may result in a lower standard of voice service. Given 
that consumers are increasingly obtaining voice services over broadband 
networks as well as over traditional circuit switched telephone 
networks, the Commission agrees with commenters that urge the 
Commission to focus on the functionality offered, not the specific 
technology used to provide the supported service.
    29. The decision to classify the supported services as voice 
telephony should not result in a lower standard of voice service: Many 
of the enumerated services are universal today, and the Commission 
requires eligible providers to continue to offer those particular 
functionalities as part of voice telephony. Rather, the modified 
definition simply shifts to a technologically neutral approach, 
allowing companies to provision voice service over any platform, 
including the PSTN and IP networks. This modification will benefit both 
providers (as they may invest in new infrastructure and services) and 
consumers (who reap the benefits of the new technology and service 
offerings). Accordingly, to promote technological neutrality while 
ensuring that the new approach does not result in lower quality 
offerings, the Commission amends 47 CFR 54.101 of the Commission rules 
to specify that the functionalities of eligible voice telephony 
services include voice grade access to the public switched network or 
its functional equivalent; minutes of use for local service provided at 
no additional charge to end users; toll limitation to qualifying low-
income consumers; and access to the emergency services 911 and enhanced 
911 services to the extent the local government in an eligible 
carrier's service area has implemented 911 or enhanced 911 systems. The 
Commission finds that changes in the marketplace allow for the 
elimination of the requirements to provide single-party service, 
operator services, and directory assistance.
    30. Today, all ETCs, whether designated by a state commission or 
this Commission, are required to offer the supported service--voice 
telephony service--throughout their designated service area. ETCs also 
must provide Lifeline service throughout their designated service area. 
In the USF/ICC Transformation FNPRM, the Commission seeks comment on 
modifying incumbent ETCs' obligations to provide voice service in 
situations where the incumbent's high-cost universal service funding is 
eliminated, for example as a result of a competitive bidding process in 
which another ETC wins universal support for an area and is subject to 
accompanying voice and broadband service obligations. (Throughout this 
R&O, unless otherwise specified, the term ``ETC'' does not include ETCs 
that are designated only for the purposes of the low income program.)
    31. As a condition of receiving support, the Commission requires 
ETCs to offer voice telephony as a standalone service throughout their 
designated service area, meaning that consumers must not be required to 
purchase any other services (e.g., broadband) in order to purchase 
voice service. As indicated above, ETCs may use any technology in the 
provision of voice telephony service.
    32. Additionally, consistent with the 47 U.S.C. 254(b) principle 
that ``[c]onsumers in all regions of the Nation * * * should have 
access to telecommunications and information services * * * that are 
available at rates that are reasonably comparable to rates charged for 
similar services in urban areas,'' ETCs must offer voice telephony 
service, including voice telephony service offered on a standalone 
basis, at rates that are reasonably comparable to urban rates. The 
Commission finds that these requirements are appropriate to help ensure 
that consumers have access to voice telephony service that best fits 
their particular needs.
    33. The Commission declines to preempt state obligations regarding 
voice service, including COLR obligations, at this time. Proponents of 
such preemption have failed to support their assertion that state 
service obligations are inconsistent with federal rules and burden the 
federal universal service mechanisms, nor have they identified any 
specific legacy service obligations that represent an unfunded mandate 
that make it infeasible for carriers to deploy broadband in high-cost 
areas. Carriers must therefore continue to satisfy state voice service 
requirements.
    34. That said, the Commission encourages states to review their 
respective regulations and policies in light of these changes and 
revisit the appropriateness of maintaining those obligations for 
entities that no longer receive federal high-cost universal service 
funding, just as the Commission intends to explore the necessity of 
maintaining ETC obligations when ETCs no longer are receiving funding. 
For example, states could consider providing state support directly to 
the incumbent LEC to continue providing voice service in areas where 
the incumbent is no longer receiving federal high-cost universal 
service support or, alternatively, could shift COLR obligations from 
the existing incumbent to another provider who is receiving federal or 
state universal service support in the future.
    35. Voice Rates. The Commission will consider rural rates for voice 
service to be ``reasonably comparable'' to urban voice rates under 47 
U.S.C. 254(b)(3) if rural rates fall within a reasonable range of urban 
rates for reasonably comparable voice service. Consistent with the 
existing precedent, the Commission will presume that a voice rate is 
within a reasonable range if it falls within two standard deviations 
above the national average.
    36. Because the data used to calculate the national average price 
for voice service is out of date, the Commission directs the Wireline 
Competition Bureau and the Wireless Telecommunications Bureau to 
develop and conduct an annual survey of voice rates in order to compare 
urban voice rates to the rural voice rates that ETCs will be reporting 
to us. The results of this survey will be published annually. For 
purposes of conducting the survey, the Bureaus should develop a 
methodology to survey a representative sample of facilities-based fixed 
voice service providers taking into account the relative categories of 
fixed voice providers as determined in the most recent FCC Form 477 
data collection. In the USF/

[[Page 81567]]

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

B. Broadband Service

    37. As a condition of receiving federal high-cost universal service 
support, all ETCs, whether designated by a state commission or the 
Commission, will be required to offer broadband service in their 
supported area that meets certain basic performance requirements and to 
report regularly on associated performance measures. Although the 
Commission does not at this time require it, the Commission expects 
that ETCs that offer standalone broadband service in any portion of 
their service territory will also offer such service in all areas that 
receive CAF support. By standalone service, the Commission means that 
consumers are not required to purchase any other service (e.g., voice 
or video) in order to purchase broadband service. ETCs must make this 
broadband service available at rates that are reasonably comparable to 
offerings of comparable broadband services in urban areas.
    38. In developing these performance requirements, the Commission 
seeks to ensure that the performance of broadband available in rural 
and high cost areas is ``reasonably comparable'' to that available in 
urban areas. All Americans should have access to broadband that is 
capable of enabling the kinds of key applications that drive efforts to 
achieve universal broadband, including education (e.g., distance/online 
learning), health care (e.g., remote health monitoring), and person-to-
person communications (e.g., VoIP or online video chat with loved ones 
serving overseas).
1. Broadband Performance Metrics
    39. Broadband services in the market today vary along several 
important dimensions. As discussed more fully below, the Commission 
focuses on speed, latency, and capacity as three core characteristics 
that affect what consumers can do with their broadband service, and the 
Commission therefore includes requirements related to these three 
characteristics in defining ETCs' broadband service obligations.
    40. For each of these characteristics, the Commission requires that 
funding recipients offer service that is reasonably comparable to 
comparable services offered in urban areas. By limiting reasonable 
comparability to ``comparable services,'' the Commission is intending 
to ensure that fixed broadband services in rural areas are compared to 
fixed broadband services in urban areas and mobile broadband services 
in rural areas are compared to mobile broadband services in rural 
areas. The actual download and upload speeds, latency, and usage limits 
(if any) for providers' broadband must be reasonably comparable to the 
typical speeds, latency, and usage limits (if any) of comparable 
broadband services in urban areas. Funding recipients may use any 
wireline, wireless, terrestrial, or satellite technology, or 
combination of technologies, to deliver service that satisfies this 
requirement.
    41. Speed. Users and providers commonly refer to the bandwidth of a 
broadband connection as its ``speed.'' The bandwidth (speed) of a 
connection indicates the rate at which information can be transmitted 
by that connection, typically measured in bits, kilobits (kbps), or 
megabits per second (Mbps). The speed of consumers' broadband 
connections affects their ability to access and utilize Internet 
applications and content. To ensure that consumers are getting the full 
benefit of broadband, the Commission requires funding recipients to 
provide broadband that meets performance metrics for actual speeds, 
measured as described below, rather than ``advertised'' or ``up to'' 
metrics.
    42. In the past two Broadband Progress Reports, the Commission 
found that the availability of residential broadband connections that 
actually enable an end user to download content from the Internet at 4 
Mbps and to upload such content at 1 Mbps over the broadband provider's 
network was a reasonable benchmark for the availability of ``advanced 
telecommunications capability,'' defined by the statute as ``high-
speed, switched, broadband telecommunications capability that enables 
users to originate and receive high-quality voice, data, graphics, and 
video telecommunications using any technology.'' This conclusion was 
based on the Commission's examination of overall Internet traffic 
patterns, which revealed that consumers increasingly are using their 
broadband connections to view high-quality video, and want to be able 
to do so while still using basic functions such as email and web 
browsing. The evidence shows that streaming standard definition video 
in near real-time consumes anywhere from 1-5 Mbps, depending on a 
variety of factors. This conclusion also was drawn from the National 
Broadband Plan, which, based on an analysis of user behavior, demands 
this usage places on the network, and recent experience in network 
evolution, recommended as a national broadband availability target that 
every household in America have access to affordable broadband service 
offering actual download speeds of at least 4 Mbps and actual upload 
speeds of at least 1 Mbps.
    43. Given the foregoing, other than for the Phase I Mobility Fund, 
the Commission adopts an initial minimum broadband speed benchmark for 
CAF recipients of 4 Mbps downstream and 1 Mbps upstream. Broadband 
connections that meet this speed threshold will provide subscribers in 
rural and high cost areas with the ability to use critical broadband 
applications in a manner reasonably comparable to broadband subscribers 
in urban areas. Requiring 4 Mbps/1 Mbps to be provided to all 
locations, including the more distant locations on a landline network 
and regardless of the served location's position in a wireless network, 
implies that customers located closer to the wireline switch or 
wireless tower will be capable of receiving service in excess of the 
this minimum standard.
    44. Some commenters, including DSL and mobile wireless broadband 
providers, observe that the 1 Mbps upload speed requirement in 
particular could impose costs well in excess of the benefits of 1 Mbps 
versus 768 kilobits per second (kbps) upstream. In general, the 
Commission expects new installations to provide speeds of at least 1 
Mbps upstream. However, to the extent a CAF recipient can demonstrate 
that support is insufficient to enable 1 Mbps upstream for all 
locations, temporary waivers of the upstream requirement for some 
locations will be available. The Commission delegates authority to the 
Wireline Competition Bureau and Wireless Telecommunications Bureau to 
address such waiver requests. The Commission expects that those 
facilities that are not currently capable of providing the minimum 
upstream speed will eventually be upgraded, consistent with the build-
out requirements adopted below, with scalable technology capable of 
meeting future speed increases.
    45. Latency. Latency is a measure of the time it takes for a packet 
of data to travel from one point to another in a network. Because many 
communication protocols depend on an acknowledgement that packets were 
received successfully, or otherwise involve transmission of data 
packets back and forth along a path in the network, latency is often 
measured by round-trip time in milliseconds. Latency affects a 
consumer's ability to use real-time applications, including interactive

[[Page 81568]]

voice or video communication, over the network. The Commission requires 
ETCs to offer sufficiently low latency to enable use of real-time 
applications, such as VoIP. The Commission's broadband measurement test 
results showed that most terrestrial wireline technologies could 
reliably provide latency of less than 100 milliseconds.
    46. Capacity. Capacity is the total volume of data sent and/or 
received by the end user over a period of time. It is often measured in 
gigabytes (GB) per month. Several broadband providers have imposed 
monthly data usage limits, restricting users to a predetermined 
quantity of data, and these limits typically vary between fixed and 
mobile services. The terms of service may include an overage fee if a 
consumer exceeds the monthly limit. Some commenters recommended the 
Commission specifies a minimum usage limit.
    47. Although at this time the Commission declines to adopt specific 
minimum capacity requirements for CAF recipients, the Commission 
emphasizes that any usage limits imposed by an ETC on its USF-supported 
broadband offering must be reasonably comparable to usage limits for 
comparable broadband offerings in urban areas (which could include, for 
instance, use of a wireless data card if it can provide the performance 
characteristics described herein). In particular, ETCs whose support is 
predicated on offering of a fixed broadband service--namely, all ETCs 
other than recipients of the Phase I Mobility Funds--must allow usage 
at levels comparable to residential terrestrial fixed broadband service 
in urban areas. The Commission defines terrestrial fixed broadband 
service as one that serves end users primarily at fixed endpoints using 
stationary equipment, such as the modem that connects an end user's 
home router, computer or other Internet access device to the network. 
This term includes fixed wireless broadband services (including those 
offered over unlicensed spectrum).
    48. In 2009, residential broadband users who subscribed to fixed 
broadband service with speeds between 3 Mbps and 5 Mbps used, on 
average, 10 GB of capacity per month, and annual per-user growth was 
between 30 and 35 percent. AT&T's DSL usage limit is 150 GB and its U-
Verse offering has a 250 GB limit. Since 2008, Comcast has had a 250 GB 
monthly data usage threshold on residential accounts. Without endorsing 
or approving of these or other usage limits, the Commission provides 
guidance by noting that a usage limit significantly below these current 
offerings (e.g., a 10 GB monthly data limit) would not be reasonably 
comparable to residential terrestrial fixed broadband in urban areas. 
(This should not be interpreted to mean that the Commission intends to 
regulate usage limits.) A 250 GB monthly data limit for CAF-funded 
fixed broadband offerings would likely be adequate at this time because 
250 GB appears to be reasonably comparable to major current urban 
broadband offerings. The Commission recognizes, however, that both 
pricing and usage limitations change over time. The Commission 
delegates authority to the Wireline Competition Bureau and Wireless 
Telecommunications Bureau to monitor urban broadband offerings, 
including by conducting an annual survey, in order to specify an 
appropriate minimum for usage allowances, and to adjust such a minimum 
over time.
    49. Similarly, for Mobility Fund Phase I, the Commission declines 
to adopt a specific minimum capacity requirement that supported 
providers must offer mobile broadband users. However, the Commission 
emphasizes that any usage limits imposed by a provider on its mobile 
broadband offerings supported by the Mobility Fund must be reasonably 
comparable to any usage limits for mobile comparable broadband 
offerings in urban areas.
    50. Areas with No Terrestrial Backhaul. Recognizing that satellite 
backhaul may limit the performance of broadband networks as compared to 
terrestrial backhaul, the Commission relaxes the broadband public 
interest obligation for carriers providing fixed broadband that are 
compelled to use satellite backhaul facilities. The Regulatory 
Commission of Alaska reports that ``for many areas of Alaska, satellite 
links may be the only viable option to deploy broadband.'' Carriers 
seeking relaxed public interest obligations because they lack the 
ability to obtain terrestrial backhaul--either fiber, microwave, or 
other technology--and are therefore compelled to rely exclusively on 
satellite backhaul in their study area, must certify annually that no 
terrestrial backhaul options exist, and that they are unable to satisfy 
the broadband public interest obligations adopted above due to the 
limited functionality of the available satellite backhaul facilities. 
Any such funding recipients must offer broadband service speeds of at 
least 1 Mbps downstream and 256 kbps upstream within the supported area 
served by satellite middle-mile facilities. Latency and capacity 
requirements discussed above will not apply to this subset of 
providers. Buildout obligations--which are dependent on the mechanism 
by which a carrier receives funding--remain the same for this class of 
carriers. The Commission will monitor and review the public interest 
obligations for satellite backhaul areas. To the extent that new 
terrestrial backhaul facilities are constructed, or existing facilities 
improve sufficiently to meet the public interest obligations, the 
Commission requires funding recipients to satisfy the relevant 
broadband public interest obligations in full within twelve months of 
the new backhaul facilities becoming commercially available. This 
limited exemption is only available to providers that have no access in 
their study area to any terrestrial backhaul facilities, and does not 
apply to any providers that object to the cost of backhaul facilities. 
Similarly, providers relying on terrestrial backhaul facilities today 
will not be allowed this exemption if they elect to transition to 
satellite backhaul facilities.
    51. Community Anchor Institutions. The Commission expects that ETCs 
will likely offer broadband at greater speeds to community anchor 
institutions in rural and high cost areas, although the Commission does 
not set requirements at this time, as the 4 Mbps/1 Mbps standard will 
be met in the more rural areas of an ETC's service territory, and 
community anchor institutions are typically located in or near small 
towns and more inhabited areas of rural America. There is nothing in 
this R&O that requires a carrier to provide broadband service to a 
community anchor institution at a certain rate, but the Commission 
acknowledges that community anchor institutions generally require more 
bandwidth than a residential customer, and expect that ETCs would 
provide higher bandwidth offerings to community anchor institutions in 
high-cost areas at rates that are reasonably comparable to comparable 
offerings to community anchor institutions in urban areas.
    52. The Commission also expects ETCs to engage with community 
anchor institutions in the network planning stages with respect to the 
deployment of CAF-supported networks. The Commission requires ETCs to 
identify and report on the community anchor institutions that newly 
gain access to fixed broadband service as a result of CAF support. In 
addition, the Wireline Competition Bureau will invite further input on 
the unique needs of community anchor institutions as it develops a 
forward-looking cost model to estimate the cost of serving locations, 
including community anchor locations, in price cap territories.

[[Page 81569]]

    53. Broadband Buildout Obligations. All CAF funding comes with 
obligations to build out broadband within an ETC's service area, 
subject to certain limitations. The timing and extent of these 
obligations varies across the different CAF mechanisms. However, all 
broadband buildout obligations for fixed broadband are conditioned on 
not spending the funds to serve customers in areas already served by an 
``unsubsidized competitor.'' The Commission defines an unsubsidized 
competitor as a facilities-based provider of residential terrestrial 
fixed voice and broadband service. The best data available at this time 
to determine whether broadband is available from an unsubsidized 
competitor at speeds at or above the 4 Mbps/1 Mbps speed threshold will 
likely be data on broadband availability at 3 Mbps downstream and 768 
kbps upstream, which is collected for the National Broadband Map and 
through the Commission's Form 477. Such data may therefore be used as a 
proxy for the availability of 4 Mbps/1 Mbps broadband. Depending on the 
anticipated reform to the Form 477 data collection, the Commission may 
have additional data in the future upon which the Commission may rely.
    54. The Commission limits this definition to fixed, terrestrial 
providers because the Commission thinks these limitations will 
disqualify few, if any, broadband providers that meet CAF speed, 
capacity, or latency minimums for all locations within relevant areas 
of comparison, while significantly easing administration of the 
definition. For example, the record suggests that satellite providers 
are generally unable to provide affordable voice and broadband service 
that meets the minimum capacity requirements without the aid of a 
subsidy: Consumer satellite services have limited capacity allowances 
today, and future satellite services appear unlikely to offer capacity 
reasonably comparable to urban offerings in the absence of universal 
service support. Likewise, while 4G mobile broadband services may meet 
the speed requirements in many locations, meeting minimum speed and 
capacity guarantees is likely to prove challenging over larger areas, 
particularly indoors. And because the performance offered by mobile 
services varies by location, it would be very difficult and costly for 
a CAF recipient or the Commission to evaluate whether such a service 
met the performance requirements at all homes and businesses within a 
study area, census block, or other required area. A wireless provider 
that currently offers mobile service can become an ``unsubsidized 
competitor,'' however, by offering a fixed wireless service that 
guarantees speed, capacity, and latency minimums will be met at all 
locations with the relevant area. Taken together, these considerations 
persuade us that the advantages of limiting the definition of 
unsubsidized providers outweigh any potential concerns that the 
Commission may unduly disqualify service providers that otherwise meet 
the performance requirements. As mobile and satellite services develop 
over time, the Commission will revisit the definition of ``unsubsidized 
competitor'' as warranted. Recognizing the benefits of certainty, 
however, the Commission does not anticipate changing the definition for 
the next few years.
    55. Because most of these funding mechanisms are aimed at 
immediately narrowing broadband deployment gaps, both fixed and mobile, 
their performance benchmarks reflect technical capabilities and user 
needs that are expected at this time to be suitable for today and the 
next few years. However, the Commission must also lay the groundwork 
for longer-term evolution of CAF broadband obligations, as the 
Commission expects technical capabilities and user needs will continue 
to evolve. The Commission therefore commits to monitoring trends in the 
performance of urban broadband offerings through the survey data the 
Commission will collect and rural broadband offerings through the 
reporting data the Commission will collect, and to initiating a 
proceeding no later than the end of 2014 to review the performance 
requirements and ensure that CAF continues to support broadband service 
that is reasonably comparable to broadband service in urban areas.
    56. In advance of that future proceeding, the Commission relies on 
its predictive judgment to provide guidance to CAF recipients on 
metrics that will satisfy the expectation that they invest the public's 
funds in robust, scalable broadband networks. The National Broadband 
Plan estimated that by 2017, average advertised speeds for residential 
broadband would be approximately 5.76 Mbps downstream. Applying growth 
rates measured by Akamai, one finds a projected average actual 
downstream speed by 2017 of 5.2 Mbps, and a projected average actual 
peak downstream speed of 6.86 Mbps.
    57. Based on these projections, the Commission establishes a 
benchmark of 6 Mbps downstream and 1.5 Mbps upstream for broadband 
deployments in later years of CAF Phase II.
2. Measuring and Reporting Broadband
    58. The Commission will require recipients of funding to test their 
broadband networks for compliance with speed and latency metrics and 
certify to and report the results to the Universal Service 
Administrative Company (USAC) on an annual basis. These results will be 
subject to audit. In addition, as part of the federal-state partnership 
for universal service, the Commission expects and encourage states to 
assist us in monitoring and compliance and therefore require funding 
recipients to send a copy of their annual broadband performance report 
to the relevant state or Tribal government.
    59. Commenters generally supported testing and reporting of 
broadband performance. While some preferred only certifications without 
periodic testing, the Commission finds that requiring ETCs to submit 
verifiable test results to USAC and the relevant state commissions will 
strengthen the ability of this Commission and the states to ensure that 
ETCs that receive universal service funding are providing at least the 
minimum broadband speeds, and thereby using support for its intended 
purpose as required by 47 U.S.C. 254(e).
    60. The Commission adopts the proposal in the USF/ICC 
Transformation NPRM that actual speed and latency be measured on each 
ETC's access network from the end-user interface to the nearest 
Internet access point. The end-user interface end-point would be the 
modem, the customer premise equipment typically managed by a broadband 
provider as the last connection point to the managed network, while the 
nearest Internet access point end-point would be the Internet gateway, 
the closest peering point between the broadband provider and the public 
Internet for a given consumer connection. The results of Commission 
testing of wired networks suggest that ``broadband performance that 
falls short of expectations is caused primarily by the segment of an 
ISP's network from the consumer gateway to the ISP's core network.''
    61. In the USF/ICC Transformation FNPRM, the Commission seeks 
further comment on the specific methodology ETCs should use to measure 
the performance of their broadband services subject to these general 
guidelines, and the format in which funding recipients should report 
their results. The Commission directs the Wireline Competition Bureau, 
the Wireless Telecommunications Bureau, and the Office of Engineering 
and Technology to work together to refine the methodology

[[Page 81570]]

for such testing, which the Commission anticipates will be implemented 
in 2013.
3. Reasonably Comparable Rates for Broadband Service
    62. As with voice services, for broadband services the Commission 
will consider rural rates to be ``reasonably comparable'' to urban 
rates under 47 U.S.C. 254(b)(3) if rural rates fall within a reasonable 
range of urban rates for reasonably comparable broadband service. 
However, the Commission has never compared broadband rates for purposes 
of 47 U.S.C. 254(b)(3), and therefore the Commission directs the 
Bureaus to develop a specific methodology for defining that reasonable 
range, taking into account that retail broadband service is not rate 
regulated and that retail offerings may be defined by price, speed, 
usage limits, if any, and other elements. In the USF/ICC Transformation 
FNPRM, the Commission seeks comment on how specifically to define a 
reasonable range.
    63. The Commission also delegates to the Wireline Competition 
Bureau and Wireless Telecommunications Bureau the authority to conduct 
an annual survey of urban broadband rates, if necessary, in order to 
derive a national range of rates for broadband service. The Commission 
does not currently have sufficient data to establish such a range for 
broadband pricing, and are unaware of any adequate third-party sources 
of data for the relevant levels of service to be compared. The 
Commission therefore delegates authority to the Bureaus to determine 
the appropriate components of such a survey. By conducting its own 
survey, the Commission believes it will be able to tailor the data 
specifically to the need to satisfy the statutory obligation. The 
Commission requires recipients of funding to provide information 
regarding their pricing for service offerings, as described more fully 
below. The Commission also encourages input from the states and other 
stakeholders as the Bureaus develop the survey.

V. Establishing the Connect America Fund

A. The Budget

    64. Discussion. For the first time, the Commission now establishes 
a defined budget for the high-cost component of the universal service 
fund. For purposes of this budget, the term ``high-cost'' includes all 
support mechanisms in place as of the date of this order, specifically, 
high-cost loop support, safety net support, safety valve support, local 
switching support, interstate common line support, high cost model 
support, and interstate access support, as well as the new Connect 
America Fund, which includes funding to support and advance networks 
that provide voice and broadband services, both fixed and mobile, and 
funding provided in conjunction with the recovery mechanism adopted as 
part of intercarrier compensation reform.
    65. The Commission believes the establishment of such a budget will 
best ensure that the Commission has in place ``specific, predictable, 
and sufficient'' funding mechanisms to achieve the universal service 
objectives. The Commission is taking important steps to control costs 
and improve accountability in USF, and the estimates of the funding 
necessary for components of the CAF and legacy high-cost mechanisms 
represent its predictive judgment as to how best to allocate limited 
resources at this time. The Commission anticipates that it may revisit 
and adjust accordingly the appropriate size of each of these programs 
by the end of the six-year period the Commission budgets for today, 
based on market developments, efficiencies realized, and further 
evaluation of the effect of these programs in achieving the goals.
    66. Importantly, establishing a CAF budget ensures that individual 
consumers will not pay more in contributions due to these reforms. 
Indeed, were the CAF to significantly raise the end-user cost of 
services, it could undermine the broader policy objectives to promote 
broadband and mobile deployment and adoption.
    67. The Commission therefore establishes an annual funding target, 
set at the same level as the current estimate for the size of the high-
cost program for FY 2011, of no more than $4.5 billion. The $4.5 
billion budget includes only disbursements of support and does not 
include administrative expenses, which will continue to be collected 
consistent with past practices. Similarly, the $4.5 billion budget does 
not include prior period adjustments associated with support 
attributable to years prior to 2012. To the extent that those true-ups 
result in increased support for 2010, those disbursements would not 
apply to the budget discussed here.
    68. This budgetary target will remain in place until changed by a 
vote of the Commission. The Commission believes that setting the budget 
at this year's support levels will minimize disruption and provide the 
greatest certainty and predictability to all stakeholders. The 
Commission does not find that amount to be excessive given the reforms 
the Commission adopts today, which expand the high-cost program in 
important ways to promote broadband and mobility; facilitate 
intercarrier compensation reform; and preserve universal voice 
connectivity. At the same time, the Commission does not believe a 
higher budget is warranted, given the substantial reforms the 
Commission concurrently adopts to modernize the legacy funding 
mechanisms to address long-standing inefficiencies and wasteful 
spending. The Commission concludes that it is appropriate, in the first 
instance, to evaluate the effect of these reforms before adjusting the 
budget.
    69. The total $4.5 billion budget will include CAF support 
resulting from intercarrier compensation reform, as well as new CAF 
funding for broadband and support for legacy programs during a 
transitional period. As part of this budget, the Commission will 
provide $500 million per year in support through the Mobility Fund, of 
which up to $100 million in funding will be reserved for Tribal lands. 
Throughout this document, ``Tribal lands'' include any federally 
recognized Indian tribe's reservation, pueblo or colony, including 
former reservations in Oklahoma, Alaska Native regions established 
pursuant to the Alaska Native Claims Settlements Act (85 Stat. 688), 
and Indian Allotments, 47 CFR 54.400(e), as well as Hawaiian Home 
Lands--areas held in trust for native Hawaiians by the state of Hawaii, 
pursuant to the Hawaiian Homes Commission Act, 1920, Act July 9, 1921, 
42 Stat. 108, et seq., as amended. The Commission adopts a definition 
of ``Tribal lands'' that includes Hawaiian Home Lands, as the term was 
used in the USF/ICC Transformation NPRM. The Commission notes that 
Hawaiian Home Lands were not included within the Tribal definition in 
the 2007 order that adopted an interim cap on support for competitive 
eligible telecommunications carriers, with an exemption of Tribal lands 
from that cap. The Commission agrees with the State of Hawaii that 
Hawaiian Home Lands should be included in the definition of Tribal 
lands in the context of these comprehensive reforms for the universal 
service program.
    70. The Commission will also provide at least $100 million to 
subsidize service in the highest cost areas. The remaining amount--
approximately $4 billion--will be divided between areas served by price 
cap carriers and areas served by rate-of-return carriers, with no more 
than $1.8 billion available annually for price cap territories after a 
transition period and up to $2 billion available annually for rate-of-
return territories,

[[Page 81571]]

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

B. Providing Support in Areas Served by Price Cap Carriers

1. Immediate Steps To Begin Rationalizing Support Levels for Price Cap 
Carriers
    71. Discussion. Effective January 1, 2012, the Commission freezes 
all support under the existing high-cost support mechanisms, HCLS, 
forward-looking model support (HCMS), safety valve support, LSS, IAS, 
and ICLS, on a study area basis for price cap carriers and their rate-
of-return affiliates. On an interim basis, the Commission will provide 
this ``frozen high-cost support'' to such carriers equal to the amount 
of support each carrier received in 2011 in a given study area. Frozen 
high-cost support amounts will be calculated by USAC, and will be equal 
to the amount of support disbursed in 2011, without regard to prior 
period adjustments related to years other than 2011 and as determined 
by USAC on January 31, 2012. USAC shall publish each carrier's frozen 
high-cost support amount 2011 support, as calculated, on its Web site, 
no later than February 15, 2012. As a consequence of this action, rate-
of-return operating companies that will be treated as price cap areas 
will no longer be required to perform cost studies for purposes of 
calculating HCLS or LSS, as their support will be frozen on a study 
area basis as of year-end 2011.
    72. Frozen high-cost support will be reduced to the extent that a 
carrier's rates for local voice service fall below an urban local rate 
floor that the Commission adopts below to limit universal service 
support where there are artificially low rates. In addition to frozen 
high-cost support, the Commission will distribute up to $300 million in 
``incremental support'' to price cap carriers and their rate of return 
affiliates using a simplified forward-looking cost estimate, based on 
the existing cost model.
    73. This simplified, interim approach is based on a proposal in the 
record from several carriers. Support will be determined as follows: 
First, a forward-looking cost estimate will be generated for each wire 
center served by a price cap carrier. Our existing forward-looking cost 
model, designed to estimate the costs of providing voice service, 
generates estimates only for wire centers served by non-rural carriers; 
it cannot be applied to areas served by rural carriers without 
obtaining additional data from those carriers. The simplest, quickest, 
and most efficient means to provide support solely based on forward-
looking costs for both rural and non-rural price cap carriers is to 
extend the existing cost model by using an equation designed to 
reasonably predict the output of the existing model for wire centers it 
already applies to, and apply it to data that are readily available for 
wire centers in all areas served by price cap carriers and their 
affiliates, including areas the current model does not apply to. Three 
price cap carriers submitted an estimated cost equation that was 
derived through a regression analysis of support provided under the 
existing high-cost model, and they submitted, under protective order, 
the data necessary to replicate their analysis. No commenter objected 
to the proponents' cost-estimation function. Following its own 
assessment of the regression analysis and the proposed cost-estimation 
function, the Commission concludes that the proposed function will 
serve the purpose well to estimate costs on an interim basis in wire 
centers now served by rural price cap carriers, and the Commission 
adopts it. That cost-estimation function is defined as:

ln(Total cost) = 7.08 + 0.02 * ln(distance to nearest central office in 
feet + 1)
-0.15 * ln(number of households + businesses in the wire center + 1)
+ 0.22 * ln(total road feed in wire center + 1)
+ 0.06 * (ln(number of households + businesses in wire center + 1)) 
[caret]2
-0.01 * (ln(number of businesses in wire center + 1))-2
-0.07 * ln((number of households + businesses)/square miles) + 1)

    74. The output of the cost-estimation function will be converted 
into dollars and then further converted into a per-location cost in the 
wire center. The resulting per-location cost for each wire center will 
be compared to a funding threshold, which, as explained below, will be 
determined by the budget constraint. Support will be calculated based 
on the wire centers where the cost for the wire center exceeds the 
funding threshold. Specifically, the amount by which the per-location 
cost exceeds the funding threshold will be multiplied by the total 
number of household and business locations in the wire center.
    75. The funding threshold will be set so that, using the 
distribution process described above, all $300 million of incremental 
support potentially available under the mechanism would be allocated. 
The Commission delegates to the Wireline Competition Bureau the task of 
performing the calculations necessary to determine the support amounts 
and selecting any necessary data sources for that task. In the event 
the Wireline Competition Bureau concludes that appropriate data are not 
readily available for these purposes for certain areas, such as some or 
all U.S. territories served by price cap carriers, the Bureau may 
exclude such areas from the analysis for this interim mechanism, which 
would result in the carriers in such areas continuing to receive frozen 
support. The Bureau will announce incremental support amounts via 
Public Notice; the Commission anticipates the Bureau will complete its 
work and announce such support amounts on or before March 31, 2012. 
USAC will disburse CAF Phase I funds on its customary schedule.
    76. The Commission intends for CAF Phase I to enable additional 
deployment beyond what carriers would otherwise undertake, absent this 
reform. Thus, consistent with the other reforms, the Commission will 
require carriers that accept incremental support under CAF Phase I to 
meet concrete broadband deployment obligations. The Commission 
acknowledges that the existing cost model, on which the distribution 
mechanism for CAF Phase I incremental funding is based, calculates the 
cost of providing voice service rather than broadband service, although 
the Commission is requiring carriers to meet broadband deployment 
obligations if they accept CAF Phase I incremental funding. The 
Commission finds that using estimates of the cost of deploying voice 
service, even though the Commission imposes broadband deployment 
obligations, is reasonable in the context of this interim support 
mechanism.
    77. Specifically, the Bureau will calculate, on a holding company 
basis, how much CAF Phase I incremental support price cap carriers are 
eligible for. Carriers may elect to receive all, none, or a portion of 
the incremental support for which they are eligible. A

[[Page 81572]]

carrier accepting incremental support will be required to deploy 
broadband to a number of locations equal to the amount it accepts 
divided by $775. For example, a carrier projected to receive $7,750,000 
will be permitted to accept up to that amount of incremental support. 
If it accepts the full amount, it will be required to deploy broadband 
to at least 10,000 unserved locations; if it accepts $3,875,000, it 
will be required to deploy broadband to at least 5,000 unserved 
locations. To the extent incremental support is declined, it may be 
used in other ways to advance the broadband objectives pursuant to the 
statutory authority. For instance, the funds could be held as part of 
accumulated reserve funds that would help minimize budget fluctuations 
in the event the Commission grants some petitions for waiver. Also, a 
number of parties have urged us to use high-cost funding to advance 
adoption programs. The Commission notes that the Commission has an open 
proceeding to reform the low income assistance programs, which 
specifically contemplates broadband pilots in the Lifeline and LinkUp 
programs. To the extent that savings were available from CAF programs, 
the Commission could reallocate that funding for broadband adoption 
programs, consistent with the statutory authority, while still 
remaining within the budget target. Alternatively, savings could be 
used to reduce the contribution burden.
    78. Our objective is to articulate a measurable, enforceable 
obligation to extend service to unserved locations during CAF Phase I. 
For this interim program, the Commission is not attempting to identify 
the precise cost of deploying broadband to any particular location. 
Instead, the Commission is trying to identify an appropriate standard 
to spur immediate broadband deployment to as many unserved locations as 
possible, given the budget constraint. In this context, the Commission 
finds that a one-time support payment of $775 per unserved location for 
the purpose of calculating broadband deployment obligations for 
companies that elect to receive additional support is appropriate.
    79. To develop that performance obligation, the Commission 
considered broadband deployment projects undertaken by a mid-sized 
price cap carrier under the Broadband Initiatives Program (BIP). The 
average per-location cost of deployment for those projects--including 
both the public contribution and the company's own capital 
contribution--was $557, significantly lower than $775 per-location--
which does not include any company contribution. Analysis indicated 
that the per-location cost for deployments funded through the BIP 
program varied considerably. In addition, the BIP program's 
requirements differ from these requirements. Specifically, carriers 
could obtain BIP funding for improving service to underserved locations 
as well as deploying to unserved locations, while carriers can meet 
their CAF Phase I deployment obligations only by deploying broadband to 
unserved locations. For these reasons, while the Commission finds this 
average per-location cost to be relevant, the Commission declines to 
set the requirement at a per-location cost of $557.
    80. In addition, the Commission considered data from the analysis 
done as part of the National Broadband Plan. The cost model used in 
developing the National Broadband Plan estimated that the median cost 
of upgrading existing unserved homes is approximately $650 to $750, 
with approximately 3.5 million locations whose upgrade cost is below 
that figure.
    81. Commission staff also conducted an analysis using the ABC plan 
cost model, which calculates the cost of deploying broadband to 
unserved locations on a census block basis. Commission staff estimated 
that the median cost of a brownfield deployment of broadband to low-
cost unserved census blocks is $765 per location (i.e., there are 1.75 
million unserved, low-cost locations in areas served by price cap 
carriers with costs below $765); the cost of deploying broadband to the 
census block at the 25th percentile of the cost distribution is 
approximately $530 per location (under this analysis, there are 875,000 
such locations whose cost is below $530). Although the Commission does 
not adopt the proposed cost model to calculate support amounts for CAF 
Phase II, these estimates provide additional data points to consider.
    82. In addition, the Commission notes that several carriers placed 
estimates of the per-location cost of extending broadband to unserved 
locations in their respective territories into the record. While 
several carriers claim that the cost to serve unserved locations is 
higher than the figure the Commission adopts, those estimates did not 
provide supporting data sufficient to fully evaluate them.
    83. Taking into account all of these factors, including the cost 
estimates developed in the course of BIP applications as well as the 
flexibility the Commission provides to carriers accepting such funding 
to determine where to deploy and the expectation that carriers will 
supplement incremental support with their own investment, the 
Commission concludes that the $775 per unserved location figure 
represents a reasonable estimate of an interim performance obligation 
for this one-time support. The Commission also emphasizes that CAF 
Phase I incremental support is optional--carriers that cannot meet the 
broadband deployment requirement may decline to accept incremental 
support or may choose to accept only a portion of the amount for which 
they are eligible.
    84. The Commission find that, in this interim support mechanism, 
setting the broadband deployment obligations based on the costs of 
deploying to lower-cost wire centers that would not otherwise be 
served, even though the Commission bases support on the predicted costs 
of the highest-cost wire centers, is reasonable because the Commission 
is trying to expand voice and broadband availability as much and as 
quickly as possible. The Commission distributes support based on the 
costs of the highest-cost wire centers because the ultimate goal of the 
reforms is to ensure that all areas get broadband-capable networks, 
whether through the operation of the market or through support from 
USF. In this interim mechanism, the Commission distributes funding to 
those carriers that provide service in the highest-cost areas because 
these are the areas where the Commission can be most confident, based 
on available information, that USF support will be necessary in order 
to realize timely deployment. Thus, the Commission can be confident the 
Commission is allocating support to carriers that will need it to 
deploy broadband in some portion of their service territory. At the 
same time, to promote the most rapid expansion of broadband to as many 
households as possible, the Commission wishes to encourage carriers to 
use the support in lower-cost areas where there is no private sector 
business case for deployment of broadband, to the extent carriers also 
serve such areas. Although at this time the Commission lacks data 
sufficient to identify these areas, the Commission can encourage this 
use of funding by setting the deployment requirement based on the 
overall estimate of upgrade costs in lower cost unserved areas, while 
providing carriers flexibility to allocate funding to these areas, 
rather than the highest cost wire centers identified by the cost-
estimation equation. Accordingly, while the Commission allocates CAF 
Phase I support on the basis of carriers' service to the highest-cost 
areas, the

[[Page 81573]]

Commission allows carriers to use that support in lower-cost areas, and 
sizes their deployment obligations accordingly. The Commission notes 
that, historically, carriers have always been able to use support in 
wire centers other than the ones for which support is paid, and nothing 
in the Act constrains that flexibility such that it applies only within 
state boundaries. Accordingly, in the context of this interim 
mechanism, the Commission will permit carriers to continue to have such 
flexibility.
    85. Within 90 days of being informed of the amount of incremental 
support it is eligible to receive, each carrier must provide notice to 
the Commission, the Administrator, the relevant state or territorial 
commission, and any affected Tribal government, identifying the amount 
of support it wishes to accept and the areas by wire center and census 
block in which the carrier intends to deploy broadband to meet its 
obligation, or stating that the carrier declines to accept incremental 
support for that year. Carriers accepting incremental support must make 
the following certifications. First, the carrier must certify that 
deployment funded through CAF Phase I incremental support will occur in 
areas shown on the most current version of the National Broadband Map 
as unserved by fixed broadband with a minimum speed of 768 kbps 
downstream and 200 kbps upstream, and that, to the best of the 
carrier's knowledge, are, in fact, unserved by fixed broadband at those 
speeds. Second, the carrier must certify that the carrier's current 
capital improvement plan did not already include plans to complete 
broadband deployment to that area within the next three years, and that 
CAF Phase I incremental support will not be used to satisfy any merger 
commitment or similar regulatory obligation.
    86. Carriers must complete deployment to no fewer than two-thirds 
of the required number of locations within two years, and all required 
locations within three years, after filing their notices of acceptance. 
Carriers must provide a certification to that effect to the Commission, 
the Administrator, the relevant state or territorial commission, and 
any affected Tribal government, as part of their annual certifications 
pursuant to new 47 CFR 54.313 of the rules, following both the two-
thirds and completion milestones. To fulfill their deployment 
obligation, carriers must offer broadband service of at least 4 Mbps 
downstream and 1 Mbps upstream, with latency sufficiently low to enable 
the use of real-time communications, including VoIP, and with usage 
limits, if any, that are reasonably comparable to those for comparable 
services in urban areas. Carriers failing to meet a deployment 
milestone will be required to return the incremental support 
distributed in connection with that deployment obligation and will be 
potentially subject to other penalties, including additional 
forfeitures, as the Commission deems appropriate. If a carrier fails to 
meet the two-thirds deployment milestone within two years and returns 
the incremental support provided, and then meets its full deployment 
obligation associated with that support by the third year, it will be 
eligible to have support it returned restored to it.
    87. Our expectation is that CAF Phase II will begin on January 1, 
2013. However, absent further Commission action, if CAF Phase II has 
not been implemented to go into effect by that date, CAF Phase I will 
continue to provide support as follows. Annually, no later than 
December 15, the Bureau will announce via Public Notice CAF Phase I 
incremental support amounts for the next term of incremental support, 
indicating whether support will be allocated for the full year or for a 
shorter term. The Commission delegates to the Wireline Competition 
Bureau the authority to adjust the term length of incremental support 
amounts, and to pro-rate obligations as appropriate, to the extent 
Phase II CAF is anticipated to be implemented on a date after the 
beginning of the calendar year. The amount of incremental support to be 
distributed during a term will be calculated in the manner described 
above, based on allocating $300 million through the incremental support 
mechanism, but that amount will be reduced by a factor equal to the 
portion of a year that the term will last. Within 90 days of the 
beginning of each term of support, carriers must provide notice to the 
Commission, the relevant state commission, and any affected Tribal 
government, identifying the amount of support it wishes to accept and 
the areas by wire center and census block in which the carrier intends 
to deploy broadband or stating that the carrier declines to accept 
incremental support for that term, with the same certification 
requirements described above. For purposes of this R&O, a carrier 
accepting incremental support in terms after 2012 will be required to 
deploy broadband to a number of locations equal to the amount of 
incremental support it accepts divided by $775, similar to the 
obligation for accepting support in 2012.
    88. CAF Phase I will also begin the process of transitioning all 
federal high-cost support to price cap carriers to supporting modern 
communications networks capable of supporting voice and broadband in 
areas without an unsubsidized competitor. Consistent with the goal of 
providing support to price cap companies on a forward-looking cost 
basis, rather than based on embedded costs, the Commission will, for 
the purposes of CAF Phase I, treat as price cap carriers the rate-of-
return operating companies that are affiliated with holding companies 
for which the majority of access lines are regulated under price caps. 
That is, the Commission will freeze their universal service support and 
consider them as price cap areas for the purposes of the new CAF Phase 
I distribution mechanism. Effective January 1, 2012, the Commission 
requires carriers to use their frozen high-cost support in a manner 
consistent with achieving universal availability of voice and 
broadband. If CAF Phase II has not been implemented to go into effect 
on or before January 1, 2013, the Commission will phase in a 
requirement that carriers use such support for building and operating 
broadband-capable networks used to offer their own retail service in 
areas substantially unserved by an unsubsidized competitor.
    89. Specifically, in 2013, all carriers receiving frozen high-cost 
support must use at least one-third of that support to build and 
operate broadband-capable networks used to offer the provider's own 
retail broadband service in areas substantially unserved by an 
unsubsidized competitor. For 2014, at least two-thirds of the frozen 
high-cost support must be used in such fashion, and for 2015 and 
subsequent years, all of the frozen high-cost support must be spent in 
such fashion. Carriers will be required to certify that they have spent 
frozen high-cost support consistent with these requirements in their 
annual filings pursuant to new 47 CFR 54.313 of the rules.
    90. These interim reforms to the support mechanisms for price cap 
carriers are an important step in the transition to full implementation 
of the Connect America Fund. While the Commission intends to complete 
implementation of the CAF rapidly, the Commission finds that these 
interim reforms offer immediate improvements over the existing support 
mechanisms. First, existing support for price cap carriers will be 
frozen and no longer calculated based on embedded costs. Rather, the 
Commission begins the process of transitioning all high-cost support to 
forward-looking costs and

[[Page 81574]]

market-based mechanisms, which will improve incentives for carriers to 
invest efficiently. Second, these reforms begin the process of 
eliminating the distinction, for the purposes of calculating high-cost 
support, between price cap carriers that are classified as rural and 
those that are classified as non-rural, a classification that has no 
direct or necessary relation to the cost of providing voice and 
broadband services. In this way, the support mechanisms will be better 
aligned with the text of 47 U.S.C. 254, which directs us to focus on 
the needs of consumers in ``rural, insular, and high cost areas'' but 
makes no reference to the classification of the company receiving 
support. In addition, the Commission notes that the reforms the 
Commission adopts today, which include providing immediate support to 
spur broadband deployment, can be implemented quickly, without the need 
to overhaul an admittedly dated cost model that does not reflect modern 
broadband network architecture. Thus, although the simplified interim 
mechanism is imperfect in some respects, it will allow us to begin 
providing additional support to price cap carriers on a more efficient 
basis, while spurring immediate and material broadband deployment 
pending implementation of CAF competitive bidding- and model-based 
support for price cap areas.
    91. No Effect on Interstate Rates. Historically, IAS was intended 
to replace allowable common line revenues that otherwise are not 
recovered through SLCs, while some carriers received frozen ICLS 
because, due to the timing of their conversion to price cap regulation, 
they could not receive IAS. The Commission notes that many price cap 
carriers did not object to the elimination of the IAS mechanism, as 
long is it did not occur before the implementation of CAF. The 
Commission has no indication that these price cap carriers expect to 
raise their SLCs, presubscribed interexchange carrier charges, or other 
interstate rates as a result of any reform that would eliminate IAS. 
For clarity, however, the Commission specifically notes that while 
carriers receive support under CAF Phase I, the amount of their frozen 
high cost support equal to the amount of IAS for which each carrier was 
eligible in 2011 as being received under IAS, including, but not 
limited to, for the purposes of calculating interstate rates will be 
treated as IAS for purposes of the existing rules. To the extent that a 
carrier believes that it cannot meet its obligations with the revenues 
it receives under the CAF and ICC reforms, it may avail itself of the 
total cost and earnings review process described below.
    92. Elimination of State Rate Certification Filings. Under 47 CFR 
54.316 of the existing rules, states are required to certify annually 
whether residential rates in rural areas of their state served by non-
rural carriers are reasonably comparable to urban rates nationwide. As 
part of these reforms, however, the Commission requires carriers to 
file rate information directly with the Commission. For this reason, 
the Commission concludes that continuing to impose this obligation on 
the states is unnecessary, and the Commission relieves state 
commissions of their obligations under that provision.
    93. Hawaiian Telcom Petition for Waiver. Hawaiian Telcom, a non-
rural price cap incumbent local exchange carrier, previously sought a 
waiver of certain rules relating to the support to which it would be 
entitled under the high-cost model. As Hawaiian Telcom explained, it 
received no high-cost model support at all because support under the 
model was based not on the estimated costs of individual wire centers 
but rather the statewide average of the costs of all individual wire 
centers included in the model. In its petition, Hawaiian Telcom 
requested that its support under the model be determined on a wire 
center basis, without regard to the statewide average of estimated 
costs calculated under the high-cost model.
    94. In light of these reforms for support to price cap carriers, 
the Commission denies the Hawaiian Telcom petition. These reforms are 
largely consistent with the thrust of Hawaiian Telcom's petition. Phase 
II support will not involve statewide averaging of costs determined by 
a model, but instead will be determined on a much more granular basis. 
In Phase I, the Commission adopts, on an interim basis, a new method 
for distributing support to price cap carriers. While the Commission 
freezes existing support, the Commission provides incremental support 
to price cap carriers through a mechanism that, consistent with 
Hawaiian Telcom's proposal, identifies carriers serving the highest-
cost wire centers but does not average wire center costs in a state. 
The Commission therefore believes that these reforms will achieve the 
relief Hawaiian Telcom seeks in its waiver petition and that, to the 
extent they do not, Hawaiian Telcom may seek additional targeted 
support through a request for waiver.
2. New Framework for Ongoing Support in Price Cap Territories
a. Budget for Price Cap Areas
    95. Within the total $4.5 billion annual budget, the Commission 
sets the total annual CAF budget for areas currently served by price 
cap carriers at no more than $1.8 billion for a five-year period. For 
purposes of CAF Phase II, consistent with the approach in CAF Phase I, 
the Commission will treat as price cap carriers the rate-of-return 
operating companies that are affiliated with holding companies for 
which the majority of access lines are regulated under price caps. A 
``price cap territory'' therefore includes a study area served by a 
rate-of-return operating company affiliated with price cap companies.
    96. In 2010, the most recent year for which complete disbursement 
data are available, price cap carriers and their rate-of-return 
affiliates received approximately $1.076 billion in support. 
Collectively, more than 83 percent of the unserved locations in the 
nation are in price cap areas, yet such areas currently receive 
approximately 25 percent of high-cost support.
    97. The Commission concludes that increased support to areas served 
by price cap carriers, coupled with rigorous, enforceable deployment 
obligations, is warranted in the near term to meet the universal 
service mandate to unserved consumers residing in these communities. At 
the same time, the Commission seeks to balance many competing demands 
for universal service funds, including the need to extend advanced 
mobile services and to preserve and advance universal service in areas 
currently served by rate-of-return companies. Budgeting up to $1.8 
billion for price cap territories, in the judgment, represents a 
reasonable balance of these considerations. The Commission also 
stresses that these subsidies will go to carriers serving price cap 
areas, not necessarily incumbent price cap carriers. Before 2018, the 
Commission will re-evaluate the need for ongoing support at these 
levels and determine how best to drive support to efficient levels, 
given consumer demand and technological developments at that time.
b. Price Cap Public Interest Obligations
    98. Price cap ETCs that accept a state-level commitment must 
provide broadband service that is reasonably comparable to terrestrial 
fixed broadband service in urban America. Specifically, price cap ETCs 
that receive model-based CAF support will be required, for the first 
three years they receive support, to offer broadband at

[[Page 81575]]

actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with 
latency suitable for real-time applications, such as VoIP, and with 
usage capacity reasonably comparable to that available in comparable 
offerings in urban areas. By the end of the third year, ETCs must offer 
at least 4 Mbps/1 Mbps broadband service to at least 85 percent of 
their high-cost locations--including locations on Tribal lands--covered 
by the state-level commitment, as described below. By the end of the 
fifth year, price cap ETCs must offer at least 4 Mbps/1 Mbps broadband 
service to all supported locations, and at least 6 Mbps/1.5 Mbps to a 
number of supported locations to be specified.
    99. The Commission establishes the 85 percent third-year milestone 
to ensure that recipients of funding remain on track to meet their 
performance obligations. While a number of parties agreed generally 
with the concept of setting specific, enforceable interim milestones to 
safeguard the use of public funds, there are few concrete suggestions 
in the record on what those intermediate deadlines should be. The 
Commission agrees with the State Members of the Joint Board that there 
should be intermediate milestones for the required broadband deployment 
obligations. The Commission sets an initial requirement of offering 
broadband to at least 85 percent of supported locations by the end of 
the third year, and to all supported locations by the end of the fifth 
year. As set forth more fully below, recipients of funding will be 
required annually to report on their progress in extending broadband 
throughout their areas and must meet the interim deadline established 
for the third year, or face loss of support.
    100. Before the end of the fifth year, the Commission expects to 
have reviewed the minimum broadband performance metrics in light of 
expected increases in speed, and other broadband characteristics, in 
the intervening years. Based on the information before us today, the 
Commission expects that consumer usage of applications, including those 
for health and education, may evolve over the next five years to 
require speeds higher than 4 Mbps downstream/1 Mbps upstream. For this 
reason, the Commission expects ETCs to build robust, scalable networks 
that will provide speeds of at least 6 Mbps/1.5 Mbps to a number of 
supported locations to be determined in the model development process, 
as set forth more fully below.
    101. After the end of the five-year term of CAF Phase II, the 
Commission expects to be distributing all CAF support in price cap 
areas pursuant to a market-based mechanism, such as competitive 
bidding. However, if such a mechanism is not implemented by the end of 
the five-year term of CAF Phase II, the incumbent ETCs will be required 
to continue providing broadband with performance characteristics that 
remain reasonably comparable to the performance characteristics of 
terrestrial fixed broadband service in urban America, in exchange for 
ongoing CAF Phase II support.
c. Methodology for Allocating Support
    102. Discussion. The Commission concludes that the Connect America 
Fund should ultimately rely on market-based mechanisms, such as 
competitive bidding, to ensure the most efficient and effective use of 
public resources. However, the CAF is not created on a blank slate, but 
rather against the backdrop of a decades-old regulatory system. The 
continued existence of legacy obligations, including state carrier of 
last resort obligations for telephone service, complicate the 
transition to competitive bidding. In the transition, the Commission 
seeks to avoid consumer disruption--including the loss of traditional 
voice service--while getting robust, scalable broadband to substantial 
numbers of unserved rural Americans as quickly as possible. 
Accordingly, the Commission adopts an approach that enables competitive 
bidding for CAF Phase II support in the near-term in some price cap 
areas, while in other areas holding the incumbent carrier to broadband 
and other public interest obligations over large geographies in return 
for five years of CAF support.
    103. Specifically, the Commission adopts the following methodology 
for providing CAF support in price cap areas. First, the Commission 
will model forward-looking costs to estimate the cost of deploying 
broadband-capable networks in high-cost areas and identify at a 
granular level the areas where support will be available. Second, using 
the cost model, the Commission will offer each price cap LEC annual 
support for a period of five years in exchange for a commitment to 
offer voice across its service territory within a state and broadband 
service to supported locations within that service territory, subject 
to robust public interest obligations and accountability standards. 
Third, for all territories for which price cap LECs decline to make 
that commitment, the Commission will award ongoing support through a 
competitive bidding mechanism.
    104. The Commission anticipates adoption of the selected model by 
the end of 2012 for purposes of providing support beginning January 1, 
2013.
    105. Determination of Eligible Areas. The Commission will use a 
forward-looking cost model to determine, on a census block or smaller 
basis, areas that will be eligible for CAF Phase II support. In doing 
so, the Commission will allocate the budget of no more than $1.8 
billion for price cap areas to maximize the number of expensive-to-
serve residences, businesses, and community anchor institutions that 
will have access to modern networks providing voice and robust, 
scalable broadband. Specifically, the Commission will use the model to 
identify those census blocks where the cost of service is likely to be 
higher than can be supported through reasonable end-user rates alone, 
and, therefore, should be eligible for CAF support. The Commission will 
also use the model to identify, from among these, a small number of 
extremely high-cost census blocks that should receive funding 
specifically set aside for remote and extremely high-cost areas, as 
described below, rather than receiving CAF Phase II support, in order 
to keep the total size of the CAF and legacy high-cost mechanisms 
within the $4.5 billion budget.
    106. This methodology balances the desire to extend robust, 
scalable broadband to all Americans with the recognition that the very 
small percentage of households that are most expensive to serve via 
terrestrial technology represent a disproportionate share of the cost 
of serving currently unserved areas. In light of this fact, the State 
Members of the Joint Board propose that universal service support be 
limited to not more than $100 per high-cost location per month, which 
they suggest is somewhat higher than the prevailing retail price of 
satellite service. Similarly, ABC Plan proponents recommend an 
alternative technology benchmark of $256 per month based on the plan 
proponents' cost model--the CostQuest Broadband Analysis Tool (CQBAT)--
which would limit support per location to no more than $176 per month 
($256-$80 cost benchmark). The Commission agrees that the highest cost 
areas are more appropriately served through alternative approaches, and 
in the USF/ICC Transformation FNPRM the Commission seeks comment on how 
best to utilize at least $100 million in annual CAF funding to maximize 
the availability of affordable broadband in such areas. Here, the 
Commission adopts a methodology for calculating support that will 
target support to areas that exceed a specified cost benchmark, but not 
provide support for areas that

[[Page 81576]]

exceed an ``extremely high cost'' threshold.
    107. The Commission delegates to the Wireline Competition Bureau 
the responsibility for setting the extremely high-cost threshold in 
conjunction with adoption of a final cost model. The threshold should 
be set to maintain total support in price cap areas within the up to 
$1.8 billion annual budget.
    108. In determining the areas eligible for support, the Commission 
will also exclude areas where, as of a specified future date as close 
as possible to the completion of the model and to be determined by the 
Wireline Competition Bureau, an unsubsidized competitor offers 
affordable broadband that meets the initial public interest obligations 
that the Commission establishes in this R&O for CAF Phase I, i.e., 
speed, latency, and usage requirements. The model scenarios submitted 
by the ABC Plan proponents excluded areas already served by a cable 
company offering broadband. State Members propose, at a minimum, 
excluding areas with unsubsidized wireline competition, and suggested 
that areas with reliable 4G wireless service could also be excluded. In 
an ``Amended ABC Plan,'' NCTA proposes to exclude areas where there is 
an unsupported wireline or wireless broadband competitor, and areas 
that received American Recovery and Reinvestment Act stimulus funding 
from Rural Utilities Service (RUS) or NTIA to build broadband 
facilities. The Commission concludes, on balance, that it would be 
appropriate to exclude any area served by an unsubsidized competitor 
that meets the initial performance requirements, and the Commission 
delegates to the Wireline Competition Bureau the task of implementing 
the specific requirements of this rule.
    109. State-Level Commitment. Following adoption of the cost model, 
which the Commission anticipates will be before the end of 2012, the 
Bureau will publish a list of all eligible census blocks associated 
with each incumbent price cap carrier within each state. After the list 
is published, there will be an opportunity for comments and data to be 
filed to challenge the determination of whether or not areas are 
unserved by an unsubsidized competitor. Each incumbent carrier will 
then be given an opportunity to accept, for each state it serves, the 
public interest obligations associated with all the eligible census 
blocks in its territory, in exchange for the total model-derived annual 
support associated with those census blocks, for a period of five 
years. The model-derived support amount associated with each census 
block will be the difference between the model-determined cost in that 
census block, provided that cost is below the highest-cost threshold, 
and the cost benchmark used to identify high-cost areas. If the 
incumbent accepts the state-level broadband commitment, it shall be 
subject to the public interest obligations described above for all 
locations for which it receives support in that state, and shall be the 
presumptive recipient of the model-derived support amount for the five-
year CAF Phase II period. In meeting its obligation to serve a 
particular number of locations in a state, an incumbent that has 
accepted the state-level commitment may choose to serve some census 
blocks with costs above the highest cost threshold instead of eligible 
census blocks (i.e., census blocks with lower costs), provided that it 
meets the public interest obligations in those census blocks, and 
provided that the total number of unserved locations and the total 
number of locations covered is greater than or equal to the number of 
locations in the eligible census blocks.
    110. Carriers accepting a state-level commitment will receive 
funding for five years. At the end of the five-year term, in the areas 
where the price cap carriers have accepted the five-year state level 
commitment, the Commission expects to use competitive bidding to award 
CAF support on a going-forward basis, and may use the competitive 
bidding structure adopted by the Commission for use in areas where the 
state-level commitment is declined.
    111. The Commission concludes that the state-level commitment 
framework the Commission adopts is preferable to the right of first 
refusal approach proposed by the Commission in the USF/ICC 
Transformation NPRM, which would have been offered at the study area 
level, and to a right of first refusal offered at the wire center 
level, as proposed by some commenters. Both of these approaches would 
have allowed price cap carriers to pick and choose on a granular basis 
the areas where they would receive model-based support within a state. 
This would allow the incumbent to cherry pick the most attractive areas 
within its service territory, leaving the least desirable areas for a 
competitive process. This concern was greatest with the ABC proposal, 
under which carriers would have been able to exercise a right of first 
refusal on a wire center basis, but also applies to the study area 
proposal in the USF/ICC Transformation NPRM. Although for some price 
cap carriers, their study areas are their entire service area within a 
state, other carriers still have many study areas within a state. These 
carriers may have acquired various properties over time and chosen to 
keep them as separate study areas for various reasons, including 
potentially to maximize universal service support. Rather than enshrine 
such past decisions in the new CAF, the Commission concludes that it is 
more equitable to treat all price cap carriers the same and require 
them to offer service to all high-cost locations between an upper and 
lower threshold within their service territory in a state, consistent 
with the public interest obligations described above, in exchange for 
support. Requiring carriers to accept or decline a commitment for all 
eligible locations in their service territory in a state should reduce 
the chances that eligible locations that may be less economically 
attractive to serve, even with CAF support, get bypassed, and increase 
the chance such areas get served along with eligible locations that are 
more economically attractive.
    112. In determining how best to award CAF support in price cap 
areas, the Commission carefully weighed the risks and benefits of 
alternatives, including using competitive bidding everywhere, without 
first giving incumbent LECs an opportunity to enter a state-level 
service commitment. The Commission concludes that, on balance, the 
approach the Commission adopts will best ensure continued universal 
voice service and speed the deployment of broadband to all Americans 
over the next several years, while minimizing the burden on the 
Universal Service Fund.
    113. In particular, several considerations support the 
determination not to immediately adopt competitive bidding everywhere 
for the distribution of CAF support. Because the Commission excludes 
from the price cap areas eligible for support all census blocks served 
by an unsubsidized competitor, the Commission will generally be 
offering support for areas where the incumbent LEC is likely to have 
the only wireline facilities, and there may be few other bidders with 
the financial and technological capabilities to deliver scalable 
broadband that will meet the requirements over time. In addition, it is 
the predictive judgment that the incumbent LEC is likely to have at 
most the same, and sometimes lower, costs compared to a new entrant in 
many of these areas. The Commission also weighs the fact that incumbent 
LECs generally continue to have carrier of last resort obligations for 
voice services. While some states are beginning to re-evaluate those 
obligations, in many states the incumbent carrier still has the 
continuing obligation to provide voice service and cannot exit the 
marketplace

[[Page 81577]]

absent state permission. On balance, the Commission believes that that 
the approach best serves consumers in these areas in the near term, 
many of whom are receiving voice services today supported in part by 
universal service funding and some of whom also receive broadband, and 
will speed the delivery of broadband to areas where consumers have no 
access today.
    114. The Commission disagrees with commenters who assert that the 
principle of competitive neutrality precludes the Commission from 
giving incumbent carriers an opportunity to commit to deploying 
broadband throughout their service areas in a state in exchange for 
five years of funding. The principle of competitive neutrality states 
that ``[u]niversal service support mechanisms and rules should be 
competitively neutral,'' which means that they should not ``unfairly 
advantage nor disadvantage one provider over another, and neither 
unfairly favor nor disfavor one technology over another.'' The 
competitive neutrality principle does not require all competitors to be 
treated alike, but ``only prohibits the Commission from treating 
competitors differently in `unfair' ways.'' Moreover, neither the 
competitive neutrality principle nor the other 47 U.S.C. 254(b) 
principles impose inflexible requirements for the Commission's 
formulation of universal service rules and policies. Instead, the 
``promotion of any one goal or principle should be tempered by a 
commitment to ensuring the advancement of each of the principles'' in 
47 U.S.C. 254(b).
    115. As an initial matter, the Commission notes that the USF 
reforms generally advance the principle of competitive neutrality by 
limiting support to only those areas of the nation that lack 
unsubsidized providers. Thus, providers that offer service without 
subsidy will no longer face competitors whose service in the same area 
is subsidized by federal universal service funding. Especially in this 
light, the Commission concludes that any departure from strict 
competitive neutrality occasioned by affording incumbent LECs an 
opportunity to commit to deploying broadband in their statewide service 
areas is outweighed by the advancement of other 47 U.S.C. 254(b) 
principles, in particular, the principles that ``[a]ccess to advanced 
telecommunications and information services should be provided in all 
regions of the Nation,'' and that consumers in rural areas should have 
access to advanced services comparable to those available in urban 
areas. Although other classes of providers may be well situated to make 
broadband commitments with respect to relatively small geographic areas 
such as discrete census blocks, the purpose of the five-year commitment 
is to establish a limited, one-time opportunity for the rapid 
deployment of broadband services over a large geographic area. The fact 
that incumbent LECs' have had a long history of providing service 
throughout the relevant areas--including the fact that incumbent LECs 
generally have already obtained the ETC designation necessary to 
receive USF support throughout large service areas--puts them in a 
unique position to deploy broadband networks rapidly and efficiently in 
such areas. The Commission sees nothing in the record that suggests a 
more competitively neutral way of achieving that objective quickly, 
without abandoning altogether the goal of obtaining large-area build-
out commitments or substantially ballooning the cost of the program.
    116. Moreover, it is important to emphasize the limited scope and 
duration of the state-level commitment procedure. Incumbent LECs are 
afforded only a one-time opportunity to make a commitment to build out 
broadband networks throughout their service areas within a state. If 
the incumbent declines that opportunity in a particular state, support 
to serve the unserved areas located within the incumbent's service area 
will be awarded by competitive bidding, and all providers will have an 
equal opportunity to seek USF support, as described below. Furthermore, 
even where the incumbent LEC makes a state-level commitment, its right 
to support will terminate after five years, and the Commission expects 
that support after such five-year period will be awarded through a 
competitive bidding process in which all eligible providers will be 
given an equal opportunity to compete. Thus, the Commission anticipates 
that funding will soon be allocated on a fully competitive basis. In 
light of all these considerations, the Commission concludes that 
adhering to strict competitive neutrality at the expense of the state-
level commitment process would unreasonably frustrate achievement of 
the universal service principles of ubiquitous and comparable broadband 
services and promoting broadband deployment, and unduly elevate the 
interests of competing providers over those of unserved and under-
served consumers who live in high-cost areas of the country, as well as 
of all consumers and telecommunications providers who make payments to 
support the Universal Service Fund.
    117. Competitive Bidding. In areas where the incumbent declines a 
state-level commitment, the Commission will use a competitive bidding 
mechanism to distribute support. In the USF/ICC Transformation FNPRM, 
the Commission proposes to design this mechanism in a way that 
maximizes the extent of robust, scalable broadband service subject to 
the budget. Assigning support in this way should enable us to identify 
those providers that will make most effective use of the budgeted 
funds, thereby extending services to as many consumers as possible. The 
Commission proposes to use census blocks as the minimum geographic unit 
eligible for competitive bidding and seek comment on ways to allow 
aggregation of such blocks. Although the Commission proposes using the 
same areas identified by the CAF Phase II model as eligible for 
support, the Commission also seeks comment on other approaches--for 
example, excluding areas served by any broadband provider, or using 
different cost thresholds. The Commission also seeks targeted comment 
on other issues, including bidder eligibility, auction design, and 
auction process.
    118. Transition to New Support Levels. Support under CAF Phase II 
will be phased in, in the following manner. For a carrier accepting the 
state-wide commitment, in the first year, the carrier will receive one-
half the full amount the carrier will receive under CAF Phase II and 
one-half the amount the carrier received under CAF Phase I for the 
previous year (which would be the frozen amount if the carrier declines 
Phase I or the frozen amount plus the incremental amount if the carrier 
accepts Phase I); in the second year, each carrier accepting the state-
wide commitment will receive the full CAF Phase II amount. To the 
extent a carrier will receive less money from CAF Phase II than it will 
receive under frozen high-cost support, there will be an appropriate 
multi-year transition to the lower amount. It is premature to specify 
the length of that transition now, before the cost model is adopted, 
but it will be addressed in conjunction with finalization of the cost 
model that will be developed with public input.
    119. For a carrier declining the state-wide commitment, the carrier 
will continue to receive support in an amount equal to its CAF Phase I 
support amount until the first month that the winner of any competitive 
process receives support under CAF Phase II; at that time, the carrier 
declining the state-wide commitment will cease to receive high-cost 
universal service support. No additional broadband obligations apply to 
funds received during the transition period. That is, carriers 
accepting the

[[Page 81578]]

state-wide commitment are obliged to meet the Phase II broadband 
obligations described above, while carriers declining the state-wide 
commitment will be required to meet their pre-existing Phase I 
obligations, but will not be required to deploy additional broadband in 
connection with their receipt of transitional funding.
d. Forward-Looking Cost Model
    120. Discussion. Although the Commission agrees with both the State 
Members and the ABC Plan proponents that the Commission should use a 
forward-looking model to assist in setting support levels in price cap 
territories, the Commission does not adopt the CQBAT cost model 
proposed by the ABC Coalition, nor does the Commission accept the State 
Board's proposal that the Commission simply update the existing cost 
model. Instead, the Commission initiates a public process to develop a 
robust cost model for the Connect America Fund to accurately estimate 
the cost of a modern voice and broadband capable network, and delegate 
to the Wireline Competition Bureau the responsibility of completing it.
    121. In light of the limited opportunity the public has received to 
review and modify the ABC Coalition's proposed CQBAT model, the 
Commission rejects the group's suggestion that the Commission adopts 
that model at this time. The Commission has previously held that before 
any cost model may be ``used to calculate the forward-looking economic 
costs of providing universal service in rural, insular, and high cost 
areas,'' the ``model and all underlying data, formulae, computations, 
and software associated with the model must be available to all 
interested parties for review and comment. All underlying data should 
be verifiable, engineering assumptions reasonable, and outputs 
plausible.'' The Commission sees no reason to depart from this 
conclusion here, and the CQBAT model, as presented to the Commission at 
this time, does not meet this requirement.
    122. The Commission likewise rejects the State Members' proposal to 
modify the Commission's existing cost model to estimate the costs of 
modern voice and broadband-capable network. The Commission's existing 
cost model does not fully reflect the costs associated with modern 
voice and broadband networks because the model calculates cost based on 
engineering assumptions and equipment appropriate to the 1990s. In 
addition, modeling techniques and capabilities have advanced 
significantly since 1998, when the Commission's existing high cost 
model was developed, and the new techniques could significantly improve 
the accuracy of modeled costs in a new model relative to an updated 
version of the Commission's existing model. For example, new models can 
estimate the costs of efficient routing along roads in a way that the 
older model cannot. The Commission sees the benefits of leveraging the 
existing model to rapidly deploy interim support, and does just that 
for Phase I of the CAF. For the longer-term disbursement of support, 
however, the Commission concludes that it is preferable to use a more 
accurate, up to date model based on modern techniques.
    123. To expedite the process of finalizing the model to be used as 
part of the state-level commitment, the Commission delegates to the 
Wireline Competition Bureau the authority to select the specific 
engineering cost model and associated inputs, consistent with this R&O. 
For the reasons below, the model should be of wireline technology and 
at a census block or smaller level. In other respects, the Commission 
directs the Wireline Competition Bureau to ensure that the model design 
maximizes the number of locations that will receive robust, scalable 
broadband within the budgeted amounts. Specifically, the model should 
direct funds to support 4 Mbps/1 Mbps broadband service to all 
supported locations, subject only to the waiver process for upstream 
speed described above, and should ensure that the most locations 
possible receive a 6 Mbps/1.5 Mbps or faster service at the end of the 
five year term, consistent with the CAF Phase II budget. The Wireline 
Competition Bureau's ultimate choice of a greenfield or brownfield 
model, the modeled architecture, and the costs and inputs of that model 
should ensure that the public interest obligations are achieved as 
cost-effectively as possible.
    124. Geographic Granularity. The Commission concluded that the CAF 
Phase II model should estimate costs at a granular level--the census 
block or smaller--in all areas of the country. Geographic granularity 
is important in capturing the forward-looking costs associated with 
deploying broadband networks in rural and remote areas. Using the 
average cost per location of existing deployments in large areas, even 
when adjusted for differences in population and linear densities, 
presents a risk that costs may be underestimated in rural areas. 
Deployments in rural markets are likely to be subscale, so an analysis 
based on costs averaged over large areas, particularly large areas that 
include both low- and high-density zones, will be inaccurate. A 
granular approach, calculating costs based on the plant and hardware 
required to serve each location in a small area (i.e., census block or 
smaller), will provide sufficient geographic and cost-component 
granularity to accurately capture the true costs of subscale markets. 
For example, if only one home in an area with very low density is 
connected to a DSLAM, the entire cost of that DSLAM should be allocated 
to the home rather than the fraction based on DSLAM capacity. 
Furthermore, to the extent that a home is served by a long section of 
feeder or distribution cabling that serves only that home, the entire 
cost of such cabling should be allocated to the home as well.
    125. Wireline Network Architecture. The Commission concludes that 
the CAF Phase II model should estimate the cost of a wireline network. 
For a number of reasons, the Commission rejects some commenters' 
suggestion that the Commission should attempt to model the costs of 
both wireline and wireless technologies and base support on whichever 
technology is lower cost in each area of the country.
    126. For one, the Commission has concerns about the feasibility of 
developing a wireless cost model with sufficient accuracy for use in 
the CAF Phase II framework. The Commission recognizes that all cost 
models involve a certain degree of imprecision. As the Commission noted 
in the USF Reform NOI/NPRM, 75 FR 26906, May 13, 2010, however, 
accurately modeling wireless deployment may raise challenges beyond 
those that exist for wireline models, particularly where highly 
localized cost estimates are required. For example, the availability of 
desirable cell sites can significantly affect the cost of covering any 
given small geographic area and is challenging to model without 
detailed local siting information. Propagation characteristics may vary 
based on local and difficult to model features like foliage. Access to 
spectrum, which substantially affects overall network costs, varies 
dramatically among potential funding recipients and differs across 
geographies. Because the cost model for CAF Phase II will need to 
calculate costs for small areas (census-block or smaller), high local 
variability in the accuracy of outputs will create challenges, even if 
a cost model provides high quality results when averaged over a larger 
area. In light of the issues with modeling wireless costs, the 
Commission remains concerned that a lowest-cost technology model 
including both wireless and wireline

[[Page 81579]]

components could introduce greater error than a wireline-only model in 
identifying eligible areas. The Commission does not believe that 
delaying implementation of CAF Phase II to resolve these issues serves 
the public interest.
    127. Finally, the record fails to persuade us that, in general, the 
costs of cellular wireless networks are likely to be significantly 
lower than wireline networks for providing broadband service that meets 
the CAF Phase II speed, latency, and capacity requirements. In 
particular, the Commission emphasizes that, as described above, 
carriers receiving CAF Phase II support should expect to offer service 
with increasing download and upload speeds over time, and that allows 
monthly usage reasonably comparable to terrestrial fixed residential 
broadband offerings in urban areas. The National Broadband Plan modeled 
the nationwide costs of a wireless broadband network dimensioned to 
support typical usage patterns for fixed services to homes, and found 
that the cost was similar to that of wireline networks. None of the 
parties advocating for the use of a wireless model has submitted into 
the record a wireless model for fixed service and, therefore, the 
Commission has no evidence that such service would be less costly.
    128. Process for Adopting the Model. The Commission anticipates 
that the Wireline Competition Bureau will adopt the specific model to 
be used for purposes of estimating support amounts in price cap areas 
by the end of 2012 for purposes of providing support beginning January 
1, 2013. Before the model is adopted, the Commission will ensure that 
interested parties have access to the underlying data, assumptions, and 
logic of all models under consideration, as well as the opportunity for 
further comment. When the Commission adopted its existing cost model, 
it did so in an open, deliberative process with ample opportunity for 
interested parties to participate and provide valuable assistance. The 
Commission has had three rounds of comment on the use of a model for 
purposes of determining Connect America Fund support and remains 
committed to a robust public comment process. To expedite this process, 
the Commission delegates to the Wireline Competition Bureau the 
authority to select the specific engineering cost model and associated 
inputs, consistent with this R&O. The Commission directs the Wireline 
Competition Bureau to issue a public notice within 30 days of release 
of this R&O requesting parties to file models for consideration in this 
proceeding consistent with this R&O, and to report to the Commission on 
the status of the model development process no later than June 1, 2012.
    129. The Commission notes that price cap carriers serving Alaska, 
Hawaii, Puerto Rico, the U.S. Virgin Islands and Northern Marianas 
Islands argue they face operating conditions and challenges that differ 
from those faced by carriers in the contiguous 48 states. The 
Commission directs the Wireline Competition Bureau to consider the 
unique circumstances of these areas when adopting a cost model, and 
further directs the Wireline Competition Bureau to consider whether the 
model ultimately adopted adequately accounts for the costs faced by 
carriers serving these areas. If, after reviewing the evidence, the 
Wireline Competition Bureau determines that the model ultimately 
adopted does not provide sufficient support to any of these areas, the 
Bureau may maintain existing support levels, as modified in this R&O, 
to any affected price cap carrier, without exceeding the overall budget 
of $1.8 billion per year for price cap areas.

C. Universal Service Support for Rate-of-Return Carriers

1. Public Interest Obligations of Rate-of-Return Carriers
    130. The Commission recognizes that, in the absence of any federal 
mandate to provide broadband, rate-of-return carriers have been 
deploying broadband to millions of rural Americans, often with support 
from a combination of loans from lenders such as RUS and ongoing 
universal service support. The Commission now requires that recipients 
use their support in a manner consistent with achieving universal 
availability of voice and broadband.
    131. To implement this policy, rather than establishing a mandatory 
requirement to deploy broadband-capable facilities to all locations 
within their service territory, the Commission continues to offer a 
more flexible approach for these smaller carriers. Specifically, 
beginning July 1, 2012, the Commission requires the following of rate-
of-return carriers that continue to receive HCLS or ICLS or begin 
receiving new CAF funding in conjunction with the implementation of 
intercarrier compensation reform, as a condition of receiving that 
support: Such carriers must provide broadband service at speeds of at 
least 4 Mbps downstream and 1 Mbps upstream with latency suitable for 
real-time applications, such as VoIP, and with usage capacity 
reasonably comparable to that available in residential terrestrial 
fixed broadband offerings in urban areas, upon reasonable request. The 
Commission thus requires rate-of-return carriers to provide their 
customers with at least the same initial minimum level of broadband 
service as those carriers who receive model-based support, but given 
their generally small size, the Commission determines that rate-of-
return carriers should be provided greater flexibility in edging out 
their broadband-capable networks in response to consumer demand. At 
this time the Commission does not adopt intermediate build-out 
milestones or increased speed requirements for future years, but the 
Commission expects carriers will deploy scalable broadband to their 
communities and will monitor their progress in doing so, including 
through the annual reports they will be required to submit. The 
broadband deployment obligation the Commission adopts is similar to the 
voice deployment obligations many of these carriers are subject to 
today.
    132. The Commission believes these public interest obligations are 
reasonable. Although many carriers may experience some reduction in 
support as a result of the reforms adopted herein, those reforms are 
necessary to eliminate waste and inefficiency and improve incentives 
for rational investment and operation by rate-of-return LECs. The 
Commission notes that these carriers benefit by receiving certain and 
predictable funding through the CAF created to address access charge 
reform. In addition, rate-of-return carriers will not necessarily be 
required to build out to and serve the most expensive locations within 
their service area.
    133. Upon receipt of a reasonable request for service, carriers 
must deploy broadband to the requesting customer within a reasonable 
amount of time. The Commission agrees with the State Members of the 
Federal-State Joint Board on Universal Service that construction 
charges may be assessed, subject to limits. In the Accountability and 
Oversight section of this R&O, the Commission requires ETCs to include 
in their annual reports to USAC and to the relevant state commission 
and Tribal government, if applicable, the number of unfulfilled 
requests for service from potential customers and the number of 
customer complaints, broken out separately for voice and broadband 
services. The Commission will monitor carriers' filings to determine 
whether reasonable requests for broadband service are being fulfilled, 
and the Commission encourages states and Tribal governments to do the 
same. As

[[Page 81580]]

discussed in the legal authority section above, the Commission is 
funding a broadband-capable voice network, so the Commission believes 
that to the extent states retain jurisdiction over voice service, 
states will have jurisdiction to monitor these carriers' responsiveness 
to customer requests for service.
    134. The Commission recognizes that smaller carriers serve some of 
the highest cost areas of the nation. The Commission seeks comment in 
the USF/ICC Transformation FNPRM below on alternative ways to meet the 
needs of consumers in these highest cost areas. Pending development of 
the record and resolution of these issues, rate-of-return carriers are 
simply required to extend broadband on reasonable request. The 
Commission expects that rate-of-return carriers will follow pre-
existing state requirements, if any, regarding service line extensions 
in their highest-cost areas.
2. Limits on Reimbursable Capital and Operating Costs
    135. Discussion. The Commission concludes that the Commission 
should use regression analyses to limit reimbursable capital expenses 
and operating expenses for purposes of determining high-cost support 
for rate-of-return carriers. The methodology will generate caps, to be 
updated annually, for each rate-of-return company. This rule change 
will place important constraints on how rate-of-return companies invest 
and operate that over time will incent greater operational 
efficiencies. The Commission delegates authority to the Wireline 
Competition Bureau to implement a methodology and expect that limits 
will be implemented no later than July 1, 2012.
    136. Several commenters support the proposal to impose reasonable 
limits on reimbursable capital and operating expenses. Although many 
small rate-of-return carriers seem to imply that the Commission should 
not adopt operating expense benchmarks because their operating expenses 
are ``fixed,'' other representatives of rural rate-of-return companies 
support the concept of imposing reasonable benchmarks. The Rural 
Associations concede that ``[t]o the extent any `race to the top' 
occurs, it undermines predictability and stability for current USF 
recipients.''
    137. The Commission sets forth in the USF/ICC Transformation FNPRM 
and Appendix H a specific methodology for capping recovery for capital 
expenses and operating expenses using quantile regression techniques 
and publicly available cost, geographic and demographic data. The net 
effect would be to limit high-cost loop support amounts for rate-of-
return carriers to reasonable amounts relative to other carriers with 
similar characteristics. Specifically, the methodology uses National 
Exchange Carrier Association (NECA) cost data and 2010 Census data to 
cap permissible expenses for certain costs used in the HCLS formula. 
The Commission invites public input in the accompanying USF/ICC 
Transformation FNPRM on that methodology and anticipates that HCLS 
benchmarks will be implemented for support calculations beginning in 
July 2012.
    138. The Commission sets forth here the parameters of the 
methodology that the Bureau should use to limit payments from HCLS. The 
Commission requires that companies' costs be compared to those of 
similarly situated companies. The Commission concludes that statistical 
techniques should be used to determine which companies shall be deemed 
similarly situated. For purposes of this analysis, the Commission 
concludes the following non-exhaustive list of variables may be 
considered: Number of loops, number of housing units (broken out by 
whether the housing units are in urbanized areas, urbanized clusters, 
and nonurban areas), as well as geographic measures such as land area, 
water area, and the number of census blocks (all broken out by 
urbanized areas, urbanized clusters, and nonurban areas). The 
Commission grants the Bureau discretion to determine whether other 
variables, such as soil type, would improve the regression analysis. 
The Commission notes that the soils data from the Natural Resource 
Conservation Service (NRCS) that the Nebraska study used to generate 
soil, frost and wetland variables do not cover the entire United 
States. These data, called the Soil Survey Geographic Database or 
SSURGO, do not cover about 24 percent of the United States land mass, 
including Puerto Rico, Guam, American Samoa, U.S. Virgin Islands and 
Northern Mariana Islands as well as Alaska. The Commission seeks 
comment in the USF/ICC Transformation FNPRM on sources of other 
publicly available soil data. The Commission delegates authority to the 
Bureau to adopt the initial methodology, to update it as it gains more 
experience and additional information, and to update its regression 
analysis annually with new cost data.
    139. Each year the Wireline Competition Bureau will publish in a 
public notice the updated capped values that will be used in the NECA 
formula in place of an individual company's actual cost data for those 
rate-of-return cost companies whose costs exceed the caps, which will 
result in revised support amounts. The Commission directs NECA to 
modify the high-cost loop support universal service formula for average 
schedule companies annually to reflect the caps derived from the cost 
company data.
    140. The Commission concludes that establishing reasonable limits 
on recovery for capital expenses and operating expenses will provide 
better incentives for carriers to invest prudently and operate 
efficiently than the current system. Under the current HCLS rules, a 
company receives support when its costs are relatively high compared to 
a national average--without regard to whether a lesser amount would be 
sufficient to provide supported services to its customers. The current 
rules fail to create incentives to reduce expenditures; indeed, because 
of the operation of the overall cap on HCLS, carriers that take prudent 
measures to cut costs under the current rules may actually lose HCLS 
support to carriers that significantly increase their costs in a given 
year.
    141. Under the new rule, the Commission will place limits on the 
HCLS provided to carriers whose costs are significantly higher than 
other companies that are similarly situated, and support will be 
redistributed to those carriers whose unseparated loop cost is not 
limited by operation of the benchmark methodology. The Commission notes 
that the fact that an individual company will not know how the 
benchmark affects its support levels until after investments are made 
is no different from the current operation of high-cost loop support, 
in which a carrier receives support based on where its own cost per 
loop falls relative to a national average that changes from year to 
year. Even today, companies can only estimate whether their 
expenditures will be reimbursed through HCLS. In contrast to the 
current situation, the new rule will discourage companies from over-
spending relative to their peers. The new rule will provide additional 
support to those companies that are otherwise at risk of losing HCLS 
altogether, and would not otherwise be well-positioned to further 
advance broadband deployment.
    142. The Commission rejects the argument that imposing benchmarks 
in this fashion would negatively impact companies that have made past 
investments in reliance upon the current rules or the ``no barriers to 
advanced services'' policy. 47 U.S.C. 254 does not mandate the receipt 
of support by any particular carrier. Rather, as the Commission has 
indicated

[[Page 81581]]

and the courts have agreed, the ``purpose of universal service is to 
benefit the customer, not the carrier.'' That is, while 47 U.S.C. 254 
directs the Commission to provide support that is sufficient to achieve 
universal service goals, that obligation does not create any 
entitlement or expectation that ETCs will receive any particular level 
of support or even any support at all. The new rule will inject greater 
predictability into the current HCLS mechanism, as companies will have 
more certainty of support if they manage their costs to be in alignment 
with their similarly situated peers.
    143. Our obligation to consumers is to ensure that they receive 
supported services. Our expectation is that carriers will provide such 
services to their customers through prudent facility investment and 
maintenance. To the extent costs above the benchmark are disallowed 
under this new rule, companies are free to file a petition for waiver 
to seek additional support.
    144. The Commission finds that the approach--which limits allowable 
investment and expenses with reference to similarly situated carriers--
is a reasonable way to place limits on recovery of loop costs. The 
Rural Associations propose an alternative limitation on capital 
investment that would tie the amount of a rural company's recovery of 
prospective investment that qualifies for high-cost support to the 
accumulated depreciation in its existing loop plant. Their proposal 
would limit only future annual loop investment for individual companies 
by multiplying (a) the ratio of accumulated loop depreciation to total 
loop plant or (b) twenty percent, whichever is lower, times (c) an 
estimated total loop plant investment amount (adjusted for inflation). 
This proposal would do little to limit support for capital expenses if 
past investments for a particular company were high enough to be more 
than sufficient to provide supported services, and would do nothing to 
limit support for operating expenses, which are on average more than 
half of total loop costs. In addition, it would likely be 
administratively impracticable for the Commission to verify the 
inflation adjustments each company would make for various pieces of 
equipment acquired at various times.
    145. The Commission also concludes that the approach can be more 
readily implemented and updated than the specific proposal presented by 
the Nebraska Companies. Consultants for the Nebraska Companies, in 
their regression analyses, used proprietary cost data. Because the 
proprietary cost data were not placed in the record, Commission staff 
was not able to verify the results of the Nebraska Companies' studies. 
The Nebraska Companies subsequently proposed that the Commission begin 
collecting similar investment and operating expense data, as well as 
independent variables such as density per route mile, to be used in 
similar regression analyses. For example, they suggest that ``[o]ne 
useful source for this data would be the investment costs associated 
with actual broadband construction projects that meet or exceed current 
engineering standards.'' Although the Nebraska Companies' proposal 
shares objectives similar to the methodology, it would require the 
collection of additional data that the Commission does not currently 
have, which would lead to considerable delay in implementation. The 
Commission also is concerned about the difficulty in obtaining a 
sufficiently representative and standardized data set based on 
construction projects that will vary in size, scope and duration. 
Moreover, regressions based on such data could not easily be updated on 
a regular basis without further data collection and standardization. On 
balance, the Commission does not believe that any advantages of the 
Nebraska Companies' approach outweigh the benefits of relying on cost 
data that the Commission already collects on a regular basis. As 
explained in detail in the accompanying USF/ICC Transformation FNPRM 
and Appendix H, Commission staff used publicly available NECA cost data 
and other publicly available geographic and demographic data sets to 
develop the proposed benchmarks.
    146. Finally, the Commission notes that while the methodology in 
Appendix H is specifically designed to modify the formula for 
determining HCLS, the Commission concludes that the Commission should 
also develop similar benchmarks for determining ICLS. The Commission 
directs NECA to file the detailed revenue requirement data it receives 
from carriers, no later than thirty days after release of this R&O, so 
that the Wireline Competition Bureau can evaluate whether it should 
adopt a methodology using these data. Over time, benchmarks to limit 
reimbursable recovery of costs will provide incentives for each 
individual company to keep its costs lower than its own cap from prior 
years, and more generally moderate expenditures and improve efficiency, 
and the Commission believes these objectives are as important in the 
context of ICLS as they are for HCLS. The Commission seeks comment in 
the USF/ICC Transformation FNPRM on ICLS benchmarks.
    147. The Commission delegates authority to the Wireline Competition 
Bureau to finalize a methodology to limit HCLS and ICLS reimbursements 
after this further input.
3. Corporate Operations Expense
    148. Discussion. As supported by many parties, the Commission will 
adopt the more modest reform proposal to extend the limit on recovery 
of corporate operations expense to ICLS effective January 1, 2012. The 
Commission concluded in the Universal Service First Report and Order, 
62 FR 32862, June 17, 1997, that the amount of recovery of corporate 
operations expense from HCLS should be limited to help ensure that 
carriers use such support only to offer better service to their 
customers through prudent facility investment and maintenance, 
consistent with their obligations under 47 U.S.C. 254(k). The 
Commission now concludes that the same reasoning applies to ICLS. 
Extending the limit on the recovery of corporate operations expenses to 
ICLS likewise furthers the goal of fiscal responsibility and 
accountability.
    149. The Commission notes, however, that the current formula for 
limiting the eligibility of corporate operations expenses for HCLS has 
not been revised since 2001. The initial formula was implemented in 
1998, based on 1995 cost data. In 2001, the formula was modified to 
reflect increases in Gross Domestic Product-Chained Price Index (GDP-
CPI), but has not been updated since then.
    150. There have been considerable changes in the telecommunications 
industry in the last decade, given the ``ongoing evolution of the voice 
network into a broadband network,'' and the Commission believes 
updating the formula based on more recent cost data will ensure that it 
reflects the current economics of serving rural areas and appropriately 
provides incentives for efficient operations. Therefore, the Commission 
now updates the limitation formula based on an analysis of the most 
recent actual corporate operations expense submitted by rural incumbent 
LECs. As set forth in Appendix C of the Report and Order, which is 
available in its entirety at http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf, and as summarized below 
in section V.C.3.a, the basic statistical methods for developing the 
limitation formula and the structure of the formula are the same as 
before. The Commission also concludes that the updated formula the 
Commission adopts should include a

[[Page 81582]]

growth factor, consistent with the current formula that applies to 
HCLS.
    151. Accordingly, effective January 1, 2012, the Commission 
modifies the existing limitation on corporate operations expense 
formula as follows:
     For study areas with 6,000 or fewer total working loops 
the monthly amount per loop shall be (a) $42.337-(.00328 x number of 
total working loops), or (b) $63,000/number of total working loops, 
whichever is greater;
     For study areas with more than 6,000, but fewer than 
17,887 total working loops, the monthly amount per loop shall be $3.007 
+ (117,990/number of total working loops); and
     For study areas with 17,887 or more total working loops, 
the monthly amount per loop shall be $9.56;
     Beginning January 1, 2013, the monthly per-loop limit 
shall be adjusted each year to reflect the annual percentage change in 
GDP-CPI.
a. Explanation of Methodology for Modifications to Corporate Operations 
Expense Formulae
    152. The Basic Formulae. The Commission conducted a statistical 
analysis using actual incumbent local exchange carrier data submitted 
by NECA. The Commission used statistical regression techniques that 
focused on corporate operations expense per loop and the number of 
loops, in which the cap on corporate operations expense per loop 
declines as the number of loops increases so that economies of scale, 
which are evident in the data, can be reflected in the model. As in the 
previous corporate operations expense limitation formulae, the linear 
spline model developed has two line segments joined together at a 
single point or knot. In general, the linear spline model allows the 
per-line cap on corporate operations expense to decline as the number 
of loops increases for the smaller study areas having fewer loops than 
the knot point. Estimates produced by the linear spline model suggest 
that the per-loop cap on corporate operations expense for study areas 
with a number of loops higher than the spline knot is constant.
    153. The linear spline model requires selecting a knot, the point 
at which the two line segments of differing slopes meet. The Commission 
retained the knot point at 10,000 loops from the Commission's previous 
analysis. The regression results are as follows:
     For study areas having fewer than 10,000 total working 
loops, the projected monthly corporate operations expense per-loop 
equals $36.815-0.00285 x (number of working loops);
     For study areas with total working loops equal or greater 
than 10,000 loops, the projected monthly corporate operations expense 
per-loop equals $8.12.
    154. Correcting for Non-monotonic Behavior in the Model's Total 
Corporate Operations Expense. The linear spline model has one 
undesirable feature. For a certain range, it yields a total allowable 
corporate operations expense that declines as the number of working 
loops increases. This occurs because multiplying the linear function 
that defines the first line segment of the estimated spline model 
(36.815-(0.00285 x the number of loops)) by the number of loops defines 
a quadratic function that determines total allowable corporate 
operations expense. This quadratic function produces a maximum value at 
6,459 loops, well below the selected knot point of 10,000. To correct 
this problem, we refined the formulae to ensure that the total 
allowable corporate operations expense always increases as the number 
of loops increases. The Commission chose a point to the left of the 
point at which the total corporate operations expense estimate peaks. 
At that selected point, the slope of the function defining total 
corporate operations expense is positive. We then calculated the slope 
at that point and extended a line with the same slope upward to the 
right of that point until the line intersected the original estimated 
total operations expense, which is represented by 8.315 x the number of 
loops. Thus, the Commission we created a line segment with constant 
slope covering the region over which the original model of corporate 
operations expenses declines so that total corporate operations expense 
continues to increase with the number of loops. The Commission chose 
the point that leads to a line segment that yields the highest R\2\.
    155. Using this procedure, the Commission selected 6,000 as the 
point. The slope of total operations expense at this point is 2.615 and 
the line extended intersects the original total operations expense 
model at 17,887. Accordingly, the line segment formed for total 
corporate operations expenses, to be applied from 6,000 loops to 17,887 
loops, is $2.615 x the number of working loops + $102,600. Dividing 
this number by the number of working loops defines the maximum 
allowable corporate operations expense per-loop for the range from 
6,000 to 17,887 working loops, i.e., $2.615 + ($102,600/number of 
working loops). Therefore, the projected per-loop corporate operations 
expense formulae are:
     For study areas having fewer than 6,000 total working 
loops, the projected monthly corporate operations expense per-loop 
equals $ 36.815-0.00285 x (number of total working loops);
     For study areas having 6,000 or more total working loops, 
but less than 17,887 total working loops, the projected monthly 
corporate operations expense per-loop equals $2.615 + (102,600/number 
of total working loops);
     For study areas having total working loops greater than or 
equal to 17,887 total working loops, the projected monthly corporate 
operations expense per-loop equals $8.315.
    156. The Commission concluded previously that the amount of 
corporate operations expense per-loop that is supported through our 
universal service programs should fall within a range of 
reasonableness. Consistent with the formulae currently in place, we 
define this range of reasonableness for each study area as including 
levels of reported corporate operations expense per-loop up to a 
maximum of 115 percent of projected level of corporate operations 
expense per-loop. Therefore, each of the above formulae is multiplied 
by 115 percent to yield the maximum allowable monthly per-loop 
corporate operations expense as follows:
     For study areas having fewer than 6,000 total working 
loops, the maximum allowable monthly corporate operations expense per-
loop equals $42.337 - 0.00328 x number of total working loops;
     For study areas having 6,000 or more total working loops, 
but fewer than 17,887 total working loops, the maximum allowable 
monthly corporate operations expense per-loop equals $3.007 + (117,990/
number of total working loops);
     For study areas with total working loops greater than or 
equal to 17,887 total working loops, the maximum allowable monthly 
corporate operations expense per-loop equals $9.562.
    157. Consistent with the existing rules, we will adjust the monthly 
per-loop limit to reflect the annual change in GDP-CPI.
4. Reducing High Cost Loop Support for Artificially Low End-User Rates
    158. Discussion. The Commission now adopts a rule to limit high-
cost support where end-user rates do not meet a specified local rate 
floor. This rule will apply to both rate-of-return carriers and price 
cap companies. 47 U.S.C. 254 obligates states to share in the 
responsibility of ensuring universal service. The Commission recognizes 
some state commissions may not have

[[Page 81583]]

examined local rates in many years, and carriers may lack incentives to 
pursue a rate increase when federal universal service support is 
available. Based on evidence in the record, however, there are a number 
of carriers with local rates that are significantly lower than rates 
that urban consumers pay. Indeed, there are local rates paid by 
customers of universal service recipients as low as $5 in some areas of 
the country. For example, the Commission notes that two carriers in 
Iowa and one carrier in Minnesota offer local residential rates below 
$5 per month. The Commission does not believe that Congress intended to 
create a regime in which universal service subsidizes artificially low 
local rates in rural areas when it adopted the reasonably comparable 
principle in 47 U.S.C. 254(b); rather, it is clear from the overall 
context and structure of the statute that its purpose is to ensure that 
rates in rural areas not be significantly higher than in urban areas.
    159. The Commission focuses here on the impact of such a rule on 
rate-of-return companies. Data submitted by NECA summarizing 
residential R-1 rates for over 600 companies--a broad cross-section of 
carriers that typically receive universal service support--show that 
approximately 60 percent of those study areas have local residential 
rates that are below the 2008 national average local rate of $15.62. 
Most rates fall within a five-dollar range of the national average, but 
more than one hundred companies, collectively representing hundreds of 
thousands of access lines, have a basic R-1 rate that is significantly 
lower. This appears consistent with rate data filed by other 
commenters.
    160. It is inappropriate to provide federal high-cost support to 
subsidize local rates beyond what is necessary to ensure reasonable 
comparability. Doing so places an undue burden on the Fund and 
consumers that pay into it. Specifically, the Commission does not 
believe it is equitable for consumers across the country to subsidize 
the cost of service for some consumers that pay local service rates 
that are significantly lower than the national urban average.
    161. Based on the foregoing, and as described below, the Commission 
will limit high-cost support where local end-user rates plus state 
regulated fees (specifically, state SLCs, state universal service fees, 
and mandatory extended area service charges) do not meet an urban rate 
floor representing the national average of local rates plus such state 
regulated fees. Our calculation of this urban rate floor does not 
include federal SLCs, as the purposes of this rule change are to ensure 
that states are contributing to support and advance universal service 
and that consumers are not contributing to the Fund to support 
customers whose rates are below a reasonable level.
    162. The Commission will phase in this rate floor in three steps, 
beginning with an initial rate floor of $10 for the period July 1, 2012 
through June 30, 2013 and $14 for the period July 1, 2013 through June 
30, 2014. Beginning July 1, 2014, and in each subsequent calendar year, 
the rate floor will be established after the Wireline Competition 
Bureau completes an updated annual survey of voice rates. Under this 
approach, the Commission will reduce, on a dollar-for-dollar basis, 
HCLS and CAF Phase I support to the extent that a carrier's local rates 
(plus state regulated fees) do not meet the urban rate floor.
    163. To the extent end-user rates do not meet the rate floor, USAC 
will make appropriate reductions in HCLS support. This calculation will 
be pursuant to a rule that is separate from the existing rules for 
calculation of HCLS, which is subject to an annual cap. As a 
consequence, any calculated reductions will not flow to other carriers 
that receive HCLS, but rather will be used to fund other aspects of the 
CAF pursuant to the reforms the Commission adopts today.
    164. This offset does not apply to ICLS because that mechanism 
provides support for interstate rates, not intrastate end-user rates. 
Accordingly, the Commission will revise the rules to limit a carrier's 
high-cost loop support when its rates do not meet the specified local 
urban rate floor.
    165. Phasing in this requirement in three steps will appropriately 
limit the impact of the new requirement in a measured way. Based on the 
NECA data, the Commission estimates that there are only 257,000 access 
lines in study areas having local rates less than $10--which would be 
affected by the rule change in the second half of 2012--and there are 
827,000 access lines in study areas that potentially would be affected 
in 2013. The Commission assumes, however, that by 2013 carriers will 
have taken necessary steps to mitigate the impact of the rule change. 
By adopting a multi-year transition, the Commission seeks to avoid a 
flash cut that would dramatically affect either carriers or the 
consumers they serve.
    166. In addition, because the Commission anticipates that the rate 
floor for the third year will be set at a figure close to the sum of 
$15.62 plus state regulated fees, the Commission is confident that $10 
and $14 are conservative levels for the rate floors for the first two 
years. $15.62 was the average monthly charge for flat-rate service in 
2008, the most recent year for which data was available. Under the 
definition of ``reasonably comparable,'' rural rates are reasonably 
comparable to urban rates under 47 U.S.C. 254(b) if they fall within a 
reasonable range above the national average. Under this definition, the 
Commission could set the rate floor above the national average urban 
rate but within a range considered reasonable. In the present case, the 
Commission is expecting to set the end point rate floor at the average 
rate, and the Commission is setting rate floors well below the current 
best estimate of the average during the multi-year transition period.
    167. Although the high-cost program is not the primary universal 
service program for addressing affordability, the Commission notes that 
some commenters have argued that if rates increase, service could 
become unaffordable for low-income consumers. However, staff analysis 
suggests that this rule change should not disproportionately affect 
low-income consumers, because there is no correlation between local 
rates and average incomes in rate-of-return study areas--that is, rates 
are not systematically lower where consumer income is lower and higher 
where consumer income is higher. The Commission further notes that the 
Commission's Lifeline and Link Up program remains available to low-
income consumers regardless of this rule change.
    168. In 2010, 1,048 rate-of-return study areas received HCLS 
support. Using data from the NECA survey filed pursuant to the 
Protective Order in this proceeding and U.S. Census data from third-
party providers, the Commission analyzed monthly local residential rate 
data for 641 of these study areas and median income data for 618 of 
those 641 study areas. Based on the 618 study areas for which the 
Commission has both local rate data and median income data, when the 
Commission sets one variable dependent upon the other (price as a 
function of income), the Commission does not observe prices correlating 
at all with median income levels in the given study areas. The 
Commission observes a wide range of prices--many are higher than 
expected and just as many are lower than expected. In fact, some areas 
with extremely low residential rates exhibit higher than average 
consumer income.
    169. To implement these rule changes, The Commission directs that 
all carriers receiving HCLS must report their basic voice rates and 
state regulated fees on an annual basis, so

[[Page 81584]]

that necessary support adjustments can be calculated. In addition, all 
carriers receiving frozen high-cost support will be required to report 
their basic voice rates and state regulated fees on an annual basis. 
Carriers will be required to report their rates to USAC, as set forth 
more fully below. As noted above, the Commission has delegated 
authority to the Wireline Competition Bureau and the Wireless 
Telecommunications Bureau to take all necessary steps to develop an 
annual rate survey for voice services. The Commission expects this 
annual survey to be implemented as part of the annual survey described 
above in the section discussing public interest obligations for voice 
telephony. The Commission expects the initial annual rate survey will 
be completed prior to the implementation of the third step of the 
transition.
    170. Finally, the Commission notes that the Rural Associations 
contend that a benchmark approach for voice services fails to address 
rate comparability for broadband services. Although the Commission 
addresses only voice services here, elsewhere in this R&O the 
Commission addresses reasonable comparability in rates for broadband 
services. The Commission believes that it is critical to reduce support 
for voice--the supported service--where rates are artificially low. 
Doing so will relieve strain on the USF and, thus, greatly assist the 
efforts in bringing about the overall transformation of the high-cost 
program into the CAF.
5. Safety Net Additive
    171. Discussion. The Commission concludes the safety net additive 
is not designed effectively to encourage additional significant 
investment in telecommunications plant, and therefore eliminate the 
rule immediately. The Commission grandfathers existing recipients and 
begin phasing out their support in 2012.
    172. Several commenters suggest that rather than eliminate the 
safety net additive, the Commission revises the rule to base 
qualification on the total year-over-year changes in TPIS, rather than 
on per-line change in TPIS. The Commission declines to adopt this 
suggestion, and the Commission concludes instead that it should phase 
out safety net additive rather than modify how it operates. While 
revising the rule as some commenters suggested would address one 
deficiency with safety net additive support, doing so would not address 
the overarching concern that safety net additive as a whole does not 
provide the right incentives for investment in modern communications 
networks. It does not ensure that investment is reasonable or cost-
efficient, nor does it ensure that investment is targeted to areas that 
would not be served absent support. For example, even if the Commission 
changed the rule as proposed, safety net additive could continue to 
allow incumbent LECs to get additional support if, for instance, they 
choose to build fiber-to-the-home on an accelerated basis in an area 
that is also served by an unsubsidized cable competitor. That said, the 
Commission does modify the proposed phase out of safety net additive 
based on the record.
    173. The Commission concludes that beneficiaries of safety net 
additive whose total TPIS increased by more than 14 percent over the 
prior year at the time of their initial qualification should continue 
to receive such support for the remainder of their eligibility period, 
consistent with the original intent of the rule. For the remaining 
beneficiaries of safety net, the Commission finds that such support 
should be phased down in 2012 because such support is not being paid on 
the basis of significant investment in telecommunications plant. 
Specifically, for the latter group of beneficiaries, the safety net 
additive will be reduced 50 percent in 2012, and eliminated in 2013. 
The Commission does not provide any new safety net support for costs 
incurred after 2009.
6. Local Switching Support
    174. Discussion. The Commission agrees with the Rural Associations 
that reforms to LSS should be integrated with reforms to ICC and the 
accompanying creation of a CAF to provide measured replacement of lost 
intercarrier revenues. The Commission continues to believe that the 
rationale for LSS has weakened with the advent of cheaper, more 
scalable switches and routers. The Commission also agrees with the Ad 
Hoc Telecommunications Users Committee that the LSS funding mechanism 
provides a disincentive for those carriers owning multiple study areas 
in the same state to combine those study areas, potentially resulting 
in inefficient, costly deployment of resources. Further, because 
qualification is solely based on the number of lines in the study area, 
LSS does not appropriately target funding to high-cost areas, nor does 
it target funding to areas that are unserved with broadband.
    175. At the same time, the Commission recognizes that today many 
small companies recover a portion of the costs of their switching 
investment, both for circuit switches and recently purchased soft 
switches, through LSS. LSS is a form of explicit recovery for switching 
investment that otherwise would be recovered through intrastate access 
charges or end user rates. As such, any reductions in LSS would result 
in a revenue requirement flowing back to the state jurisdiction.
    176. For all of these reasons, the Commission concludes that it is 
time to end LSS as a stand-alone universal service support mechanism, 
but that, as discussed in more detail in the ICC section of this R&O, 
limited recovery of the costs previously covered by LSS should be 
available pursuant to the ICC reform and the accompanying creation of 
an ICC recovery mechanism through the CAF. Effective July 1, 2012 the 
Commission will eliminate LSS as a separate support mechanism. In order 
to simplify the transition of LSS, beginning January 1, 2012 and until 
June 30, 2012, LSS payments to each eligible incumbent LEC shall be 
frozen at 2011 support levels subject to true-up based on 2011 
operating results. To the extent that the elimination of LSS support 
affects incumbent LECs interstate switched access revenue requirement, 
the Commission addresses that issue in the ICC context.
7. Other High-Cost Rule Changes
a. Adjusted High Cost Loop Cap for 2012
    177. Discussion. NECA projects that the high-cost loop cap will be 
$858 million for all rural incumbent LECs for 2012, which is $48 
million less than the $906 million projected to be disbursed in 2011. 
Due to the elimination of HCLS for price cap companies as discussed 
above, the Commission is lowering the HCLS cap for 2012 by the amount 
of HCLS support price cap carriers would have received for 2012. The 
Commission resets the 2012 high-cost loop cap to the level that 
remaining rate-of-return carriers are projected to receive in 2012. 
Although price cap holding companies currently receive HCLS in a few 
rate-of- return study areas, as a result of the rule changes discussed 
above, all of their remaining rate-of-return support will be 
distributed through a new transitional CAF program, rather than 
existing mechanisms like HCLS. Accordingly, NECA is required to re-
calculate the HCLS cap for 2012 after deducting all HCLS that price cap 
carriers and their affiliated rate-of-return study areas would have 
received for 2012. NECA is required to submit to the Wireline Bureau 
the revised 2012 HCLS cap within 30 days of the release of this R&O. 
NECA shall provide to the Wireline Bureau all calculations and

[[Page 81585]]

assumptions used in re-calculating the HCLS cap.
b. Study Area Waivers
i. Standards for Review
    178. Discussion. The Commission concludes that the one-percent 
guideline is no longer an appropriate guideline to evaluate whether a 
study area waiver would result in an adverse effect on the fund and, 
therefore, eliminate the one-percent guideline in evaluating petitions 
for study area waiver. Therefore, on a prospective basis, the standards 
for evaluating petitions for study area waiver are: (1) The state 
commission having regulatory authority over the transferred exchanges 
does not object to the transfer and (2) the transfer must be in the 
public interest. As proposed in the USF/ICC Transformation NPRM, the 
evaluation of the public interest benefits of a proposed study area 
waiver will include: (1) the number of lines at issue; (2) the 
projected universal service fund cost per line; and (3) whether such a 
grant would result in consolidation of study areas that facilitates 
reductions in cost by taking advantage of the economies of scale, i.e., 
reduction in cost per line due to the increased number of lines. The 
Commission stresses that these guidelines are only guidelines and not 
rigid measures for evaluating a petition for study area waiver. The 
Commission believes that this streamlined process will provide greater 
regulatory certainty and a more certain timetable for carriers seeking 
to invest in additional exchanges.
ii. Streamlining the Study Area Waiver Process
    179. Discussion. To more efficiently and effectively process 
petitions for waiver of the study area freeze, the Commission adopts 
the proposal to streamline the study are waiver process. Upon receipt 
of a petition for study area waiver, a public notice shall be issued 
seeking comment on the petition. As is the usual practice, comments and 
reply comments will be due within 30 and 45 days, respectively, after 
release of the public notice. Absent any further action by the Bureau, 
the waiver will be deemed granted on the 60th day after the reply 
comment due date. Additionally, any study area waiver related waiver 
requests that petitioners routinely include in petitions for study area 
waiver and the Commission routinely grants--such as requests for waiver 
of 47 CFR 69.3(e)(11) (to include any acquired lines in the NECA pool) 
and 69.605(c) (to remain an average schedule company after an 
acquisition of exchanges)--will also be deemed granted on the 60th day 
after the reply comment due date absent any further action by the 
Bureau. Should the Bureau have concerns with any aspect of the petition 
for study area waiver or related waivers, however, the Bureau may issue 
a second public notice stating that the petition will not be deemed 
granted on the 60th day after the reply comment due date and is subject 
to further analysis and review.
c. Revising the ``Parent Trap'' Rule, Section 54.305
    180. Discussion. The Commission finds that the proposed minor 
revision to the rule will better effectuate the intent of 47 CFR 54.305 
that incumbent LECs not purchase exchanges merely to increase their 
high-cost universal service support and should not dissuade any 
transactions that are in the public interest. Therefore, effective 
January 1, 2012, any incumbent LEC currently and prospectively subject 
to the provisions of 47 CFR 54.305, that would otherwise receive no 
support or lesser support based on the actual costs of the study area, 
will receive the lesser of the support pursuant to 47 CFR 54.305 or the 
support based on its own costs.
    181. The Commission notes that above, the Commission freezes all 
support under the existing high-cost support mechanisms on a study area 
basis for price cap carriers and their rate-of-return affiliates, at 
2011 levels, effective January 1, 2012. The modification of the 
operation of 47 CFR 54.305 is not intended to reduce support levels for 
those companies; they will receive frozen high-cost support equal to 
the amount of support each carrier received in 2011 in a given study 
area, adjusted downward as necessary to the extent local rates are 
below the specified urban rate floor.
8. Limits on Total per Line High-Cost Support
    182. Discussion. After consideration of the record, the Commission 
finds it appropriate to implement responsible fiscal limits on 
universal service support by immediately imposing a presumptive per-
line cap on universal service support for all carriers, regardless of 
whether they are incumbents or competitive ETCs. For administrative 
reasons, the Commission finds that the cap shall be implemented based 
on a $250 per-line monthly basis rather than a $3,000 per-line annual 
basis because USAC disburses support on a monthly basis, not on an 
annual basis. The Commission finds that support drawn from limited 
public funds in excess of $250 per-line monthly (not including any new 
CAF support resulting from ICC reform) should not be provided without 
further justification.
    183. This rule change will be phased in over three years to ease 
the potential impact of this transition. From July 1, 2012 through June 
30, 2013, carriers shall receive no more than $250 per-line monthly 
plus two-thirds of the difference between their uncapped per-line 
amount and $250. From July 1, 2013 through June 30, 2014, carriers 
shall receive no more than $250 per-line monthly plus one-third of the 
difference between their uncapped per-line amount and $250. July 1, 
2014, carriers shall receive no more than $250 per-line monthly.
    184. The Rural Associations argue that a cap on total annual per-
line high-cost support should not be imposed without considering 
individual circumstances and that if such a cap is imposed only on non-
tribal companies located in the contiguous 48 states, about 12,000 
customers would experience rate increases of $9.24 to $1,200 per month 
and the overall effect would reduce high-cost disbursements by less 
than $15 million. The Rural Associations also point out while that it 
is reasonable to ask whether it makes sense for USF to support 
extremely high per-line levels going forward, the Commission must 
consider the consequences of imposing such a limit on companies with 
high costs based on past investments.
    185. The Commission emphasizes that virtually all (99 percent) of 
incumbent LEC study areas currently receiving support are under the 
$250 per-line monthly limit. Only eighteen incumbent carriers and one 
competitive ETC today receive support in excess of $250 per-line 
monthly, and as a result of the other reforms described above, the 
Commission estimates that only twelve will continue to receive support 
in excess of $250 per-line monthly.
    186. The Commission also recognizes that there may be legitimate 
reasons why certain companies have extremely high support amounts per 
line. For example, some of these extremely high-cost study areas exist 
because states sought to ensure a provider would serve a remote area. 
The Commission estimates that the cap the Commission adopts today will 
affect companies serving approximately 5,000 customers, many of whom 
live in extremely remote and high-cost service territories. That is, 
all of the affected study areas total just 5,000 customers. Therefore, 
as suggested by the Rural Associations, the Commission will consider 
individual circumstances when applying the $250

[[Page 81586]]

per-line monthly cap. Any carrier affected by the $250 per-line monthly 
cap may file a petition for waiver or adjustment of the cap that would 
include additional financial data, information, and justification for 
support in excess of the cap using the process set forth below. The 
Commission does not anticipate granting any waivers of undefined 
duration, but rather would expect carriers to periodically re-validate 
any need for support above the cap. The Commission also notes that even 
if a carrier can demonstrate the need for funding above the $250 per-
line monthly cap, they are only entitled to the amount above the cap 
they can show is necessary, not the amount they were previously 
receiving.
    187. Absent a waiver or adjustment of the $250 per-line monthly 
cap, USAC shall commence reductions of the affected carrier's support 
to $250 per-line monthly six months after the effective date of these 
rules. This six month delay should provide an opportunity for companies 
to make operational changes, engage in discussions with their current 
lenders, and bring any unique circumstances to the Commission's 
attention through the waiver process. To reach the $250 per-line cap, 
USAC shall reduce support provided from each universal support 
mechanism, with the exception of LSS, based on the relative amounts 
received from each mechanism.
9. Elimination of Support in Areas With 100 Percent Overlap
    188. Discussion. Providing universal service support in areas of 
the country where another voice and broadband provider is offering 
high-quality service without government assistance is an inefficient 
use of limited universal service funds. The Commission agrees with 
commenters that ``USF support should be directed to areas where 
providers would not deploy and maintain network facilities absent a USF 
subsidy, and not in areas where unsubsidized facilities-based providers 
already are competing for customers.'' For this reason, the Commission 
excludes from the CAF areas that are overlapped by an unsubsidized 
competitor (see infra Section VII.C). Likewise, the Commission does not 
intend to continue to provide current levels of high-cost support to 
rate-of-return companies where there is overlap with one or more 
unsubsidized competitors.
    189. At the same time, the Commission recognizes that there are 
instances where an unsubsidized competitor offers broadband and voice 
service to a significant percentage of the customers in a particular 
study area (typically where customers are concentrated in a town or 
other higher density sub-area), but not to the remaining customers in 
the rest of the study area, and that continued support may be required 
to enable the availability of supported voice services to those 
remaining customers. In those cases, the Commission agrees with the 
Rural Associations that there should be a process to determine 
appropriate support levels.
    190. Accordingly, the Commission adopts a rule to phase out all 
high-cost support received by incumbent rate-of-return carriers over 
three years in study areas where an unsubsidized competitor--or a 
combination of unsubsidized competitors--offers voice and broadband 
service at speeds of at least 4 Mbps downstream/1 Mbps upstream, and 
with latency and usage limits that meet the broadband performance 
requirements described above, for 100 percent of the residential and 
business locations in the incumbent's study area.
    191. The USF/ICC Transformation FNPRM seeks comment on the 
methodology and data for determining overlap. Upon receiving a record 
on those issues, the Commission directs the Wireline Competition Bureau 
to publish a finalized methodology for determining areas of overlap and 
to publish a list of companies for which there is a 100 percent 
overlap. In study areas where there is 100 percent overlap, the 
Commission will freeze the incumbent's high-cost support at its total 
2010 support, or an amount equal to $3,000 times the number of reported 
lines as of year end 2010, whichever is lower, and reduce such support 
over three years (i.e. by 33 percent each year). For this purpose, 
``total 2010 support'' is the amount of support disbursed to carrier 
for 2010, without regard to prior period adjustments related to years 
other than 2010 and as determined by USAC on January 31, 2011. In 
addition, in the USF/ICC Transformation FNPRM, the Commission seeks 
comment on a process for determining support in study areas with less 
than 100 percent overlap.
10. Impact of These Reforms on Rate-of-Return Carriers and the 
Communities They Serve
    192. The Commission agrees with the Rural Associations that ``there 
is * * * without question a need to modify certain of the existing 
universal service mechanism to enhance performance and improve 
sustainability.'' The Commission takes a number of important steps to 
do so in this R&O, and the Commission is careful to implement these 
changes in a gradual manner so that the efforts do not jeopardize 
service to consumers or investments made consistent with existing 
rules. It is essential that the Commission ensures the continued 
availability and affordability of offerings in the rural and remote 
communities served by many rate-of-return carriers. The existing 
regulatory structure and competitive trends have placed many small 
carriers under financial strain and inhibited the ability of providers 
to raise capital.
    193. The Commission reaffirms its commitment to these communities. 
The Commission provides rate-of-return carriers the predictability of 
remaining under the legacy universal service system in the near-term, 
while giving notice that the Commission intends to transition to more 
incentive-based regulation in the near future. The Commission also 
provides greater certainty and a more predictable flow of revenues than 
the status quo through the intercarrier compensation reforms, and set a 
total budget to direct up to $2 billion in annual universal service 
(including CAF associated with intercarrier compensation reform) 
payments to areas served by rate-of-return carriers. The Commission 
believes that this global approach will provide a more stable base 
going forward for these carriers, and the communities they serve.
    194. Today's package of universal service reforms is targeted at 
eliminating inefficiencies and closing gaps in the system, not at 
making indiscriminate industry-wide reductions. Many of the rules 
addressed today have not been comprehensively examined in more than a 
decade, and direct funding in ways that may no longer make sense in 
today's marketplace. By providing an opportunity for a stable 11.25 
percent interstate return for rate-of-return companies, regardless of 
the necessity or prudence of any given investment, the current system 
imposes no practical limits on the type or extent of network upgrades 
or investment. Our system provides universal service support to both a 
well-run company operating as efficiently as possible, and a company 
with high costs due to imprudent investment decisions, unwarranted 
corporate overhead, or an inefficient operating structure.
    195. In this R&O, the Commission takes the overdue steps necessary 
to address the misaligned incentives in the current system by 
correcting program design flaws, extending successful safeguards, 
ensuring basic fiscal

[[Page 81587]]

responsibility, and closing loopholes to ensure the rules reward only 
prudent and efficient investment in modern networks. Today's reforms 
will help ensure rate-of-return carriers retain the incentive and 
ability to invest and operate modern networks capable of delivering 
broadband as well as voice services, while eliminating unnecessary 
spending that unnecessarily limits funding that is available to 
consumers in high-cost, unserved communities.
    196. Because the approach is focused on rooting out inefficiencies, 
these reforms will not affect all carriers in the same manner or in the 
same magnitude. After significant analysis, including review of 
numerous cost studies submitted by individual small companies and cost 
consultants, NECA and USAC data, and aggregated information provided by 
the RUS on their current loan portfolio, the Commission is confident 
that these incremental reforms will not endanger existing service to 
consumers. Further, the Commission believes strongly that carriers that 
invest and operate in a prudent manner will be minimally affected by 
this R&O.
    197. Indeed, based on calendar year 2010 support levels, the 
analysis shows that nearly 9 out of 10 rate-of-return carriers will see 
reductions in high-cost universal service receipts of less than 20 
percent annually, and approximately 7 out of 10 will see reductions of 
less than 10 percent. In fact, almost 34 percent of rate-of-return 
carriers will see no reductions whatsoever, and more than 12 percent of 
providers will see an increase in high-cost universal service receipts. 
This, coupled with a stabilized path for ICC, will provide the 
predictability and certainty needed for new investment.
    198. Looking more broadly at all revenues, the Commission believes 
that the overall regulatory and revenue predictability and certainty 
for rate-of-return carriers under today's reforms will help facilitate 
access to capital and efficient network investment. Specifically, it is 
critical to underscore that legacy high-cost support is but one of four 
main sources of revenues for rate-of-return providers: universal 
service revenues account for approximately 30 percent of the typical 
rate-of-return carrier's total revenues. Today's action does not alter 
a provider's ability to collect regulated or unregulated end-user 
revenues, and comprehensively reforms the fourth main source of 
revenues, the intercarrier compensation system. Importantly, ICC 
reforms will provide rate-of-return carriers with access to a new 
explicit recovery mechanism in CAF, offering a source of stable and 
certain revenues that the current intercarrier system can no longer 
provide. Taking into account these other revenue streams, and the 
complete package of reforms, the Commission believes that rate-of-
return carriers on the whole will have a stronger and more certain 
foundation from which to operate, and, therefore, continue to serve 
rural parts of America.
    199. The Commission is, therefore, equally confident that these 
reforms, while ensuring significant overall cost savings and improving 
incentives for rational investment and operation by rate-of-return 
carriers, will in general not materially impact the ability of these 
carriers to service their existing debt. Based on an analysis of the 
reform proposals in the Notice, RUS projects that the Times Interest 
Earned Ratio (TIER) for some borrowers could fall below 1.0, which RUS 
considers a minimum baseline level for a healthy borrower. However, the 
package of reforms adopted in this R&O is more modest than the set 
proposed in the Notice. In addition, companies may still have positive 
cash flow and be able to service their debt even with TIERs of less 
than 1.0. Indeed of the 444 RUS borrowers in 2010, 75 (17 percent) were 
below TIER 1.0. Moreover, whereas RUS assumed that all USF reductions 
directly impact borrowers' bottom lines, in fact the Commission expects 
many borrowers affected by the reforms will be able to achieve 
operational efficiencies to reduce operating expenses, for instance, by 
sharing administrative or operating functions with other carriers, and 
thereby offset reductions in universal service support.
    200. The Commission, therefore, rejects the sweeping argument that 
the rule changes the Commission adopts today would unlawfully 
necessarily affect a taking. Commenters seem to suggest that they are 
entitled to continued USF support as a matter of right. Precedent makes 
clear, however, that carriers have no vested property interest in USF. 
To recognize a property interest, carriers must ``have a legitimate 
claim of entitlement to'' USF support. Such entitlement would not be 
established by the Constitution, but by independent sources of law. 47 
U.S.C. 254 does not expressly or impliedly provide that particular 
companies are entitled to ongoing USF support. Indeed, there is no 
statutory provision or Commission rule that provides companies with a 
vested right to continued receipt of support at current levels, and the 
Commission is not aware of any other, independent source of law that 
gives particular companies an entitlement to ongoing USF support. 
Carriers, therefore, have no property interest in or right to continued 
USF support.
    201. Additionally, carriers have not shown that elimination of USF 
support will result in confiscatory end-user rates. To be confiscatory, 
government-regulated rates must be so low that they threaten a 
regulated entity's ``financial integrity'' or ``destroy the value'' of 
the company's property. Carriers face a ``heavy burden'' in proving 
confiscation as a result of rate regulation. To the extent that any 
rate-of-return carrier can effectively demonstrate that it needs 
additional support to avoid constitutionally confiscatory rates, the 
Commission will consider a waiver request for additional support. The 
Commission will seek the assistance of the relevant state commission in 
review of such a waiver to the extent that the state commission wishes 
to provide insight based on its understanding of the carrier's 
activities and other circumstances in the state. The Commission does 
not expect to routinely grant requests for additional support, but this 
safeguard is in place to help protect the communities served by rate-
of-return carriers.

D. Rationalizing Support for Mobility

    202. Mobile voice and mobile broadband services are increasingly 
important to consumers and to our nation's economy. Given the important 
benefits of and the strong consumer demand for mobile services, 
ubiquitous mobile coverage must be a national priority. Yet despite 
growth in annual funding for competitive ETCs of almost 1000 percent 
over the past decade, there remain many areas of the country where 
people live, work, and travel that lack any mobile voice coverage, and 
still larger geographic areas that lack current generation mobile 
broadband coverage. To increase the availability of current generation 
mobile broadband, as well as mobile voice, across the country, 
universal service funding for mobile networks must be deployed in a 
more targeted and efficient fashion than it is today.
    203. With the R&O, the Commission adopts reforms that will secure 
funding for mobility directly, rather than as a side-effect of the 
competitive ETC system, while rationalizing how universal service 
funding is provided to ensure that it is cost-effective and targeted to 
areas that require public funding to receive the benefits of mobility.
    204. To accomplish the universal service goal of ubiquitous 
availability of mobile services, the Commission establishes the 
Mobility Fund. The first

[[Page 81588]]

phase of the Mobility Fund will provide one-time support through a 
reverse auction, with a total budget of $300 million, and will provide 
the Commission with experience in running reverse auctions for 
universal service support. The Commission expects to distribute this 
support as quickly as feasible, with the goal of holding an auction in 
2012, with support beginning to flow no later than 2013. As part of 
this first phase, the Commission also designates an additional $50 
million for one-time support for advanced mobile services on Tribal 
lands, for which the Commission expects to hold an auction in 2013. The 
second phase of the Mobility Fund will provide ongoing support for 
mobile service with the goal of holding the auction in the third 
quarter of 2013 and support disbursed starting in 2014, with an annual 
budget of $500 million. This dedicated support for mobile service 
supplements the other competitive bidding mechanisms under the CAF.
1. Mobility Fund Phase I
a. Overall Design of Mobility Fund Phase I
i. Legal Authority
    205. In other parts of the R&O, the Commission discussed its 
authority to provide universal service funding to support the provision 
of voice telephony services. The Commission explained that, pursuant to 
its statutory authority, it may require that universal service support 
be used to ensure the deployment of broadband networks capable of 
offering not only voice telephony services, but also advanced 
telecommunications and information services, to all areas of the 
nation, as contemplated by the principles set forth in 47 U.S.C. 
254(b). In this section of the R&O, the Commission applies the legal 
analysis of its statutory authority to the establishment of Phase I and 
II of the Mobility Fund.
    206. As an initial matter, it is wholly apparent that mobile 
wireless providers offer ``voice telephony services'' and thus offer 
services for which federal universal support is available. Furthermore, 
wireless providers have long been designated as ETCs eligible to 
receive universal service support. Nonetheless, a number of parties 
responding to the Mobility Fund NPRM, 75 FR 67060, November 1, 2010, 
question the Commission's authority to establish the Mobility Fund as 
described below. The Commission rejects those arguments.
    207. First, the Commission rejects the argument that it may not 
support mobile networks that offer services other than the services 
designated for support under 47 U.S.C. 254. Under its longstanding ``no 
barriers'' policy, the Commission allows carriers receiving high-cost 
support ``to invest in infrastructure capable of providing access to 
advanced services'' as well as supported voice services. Moreover, 47 
U.S.C. 254(e)'s reference to ``facilities'' and ``services'' as 
distinct items for which federal universal service funds may be used 
demonstrates that the federal interest in universal service extends not 
only to supported services, but also the nature of the facilities over 
which they are offered. Specifically, the Commission has an interest in 
promoting the deployment of the types of facilities that will best 
achieve the principles set forth in 47 U.S.C. 254(b) (and any other 
universal service principle that the Commission may adopt under 47 
U.S.C. 254(b)(7)), including the principle that universal service 
program be designed to bring advanced telecommunications and 
information services to all Americans, at rates and terms that are 
comparable to the rates and terms enjoyed in urban areas. Those 
interests are equally strong in the wireless arena. The Commission thus 
concludes that USF support may be provided to networks, including 3G 
and 4G wireless services networks, that are capable of providing 
additional services beyond supported voice services.
    208. For similar reasons, the Commission rejects arguments made by 
MetroPCS, NASUCA, and US Cellular that the Mobility Fund would 
impermissibly support an ``information service;'' by Free Press and the 
Florida Commission that establishment of the Mobility Fund would 
violate 47 U.S.C. 254 because mobile data service is not a supported 
service; and by various parties that 47 U.S.C. 254(c)(1) prohibits 
funding for services to which a substantial majority of residential 
customers do not subscribe. All of these arguments incorrectly assume 
that the Mobility Fund will be used to support mobile data service as a 
supported service in its own right. To the contrary, the Mobility Fund 
will be used to support the provision of ``voice telephony service'' 
and the underlying mobile network. That the network will also be used 
to provide information services to consumers does not make the network 
ineligible to receive support; to the contrary, such use directly 
advances the policy goals set forth in 47 U.S.C. 254(b), the new 
universal service principle recommended by the Joint Board, as well as 
47 U.S.C. 1302.
    209. The Commission also rejects the argument that the Mobility 
Fund violates the principle in 47 U.S.C. 254(b)(5) that ``[t]here 
should be specific, predictable and sufficient Federal and State 
mechanisms to preserve and advance universal service.'' The Commission 
disagrees with commenters argue that non-recurring funding won in a 
reverse auction is not ``predictable'' because the final amount of 
support is not known in advance of the bidding or ``sufficient'' 
because non-recurring funding will not meet recurring costs. The terms 
``predictable'' and ``sufficient'' modify ``Federal and State 
mechanisms.'' Reverse auction rules establish a predictable mechanism 
to support universal service in that the carrier receiving support has 
notice of its rights and obligations before it undertakes to fulfill 
its universal service obligations. Moreover, this interpretation of the 
statute was upheld by the Fifth Circuit's decision in Alenco 
Communications v. FCC, 201 F.3d 608 (5th Cir 2000).
    210. The mechanism adopted in the R&O is also ``sufficient.'' The 
auction process is effectively a self-selecting mechanism: Bidders are 
presumed to understand that Mobility Fund Phase I will provide one-time 
support, that bidders will face recurring costs when providing service, 
and that they must tailor their bid amounts accordingly. The Commission 
declines to interpret the ``sufficiency'' requirement so broadly as to 
require it to guarantee that carriers who receive support make the 
correct business judgments in deciding how to structure their bids or 
their service offerings to consumers.
    211. The Commission also disagrees with Cellular South's contention 
that ``by collecting USF contributions from all ETCs and awarding 
distributions to only a limited set of ETCs, support auctions would 
transform the Fund into an unconstitutional tax.'' As the Supreme Court 
explained in United States v. Munoz-Flores, 495 U.S. 385, 398 (1990), 
``a statute that creates a particular governmental program and that 
raises revenue to support that program, as opposed to a statute that 
raises revenue to support Government generally, is not a `Bil[l] for 
raising Revenue' within the meaning of the Origination Clause.'' This 
analysis clearly applies to the sections of the Telecommunications Act 
of 1996 authorizing the Universal Service Fund, including the Mobility 
Fund. Moreover, the Commission concludes that the Fifth Circuit's 
analysis of this issue in Texas Office of Public Utility Counsel et al 
v. FCC, 183 F.3d 393, 428 (5th Cir. 1999), with respect to paging 
carriers applies equally to all carriers. As that court explained: 
``universal service contributions are part of a particular

[[Page 81589]]

program supporting the expansion of, and increased access to, the 
public institutional telecommunications network. Each paging carrier 
directly benefits from a larger and larger network and, with that in 
mind, Congress designed the universal service scheme to exact payments 
from those companies benefiting from the provision of universal 
service.'' Finally, there is always likely to be a disparity between 
the contributions parties make to the USF and the amounts that they 
receive from the USF. Indeed, 47 U.S.C. 254(d) requires contributions 
from ``every telecommunications carrier that provides interstate 
telecommunications services,'' not just ETCs or funding recipients.
ii. Size of Mobility Fund Phase I
    212. The Commission concludes that $300 million is an appropriate 
amount for one-time Mobility Fund Phase I support, and is consistent 
with the goal of swiftly extending current generation wireless coverage 
in areas where it is cost effective to do so with one-time support. The 
Commission believes that there are unserved areas for which such 
support will be useful, and that competition among wireless carriers 
for support to serve these areas will be sufficient to ensure that the 
available funds are distributed efficiently and effectively. The 
Commission concludes that a one-time infusion of $300 million should be 
sufficient to enable the deployment of 3G or better mobile broadband to 
many of the areas where such services are unavailable, while at the 
same time ensuring adequate universal service monies are available for 
other priorities, including broader reform initiatives to address 
ongoing support.
iii. Basic Structure for Mobility Fund Phase I
    213. The Commission declines to adopt the structure of the current 
competitive ETC rules, which provide support for multiple providers in 
an area. That structure has led to duplicative investment by multiple 
competitive ETCs in certain areas at the expense of investment that 
could be directed elsewhere, including areas that are not currently 
served. Therefore, as a general matter, the Commission should not award 
Mobility Fund Phase I support to more than one provider per area unless 
doing so would increase the number of units (road miles) served, as is 
possible with partially overlapping bids. Priority in awarding USF 
support should be to expand service; permitting multiple winners as a 
routine matter in any geographic area to serve the same pool of 
customers would drain Mobility Fund resources with limited 
corresponding benefits to consumers. In certain limited circumstances, 
however, the most efficient use of resources may result in small 
overlaps in supported service. Thus, the Commission delegates to the 
Bureaus, as part of the auctions procedures process, the question of 
the circumstances, if any, in which to allow overlaps in supported 
service to permit the widest possible coverage given the overall 
budget.
    214. While 47 U.S.C. 214(e) allows the states to designate more 
than one provider as an eligible telecommunications provider in any 
given area, nothing in the statute compels the states (or this 
Commission) to do so; rather, the states (and this Commission) must 
determine whether that is in the public interest. Likewise, nothing in 
the statute compels that every party eligible for support actually 
receive it.
    215. In the past, the Commission concluded that universal service 
subsidies should be portable, and allowed multiple competitive ETCs to 
receive support in a given geographic area. Based on the experience of 
a decade, however, this prior policy of supporting multiple networks 
may not be the most effective way of achieving universal service. In 
this case, the Commission chooses not to subsidize competition through 
universal service in areas that are challenging for even one provider 
to serve. Given that Mobility Fund Phase I seeks to expand the 
availability of current and next generation services, it will be used 
to offer services where no provider currently offers such service. The 
public interest is best served by maximizing the expansion of networks 
into currently unserved communities given the available budget, which 
will generally result in providing support to no more than one provider 
in a given area.
    216. Participation in Mobility Fund Phase I, however, is 
conditioned on collocation and data roaming obligations designed to 
minimize anticompetitive behavior. Recipients must also provide 
services with Mobility Fund Phase I support at reasonably comparable 
rates. These obligations should help address the concerns of those that 
argue for continued support of multiple providers in a particular 
geographic area and further the goal to ensure the widest possible 
reach of Phase I of the Mobility Fund.
iv. Auction To Determine Awards of Support
    217. The goal of Mobility Fund Phase I is to extend the 
availability of mobile voice service on networks that provide 3G or 
better performance and to accelerate the deployment of 4G wireless 
networks in areas where it is cost effective to do so with one-time 
support. The purpose of the mechanism the Commission chooses is to 
identify those areas where additional investment can make as large a 
difference as possible in improving current-generation mobile wireless 
coverage. The Commission adopts a reverse auction format because it 
believes such a format is the best available tool for identifying such 
areas--and associated support amounts--in a transparent, simple, 
speedy, and effective way. In such a reverse auction, bidders are asked 
to indicate the amount of one-time support they would require to 
achieve the defined performance standards for specified numbers of 
units in given unserved areas. A reverse auction is the best way to 
achieve the Commission's overall objective of maximizing consumer 
benefits given the available funds.
    218. Objections to using a competitive bidding mechanism largely 
challenge or misunderstand the goals of the instant proposal. Mobility 
Fund Phase I is focused solely on identifying recipients that can 
extend coverage with one-time support. Phase I has a limited and 
targeted purpose and is not intended to ensure that the highest cost 
areas receive support. Those issues are addressed separately in the 
sections of the R&O discussing Mobility Fund Phase II and other aspects 
of CAF, as well as in the USF/ICC Transformation FNPRM.
    219. Others contend that funding will be directed to areas that 
will be built out with private investment even without support. The 
goal in establishing the Mobility Fund, however, is to provide the 
necessary ``jump start'' to accelerate service to areas where it is 
cost effective to do so. The Commission will also exclude from auction 
those areas where a provider has made a regulatory commitment to 
provide 3G or better wireless service, or has received a funding 
commitment from a federal executive department or agency in response to 
the carrier's commitment to provide 3G or better service. Taken 
together, these measures provide sufficient safeguards to exclude 
funding for areas that would otherwise be built with private investment 
in the near term.

[[Page 81590]]

    220. Delegation of Authority. The Commission delegates to the 
Bureaus authority to administer the policies, programs, rules and 
procedures to implement Mobility Fund Phase I. In addition to the 
specific tasks noted elsewhere in the R&O, such as identifying areas 
eligible for Mobility Fund support and the number of units associated 
with each, this delegation includes all authority necessary to conduct 
a Mobility Fund Phase I auction and conduct program administration and 
oversight consistent with the policies and rules adopted in the R&O.
v. Identifying Unserved Areas Eligible for Support
(a) Using Census Blocks To Identify Unserved Areas
    221. The Commission will identify areas eligible for Mobility Fund 
Phase I support at the census block level. Such a granular review will 
allow the Commission to identify unserved areas with greater accuracy 
than if it used larger areas. Although census blocks, particularly in 
rural areas, may include both served and unserved areas, it is not 
feasible to identify unserved areas on a more granular level for 
Mobility Fund Phase I, since as noted, census blocks are the smallest 
unit for which the Census Bureau provides data.
(b) Identifying Unserved Census Blocks
(i) Using American Roamer Data
    222. American Roamer data is the best available choice at this time 
for determining wireless service at the census-block level. American 
Roamer data is recognized as the industry standard for the presence of 
service, although commenters note that the data may not be 
comprehensive and accurate in all cases. The Bureaus will exercise 
their delegated authority to use the most recent American Roamer data 
available in advance of a Phase I auction in 2012. In so doing, they 
should use the data to determine the geographic coverage of networks 
using EV-DO, EV-DO Rev A, UMTS/HSPA, or better technologies. In 
identifying unserved census blocks, the Commission will exclude census 
blocks that are served by 3G or better service. Better than 3G service 
would include any 4G technologies, including, for example, HSPA+ or 
LTE.
    223. Some commenters to the Mobility Fund NPRM observe that 
American Roamer data relies on reporting by existing providers and 
therefore may tend to over-report the extent of existing coverage. 
While the Commission intends to be as accurate as possible in 
determining the extent of coverage, perfect information is not 
available, and the Commission knows of no data source that is more 
reliable than American Roamer, nor does the record reflect any other 
viable options.
    224. Several commenters note that the potential for error is 
unavoidable and therefore advocate that some provision be made for 
outside parties to appeal or initiate a review of the initial coverage 
determination for a particular area. The Commission will, within a 
limited timeframe only, entertain challenges to its determinations 
regarding unserved geographic areas for purposes of Mobility Fund Phase 
I. Specifically, the Commission will make public a list of unserved 
areas as part of the pre-auction process and afford parties a 
reasonable opportunity to respond by demonstrating that specific areas 
identified as unserved are actually served and/or that additional 
unserved areas should be included. The Commission's goal is to 
accelerate expanded availability of mobile voice service over current-
generation or better networks by providing one-time support from a 
limited source of funds, and any more extended pre-auction review 
process might risk undue delay in making any support available. 
Providing for post-auction challenges would similarly inject 
uncertainty and delay into the process. It is important to provide 
finality prior to the auction with respect to the specific unserved 
census blocks eligible for support. Accordingly, the Bureaus will 
finalize determinations with respect to which areas are eligible for 
support in a public notice establishing final procedures for a Mobility 
Fund Phase I auction.
(ii) Other Service-Related Factors
    225. The Commission will not consider the presence in a census 
block of voice or broadband services over non-mobile networks in 
determining which census blocks are unserved. Mobile services provide 
benefits, consistent with, and in furtherance of the principles of 47 
U.S.C. 254, not offered by fixed services. The ability to communicate 
from any point within a mobile network's coverage area lets people 
communicate at times when they may need it most, including during 
emergencies. The fact that fixed communications may be available nearby 
does not detract from this critical benefit. Moreover, the Internet 
access provided by current and next generation mobile networks renders 
them qualitatively different from existing voice-only mobile networks. 
Current and next generation networks offer the ability to tap resources 
well beyond the resources available through basic voice networks. 
Accordingly, in identifying blocks eligible for Mobility Fund support, 
the Commission will not consider whether voice and/or broadband 
services are available using non-mobile technologies or pre-3G mobile 
wireless technologies.
    226. To help focus Mobility Fund Phase I support toward unserved 
locations where it will have the most significant impact, the 
Commission provides that support will not be offered in areas where, 
notwithstanding the current absence of 3G wireless service, any 
provider has made a regulatory commitment to provide 3G or better 
wireless service, or has received a funding commitment from a federal 
executive department or agency in response to the carrier's commitment 
to provide 3G or better wireless service.
    227. To implement this decision, the Commission will require that 
all wireless competitive ETCs that receive USF high cost support, under 
either legacy or reformed programs, as well as all parties that seek 
Mobility Fund support, review the list of areas eligible for Mobility 
Fund support when published by the Commission and identify any areas 
with respect to which they have made a regulatory commitment to provide 
3G or better wireless service or received a federal executive 
department or agency funding commitment in exchange for their 
commitment to provide 3G or better wireless service. A regulatory 
commitment ultimately may not result in service to the area in 
question. Nevertheless, given the limited resources provided for 
Mobility Fund Phase I and the fact that the commitments were made in 
the absence of any support from the Mobility Fund, it would not be an 
appropriate use of available resources to utilize Mobility Fund support 
in such areas.
(iii) Using Centroid Method
    228. The Commission will consider any census block as unserved, if 
the American Roamer data indicates that the geometric center of the 
block--referred to as the centroid--is not covered by networks using 
EV-DO, EV-DO Rev A, or UMTS/HSPA or better. Employing the centroid 
method is relatively simple and straightforward, and will be an 
effective method for determining whether a block is uncovered. The 
centroid method is an administratively simple and efficient approach 
that, when used here, will permit the Commission to begin distributing 
this support without undue delay.

[[Page 81591]]

(c) Offering Support for Unserved Areas by Census Block
    229. The census block should be the minimum geographic building 
block for defining areas for which support is provided. Using census 
blocks as the minimum geographic area gives the Commission and bidders 
more flexibility to tailor their bids to their business plans. Because 
census blocks are numerous and can be quite small, the Commission will 
need to provide at the auction for the aggregation of census blocks for 
purposes for bidding. Therefore, the Commission delegates to the 
Bureaus, as part of the auctions procedures process, the task of 
deciding whether to provide a minimum area for bidding comprised of an 
aggregation of eligible census blocks or whether to permit bidding on 
individual census blocks and provide bidders with the opportunity to 
make ``all-or-nothing'' package bids on combinations of census blocks. 
Package bidding procedures could specify certain predefined packages, 
or could provide bidders greater flexibility in defining their own 
areas, comprised of census blocks. However, any aggregation, whether 
predetermined by the Bureaus or defined by bidders, should not exceed 
the bounds of one Cellular Market Area (CMA).
    230. The unique circumstances raised by the large size of census 
areas in Alaska may require that bidding be permitted on individual 
census blocks, rather than a larger pre-determined area, such as a 
census tract or block group. In Alaska, the average census block is 
more than 50 times the size of the average census block in the other 49 
states and the District of Columbia, such that the large size of census 
areas poses distinctive challenges in identifying unserved communities 
and providing service.
(d) Establishing Unserved Units
    231. The Commission will use the number of linear road miles--
rather than population, as proposed in the Mobility Fund NPRM--as the 
basis for calculating the number of units in each unserved census 
block. This decision is based on a number of factors. First, requiring 
additional coverage of road miles more directly reflects the Mobility 
Fund's goal of extending current generation mobile services. Using road 
miles, rather than population, as a unit for bids and awards of support 
is also more consistent with the Commission's decision to measure 
mobile broadband service based on drive tests and to require coverage 
of a specified percentage of road miles. Moreover, using per-road mile 
bids as a basis for awarding support implicitly will take into account 
many of the other factors that commenters argue are important--such as 
business locations, recreation areas, and work sites--since roads are 
used to access those areas. Because bidders are likely to take 
potential roaming and subscriber revenues into account when deciding 
where to bid for support under Mobility Fund Phase I, support will tend 
to be disbursed to areas where there is greater traffic, even without 
our factoring traffic into the number of road mile units. Further, 
using road miles as the basic unit for the Mobility Fund Phase I will 
be relatively simple to administer, since standard nationwide data 
exists for road miles, as it does for population. In both cases, the 
data can be disaggregated to the census block level.
    232. The TIGER road miles data made available by the Census Bureau 
can be used to establish the road miles associated with each census 
block eligible for Mobility Fund Phase I support. TIGER data is 
comprehensive and consistent nationwide, and available at no cost. As 
with the standard for identifying census blocks that will be eligible 
for Phase I support, the Bureaus will, in the pre-auction process, 
establish the road miles associated with each and identify the specific 
road categories considered--for example, interstate highways, etc.--to 
be consistent with the performance requirements and with the goal of 
extending coverage to the areas where people live, work, and travel.
(e) Distributing Mobility Fund Phase I Support Among Unserved Areas
    233. The Commission creates a separate Mobility Fund Phase I to 
support the extension of current generation wireless service in Tribal 
lands. For both general and Tribal Mobility Fund Phase I support, 
providers seeking to serve Tribal lands must engage with the affected 
Tribal governments, where appropriate. The Commission will also provide 
a bidding credit for Tribally-owned and controlled providers seeking to 
serve Tribal lands with which they are associated. Apart from these 
provisions, the Commission concludes that it should not attempt to 
prioritize within the areas otherwise eligible for support from Phase 
I.
(ii) Public Interest Obligations
(a) Mobile Performance Requirements
    234. In addition to the public interest obligations applicable to 
all recipients of CAF support, mobile service providers receiving non-
recurring Mobility Fund Phase I support will be obligated to provide 
supported services over a 3G or better network that has achieved 
particular data rates under particular conditions. Specifically, Phase 
I recipients will be required to specify whether they will be deploying 
a network that meets 3G requirements or 4G requirements in areas 
eligible for support as those requirements are detailed here.
    235. Recognizing the unavoidable variability of mobile service 
within a covered area, the Commission proposed and adopted performance 
standards that will adopt a strong floor for the service provided. 
Consequently, many users may receive much better service when, for 
example, accessing the network from a fixed location or when close to a 
base station. In light of this fact, and the decision to permit 
providers to elect whether to provide 3G or 4G service, the Commission 
is adopting different speeds than originally proposed for those 
providing 3G, while retaining the original proposal for those that 
offer 4G.
    236. For purposes of meeting a commitment to deploy a 3G network, 
providers must offer mobile transmissions to and from the network 
meeting or exceeding an outdoor minimum of 200 kbps downstream and 50 
kbps upstream to handheld mobile devices.
    237. Recipients that commit to provide supported services over a 
network that represents the latest generation of mobile technologies, 
or 4G, must offer mobile transmissions to and from the network meeting 
or exceeding the following minimum standards: outdoor minimum of 768 
kbps downstream and 200 kbps upstream to handheld mobile devices.
    238. For both 3G and 4G networks, the data rates should be 
achievable in both fixed and mobile conditions, at vehicle speeds 
consistent with typical speeds on the roads covered. These minimum 
standards must be achieved throughout the cell area, including at the 
cell edge.
    239. With respect to latency, in order to assure that recipients 
offer service that enables the use of real-time applications such as 
VoIP, the Commission also requires that round trip latencies for 
communications over the network be low enough for this purpose.
    240. With respect to capacity, the Commission declines at this time 
to adopt a specific minimum capacity requirement that supported 
providers must offer mobile broadband users. However, any usage limits 
imposed by a provider on its mobile broadband offerings supported by 
the Mobility

[[Page 81592]]

Fund must be reasonably comparable to any usage limits for comparable 
mobile broadband offerings in urban areas.
    241. Recipients that elect to provide supported services over 3G 
networks will have two years to meet their requirements and those that 
elect to deploy 4G networks will have three years. At the end of the 
applicable period for build-out, providers will be obligated to provide 
the service defined above in the areas for which they receive support, 
over at least 75 percent of the road miles associated with census 
blocks identified as unserved by the Bureaus in advance of the Mobility 
Fund Phase I auction. The Commission delegates to the Bureaus the 
question of whether a higher coverage threshold should be required 
should the Bureaus permit bidding on individual census blocks. A higher 
coverage threshold may be appropriate in such circumstances because 
bidders can choose the particular census blocks they can cover. 
Presumably, this would allow them to choose areas in which their 
coverage can be 95 to 100 percent, as suggested by the Mobility Fund 
NPRM.
    242. Should the Bureaus choose to implement a coverage area 
requirement of less than 100 percent, a recipient will receive support 
only for those road miles actually covered and not for the full 100 
percent of road miles of the census blocks or tracts for which it is 
responsible. For example, if a recipient covers 90 percent of the road 
miles in the minimum geographic area (and it meets the threshold), then 
that recipient will receive 90 percent of the total support available 
for that area. To the extent that a recipient covers additional road 
miles, it will receive support in an amount based on its bid per road 
mile up to 100 percent of the road miles associated with the specific 
unserved census blocks covered by a bid.
    243. In contrast to other support provided under CAF, support 
provided through Mobility Fund Phase I will be non-recurring. 
Consequently, the Commission does not plan to modify the service 
obligations of providers that receive Phase I support.
(b) Measuring and Reporting Mobile Broadband
    244. As proposed in the Mobility Fund NPRM, Mobility Fund support 
recipients must demonstrate that they have deployed a network that 
covers the relevant area and meets their public interest obligations 
with data from drive tests. The drive test data satisfying the 
requirements must be submitted by the deadline for providing the 
service. Drive test data must also be submitted to demonstrate the 
recipient has met the 50 percent minimum coverage requirement to 
receive the second payment of Mobility Fund Phase I support.
    245. The requirement regarding drive tests demonstrating data 
speeds ``to the network'' means to the physical location of core 
network equipment, such as the mobile switching office or the evolved 
packet core. Therefore, a test server utilized to conduct drive tests 
should be at such a central location rather than at a base station, so 
that the drive test results take into account the effect of backhaul on 
communication speeds.
(c) Collocation
    246. Recipients of Mobility Fund support must allow for reasonable 
collocation by other providers of services that would meet the 
technological requirements of the Mobility Fund on newly constructed 
towers that Mobility Fund recipients own or manage in the unserved area 
for which they receive support. This includes a duty: (1) To construct 
towers where reasonable in a manner that will accommodate collocations; 
and (2) to engage in reasonable negotiations on a not unreasonably 
discriminatory basis with any party that seeks to collocate equipment 
at such a site in order to offer service that would meet the 
technological requirements of the Mobility Fund. Furthermore, Mobility 
Fund recipients must not enter into arrangements with third parties for 
access to towers or other siting facilities wherein the Mobility Fund 
recipients restrict the third parties from allowing other providers to 
collocate on their facilities.
    247. These collocation requirements are in the public interest 
because they will help increase the benefits of the expanded coverage 
made possible by the Mobility Fund, by facilitating service that meets 
the requirements of the Mobility Fund by providers using different 
technologies. Mobility Fund recipients will not be required to favor 
providers of services that meet Mobility Fund requirements over other 
applicants for limited collocation spaces.
    248. The Commission agrees with those commenters that attempting to 
specify collocation practices that are applicable in all circumstances 
may unduly complicate efforts to expand coverage, and thus declines to 
adopt more specific requirements for collocation by any specific number 
of providers or require any specific terms or conditions as part of any 
agreement for collocation.
(d) Voice and Data Roaming
    249. Recipients of Mobility Fund support must comply with the 
Commission's voice and data roaming requirements on networks that are 
built through Mobility Fund support. Specifically, recipients of 
Mobility Fund support must provide roaming pursuant to 47 CFR 20.12 on 
networks that are built through Mobility Fund support.
    250. Some commenters responding to the Mobility Fund NPRM contend 
that there is no need to adopt a data roaming requirement specifically 
for Mobility Fund recipients because the Commission's general data 
roaming rules already address the issue or that such a requirement is 
unrelated to the goals of the Mobility Fund. Making compliance with 
these rules a condition of universal service support, however, will 
mean that violations can result in the withholding or clawing back of 
universal service support--sanctions based on the receipt of federal 
support--that would be in addition to penalties for violation of the 
Commission's generally applicable data roaming rules. Moreover, in 
addition to the sanctions that would apply to any party violating the 
general requirements, Mobility Fund recipients may lose their 
eligibility for future Mobility Fund participation as a consequence of 
any violation. Recipients shall comply with these requirements without 
regard to any judicial challenge thereto.
    251. Consistent with the R&O, any interested party may file a 
formal or informal complaint using the Commission's existing processes 
if it believes a Mobility Fund recipient has violated the Commission's 
roaming requirements. As noted, the Commission intends to address 
roaming-related disputes expeditiously. The Commission also has the 
authority to initiate enforcement actions on its own motion.
(e) Reasonably Comparable Rates
    252. The Commission will evaluate the rates for services offered 
with Mobility Fund Phase I support based on whether they fall within a 
reasonable range of urban rates for mobile service. To implement the 
statutory principle regarding comparable rates while offering Mobility 
Fund Phase I support at the earliest time feasible, the Bureaus may 
develop target rate(s) for Mobility Fund Phase I before fully 
developing all the data to be included in a determination of comparable 
rates with respect to other CAF support. Mobility Fund Phase I 
recipients must certify annually that they offer service in areas with 
support at rates that are within a

[[Page 81593]]

reasonable range of rates for similar service plans offered by mobile 
wireless providers in urban areas. Recipients' service offerings will 
be subject to this requirement for a period ending five years after the 
date of award of support. The Bureaus, under their delegated authority, 
may define these conditions more precisely in the pre-auction process. 
The Commission will retain its authority to look behind recipients' 
certifications and take action to rectify any violations that develop.
b. Mobility Fund Phase I Eligibility Requirements
    253. The Commission proposed that to be eligible for Mobility Fund 
support, entities must (1) be designated as a wireless ETC pursuant to 
47 U.S.C. 214(e) by the state public utilities commission (``PUC'') (or 
the Commission, where the state PUC does not have jurisdiction to 
designate ETCs) in any area that it seeks to serve; (2) have access to 
spectrum capable of 3G or better service in the geographic area to be 
served; and (3) certify that it is financially and technically capable 
of providing service within the specified timeframe. With a limited 
exception, the Commission adopts these requirements.
    254. The Commission also adopts a two-stage application filing 
process for participants in the Mobility Fund Phase I auction, similar 
to that used in spectrum license auctions, which will, among other 
things, require potential Mobility Fund recipients to make disclosures 
and certifications establishing their eligibility. Specifically, in the 
pre-auction ``short-form'' application, a potential bidder will need to 
establish its eligibility to participate in the Mobility Fund Phase I 
auction and, in a post-auction ``long-form'' application, a winning 
bidder will need to establish its eligibility to receive support. Such 
an approach should provide an appropriate screen to ensure serious 
participation without being unduly burdensome.
(i) ETC Designation
    255. Mobility Fund Phase I participants must be ETCs prior to 
participating in the auction. As a practical matter, this means that 
parties that seek to participate in the auction must be ETCs in the 
areas for which they will seek support at the deadline for applying to 
participate in the auction. As discussed elsewhere in the R&O, the 
Commission provides a narrow exception to permit participation by 
Tribally-owned or controlled entities that have filed for ETC 
designation prior to the short-form application deadline. An ETC must 
be designated (or have applied for designation under the exception) 
with respect to an area that includes area(s) on which it wishes to 
receive Mobility Fund support. Moreover, a recipient of Mobility Fund 
support will remain obligated to provide supported services throughout 
the area for which it is designated an ETC if that area is larger than 
the areas for which it receives Mobility Fund support.
    256. By statute, the states, along with the Commission, are 
empowered to designate common carriers as ETCs. In light of the roughly 
comparable amounts of time required for the Commission and states to 
process applications to be designated as an ETC and the time required 
to move from the adoption of the R&O to the acceptance of applications 
to participate in a Mobility Fund Phase I auction, parties 
contemplating requesting new designations as ETCs for purposes of 
participating in the auction should act promptly to begin the process. 
The Commission will make every effort to process such applications in a 
timely fashion, and it urges the states to do likewise.
    257. The Commission retains existing ETC requirements and 
obligations, in addition to requiring that parties be ETCs in the area 
in which they seek Mobility Fund support. It is sufficient for purposes 
of an application to participate in the Mobility Fund Phase I auction, 
however, that the applicant has received its ETC designation 
conditioned only upon receiving Mobility Fund Phase I support.
    258. The Commission generally will not allow parties to bid for 
support prior to being designated an ETC because such an approach would 
inject uncertainties as to eligibility that could interfere with speedy 
deployment of networks by those that are awarded support, or disrupt 
the Mobility Fund auction. Moreover, requiring that applicants be 
designated as ETCs prior to a Mobility Fund Phase I auction may help 
ensure that the pool of bidders is serious about seeking support and 
meeting the obligations that receipt of support would entail.
(ii) Access to Spectrum
    259. Any applicant for a Mobility Fund Phase I auction must have 
access to the necessary spectrum to fulfill any obligations related to 
support. Thus, those eligible for Mobility Fund Phase I support include 
all entities that, prior to an auction, hold a license authorizing use 
of appropriate spectrum in the geographic area(s) for which support is 
sought. The spectrum access requirement can also be met by leasing 
appropriate spectrum, prior to an auction, covering the relevant 
geographic area(s). Spectrum access through a license or leasing 
arrangement must be in effect prior to auction for an applicant to be 
eligible for an award of support. Regardless of whether an applicant 
claims required access to spectrum through a license or a lease, it 
must retain such access for at least five years from the date of award 
of Phase I support. For purposes of calculating term length, parties 
may include opportunities for license and/or lease renewal.
    260. Further, parties may satisfy the spectrum access requirement 
if they have acquired spectrum access, including any necessary renewal 
expectancy, that is contingent on their obtaining support in the 
auction. Other contingencies, however, will render the relevant 
spectrum access insufficient for the party to meet the Commission's 
requirements for participation.
    261. Entities seeking to receive support from the Mobility Fund 
must certify that they have access to spectrum capable of supporting 
the required services. While the Commission declines to restrict the 
frequencies applicants must use to be eligible for Mobility Fund 
Support, certain spectrum bands will not support mobile broadband (for 
example, paging service). Applicants will be required to identify the 
particular frequency bands and the nature of the access on which they 
assert their eligibility for support, and the Commission will assess 
the reasonableness of eligibility certifications based on information 
submitted in short- and long-form applications. Should entities make 
this certification and not have access to the appropriate level of 
spectrum, they will be subject to the penalties described elsewhere in 
the R&O.
(iii) Certification of Financial and Technical Capability
    262. Each applicant for Mobility Fund Phase I support must certify, 
in its pre-auction short-form application and in its post-auction long-
form application, that it is financially and technically capable of 
providing 3G or better service within the specified timeframe in the 
geographic areas for which it seeks support. Given that Mobility Fund 
Phase I provides non-recurring support, applicants for Phase I funds 
need to assure the Commission that they can provide the requisite 
service without any assurance of ongoing support for the area in 
question after Phase I support has been exhausted.
    263. Applicants making certifications to the Commission expose 
themselves to

[[Page 81594]]

liability for false certifications. Applicants should take care to 
review their resources and their plans before making the required 
certification and be prepared to document their review, if necessary.
(iv) Other Qualifications
    264. The Commission will not impose any additional eligibility 
requirements to participation in the Mobility Fund, with one exception. 
One commenter to the Mobility Fund NPRM questions whether the Mobility 
Fund should be available to parties in particular areas if the party 
previously (that is, without respect to Mobility Fund support) 
indicated an intention to deploy wireless voice and broadband service 
in that area. The Commission concludes that this concern has merit and 
it will restrict parties from bidding for support in certain limited 
circumstances to assure that Mobility Fund Phase I support does not go 
to finance coverage that carriers would have provided in the near term 
without any subsidy. In particular, an applicant for Mobility Fund 
Phase I support must certify that it will not seek support for any 
areas in which it has made a public commitment to deploy 3G or better 
wireless service by December 31, 2012. This restriction will not 
prevent a provider from seeking and receiving support for a geographic 
area where another carrier has announced such a commitment to deploy 3G 
or better, but it may conserve funds and avoid displacing private 
investment by making a carrier that made such a commitment ineligible 
for Mobility Fund Phase I support with respect to the identified 
geographic area(s). Because circumstances are more likely to change 
over a longer term, providers should not be held to statements for any 
time period beyond December 31, 2012.
c. Reverse Auction Mechanism
    265. In the R&O, the Commission establishes program and auction 
rules for the Mobility Fund Phase I, to be followed by a process 
conducted by the Bureaus on delegated authority identifying areas 
eligible for support, and seeking comment on specific detailed auction 
procedures to be used, consistent with the R&O. This process will be 
initiated by the release of a Public Notice announcing an auction date, 
to be followed by a subsequent Public Notice specifying the auction 
procedures, including dates, deadlines, and other details of the 
application and bidding process.
(i) Basic Auction Design
    266. A single-round sealed bid format appears to be most 
appropriate for a Mobility Fund Phase I reverse auction, although the 
Commission does not make a final determination in the R&O, but 
delegates such determination to the Bureaus, to be addressed in the 
pre-auction development of specific procedures.
(ii) Application Process
    267. The Commission adopts a two-stage application process. In the 
first stage Mobility Fund auction short-form application, each auction 
applicant must provide information to establish its identity, including 
disclosure of parties with ownership interests, consistent with the 
ownership interest disclosure required in 47 CFR part 1 for applicants 
for spectrum licenses, and any agreements the applicant may have 
relating to the support to be sought through the auction. With respect 
to eligibility requirements relating to ETC designation and spectrum 
access, applicants will be required to disclose and certify their ETC 
status as well as the source of the spectrum they plan to use to meet 
Mobility Fund obligations in the particular area(s) for which they plan 
to bid. Specifically, applicants will be required to disclose whether 
they currently hold or lease the spectrum, or have entered into a 
binding agreement, and have submitted an application with the 
Commission, to either hold or lease spectrum. Moreover, applicants will 
be required to certify that they will retain their access to the 
spectrum for at least five years from the date of award of support. The 
Bureaus should exercise their delegated authority to establish the 
specific form in which such information will be collected from 
applicants.
(iii) Bidding Process
    268. The Commission delegates authority to the Bureaus to 
administer the policies, programs, rules, and procedures for Mobility 
Fund Phase I and take all actions necessary to conduct a Phase I 
auction. The Bureaus should exercise this authority by conducting a 
pre-auction notice-and-comment process to establish the specific 
procedures for the auction. Such procedures will enable the 
establishment of procedures for reviewing bids and determining winning 
bidders. The overall objective of the bidding in this context is to 
maximize the number of units to be covered in unserved areas given the 
overall budget for support. The Bureaus have discretion to adopt the 
best procedures to achieve this objective during the pre-auction 
process taking into account all relevant factors, including the 
implementation feasibility and the simplicity of bidder participation.
    269. Maximum Bids and Reserve Prices. The Commission adopts its 
proposed rule to provide for maximum acceptable per-unit bid amounts 
and reserve amounts, separate and apart from any maximum opening bids, 
and to provide that those reserves may be disclosed or undisclosed and 
anticipates that, as detailed procedures for a Mobility Fund Phase I 
auction are established during the pre-auction period, the Bureaus will 
consider all proposals with respect to reserve prices in light of the 
specific timing of and other circumstances related to the auction.
    270. Aggregating Service Areas and Package Bidding. The Bureaus 
will address issues relating to package bidding as part of the pre-
auction process, which is consistent with the way the Commission 
approaches this issue for spectrum auctions. Interested parties will 
have an opportunity to comment on the desirability of package bidding 
in the pre-auction process in connection with the determination of the 
minimum area for bidding. Potential bidders will be able to provide 
input on whether specific package bidding procedures would allow them 
to formulate and implement bidding strategies to incorporate Mobility 
Fund Phase I support into their business plans and capture 
efficiencies, and on how well those procedures will facilitate the 
realization of the Commission's objectives for Mobility Fund Phase I.
    271. Refinements to the Selection Mechanism to Address Limited 
Available Funds.
    272. The Commission adopts a rule that would provide the Bureaus 
with discretion to establish procedures in the pre-auction process to 
deal with the possibility that funds may remain available after the 
auction has identified the last lowest per-unit bid that does not 
assign support exceeding the total funds available. The Commission also 
proposed a rule to give discretion to address a situation where there 
are two or more bids for the same per-unit amount but for different 
areas (``tied bids'') and remaining funds are insufficient to satisfy 
all of the tied bids. The Bureaus should develop appropriate procedures 
to address these issues during the pre-auction notice-and-comment 
process. These procedures shall be consistent with the objective of 
awarding support so as to maximize the number of units that will

[[Page 81595]]

gain coverage in unserved areas subject to the overall budget for 
support.
    273. Withdrawn Bids. In the R&O, the Commission adopts a rule to 
provide for procedures for withdrawing provisionally winning bids, but 
does not expect the Bureaus to permit withdrawn bids, particularly if 
the Mobility Fund Phase I auction will be conducted in a single round.
    274. Preference for Tribally-Owned or Controlled Providers. The 
Commission adopts a 25 percent bidding credit for Tribally-owned or 
controlled providers that participate in a Mobility Fund Phase I 
auction. The preference would act as a ``reverse'' bidding credit that 
would effectively reduce the bid amount by 25 percent for the purpose 
of comparing it to other bids, thus increasing the likelihood that a 
Tribally-owned or controlled entity would receive funding. The 
preference would be available solely with respect to the eligible 
census blocks located within the geographic area defined by the 
boundaries of the Tribal land associated with the Tribal entity seeking 
support.
(iv) Information and Competition
    275. The Commission adopts rules to prohibit applicants competing 
for support in the auction from communicating with one another 
regarding the substance of their bids or bidding strategies and to 
limit public disclosure of auction-related information as appropriate. 
These rules are similar to those used for spectrum license auctions, 
and the Bureaus should seek comment during the pre-auction procedures 
process and decide on the details and extent of information to be 
withheld until the close of the auction.
(v) Auction Cancellation
    276. The Commission adopts a rule to provide discretion to delay, 
suspend, or cancel bidding before or after a reverse auction begins 
under a variety of circumstances, including natural disasters, 
technical failures, administrative necessity, or any other reason that 
affects the fair and efficient conduct of the bidding. Based on its 
experience with a similar rule for spectrum license auctions, the 
Commission concludes that such a rule is necessary.
d. Post-Auction Long-Form Application Process
(i) Long-Form Application
    277. The Commission adopts the long-form application process 
proposed in the Mobility Fund NPRM and delegates to the Bureaus 
responsibility for establishing the necessary FCC application form(s). 
After bidding for Mobility Fund Phase I support has ended, the 
Commission will declare the bidding closed and identify and notify the 
winning bidders. Unless otherwise specified by public notice, within 10 
business days after being notified that it is a winning bidder for 
Mobility Fund support, a winning bidder will be required to submit a 
long-form application, providing certain information described below.
(ii) Ownership Disclosure
    278. The Commission adopts for the Mobility Fund the existing 
ownership disclosure requirements in 47 CFR part 1 that already apply 
to short-form applicants to participate in spectrum license auctions 
and long-form applicants for licenses in the wireless services. Thus, 
an applicant for Mobility Fund support will be required to fully 
disclose its ownership structure as well as information regarding the 
real party- or parties-in-interest of the applicant or application. 
Wireless providers that have participated in spectrum auctions will 
already be familiar with these requirements, and are likely to already 
have ownership disclosure information reports (FCC Form 602) on file 
with the Commission, which may simply need to be updated. To minimize 
the reporting burden on winning bidders, applicants will be able to use 
ownership information stored in existing Commission databases and 
update that ownership information as necessary.
(iii) Eligibility To Receive Support
    279. ETC Designation. The Commission will, with a limited 
exception, require any entity bidding for Mobility Fund support to be 
designated an ETC prior to the Mobility Fund auction short-form 
application deadline. A winning bidder will be required to submit with 
its long-form application appropriate documentation of its ETC 
designation in all of the areas for which it will receive support. 
However, in the event that a winning bidder receives an ETC designation 
conditioned upon receiving Mobility Fund support, it may submit 
documentation of its conditional designation, provided that it promptly 
submits documentation of its final designation after its long-form 
application has been approved but before any disbursement of Mobility 
Fund funds.
    280. Access to Spectrum. Applicants for Mobility Fund support must 
also identify the particular frequency bands and the nature of the 
access (for example, licenses or leasing arrangements) on which they 
assert their eligibility for support. Because not all spectrum bands 
are capable of supporting mobile broadband, and leasing arrangements 
can be subject to a wide variety of conditions and contingencies, 
before an initial disbursement of support is approved, the Commission 
will assess the reasonableness of these assertions. An applicant whose 
access to spectrum derives from a spectrum manager leasing arrangement 
pursuant to 47 CFR 1.9020 may have a greater burden than other 
licensees and spectrum lessees to demonstrate through the execution of 
contractual conditions in its leasing arrangements that it has the 
necessary access to spectrum required to qualify for disbursement of 
Mobility Fund support. Should an applicant not have access to the 
appropriate level of spectrum, it will be found not qualified to 
receive Mobility Fund support and will be subject to an auction default 
payment.
(iv) Project Construction
    281. A winning bidder's long-form application must include a 
description of the network it will construct with Mobility Fund 
support. Carriers must specify on their long-form applications whether 
the supported project will qualify as either a 3G or 4G network, 
including the proposed technology choice and demonstration of technical 
feasibility. Applications should also include a detailed description of 
the network design and contracting phase, construction period, and 
deployment and maintenance period. Applicants must also provide a 
complete projected budget for the project and a project schedule and 
timeline. Recipients will be required to provide updated information in 
their annual reports and in the information they provide to obtain a 
disbursement of funds. In addition, winning bidders of areas that 
include Tribal lands must comply with Tribal engagement obligations to 
demonstrate that they have engaged Tribal governments in the planning 
process and that the service to be provided will advance the goals 
established by the Tribe.
(v) Financial Security and Guarantee of Performance
    282. Winning bidders for Mobility Fund support must provide the 
Commission with an irrevocable stand-by Letter of Credit (``LOC'') 
issued by a bank that is acceptable to the Commission, in an amount 
equal to the amount of support as it is disbursed, plus an additional 
percentage of the amount of support disbursed which shall serve as a 
default payment, which percentage will be determined by the

[[Page 81596]]

Bureaus in advance of the auction. The LOC should be in substantially 
the same form as set forth in the model LOC provided in Appendix N to 
the R&O and must be acceptable in all respects to the Commission.
    283. The Commission is primarily concerned with protecting the 
integrity of the USF funds disbursed to the recipient. Should a 
recipient default on its obligations under the Mobility Fund, the 
priority should be to secure a return of the USF funds disbursed to it 
for this purpose, so that the Commission can reassign the support 
consistent with its goal to maximize the number of units covered given 
the funds available. A Mobility Fund recipient's failure to fulfill its 
obligations may also impose significant costs on the Commission and 
higher support costs for USF. Therefore, the Commission also concludes 
that it is necessary to adopt a default payment obligation for 
performance defaults.
    284. Consistent with its goal of using the LOC to protect the 
government's interest in the funds it disburses in Mobility Fund Phase 
I, the Commission will require winning bidders to obtain an LOC in an 
amount equal to the amount of support it receives plus an additional 
percentage of the amount of support disbursed to safeguard against 
costs to the Commission and the USF. The precise amount of this 
additional percentage will not exceed 20 percent and will be determined 
by the Bureaus as part of its process for establishing the procedures 
for the auction. Thus, before an application for Mobility Fund support 
is granted and funds are disbursed, each winning bidder must provide an 
LOC in the amount of the first one-third of the support associated with 
the unserved census tract that will be disbursed upon grant of its 
application, plus the established additional default payment 
percentage. Before a participant receives the second third of its total 
support, it will be required to provide a second LOC or increase the 
initial LOC to correspond to the amount of that second support payment 
such that LOC coverage will be equal to the total support amount plus 
the established default payment percentage. The LOC(s) will remain open 
and must be renewed to secure the amounts disbursed as necessary until 
the recipient has met the requirements for demonstrating coverage and 
final payment is made. This approach will help to reduce the costs 
recipients incur for maintaining the LOCs, because they will only have 
to maintain LOCs in amounts that correspond to the actual USF funds as 
they are being disbursed.
    285. Consistent with the purpose of the LOC, recipients must 
maintain the LOC in place until at least 120 days after they have 
completed their supported expansion to unserved areas and received 
their final payment of Mobility Fund Phase I support. Under the terms 
of the LOC, the Commission will be entitled to draw upon the LOC upon a 
recipient's failure to comply with the terms and conditions upon which 
USF support was granted. The Commission, for example, will draw upon 
the LOC when the recipient fails to meet its required deployment 
milestone(s). Failure to satisfy essential terms and conditions upon 
which USF support was granted or to ensure completion of the supported 
project, including failure to timely renew the LOC, will be deemed a 
failure to properly use USF support and will entitle the Commission to 
draw the entire amount of the LOC. Failure to comply will be evidenced 
by a letter issued by the Chief of either the Wireless Bureau or 
Wireline Bureau or their designees, which letter, attached to an LOC 
draw certificate, shall be sufficient for a draw on the LOC. In 
addition, a recipient that fails to comply with the terms and 
conditions of the Mobility Fund support it is granted could be 
disqualified from receiving additional Mobility Fund support or other 
USF support.
    286. In the Mobility Fund NPRM, the Commission sought comment on 
the relative merits of performance bonds and LOCs and the extent to 
which performance bonds, in the event of the bankruptcy of the 
recipient of Mobility Fund support, might frustrate the Commission's 
goal of ensuring timely build-out of the network. The Commission 
concludes that an LOC will better serve its objective of minimizing the 
possibility that Mobility Fund support becomes property of a 
recipient's bankruptcy estate for an extended period of time, thereby 
preventing the funds from being used promptly to accomplish the 
Mobility Fund's goals. It is well established that an LOC and the 
proceeds thereunder are not property of a debtor's estate under 11 
U.S.C. 541 (the ``Bankruptcy Code''). In a proper draw upon an LOC, the 
issuer honors a draft under the LOC from its own assets and not from 
the assets of the debtor who caused the LOC to be issued. Because the 
proceeds under an LOC are not property of the bankruptcy estate, absent 
extreme circumstances such as fraud, neither the LOC nor the funds 
drawn down under it are subject to the automatic stay provided by the 
Bankruptcy Code.
    287. In the long-form application filing, each winning bidder must 
submit a commitment letter from the bank issuing the LOC. The 
commitment letter will at a minimum provide the dollar amount of the 
LOC and the issuing bank's agreement to follow the terms and conditions 
of the Commission's model LOC, found in Appendix N to the R&O. The 
winning bidder will, however, be required to have its LOC in place 
before it is authorized to receive Mobility Fund Phase I support and 
before any Mobility Fund Phase I support is disbursed. Further, at the 
time it submits its LOC, a winning bidder must provide an opinion 
letter from legal counsel clearly stating, subject only to customary 
assumptions, limitations and qualifications, that in a proceeding under 
the Bankruptcy Code, the bankruptcy court would not treat the LOC or 
proceeds of the LOC as property of winning bidder's bankruptcy estate, 
or the bankruptcy estate of any other bidder-related entity requesting 
issuance of the LOC, under 11 U.S.C. 541.
(vi) Other Funding Restrictions
    288. While the Commission agrees with commenters that Mobility Fund 
recipients might benefit if they were able to leverage resources from 
other federal programs, it must also take care to ensure that USF funds 
are put to their most efficient and effective use. Therefore, the 
Commission will exclude all areas from the Mobility Fund where, prior 
to the short-form filing deadline, any carrier has made a regulatory 
commitment to provide 3G or better service, or has received a funding 
commitment from a federal executive department or agency in response to 
the carrier's commitment to provide 3G or better service.
(vii) Post-Auction Certifications
    289. Prior to receiving Mobility Fund support, an applicant must 
certify in its long-form application to the availability of funds for 
all project costs that exceed the amount of support to be received from 
the Mobility Fund and certify that they will comply with all program 
requirements.
    290. As discussed elsewhere in the R&O, recipients of Mobility Fund 
support are required by statute to offer services in rural areas at 
rates that are reasonably comparable to those charged to customers in 
urban areas. Accordingly, the post-auction certifications made in the 
long-form application will include a certification that the applicant 
will offer services in rural areas at rates that are reasonably 
comparable to those charged to customers in urban areas.

[[Page 81597]]

(viii) Auction Defaults
    291. Auction Default Payments. The Commission will impose a default 
payment on winning bidders that fail to timely file a long-form 
application. Such a payment is also appropriate if a bidder is found 
ineligible or unqualified to receive Mobility Fund support, its long-
form application is dismissed for any reason, or it otherwise defaults 
on its bid or is disqualified for any reason after the close of the 
auction.
    292. Failures to fulfill auction obligations may undermine the 
stability and predictability of the auction process, and impose costs 
on the Commission and higher support costs for USF. In the case of a 
reverse auction for USF support, a default payment is appropriate to 
ensure the integrity of the auction process and to safeguard against 
costs to the Commission and the USF. The size of the payment and the 
method by which it is calculated may vary depending on the procedures 
established for the auction, including auction design. In advance of 
the auction, the Bureaus will determine whether a default payment 
should be a percentage of the defaulted bid amount or should be 
calculated using another method, such as basing the amount on 
differences between the defaulted bid and the next best bid(s) to cover 
the same number of road miles as without the default. If the Bureaus 
establish a default payment to be calculated as a percentage of the 
defaulted bid, that percentage will not exceed 20 percent of the total 
amount of the defaulted bid. However it is determined, agreeing to that 
payment in event of a default will be a condition for participating in 
bidding. The Bureaus may determine prior to bidding that all 
participants will be required to furnish a bond or place funds on 
deposit with the Commission in the amount of the maximum anticipated 
default payment. A winning bidder will be deemed to have defaulted on 
its bid under a number of circumstances if it withdraws its bid after 
the close of the auction, it fails to timely file a long-form 
application, it is found ineligible or unqualified to receive Mobility 
Fund Phase I support, its long-form application is dismissed for any 
reason, or it otherwise defaults on its bid or is disqualified for any 
reason after the close of the auction. In addition to being liable for 
an auction default payment, a bidder that defaults on its bid may be 
subject to other sanctions, including but not limited to 
disqualification from future competitive bidding for USF support.
    293. The Commission distinguishes between a Mobility Fund auction 
applicant that defaults on its winning bid and a winning bidder whose 
long-form application is approved but subsequently fails or is unable 
to meet its minimum coverage requirement or demonstrate an adequate 
quality of service that complies with Mobility Fund requirements. In 
the latter case of a recipient's performance default, in addition to 
being liable for a performance default payment, the recipient will be 
required to repay all of the Mobility Fund support it has received and, 
depending on the circumstances involved, could be disqualified from 
receiving any additional Mobility Fund or other USF support. The 
Commission may obtain its performance default payment and repayment of 
a recipient's Mobility Fund support by drawing upon the irrevocable 
stand-by LOC that recipients will be required to provide in the full 
amount of support received.
    294. Undisbursed Support Payments. When a winning bidder defaults 
on its bid or is disqualified for any reason after the close of the 
auction, the funds that would have been provided to such an applicant 
will be used in a manner consistent with the purposes of the Universal 
Service program.
e. Accountability and Oversight
    295. In the Mobility Fund NPRM, the Commission sought comment on 
issues relating to the administration, management and oversight of the 
Mobility Fund. On a number of these issues, the Commission adopts 
uniform requirements that will apply to all recipients of high-cost and 
CAF support, including recipients of Mobility Fund Phase I support. 
Recipients of Phase I support will be subject generally to the 
reporting, audit, and record retention requirements that are discussed 
in the Accountability and Oversight section of the R&O. In addition, 
recipients of Mobility Fund Phase I support will be subject to certain 
aspects of support disbursement and annual reporting and record 
retention requirements.
(i) Disbursing Support Payments
    296. Mobility Fund Phase I support will be provided in three 
installments. This approach strikes the appropriate balance between 
advancing funds to expand service and assuring that service is actually 
expanded. Specifically, each party receiving support will be eligible 
to receive from USAC a disbursement of one-third of the amount of 
support associated with any specific census tract once its long-form 
application for support is granted. To qualify for the second 
installment of support, a recipient will be required to demonstrate it 
has met 50 percent of its minimum coverage requirement using the same 
drive tests that will be used to analyze network coverage to provide 
proof of deployment at the end of the project to receive its final 
installment of support. The report a recipient files for this purpose 
will be subject to review and verification before support is disbursed. 
A party will receive the remainder of its support after filing with 
USAC a report with the required data that demonstrates that it has 
deployed a network covering at least the required percent of the 
relevant road miles in the unserved census block(s) within the census 
tract. This data will be subject to review and verification before the 
final support payment for an unserved area is disbursed to the 
recipient. A party's final payment would be the difference between the 
total amount of support based on the road miles of unserved census 
blocks actually covered, i.e., a figure between the required percent 
and 100 percent of the road miles, and any support previously received.
    297. To minimize that risk of lost funds to parties that ultimately 
fail to meet their obligations, the Commission is requiring 
participants to maintain their LOCs in place until after they have 
completed their supported network construction and received their final 
payment of Mobility Fund Phase I support. In addition, participants 
must certify that they are in compliance with all requirements for 
receipt of Mobility Fund Phase I support at the time that they request 
disbursements.
(ii) Annual Reports
    298. Parties receiving Mobility Fund support must file annual 
reports with the Commission demonstrating the coverage provided with 
support from the Mobility Fund for five years after the winning bidder 
is authorized to receive Mobility Fund support. The reports must 
include maps illustrating the scope of the area reached by new 
services, the population residing in those areas (based on Census 
Bureau data and estimates), and the linear road miles covered. In 
addition, annual reports must include all coverage test data for the 
supported areas that the party receives or makes use of, whether the 
tests were conducted pursuant to Commission requirements or any other 
reason. Further, annual reports will include any updated project 
information including updates to the project description, budget and 
schedule.
    299. However, to the extent that a recipient of Mobility Fund 
support is a carrier subject to other existing or new annual reporting 
requirements under 47 CFR 54.313 based on their receipt of

[[Page 81598]]

USF support under another high cost mechanism, it will be permitted to 
satisfy its Mobility Fund Phase I reporting requirements by filing a 
separate Mobility Fund annual report or by including this additional 
information in a separate section of its other annual report filed with 
the Commission. Mobility Fund recipients choosing to fulfill their 
Mobility Fund reporting requirements in an annual report filed under 47 
CFR 54.313 must, at a minimum, file a separate Mobility Fund annual 
report notifying us that the required information is included the other 
annual report.
(iii) Record Retention
    300. Elsewhere in the R&O, the Commission adopts revised 
requirements that extend the record retention period to ten years for 
all recipients of high-cost and CAF support, including recipients of 
Mobility Fund Phase I. This new retention period will be adequate to 
facilitate audits of Mobility Fund program participants, with one 
clarification regarding the required retention period: for the purpose 
of the Mobility Fund program, the ten-year period for which records 
must be maintained will begin to run only after a recipient has 
received its final payment of Mobility Fund support. That is, because 
recipients will receive Mobility Fund support in up to three 
installments, but recipients that ultimately fail to deploy a network 
that meets the Commission's minimum coverage and performance 
requirements or otherwise fail to meet their Mobility Fund public 
interest obligations will be liable for repayment of all previously 
disbursed Mobility Fund support, recipients must retain records for ten 
years from the receipt of the final disbursement of Mobility Fund 
funds.
2. Service to Tribal Lands
a. Tribal Mobility Fund Phase I
    301. The Commission establishes a separate Tribal Mobility Fund 
Phase I to provide one-time support to deploy mobile broadband to 
unserved Tribal lands, which have significant telecommunications 
deployment and connectivity challenges. The Commission anticipates that 
an auction will occur as soon as feasible after a general Mobility Fund 
Phase I auction, providing for a limited period of time in between so 
that applicants that may wish to participate in both auctions may plan 
and prepare for a Tribal Phase I auction after a general Phase I 
auction. The decision to establish a Tribal Mobility Fund Phase I stems 
from the Commission's policy regarding ``Covered Locations,'' and 
represents its commitment to Tribal lands, including Alaska.
    302. The Commission allocates $50 million from universal service 
funds reserves for Tribal Mobility Fund Phase I, separate and apart 
from the $300 million allocated for the general Mobility Fund Phase I. 
Providers in Tribal lands will be eligible for both the general and 
Tribal Mobility Fund Phase I auctions. Consistent with the general 
Mobility Fund Phase I, the Commission delegates to the Bureaus 
authority to administer the policies, programs, rules and procedures to 
implement Tribal Mobility Fund Phase I as established in the R&O. The 
Commission determines that allocating $50 million from universal 
service fund reserves to support the deployment of mobile broadband to 
unserved Tribal lands is necessary, separate and apart from the $300 
million we are allocating for Mobility Fund Phase I, because of special 
challenges involved in deploying mobile broadband on Tribal lands. 
Various characteristics of Tribal lands may increase the cost of entry 
and reduce the profitability of providing service, including: ``(1) The 
lack of basic infrastructure in many tribal communities; (2) a high 
concentration of low-income individuals with few business subscribers; 
(3) cultural and language barriers where carriers serving a tribal 
community may lack familiarity with the Native language and customs of 
that community; (4) the process of obtaining access to rights-of-way on 
tribal lands where tribal authorities control such access; and (5) 
jurisdictional issues that may arise where there are questions 
concerning whether a state may assert jurisdiction over the provision 
of telecommunications services on tribal lands.''
    303. Promoting the development of telecommunications infrastructure 
on Tribal lands is consistent with the Commission's unique trust 
relationship with Tribes. The Commission previously observed that ``by 
increasing the total number of individuals, both Indian and non-Indian, 
who are connected to the network within a tribal community the value of 
the network for tribal members in that community is greatly enhanced.'' 
By structuring the support to benefit Tribal lands, rather than 
attempting to require wireless providers to distinguish between Tribal 
and non-Tribal customers, the Commission will ``reduc[e] the possible 
administrative burdens associated with implementation of the enhanced 
federal support, [and] eliminate a potential disincentive to providing 
service on Tribal lands.'' Support for Tribal lands generally will be 
awarded on the same terms and subject to the same rules as general 
Mobility Fund Phase I support. Therefore, the Commission incorporates 
by reference the eligible geographic area, provider eligibility, public 
interest obligations, auction and post-auction processes, and program 
management and oversight measures established for Phase I of the 
Mobility Fund. However, in some instances, a more tailored approach is 
appropriate and the Commission adopts modest revisions to its general 
rules. As discussed in the USF-ICC Transformation FNPRM, the Commission 
also proposes an ongoing support mechanism for Tribal lands in Phase II 
of the Mobility Fund, as well as a separate CAF mechanism to reach the 
most remote areas, including Tribal lands.
    304. Size of Fund. The Commission dedicates $50 million in one-time 
support for the Tribal Mobility Fund Phase I, which should help 
facilitate mobile deployment in unserved areas on Tribal lands. This 
amount is in addition to the $300 million to be provided under the 
general Mobility Fund Phase I, for which qualifying Tribal lands would 
also be eligible, and is in addition to the up to $100 million in 
ongoing support being dedicated to Tribal lands in the Tribal Mobility 
Fund Phase II. A one-time infusion of $50 million through the Tribal 
Mobility Fund can make a difference in expanding the availability of 
mobile broadband in Tribal lands unserved by 3G. The more targeted 
nature of this support will enhance the impact of this significant one-
time addition to current support levels. At the same time, this funding 
level is consistent with the Commission's commitment to fiscal 
responsibility and the varied objectives the Commission has for its 
limited funds, including its proposals for ongoing support for mobile 
services as established below.
    305. Mechanism To Award Support. Consistent with the general 
approach to awarding Phase I support, to maximize consumer benefits, 
the Commission generally will award support to one provider per 
qualifying area by reverse auction and will only award support to more 
than one provider per area where doing so would cover more total units 
given the budget constraint. In certain limited circumstances, however, 
depending on the bidding at auction, allowing small overlaps in support 
could result in greater overall coverage.
    306. Because it is essential to award support in a way that 
respects and reflects Tribal needs, the Commission adopts Tribal 
engagement obligations to

[[Page 81599]]

ensure that needs are identified and appropriate solutions are 
developed. The Commission also adopts a bidding credit for Tribally-
owned or controlled providers seeking to expand service on their Tribal 
lands. A reverse auction mechanism, together with the Tribal engagement 
and preferences adopted in the R&O, would best achieve the Commission's 
goals in expanding service to Tribal lands in a respectful, fair, and 
fiscally responsible manner.
    307. Establishing Unserved Units. For purposes of determining the 
number of unserved units in a given geographic area, the Commission 
concludes that, for a Tribal Phase I auction, a population-based metric 
is more appropriate than road miles, which will be used in a general 
Mobility Fund Phase I auction. In light of this conclusion, the ``drive 
tests'' used to demonstrate coverage supported by Tribal Mobility Fund 
Phase I may be conducted by means other than in automobiles on roads. 
Providers may demonstrate coverage of an area with a statistically 
significant number of tests in the vicinity of residences being 
covered. Moreover, equipment to conduct the testing can be transported 
by off-road vehicles, such as snow-mobiles or other vehicles 
appropriate to local conditions.
b. Tribal Engagement Obligation
    308. The Commission agrees with commenters that have repeatedly 
stressed the essential role that Tribal consultation and engagement 
plays in the successful deployment of mobile broadband service. 
Therefore, for both the general and Tribal Mobility Fund Phase I 
auctions, the Commission encourages applicants seeking to serve Tribal 
lands to begin engaging with the affected Tribal government as soon as 
possible but no later than the submission of its long-form application. 
Any such engagement, however, must be done consistent with the 
Commission's auction rules prohibiting certain communications during 
the competitive bidding process.
    309. Moreover, any bidder winning support for areas within Tribal 
lands must notify the relevant Tribal government no later than five 
business days after being identified by Public Notice as such a winning 
bidder. Thereafter, at the long-form application stage, in annual 
reports, and prior to any disbursement of support from USAC, Mobility 
Fund Phase I winning bidders will be required to comply with the 
general Tribal engagement obligations discussed infra.
c. Preference for Tribally-Owned or Controlled Providers
    310. The Commission adopts a preference for Tribally-owned or 
controlled providers seeking general or Tribal Mobility Fund Phase I 
support. Eligible entities include Tribes or tribal consortia, and 
entities majority owned or controlled by Tribes. The preference will 
act as a ``reverse'' bidding credit that will effectively reduce the 
bid amount of a qualified Tribally owned- or controlled provider by a 
designated percentage for the purpose of comparing it to other bids, 
thus increasing the likelihood that Tribally-owned and controlled 
entities will receive funding. The preference will be available with 
respect to the eligible census blocks located within the geographic 
area defined by the boundaries of the Tribal land associated with the 
Tribal entity seeking support. In the spectrum auction context, the 
Commission typically awards small business bidding credits ranging from 
15 to 35 percent, depending on varying small business size standards. 
The Commission believes that a bidding credit in that range would 
further Tribal self-government by increasing the likelihood that the 
bid would be awarded to a Tribal entity associated with the relevant 
Tribal land, without providing an unfair advantage over substantially 
more cost-competitive bids. Accordingly, it adopts a 25 percent bidding 
credit.
d. ETC Designation for Tribally-Owned or Controlled Entities
    311. To afford Tribes an increased opportunity to participate at 
auction, in recognition of their interest in self-government and self-
provisioning on their own lands, the Commission will permit a Tribally-
owned or controlled entity that has an application for ETC designation 
pending at the relevant short-form application deadline to participate 
in an auction to seek general and Tribal Mobility Fund Phase I support 
for eligible census blocks located within the geographic area defined 
by the boundaries of the Tribal land associated with the Tribe that 
owns or controls the entity. Allowing such participation at auction in 
no way prejudges the ultimate decision on a Tribally-owned or 
controlled entity's ETC designation and that support will be disbursed 
only after it receives such designation.
e. Tribal Priority
    312. Further comment is warranted before the Commission moves 
forward with any Tribal priority process that would afford Tribes 
``priority units'' to allocate to areas of particular importance to 
them. Therefore, the Commission seeks additional input on this proposal 
in the context of the Tribal Mobility Fund Phase II. In the meantime, 
the Tribal engagement obligations adopted in the R&O, combined with 
build-out obligations, will ensure that Tribal needs are met in 
bringing service to unserved Tribal communities in the Mobility Fund 
Phase I.
3. Mobility Fund Phase II
    313. In addition to Phase I of the Mobility Fund, the Commission 
also establishes in the R&O Phase II of the Mobility Fund, which will 
provide ongoing support for mobile services in areas where such support 
is needed. Whereas Mobility Fund Phase I will provide one-time funding 
for the expansion of current and next generation mobile networks, Phase 
II of the Mobility Fund recognizes that there are areas in which 
offering of mobile services will require ongoing support.
    314. The Commission designates $500 million annually for ongoing 
support for mobile services, to be distributed in Phase II of the 
Mobility Fund. Of this amount, the Commission anticipates that it would 
designate up to $100 million to address the special circumstances of 
Tribal lands. The Commission sets a budget of $500 million to promote 
mobile broadband in these areas, where a private sector business case 
cannot be met without federal support. Although the budget for fixed 
services exceeds the budget for mobile services, significantly more 
Americans at this time have access to 3G mobile coverage than have 
access to residential broadband via fixed wireless, DSL, cable, or 
fiber. The Commission expects that as 4G mobile service is rolled out, 
this disparity will persist--private investment will enable the 
availability of 4G mobile service to a larger number of Americans than 
will have access to fixed broadband with speeds of at least 4 Mbps 
downstream and 1 Mbps upstream.
    315. In 2010, wireless ETCs other than Verizon Wireless and Sprint 
received $921 million in high-cost support. Under 2008 commitments to 
phase down their competitive ETC support, Verizon Wireless and Sprint 
have already given up significant amounts of the support they received 
under the identical support rule, and there is nothing in the record 
showing that either carrier is reducing coverage or shutting down 
towers even as this support is eliminated. Nor is there anything in the 
record that suggests

[[Page 81600]]

AT&T or T-Mobile would reduce coverage or shut down towers in the 
absence of ETC support. It reasonable to assume that the four national 
carriers will maintain at least their existing coverage footprints even 
if the support they receive today is phased out. In 2010, $579 million 
flowed to regional and small carriers, i.e., carriers other than the 
four nationwide providers. Of this $579 million, in many instances this 
support is being provided to multiple wireless carriers in the same 
geographic area. The State Members of the Federal State Joint Board on 
Universal Service have proposed that the Commission establish a 
dedicated Mobility Fund that would provide $50 million in the first 
year, $100 million in the second year, and then increase by $100 
million each year until support reaches $500 million annually. A $500 
million annual budget should be sufficient to sustain and expand the 
availability of mobile broadband. Moreover, mobile providers may also 
be eligible for support in CAF 1 in areas where price cap carriers opt 
not to accept the state-level commitment, in addition to Mobility Fund 
Phase II support.
    316. Some small proportion of geographic areas may be served by a 
single wireless ETC, which might reduce coverage if it fails to win 
ongoing support within the $500 million budget. But the current record 
does not persuade the Commission that the best approach to ensure 
continuing service in those instances is to increase its overall $500 
million budget. Rather, the Commission has established a waiver process 
as discussed elsewhere in the R&O that a wireless ETC may use to 
demonstrate that additional support is needed for its customers to 
continue receiving mobile voice service in areas where there is no 
terrestrial mobile alternative.
    317. Of the $500 million, the Commission sets aside up to $100 
million for a separate Tribal Mobility Fund, for the same reasons 
articulated with respect to the Tribal Mobility Fund Phase I. In 
addition, many Tribal lands require ongoing support in order to provide 
service and therefore the Commission designates a substantial level of 
funding to ensure that these communities are not left behind. This 
amount is roughly equivalent to the amount of funding currently 
provided to Tribal lands in the lower 48 states and in Alaska, 
excluding support awarded to study areas that include the most densely 
populated communities in Alaska.
4. Eliminating the Identical Support Rule
    318. Discussion. The Commission eliminates the identical support 
rule. Based on more than a decade of experience with the operation of 
the current rule and having received a multitude of comments noting 
that the current rule fails to efficiently target support where it is 
needed, the Commission reiterates the conclusion that this rule has not 
functioned as intended. As described in more detail below, identical 
support does not provide appropriate levels of support for the 
efficient deployment of mobile services in areas that do not support a 
private business case for mobile voice and broadband. Because the 
explicit support for mobility the Commission adopts today will be 
designed to appropriately target funds to such areas, the identical 
support rule is no longer necessary or in the public interest.
    319. The Commission anticipated that universal service support 
would be driven to the most efficient providers as they captured 
customers from the incumbent provider in a competitive marketplace. It 
originally expected that growth in subscribership to a competitive 
ETC's services would necessarily result in a reduction in 
subscribership to the incumbent's services. Instead, the vast majority 
of competitive ETC support has been attributable to the growing role of 
wireless in the United States. Overwhelmingly, high-cost support for 
competitive ETCs has been distributed to wireless carriers providing 
mobile services. Although nearly 30 percent of households nationwide 
have cut the cord and have only wireless voice service, many households 
subscribe to both wireline voice service and wireless voice service. 
Moreover, because households typically have multiple mobile phones, 
wireless competitive ETCs have been able to receive multiple subsidies 
for the same household. Although the expansion of wireless service has 
brought many benefits to consumers, the identical support rule was not 
designed to efficiently provide appropriate levels of support for 
mobility.
    320. The support levels generated by the identical support rule 
bear no relation to the efficient cost of providing mobile voice 
service in a particular geography. In areas where the incumbent's 
support per line is high, a competitive ETC will receive relatively 
high levels of support per line, while it would receive markedly less 
support in an adjacent area with the same cost characteristics, if the 
incumbent there is receiving relatively little support per line. This 
makes little sense. Demographics, topography, and demand by travelers 
for mobile coverage along roads, as opposed to residences, are 
considerations that may create different business cases for fixed vs. 
mobile voice services in different areas, with a resulting effect on 
the level of need for subsidization. As a result of these and other 
differences in cost and revenue structures, the per-line amounts 
received by competitive ETCs are a highly imperfect approximation of 
the amount of subsidy necessary to support mobile service in a 
particular geographic area and such structures have simply missed the 
mark.
    321. Given the way the identical support rule operates, wireless 
competitive ETCs often do not have appropriate incentives for entry. 
Some areas with per-line support amounts that are relatively high may 
be attracting multiple competitive ETCs, each of which invests in its 
own duplicative infrastructure. Indeed, many areas have four or more 
competitive ETCs providing overlapping service. These areas may be 
attracting investment that could otherwise be directed elsewhere, 
including areas that are not currently served. Conversely, in some 
areas the subsidy provided by the identical support rule may be too 
low, so that no competitive ETCs seek to serve the area, resulting in 
inadequate mobile coverage.
    322. Moreover, today, competitive ETC support is calculated, and 
lines are reported, according to the billing address of the subscriber. 
Although the identical support rule provides a per-line subsidy for 
each competitive ETC handset in service, the customer need not use the 
handset at the billing address in order to receive support. Indeed, 
mobile competitive ETCs may receive support for some customers that 
rarely use their handsets in high-cost areas, but typically use their 
cell phones on highways and in towns or other places in which coverage 
would be available even without support. As currently constructed, the 
rule fails to ensure that facilities are built in areas that actually 
lack coverage.
    323. The Commission rejects contentions that competitive ETCs 
serving certain types of areas should be exempted from elimination of 
the identical support rule. For example, a number of commenters from 
Alaska suggest that Alaska should be excluded altogether from today's 
reforms, and that high-cost support should generally continue in Alaska 
at existing levels with redistribution of that support within the 
state. The Commission appreciates and recognizes that Alaska

[[Page 81601]]

faces uniquely challenging operating conditions, and agrees that 
national solutions may require modification to serve the public 
interest in Alaska. The Commission does not, however, believe that the 
Alaskan proposals ultimately best serve the interest of Alaskan 
consumers. The Commission believes that the package of reforms adopted 
in the R&O targeting funding for broadband and mobility, eliminating 
duplicative support, and ensuring all mechanisms provide incentives for 
prudent and efficient network investment and operation is the best 
approach for all parts of the Nation, including Alaska.
    324. That said, it is important to ensure our approach is flexible 
enough to take into account the unique conditions in places like 
Alaska, and the Commission makes a number of important modifications to 
the national rules, particularly with respect to public interest 
obligations, the Mobility Funds, and competitive ETC phase down, to 
account for those special circumstances, such as its remoteness, lack 
of roads, challenges and costs associated with transporting fuel, lack 
of scalability per community, satellite and backhaul availability, 
extreme weather conditions, challenging topography, and short 
construction season. Further, to the extent specific proposals have a 
disproportionate or inequitable impact on any carriers (wireline or 
wireless) serving Alaska, the Commission notes that it will provide for 
expedited treatment of any related waiver requests for all Tribal and 
insular areas. The Commission believes this approach, on balance, 
provides the benefits of our national approach while taking into 
account the unique operating conditions in some communities. Analogous 
proposals to maintain existing wireline and wireless support levels in 
other geographic areas, including the U.S. Territories and other Tribal 
lands, suffer the same infirmities as the proposals related to Alaska, 
and are also rejected.
    325. The Commission notes that the elimination of the identical 
support rule applies also to competitive ETCs providing fixed services, 
including competitive wireline service providers. The reforms the 
Commission adopts elsewhere in the R&O are designed to achieve nearly 
ubiquitous broadband deployment. In those states where the incumbent 
price cap carrier declines to make a state-level commitment to build 
broadband in exchange for model-based support, all competitive ETCs 
will have the opportunity to compete to provide supported services. In 
other areas, where the incumbent service providers will be responsible 
for achieving the universal service goals, the Commission finds it 
would not be in the public interest to provide additional support to 
carriers providing duplicative services. In addition, in areas where 
unsubsidized providers have built out service, no carrier--incumbent or 
competitive--will receive support, placing all providers on even 
footing.
    326. The Commission rejects any arguments that the Commission may 
not eliminate the identical support rule because doing so would prevent 
some carriers from receiving high-cost support. 47 U.S.C. 254 does not 
mandate the receipt of support by any particular carrier. Rather, as 
the Commission has indicated and the courts have agreed, the ``purpose 
of universal service is to benefit the customer, not the carrier.'' 
ETCs are not entitled to the expectation of any particular level of 
support, or even any support, so long as the level of support provided 
is sufficient to achieve universal service goals. As explained above, 
the Commission finds that the identical support rule does not provide 
an amount to any particular carrier that is reasonably calculated to be 
sufficient but not excessive for universal service purposes.
    327. For all of these reasons, the Commission finds the identical 
support rule does not effectively serve the Commission's goals, and the 
Commission eliminates the rule effective January 1, 2012.
5. Transition of Competitive ETC Support to CAF
    328. Discussion. The Commission transitions existing competitive 
ETC support to the CAF, including our reformed system for supporting 
mobile service over a five-year period beginning July 1, 2012. The 
Commission finds that a transition is desirable in order to avoid 
shocks to service providers that may result in service disruptions for 
consumers. Several commenters supported longer transition periods, but 
the Commission does not find their arguments compelling. The Commission 
understands that current recipients would prefer a slower, longer 
transition that provides them with more universal service revenues 
under the current system. The Commission finds, however, that a five-
year transition will be sufficient for competitive ETCs that are 
currently receiving high-cost support to adjust and make necessary 
operational changes to ensure that service is maintained during the 
transition.
    329. Moreover, during this period, competitive ETCs offering mobile 
wireless services will have the opportunity to bid in the Mobility Fund 
Phase I auction in 2012 and participate in the second phase of the 
Mobility Fund in 2013. Competitive ETCs offering broadband services 
that meet the performance standards described above will also have the 
opportunity to participate in competitive bidding for CAF support in 
areas where price cap companies decline to make a state-level broadband 
commitment in exchange for model-determined support, as described 
above, in 2013. With these new funding opportunities, many carriers, 
including wireless carriers, could receive similar or even greater 
amounts of funding after our reforms than before, albeit with that 
funding more appropriately targeted to the areas that need additional 
support.
    330. For the purpose of this transition, the Commission concludes 
that each competitive ETC's baseline support amount will be equal to 
its total 2011 support in a given study area, or an amount equal to 
$3,000 times the number of reported lines as of year-end 2011, 
whichever is lower. For the purpose of this transition, ``total 2011 
support'' is the amount of support disbursed to a competitive ETC for 
2011, without regard to prior period adjustments related to years other 
than 2011 and as determined by USAC on January 31, 2012. Using a full 
calendar year of support to set the baseline will provide a reasonable 
approximation of the amount that competitive ETCs would currently 
expect to receive, absent reform, and a natural starting point for the 
phase-down of support.
    331. In addition, the Commission limits the baseline to $3,000 per 
line in order to reflect similar changes to our rules limiting support 
for incumbent wireline carriers to $3,000 per line per year. For the 
purpose of applying the $3,000 per line limit, USAC shall use the 
average of lines reported by a competitive ETC pursuant to line count 
filings required for December 31, 2010, and December 31, 2011. This 
will provide an approximation of the number of lines typically served 
during 2011. As discussed above, the per-line amounts received by 
competitive ETCs are a highly imperfect approximation of the amount of 
subsidy necessary to support mobile service in a particular geographic 
area. There is no indication in the record before us that competitive 
ETCs need support in excess of $3,000 per line to maintain existing 
service pending transition to the Mobility Fund. Moreover, if the 
Commission did not apply the $3,000 per line limit to the baseline 
amount for competitive ETCs, their baselines could, in some 
circumstances, be much higher than the amount that they would have been

[[Page 81602]]

permitted had the Commission retained the identical support rule going 
forward, due to other changes that may lower support for the incumbent 
carrier.
    332. Because the amount of Mobility Fund Phase II support provided 
will be designed to provide a sufficient level of support for a mobile 
carrier to provide service, the Commission finds there is no need for 
any carrier receiving Mobility Fund Phase II support to also continue 
receiving legacy support. Therefore, any such carrier will cease to be 
eligible for phase-down support in the first month it is eligible to 
receive support pursuant to the Mobility Fund Phase II. The receipt of 
support pursuant to Mobility Fund Phase I will not impact a carrier's 
receipt of support under the phase-down. Similarly, the receipt of 
support pursuant to Mobility Fund Phase II for service to a particular 
area will not affect a carrier's receipt of phase-down support in other 
areas.
    333. The Commission notes that, pursuant to 47 U.S.C. 214(e) of the 
Act, competitive ETCs are required to offer service throughout their 
designated service areas. This requirement remains in place, even as 
support provided pursuant to the identical support rule is phased down. 
A competitive ETC may request modification of its designated service 
area by petitioning the entity with the relevant jurisdictional 
authority. In considering such petitions, the Commission will examine 
how an ETC modification would affect areas for which there is no other 
mobile service provider, and the Commission encourages state 
commissions to do the same.
    334. Competitive ETC support per study area will be frozen at the 
2011 baseline, and that monthly baseline amount will be provided from 
January 1, 2012 to June 30, 2012. Each competitive ETC will then 
receive 80 percent of its monthly baseline amount from July 1, 2012 to 
June 30, 2013, 60 percent of its baseline amount from July 1, 2013, to 
June 30, 2014, 40 percent from July 1, 2014, to June 30, 2015, 20 
percent from July 1, 2015, to June 30, 2016, and no support beginning 
July 1, 2016. The Commission expects that the Mobility Fund Phase I 
auction will occur in 2012, and that ongoing support through the 
Mobility Fund Phase II will be implemented by 2013, with $500 million 
expressly dedicated to mobility. If the Mobility Fund Phase II is not 
operational by June 30, 2014, the Commission will halt the phase-down 
of support until it is operational. The Commission will similarly halt 
the phase-down of support for competitive ETCs serving Tribal lands if 
the Mobility Fund Phase II for Tribal lands has not been implemented at 
that time. The Commission anticipates that any temporary halt of the 
phase-down would be accompanied by additional mobile broadband public 
interest obligations, to be determined. The temporary halt will apply 
to wireline competitive ETCs as well as competitive ETCs providing 
mobile services.
    335. The Commission notes that Verizon Wireless and Sprint will 
continue to be subject to the phase-down commitments they made in the 
November 2008 merger Orders. Consistent with the process set forth in 
the Corr Wireless Order, their specific phase downs will be applied to 
the revised rules of general applicability the Commission adopts today. 
As a result, each carrier will have its baseline support calculated 
based on disbursements, with a 20 percent reduction applied beginning 
July 1, 2012. Sprint, which elected Option A described in the Corr 
Wireless Order, will, in 2012, have an additional reduction applied as 
necessary to reduce its support to 20 percent of its 2008 baseline 
amount. Verizon Wireless, which elected Option B, will, in 2012, have 
an 80 percent reduction applied to the support it would otherwise 
receive. In 2013, neither carrier will receive phase down support, 
consistent with the commitments. To the extent that they qualify by 
remaining ETCs or obtaining ETC designations and agreeing to the 
obligations imposed on all Mobility Fund recipients, they will be 
permitted to participate in Mobility Fund Phases I and II.
    336. In determining this transition process, the Commission also 
considered (a) applying the reduction factors to each state's interim 
cap amount, or (b) converting each competitive ETC's baseline amount to 
a per-line amount, to which the reduction factor would be applied. The 
Commission rejects these alternatives because they would provide less 
certainty regarding support amounts for competitive ETCs during the 
transition and would create greater administrative burdens and 
complexity. Under the first alternative, an individual competitive 
ETC's support would continue to be affected by line counts, support 
calculations and relinquishments for other, unrelated carriers within 
the state. Under the second alternative, a competitive ETC's support 
would fluctuate based on line growth or loss. The Commission believes, 
on balance, that the additional certainty to all competitive ETCs and 
the administrative efficiencies for USAC of freezing study area support 
as the baseline, particularly at a time when considerable demands will 
be placed on USAC to implement an entirely new support mechanism, 
outweigh the potential negative impact to any individual competitive 
ETCs that otherwise might receive greater support amounts during the 
transition to the CAF. In addition, competitive ETCs will be relieved 
of the obligation to file quarterly line counts, which will reduce 
their administrative burden as well.
    337. In the USF/ICC Transformation NPRM, the Commission sought 
comment on whether exceptions to the phase down or other modified 
transitions should be permitted for some carriers. Although the 
Commission adopts limited exceptions for some remote parts of Alaska 
described below and for one Tribally-owned carrier whose ETC 
designation was modified after release of the USF/ICC Transformation 
NPRM, the Commission declines to adopt any general exceptions to our 
transition. Although some commenters have argued that broad exceptions 
will be needed, they did not generally provide the sort of detailed 
data and analysis that would enable us to develop a general rule for 
which carriers would qualify. The purpose of the phase down is to avoid 
unnecessary consumer disruption as the Commission transitions to new 
programs that will be better designed to achieve universal service 
goals, especially with respect to promoting investment in and 
deployment of mobile service to areas not yet served. The Commission 
does not wish to encourage further investment based on the inefficient 
subsidy levels generated by the identical support rule. The Commission 
concludes that phasing down and transitioning existing competitive 
support will not create significant or widespread risks that consumers 
in areas that currently have service, including mobile service, will be 
left without any viable mobile service provider serving their area.
    338. The Commission will, however, consider waiver requests on a 
case-by-case basis. Consistent with the phase-down support's purpose of 
protecting existing service during the transition to the Mobility Fund 
programs, the Commission would not find persuasive arguments that 
waivers are necessary in order to expand deployment and service 
offerings to new areas. The Commission anticipates that future 
investment supported with universal service support will be provided 
pursuant to the new programs.
    339. The Commission will carefully consider all requests for waiver 
of the phase down that meet the requirements

[[Page 81603]]

described above. The Commission expects that those requests will not be 
numerous. The Commission notes that two of the four nationwide 
carriers--Verizon Wireless and Sprint--have already given up 
significant amounts of the support they received under the identical 
support rule, and there is no indication in the record before us that 
those companies have turned off towers as a consequence of 
relinquishing their support.
    340. The Commission notes that the transition the Commission adopts 
here will include those carriers currently receiving support under the 
Covered Locations exception to the interim cap and those carriers that 
have sought to take advantage of the own-costs exception to the cap. In 
adopting the Covered Locations exception to the funding cap in the 2008 
Interim Cap Order, the Commission recognized that penetration rates for 
basic telephone service on Tribal lands were lower than for the rest of 
the Nation, and the Commission concluded that competitive ETCs serving 
those areas were not merely providing complementary services. Under 
this exception, competitive ETCs serving Tribal lands have operated 
without a cap, and have benefited from significant funding increases. 
Indeed, support provided for service in Covered Locations has nearly 
doubled, from an estimated $72 million in 2008 to an estimated $150 
million in 2011, while competitive ETC high-cost support for the 
remainder of the nation was frozen.
    341. A significant number of supported lines under the Covered 
Locations exception are in larger cities in Alaska where multiple 
competitive ETCs often serve the same area. The result is that a 
significant amount of support in Alaska is provided to competitive ETCs 
serving the three largest Alaskan cities, Anchorage, Fairbanks, and 
Juneau.
    342. The interim cap--along with its exceptions--was intended to be 
in place only until the Commission adopted comprehensive reforms to the 
high-cost program. The Commission adopts those reforms today. It is 
therefore appropriate, as the Commission transitions away from the 
identical support rule and the interim cap to a new high-cost support 
mechanism, including for mobile services, that this transition should 
begin for all competitive ETCs, including those that previously 
received uncapped support under exceptions to the interim cap.
    343. With respect to Covered Locations, the Commission recognizes 
the significant strides that competitive ETCs have made in Covered 
Locations in the last two years, and that more still must be done to 
support expanded mobile coverage on Tribal lands. But, as with the rest 
of the Nation, the Commission concludes that the most effective way to 
do so will be through mechanisms that specifically and explicitly 
target support to expand coverage in Tribal lands where there is no 
economic business case to provide mobile service, not through the 
permanent continuation of the identical support rule. Our newly created 
Mobility Funds will provide dedicated funding to Tribal lands in a 
manner consistent with the policy objectives underlying our Covered 
Locations policy to continue to promote deployment in these 
communities.
    344. The Commission therefore lifts the Covered Locations 
exception, and concludes that those carriers serving Tribal lands will 
be subject to the national five-year transition period. The Commission 
finds persuasive, however, arguments that carriers serving remote parts 
of Alaska, including Alaska Native villages, should have a slower 
transition path in order to preserve newly initiated services and 
facilitate additional investment in still unserved and underserved 
areas during the national transition to the Mobility Funds. Over 50 
remote communities in Alaska have no access to mobile voice service 
today, and many remote Alaskan communities have access to only 2G 
services. While carriers serving other parts of Alaska will be subject 
to the national five-year transition period, the Commission is 
convinced a more gradual approach is warranted for carriers in remote 
parts of Alaska. For purposes of this R&O, the Commission will treat as 
remote areas of Alaska all areas other than the study areas, or 
portions thereof, that include the three major cities in Alaska with 
over 30,000 in population, Anchorage, Juneau, and Fairbanks. With 
respect to Anchorage, the Commission excludes the ACS of Anchorage 
study area (SAC 613000) as well as Eagle River Zones 1 and 2 and 
Chugiak Zones 1 and 2 of the Matanuska Telephone Authority study area 
(SAC 619003). For Fairbanks, the Commission excludes zone 1 of the ACS 
of Fairbanks (SAC 613008), and for Juneau, the Commission excludes the 
ACS Alaska-Juneau study area (SAC 613012). The Commission notes that 
ACS and GCI concur that the study areas, or portions thereof, that 
include these three cities are an appropriate proxy for non-remote 
areas of Alaska. There is no evidence on the record that any 
accommodation is necessary to preserve service or protect consumers in 
these larger Alaskan communities.
    345. Specifically, in lifting the Covered Locations exception, the 
Commission delays the beginning of the five-year transition period for 
a two-year period for remote areas of Alaska. As a result, the 
Commission expects that ongoing support through the Mobility Fund Phase 
II, including the Tribal Mobility Fund Phase II, will be implemented 
prior to the beginning of the five-year transition period in July 2014 
for remote parts of Alaska, providing greater certainty and stability 
for carriers in these areas. During this two-year period, the 
Commission establishes an interim cap for remote areas of Alaska for 
high-cost support for competitive ETCs, which balances the need to 
control the growth in support to competitive ETCs in uncapped areas and 
the need to provide a more gradual transition for the very remote and 
very high-cost areas in Alaska to reflect the special circumstances 
carriers and consumers face in those communities. This cap will be 
modeled on the state-by-state interim cap that has been in place under 
the Interim Cap Order. Specifically, the interim cap for remote areas 
of Alaska will be set at the total of all competitive ETC's baseline 
support amounts in remote areas of Alaska using the same process 
described above. On a quarterly basis, USAC will calculate the support 
each competitive ETC would have received under the frozen per-line 
support amount as of December 31, 2011 capped at $3000 per year, and 
then, if necessary, calculate a state reduction factor to reduce the 
total amount down to the cap amount for remote areas of Alaska. 
Specifically, USAC will compare the total amount of uncapped support to 
the interim cap for remote areas of Alaska. Where the total uncapped 
support is greater than the available support amount, USAC will divide 
the interim cap support amount by the total uncapped amount to yield 
the reduction factor. USAC will then apply the reduction factor to the 
uncapped amount for each competitive ETC within remote areas of Alaska 
to arrive at the capped level of high-cost support. If the uncapped 
support is less than the available capped support amount, no reduction 
will be required.
    346. In addition, the Commission adopts a limited exception to the 
phase-down of support for Standing Rock Telecommunications, Inc. 
(Standing Rock), a Tribally-owned competitive ETC that had its ETC 
designation modified within calendar year 2011 for the purpose of 
providing service throughout the entire Standing Rock Sioux 
Reservation. The Commission recognizes that Tribally-owned ETCs

[[Page 81604]]

play a vital role in serving their communities, often in remote, low-
income, and unserved and underserved regions. The Commission finds that 
a tailored approach in this particular instance is appropriate because 
of the unique federal trust relationship the Commission shares with 
federally recognized Tribes, which requires the federal government to 
adhere to certain fiduciary standards in its dealings with Tribes. In 
this regard, the federal government has a longstanding policy of 
promoting Tribal self-sufficiency and economic development, as embodied 
in various federal statutes. As an independent agency of the federal 
government, ``the Commission recognizes its own general trust 
relationship with, and responsibility to, federally recognized 
Tribes.'' In keeping with this recognition, the Commission has 
previously taken actions to aid Tribally-owned companies, which are 
entities of their Tribal governments and instruments of Tribal self-
determination. For example, the Commission has adopted licensing 
procedures to increase radio station ownership by Tribes and Tribally-
owned entities through the use of a ``Tribal Priority.''
    347. A limited exception to the phase-down of competitive ETC 
support will give Standing Rock, a nascent Tribally-owned ETC that was 
designated to serve its entire Reservation and the only such ETC to 
have its ETC designation modified since release of the USF/ICC 
Transformation NPRM in February 2011, the opportunity to ramp up its 
operations in order to reach a sustainable scale to serve consumers in 
its service territory. The Commission finds that granting a two-year 
exception to the phase-down of support to this Tribally-owned 
competitive ETC is in the public interest. For a two-year period, 
Standing Rock will receive per-line support amounts that are the same 
as the total support per line received in the fourth quarter of this 
year. The Commission adopts this approach in order to enable Standing 
Rock to reach a sustainable scale so that consumers on the Reservation 
can realize the benefits of connectivity that, but for Standing Rock, 
they might not otherwise have access to.
    348. The Commission concludes that carriers that have sought to 
take advantage of the ``own-costs'' exception to the existing interim 
cap on competitive ETC funds should not be exempted from the phase down 
of support. The ``own costs'' exception was intended to exempt carriers 
filing their own cost data from the interim cap to the extent their 
costs met an appropriate threshold. Because the Commission is 
transitioning away from support based on the identical support rule and 
toward new high-cost support mechanisms, the Commission sees no reason 
to continue to make the exception available going forward.

E. Connect America Fund in Remote Areas

    349. In this section of the R&O, the Commission establishes a 
budget for CAF support in remote areas. This reflects the Commission's 
commitment to ensuring that Americans living in the most remote areas 
of the nation, where the cost of deploying wireline or cellular 
terrestrial broadband technologies is extremely high, can obtain 
affordable broadband through alternative technology platforms such as 
satellite and unlicensed wireless. As the National Broadband Plan 
observes, the cost of providing service is typically much higher for 
terrestrial networks in the hardest-to-serve areas of the country than 
in less remote but still rural areas. Accordingly, the Commission has 
exempted the most remote areas, including fewer than 1 percent of all 
American homes, from the home and business broadband service 
obligations that otherwise apply to CAF recipients. By setting aside 
designated funding for these difficult-to-serve areas, however, and by 
modestly relaxing the broadband performance obligations associated with 
this funding to encourage its use by providers of innovative 
technologies like satellite and fixed wireless, which may be 
significantly less costly to deploy in these remote areas, the 
Commission can ensure that those who live and work in remote locations 
also have access to affordable broadband service.
    350. Although the Commission seeks further comment on the details 
of distributing dedicated remote-areas funding in the Further Notice of 
Proposed Rulemaking accompanying the R&O, the Commission sets as the 
budget for this funding at least $100 million annually. The choice of 
budget necessarily involves the reasonable exercise of predictive 
judgment, rather than a precise calculation: Many of the innovative, 
lower-cost approaches to serving hard to reach areas continue to evolve 
rapidly; the Commission is not setting the details of the distribution 
mechanism in the R&O; and the Commission is balancing competing 
priorities for funding. Nevertheless, a budget of at least $100 million 
per year is likely to make a significant difference in ensuring 
meaningful broadband access in the most difficult-to-serve areas.
    351. Based on the RUS's prior experience with dedicated satellite 
funding to remote areas, a budget of at least $100 million could make a 
significant difference in expanding availability of affordable 
broadband service at such locations. Satellite broadband is already 
available to most households and small businesses in remote areas, and 
is likely to be available at increasing speeds over time, but current 
satellite services tend to have significantly higher prices to end-
users than terrestrial fixed broadband services, and include 
substantial up-front installation costs. To help overcome these 
barriers in the RUS's BIP satellite program, supported providers 
received a one-time upfront payment per location to offer service for 
at least one year at a reduced price. There has been substantial 
consumer participation in this program, with providers estimating that 
they would be able to provide service to approximately 424,000 people 
at the reduced rates. Were the Commission to take a similar approach in 
distributing the $100 million set aside for remote areas funding, it 
could, in principle, provide a one-time sign-up subsidy to almost all 
of the estimated 670,000 remote, terrestrially-unserved locations 
within 4 years.
    352. Such a calculation is only illustrative. For one, the 
Commission does not anticipate restricting the technology that can be 
used for remote area support. To the contrary, it seeks to encourage 
maximum participation of providers able to serve these most difficult 
to reach areas. In addition, the Commission may choose to disburse 
funding for remote areas in ways that either increase or decrease the 
dollars per supported customer, as compared to the RUS program. For 
example, the Commission may choose to provide ongoing support, in 
addition to or instead of a one-time subsidy, or it may adopt a means-
tested approach to reducing the cost of service in remote areas, to 
target support to those most in need. The Commission seeks comment on 
each of these approaches in the Further Notice.
    353. Notwithstanding this uncertainty, however, the record is 
sufficient for the Commission to conclude that a budget of at least 
$100 million falls within a reasonable initial range for a program 
targeted at innovative broadband technologies in remote areas. The 
Commission expects to revisit this decision over time, and will adjust 
support levels as appropriate.

[[Page 81605]]

F. Petitions for Waiver

    354. During the course of this proceeding, various parties, both 
incumbents and competitive ETCs, have argued that reductions in current 
support levels would threaten their financial viability, imperiling 
service to consumers in the areas they serve. The Commission cannot, 
however, evaluate those claims absent detailed information about 
individualized circumstances, and conclude that they are better handled 
in the course of case-by-case review. Accordingly, the Commission 
permits any carrier negatively affected by these universal service 
reforms to file a petition for waiver that clearly demonstrates that 
good cause exists for exempting the carrier from some or all of those 
reforms, and that waiver is necessary and in the public interest to 
ensure that consumers in the area continue to receive voice service.
    355. The Commission does not, however, expect to grant waiver 
requests routinely, and caution petitioners that the Commission intends 
to subject such requests to a rigorous, thorough and searching review 
comparable to a total company earnings review. In particular, the 
Commission intends to take into account not only all revenues derived 
from network facilities that are supported by universal service but 
also revenues derived from unregulated and unsupported services as 
well. The intent of this waiver process is not to shield companies from 
secular market trends, such as line loss or wireless substitution. 
Waiver would be warranted where an ETC can demonstrate that, without 
additional universal service funding, its support would not be 
``sufficient to achieve the purposes of [section 254 of the Act].'' In 
particular, a carrier seeking such waiver must demonstrate that it 
needs additional support in order for its customers to continue 
receiving voice service in areas where there is no terrestrial 
alternative. The Commission envisions granting relief only in those 
circumstances in which the petitioner can demonstrate that the 
reduction in existing high-cost support would put consumers at risk of 
losing voice services, with no alternative terrestrial providers 
available to provide voice telephony service using the same or other 
technologies that provide the functionalities required for supported 
voice service. The Commission envisions granting relief only in those 
circumstances in which the petitioner can demonstrate that the 
reduction in existing high-cost support would put consumers at risk of 
losing voice services, with no alternative terrestrial providers 
available to provide voice telephony service to consumers using the 
same or other technologies that provide the functionalities required 
for supported voice service. The Commission will also consider whether 
the specific reforms would cause a provider to default on existing 
loans and/or become insolvent. For mobile providers, the Commission 
will consider as a factor specific showings regarding the impact on 
customers, including roaming customers, if a petitioner is the only 
provider of CDMA or GSM coverage in the affected area.
    356. Petitions for waiver must include a specific explanation of 
why the waiver standard is met in a particular case. Conclusory 
assertions that reductions in support will cause harm to the carrier or 
make it difficult to invest in the future will not be sufficient.
    357. In addition, petitions must include all financial data and 
other information sufficient to verify the carrier's assertions, 
including, at a minimum, the following information:
     Density characteristics of the study area or other 
relevant geographic area including total square miles, subscribers per 
square mile, road miles, subscribers per road mile, mountains, bodies 
of water, lack of roads, remoteness, challenges and costs associated 
with transporting fuel, lack of scalability per community, satellite 
and backhaul availability, extreme weather conditions, challenging 
topography, short construction season or any other characteristics that 
contribute to the area's high costs.
     Information regarding existence or lack of alternative 
providers of voice and whether those alternative providers offer 
broadband.
     (For incumbent carriers) How unused or spare equipment or 
facilities is accounted for by providing the Part 32 account and Part 
36 separations category this equipment is assigned to.
     Specific details on the make-up of corporate operations 
expenses such as corporate salaries, the number of employees, the 
nature of any overhead expenses allocated from affiliated or parent 
companies, or other expenses.
     Information regarding all end user rate plans, both the 
standard residential rate and plans that include local calling, long 
distance, Internet, texting, and/or video capabilities.
     (For mobile providers) A map or maps showing (1) the area 
it is licensed to serve; (2) the area in which it actually provides 
service; (3) the area in which it is designated as a CETC; (4) the area 
in which it is the sole provider of mobile service; (5) location of 
each cell site. For the first four of these areas, the provider must 
also submit the number of road-miles, population, and square miles. 
Maps shall include roads, political boundaries, and major topographical 
features. Any areas, places, or natural features discussed in the 
provider's waiver petition shall be shown on the map.
     (For mobile providers) Evidence demonstrating that it is 
the only provider of mobile service in a significant portion of any 
study area for which it seeks a waiver. A mobile provider may satisfy 
this evidentiary requirement by submitting industry-recognized carrier 
service availability data, such as American Roamer data, for all 
wireless providers licensed by the FCC to serve the area in question. 
If a mobile provider claims to be the sole provider in an area where an 
industry-recognized carrier service availability data indicates the 
presence of other service, then it must support its claim with the 
results of drive tests throughout the area in question. In the parts of 
Alaska or other areas where drive testing is not feasible, a mobile 
provider may offer a statistically significant number of tests in the 
vicinity of locations covered. Moreover, equipment to conduct the 
testing can be transported by off-road vehicles, such as snow-mobiles 
or other vehicles appropriate to local conditions. Testing must examine 
a statistically meaningful number of call attempts (originations) and 
be conducted in a manner consistent with industry best practices. 
Waiver petitioners that submit test results must fully describe the 
testing methodology, including but not limited to the test's geographic 
scope, sampling method, and test set-up (equipment models, 
configuration, etc.). Test results must be submitted for the waiver 
petitioner's own network and for all carriers that the industry-
recognized carrier service availability data shows to be serving the 
area in which the petitioner claims to be the only provider of mobile 
service.
     (For mobile providers). Revenue and expense data for each 
cell site for the three most recent fiscal years. Revenues shall be 
broken out by source: End user revenues, roaming revenues, other 
revenues derived from facilities supported by USF, all other revenues. 
Expenses shall be categorized: Expenses that are directly attributable 
to a specific cell site, network expenses allocated among all sites, 
overhead expenses allocated among sites. Submissions must include 
descriptions the manner in which shared or common costs and corporate 
overheads are allocated to specific cell sites. To the extent that a 
mobile provider makes arguments in its

[[Page 81606]]

waiver petition based on the profitability of specific cell sites, 
petitioner must explain why its cost allocation methodology is 
reasonable.
     (For mobile providers) Projected revenues and expenses, on 
cell-site basis, for 5 years, with and without the waiver it seeks. In 
developing revenue and expense projections, petitioner should assume 
that it is required to serve those areas in which it is the sole 
provider for the entire five years and that it is required to fulfill 
all of its obligations as an ETC through December 2013.
     A list of services other than voice telephone services 
provided over the universal service supported plant, e.g., video or 
Internet, and the percentage of the study area's telephone subscribers 
that take these additional services.
     (For incumbent carriers) Procedures for allocating shared 
or common costs between incumbent LEC regulated operations, competitive 
operations, and other unregulated or unsupported operations.
     Audited financial statements and notes to the financial 
statements, if available, and otherwise unaudited financial statements 
for the most recent three fiscal years. Specifically, the cash flow 
statement, income statement and balance sheets. Such statements shall 
include information regarding costs and revenues associated with 
unregulated operations, e.g., video or Internet.
     Information regarding outstanding loans, including lender, 
loan terms, and any current discussions regarding restructuring of such 
loans.
     Identification of the specific facilities that will be 
taken out of service, such as specific cell towers for a mobile 
provider, absent grant of the requested waiver.
     For Tribal lands and insular areas, any additional 
information about the operating conditions, economic conditions, or 
other reasons warranting relief based on the unique characteristics of 
those communities.
    358. Failure to provide the listed information shall be grounds for 
dismissal without prejudice. In addition to the above, the petitioner 
shall respond and provide any additional information as requested by 
Commission staff. The Commission will also welcome any input that the 
relevant state commission may wish to provide on the issues under 
consideration, with a particular focus on the availability of 
alternative unsubsidized voice competitors in the relevant area and 
recent rate-setting activities at the state level, if any.
    359. The Commission delegates to the Wireline Competition and 
Wireless Telecommunications Bureaus the authority to approve or deny 
all or part of requests for waiver of the phase-down in support adopted 
herein. Such petitions will be placed on public notice, with a minimum 
of 45 days provided for comments and reply comments to be filed by the 
general public and relevant state commission. The Commission directs 
the Bureaus to prioritize review of any applications for waiver filed 
by providers serving Tribal lands and insular areas, and to complete 
their review of petitions from providers serving Tribal lands and 
insular areas within 45 days of the record closing on such waiver 
petitions.

G. Enforcing the Budget for Universal Service

1. Creating New Flexibility To Manage Fluctuations in Demand
    360. Discussion. The Commission adopts the proposed amendment to 47 
CFR 54.709(b) to permit the Commission to instruct USAC to take 
alternative action with regard to prior period adjustments when making 
its quarterly demand filings. Currently, the section requires that 
excess contributions received in a quarter ``will be carried forward to 
the following quarter.'' The Commission amends the rule to add 
paragraph 54.709(b)(1), which shall read, ``The Commission may instruct 
USAC to treat excess contributions in a manner other than as prescribed 
in paragraph (b). Such instructions may be made in the form of a 
Commission Order or a Public Notice released by the Wireline 
Competition Bureau. Any such Public Notice will become effective 
fourteen days after release of the Public Notice, absent further 
Commission action.''
    361. Permitting the Commission to modify its current treatment of 
excess contributions as necessary on a case-by-case basis will permit 
it to better manage the effects of one-time and seasonal events that 
may create undue volatility in the contribution factor. Programmatic 
changes, one-time distributions of support (such as Mobility Fund Phase 
I), and other transitional processes will likely cause the quarterly 
funding demands to fluctuate considerably until the transitions are 
complete, similarly to how large, unforecasted one-time contributions 
have caused significant fluctuations in the past. The ability to 
provide specific, case-by-case instructions will allow the Commission 
to smooth the effects of such events on the contribution factor, 
rendering it more predictable for the consumers who ultimately pay for 
universal service.
    362. In response to the USF/ICC Transformation NPRM seeking comment 
on whether to modify 47 CFR 54.709(b), some commenters raise questions 
about whether 47 U.S.C. 254 of the Act provides the Commission the 
authority to establish a broadband reserve fund intended to make 
disbursements according to rules that were, at the time, not yet 
adopted. As RICA put it, 47 U.S.C. 254 requires carriers to contribute 
to the ``specific, predictable, and sufficient mechanisms established 
(not to be established) by the Commission to preserve and advance 
Universal Service.'' Verizon, similarly, suggests that 47 U.S.C. 254's 
reference to ```specific' and `predictable' USF programs and support--
and contributions collected for `established' universal service 
mechanisms--counsels against reserving support for mechanisms that do 
not yet exist.'' Nevertheless, for the reasons set forth below, the 
Commission concludes that a broadband reserve account is consistent 
with 47 U.S.C. 254 of the Act.
    363. The Commission does not read 47 U.S.C. 254(d) as limiting the 
Commission's authority to require contributions only to support 
specific mechanisms that are already established at the time the 
contributions are required, for several reasons.
    364. Broadly speaking, the Commission understands 47 U.S.C. 254(d) 
to be directed to explaining who must contribute to the Federal 
universal service mechanisms--specifically, telecommunications carriers 
that provide interstate telecommunications services, unless exempted by 
the Commission, as well as other providers of interstate 
telecommunications if the Commission determines the public interest so 
requires. The reference in 47 U.S.C. 254(d) to ``the specific, 
predictable, and sufficient mechanisms established by the Commission to 
preserve and advance universal service'' is not, as these commenters 
suggest, a limitation on what kinds of mechanisms--i.e., already-
established mechanisms--will be supported; it is instead a reference to 
language in 47 U.S.C. 254(b), which directs the Commission (as well as 
the Joint Board) to be guided by several principles in establishing 
universal service policies, including the principle that ``[t]here 
should be specific, predictable and sufficient Federal and State 
mechanisms to preserve and advance universal service.'' In other words, 
it merely requires that contributions under 47 U.S.C. 254 are to be 
used to support the Federal mechanisms that are established under 47 
U.S.C. 254.

[[Page 81607]]

    365. The Commission also finds that commenters' argument is 
unpersuasive given the grammatical construction of the relevant section 
of the law. In the phrase ``mechanisms established by the Commission,'' 
the clause ``established by the Commission'' functions as an adjectival 
phrase identifying which mechanisms are funded through 47 U.S.C. 
254(d). Specifically, the mechanisms funded by 47 U.S.C. 254(d) are the 
mechanisms ``established by the Commission'' consistent with the 
principles of 47 U.S.C. 254(b) (that they be specific, predictable, and 
sufficient). When used in this way, the word ``established'' is not a 
word in the past tense; it is not a word that signifies any particular 
tense at all. Commenters who read the word ``established'' as 
signifying the past tense are, the Commission concludes, improperly 
reading ``already'' into the phrase, so that it would read ``mechanisms 
already established by the Commission.'' Congress could have written 
the statute that way, but it did not. Admittedly, Congress could have 
written the statute in yet other ways that would have made clearer that 
these commenters' concerns are misplaced. But that indicates only that 
the statute is amenable to various interpretations. And for the reasons 
explained here, the Commission concludes its interpretation is the 
better reading of the statute.
    366. These commenters' view also raises troubling questions of 
interpretation, which the Commission believes Congress did not intend. 
That is, under these commenters' reading of the statute, contributions 
may only be collected to fund a mechanism that has already been 
established. Broadly speaking, all of the rule changes that the 
Commission has implemented since the 1996 Act, including those adopted 
in this R&O, have been to effectuate the general statutory directive 
that consumers should have access to telecommunication and information 
services in rural and high cost areas. As such, the entire collection 
of rules can be viewed as the ``high-cost mechanism,'' and the specific 
existing programs, as well as the Connect America Fund, are part of 
that high-cost mechanism.
    367. To read the statute in any other way would create significant 
administrative issues that the Commission cannot believe Congress would 
have intended. How would the Commission--or a court-- decide whether a 
modified mechanism is a new, not-yet-established mechanism (which could 
not provide support until new funds are collected for it), or whether 
the modifications are minor enough such that the mechanism, although 
different, is still the mechanism that was already established? The 
Commission does not believe that Congress intended either the 
Commission or a court to be required to wrestle with such questions, 
which serve no obvious congressional purpose. Alternatively, any 
change, no matter how minor, could transform the mechanism into one 
that was not-yet-established. Interpreting the statute in that way 
would similarly serve no identifiable congressional purpose, but would 
serve only to slow down and complicate reforms to support mechanisms 
that the Commission determines are appropriate to advance the public 
interest. Significantly in this regard, Congress in 47 U.S.C. 254 
specifically contemplated that universal service programs would change 
over time; reading the statute the way these commenters suggest would 
add unnecessary burdens to that process.
2. Setting Quarterly Demand To Meet the $4.5 Billion Budget
    368. Discussion. Various parties have submitted proposed budgets 
into the record suggesting that the Commission could maintain an 
overall $4.5 billion annual budget by collecting that amount in the 
near term, projecting that actual demand will be lower than that 
amount, and using those funds in subsequent quarters to address actual 
demand that exceeds $1.125 billion. The Commission is persuaded that, 
on balance, it would be appropriate to provide greater flexibility to 
USAC to use past contributions to meet future program demand so that 
the Commission can implement the Connect America Fund in a way that 
does not cause dramatic swings in the contribution factor. The 
Commission now sets forth general instructions to USAC on how to 
implement the $4.5 billion budget target.
    369. First, beginning with the quarterly demand filing for the 
first quarter of 2012, USAC should forecast total high-cost universal 
service demand as no less than $1.125 billion, i.e., one quarter of the 
annual high-cost budget. To the extent that USAC forecasts demand will 
actually be higher than that amount, USAC should reflect that higher 
forecast in its quarterly demand filing. If high-cost demand actually 
exceeds $1.125 billion, no additional funds will accumulate in the 
reserve account for that quarter and, consistent with the third 
instruction below, the reserve account will be used to constrain the 
high-cost demand in the contribution factor. USAC should no longer 
forecast total competitive ETC support at the original interim cap 
amount, as previously instructed, but should forecast competitive ETC 
support subject to the rules the Commission adopts today. Specifically, 
USAC shall forecast competitive ETC demand as set by the frozen 
baseline per study area as of year end 2011, as adjusted by the phase-
down in the relevant time period.
    370. Second, consistent with the newly revised section 54.709(b) of 
the rules, the Commission instructs USAC not to make prior period 
adjustments related to high-cost support if actual contributions exceed 
demand. Excess contributions shall instead be credited to a new Connect 
America Fund reserve account, to be used as described below.
    371. Third, beginning with the second quarter of 2012, the 
Commission directs USAC to use the balances accrued in the CAF reserve 
account to reduce high-cost demand to $1.125 billion in any quarter 
that would otherwise exceed $1.125 billion.
    372. The Commission expects the reforms the Commission adopts today 
to keep annual contributions for the CAF and any existing high-cost 
support mechanisms to no more than $4.5 billion. And through the use of 
incentive-based rules and competitive bidding, the fund could require 
less than $4.5 billion to achieve its goals in future years. However, 
if actual program demand, exclusive of funding provided from the CAF or 
Corr Wireless reserve accounts, for CAF and existing high-cost 
mechanisms exceed an annualized $4.5 billion over any consecutive four 
quarters, this situation will automatically trigger a process to bring 
demand back under budget. Specifically, immediately upon receiving 
information from USAC regarding actual quarterly demand, the Wireline 
Competition Bureau will notify each Commissioner and publish a Public 
Notice indicating that program demand has exceeded $4.5 billion over 
the last four quarters. Then, within 75 days of the Public Notice being 
published, the Bureau will develop options and provide to the 
Commissioners a recommendation and specific action plan to immediately 
bring expenditures back to no more than $4.5 billion.
3. Drawing Down the Corr Wireless Reserve Account
    373. Discussion. In order to wind down the current broadband 
reserve account, the Commission provides the following instructions to 
USAC.
    374. First, the Commission directs USAC to utilize $300 million in 
the Corr Wireless reserve account to fund

[[Page 81608]]

commitments that the Commission anticipates will be made in 2012 to 
recipients of the Mobility Fund Phase I to accelerate advanced mobile 
services. The Commission also directs USAC to use the remaining funds 
and any additional funding necessary for Phase I of the CAF for price 
cap carriers in 2012. Those actions together should exhaust the Corr 
Wireless reserve account.
    375. Second, the Commission instructs USAC not to use the Corr 
Wireless reserve account to fund inflation adjustments to the e-rate 
cap for the current 2011 funding year. Inflation adjustments to the e-
rate cap for Funding Year 2011 and future years shall be included in 
demand projections for the e-rate program.

VI. Accountability and Oversight

    376. The billons of dollars that the Universal Service Fund 
disburses each year to support vital communications services come from 
American consumers and businesses, and recipients must be held 
accountable for how they spend that money. This requires vigorous 
ongoing oversight by the Commission, working in partnership with the 
states, Tribal governments, where appropriate, and U.S. Territories, 
and the Fund administrator, USAC. Because the CAF, including the 
Mobility Fund, are part of USF, the Commission concludes that USAC 
shall administer these new programs under the terms of its current 
appointment as Administrator, subject to all existing Commission rules 
and orders applicable to the Administrator. The Commission hereby 
designates the Wireless Telecommunications Bureau as a point of 
contact, in addition to the Wireline Competition Bureau, on policy 
matters relating to USF administration.

A. Uniform Framework for ETC Oversight

1. Need for Uniform Standards for Accountability and Oversight
    377. Discussion. A uniform national framework for accountability, 
including unified reporting and certification procedures, is critical 
to ensure appropriate use of high-cost support and to allow the 
Commission to determine whether it is achieving its goals efficiently 
and effectively. Therefore, the Commission now establishes a national 
framework for oversight that will be implemented as a partnership 
between the Commission and the states, U.S. Territories, and Tribal 
governments, where appropriate. As set forth more fully in the 
subsections immediately following, this national framework will include 
annual reporting and certification requirements for all ETCs receiving 
universal funds--not just federally-designated ETCs--which will provide 
federal and state regulators the factual basis to determine that all 
USF recipients are using support for the intended purposes, and are 
receiving support that is sufficient, but not excessive. The Commission 
has authority to require all ETCs to comply with these national 
requirements as a condition of receiving federal high-cost universal 
service support. (For purposes of this section, the references to ETCs 
include those ETCs that receive high-cost support pursuant to legacy 
high-cost programs and CAF programs adopted in this R&O. It does not 
generally include ETCs that receive support solely pursuant to Mobility 
Fund Phase I, which has separate reporting obligations. Where the 
requirements discussed in this section also apply to ETCs receiving 
only Phase I Mobility Fund support, the Commission specifically states 
so. In the USF/ICC Transformation FNPRM, the Commission seeks comment 
on alternative reporting requirements for Mobility Fund support to 
reflect basic differences in the nature and purpose of the support 
provided for mobile services.)
    378. The Commission clarifies that the specific reporting and 
certification requirements adopted below are a floor rather than a 
ceiling for the states. In 47 U.S.C. 254(f), Congress expressly 
permitted states to take action to preserve and advance universal 
service, so long as not inconsistent with the Commission's universal 
service rules. The statute permits states to adopt additional 
regulations to preserve and advance universal service so long as they 
also adopt state mechanisms to support those additional substantive 
requirements. Consistent with this federal framework, state commissions 
may require the submission of additional information that they believe 
is necessary to ensure that ETCs are using support consistent with the 
statute and the implementing regulations, so long as those additional 
reporting requirements do not create burdens that thwart achievement of 
the universal service reforms set forth in this R&O.
    379. The Commission notes, however, that one benefit of a uniform 
reporting and certification framework for ETCs is that it will minimize 
regulatory compliance costs for those ETCs that operate in multiple 
states. ETCs should be able to implement uniform policies and 
procedures in all of their operating companies to track, validate, and 
report the necessary information. Although the Commission adopts a 
number of new reporting requirements below, the Commission concludes 
that the critical benefit of such reporting--to ensure that statutory 
and regulatory requirements associated with the receipt of USF funds 
are met--outweighs the imposition of some additional time and cost on 
individual ETCs to make the necessary reports. Under this uniform 
framework, ETCs will provide annual reports and certifications 
regarding specific aspects of their compliance with public interest 
obligations to the Commission, USAC, and the relevant state commission, 
relevant authority in a U.S. Territory, or Tribal government, as 
appropriate by April 1 of each year. These annual reporting 
requirements should provide the factual basis underlying the annual 47 
U.S.C. 254(e) certification by the state commission (or ETC in the case 
of federally designated ETCs) by October 1 of every year that support 
is being used for the intended purposes.
2. Reporting Requirements
    380. Discussion. First, the Commission extends the current federal 
annual reporting requirements to all ETCs, including those designated 
by states. These requirements will now be located in new 47 CFR 54.313. 
Specifically, the Commission concludes that all ETCs must include in 
their annual reports the information that is currently required by 47 
CFR 54.209(a)(1)-(a)(6)--specifically, a progress report on their five-
year build-out plans; data and explanatory text concerning outages; 
unfulfilled requests for service; complaints received; and 
certifications of compliance with applicable service quality and 
consumer protection standards and of the ability to function in 
emergency situations. If ETCs are complying with any voluntary code 
(e.g., the voluntary code of conduct concerning ``bill shock'' or the 
CTIA Consumer Code for Wireless Service), they should so indicate in 
their reports. The Commission concludes that it is necessary and 
appropriate to obtain such information from all ETCs, both federal- and 
state-designated, to ensure the continued availability of high-quality 
voice services and monitor progress in achieving the broadband goals 
and to assist the FCC in determining whether the funds are being used 
appropriately. As the Commission said at the time the Commission 
adopted these requirements for federally-designated ETCs, these 
reporting requirements ensure that ETCs comply with the conditions of 
the ETC designation and that universal service funds are used for

[[Page 81609]]

their intended purposes. They also help prevent carriers from seeking 
ETC status for purposes unrelated to providing rural and high-cost 
consumers with access to affordable telecommunications and information 
services. Accordingly, the Commission now concludes that these 
requirements should serve as a baseline requirement for all ETCs.
    381. All ETCs that receive high-cost support will file the 
information required by new 47 CFR 54.313 with the Commission, USAC, 
and the relevant state commission, relevant authority in a U.S. 
Territory, or Tribal government, as appropriate. USAC will review such 
information as appropriate to inform its ongoing audit program, in 
depth data validations, and related activities. 47 CFR 54.313 reports 
will be due annually by April 1, beginning on April 1, 2012. (The 
Commission delegates authority to the Wireline Competition Bureau to 
modify the initial filing deadline as necessary to comply with the 
requirements of the Paperwork Reduction Act.) The Commission will also 
require that an officer of the company certify to the accuracy of the 
information provided and make the certifications required by new 47 CFR 
54.313, with all certifications subject to the penalties for false 
statements imposed under 18 U.S.C. 1001.
    382. Second, the Commission incorporates new reporting requirements 
described below to ensure that recipients are complying with the new 
broadband public interest obligations adopted in this R&O, including 
broadband public interest obligations associated with CAF ICC. This 
information must be included in annual 47 CFR 54.313 reports filed with 
Commission, USAC, and the relevant state commission, relevant authority 
in a U.S. Territory, or Tribal government, as appropriate. However, 
some of the new elements are tied to new public interest obligations 
that will be implemented in 2013 or a subsequent year and, therefore, 
they need not be included until that time, as detailed below.
    383. Competitive ETCs whose support is being phased down will not 
be required to submit any of the new information or certifications 
below related solely to the new broadband public interest obligations, 
but must continue to submit information or certifications with respect 
to their provision of voice service.
    384. The Commission delegates to the Wireline Competition Bureau 
and Wireless Telecommunication Bureaus the authority to determine the 
form in which recipients of support must report this information.
    385. Speed and latency. Starting in 2013, the Commission will 
require all ETCs to include the results of network performance tests 
conducted in accordance with the requirements of this R&O and any 
further requirements adopted after consideration of the record received 
in response to the FNPRM. Additionally, in the calendar year no later 
than three years after implementation of CAF Phase II, price cap 
recipients must certify that they are meeting all interim speed and 
latency milestones, including the 4 Mbps/1 Mbps speed standard required 
by this R&O. In the calendar year no later than five years after 
implementation of CAF Phase II, those price cap recipients must certify 
that they are meeting the default speed and latency standards 
applicable at the time.
    386. Capacity. Starting in 2013, the Commission requires all ETCs 
to include a self-certification letter certifying that usage capacity 
limits (if any) for their services that are subject to the broadband 
public interest standard associated with the type of funding they are 
receiving are reasonably comparable to usage capacity limits for 
comparable terrestrial residential fixed broadband offerings in urban 
areas, as set forth in the Public Interest Obligations sections above. 
ETCs will also be required to report on specific capacity requirements 
(if any) in conjunction with reporting of pricing of their broadband 
offerings that meet the public interest obligations, as discussed 
below.
    387. Build-out/Service. Recognizing that existing five-year build 
out plans may need to change to account for new broadband obligations 
set forth in this R&O, the Commission requires all ETCs to file a new 
five-year build-out plan in a manner consistent with 54.202(a)(1)(ii) 
by April 1, 2013. Under the terms of new 47 CFR 54.313(a), all ETCs 
will be required to include in their annual 54.313 reports information 
regarding their progress on this five-year broadband build-out plan 
beginning April 1, 2014. This progress report shall include the number, 
names, and addresses of community anchor institutions to which the ETCs 
newly offer broadband service. As discussed above, the Commission 
expects ETCs to use their support in a manner consistent with achieving 
universal availability of voice and broadband. Incumbent carriers, both 
rate-of-return and price cap, should make certifications to that effect 
beginning April 1, 2013 for the 2012 calendar year.
    388. In addition, all ETCs must supply the following information:
    (a) Rate-of-Return Territories. The Commission requires all rate-
of-return ETCs receiving support to include a self-certification letter 
certifying that they are taking reasonable steps to offer broadband 
service meeting the requirements established above throughout their 
service area, and that requests for such service are met within a 
reasonable amount of time. As noted above, these carriers must also 
notify the Commission, USAC, and the relevant state commission, 
relevant authority in a U.S. Territory, or Tribal government, as 
appropriate, of all unfulfilled requests for broadband service meeting 
the 4 Mbps/1 Mbps standard the Commission establishes as the initial 
CAF requirement, and the status of such requests.
    (b) Price Cap Territories. The Commission requires all ETCs 
receiving CAF support in price cap territories based on a forward-
looking cost model to include a self-certification letter certifying 
that they are meeting the interim deployment milestones as set forth in 
the Public Interest Obligations section above and that they are taking 
reasonable steps to meet increased speed obligations that will exist 
for a specified number of supported locations before the expiration of 
the five-year term for CAF Phase II funding. ETCs that receive CAF 
support awarded through a competitive process will also be required to 
file such self-certifications, subject to any modifications adopted 
pursuant to the FNPRM below.
    389. In addition, as discussed above, price cap ETCs will be able 
to elect to receive CAF Phase I incremental funding under a 
transitional distribution mechanism prior to adoption and 
implementation of an updated forward-looking broadband-focused cost 
model for CAF Phase II. As a condition of receiving such support, those 
companies will be required to deploy broadband to a certain number of 
unserved locations within three years, with deployment to no fewer than 
two-thirds of the required number of locations within two years and to 
all required locations within three years after filing their notices of 
acceptance. As of that time, carriers must offer broadband service of 
at least 4 Mbps downstream and 1 Mbps upstream, with latency 
sufficiently low to enable the use of real-time communications, 
including VoIP, and with usage limits, if any, that are reasonably 
comparable to those in urban areas. As noted above, no later than 90 
days after being informed of its eligible incremental support amount, 
each price cap ETC must provide notice to the Commission and to the 
relevant state commission, relevant authority in a U.S. Territory, or

[[Page 81610]]

Tribal government, as appropriate, identifying the areas, by wire 
center and census block, in which the carrier intends to deploy 
broadband to meet this obligation, or stating that the carrier declines 
to accept incremental support for that year.
    390. The carrier must also certify that (1) deployment funded by 
CAF Phase I incremental support will occur in areas shown as unserved 
by fixed broadband on the National Broadband Map that is most current 
at that time, and that, to the best of the carrier's knowledge, are 
unserved by fixed broadband with a minimum speed of 768 kbps downstream 
and 200 kbps upstream, and that, to the best of the carrier's 
knowledge, are, in fact, unserved by fixed broadband at those speeds; 
and (2) the carrier's current capital improvement plan did not already 
include plans to deploy broadband to that area within three years, and 
that CAF Phase I support will not be used to satisfy any merger 
commitment or similar regulatory obligation. In addition, carriers must 
certify that: (1) Within two years after filing a notice of acceptance, 
they have deployed to no fewer than two-thirds of the required number 
of locations; and (2) within three years after filing a notice of 
acceptance, they have deployed to all required locations and that they 
are offering broadband service of at least 4 Mbps downstream and 1 Mbps 
upstream, with latency sufficiently low to enable the use of real-time 
communications, including VoIP, and with usage limits, if any, that are 
reasonably comparable to those in urban areas. These certifications 
must be included in the first annual report due following the year in 
which the carriers reach the required milestones.
    391. In addition, price cap carriers that receive frozen high-cost 
support will be required to certify that they are using such support in 
a manner consistent with achieving universal availability of voice and 
broadband. Specifically, in the 2013 certification, all price cap 
carriers receiving frozen high-cost support must certify to the 
Commission, the relevant state commission, relevant authority in a U.S. 
Territory, and to any affected Tribal government that they used such 
support in a manner consistent with achieving the universal 
availability of voice and broadband. In the 2014 certification, all 
price cap carriers receiving frozen high-cost support must certify that 
at least one-third of the frozen-high cost support they received in 
2013 was used to build and operate broadband-capable networks used to 
offer the provider's own retail broadband service in areas 
substantially unserved by an unsubsidized competitor. In the 2015 
certification, carriers must certify that at least two-thirds of the 
frozen high-cost support the carrier received in 2014 was used in such 
fashion, and for 2016 and subsequent years, carriers must certify that 
all frozen high-cost support they received in the previous year was 
used in such fashion. These certifications must be included in the 
carriers' annual reports due April 1 of each year. Price cap companies 
that receive CAF ICC also are obligated to certify that they are using 
such support for building and operating broadband-capable networks used 
to offer their own retail service in areas substantially unserved by an 
unsubsidized competitor.
    392. Price. The Commission requires all ETCs to submit a self-
certification that the pricing of their voice services is no more than 
two standard deviations above the national average urban rate for voice 
service, which will be specified annually in a public notice issued by 
the Wireline Competition Bureau. This certification requirement begins 
April 1, 2013, to cover 2012.
    393. ETCs receiving only Mobility Fund Phase I support will self-
certify annually that they offer service in areas with support at rates 
that are within a reasonable range of rates for similar service plans 
offered by mobile wireless providers in urban areas. ETCs receiving any 
other support will submit a self-certification that the pricing of 
their broadband service is within a specified reasonable range. That 
range will be established and published as more fully described above 
for recipients of high-cost and CAF support, other than Mobility Fund 
Phase I. This certification requirement begins April 1, 2013, to cover 
2012.
    394. ETCs must also report pricing information for both voice and 
broadband offerings. They must submit the price and capacity range (if 
any) for the broadband offering that meets the relevant speed 
requirement in their annual reporting. In addition, beginning April 1, 
2012, subject to PRA approval, all incumbent local exchange company 
recipients of HCLS, frozen high-cost support, and CAF also must report 
their flat rate for residential local service to USAC so that USAC can 
calculate reductions in support levels for those carriers with R1 rates 
below the specified rate floor, as established above. Carriers may not 
request confidential treatment for such pricing and rate information.
    395. Financial Reporting. The Commission sought comment on 
requiring all ETCs to provide financial information, including balance 
sheets, income statements, and statements of cash flow.
    396. Upon consideration of the record, the Commission now adopts a 
less burdensome variation of this proposal. The Commission concludes 
that it is not necessary to require submission of such information from 
publicly traded companies, as we can obtain such information directly 
for SEC registrants. Likewise, the Commission concludes at this time it 
is not necessary to require the filing of such information by 
recipients of funding determined through a forward-looking cost model 
or through a competitive bidding process, even if those recipients are 
privately held. The Commission expects that a model developed through a 
transparent and rigorous process will produce support levels that are 
sufficient but not excessive, and that support awarded through 
competitive processes will be disciplined by market forces. The design 
of those mechanisms should drive support to efficient levels.
    397. The Commission emphasizes, however, that it may request 
additional information on a case-by-case basis from all ETCs, both 
private and public, as necessary to discharge the universal service 
oversight responsibilities.
    398. For privately-held rate-of-return carriers that continue to 
receive support based in part on embedded costs, the Commission adopts 
a more limited reporting requirement, beginning in 2012. The Commission 
requires all privately-held rate-of-return carriers receiving high-cost 
and/or CAF support to file with the Commission, USAC, and the relevant 
state commission, relevant authority in a U.S. Territory, or Tribal 
government, as appropriate beginning April 1, 2012, subject to PRA 
approval, a full and complete annual report of their financial 
condition and operations as of the end of their preceding fiscal year, 
which is audited and certified by an independent certified public 
accountant in a form satisfactory to the Commission, and accompanied by 
a report of such audit. The annual report shall include balance sheets, 
income statements, and cash flow statements along with necessary notes 
to clarify the financial statements. The income statements shall 
itemize revenue by its sources.
    399. The ETCs subject to this new requirement are all already 
subject to the Uniform System of Accounts, which specifies how required 
financial information shall be maintained in accordance with Part 32 of 
the Commission's rules. Because Part 32 of the rules already requires 
incumbent carriers to break down accounting by study area, it should 
provide an

[[Page 81611]]

accurate picture of how recipients are using the high-cost support they 
receive in particular study areas. Additionally, Part 32 provides a 
uniform system of accounting that allows for an accurate comparison 
among carriers. ETCs that receive loans from the Rural Utility Service 
(RUS) are already required to provide RUS with annual financial reports 
maintained in accordance with Part 32. The Commission will allow these 
carriers to satisfy their financial reporting obligation by simply 
providing electronic copies of their annual RUS reports to the 
Commission, which should not impose any additional burden. All other 
rate-of-return carriers, in their initial filing after adoption of this 
R&O, shall provide the required financial information as kept in 
accordance with Part 32 of the Commission's rules.
    400. The Commission delegates to the Wireline Competition Bureau 
the authority to resolve all other questions regarding the appropriate 
format for carriers' first financial filing following this R&O, as well 
as the authority to set the format for subsequent reports. The 
Commission may in future years implement a standardized electronic 
filing system, and the Commission also delegates to the Wireline 
Competition Bureau the task of establishing an appropriate format for 
transmission of this information.
    401. The Commission does not expect privately held ETCs will face a 
significant burden in producing the financial disclosures required 
herein because such financial accounting statements are normally 
prepared in the usual course of business. In particular, because 
incumbent LECs are already required to maintain their accounts in 
accordance with Part 32, the required disclosures are expected to 
impose minimal new burdens. Indeed, for the many carriers that already 
provide Part 32 financial reports to RUS, there will be no additional 
burden.
    402. Finally, the Commission concludes that these carriers' 
financial disclosures should be made publicly available. The only 
comment the Commission received on this issue came from NASUCA, which 
strongly urged the Commission to require public disclosure of all 
financial reports. NASUCA rightly observed that recipients of high-cost 
and/or CAF support receive extensive public funding, and therefore the 
public has a legitimate interest in being able to verify the efficient 
use of those funds. Moreover, by making this information public, the 
Commission will be assisted in its oversight duties by public interest 
watchdogs, consumer advocates, and others who seek to ensure that 
recipients of support receive funding that is sufficient but not 
excessive.
    403. Ownership Information. The Commission now adopts a rule 
requiring all ETCs to report annually the company's holding company, 
operating companies, affiliates, and any branding (a ``dba,'' or 
``doing-business-as company'' or brand designation). In addition, 
filers will be required to report relevant universal service 
identifiers for each such entity by Study Area Codes. This will help 
the Commission reduce waste, fraud, and abuse and increase 
accountability in the universal service programs by simplifying the 
process of determining the total amount of public support received by 
each recipient, regardless of corporate structure. Such information is 
necessary in order for the Commission to ensure compliance with various 
requirements adopted today that take into account holding company 
structure. For purposes of this requirement, affiliated interests shall 
be reported consistent with 47 U.S.C. 3(2) of the Communications Act of 
1934, as amended.
    404. Tribal Engagement. ETCs serving Tribal lands must include in 
their reports documents or information demonstrating that they have 
meaningfully engaged Tribal governments in their supported areas. The 
demonstration must document that they had discussions that, at a 
minimum, included: (1) A needs assessment and deployment planning with 
a focus on Tribal community anchor institutions; (2) feasibility and 
sustainability planning; (3) marketing services in a culturally 
sensitive manner; (4) rights of way processes, land use permitting, 
facilities siting, environmental and cultural preservation review 
processes; and (5) compliance with Tribal business and licensing 
requirements.
    405. Elimination of Certain Data Reporting Requirements. Finally, 
as discussed above, the Commission is eliminating LSS and IAS as 
standalone support mechanisms. This obviates the need for reporting 
requirements specific to 54.301(b) and 54.802 of the rules (and 
54.301(e) after December 31, 2012).
    406. Overall, the changes to the reporting requirements do not 
impose an undue burden on ETCs and that the benefits outweigh any 
burdens. Given the extensive public funding these entities receive, the 
expanded goals of the program, and the need for greater oversight, as 
noted by the GAO, it is prudent to impose narrowly tailored reporting 
requirements focused on the information that will demonstrate 
compliance with statutory requirements and the implementing rules. 
These specific reporting requirements are tailored to ensure that ETCs 
are complying with their public interest obligations and using support 
for the intended purposes, as required by 47 U.S.C. 254(e) of the Act. 
Where possible, the Commission is minimizing burdens by requiring 
certifications in lieu of collecting data, and by allowing the filing 
of reports already prepared for other government agencies in lieu of 
new reports. Moreover, the Commission is eliminating some of the 
existing requirements, which will reduce burdens for some ETCs. 
Finally, to the extent ETCs currently provide information either to 
their state or to the Commission, they will not bear any significant 
additional burden in now also providing copies of such information to 
the other regulatory body.
3. Annual Section 254(e) Certifications
    407. Discussion. First, the Commission requires that states--and 
entities not falling within the states' jurisdiction (i.e., federally-
designated ETCs)--certify that all federal high-cost and CAF support 
was used in the preceding calendar year and will be used in the new 
calendar year only for the provision, maintenance, and upgrading of 
facilities and services for which the support is intended, regardless 
of the rule under which that support is provided. This corrects a 
defect in the current rules, which require only a certification with 
respect to the coming year. The certifications required by new 47 CFR 
54.314 will be due by October 1 of each year, beginning with October 1, 
2012. The certification requirement applies to all recipients of high-
cost and CAF support, including those that receive only Phase I 
Mobility Fund support.
    408. Second, the Commission maintains states' ongoing role in 
annual certifications. Several commenters take the position that 
responsibility for ensuring USF recipients comply with their public 
interest obligations should remain with the states. As discussed above, 
the Commission agrees that the states should play an integral role in 
assisting the Commission in monitoring compliance, consistent with an 
overarching uniform national framework. States will continue to certify 
to the Commission that support is used by state-designated ETCs for the 
intended purpose, which is modified to include the provision, 
maintenance, and upgrading of facilities capable of delivering voice 
and broadband services to homes, businesses and community anchor 
institutions.

[[Page 81612]]

    409. Under the reformed rules, as before, some recipients of 
support may be designated by the Commission rather than the states. 
States are not required to file certifications with the Commission with 
respect to carriers that do not fall within their jurisdiction. 
However, consistent with the partnership between the Commission and the 
states to preserve and enhance universal service, and the recognition 
that states will continue to be the first place that consumers may 
contact regarding consumer protection issues, the Commission encourages 
states to bring to its attention issues and concerns about all carriers 
operating within their boundaries, including information regarding non-
compliance with the rules by federally-designated ETCs. The Commission 
similarly encourages Tribal governments, where appropriate, to report 
to the Commission any concerns about non-compliance with the rules by 
all recipients of support operating on Tribal lands. Any such 
information should be provided to the Wireline Competition Bureau and 
the Consumer & Governmental Affairs Bureau. Through such collaborative 
efforts, the Commission will work together to ensure that consumer 
interests are appropriately protected.
    410. Third, the Commission clarifies that it expects a rigorous 
examination of the factual information provided in the annual 47 CFR 
54.313 reports prior to issuance of the annual 47 U.S.C. 254(e) 
certifications. Because the underlying reporting requirements for 
recipients of Mobility Fund Phase I support differ from the reporting 
requirements for ETCs receiving other high-cost support, Mobility Fund 
Phase I recipients' certifications will be based on the factual 
information they provide in the annual reports they file pursuant to 47 
CFR 54.1009 of the Mobility Fund rules. Because ETCs of Mobility Fund 
Phase I support that receive support pursuant to other high-cost 
mechanisms are subject to the reporting requirements of new 47 CFR 
54.313, those companies' certifications will be based on the factual 
information in the annual reports they file pursuant to both new 47 CFR 
54.313 and 47 CFR 54.1009 of the Mobility Fund rules.
    411. The Commission expects that states (or the ETC if the state 
lacks jurisdiction) will use the information reported in April of each 
year for the prior calendar year in determining whether they can 
certify that carriers' support has been used and will be used for the 
intended purposes. In light of the public interest obligations the 
Commission adopts in this R&O, a key component of this certification 
will now be that support is being used to maintain and extend modern 
networks capable of providing voice and broadband service. Thus, for 
example, if a state commission determines, after reviewing the annual 
47 CFR 54.313 report, that an ETC did not meet its speed or build-out 
requirements for the prior year, a state commission should refuse to 
certify that support is being used for the intended purposes. In 
conjunction with such review, to the extent the state has a concern 
about ETC performance, the Commission welcomes a recommendation from 
the state regarding prospective support adjustments or whether to 
recover past support amounts. As discussed more fully below, failure to 
meet all requirements will not necessarily result in a total loss of 
support, to the extent the Commission concludes, based on a review of 
the circumstances, that a lesser reduction is warranted. Likewise, the 
Commission will look at ETCs' annual 54.313 reports to verify 
certifications by ETCs (in instances where the state lacks 
jurisdiction) that support is being used for the intended purposes.
    412. Fourth, the Commission streamlines existing certifications. 
Today, the Commission has two different state certification rules, one 
for rural carriers and one for non-rural carriers. There is no 
substantive difference between the existing certification rules for the 
two classes of carriers, and as a matter of administrative convenience, 
the Commission consolidates all certifications into a single rule. 
Moreover, because the net effect of the changes that the Commission is 
implementing to the high-cost programs is, as a practical matter, to 
shift the focus from whether a company is classified as ``rural'' 
versus ``non-rural'' to whether a company receives all support through 
a forward-looking model or competitive process or, instead, based in 
part on embedded costs, it does not make sense to maintain separate 
certification rules for ``rural'' and ``non-rural'' carriers. The 
Commission sees no substantive difference in the certifications that 
should be made. Thus, the Commission eliminates the certification 
requirements currently found in 47 CFR 54.313 and 54.314 of the rules 
and implement new 47 CFR 54.314.
    413. Finally, the Commission also eliminates carriers' separate 
certification requirements for IAS and ICLS. As discussed above, the 
Commission is eliminating IAS as a standalone support mechanism, and 
this obviates the need for IAS-specific certifications. Although ICLS 
will remain in place for some carriers, those carriers will certify 
compliance through new 47 CFR 54.314. However, to ensure there is no 
gap in coverage, those carriers will file a final certification under 
47 CFR 54.904 due June 30, 2012, covering the 2012-13 program year. 
Thus, by this R&O, the Commission eliminates 47 CFR 54.809 and, 
effective July 2013, 47 CFR 54.904 of the rules. And as discussed 
above, the Commission also eliminates 47 CFR 54.316 of the rules, 
relating to rate comparability.

B. Consequences for Non-Compliance With Program Rules

    414. Discussion. Effective enforcement is necessary to ensure that 
the reforms R&O achieve their intended goal. Our existing rules already 
have self-effectuating mechanisms to incent prompt filing of requisite 
certifications and information necessary to calculate support amounts, 
as companies lose support to the extent such information is not 
provided in a timely fashion. While the Commission needs such 
information to ensure that support is being used for the intended 
purposes, consistent with 47 U.S.C. 254(e) of the Act, the Commission 
also needs to ensure that such certifications, which will be based upon 
the certifications and information provided in the new 47 CFR 54.313 
annual reports, adequately address all areas of material non-compliance 
with program obligations.
    415. The Commission believes that in the majority of cases 
involving repeated failures to timely file certifications or data, the 
Commission's existing enforcement procedures and penalties will 
adequately deter noncompliance with the Commission's rules, as herein 
amended, regarding high-cost and CAF support. The Commission adopts the 
provisions of 47 CFR 54.209(b) in new 47 CFR 54.313, which provides for 
reductions in support for failing to file the reports required by 47 
CFR 54.209(a) in a timely fashion, and extend those provisions to all 
recipients of high-cost support. The Commission also adopts new 47 CFR 
54.314, which provides for a similar reduction in support for the late 
filing of annual certifications that the funds received were used in 
the preceding calendar year and will be used in the coming calendar 
year only for the provision, maintenance, and upgrading of facilities 
and services for which the support is intended. The rules also provide 
for debarment of those convicted of or found civilly liable for 
defrauding the high-cost support program, and the Commission emphasizes 
that those rules apply with

[[Page 81613]]

equal force to CAF, including the Mobility Fund Phase I.
    416. To further ensure that the recipients of existing high-cost 
and/or CAF support use those funds for the purposes for which they are 
provided, the Commission creates a rule that entities receiving such 
support will receive reduced support should they fail to fulfill their 
public interest obligations, such as by failing to meet deployment 
milestones, to provide broadband at the speeds required by this R&O, or 
to provide service at reasonably comparable rates. This is consistent 
with the suggestions of the State Members of the Federal-State Joint 
Board on Universal Service, who further note that revoking a carrier's 
ETC designation is too blunt an instrument. The Commission agrees that 
revoking a carrier's ETC status is not an appropriate consequence for 
noncompliance, except in the most egregious circumstances. In the 
FNPRM, the Commission seeks comment on appropriate enforcement options 
for partial non-performance. The Commission does not rule out the 
option of revoking an ETC's status, but the Commission seeks comment on 
what circumstances would justify such a remedy and what alternatives 
might be appropriate in other circumstances. The Commission delegates 
to the Wireline Competition Bureau and Wireless Telecommunications 
Bureau the task of implementing reductions in support based on the 
record received in response to the FNPRM.

C. Record Retention

    417. Discussion. The Commission finds that the current record 
retention requirements, although adequate to facilitate audits of 
program participants, are not adequate for purposes of litigation under 
the False Claims Act, which can involve conduct that relates back 
substantially more than five years. Thus, the Commission revises the 
record retention requirements to extend the retention period to ten 
years.
    418. Additionally, the Commission believes the record retention 
requirements need clarification. The current record retention 
requirements appear in 47 CFR 54.202(e) of the Commission's rules. 47 
CFR 54.202 is entitled: ``Additional requirements for Commission 
designation of eligible telecommunications carriers.'' Subsections (a) 
through (d) of that section apply, by their terms, only to ETCs 
designated under 47 U.S.C. 214(e)(6) of the Act--i.e., ETCs designated 
by the Commission rather than by the states. Subsection (e), however, 
is not so limited. Indeed, the Commission intended the requirements of 
47 CFR 54.202(e) to apply to all recipients of high-cost support. To 
fully support ongoing oversight, the record retention requirements must 
apply to all recipients of high-cost and CAF support. Thus, by this 
R&O, the Commission amends the rules by re-designating 47 CFR 54.202(e) 
as new 47 CFR 54.320 to clarify that these ten-year record retention 
requirements apply to all recipients of high-cost and CAF support. To 
ensure access to documents and information needed for effective ongoing 
oversight, the Commission includes in new 47 CFR 54.320 a requirement 
that all documents be made available upon request to the Commission and 
any of its Bureaus or offices, the Administrator, and their respective 
auditors.

D. USAC Oversight Process

    419. Discussion. As noted in the USF/ICC Transformation NPRM, 
audits are an essential tool for the Commission and USAC to ensure 
program integrity and to detect and deter waste, fraud, and abuse. In 
the USF/ICC Transformation NPRM, the Commission discussed the concerns 
expressed by the GAO in 2008 regarding, among other things, the audit 
process that existed at the time. The USF/ICC Transformation NPRM also 
acknowledged USAC's December 2010 Final Report, which detailed the 
findings of the audits conducted at the direction of the Commission's 
Office of Inspector General.
    420. As directed by the Commission's Office of the Managing 
Director, USAC now has two programs in place to safeguard the Universal 
Service Fund--the Beneficiary/Contributor Compliance Audit Program 
(BCAP) and Payment Quality Assurance (PQA) program. The Commission 
created these programs, in conjunction with USAC, in order to address 
the shortcomings of the audit processes discussed in the GAO High-Cost 
Report and USAC's December 2010 Final Report. The PQA program was 
launched in August 2010, and the first round of BCAP audits were 
announced on December 1, 2010. OMD oversees USAC's implementation of 
both programs.
    421. The Commission directs USAC to review and revise the BCAP and 
PQA programs to take into account the changes adopted in this R&O. The 
Commission directs USAC to annually assess compliance with the new 
requirements established for recipients, including for recipients of 
CAF Phase I and Phase II. For CAF Phase I, the Commission establishes 
above a requirement that companies have completed build-out to two-
thirds of the requisite number of locations within two years. The 
Commission directs USAC to assess compliance with this requirement for 
each holding company that receives CAF Phase I funds. ETCs that receive 
CAF Phase I funding should ensure that their underlying books and 
records support the assertion that assets necessary to offer broadband 
service have been placed in service in the requisite number of 
locations. The Commission also directs USAC to test the accuracy of 
certifications made pursuant to the new reporting requirements. Any 
oversight program to assess compliance should be designed to ensure 
that management is reporting accurately to the Commission, USAC, and 
the relevant state commission, relevant authority in a U.S. Territory, 
or Tribal government, as appropriate, and should be designed to test 
some of the underlying data that forms the basis for management's 
certification of compliance with various requirements. This list is not 
intended to be exhaustive, but rather illustrative of the modifications 
that USAC should make to its existing oversight activities. The 
Commission directs USAC to submit a report to WCB, WTB, and OMD within 
60 days of release of this R&O proposing changes to the BCAP and PQA 
programs consistent with this R&O.
    422. To assist USAC's audit and review efforts, the Commission 
clarifies in new 47 CFR 54.320 that all ETCs that receive high-cost 
support are subject to random compliance audits and other 
investigations to ensure compliance with program rules and orders.

E. Access to Cost and Revenue Data

    423. Discussion. The Commission takes two steps to facilitate the 
exchange of information needed to administer and oversee universal 
service programs. First, the Commission the rules to clarify that USAC 
has a right to obtain--at any time and in any unaltered format--all 
cost and revenue submissions and related information that carriers 
submit to NECA that is used to calculate payments under any of the 
existing programs and any new programs, including the new CAF ICC 
(access replacement) support.
    424. Second, the Commission modfies the rules to ensure that the 
Commission has timely access to relevant data. Specifically, the 
Commission requires that USAC (and NECA to the extent USAC does not 
directly receive such information from carriers) provide to the 
Commission upon request all underlying data collected from ETCs to 
calculate payments under current support mechanisms--specifically,

[[Page 81614]]

HCLS, ICLS, LSS, SNA, SVS, HCMS and IAS--as well as to calculate CAF 
payments. This includes information or data underlying existing and 
future analyses that USAC uses to determine the amount of federal 
universal service support disbursed in the past or the future, 
including the new CAF.
    425. The Commission anticipates that NECA and USAC will submit 
summary filings to the Commission on a regular basis, and the 
Commission delegates to the Wireline Competition Bureau authority to 
determine the format and timing of such summary filings, but the 
Commission emphasizes that USAC and NECA must timely provide any 
underlying data upon request. The Commission also modifies the rules to 
require rate-of-return carriers to submit to the Commission upon 
request a copy of all cost and revenue data and related information 
submitted to NECA for purposes of calculating intercarrier compensation 
and any new CAF payments resulting from intercarrier compensation 
reform adopted in this R&O.

VII. Additional Issues

A. Tribal Engagement

    426. The deep digital divide that persists between the Native 
Nations of the United States and the rest of the country is well-
documented. Many residents of Tribal lands lack not only broadband 
access, but even basic telephone service. Throughout this reform 
proceeding, commenters have repeatedly stressed the essential role that 
Tribal consultation and engagement play in the successful deployment of 
service on Tribal lands. For example, the National Tribal 
Telecommunications Association, the National Congress of American 
Indians, and the Affiliated Tribes of Northwest Indians have stressed 
the importance of measures to ``specifically support and enhance tribal 
sovereignty, with emphasis on consultation with Tribes.''
    427. The Commission agrees that engagement between Tribal 
governments and communications providers either currently providing 
service or contemplating the provision of service on Tribal lands is 
vitally important to the successful deployment and provision of 
service. The Commission, therefore, will require that, at a minimum, 
ETCs to demonstrate on an annual basis that they have meaningfully 
engaged Tribal governments in their supported areas. At a minimum, such 
discussions must include: (1) A needs assessment and deployment 
planning with a focus on Tribal community anchor institutions; (2) 
feasibility and sustainability planning; (3) marketing services in a 
culturally sensitive manner; (4) rights of way processes, land use 
permitting, facilities siting, environmental and cultural preservation 
review processes; and (5) compliance with Tribal business and licensing 
requirements. Tribal business and licensing requirements include 
business practice licenses that Tribal and non-Tribal business 
entities, whether located on or off Tribal lands, must obtain upon 
application to the relevant Tribal government office or division to 
conduct any business or trade, or deliver any goods or services to the 
Tribes, Tribal members, or Tribal lands. These include certificates of 
public convenience and necessity, Tribal business licenses, master 
licenses, and other related forms of Tribal government licensure.
    428. In requiring Tribal engagement, the Commission does not seek 
to supplant the Commission's own ongoing obligation to consult with 
Tribes on a government-to-government basis, but instead recognize the 
important role that all parties play in expediting service to Tribal 
lands. As discussed above, support recipients will be required to 
submit to the Commission and appropriate Tribal government officials an 
annual certification and summary of their compliance with this Tribal 
government engagement obligation. Appropriate Tribal government 
officials are elected or duly authorized government officials of 
federally recognized American Indian Tribes and Alaska Native Villages. 
In the instance of the Hawaiian Home Lands, this engagement must occur 
with the State of Hawaii Department of Hawaiian Home Lands and Office 
of Hawaiian Affairs. Carriers failing to satisfy the Tribal government 
engagement obligation would be subject to financial consequences, 
including potential reduction in support should they fail to fulfill 
their engagement obligations. The Commission envisions that the Office 
of Native Affairs and Policy (``ONAP''), in coordination with the 
Wireline and Wireless Bureaus, would utilize their delegated authority 
to develop specific procedures regarding the Tribal engagement process 
as necessary.

B. Interstate Rate of Return Prescription

    429. In the USF/ICC Transformation Notice, the Commission sought 
comment on whether to initiate a proceeding to represcribe the 
authorized interstate rate of return for rate-of-return carriers if it 
determines that such carriers should continue to receive high-cost 
support under a modified rate-of-return system. The Commission has not 
revisited the current 11.25 percent rate of return for over 20 years. 
Several commenters supported our proposal to initiate a represcription 
proceeding. Others offered comments on how the Commission should 
proceed in the event it does initiate such a proceeding. We, therefore, 
conclude that the Commission should represcribe the authorized 
interstate rate of return for rate-of-return carriers, and we initiate 
that represcription process today. In the FNPRM, we propose that the 
interstate rate of return should be adjusted to ensure that it more 
accurately reflects the true cost of capital today. Based on our 
preliminary analysis and record evidence, we believe the current rate 
of return of 11.25 percent is no longer consistent with the Act and 
today's financial conditions. In this Order, we find good cause to 
waive certain procedural requirements in the Commission's rules 
relating to rate represcriptions to streamline and modernize this 
process to align it with the current Commission practice.
1. Represcription
    430. Section 205(a) of the Act authorizes the Commission, on an 
appropriate record, to prescribe just and reasonable charges of common 
carriers. The Commission last adjusted the authorized rate of return in 
1990, reducing it from 12 percent to 11.25 percent. In 1998, the 
Commission initiated a proceeding to represcribe the authorized rate of 
return for rate-of-return carriers. However, in the MAG Order, the 
Commission terminated that prescription proceeding. Given the time that 
has elapsed since the authorized rate of return was last prescribed, 
and the major changes that have occurred in the market since then, we 
find that the authorized interstate rate of return should be reviewed 
and begin that process, seeking the information necessary to prescribe 
a new rate of return.
    431. The Commission's rules provide that the trigger for a new 
prescription proceeding is satisfied if the monthly average yields on 
ten-year United States Treasury securities remain, for a consecutive 
six month period, at least 150 basis points above or below the average 
of the monthly average yields in effect for the consecutive six month 
period immediately prior to the effective date of the current 
prescription. The monthly average yields for the past six months have 
been over 450 basis points below the monthly average yields in the six 
months immediately prior to the last prescription. Our trigger is 
easily

[[Page 81615]]

satisfied, and we initiate the represcription now.
2. Procedural Requirements
    432. Section 205(a) requires the Commission to give ``full 
opportunity for hearing'' before prescribing a rate. However, a formal 
evidentiary hearing is not required under section 205, and we have on 
multiple occasions prescribed individual rates in notice and comment 
rulemaking proceedings. Although we have found it useful in the past to 
impose somewhat more detailed requirements in rate of return 
prescription proceedings, we have expressly rejected the proposition 
that we could not ``lawfully use simple notice and comment procedures 
to prescribe the rate of return authorized for LEC interstate access 
services.'' Accordingly, in the FNPRM we initiate a new rate of return 
prescription proceeding using notice and comment procedures, and on our 
own motion, we waive certain existing procedural rules to facilitate a 
more efficient process.
    433. The Commission's current interstate rate of return 
represcription rules in Part 65 contemplate a streamlined paper hearing 
process. These procedural rules are more specific and detailed than the 
Commission's rules for filing comments, replies, and written ex parte 
presentations in permit-but-disclose proceedings. The Part 65 rules 
require that:
--An original and four copies of all submissions must be filed with the 
Secretary (rule 65.103(d)),
--All participants in the proceeding state in their initial pleading 
whether they wish to receive service of documents filed in the 
proceeding (rule 65.100(b)), and filing parties must serve copies of 
their submissions (other than initial submissions) on all participants 
who properly so requested (rule 65.103(e)),
--Parties may file ``direct case submissions, responses, and 
rebuttals,'' with direct case submissions due 60 days after the 
beginning of the proceeding, responses due 60 days thereafter, and 
rebuttals due 21 days thereafter (rule 65.103(b),
--Direct case submissions and responses are subject to a 70-page limit, 
and rebuttals to a 50-page limit (rule 65.104(a)-(c)),
--Parties must file copies of all information (such as financial 
analysts' reports) that they relied on in preparing their submissions 
(rule 65.105(a)), and
--Parties may file written interrogatories and discovery requests 
directed at any other party's submissions, and the submitting parties 
may oppose those requests (rule 65.105(b)-(f)).

    434. We find good cause to waive some of these procedural 
requirements on our own motion. We find that these procedures would be 
onerous and are not necessary to ensure adequate public participation. 
For instance, there is no need for parties to file an original plus 
four copies of submissions with the Secretary. The Commission recently 
revised its rules to encourage electronic filing of comments and 
replies whenever technically feasible, and to require that ex parte 
submissions be filed electronically unless doing so poses a hardship. 
Given the vast improvements to the electronic filing system, and the 
usual practice now of many parties to file documents electronically 
rather than on paper, we see no reason to require the submission of 
paper copies. Rather, parties to this proceeding may comply with our 
usual procedures in permit-but-disclosure proceedings. Pleadings other 
than ex parte submissions may be filed electronically or may be filed 
on paper with the Secretary's office. If they are filed on paper, the 
original and one copy should be provided.
    435. The Part 65 rules also contemplate that all parties to the 
proceeding will be served with copies of all other parties' 
submissions. Again, this is no longer necessary. Before the greater and 
more accepted use of electronic filing, service may have been a 
reasonable requirement to assure timely distribution of relevant 
materials. However, our electronic filing system generally makes 
filings available within 24 hours, and the vast majority of parties 
have access to these materials via the Internet. We, therefore, find 
that service is not required, and we waive the requirement. Any party 
that wishes to receive an electronic notification when new documents 
are filed in the proceeding may subscribe to an RSS feed, available 
from ECFS.
    436. In addition, we waive the specific filing schedule contained 
in section 65.103(b) of the Commission's rules so that comments may be 
filed pursuant to the pleading cycle adopted for sections XVII.A-K of 
the FNPRM. We also find the page limits applicable to rate 
represcription proceedings to be inappropriate here. Lastly, we waive 
the requirement in section 65.301 that the Commission publish in this 
notice the cost of debt, cost of preferred stock, and capital structure 
computed under our rules, because, as detailed in the FNPRM, the data 
set necessary to calculate those formulas is no longer collected by the 
Commission. We seek comment in the FNRPM on those calculations and the 
related data and methodology issues.

C. Pending Matters

    437. The Commission also denies four pending high-cost maters 
currently pending before the Commission: two petitions for 
reconsideration of the Corr Wireless Order; Puerto Rico Telephone 
Company, Inc.'s petition to reconsider the decision declining to adopt 
a new high-cost support mechanism for non-rural insular carriers; and 
Verizon Wireless's Petition for Reconsideration of the Wireline 
Competition Bureau's letter directing the USAC to implement certain 
caps on high-cost universal service support for two companies, known as 
the ``company-specific caps.''

D. Deletion of Obsolete Universal Service Rules and Conforming Changes 
to Existing Rules

    438. As part of comprehensive reform, the Commission makes 
conforming changes to delete obsolete rules from the Code of Federal 
Regulations. Specifically, we eliminate the rules governing Long Term 
Support, which the Commission eliminated as a discrete support program 
in the MAG Order, and Interim Hold Harmless Support for Non-Rural 
Carriers, which addressed non-rural carriers' transition from high-cost 
loop support to high-cost model support. Because these rules are 
obsolete, the Commission finds good cause to delete them without notice 
and comment. The Commission also makes conforming changes to existing 
rules to ensure they are consistent with changes made in this R&O.

VIII. Measures To Address Arbitrage

A. Rules To Reduce Access Stimulation

    439. In this section, the Commission adopts revisions to its 
interstate switched access charge rules to address access stimulation. 
Access stimulation occurs when a LEC with high switched access rates 
enters into an arrangement with a provider of high call volume 
operations such as chat lines, adult entertainment calls, and ``free'' 
conference calls. The arrangement inflates or stimulates the access 
minutes terminated to the LEC, and the LEC then shares a portion of the 
increased access revenues resulting from the increased demand with the 
``free'' service provider, or offers some other benefit to the ``free'' 
service provider. The shared revenues received by the service provider 
cover its costs, and it therefore may not need to, and typically does 
not, assess a separate charge for the service it is offering. 
Meanwhile, the wireless

[[Page 81616]]

and interexchange carriers (collectively IXCs) paying the increased 
access charges are forced to recover these costs from all their 
customers, even though many of those customers do not use the services 
stimulating the access demand.
    440. Access stimulation schemes work because when LECs enter 
traffic-inflating revenue-sharing agreements, they are currently not 
required to reduce their access rates to reflect their increased volume 
of minutes. The combination of significant increases in switched access 
traffic with unchanged access rates results in a jump in revenues and 
thus inflated profits that almost uniformly make the LEC's interstate 
switched access rates unjust and unreasonable under section 201(b) of 
the Act, 47 U.S.C. 201(b). Consistent with the approach proposed in the 
USF/ICC Transformation NPRM, the Commission adopts a definition of 
access stimulation that includes two conditions. If a LEC meets those 
conditions, the LEC generally must reduce its interstate switched 
access tariffed rates to the rates of the price cap LEC in the state 
with the lowest rates, which are presumptively consistent with the Act. 
This will reduce the extent to which IXC customers that do not use the 
stimulating services are forced to subsidize the customers that do use 
the services.
    441. Based on the record received in response to the single-pronged 
trigger proposed in the USF/ICC Transformation NPRM, the Commission 
modifies its approach from defining an access stimulation trigger to 
defining access stimulation. The access stimulation definition the 
Commission adopts now has two conditions: (1) A revenue sharing 
condition, revised slightly from the proposal in the USF/ICC 
Transformation NPRM; and (2) an additional traffic volume condition, 
which is met where the LEC either: (a) Has a three-to-one interstate 
terminating-to-originating traffic ratio in a calendar month; or (b) 
has had more than a 100 percent growth in interstate originating and/or 
terminating switched access MOU in a month compared to the same month 
in the preceding year. If both conditions are satisfied, the LEC 
generally must file revised tariffs to account for its increased 
traffic.
    442. Adoption of the definition of access stimulation with two 
conditions will facilitate enforcement of the new access stimulation 
rules in instances where a LEC meets the conditions for access 
stimulation but does not file revised tariffs. In particular, IXCs will 
be permitted to file complaints based on evidence from their traffic 
records that a LEC has exceeded either of the traffic measurements of 
the second condition, i.e., that the second condition has been met. If 
the IXC filing the complaint makes this showing, the burden will shift 
to the LEC to establish that it has not met the access stimulation 
definition and therefore that it is not in violation of its rules. This 
burden-shifting approach will enable IXCs to bring complaints based on 
their own traffic data, and will help the Commission to identify 
circumstances where a LEC may be in violation of its rules.
    443. The Commission concludes that these revised interstate access 
rules are narrowly tailored to minimize the costs of the rule revisions 
on the industry, while reducing the adverse effects of access 
stimulation and ensuring that interstate access rates are at levels 
presumptively consistent with section 201(b) of the Act, 47 U.S.C. 
201(b).
1. Discussion
a. Need for Reform To Address Access Stimulation
    444. The record confirms the need for prompt Commission action to 
address the adverse effects of access stimulation and to help ensure 
that interstate switched access rates remain just and reasonable, as 
required by section 201(b) of the Act, 47 U.S.C. 201(b). Commenters 
agree that the interstate switched access rates being charged by access 
stimulating LECs do not reflect the volume of traffic associated with 
access stimulation. As a result, access stimulating LECs realize 
significant revenue increases and thus inflated profits that almost 
uniformly make their interstate switched access rates unjust and 
unreasonable.
    445. Access stimulation imposes undue costs on consumers, 
inefficiently diverting capital away from more productive uses such as 
broadband deployment. When access stimulation occurs in locations that 
have higher than average access charges, which is the predominant case 
today, the average per-minute cost of access and thus the average cost 
of long-distance calling is increased. Because of the rate integration 
requirements of section 254(g) of the Act, 47 U.S.C. 254(g), long-
distance carriers are prohibited from passing on the higher access 
costs directly to the customers making the calls to access stimulating 
entities. Therefore, all customers of these long-distance providers 
bear these costs, even though many of them do not use the access 
stimulator's services, and, in essence, ultimately support businesses 
designed to take advantage of today's above-cost intercarrier 
compensation rates.
    446. The record indicates that a significant amount of access 
traffic is going to LECs engaging in access stimulation. TEOCO 
estimates that the total cost of access stimulation to IXCs has been 
more than $2.3 billion over the past five years. Verizon estimates the 
overall costs to IXCs to be between $330 and $440 million per year, and 
states that it expected to be billed between $66 and $88 million by 
access stimulators for approximately two billion wireline and wireless 
long-distance minutes in 2010. Other parties indicate that payment of 
access charges to access stimulating LECs is the subject of large 
numbers of disputes in a variety of forums. When carriers pay more 
access charges as a result of access stimulation schemes, the amount of 
capital available to invest in broadband deployment and other network 
investments that would benefit consumers is substantially reduced.
    447. Access stimulation also harms competition by giving companies 
that offer a ``free'' calling service a competitive advantage over 
companies that charge their customers for the service. For example, 
conference calling provider ZipDX indicates that, by not engaging in 
access stimulation, it is at a disadvantage vis-[agrave]-vis 
competitors that engage in access stimulation. Providers of 
conferencing services, like ZipDX, are recovering the costs of the 
service, such as conference bridges, marketing, and billing, from the 
user of the service rather than, as explained above in the case of 
access stimulators, spreading those costs across the universe of long-
distance subscribers. As a result, the services offered by ``free'' 
conferencing providers that leverage arbitrage opportunities put 
companies that recover the cost of services from their customers at a 
distinct competitive disadvantage.
    448. How access revenues are used is not relevant in determining 
whether switched access rates are just and reasonable in accordance 
with section 201(b), 47 U.S.C. 201(b). In addition, excess revenues 
that are shared in access stimulation schemes provide additional proof 
that the LEC's rates are above cost. Moreover, Congress created an 
explicit universal service fund to spur investment and deployment in 
rural, high cost, and insular areas, and the Commission is taking 
action here and in other proceedings to facilitate such deployment.
(i) Access Stimulation Definition
    449. The Commission adopts a definition to identify when an access

[[Page 81617]]

stimulating LEC must refile its interstate access tariffs at rates that 
are presumptively consistent with the Act. After reviewing the record, 
the Commission makes a few changes to the USF/ICC Transformation NPRM 
proposal, including defining access stimulation as occurring when two 
conditions are met. The first condition is that the LEC has entered 
into an access revenue sharing agreement, and the Commission clarifies 
what types of agreements qualify as ``revenue sharing.'' The second 
condition is met where the LEC either has had a three-to-one interstate 
terminating-to-originating traffic ratio in a calendar month, or has 
had a greater than 100 percent increase in interstate originating and/
or terminating switched access MOU in a month compared to the same 
month in the preceding year. The Commission adopts these changes to 
ensure that the access stimulation definition is not over-inclusive and 
to improve its enforceability.
    450. Definition of a Revenue Sharing Agreement. After reviewing the 
record, the Commission clarifies the scope of the access revenue 
sharing agreement condition of the new access stimulation definition. 
The access revenue sharing condition of the access stimulation 
definition the Commission adopts herein is met when a rate-of-return 
LEC or a competitive LEC: ``has an access revenue sharing agreement, 
whether express, implied, written or oral, that, over the course of the 
agreement, would directly or indirectly result in a net payment to the 
other party (including affiliates) to the agreement, in which payment 
by the rate-of-return LEC or competitive LEC is based on the billing or 
collection of access charges from interexchange carriers or wireless 
carriers. When determining whether there is a net payment under this 
rule, all payments, discounts, credits, services, features, functions, 
and other items of value, regardless of form, provided by the rate-of-
return LEC or competitive LEC to the other party to the agreement shall 
be taken into account.''
    451. This rule focuses on revenue sharing that would result in a 
net payment to the other entity over the course of the agreement 
arising from the sharing of access revenues. The use of ``over the 
course of the agreement'' does not preclude an IXC from filing a 
complaint if the traffic measurement condition is met. The agreement is 
to be interpreted in terms of what the anticipated net payments would 
be over the course of the agreement. The Commission clarifies that 
patronage dividends paid by cooperatives generally do not constitute 
revenue sharing as contemplated by this definition. However, a 
cooperative, like other LECs, could structure payments in a manner to 
engage in revenue sharing that would cause it to meet the definition as 
discussed herein. The Commission intends the net payment language to 
limit the revenue sharing definition in a manner that, along with the 
traffic measurements discussed below, best identifies the revenue 
sharing agreements likely to be associated with access stimulation and 
thus those cases in which a LEC must refile its switched access rates. 
Revenue sharing may include payments characterized as marketing fees or 
other similar payments that result in a net payment to the access 
stimulator. However, this rule does not encompass typical, widely 
available, retail discounts offered by LECs through, for example, 
bundled service offerings.
    452. If a LEC's circumstances change because it terminates the 
access revenue sharing agreement(s), it may file a tariff to revise its 
rates under the rules applicable when access stimulation is not 
occurring. As part of that tariff filing, an officer of the LEC must 
certify that it has terminated the revenue sharing agreement(s).
    453. As proposed in the USF/ICC Transformation NPRM, the Commission 
does not declare revenue sharing to be a per se violation of section 
201(b) of the Act, 47 U.S.C. 201(b). A ban on all revenue sharing 
arrangements could be overly broad, and no party has suggested a way to 
overcome this shortcoming. Nor does the Commission find that parties 
have demonstrated that traffic directed to access stimulators should 
not be subject to tariffed access charges in all cases. The Commission 
notes that the access stimulation rules it adopts in this R&O are part 
of the Commission's comprehensive intercarrier compensation reform. 
That reform will, as the transition unfolds, address remaining 
incentives to engage in access stimulation.
    454. The rules adopted here pursuant to sections 201 and 202 of the 
Act, 47 U.S.C. 201, 202, address conferencing services being provided 
by a third party, whether affiliated with the LEC or not. Section 
254(k), 47 U.S.C. 254(k), would apply to a LEC's operation of an access 
stimulation plan within its own corporate organization. In that 
context, as the Commission has found in other proceedings, terminating 
access is a monopoly service. The conferencing activity, as portrayed 
by the parties engaged in access stimulation, would be a competitive 
service. Thus, the use of non-competitive terminating access revenues 
to support competitive conferencing service within the LEC operating 
entity would violate section 254(k), 47 U.S.C. 254(k), and appropriate 
sanctions could be imposed.
    455. Addition of a Traffic Measurement Condition. After reviewing 
the record, the Commission agrees that it is appropriate to include a 
traffic measurement condition in the definition of access stimulation. 
Accordingly, in addition to requiring the existence of a revenue 
sharing agreement, the Commission adds a second condition to the 
definition requiring that a LEC: ``Has either an interstate 
terminating-to-originating traffic ratio of at least 3:1 in a calendar 
month, or has had more than a 100 percent growth in interstate 
originating and/or terminating switched access MOU in a month compared 
to the same month in the preceding year.'' The addition of a traffic 
measurement component to the access stimulation definition creates a 
bright-line rule that responds to record concerns about using access 
revenue sharing alone. The Commission concludes that these measurements 
of switched access traffic of all carriers exchanging traffic with the 
LEC reflect the significant growth in traffic volumes that would 
generally be observed in cases where access stimulation is occurring 
and thus should make detection and enforcement easier. Carriers paying 
switched access charges can observe their own traffic patterns for each 
of these traffic measurements and file complaints based on their own 
traffic patterns. Thus, this will not place a burden on LECs to file 
traffic reports, as some proposals would.
    456. The record offers support for both a terminating-to-
originating traffic ratio and a traffic growth factor. The Commission 
adopted a 3:1 ratio in its 2001 ISP-Remand Order to address a similar 
arbitrage scheme based on artificially increasing reciprocal 
compensation minutes. Further, the Wireline Competition Bureau employed 
a 100 percent traffic growth factor as a benchmark in a tariff 
investigation to address the potential that some rate-of-return LECs 
might engage in access stimulation after having filed tariffs with high 
switched access rates. In each case, the approach was largely 
successful in identifying and reducing the practice.
    457. The Commission concludes that the use of a terminating-to-
originating traffic ratio in conjunction with a traffic growth factor 
as alternative traffic measures addresses the shortcomings of using 
either component separately. A few parties argue that carriers can game 
the terminating-to-originating traffic

[[Page 81618]]

ratio component by simply increasing the number of originating MOU. The 
traffic growth component protects against this possibility because 
increasing the originating access traffic to avoid tripping the 3:1 
component would likely mean total access traffic would increase enough 
to trip the growth component. The terminating-to-originating traffic 
ratio component will capture those current access stimulation 
situations that already have very high volumes that could otherwise 
continue to operate without tripping the growth component. For example, 
a LEC that has been engaged in access stimulation for a significant 
period of time would have a high terminating traffic volume that, under 
a traffic growth factor alone, could continue to expand its operations, 
possibly avoiding the condition entirely by controlling its terminating 
traffic. Because these alternative traffic measurements are combined 
with the requirement that an access revenue sharing agreement exist, 
the Commissions reduces the risk that the terminating-to-originating 
traffic ratio or traffic growth components of the definition could be 
met by legitimate changes in a LEC's calling patterns. The combination 
of these two traffic measurements as alternatives is preferable to 
either standing alone, as some parties have urged. A terminating-to-
originating traffic ratio or traffic growth condition alone could prove 
to be overly inclusive by encompassing LECs that had realized access 
traffic growth through general economic development, unaided by revenue 
sharing. Such situations could include the location of a customer 
support center in a new community without any revenue sharing 
arrangement, or a new competitive LEC that is experiencing substantial 
growth from a small base. State Joint Board Members propose a condition 
for access stimulation based on a terminating ratio one standard 
deviation above the national average terminating ratio annually. Under 
their proposal, a carrier meeting this condition would set new rates so 
that the terminating revenue for any carrier equals the carrier's 
initial rate times its originating minutes times the terminating ratio 
at the one standard deviation point. The Commission declines to adopt 
this proposal because it is unclear that using originating traffic 
volumes would produce a rate that adequately reflects the increased 
terminating traffic volumes sufficient to ensure that rates are just 
and reasonable as required by Section 201(b) of the Act, 47 U.S.C. 
201(b).
(ii) Remedies
    458. If a LEC meets both conditions of the definition, it must file 
a revised tariff except under certain limited circumstances. As 
explained in more detail below, a rate-of-return LEC must file its own 
cost-based tariff under section 61.38 of the Commission's rules, 47 CFR 
61.38, and may not file based on historical costs under section 61.39 
of the Commission's rules, 47 CFR 61.39, or participate in the NECA 
traffic-sensitive tariff. If a competitive LEC meets the definition, it 
must benchmark its tariffed access rates to the rates of the price cap 
LEC with the lowest interstate switched access rates in the state, 
rather than to the rates of the BOC or the largest incumbent LEC in the 
state (as proposed in the USF/ICC Transformation NPRM). The Commission 
concludes, however, that if a LEC has terminated its revenue sharing 
agreement(s) before the deadline the Commission establishes for filing 
its revised tariff, or if the competitive LEC's rates are already below 
the benchmark rate, such a LEC does not have to file a revised 
interstate switched access tariff. However, once a rate-of-return LEC 
or a competitive LEC has met both conditions of the definition and has 
filed revised tariffs, when required, it may not file new tariffs at 
rates other than those required by the revised pricing rules until it 
terminates its revenue sharing agreement(s), even if the LEC no longer 
meets the 3:1 terminating-to-originating traffic ratio condition of the 
definition or traffic growth threshold. As price cap LECs reduce their 
switched access rates under the ICC reforms the Commission adopts 
herein, competitive LECs must benchmark to the reduced rates.
    459. Rate-of-Return Carriers Filing Tariffs Based on Historical 
Costs and Demand: 47 CFR 61.39. The Commission adopts its proposal in 
the USF/ICC Transformation NPRM that a LEC filing access tariffs 
pursuant to 47 CFR 61.39 would lose its ability to base its rates on 
historical costs and demand if it is engaged in access stimulation. 
Incumbent LECs filing access tariffs pursuant to 47 CFR 61.39 of the 
Commission's rules currently base their rates on historical costs and 
demand, which, because of their small size, generally results in high 
switched access rates based on the high costs and low demand of such 
carriers. The limited comment in the record was supportive of the 
Commission's proposal for the reasons set forth in the USF/ICC 
Transformation NPRM. The Commission accordingly revises 47 CFR 61.39 to 
bar a carrier otherwise eligible to file tariffs pursuant to 47 CFR 
61.39 from doing so if it meets the access stimulation definition. The 
Commission also requires such a carrier to file a revised interstate 
switched access tariff pursuant to 47 CFR 61.38 within 45 days after 
meeting the definition, or within 45 days after the effective date of 
this rule in cases where the carrier meets the definition on that date.
    460. Participation in NECA Tariffs. In the USF/ICC Transformation 
NPRM, the Commission proposed that a carrier engaging in revenue 
sharing would lose its eligibility to participate in the NECA tariffs 
45 days after engaging in access stimulation, or 45 days after the 
effective date of this rule in cases where it currently engages in 
access stimulation. A carrier leaving the NECA tariff thus would have 
to file its own tariff for interstate switched access, pursuant to 
section 61.38 of the rules, 47 CFR 61.38.
    461. The record is generally supportive of this approach for the 
reasons stated in the USF/ICC Transformation NPRM, and the Commission 
adopts it, subject to one modification. The Commission clarifies that, 
pursuant to 47 CFR 69.3(e)(3) of the rules, a LEC required to leave the 
NECA interstate tariff (which includes both switched and special access 
services) because it has met the access stimulation definition must 
file its own tariff for both interstate switched and special access 
services. USTelecom suggests that given that shared revenues are not 
appropriately included in a carrier's revenue requirement, the 
Commission does not need to address eligibility for participation in 
NECA tariffs in its access stimulation rules--a carrier would either 
stop sharing, or file its own tariff without any mandate to do so. The 
Commission disagrees, because current rules only provide for a 
participating carrier to leave the NECA tariff at the time of the 
annual tariff filing. A rule prohibiting LECs from further 
participating in the NECA tariff when the definition is met, and 
providing for advance notice to NECA, spells out the procedure.
    462. The Commission also adopts a revision to the proposed rule 
similar to a suggestion by the Louisiana Small Carrier Committee, which 
recommends that rate-of-return carriers be given an opportunity to show 
that they are in compliance with the Commission's rules before being 
required to file a revised tariff. Accordingly, the Commission 
concludes that if a carrier sharing access revenues terminates its 
access revenue sharing agreement before the date on which its revised 
tariff must be filed, it does not have to file a revised

[[Page 81619]]

tariff. The Commission believes that when sharing agreements are 
terminated, in most instances traffic patterns should return to levels 
that existed prior to the LEC entering into the access revenue sharing 
agreement. This eliminates a burden on such carriers when there is no 
ongoing reason for requiring such a filing.
    463. Rate of Return Carriers Filing Tariffs Based On Projected 
Costs and Demand: 47 CFR 61.38. In the USF/ICC Transformation NPRM, the 
Commission proposed that a carrier filing interstate switched access 
tariffs based on projected costs and demand pursuant to 47 CFR 61.38 of 
the rules be required to file revised access tariffs within 45 days of 
commencing access revenue sharing, or within 45 days of the effective 
date of the rule if the LEC on that date is engaged in access revenue 
sharing, unless the costs and demand arising from the new revenue 
sharing arrangement had been reflected in its most recent tariff 
filing. The Commission further proposed that payments made by a LEC 
pursuant to an access revenue sharing arrangement should not be 
included as costs in the rate-of-return LEC's interstate switched 
access revenue requirement because such payments have nothing to do 
with the provision of interstate switched access service and are thus 
not used and useful in the provision of such service. Thus, the 
Commission proposed to clarify prospectively that a rate-of-return 
carrier that shares access revenue, provides other compensation to an 
access stimulating entity, or directly provides the stimulating 
activity, and bundles those costs with access, is engaging in an 
unreasonable practice that violates 47 U.S.C. 201(b) and the prudent 
expenditure standard. The prudent expenditure standard is associated 
with the ``used and useful'' doctrine, which together are employed in 
evaluating whether a carrier's rates are just and reasonable.
    464. The Commission adopts the approach proposed in the USF/ICC 
Transformation NPRM. Commenters that addressed this issue support the 
approach. In particular, the Commission adopts a rule requiring 
carriers filing interstate switched access tariffs based on projected 
costs and demand pursuant to 47 CFR 61.38 of the rules to file revised 
access tariffs within 45 days of commencing access revenue sharing, or 
within 45 days of the effective date of the rule if the LEC on that 
date was engaged in access revenue sharing, unless the costs and demand 
arising from the new access revenue sharing agreement were reflected in 
its most recent tariff filing. This tariff filing requirement provides 
the carrier with the opportunity to show, and the Commission to review, 
any projected increase in costs, as well as to consider the higher 
anticipated demand in setting revised rates. If the access revenue 
sharing agreement(s) that required the new tariff filing has been 
terminated by the time the revised tariff is required to be filed, the 
Commission will not require the filing of a revised tariff, as the 
proposal would have. A refiling in that instance would be unnecessary 
because the original rates will now more likely reflect the cost/demand 
relationship of the carrier. If a LEC, however, subsequently 
reactivates the same telephone numbers in connection with a new access 
revenue sharing agreement, the Commission will presumptively treat that 
action to be furtive concealment resulting in the loss of deemed lawful 
status for the LEC's tariff, as discussed below in conjunction with the 
discussion of section 204(a)(3) of the Act, 47 U.S.C. 204(a)(3). As 
described therein, a carrier may be required to make refunds if its 
tariff does not have deemed lawful status. This will prevent a LEC from 
entering into a series of access revenue sharing agreements to avoid 
the 45-day filing requirement, while benefiting from the advertising of 
those telephone numbers used under previous agreements.
    465. The Commission also adopts the proposal that payments made by 
a LEC pursuant to an access revenue sharing agreement are not properly 
included as costs in the rate-of-return LEC's interstate switched 
access revenue requirement. This proposal received broad support in the 
record.
    466. The rule the Commission adopts will require 47 CFR 61.38 
carriers to set their rates based on projected costs and demand data.
    467. Competitive LECs. In the USF/ICC Transformation NPRM, the 
Commission proposed that when a competitive LEC is engaged in access 
stimulation, it would be required to benchmark its interstate switched 
access rates to the rate of the BOC in the state in which the 
competitive LEC operates, or the independent incumbent LEC with the 
largest number of access lines in the state if there is no BOC in the 
state, and if the competitive LEC is not already benchmarking to that 
carrier's rate. Under the proposal, a competitive LEC would have to 
file a revised tariff within 45 days of engaging in access stimulation, 
or within 45 days of the effective date of the rule if it currently 
engages in access stimulation.
    468. After reviewing the record, the Commission adopts its proposal 
with one modification to ensure that the LEC refiles at a rate no 
higher than the lowest rate of a price cap LEC in the state. In so 
doing, the Commission concludes that neither the switched access rate 
of the rate-of-return LEC in whose territory the competitive LEC is 
operating nor the rate used in the rural exemption is an appropriate 
benchmark when the competitive LEC meets the access stimulation 
definition. In those instances, the access stimulator's traffic vastly 
exceeds the volume of traffic of the incumbent LEC to whom the access 
stimulator is currently benchmarking. Thus, the competitive LEC's 
traffic volumes no longer operationally resemble the carrier's traffic 
volumes whose rates it had been benchmarking because of the significant 
increase in interstate switched access traffic associated with access 
stimulation. Instead, the access stimulating LEC's traffic volumes are 
more like those of the price cap LEC in the state, and it is therefore 
appropriate and reasonable for the access stimulating LEC to benchmark 
to the price cap LEC.
    469. Although many parties support using the switched access rates 
of the BOC in the state, or the rates of the largest independent LEC in 
the state if there is no BOC, as the Commission proposed, the 
Commission concludes that the lowest interstate switched access rate of 
a price cap LEC in the state is the rate to which a competitive LEC 
must benchmark if it meets the definition. Generally, the BOC will have 
the lowest interstate switched access rates. However, the record 
reveals that in California, Pacific Bell's interstate switched access 
rates are higher than those of other price cap LECs in the state, as 
well as being higher than the interstate switched access rates of price 
cap LECs in other states. Benchmarking to the lowest price cap LEC 
interstate switched access rate in the state will reduce rate variance 
among states and will significantly reduce the rates charged by 
competitive LECs engaging in access stimulation, even if it does not 
entirely eliminate the potential for access stimulation. However, 
should the traffic volumes of a competitive LEC that meets the access 
stimulation definition substantially exceed the traffic volumes of the 
price cap LEC to which it benchmarks, the Commission may reevaluate the 
appropriateness of the competitive LEC's rates and may evaluate whether 
any further reductions in rates is warranted. In addition, the 
Commission believes the reforms it adopts elsewhere in this R&O will, 
over time, further reduce intercarrier payments and the incentives for 
this type of arbitrage.

[[Page 81620]]

    470. The Commission requires a competitive LEC to file a revised 
interstate switched access tariff within 45 days of meeting the 
definition, or within 45 days of the effective date of the rule if on 
that date it meets the definition. A competitive LEC whose rates are 
already at or below the rate to which they would have to benchmark in 
the refiled tariff will not be required to make a tariff filing.
    471. The Commission's benchmarking approach addresses access 
stimulation within the parameters of the existing access charge 
regulatory structure. The Commission expects that the approach it 
adopts will reduce the effects of access stimulation significantly, and 
the intercarrier compensation reforms the Commission adopts should 
resolve remaining concerns.
    472. Section 204(a)(3), 47 U.S.C. 204(a)(3) (``Deemed Lawful'') 
Considerations. The Commission concludes that the policy objectives of 
this proceeding can be achieved without creating an exception to the 
statutory tariffing timelines. LECs that meet the access stimulation 
trigger are required to refile their interstate switched access tariffs 
as outlined above. Any issues that arise in these refiled tariffs can 
be addressed through the suspension and rejection authority of the 
Commission contained in section 204 of the Act, 47 U.S.C. 204, or 
through appropriate enforcement action.
    473. The Commission concludes that a LEC's failure to comply with 
the requirement that it file a revised tariff if the trigger is met 
constitutes a violation of the Commission's rules, which is 
sanctionable under section 503 of the Act, 47 U.S.C. 503. Section 
503(b)(2)(B) of the Act, 47 U.S.C. 503(b)(2)(B), authorizes the 
Commission to assess a forfeiture of up to $150,000 for each violation, 
or each day of a continuing violation, up to a statutory maximum of 
$1,500,000 for a single act or failure to act by common carriers, 47 
CFR 1.80(b)(2). In 2008, the Commission amended its rules to increase 
the maximum forfeiture amounts in accordance with the inflation 
adjustment requirements contained in the Debt Collection Improvement 
Act of 1996, 28 U.S.C. 2461. The Commission also concludes that such a 
failure would constitute ``furtive concealment'' as described by the DC 
Circuit in ACS of Anchorage, Inc. v. FCC, 290 F.3d 403 (D.C. Cir. 
2002). In 2002, the United States Court of Appeals for the D.C. 
Circuit, in reversing a Commission decision that had found a tariff 
filing did not qualify for deemed lawful treatment and was thus subject 
to possible refund liability, noted that it was not addressing ``the 
case of a carrier that furtively employs improper accounting techniques 
in a tariff filing, thereby concealing potential rate of return 
violations.'' The Commission therefore puts parties on notice that if 
it finds in a complaint proceeding under sections 206-209 of the Act, 
47 U.S.C 206-209, that such ``furtive concealment'' has occurred, that 
finding will be applicable to the tariff as of the date on which the 
revised tariff was required to be filed and any refund liability will 
be applied as of such date. The Commission concludes that this approach 
will eliminate any incentives that LECs may have to delay or avoid 
complying with the requirement that they file revised tariffs. Several 
parties support this approach.
    474. All American Telephone Co. filed a petition for declaratory 
ruling requesting that the Commission find that commercial agreements 
involving the sharing of access revenues between LECs and ``free'' 
service providers do not violate the Communications Act. In this R&O, 
the Commission adopts a definition of access revenue sharing agreement 
and prescribe that a LEC meeting the conditions of that definition must 
file revised tariffs. Given the findings and the rules adopted in this 
R&O, the Commission declines to address the All American petition and 
it is dismissed.
(iii) Enforcement
    475. The revised interstate access rules adopted in this R&O will 
facilitate enforcement through the Commission's complaint procedures, 
if necessary. Given the two-year statute of limitations in section 405 
of the Act, 47 U.S.C. 405, a complaining IXC would have two years from 
the date the cause of action accrued (the date after the tariff should 
have been filed) to file its complaint. Because the rules the 
Commission adopts are prospective, they will have no binding effect on 
pending complaints. A complaining carrier may rely on the 3:1 
terminating-to-originating traffic ratio and/or the traffic growth 
factor for the traffic it exchanges with the LEC as the basis for 
filing a complaint. This will create a rebuttable presumption that 
revenue sharing is occurring and the LEC has violated the Commission's 
rules. The LEC then would have the burden of showing that it does not 
meet both conditions of the definition. The Commission declines to 
require a particular showing, but, at a minimum, an officer of the LEC 
must certify that it has not been, or is no longer engaged in access 
revenue sharing, and the LEC must also provide a certification from an 
officer of the company with whom the LEC is alleged to have a revenue 
sharing agreement(s) associated with access stimulation that that 
entity has not, or is not currently, engaged in access stimulation and 
related revenue sharing with the LEC. If the LEC challenges that it has 
met either of the traffic measurements, it must provide the necessary 
traffic data to establish its contention. With the guidance in this 
R&O, the Commission believes parties should in good faith be able to 
determine whether the definition is met without further Commission 
intervention.
    476. Non-payment Disputes. Several parties have requested that the 
Commission address alleged self-help by long distance carriers who they 
claim are not paying invoices sent for interstate switched access 
services. As the Commission has previously stated, ``[w]e do not 
endorse such withholding of payment outside the context of any 
applicable tariffed dispute resolution provisions.'' The Commission 
otherwise declines to address this issue in this R&O, but cautions 
parties of their payment obligations under tariffs and contracts to 
which they are a party. The new rules the Commission adopts in this R&O 
will provide clarity to all affected parties, which should reduce 
disputes and litigation surrounding access stimulation and revenue 
sharing agreements.
(iv) Conclusion
    477. The rules the Commission adopt in this section will require 
rates associated with access stimulation to be just and reasonable 
because those rates will more closely reflect the access stimulators' 
actual traffic volume. Taking this basic step will immediately reduce 
some of the inefficient incentives enabled by the current intercarrier 
compensation system, and permit the industry to devote resources to 
innovation and investment rather than access stimulation and disputes. 
The Commission has balanced the need for the new rules to address 
traffic stimulation with the costs that may be imposed on LECs and have 
concluded that the benefits justify any burdens. The Commission's new 
rules will work in tandem with the comprehensive intercarrier 
compensation reforms the Commission adopts below, which will, when 
fully implemented, eliminate the incentives in the present system that 
give rise to access stimulation.

B. Phantom Traffic

    478. In this portion of the R&O, the Commission amends the 
Commission's rules to address ``phantom traffic'' by ensuring that 
terminating service

[[Page 81621]]

providers receive sufficient information to bill for telecommunications 
traffic sent to their networks, including interconnected VoIP traffic. 
The amendments the Commission adopts close loopholes that are being 
used to manipulate the intercarrier compensation system.
    479. ``Phantom traffic'' refers to traffic that terminating 
networks receive that lacks certain identifying information. In some 
cases, service providers in the call path intentionally remove or alter 
identifying information to avoid paying the terminating rates that 
would apply if the call were accurately signaled and billed. For 
example, some parties have sought to avoid payment of relatively high 
intrastate access charges by making intrastate traffic appear 
interstate or international in nature. Parties have also disguised or 
routed non-local traffic subject to access charges to avoid those 
charges in favor of lower reciprocal compensation rates. Collectively, 
problems involving unidentifiable or misidentified traffic appear to be 
widespread. Parties have documented that phantom traffic is a sizeable 
problem, with estimates ranging from 3-20 percent of all traffic on 
carriers' networks, which costs carriers--and ultimately consumers--
potentially hundreds of millions of dollars annually. In turn, carriers 
are diverting resources to investigate and pursue billing disputes, 
rather than use such resources for more productive purposes such as 
capital investment. This sort of gamesmanship distorts the intercarrier 
compensation system and chokes off revenue that carriers depend on to 
deliver broadband and other essential services to consumers, 
particularly in rural and difficult to serve areas of the country.
    480. Based on the record developed in this proceeding, the 
Commission now adopts its original proposal with the minor 
modifications described in further detail below. Service providers that 
originate interstate or intrastate traffic on the PSTN, or that 
originate inter- or intrastate interconnected VoIP traffic destined for 
the PSTN, will now be required to transmit the telephone number 
associated with the calling party to the next provider in the call 
path. Intermediate providers must pass calling party number or charge 
number signaling information they receive from other providers 
unaltered, to subsequent providers in the call path. These requirements 
will assist service providers in appropriately billing for calls 
traversing their networks.
    481. By ensuring that the calling party telephone number 
information is provided and transmitted for all types of traffic 
originating or terminating on the PSTN, the revised rules will assist 
service providers in accurately identifying and billing for traffic 
terminating on their networks, and help to guard against further 
arbitrage practices. These measures will work in tandem with the 
Commission's reforms adopted elsewhere in this R&O, which, by 
minimizing intercarrier compensation rate differences, promise to 
eliminate the incentive for providers to engage in phantom traffic 
arbitrage. Together, these changes will benefit consumers by enabling 
providers to devote more resources to investment and innovation that 
would otherwise have been spent resolving billing disputes.
1. Revised Call Signaling Rules
    482. The Commission adopts the proposal contained in the USF/ICC 
Transformation NPRM to require that the CN be passed unaltered where it 
is different from the CPN. The Commission believes that this 
requirement will be an adequate remedy to the problem of CN number 
substitution that disguises the characteristics of traffic to 
terminating service providers. Additionally, the Commission notes that 
the CN field may only be used to contain a calling party's charge 
number, and that it may not contain or be populated with a number 
associated with an intermediate switch, platform, or gateway, or other 
number that designates anything other than a calling party's charge 
number. The Commission is not persuaded by objections to this 
requirement. First, unsupported objections that there may be 
``circumstances where a CN may be different from the CPN but cannot be 
easily transmitted'' are unpersuasive without more specific evidence. 
Second, the Commission notes that it addressed similar circumstances in 
Regulation of Prepaid Calling Card Services, WC Docket No. 05-68, 
Declaratory Ruling and Report and Order, 71 FR 43667, Aug. 2, 2006 
(Prepaid Calling Card Order), and prohibited carriers that serve 
prepaid calling card providers from passing the telephone number 
associated with the platform in the charge number parameter. In this 
case, the Commission agrees with the analysis of the Prepaid Calling 
Card Order that ``[b]ecause industry standards allow for the use of CN 
to populate carrier billing records * * * passing the number of the [] 
platform in the parameters of the SS7 stream to carriers involved in 
terminating a call may lead to incorrect treatment of the call for 
billing purposes.'' In sum, the record demonstrates that CN 
substitution is a technique that leads to phantom traffic, and the 
proposed rules are a necessary and reasonable response.
    483. The Commission amends its rules to require service providers 
using MF signaling to pass the number of the calling party (or CN, if 
different) in the MF ANI field. This requirement will provide 
consistent treatment across signaling systems and will ensure that 
information identifying the calling party is included in call signaling 
information for all calls. Moreover, this requirement responds to the 
concerns expressed in the record that MF signaling can be used by 
``unscrupulous providers'' to engage in phantom traffic practices. The 
previous record concerning the technical limitations of MF ANI appears 
to be mixed. In balancing the need for a rule that covers all traffic 
with the technical limitations asserted in the record, the Commission 
concludes that the approach most consistent with its policy objective 
is not to exclude the entire category of MF traffic. Such a categorical 
exclusion could create a disincentive to invest in IP technologies and 
invite additional opportunities for arbitrage. Although the rules will 
apply to carriers that use or pass MF signaling, the Commission does 
not mandate any specific method of compliance. Carriers will have 
flexibility to devise their own means to pass this information in their 
MF signaling. Nevertheless, to the extent that a party is unable to 
comply with the rule as a result of technical limitations related to MF 
signaling in its network, it can seek a waiver for good cause shown, 
pursuant to section 1.3 of the Commission's rules, 47 CFR 1.3.
    484. IP Signaling. Consistent with the proposal in the USF/ICC 
Transformation NPRM, the rules the Commission adopts also apply to 
interconnected VoIP traffic. Failure to include interconnected VoIP 
traffic in the signaling rules would create a large and growing 
loophole as the number of interconnected VoIP lines in service 
continues to grow. Therefore, VoIP service providers will be required 
to transmit the telephone number of the calling party for all traffic 
destined for the PSTN that they originate. If they are intermediate 
providers in a call path, they must pass, unaltered, signaling 
information they receive indicating the telephone number, or billing 
number if different, of the calling party. Because IP transmission 
standards and practices are rapidly changing, the Commission refrains 
from mandating a specific compliance method and instead leaves to 
service providers using different IP technologies the flexibility to 
determine how best to comply with this requirement.

[[Page 81622]]

    485. In extending its call signaling rules to interconnected VoIP 
service providers, the Commission acknowledges that it has not 
classified interconnected VoIP services as ``telecommunications 
services'' or ``information services.'' The Commission needs not 
resolve this issue here, for the Commission would have authority to 
impose call signaling on interconnected VoIP providers even under an 
information service classification. Additionally, as the Commission has 
previously found, section 706, 47 U.S.C. 1302, provides authority 
applicable in this context.
2. Prohibition of Altering or Stripping Call Information
    486. In the USF/ICC Transformation NPRM, the Commission also sought 
comment on a proposed rule that would prohibit service providers from 
altering or stripping relevant call information. More specifically, the 
Commission proposed to require all telecommunications providers and 
entities providing interconnected VoIP service to pass the calling 
party's telephone number (or, if different, the financially responsible 
party's number), unaltered, to subsequent carriers in the call path. 
Commenters overwhelmingly supported this proposal. The Commission 
believes that a prohibition on stripping or altering information in the 
call signaling stream serves the public interest. The prohibition 
should help ensure that the signaling information required by its rules 
reaches terminating carriers. Therefore, the Commission adopts its 
proposal to prohibit stripping or altering call signaling information 
with the modifications discussed below.
    487. In response to comments in the record, the Commission makes 
several clarifying changes to the text of the proposed rules in this 
section. First, commenters objected to the use of the undefined term 
``financially responsible party'' in the proposed rules. The Commission 
agrees with the concerns and clarify that providers are required to 
pass the billing number (e.g., CN in SS7) if different from the calling 
party's number. For similar reasons, for purposes of this rule, the 
Commission adds the following definition of the term ``intermediate 
provider'' to the rules: ``any entity that carries or processes traffic 
that traverses or will traverse the PSTN at any point insofar as that 
entity neither originates nor terminates that traffic.'' The Commission 
finds that adding this definition will eliminate potential ambiguity in 
the revised rule. As provided in Appendix A, the Commission also makes 
modest adjustments to the rules proposed in the USF/ICC Transformation 
NPRM. Specifically, the Commission clarifies that the obligation to 
pass signaling information applies to the telephone number or billing 
number, and the Commission clarifies that the revised rules apply to 
telecommunications carriers and providers of interconnected VoIP 
services. Finally, because, as discussed below, the waiver process is 
available to parties seeking exceptions to the revised rule, the 
Commission removes the proposed rule language limiting applicability in 
relation to industry standards. With these minor changes, the 
Commission adopts the proposed prohibition on stripping or altering 
information regarding the calling party number.
3. Exceptions
    488. The Commission declines to adopt any general exceptions to its 
new call signaling rules at this time. Parties seeking limited 
exceptions or relief in connection with the call signaling rules the 
Commission adopts can avail themselves of established waiver procedures 
at the Commission. To that end, the Commission delegates authority to 
the Wireline Competition Bureau to act upon requests for a waiver of 
the rules adopted herein in accordance with existing Commission rules.
4. Signaling/Billing Record Requirements
a. Discussion
    489. After considering the substantial record received in response 
to the USF/ICC Transformation NPRM, the Commission determines that 
limiting the scope of the rules it adopts to address phantom traffic to 
CPN and CN signaling is consistent with the goal of helping to ensure 
complete and accurate passing of call signaling information, while 
minimizing disruption to industry practices or existing carrier 
agreements. The revised and expanded requirements with regard to CPN 
and CN will ensure that terminating carriers will receive, via SS7, MF, 
or IP signaling, information helpful in identifying carriers sending 
terminating traffic to their networks. This information, in combination 
with billing records provided to terminating carriers in accordance 
with industry standards, should significantly reduce the amount of 
unbillable traffic that terminating carriers receive.
b. Enforcement
    490. Commenters to the USF/ICC Transformation NPRM urged the 
Commission to consider a number of measures to ensure compliance with 
the Commission's new rules. As explained below, however, there is no 
persuasive evidence that existing enforcement mechanisms and complaint 
processes are inadequate. The Commission therefore declines to adopt 
these enforcement proposals. Parties aggrieved by violations of the 
phantom traffic rules have a number of options, such as filing an 
informal or formal complaint. In addition, the Commission has broad 
authority to initiate proceedings on its own motion to investigate and 
enforce its phantom traffic rules.

IX. Comprehensive Intercarrier Compensation Reform

    491. Consistent with the National Broadband Plan's recommendation 
to phase out regulated per-minute intercarrier compensation charges, in 
this section the Commission adopts bill-and-keep as the default 
methodology for all intercarrier compensation traffic. The Commission 
believes that setting an end state for all traffic will promote the 
transition to IP networks, provide a more predictable path for the 
industry and investors, and anchor the reform process that will 
ultimately free consumers from shouldering the hidden multi-billion 
dollar subsidies embedded in the current system.
    492. Under bill-and-keep arrangements, a carrier generally looks to 
its end-users--which are the entities and individuals making the choice 
to subscribe to that network--rather than looking to other carriers and 
their customers to pay for the costs of its network. To the extent 
additional subsidies are necessary, such subsidies will come from the 
CAF, and/or state universal service funds. Wireless providers have long 
been operating pursuant to what are essentially bill-and-keep 
arrangements, and this framework has proven to be successful for that 
industry. Bill-and-keep arrangements are also akin to the model 
generally used to determine who bears the cost for the exchange of IP 
traffic, where providers bear the cost of getting their traffic to a 
mutually agreeable exchange point with other providers.
    493. Bill-and-keep has significant policy advantages over other 
proposals in the record. A bill-and-keep methodology will ensure that 
consumers pay only for services that they choose and receive, 
eliminating the existing opaque implicit subsidy system under which 
consumers pay to support other carriers' network costs. This subsidy 
system shields subsidy recipients and their customers from price 
signals associated with network

[[Page 81623]]

deployment choices. A bill-and-keep methodology also imposes fewer 
regulatory burdens and reduces arbitrage and competitive distortions 
inherent in the current system, eliminating carriers' ability to shift 
network costs to competitors and their customers. The Commission has 
legal authority to adopt a bill-and-keep methodology as the end point 
for reform pursuant to its rulemaking authority to implement sections 
251(b)(5), 47 U.S.C. 251(b)(5), and 252(d)(2), 47 U.S.C. 252(d)(2), in 
addition to authority under other provisions of the Act, including 47 
U.S.C. 201 and 332.
    494. The Commission also adopts in this section a gradual 
transition for terminating access, providing price cap carriers, and 
competitive LECs that benchmark to price cap carrier rates, six years 
and rate-of-return carriers, and competitive LECs that benchmark to 
rate-of-return carrier rates, nine years to reach the end state. The 
Commission believes that initially focusing the bill-and-keep 
transition on terminating access rates will allow a more manageable 
process and will focus reform where some of the most pressing problems, 
such as access charge arbitrage, currently arise. Additionally, the 
Commission believes that limiting reform to terminating access charges 
at this time minimizes the burden intercarrier compensation reform will 
place on consumers and will help manage the size of the access 
replacement mechanism adopted herein. The Commission recognizes, 
however, that it needs to further evaluate the timing, transition, and 
possible need for a recovery mechanism for those rate elements--
including originating access, common transport elements not reduced, 
and dedicated transport--that are not immediately transitioned; the 
Commission addresses those elements in the USF/ICC Transformation 
FNPRM. The transition the Commission adopts sets a default framework, 
leaving carriers free to enter into negotiated agreements that allow 
for different terms.

A. Bill-and-Keep as the End Point for Reform

1. Bill-and-Keep Best Advances the Goals of Reform
    495. The Commission adopts a bill-and-keep methodology as a default 
framework and end state for all intercarrier compensation traffic. The 
Commission finds that a bill-and-keep framework for intercarrier 
compensation best advances the Commission's policy goals and the public 
interest, driving greater efficiency in the operation of 
telecommunications networks and promoting the deployment of IP-based 
networks.
    496. Bill-and-Keep Is Market-Based and Less Burdensome than the 
Proposed Alternatives. Bill-and-keep brings market discipline to 
intercarrier compensation because it ensures that the customer who 
chooses a network pays the network for the services the subscriber 
receives. Specifically, a bill-and-keep methodology requires carriers 
to recover the cost of their network through end-user charges, which 
are potentially subject to competition. Under the existing approach, 
carriers recover the cost of their network from competing carriers 
through intercarrier charges, which may not be subject to competitive 
discipline. Thus, bill-and-keep gives carriers appropriate incentives 
to serve their customers efficiently.
    497. Bill-and-keep is also less burdensome than approaches that 
would require the Commission and/or state regulators to set a uniform 
positive intercarrier compensation rate, such as $0.0007. In 
particular, bill-and-keep reduces the significant regulatory costs and 
uncertainty associated with choosing such a rate, which would require 
complicated, time consuming regulatory proceedings, based on factors 
such as demand elasticities for subscription and usage as well as the 
nature and extent of competition. As the Commission has recognized with 
respect to the existing reciprocal compensation rate methodology, 
``[s]tate pricing proceedings under the TELRIC [Total Element Long Run 
Incremental Cost] regime have been extremely complicated and often last 
for two or three years at a time. * * * The drain on resources for the 
state commissions and interested parties can be tremendous.'' Indeed, 
the cost of implementing such a framework potentially could outweigh 
the resulting intercarrier compensation revenues for many carriers. 
Moreover, in setting any new intercarrier rate, it would be necessary 
to rely on information from carriers who would have incentives to 
maximize their own revenues, rather than ensure socially optimal 
intercarrier compensation charges. Thus, the costs of choosing a new 
positive intercarrier compensation rate would be significant, and a 
reasonable outcome would be highly uncertain.
    498. Bill-and-Keep Is Consistent with Cost Causation Principles. As 
the USF/ICC Transformation NPRM observed, ``[u]nderlying historical 
pricing policies for termination of traffic was the assumption that the 
calling party was the sole beneficiary and sole cost-causer of a 
call.'' However, as one regulatory group has observed, if the called 
party did not benefit from incoming calls, ``users would either turn 
off their phone or not pick up calls.'' This is particularly true given 
the prevalence of caller ID, the availability of the national do-not-
call registry, and the option of having unlisted telephone numbers. 
More recent analyses have recognized that both parties generally 
benefit from participating in a call, and therefore, that both parties 
should split the cost of the call. That line of economic research finds 
that the most efficient termination charge is less than incremental 
cost, and could be negative.
    499. Moreover, the subscription decisions of the called party play 
a significant role in determining the cost of terminating calls to that 
party. A consequent effect of the existing intercarrier compensation 
regime is that it allows carriers to shift recovery of the costs of 
their local networks to other providers because subscribers do not have 
accurate pricing signals to allow them to identify lower-cost or more 
efficient providers. By contrast, a bill-and-keep framework helps 
reveal the true cost of the network to potential subscribers by 
limiting carriers' ability to recover their own costs from other 
carriers and their customers, even as the Commission retains beneficial 
policies regarding interconnection, call blocking, and geographic rate 
averaging.
    500. The Commission rejects claims that bill-and-keep does not 
allow for sufficient cost recovery. In the past, parties have argued 
that a bill-and-keep approach somehow results in ``free'' termination. 
But bill-and-keep merely shifts the responsibility for recovery from 
other carrier's customers to the customers that chose to purchase 
service from that network plus explicit universal service support where 
necessary. Such an approach provides better incentives for carriers to 
operate efficiently by better reflecting those efficiencies (or 
inefficiencies) in pricing signals to end-user customers.
    501. To the extent carriers in costly-to-serve areas are unable to 
recover their costs from their end users while maintaining service and 
rates that are reasonably comparable to those in urban areas, universal 
service support, rather than intercarrier compensation should make up 
the difference. In this respect, bill-and-keep helps fulfill the 
direction from Congress in the 1996 Act that the Commission should make 
support explicit rather than implicit.
    502. Consumer Benefits of Bill-and-Keep. Economic theory suggests 
that carriers will reduce consumers' effective price of calling, 
through reduced

[[Page 81624]]

charges and/or improved service quality. The Commission predicts that 
reduced quality-adjusted prices will lead to substantial savings on 
calls made, and to increased calling. Economic theory suggests that 
quality-adjusted prices will be reduced regardless of the extent of 
competition in any given market, but will be reduced most where 
competition is strongest. These price reductions will be most 
significant among carriers who, by and large, incur but do not collect 
termination charges, notably CMRS and long-distance carriers. The 
potential for benefits to wireless customers is particularly important, 
as today there are approximately 300 million wireless devices, compared 
to approximately 117 million fixed lines, in the United States. Lower 
termination charges for wireless carriers could allow lower prepaid 
calling charges and larger bundles of free calls for the same monthly 
price. For example, carriers presently offer free ``in-network'' 
wireless calls at least in part because they do not have to pay to 
terminate calls on their own network. Lower termination charges could 
also enable more investment in wireless networks, resulting in higher 
quality service--e.g., fewer dropped calls and higher quality calls--as 
well as accelerated deployment of 4G service. Similarly, IXCs, calling 
card providers, and VoIP providers will be able to offer cheaper long-
distance rates and unlimited minutes at a lower price.
    503. Moreover, as carriers face intercarrier compensation charges 
that more accurately reflect the incremental cost of making a call, 
consumers will see at least three mutually reinforcing types of 
benefits. First, carriers operations will become more efficient as they 
are able to better allocate resources for delivering and marketing 
existing communications services. Specifically, as described below, 
bill-and-keep will over time eliminate wasteful arbitrage schemes and 
other behaviors designed to take advantage of or avoid above-cost 
interconnection rates, as well as reducing ongoing call monitoring, 
intercarrier billing disputes, and contract enforcement efforts. 
Second, carrier decisions to invest in, develop, and market 
communications services will increasingly be based on efficient price 
signals.
    504. Third, and perhaps most importantly, the Commission expects 
carriers will engage in substantial innovation to attract and retain 
consumers. New services that are presently offered on a limited basis 
will be expanded, and innovative services and complementary products 
will be developed. For example, with the substantial elimination of 
termination charges under a bill-and-keep methodology, a wide range of 
IP-calling services are likely to be developed and extended, a process 
that may ultimately result in the sale of broadband services that 
incorporate voice at a zero or nominal charge. All these changes will 
bring substantial benefits to consumers.
    505. The impact of the Commission's last substantial intercarrier 
compensation reform supports its view that consumers will benefit 
significantly from the R&O's reforms. In 2000, the CALLS Order, Access 
Charge Reform, Price Cap Performance Review for Local Exchange 
Carriers, CC Docket Nos. 96-262 and 94-1, Sixth Report and Order, Low-
Volume Long-Distance Users, CC Docket No. 99-249, Report and Order, 
Federal-State Joint Board on Universal Service, CC Docket No. 96-45, 
Eleventh Report and Order, 65 FR 57739, Sept. 26, 2000 (CALLS Order), 
reduced interstate access charges. At the same time, in ways similar to 
the present reforms, we imposed modest increases in the fixed charges 
faced by end users. In the CALLS Order, the Commission forecasted that 
reduced interstate access rates would bring a range of efficiency 
benefits. Although some of these forecasts were met with initial 
skepticism, end-users in fact realized benefits that exceeded most 
expectations. In particular, the CALLS Order resulted in substantial 
decreases in calling prices, but in largely unexpected ways. As a 
result of the CALLS Order, retail toll charges fell sharply, bringing 
average customer expenditures per minute of interstate toll calling 
down 18 percent during the year 2000. However, rather than merely 
reducing per-minute rates, wireless carriers started offering a new 
form of pricing, a fixed fee for a ``bucket'' of minutes, and ended 
distance-based pricing. As a result of these price declines, the gains 
in consumer surplus for wireless users in the United States from the 
CALLS Order were estimated to be about $115 billion per year. 
Competitive pressure from wireless providers brought similar changes to 
fixed line carriers, who began offering unlimited domestic calls. These 
price declines and innovations also had important indirect effects, 
allowing end-users to fundamentally change the way they used telephony 
services. For example, lower calling charges enabled a substantial and 
ongoing shift from landlines to wireless. In short, the Commission's 
prior intercarrier compensation reform led to more convenient access to 
telecommunication services and substantially lower costs for long-
distance calls.
    506. Bill-and-Keep Eliminates Arbitrage and Marketplace 
Distortions. Bill-and-keep will address arbitrage and marketplace 
distortions arising from the current intercarrier compensation regimes, 
and therefore will promote competition in the telecommunications 
marketplace. Intercarrier compensation rates above incremental cost 
have enabled much of the arbitrage that occurs today, and to the extent 
that such rates apply differently across providers, have led to 
significant marketplace distortions. Rates today are determined by 
looking at the average cost of the entire network, whereas a bill-and-
keep approach better reflects the incremental cost of termination, 
reducing arbitrage incentives. For example, based on a hypothetical 
calculation of the cost of voice service on a next generation network 
providing a full range of voice, video, and data services, one study 
estimated that the incremental cost of delivering an average customer's 
total volume of voice service could be as low as $0.000256 per month; 
on a per minute basis, this incremental cost would translate to a cost 
of $0.0000001 per minute. Moreover, non-voice traffic on next 
generation networks (NGNs) is growing much more rapidly than voice 
traffic, and under any reasonable methods of cost allocation, the share 
of voice cost to total cost will continue to be small in an NGN. Record 
evidence indicates that the incremental cost of termination for 
circuit-switched networks is likewise extremely small.
    507. The conclusion that the incremental cost of call termination 
is very nearly zero, coupled with the difficulty of appropriately 
setting an efficient, positive intercarrier compensation charge, 
further supports the adoption of bill-and-keep. The Commission notes 
that the statutory text of 47 U.S.C. 252(d)(2) provides that the 
methodology for reciprocal compensation should allow for the recovery 
of the ``additional costs'' of a call which equals incremental cost, 
not the average or total cost of transporting or terminating a call. 
Exact identification of efficient termination charges would be 
extremely complex, and considering the costs of metering, billing, and 
contract enforcement that come with a non-zero termination charge, the 
Commission finds that the benefits obtained from imposing even a very 
careful estimate of the efficient interconnection charge would be more 
than offset by the considerable costs of doing so. The Commission 
acknowledges that it is also possible that, in some instances, the 
efficient

[[Page 81625]]

termination rates of preceding models would not allow overall cost 
recovery. In that case, while the efficient cost-covering termination 
rate could lie above incremental cost, the Commission also concludes 
that it is more efficient to ensure cost recovery via direct subsidies, 
such as the CAF, than by distorting usage prices.
    508. Some parties have expressed concerns that bill-and-keep 
arrangements will encourage carriers to ``dump'' traffic on other 
providers' terminating network, because the cost of termination to the 
carrier delivering the traffic will be zero. Such concerns, however, 
appear to be largely speculative; no commenter has identified a 
concrete reason why any carrier would engage in such ``dumping'' or how 
it would do so. Indeed, there has been no evidence that any such 
``dumping'' has occurred in the wireless industry, which has operated 
under a similar framework. Even so, if a long distance carrier decided 
to deliver all of its traffic to a terminating LECs' tandem switch, 
that practice could result in tandem exhaust, requiring the terminating 
LEC to invest in additional switching capacity. To help address this 
concern, the Commission confirms that a LEC may include traffic 
grooming requirements in its tariffs. These traffic grooming 
requirements specify when a long distance carrier must purchase 
dedicated DS1 or DS3 trunks to deliver traffic rather than pay per-
minute transport charges, a determination based on the amount of 
traffic going to a particular end office. The Commission believes this 
accountability and additional information will deter concerns regarding 
traffic dumping.
    509. Bill-and-Keep Is Appropriate Even If Traffic Is Imbalanced. 
The Commission initially permitted states to impose bill-and-keep 
arrangements on providers, but did so with the caveat that traffic 
should be roughly in balance. At the time, the Commission reasoned that 
carriers incur costs for terminating traffic, and bill-and-keep may not 
enable the recovery of such costs from other carriers. The Commission 
also expressed concern that, in a reciprocal compensation arrangement, 
bill-and-keep may ``distort carriers' incentives, encouraging them to 
overuse competing carriers' termination facilities by seeking customers 
that primarily originate traffic.''
    510. In light of technological advancements and the rejection of 
the calling party network pays model in favor of a model that better 
tracks cost causation principles, the Commission revisits its prior 
concerns and conclusions supporting the ``balanced traffic 
limitation.'' First, the Commission rejects claims that, as a policy 
matter, bill-and-keep is only appropriate in the case of roughly 
balanced traffic. Concerns about the balance of traffic exchanged 
reflect the view that the calling party's network should bear all the 
costs of a call. Given the understanding that both the calling and 
called party benefit from a call, the ``direction'' of the traffic--
i.e., which network is originating or terminating the call--is no 
longer as relevant. Under bill-and-keep, ``success in the marketplace 
will reflect a carrier's ability to serve customers efficiently, rather 
than its ability to extract payments from other carriers.'' 
Additionally, bill-and-keep is most consistent with the models used for 
wireless and IP networks, models that have flourished and promoted 
innovation and investment without any symmetry or balanced traffic 
requirement.
    511. Second, as already explained, the Commission rejects the 
assertion that bill-and-keep does not enable cost recovery. Although a 
bill-and-keep approach will not provide for the recovery of certain 
costs via intercarrier compensation, it will still allow for cost 
recovery via end-user compensation and, where necessary, explicit 
universal service support. The Commission finds that although the 
statute provides that each carrier will have the opportunity to recover 
its costs, it does not entitle each carrier to recover those costs from 
another carrier, so long as it can recover those costs from its own end 
users and explicit universal service support where necessary.
    512. As a result, the Commission departs from the Commission's 
earlier articulated concern that bill-and-keep distorts carriers 
incentives. To the contrary, the Commission concludes, based on policy 
and economic theory, that bill-and-keep best addresses the significant 
arbitrage incentives inherent in today's system.
    513. These conclusions are consistent with the Commission's more 
recent consideration of bill-and-keep arrangements in the context of 
ISP-bound traffic. Specifically, in the 2001 ISP Remand Order, 
Intercarrier Compensation for ISP-Bound Traffic, CC Docket Nos. 96-98, 
99-68, Order on Remand and Report and Order, 66 FR 26800, May 15, 2001 
(2001 ISP Remand Order), the Commission stated that its initial 
``concerns about economic inefficiencies associated with bill and keep 
missed the mark'' because they incorrectly assumed that the ``calling 
party was the sole cost causer of the call.'' The Commission 
tentatively concluded that bill-and-keep would provide a viable 
solution to the market distortions caused by ISP-bound traffic. Indeed, 
the Commission's experience with ISP-bound traffic suggests that a 
bill-and-keep approach may be most efficient where the traffic is not 
balanced because the obligation to pay reciprocal compensation in such 
situations may give rise to uneconomic incentives. The Commission 
therefore concludes it is appropriate to repeal section 51.713 of its 
rules, 47 CFR 51.713.
2. Legal Authority
    514. The Commission's statutory authority to implement bill-and-
keep as the default framework for the exchange of traffic with LECs 
flows directly from sections 251(b)(5) and 201(b) of the Act, 47 U.S.C. 
251(b)(5), 201(b). The Commission has additional statutory authority 
under 47 U.S.C. 332 to regulate interconnection arrangements involving 
CMRS providers. Section 251(b)(5), 47 U.S.C. 251(b)(5), states that 
LECs have a ``duty to establish reciprocal compensation arrangements 
for the transport and termination of telecommunications.'' Section 
201(b), 47 U.S.C. 201(b), grants the Commission authority to 
``prescribe such rules and regulations as may be necessary in the 
public interest to carry out the provisions of this Act.'' In AT&T 
Corp. v. Iowa Utilities Board, 525 U.S. 366, 378 (1999), the Supreme 
Court held that ``the grant in Sec.  201(b) means what it says: The FCC 
has rulemaking authority to carry out the `provisions of this Act,' 
which include Sec. Sec.  251 and 252.'' As discussed below, the 
Commission may exercise this rulemaking authority to define the types 
of traffic that will be subject to 47 U.S.C. 251(b)(5)'s reciprocal 
compensation framework and to adopt a default compensation mechanism 
that will apply to such traffic in the absence of an agreement between 
the carriers involved.
    515. The Scope of 47 U.S.C. 251(b)(5). Section 251(b)(5), 47 U.S.C. 
251(b)(5) imposes on all LECs the ``duty to establish reciprocal 
compensation arrangements for the transport and termination of 
telecommunications.'' The Commission initially interpreted this 
provision to ``apply only to traffic that originates and terminates 
within a local area.'' In the 2001 ISP Remand Order, however, the 
Commission noted that its initial reading is inconsistent with the 
statutory terms. The Commission explained that 47 U.S.C. 251(b)(5) does 
not use the term ``local,'' but instead speaks more broadly of the 
transport and termination of

[[Page 81626]]

``telecommunications.'' As defined in the Act, the term 
``telecommunications'' means the ``transmission, between or among 
points specified by the user, of information of the user's choosing, 
without change in the form or content of the information as sent and 
received'' and thus encompasses communications traffic of any 
geographic scope (e.g., ``local,'' ``intrastate,'' or ``interstate'') 
or regulatory classification (e.g., ``telephone exchange service,'' 
``telephone toll service,'' or ``exchange access''). The Commission 
reiterated this interpretation of 47 U.S.C. 251(b)(5) in its 2008 Order 
and ICC/USF FNPRM, High-Cost Universal Service Support, WC Docket No. 
05-337, 03-109, 06-122, 04-36, CC Docket No. 96-45, 99-200, 96-98, 01-
92, 99-68, Order on Remand and Report and Order and Further Notice of 
Proposed Rulemaking, 73 FR 66821, Dec. 12, 2008 (2008 Order and ICC/USF 
FNPRM), and the Commission proposed in the ICC/USF Transformation NPRM 
to make clear that 47 U.S.C. 251(b)(5) applies to ``all 
telecommunications, including access traffic.''
    516. After reviewing the record, the Commission adopts its proposal 
and concludes that 47 U.S.C. 251(b)(5) applies to traffic that 
traditionally has been classified as access traffic. Nothing in the 
record seriously calls into question the Commission's conclusion that 
access traffic is one form of ``telecommunications.'' By the express 
terms of 47 U.S.C. 251(b)(5), therefore, when a LEC is a party to the 
transport and termination of access traffic, the exchange of traffic is 
subject to regulation under the reciprocal compensation framework.
    517. The Commission recognizes that the Commission has not 
previously regulated access traffic under 47 U.S.C. 251(b)(5). The 
reason, as the Commission has previously explained, is section 251(g), 
47 U.S.C. 251(g). Section 251(g), 47 U.S.C. 251(g), is a ``transitional 
device'' that requires LECs to continue ``provid[ing] exchange access, 
information access, and exchange services for such access to 
interexchange carriers and information service providers in accordance 
with the same equal access and nondiscriminatory interconnection 
restrictions and obligations (including receipt of compensation)'' 
previously in effect ``until such restrictions and obligations are 
explicitly superseded by regulations prescribed by the Commission.'' 
Section 251(g), 47 U.S.C. 251(g), thus preserved the pre-1996 Act 
regulatory regime that applies to access traffic, including rules 
governing ``receipt of compensation,'' and thereby precluded the 
application of 47 U.S.C. 251(b)(5) to such traffic ``unless and until 
the Commission by regulation should determine otherwise.''
    518. In this R&O, the Commission explicitly supersedes the 
traditional access charge regime and, subject to the transition 
mechanism outlined below, regulates terminating access traffic in 
accordance with the 47 U.S.C. 251(b)(5) framework. Consistent with its 
approach to comprehensive reform generally and the desire for a more 
unified approach, the Commission finds it appropriate to bring all 
traffic within the 47 U.S.C. 251(b)(5) regime at this time, and 
commenters generally agree. Doing so is key to advancing the 
Commission's goals of encouraging migration to modern, all IP networks; 
eliminating arbitrage and competitive distortions; and eliminating the 
thicket of disparate intercarrier compensation rates and payments that 
are ultimately borne by consumers. Even though the transition process 
detailed below is limited to terminating switched access traffic and 
certain transport traffic, the Commission makes clear that the legal 
authority to adopt the bill-and-keep methodology described herein 
applies to all intercarrier compensation traffic. As noted below, the 
Commission seeks comment on the transition and recovery for originating 
access and transport in the USF/ICC Transformation FNPRM.
    519. The Commission rejects arguments that 47 U.S.C. 251(b)(5) does 
not apply to intrastate access traffic. Like other forms of carrier 
traffic, intrastate access traffic falls within the scope of the broad 
term ``telecommunications'' used in 47 U.S.C. 251(b)(5). ``Had Congress 
intended to exclude certain types of telecommunications traffic,'' such 
as ``local'' or ``intrastate'' traffic, ``from the reciprocal 
compensation framework, it could have easily done so by using more 
restrictive terms to define the traffic subject to 47 U.S.C. 
251(b)(5).'' Nor does the Commission believe that section 2(b) of the 
Act, 47 U.S.C. 152(b), which generally preserves state authority over 
intrastate communications, bears on its interpretation of 47 U.S.C. 
251(b)(5). As the Supreme Court noted, ``[s]uch an interpretation [of 
47 U.S.C. 152(b)] would utterly nullify the 1996 amendments, which 
clearly `apply' to intrastate services, and clearly confer `Commission 
jurisdiction' over some matters.'' Indeed, if 47 U.S.C. 152(b) limited 
the scope of 47 U.S.C. 251(b)(5), the Commission could not apply the 
reciprocal compensation framework even to local traffic between a CLEC 
and an ILEC--the type of traffic that has been subject to the 
reciprocal compensation rules since the Commission implemented the 1996 
Act. The Commission sees no reason to adopt such an absurd reading of 
the statute.
    520. The Commission also rejects arguments that 47 U.S.C. 251(g) 
and 251(d)(3) somehow limit the scope of the ``telecommunications'' 
covered by 47 U.S.C. 251(b)(5). Whatever protections these provisions 
provide to state access regulations, it is clear that those protections 
are not absolute. As noted above, 47 U.S.C. 251(g) preserves access 
charge rules only during a transitional period, which ends when the 
Commission adopts superseding regulations. Accordingly, to the extent 
47 U.S.C. 251(g) has preserved state intrastate access rules against 
the operation of 47 U.S.C. 251(b)(5) until now, this rulemaking R&O 
supersedes that provision.
    521. Section 251(d)(3), 47 U.S.C. 251(d)(3), states that ``[i]n 
prescribing and enforcing regulations to implement the requirements of 
this section, the Commission shall not preclude the enforcement of any 
regulation, order, or policy of a State commission that--(A) 
establishes access and interconnection obligations of local exchange 
carriers; (B) is consistent with the requirements of this section; and 
(C) does not substantially prevent implementation of the requirements 
of this section and the purposes of this part.'' As the Commission has 
previously observed, ``section 251(d)(3) of the Act independently 
establishes a standard very similar to the judicial conflict preemption 
doctrine,'' and ``[i]ts protections do not apply when the state 
regulation is inconsistent with the requirements of section 251, or 
when the state regulation substantially prevents implementation of the 
requirements of section 251 or the purposes of sections 251 through 261 
of the Act.'' Moreover, ``in order to be consistent with the 
requirements of section 251 and not `substantially prevent' 
implementation of section 251 or Part II of Title II, state 
requirements must be consistent with the FCC's implementing 
regulations.'' In other words, 47 U.S.C. 251(d)(3) instructs the 
Commission not to preempt state regulations that are consistent with 
and promote federal rules and policies, but it does not protect state 
regulations that frustrate the Act's policies or the Commission's 
implementation of the statute's requirements. As discussed in this R&O, 
the Commission is bringing all telecommunications traffic terminated on 
LECs, including intrastate switched access traffic, into the 47 U.S.C. 
251(b)(5) framework to fulfill the

[[Page 81627]]

objectives of 47 U.S.C. 251(b)(5) and other provisions of the Act. 
Consequently, the Commission finds that, to the extent 47 U.S.C. 
251(d)(3) applies in this context, it does not prevent us from adopting 
rules to implement the provisions of 47 U.S.C. 251(b)(5) and applying 
those rules to traffic traditionally classified as intrastate access.
    522. Finally, the Commission rejects the view of some commenters 
that the pricing standard set forth in 47 U.S.C. 252(d)(2)(A) limits 
the scope of 47 U.S.C. 251(b)(5). As the Commission explained in the 
2008 Order and ICC/USF FNPRM, 47 U.S.C. 252(d)(2)(A)(i) ``deals with 
the mechanics of who owes what to whom, it does not define the scope of 
traffic to which section 251(b)(5) applies.'' The Commission noted that 
construing ``the pricing standards in section 252(d)(2) to limit the 
otherwise broad scope of section 251(b)(5)'' would nonsensically 
suggest that ``Congress intended the tail to wag the dog.'' The 
Commission reaffirms that conclusion here.
    523. Authority To Adopt Bill-and-Keep as a Default Compensation 
Standard. The Commission concludes that it has the statutory authority 
to establish bill-and-keep as the default compensation arrangement for 
all traffic subject to 47 U.S.C. 251(b)(5). That includes traffic that, 
prior to this R&O, was subject to the interstate and intrastate access 
regimes, as well as traffic exchanged between two LECs or a LEC and a 
CMRS carrier.
    524. Section 201(b), 47 U.S.C. 201(b) states that ``[t]he 
Commission may prescribe such rules and regulations as may be necessary 
in the public interest to carry out the provisions of this Act.'' As 
the Supreme Court held in Iowa Utilities Board, section 201(b) of the 
Act, 47 U.S.C. 201(b), ``means what it says: The FCC has rulemaking 
authority to carry out the `provisions of this Act,' which include 
Sec. Sec.  251 and 252.'' Moreover, section 251(i) of the Act, 47 
U.S.C. 251(i), states that ``[n]othing in this section [section 251] 
shall be construed to limit or otherwise affect the Commission's 
authority under section 201.'' Section 251(i), 47 U.S.C. 251(i), 
``fortifies [our] position'' that the Commission has the authority to 
regulate the default compensation arrangement applicable to traffic 
subject to 47 U.S.C. 251(b)(5).
    525. The Commission concludes that it has the statutory authority 
to establish bill-and-keep as a default compensation mechanism with 
respect to interstate traffic subject to 47 U.S.C. 251(b)(5). Section 
201, 47 U.S.C. 201, has long conferred authority on the Commission to 
regulate interstate communications to ensure that ``charges, practices, 
classifications, and regulations'' are ``just and reasonable'' and not 
unreasonably discriminatory. Indeed, the D.C. Circuit recently upheld 
the Commission's authority under 47 U.S.C. 201 to establish interim 
rates for ISP-bound traffic, which the Commission had found to also be 
subject to 47 U.S.C. 251(b)(5).
    526. In any event, the Commission concludes that it has authority, 
independent of its traditional interstate rate-setting authority in 47 
U.S.C. 201, to establish bill-and-keep as the default compensation 
arrangement for all traffic subject to 47 U.S.C. 251(b)(5), including 
intrastate traffic. Although section 2(b), 47 U.S.C. 152(b) has 
traditionally preserved the states' authority to regulate intrastate 
communications, after the 1996 Act section 2(b) has ``less practical 
effect'' because ``Congress, by extending the Communications Act into 
local competition, has removed a significant area from the States' 
exclusive control.'' Thus, ``[w]ith regard to the matters addressed by 
the 1996 Act,'' Congress ``unquestionably'' ``has taken the regulation 
of local telecommunications competition away from the States,'' and, as 
the Supreme Court has held, ``the administration of the new federal 
regime is to be guided by federal-agency regulations.'' The rulemaking 
authority in section 201(b), 47 U.S.C. 152(b) ``explicitly gives the 
FCC jurisdiction to make rules governing matters to which the 1996 Act 
applies'' and thereby authorizes the Commission's adoption of rules to 
implement 47 U.S.C. 251(b)(5)'s directive that LECs have a ``duty to 
establish reciprocal compensation arrangements for the transport and 
termination of telecommunications.''
    527. The Commission rejects the argument of some commenters that 47 
U.S.C. 252(c) and 252(d)(2) limit its authority to adopt bill-and-keep. 
Section 252(c), 47 U.S.C. 252(c), provides that states conducting 
arbitration proceedings under section 252 shall ``establish any rates 
for interconnection, services, or network elements according to'' 
section 252(d), 47 U.S.C. 252(d). Section 252(d)(2), 47 U.S.C. 252(d), 
in turn, states in relevant part that ``[f]or the purposes of 
compliance by an incumbent local exchange carrier with section 
251(b)(5), a State commission shall not consider the terms and 
conditions for reciprocal compensation to be just and reasonable'' 
unless they: (i) ``provide for the mutual and reciprocal recovery by 
each carrier of costs associated with the transport and termination on 
each carrier's network facilities of calls that originate on the 
network facilities of the other carrier;'' and (ii) determine such 
costs through a ``reasonable approximation of the additional costs of 
terminating such calls.'' Section 252(d)(2), 47 U.S.C. 252(d)(2), also 
states that the pricing standard it sets forth ``shall not be construed 
* * * to preclude arrangements * * * that waive mutual recovery (such 
as bill-and-keep arrangements).'' Although the Supreme Court made clear 
that the Commission may, through rulemaking, establish a ``pricing 
methodology'' under 47 U.S.C. 252(d) for states to apply in arbitration 
proceedings, the Eighth Circuit has held that ``[s]etting specific 
[reciprocal compensation] prices goes beyond the FCC's authority to 
design a pricing methodology and intrudes on the states' right to set 
the actual rates pursuant to Sec.  252(c)(2).'' Commenters who cite 47 
U.S.C. 252(d) as a limitation on the Commission's authority to adopt 
bill-and-keep argue that bill-and-keep intrudes on states' rate-setting 
authority by effectively setting a compensation rate of zero.
    528. The Commission disagrees for two reasons. First, the pricing 
standard in 47 U.S.C. 252(d) simply does not apply to most of the 
traffic that is the focus of this R&O--traffic exchanged between LECs 
and IXCs. Section 252(d), 47 U.S.C. 252(d), applies only to traffic 
exchanged with an ILEC, so CLEC-IXC traffic is categorically beyond its 
scope. Even with respect to traffic exchanged with an ILEC, 47 U.S.C. 
252(d) applies only to arrangements between carriers where the traffic 
``originate[s] on the network facilities of the other carrier,'' i.e., 
the carrier sending the traffic for transport and termination. IXCs, 
however, typically do not originate (or terminate) calls on their own 
network facilities but instead transmit calls that originate and 
terminate on distant LECs. Accordingly, to the extent the bill-and-keep 
rules apply to LEC-IXC traffic, the rules do not implicate any question 
of the states' authority under 47 U.S.C. 252(c) or (d) or the Eighth 
Circuit's interpretation of those provisions.
    529. Second, and in any event, bill-and-keep is consistent with 
section 252(d)'s pricing standard. Section 252(d)(2)(B), 47 U.S.C. 
252(d)(2)(B) makes clear that ``arrangements that waive mutual recovery 
(such as bill-and-keep arrangements)'' are consistent with section 
252(d)'s pricing standard. Although bill-and-keep by definition 
``waive[s] mutual recovery'' 47 U.S.C. 252(d)(2)(B)(i), in that 
carriers do not pay each other for transporting and terminating calls, 
a bill-and-keep framework provides for ``reciprocal''

[[Page 81628]]

recovery because each carrier exchanging traffic is entitled to recover 
their costs through the same mechanism, i.e., through the rates they 
charge their own customers. As explained in the Local Competition First 
Report and Order, Implementation of the Local Competition Provisions in 
the Telecommunications Act of 1996, CC Docket Nos. 96-98, 95-185, First 
Report and Order, 61 FR 45476, Aug. 29, 1996 (Local Competition First 
Report and Order), this provision precludes any argument that ``the 
Commission and states do not have the authority to mandate bill-and-
keep arrangements'' or that bill-and-keep is permissible only if it is 
voluntarily agreed to by the carriers involved. Bill-and-keep also 
ensures ``recovery of each carrier of costs'' associated with transport 
and termination. The Act does not specify from whom each carrier may 
(or must) recover those costs and, under the approach the Commission 
adopts, each carrier will ``recover'' its costs from its own end users 
or from explicit support mechanisms such as the federal universal 
service fund. The economic premise of a bill-and-keep regime differs 
from the calling party network pays (CPNP) philosophy of cost 
causation. Under CPNP thinking, the party that initiated the call is 
receiving the most benefit from that call. Under the bill-and-keep 
methodology the economic premise is that both the calling and the 
called party benefit from the ability to exchange traffic, i.e., being 
interconnected. This is consistent with policy justifications for bill-
and-keep described in the Intercarrier Compensation NPRM in which the 
Commission said ``there may be no reason why both LECs should not 
recover the costs of providing these benefits directly from their end 
users. Bill-and-keep provides a mechanism whereby end users pay for the 
benefit of making and receiving calls.'' Thus, bill-and-keep will not 
limit the amount of a carrier's cost recovery, but instead will alter 
the source of the cost recovery--network costs would be recovered from 
carriers' customers supplemented as necessary by explicit universal 
service support, rather than from other carriers.
    530. Finally, even assuming 47 U.S.C. 252(d) applies, adoption of 
bill-and-keep as a default compensation mechanism would not intrude on 
the states' role to set rates as interpreted by the Eighth Circuit. To 
the extent the traffic at issue is intrastate in nature and subject to 
47 U.S.C. 252(d)'s pricing standard, states retain the authority to 
regulate the rates that the carriers will charge their end users to 
recover the costs of transport and termination to ensure that such 
rates are ``just and reasonable.'' Moreover, states will retain 
important responsibilities in the implementation of a bill-and-keep 
framework. An inherent part of any rate setting process is not only the 
establishment of the rate level and rate structure, but the definition 
of the service or functionality to which the rate will apply. Under a 
bill-and-keep framework, the determination of points on a network at 
which a carrier must deliver terminating traffic to avail itself of 
bill-and-keep (sometimes known as the ``edge'') serves this function, 
and will be addressed by states through the arbitration process where 
parties cannot agree on a negotiated outcome. Depending upon how the 
``edge'' is defined in particular circumstances, in conjunction with 
how the carriers physically interconnect their networks, payments still 
could change hands as reciprocal compensation even under a bill-and-
keep regime where, for instance, an IXC pays a terminating LEC to 
transport traffic from the IXC to the edge of the LEC's network. This 
statement does not suggest any particular outcome with respect to the 
definition of the ``edge,'' which is an issue the Commission seeks 
comment on in the USF/ICC Transformation FNPRM. Consistent with their 
existing role under 47 U.S.C. 251 and 252, which the Commission does 
not expand or contract, states will continue to have the responsibility 
to address these issues in state arbitration proceedings, which the 
Commission believes is sufficient to satisfy any statutory role that 
the states have under 47 U.S.C. 252(d) to ``determin[e] the concrete 
result in particular circumstances'' of the bill-and-keep framework the 
Commission adopts.
    531. Originating Access. Some parties contend that the Commission 
lacks authority over originating access charges under 47 U.S.C. 
251(b)(5) because that section refers only to transport and 
termination. Other commenters urge the Commission to act swiftly to 
eliminate originating access charges. Although the Commission concludes 
that the originating access regime should be reformed, at this time the 
Commission establishes a transition to bill-and-keep only with respect 
to terminating access charge rates. The concerns the Commission has 
with respect to network inefficiencies, arbitrage, and costly 
litigation are less pressing with respect to originating access, 
primarily because many carriers now have wholesale partners or have 
integrated local and long distance operations.
    532. As discussed above, 47 U.S.C. 251(g) provides for the 
continued enforcement of certain pre-1996 Act obligations pertaining to 
``exchange access'' until ``such restrictions and obligations are 
explicitly superseded by regulations prescribed by the Commission.'' 
Exchange access is defined to mean ``the offering of access to 
telephone exchange services or facilities for the purpose of the 
origination or termination of telephone toll services.'' Thus, 47 
U.S.C. 251(g) continues to preserve originating access until the 
Commission adopts rules to transition away from that system. At this 
time, the Commission adopts transition rules only with respect to 
terminating access and seeks comment in the USF/ICC Transformation 
FNPRM on the ultimate transition away from such charges as part of the 
transition of all access charge rates to bill-and-keep. In the 
meantime, the Commission will cap interstate originating access rates 
at their current level, pending resolution of the issues raised in the 
USF/ICC Transformation FNPRM.
    533. Section 332 and Wireless Traffic. With respect to wireless 
traffic exchanged with a LEC, the Commission has independent authority 
under section 332 of the Act, 47 U.S.C. 332, to establish a default 
bill-and-keep methodology that will apply in the absence of an 
interconnection agreement. Although the Commission has not previously 
exercised its authority under 47 U.S.C. 332 to reform intercarrier 
compensation charges paid by or to wireless providers, the Commission 
has clear authority to do so, and this authority extends to both 
interstate and intrastate traffic. The Eighth Circuit has construed the 
Act to authorize the Commission to set reciprocal compensation rates 
for CMRS providers. In reaching that decision, the court relied on: (a) 
47 U.S.C. 332(c)(1)(B), which obligates LECs to interconnect with 
wireless providers ``pursuant to the provisions of section 201;'' (b) 
section 2(b), 47 U.S.C. 152(b), which provides that the Act should not 
be construed to apply or to give the Commission jurisdiction with 
respect to charges in connection with intrastate communication service 
by radio ``[e]xcept as provided in * * * section 332;'' and (c) the 
preemptive language in 47 U.S.C. 332(c)(3)(A), which prohibits states 
from regulating the entry of or the rates charged by CMRS providers. 
The DC Circuit likewise recently acknowledged the Commission's 
authority in this regard, observing that the Commission historically 
had elected to leave

[[Page 81629]]

intrastate access rates imposed on CMRS providers to state regulation, 
and recognizing: ``That the FCC can issue guidance does not mean it 
must do so.'' Accordingly, the Commission concludes that it has 
separate authority under 47 U.S.C. 201 and 332(c) to establish rules 
governing the exchange of both intrastate and interstate traffic 
between LECs and CMRS carriers.
    534. Section 254(k). The Commission also rejects the claims of some 
commenters that a bill-and-keep approach would violate 47 U.S.C. 254(k) 
of the Act. Section 254(k) of the Act, 47 U.S.C. 254(k), states that a 
telecommunications carrier ``may not use services that are not 
competitive to subsidize services that are subject to competition,'' 
and that the Commission ``shall establish any necessary cost allocation 
rules, accounting safeguards, and guidelines to ensure that services 
included in universal service bear no more than a reasonable share of 
the joint and common costs of facilities used to provide those 
services.'' Some parties express concern that, under a bill-and-keep 
regime, retail voice telephone services subject to universal service 
support would bear more than ``a reasonable share of the joint and 
common costs.''
    535. The United States Court of Appeals for the Eighth Circuit 
previously considered and rejected similar arguments concerning the 
reallocation of loop costs between end users and IXCs. Specifically, 
the court considered whether the recovery of joint and common costs 
must be borne mutually by end-users and by IXCs, and whether a shift in 
cost recovery from IXCs to end-users violated 47 U.S.C. 254(k) of the 
Act. As to the first provision of 47 U.S.C. 254(k), the court found 
that ``[s]ection 254(k) was not designed to regulate the apportionment 
of loop costs between end-users and IXCs because this allocation does 
not involve improperly shifting costs from a competitive to a non-
competitive service,'' even if ``a LEC allocates all of its local loop 
costs to the end-user.'' Further, the court disagreed that an increase 
in the SLC price cap violates the second part of 254(k) by causing 
services included in the definition of universal service to bear more 
than a reasonable share of the joint and common costs of facilities 
used to provide those services. The court explained that the ``SLC is a 
method of recovering loop costs, not an allocation of costs between 
supported and unsupported services'' in violation of 47 U.S.C. 254(k). 
The Commission concurs with the Eighth Circuit's analysis and concludes 
that it applies equally in this context. A bill-and-keep framework 
resolves whether a carrier will recover its costs from its end users or 
from other carriers; the underlying service whose costs are being 
recovered is the same, however, so no costs are being improperly 
shifted between competitive and non-competitive services for purposes 
of 47 U.S.C. 254(k).

B. Federal/State Roles in Implementing Bill-and-Keep

    536. The Commission now concludes that a uniform, national 
framework for the transition of intercarrier compensation to bill-and-
keep, with an accompanying federal recovery mechanism, best advances 
the Commission's policy goals of accelerating the migration to all IP 
networks, facilitating IP-to-IP interconnection, and promoting 
deployment of new broadband networks by providing certainty and 
predictability to carriers and investors. Although states will not set 
the transition for intrastate rates under this approach, the Commission 
does follow the State Member's proposal regarding recovery coming from 
the federal jurisdiction. Doing so takes a potentially large financial 
burden away from states. States will also help implement the bill-and-
keep methodology: They will continue to oversee the tariffing of 
intrastate rate reductions during the transition period as well as 
interconnection negotiations and arbitrations pursuant to 47 U.S.C. 251 
and 252, and will have responsibility for determining the network 
``edge'' for purposes of bill-and-keep.
    537. Today, intrastate access rates vary widely. In many states, 
intrastate rates are significantly higher than interstate rates; in 
others, intrastate and interstate rates are at parity; and in still 
other states, intrastate access rates are below interstate levels. The 
varying rates have created incentives for arbitrage and pervasive 
competitive distortions within the industry. Equally important, 
consumers may not receive adequate price signals to make economically 
efficient choices because local and long-distance rates do not 
necessarily reflect the underlying costs of their calls. Depending on 
their regulatory classification, some carriers charge and collect 
intercarrier compensation charges, while other carriers do not. A bill-
and-keep system will ultimately eliminate the competitive distortions 
and consumer inequities that arise today when different carriers that 
use differing technologies (wireline, wireless, VoIP) to perform the 
same function--complete a call--are subject to different regulatory 
classifications and requirements.
    538. Providing a uniform national transition and recovery 
framework, to be implemented in partnership with the states, will 
achieve the benefits of a uniform system and realize the goals of 
reducing arbitrage and promoting investment in IP networks as quickly 
as possible. By transitioning all traffic in a coordinated manner, the 
Commission will minimize opportunities for arbitrage that could be 
presented by disparate intrastate rates. For example, the Commission's 
approach will reduce the potential for arbitrage that could result from 
a widening gap between intrastate and interstate rates if the 
Commission were to initially reduce interstate rates only. In addition, 
a coordinated transition involving both intrastate and interstate 
traffic will help to align principles of cost causation and provide 
appropriate pricing signals to end users. Whether completing an 
interstate or intrastate call, consumers will benefit from a unified 
system in which arbitrage opportunities that inequitably shift costs 
among consumers are reduced.
    539. By moving in a coordinated manner to address the intercarrier 
compensation system for all traffic, the Commission will also help to 
ensure that there is no disruption in the transition to more efficient 
forms of all IP networks. The record suggests that a ``federally 
managed, geographically neutral'' intercarrier compensation regime that 
eliminates incentives for arbitrage will allow service providers to 
deploy resources in more productive ways. In addition, a unified 
approach for all ICC traffic will help remove obstacles to progress 
toward all-IP networks where jurisdictional boundaries become less 
relevant. In sum, the Commission's approach helps to ensure that the 
intercarrier compensation modernization effort will continue apace 
without unnecessary delays needed to harmonize disparate state actions.
    540. Although several states have sought to reform intrastate 
access rates, significant challenges remain that could impede the 
comprehensive reform efforts absent a uniform, national transition. 
Under the direction of both state commissions and legislatures, states 
have taken a variety of approaches to reform. In some states, these 
efforts have resulted in intrastate access rate levels coming to parity 
with interstate levels. In other states, reform has led to reductions 
in intrastate rate levels, but rates remain above interstate levels. 
Although many states may genuinely desire to advance additional 
reforms,

[[Page 81630]]

the challenges posed by a state-by-state process would likely result in 
significant variability and unpredictability of outcomes. Moreover, 
some state commissions lack authority to address intrastate access 
reform, and the Commission is concerned that many states will be unable 
to complete reforms in a timely manner or will otherwise decline to 
act. Indeed, the Missouri Commission endorsed a 47 U.S.C. 251(b)(5) 
approach because ``states should not be allowed to delay access 
reform.'' The lack of certainty and predictability for the industry 
without a uniform framework is a significant concern. Carriers and 
investors need predictability to make investment and deployment 
decisions and lack of certainty regarding intrastate access rates or 
recovery hampers these efforts. In addition some parties warned that it 
would be ``extremely costly'' to participate in ``the multitude'' of 
state commission proceedings that would follow from an approach relying 
on dozens of different state transitions and recovery frameworks.
    541. In addition, as noted above, adopting a uniform federal 
transition and recovery mechanism will free states from potentially 
significant financial burdens. The recovery mechanism will provide 
carriers with recovery for reductions to eligible interstate and 
intrastate revenue. As a result, states will not be required to bear 
the burden of establishing and funding state recovery mechanisms for 
intrastate access reductions, while states will continue to play a role 
in implementation. Furthermore, the Residential Rate Ceiling adopted as 
part of the recovery mechanism will help ensure that consumer telephone 
rates remain affordable, and will also recognize so-called ``early 
adopter'' states that have already undertaken reform of intrastate 
access charges and rebalanced rates.
    542. Some commenters argued that the uniform approach the 
Commission takes is inappropriate because states should be allowed to 
pursue tailored intrastate access reforms. The Commission appreciates 
and respects the expertise and on-the-ground knowledge of its state 
partners concerning intrastate telecommunications. Indeed, as the 
Commission has said, states will have responsibility for implementing 
the bill-and-keep methodology adopted herein and will continue to 
oversee the tariffing of intrastate rates during the transition period 
and interconnection negotiations and arbitrations pursuant to 47 U.S.C. 
252, as well as determine the network ``edge'' for purposes of bill-
and-keep. With respect to the ultimate ICC framework and the 
intervening transition, however, the Commission finds that a uniform 
national approach will best create predictability for carriers and 
promote efficient pricing and new investment to the benefit of 
consumers.

C. Transition

    543. In light of the decision to adopt a uniform federal transition 
to bill-and-keep, in this section the Commission sets out a default 
transition path for terminating end office switching and certain 
transport rate elements to begin that process. The Commission also 
begins the process of reforming other rate elements by capping all 
interstate rate elements as of the effective date of the rules adopted 
pursuant to this R&O, and capping terminating intrastate rates for all 
carriers. Doing so ensures that no rates increase during reform, and 
that carriers do not shift costs between or among other rate elements, 
which would be counter to the principles the Commission adopts. And, 
this transition will help minimize disruption to consumers and service 
providers by giving parties time, certainty, and stability as they 
adjust to an IP world and a new compensation regime.
    544. The Commission sets forth a transition path for terminating 
end office switching and certain transport rate elements and reciprocal 
compensation charges in Figure 9. In brief, the transition plan first 
focuses on the transition for terminating traffic, which is where the 
most acute intercarrier compensation problems, such as arbitrage, 
currently arise. The Commission believes that limiting reductions at 
this time to terminating access rates will help address the majority of 
arbitrage and manage the size of the access replacement mechanism. The 
Commission also takes measures to start reforming other elements as 
well by capping all interstate switched access rates in effect as of 
the effective date of the rules, including originating access and all 
transport rates. Absent such action, rate-of-return carriers could 
shift costs between or among other rate elements and rates to 
interconnecting carriers could continue to increase as they have been 
in the past years, which is counter to the reform the Commission 
adopts. Even so, the Commission does not specify the transition to 
reduce these rates further at this time. Instead, the Commission seeks 
comment regarding the transition and recovery for such other rate 
elements in the USF/ICC Transformation FNPRM.
    545. Thus, at the outset of the transition, all interstate switched 
access and reciprocal compensation rates will be capped at rates in 
effect as of the effective date of the rules. This will ensure that 
carriers do not seek to inflate their access charges in advance of the 
Commission's reforms. Specifically, the Commission caps all rate 
elements in the ``traffic sensitive basket'' and the ``trunking 
basket'' as described in 47 CFR 61.42(d)(2)-(3) unless a price cap 
carrier made a tariff filing increasing any such rate element prior to 
the effective date of the rules and such change was not yet in effect. 
The Commission caps these rates as of the effective date of the R&O, as 
opposed to a future date such as January 1, 2012, to ensure that 
carriers cannot make changes to rates or rate structures to their 
benefit in light of the reforms adopted in this R&O. For price cap 
carriers, all intrastate rates will also be capped, and, for rate-of-
return carriers, all terminating intrastate access rates will also be 
capped. Consistent with many proposals in the record, the transition 
plan provides rate-of-return carriers, whose rates typically are 
higher, additional time to transition as appropriate. Specifically, the 
Commission concludes that a six-year transition for price cap carriers 
and competitive LECs that benchmark to price cap carrier rates and a 
nine-year transition for rate-of-return carriers and competitive LECs 
that benchmark to rate-of-return carrier rates to transition rates to 
bill-and-keep strikes an appropriate balance that will moderate 
potential adverse effects on consumers and carriers of moving too 
quickly from the existing intercarrier compensation regimes.

[[Page 81631]]



                Intercarrier Compensation Reform Timeline
------------------------------------------------------------------------
                                  For price cap      For rate-of-return
                               carriers and CLECs    carriers and CLECs
       Effective date            that benchmark        that benchmark
                                 access rates to    access rates to rate-
                               price cap carriers    of-return carriers
------------------------------------------------------------------------
Effective Date of the rules.  All intercarrier      All interstate
                               switched access       switched access
                               rate elements,        rate elements,
                               including             including all
                               interstate and        originating and
                               intrastate            terminating rates
                               originating and       and reciprocal
                               terminating rates     compensation rates
                               and reciprocal        are capped.
                               compensation rates    Intrastate
                               are capped.           terminating rates
                                                     are also capped.
July 1, 2012................  Intrastate            Intrastate
                               terminating           terminating
                               switched end office   switched end office
                               and transport         and transport
                               rates, originating    rates, originating
                               and terminating       and terminating
                               dedicated             dedicated
                               transport, and        transport, and
                               reciprocal            reciprocal
                               compensation rates,   compensation rates,
                               if above the          if above the
                               carrier's             carrier's
                               interstate access     interstate access
                               rate, are reduced     rate, are reduced
                               by 50 percent of      by 50 percent of
                               the differential      the differential
                               between the rate      between the rate
                               and the carrier's     and the carrier's
                               interstate access     interstate access
                               rate.                 rate.
July 1, 2013................  Intrastate            Intrastate
                               terminating           terminating
                               switched end office   switched end office
                               and transport rates   and transport rates
                               and reciprocal        and reciprocal
                               compensation, if      compensation, if
                               above the carrier's   above the carrier's
                               interstate access     interstate access
                               rate, are reduced     rate, are reduced
                               to parity with        to parity with
                               interstate access     interstate access
                               rate.                 rate.
July 1, 2014................  Terminating switched  Terminating switched
                               end office and        end office and
                               reciprocal            reciprocal
                               compensation rates    compensation rates
                               are reduced by one-   are reduced by one-
                               third of the          third of the
                               differential          differential
                               between end office    between end office
                               rates and $0.0007.*   rates and $0.005.*
July 1, 2015................  Terminating switched  Terminating switched
                               end office and        end office and
                               reciprocal            reciprocal
                               compensation rates    compensation rates
                               are reduced by an     are reduced by an
                               additional one-       additional one-
                               third of the          third of the
                               original              original
                               differential to       differential to
                               $0.0007.*             $0.005.*
July 1, 2016................  Terminating switched  Terminating switched
                               end office and        end office and
                               reciprocal            reciprocal
                               compensation rates    compensation rates
                               are reduced to        are reduced to
                               $0.0007.*             $0.005.*
July 1, 2017................  Terminating switched  Terminating end
                               end office and        office and
                               reciprocal            reciprocal
                               compensation rates    compensation rates
                               are reduced to bill-  are reduced by one-
                               and-keep.             third of the
                               Terminating           differential
                               switched end office   between its end
                               and transport are     office rates
                               reduced to $0.0007    ($0.005) and
                               for all terminating   $0.0007.*
                               traffic within the
                               tandem serving area
                               when the
                               terminating carrier
                               owns the serving
                               tandem switch.
July 1, 2018................  Terminating switched  Terminating switched
                               end office and        end office and
                               transport are         reciprocal
                               reduced to bill-and-  compensation rates
                               keep for all          are reduced by an
                               terminating traffic   additional one-
                               within the tandem     third of the
                               serving area when     differential
                               the terminating       between its end
                               carrier owns the      office rates as of
                               serving tandem        July 1, 2016 and
                               switch.               $0.0007.*
July 1, 2019................  ....................  Terminating switched
                                                     end office and
                                                     reciprocal
                                                     compensation rates
                                                     are reduced to
                                                     $0.0007.*
July 1, 2020................  ....................  Terminating switched
                                                     end office and
                                                     reciprocal
                                                     compensation rates
                                                     are reduced to bill-
                                                     and-keep.*
------------------------------------------------------------------------
Figure 9
* Transport rates remain unchanged from the previous step.

    546. The Commission notes that CMRS providers are subject to 
mandatory detariffing. Nonetheless, CMRS providers are included in the 
transition to the extent their reciprocal compensation rates are 
inconsistent with the reforms the Commission adopts here. The 
Commission also notes that carriers remain free to make elections 
regarding participation in the NECA pool and tariffing processes during 
the transition. See 47 CFR 69.601 et seq.
    547. The Commission believes that these transition periods strike 
the right balance between its commitment to avoid flash cuts and 
enabling carriers sufficient time to adjust to marketplace changes and 
technological advancements, while furthering the Commission's overall 
goal of promoting a migration to modern IP networks. The Commission 
finds that consumers will benefit from this regulatory transition, 
which enables their providers to adapt to the changing regulatory and 
technical landscape and will enable a faster and more efficient 
introduction of next-generation services.
    548. The transition the Commission adopts is partially based on a 
stakeholder proposal, with certain modifications, including the 
adoption of a bill-and-keep methodology as the end state for all 
traffic. As explained further below, states will play a key role in 
implementing the framework the Commission adopts. In particular, states 
will oversee changes to intrastate access tariffs to ensure that 
modifications to intrastate tariffs are consistent with the new 
framework and rules.. For example, states will help guard against 
carriers improperly moving costs between or among different rate 
elements to reap a windfall from reform.
    549. Since intercarrier compensation charges are constrained by the 
transition glide path that the Commission adopts, the Commission will 
be monitoring to ensure that carriers do not shift costs to other rate 
elements that are not specifically covered, such as special access or 
common line. The Commission also clarifies that, in cases where a 
provider's interstate terminating access rates are higher than its 
intrastate terminating access rates, intrastate rate reductions shall 
begin to occur at the stage of the transition in which interstate rates 
come to parity with intrastate rate levels.
    550. The transition imposes a cap on originating intrastate access 
charges for price cap carriers at current rates as of the effective 
date of the rules. The transition does not cap originating intrastate 
access charges for rate-of-return carriers. Rate-of-return carriers 
suggested that it would not be viable for them to reduce terminating 
switched rates, while at the same time reducing originating rates 
without overburdening the Universal Service Fund. In the meantime, 
rate-of-return carriers indicate that the wholesale long distance 
market will constrain originating rates. Given its commitment to 
control the size of the CAF and minimize burdens on consumers, the 
Commission does not cap intrastate

[[Page 81632]]

originating access charges for rate-of-return carriers at this time. As 
noted above, the Commission has placed priority on reform of 
terminating access charges and the Commission is mindful of the 
compromises that must be made to accomplish meaningful reform in a 
measured and timely manner. In the USF/ICC Transformation FNPRM, the 
Commission seeks comment on the transition of all originating access 
charges to bill-and-keep, including originating intrastate access 
charges for rate-of-return carriers.
    551. CMRS Providers. As noted above, CMRS providers will be subject 
to the transition applicable to price cap carriers. Although CMRS 
providers are subject to mandatory detariffing, these providers are 
included to the extent their reciprocal compensation rates are 
inconsistent with the reforms the Commission adopts here. The 
Commission also addresses compensation for non-access traffic exchanged 
between LECs and CMRS providers herein. As the Commission details in 
that section, the Commission immediately adopts bill-and-keep as the 
default compensation methodology for non-access traffic exchanged 
between LECs and CMRS providers under section 20.11 of its rules, 47 
CFR 20.11, and Part 51, 47 CFR part 51.
    552. Competitive LECs. To ensure smooth operation of the 
transition, the Commission provides competitive LECs that benchmark 
their rates a limited allowance of additional time to make tariff 
filings during the transition period. Application of the access reforms 
will generally apply to competitive LECs via the CLEC benchmarking 
rule. In cases where more than one incumbent LEC operates within a 
competitive LEC's service area and those incumbent LECs are both price 
cap and rate-of-return regulated, a question may arise as to the 
appropriate transition track for the competitive LEC. If the 
competitive LEC tariffs a benchmarked or average rate in such 
circumstances, that competitive LEC shall adopt the transition path 
applicable to the majority of lines capable of being served in its 
territory. For example, if price cap carriers serve 70 percent of a 
competitive LEC's service territory and rate-of-return carriers serve 
30 percent of the service territory, then the competitive LEC using a 
blended rate should follow the price cap transition. For interstate 
switched access rates, competitive LECs are permitted to tariff 
interstate access charges at a level no higher than the tariffed rate 
for such services offered by the incumbent LEC serving the same 
geographic area (the benchmarking rule). There are two exceptions to 
the general benchmarking rule. First, rural competitive LECs offering 
service in the same areas as non-rural incumbent LECs are permitted to 
``benchmark'' to the access rates prescribed in the NECA access tariff, 
assuming the highest rate band for local switching (the rural 
exemption). Second, as explained above, competitive LECs meeting the 
access revenue sharing definition are required to benchmark to the 
lowest interstate switched access rate of a price cap LEC in the state. 
Because the Commission retains the CLEC benchmark rule during the 
transition, the Commission allows competitive LECs an extra 15 days 
from the effective date of the tariff to which a competitive LEC is 
benchmarking to make its filing(s). The Commission emphasizes that the 
rates that are filed by the competitive LEC must comply with the 
applicable benchmarking rate. As is the case now, the Commission 
declines to adopt rules governing the rates that competitive LECs may 
assess on their end users.
    553. The Commission also declines to adopt a separate and longer 
transition period for competitive LECs, as suggested by some 
commenters. For one, competitive LEC rates are already at or near 
parity for many if not all access rates. Due to the operation of the 
Commission's CLEC benchmark rules, competitive LEC tariffed access 
rates are largely already at parity with incumbent LEC rates. And, in a 
large number of states, competitive LEC intrastate access rates are at 
or near parity to those of the incumbent LEC, as well. Thus, the 
Commission does not find a sufficient basis for creating a separate 
transition for competitive LECs. Moreover, the transition periods of 
six and nine years are sufficiently long to permit advance planning and 
represent a careful balance of the interests of all stakeholders. As a 
result, the Commission concludes that a uniform approach for all LECs 
is preferable and does not find compelling evidence to depart from the 
important policy objectives underlying the CLEC benchmarking rule. 
Further, new arbitrage opportunities could arise and increased 
regulatory oversight would be necessary were the Commission to abandon 
the CLEC benchmarking rule.
1. Authority To Specify the Transition
    554. Specifying the timing and steps for the transition to bill-
and-keep requires us to make a number of line-drawing decisions. 
Although the Commission could avoid those decisions by moving to bill-
and-keep immediately, such a flash cut would entail significant market 
disruption to the detriment of consumers and carriers alike. As the DC 
Circuit has recognized, ``[w]hen necessary to avoid excessively 
burdening carriers, the gradual implementation of new rates and 
policies is a standard tool of the Commission,'' and the transition 
``may certainly be accomplished gradually to permit the affected 
carriers, subscribers and state regulators to adjust to the new pricing 
system, thus preserving the efficient operation of the interstate 
telephone network during the interim.'' Thus, ``[i]t is reasonable for 
the FCC to take into account the ability of the industry to adjust 
financially to changing policies,'' and ``[i]nterim solutions may need 
to consider the past expectations of parties and the unfairness of 
abruptly shifting policies.'' In such circumstances, ``the FCC should 
be given `substantial deference' when acting to impose interim 
regulations.''
    555. In the Commission's judgment, the framework that it adopts 
carefully balances the potential industry disruption for both payers 
and recipients of intercarrier compensation as the Commission 
transitions to a new intercarrier compensation regime more broadly. It 
is particularly appropriate for the Commission to exercise its 
authority to craft a transition plan in this context, where the 
Commission is acting, as it has in prior orders, to reconcile the 
``implicit tension between'' the Act's goals of ``moving toward cost-
based rates and protecting universal service.''
2. Implementation Issues
    556. Role of Tariffs. Under today's intercarrier compensation 
system, carriers typically tariff their access charges. To avoid 
disruption of these well-established relationships, the Commission 
preserves a role for tariffing charges for toll traffic during the 
transition. Pursuant to the transition set forth above, the Commission 
permits LECs to tariff the default charges for intrastate toll traffic 
at the state level, and for interstate toll traffic with the 
Commission, in accordance with the timetable and rate reductions set 
forth above. At the same time, carriers remain free to enter into 
negotiated agreements that differ from the default rates established 
above, consistent with the negotiated agreement framework that Congress 
envisioned for the 251(b)(5) regime to which access traffic is 
transitioned. As an interim matter, this new regime will facilitate the 
benefits that can arise from negotiated arrangements, while also 
allowing for revenue predictability that has been associated with 
tariffing. In some respects the allowance of some tariffing may be 
similar to the wireless

[[Page 81633]]

termination tariffs for non-access traffic addressed in the 
Commission's 2005 T-Mobile Order, Developing a Unified Intercarrier 
Compensation Regime; T-Mobile et al. Petition for Declaratory Ruling 
Regarding Incumbent LEC Wireless Termination Tariffs, CC Docket No. 01-
92, Declaratory Ruling and Report and Order, 70 FR 49401, Mar. 30, 2005 
(T-Mobile Order). In that decision, the Commission prohibited the 
filing of state tariffs governing the compensation for terminating non-
access CMRS traffic because they were inconsistent with the negotiated 
agreement framework contemplated by Commission precedent and by 
Congress when it enacted 47 U.S.C. 251. The Commission does not, 
however, believe that the policies underlying the prohibition of 
wireless termination tariffs for non-access traffic in the T-Mobile 
Order preclude the allowance of certain tariffing of intercarrier 
compensation for toll traffic. Finally, during the transition, traffic 
that historically has been addressed through interconnection agreements 
will continue to be so addressed.
    557. Because carriers will be revising intrastate access tariffs to 
reduce rates for certain terminating switched access rate elements, and 
capping other intrastate rates, states will play a critical role 
implementing and enforcing intercarrier compensation reforms. The 
Commission does not cap intrastate originating access for rate-of-
return carriers in this R&O. The Commission notes that states remain 
free to do so, provided states support any recovery that may be 
necessary, and such a result would promote the goals of comprehensive 
reform adopted in the R&O. State oversight of the transition process is 
necessary to ensure that carriers comply with the transition timing and 
intrastate access charge reductions outlined above. Under the 
Commission's framework, rates for intrastate access traffic will remain 
in intrastate tariffs. As a result, to ensure compliance with the 
framework and to ensure carriers are not taking actions that could 
enable a windfall and/or double recovery, state commissions should 
monitor compliance with the rate transition; review how carriers reduce 
rates to ensure consistency with the uniform framework; and guard 
against attempts to raise capped intercarrier compensation rates, as 
well as unanticipated types of gamesmanship. Consistent with states' 
existing authority, therefore, states could require carriers to provide 
additional information and/or refile intrastate access tariffs that do 
not follow the framework or rules adopted in this R&O. Moreover, state 
commissions will continue to review and approve interconnection 
agreements and associated reciprocal compensation rates to ensure that 
they are consistent with the new federal framework and transition. 
Thus, the Commission will be working in partnership with states to 
monitor carriers' compliance with its rules, thereby ensuring that 
consumers throughout the country will realize the tremendous benefits 
of ICC reform.
    558. Price Cap Conversions. The Commission has regulated the 
provision of interstate access services by incumbent LECs, pursuant to 
either rate-of-return regulation or price cap regulation. The 
Commission has previously described the benefits that flow from the 
adoption of price cap regulation, and has allowed carriers to convert 
from rate-of-return to price cap regulation. The Commission continues 
to encourage carriers to undergo such conversions. The application of 
the Commission's reforms to proposed conversions will be addressed in 
the context of those proceedings based on the individualized situation 
of the carrier seeking to convert to price cap regulation. Similarly, 
transition issues related to rate-of-return affiliates of price cap 
holding companies will be addressed in the context of such proceedings.
    559. Existing Agreements. With respect to the impact of the 
Commission's reforms on existing agreements, the Commission emphasizes 
that its reforms do not abrogate existing commercial contracts or 
interconnection agreements or otherwise require an automatic ``fresh 
look'' at these agreements. As the Commission has recognized, both 
telecommunications carriers and their customers often benefit from 
long-term contracts--providers gain assurance of cost recovery, and 
customers (whether wholesale or end-users) may receive discounted and 
stable prices--and the Commission tries to avoid disrupting such 
contracts. Indeed, giving carriers or customers an automatic fresh look 
at existing commercial contracts or interconnection agreements could 
result in a windfall for entities that entered long-term arrangements 
in exchange for lower prices, as compared to other entities that 
avoided the risk of early termination fees by electing shorter contract 
periods at higher prices. Accordingly, the Commission declines to 
require that these existing arrangements be reopened in connection with 
the reforms in this R&O, and leaves such issues to any change-of-law 
provisions in these arrangements and commercial negotiations among the 
parties. The Commission does, however, make clear that its actions in 
this R&O constitute a change in law, and the Commission recognizes that 
existing agreements may contain change-of-law provisions that allow for 
renegotiation and/or may contain some mechanism to resolve disputes 
about new agreement language implementing new rules.
    560. Dismissal as Moot of Pending Petitions. The reforms adopted by 
this R&O render moot a petition filed by Embarq in 2008 and a petition 
filed by Michigan CLECs in 2010. The actions taken in this R&O, which 
set forth a comprehensive intercarrier compensation plan, render the 
Embarq petition moot and, the Commission further notes that CenturyLink 
has subsequently filed a letter seeking to withdraw the petition. The 
Michigan CLECs filed a petition asking the Commission to preempt 
Michigan's 2009 access restructuring law, which mandated intrastate 
access rate reductions and created an access restructuring mechanism 
that was unavailable to CLECs. Here, again, the actions the Commission 
takes in this R&O, which include bringing intrastate access traffic 
within 47 U.S.C. 251(b)(5) and subjecting that traffic to the above 
transition, address many of the access rates elements at issue in the 
Michigan CLECs' petition. To the extent that states have established 
rate reduction transitions for rate elements not reduced in this R&O, 
nothing in this R&O impacts such transitions. Nor does this R&O prevent 
states from reducing rates on a faster transition provided that states 
provide any additional recovery support that may be needed as a result 
of a faster transition. The Commission therefore dismisses the petition 
as the reforms in this R&O and the accompanying USF/ICC Transformation 
FNPRM will render it moot.
3. Other Rate Elements
    561. Originating Access. The Commission finds that originating 
charges also should ultimately be subject to the bill-and-keep 
framework. Some commenters urge that originating charges be retained, 
at least on an interim basis. Other parties express concerns with the 
retention of originating access charges. The legal framework 
underpinning the Commission's decision is inconsistent with the 
permanent retention of originating access charges. In the Local 
Competition First Report and Order, the Commission observed that 47 
U.S.C. 251(b)(5) does not address charges payable to a carrier that 
originates traffic and concluded, therefore, that such

[[Page 81634]]

charges were prohibited under that provision of the Act. Accordingly, 
the Commission finds that originating charges for all 
telecommunications traffic subject to its comprehensive intercarrier 
compensation framework should ultimately move to bill-and-keep. 
Notwithstanding this conclusion, the Commission takes immediate action 
to cap all interstate originating access charges and intrastate 
originating access charges for price cap carriers. Although the 
Commission does not establish the transition for rate reductions to 
bill-and-keep in this R&O, it seeks comment in the USF/ICC 
Transformation FNPRM on the appropriate transition and recovery 
mechanism for ultimately phasing down originating access charges. 
Meanwhile, the Commission prohibits carriers from increasing their 
originating interstate access rates above those in effect as the 
effective date of the rules. This prohibition on increasing access 
rates also applies to any remaining Primary Interexchange Carrier 
Charge in section 69.153 of the Commission's rules, 47 CFR 69.153, the 
per-minute Carrier Common Line charge in section 69.154 of the 
Commission's rules, 47 CFR 69.154, and the per-minute Residual 
Interconnection Charge in section 69.155 of the Commission's rules, 47 
CFR 69.155. Price cap carriers and CLECs that benchmark to price cap 
rates are also prohibited from increasing their originating intrastate 
access rates. A cap on interstate originating access represents a first 
step as part of the measured transition toward comprehensive reform and 
helps to ensure that the initial reforms to terminating access are not 
undermined. Thus, interstate originating switched access rates will 
remain capped and may not exceed current levels until further action by 
the Commission addressing the appropriate transition path for this 
traffic.
    562. Transport. Similarly, the transition path set forth above 
begins the transition for transport elements, including capping such 
rates, but does not provide the transition for all transport charges 
for price cap or rate-of-return carriers to bill-and-keep. For price 
cap carriers, in the final year of the transition, transport and 
terminating switched access shall go to bill-and-keep levels where the 
terminating carrier owns the tandem. However, transport charges in 
other instances, i.e., where the terminating carrier does not own the 
tandem, are not addressed at this time. Meanwhile, under the transition 
for rate-of-return carriers, which is consistent with the transition 
path put forward by the Joint Letter, interstate and intrastate 
transport charges will be capped at interstate levels in effect as of 
the effective date of the rules through the transition.
    563. Ultimately, the Commission agrees with concerns raised by 
commenters that the continuation of transport charges in perpetuity 
would be problematic. For example, the record contains allegations of 
``mileage pumping,'' where service providers designate distant points 
of interconnection to inflate the mileage used to compute the transport 
charges. Further, Sprint alleges that current incumbent LEC tariffed 
charges for transport are ``very high and constitute a sizeable 
proportion of the total terminating access charges ILECs impose on 
carriers today.'' More fundamentally, if transport rates are allowed to 
persist, it gives incumbent LECs incentives to retain a TDM network 
architecture and therefore likely serves as a disincentive for 
incumbent LECs to establish more efficient interconnection arrangements 
such as IP. As a result, commenters suggest that perpetuating high 
transport rates could undermine the Commission's reform effort and lead 
to anticompetitive behavior or regulatory arbitrage such as access 
stimulation. The Commission therefore seeks comment on the appropriate 
treatment of, and transition for, all tandem switching and transport 
rates in the USF/ICC Transformation FNPRM.
    564. Other Rate Elements. Finally, the Commission notes that the 
transition set forth above caps rates but does not provide the 
transition path for all rate elements or other charges, such as 
dedicated transport charges. In the USF/ICC Transformation FNPRM, the 
Commission seeks comment on what transition should be set for these 
other rate elements and charges as part of comprehensive reform, and 
how the Commission should address those elements.
4. Suspension or Modification Under Section 251(f)(2), 47 U.S.C. 
251(f)(2)
    565. Section 251(f)(2), 47 U.S.C. 251(f)(2), provides that a LEC 
with fewer than two percent of the country's subscriber lines may 
petition its state commission for a suspension or modification of the 
application to it of a requirement or requirements of 47 U.S.C. 251(b) 
or (c), and that the state commission shall grant such petition where 
it makes certain determinations. That provision further states that the 
state commission must act on the petition within 180 days and ``may 
suspend enforcement of the requirement or requirements to which the 
petition applies'' pending action on the petition. Parties aggrieved by 
a state commission decision under 47 U.S.C. 251(f) may seek review of 
that decision in federal district court--under 47 U.S.C. 252(e)(6) of 
the Act, if the decision is rendered in the course of arbitrating an 
interconnection agreement, or under general ``federal question'' 
jurisdiction if the decision arises outside of the arbitration context.
    566. In Iowa Utilities Board v. FCC, the Eighth Circuit held that 
state commissions had ``exclusive authority'' to make decisions under 
47 U.S.C. 251(f) and that the FCC lacked authority to prescribe 
``governing standards for such determinations.'' On review, however, 
the Supreme Court reversed the Eighth Circuit's decision with regard to 
the Commission's general authority to implement Title II of the Act. 
The Court stated that ``the grant in section 201(b) [of the Act] means 
what it says: The FCC has rulemaking authority to carry out the 
`provisions of this Act,' which include sections 251 and 252.'' 
Accordingly, the Commission finds that this general grant of rulemaking 
authority recognized by the Court includes the authority to adopt 
reasonable rules construing and implementing 47 U.S.C. 251(f).
    567. In light of the Supreme Court's holding, the Commission may 
adopt specific, binding prophylactic rules that give content to, among 
other things, the ``public interest, convenience, and necessity'' 
standard that governs states' exercise of 47 U.S.C. 251(f)(2) authority 
to act on suspension/modification petitions. The Commission sought 
comment on specific rules in the ICC/USF Transformation NPRM and in the 
2008 ICC NPRM. However, given the limited record the Commission 
received in response, the Commission declines to adopt specific rules 
regarding 47 U.S.C. 251(f)(2) at this time. Nevertheless, the 
Commission cautions states that suspensions or modifications of the 
bill-and-keep methodology the Commission adopts in the R&O would, among 
other things, re-introduce regulatory uncertainty, shift the costs of 
providing service to a LEC's competitors and the competitor's 
customers, increase transaction costs for terminating calls, and 
undermine the efficiencies gained from adopting a uniform national 
framework. Accordingly, the Commission believes it highly unlikely that 
any attempt by a state to modify or suspend the federal bill-and-keep 
regime would be ``consistent with the public interest, convenience and 
necessity'' as required under 47 U.S.C. 251(f)(2)(B), and the 
Commission urges states not to grant any petitions seeking

[[Page 81635]]

to modify or suspend the bill-and-keep provisions it adopts herein. The 
Commission will monitor state action regarding the reforms it adopts in 
the R&O, and may provide specific guidance for states' review of 47 
U.S.C. 251(f)(2) petitions in the future.
5. The Duty To Negotiate Interconnection Agreements
    568. Because the Commission moves traffic from the access charge 
regime to the 47 U.S.C. 251(b)(5) framework, where payment terms are 
agreed to pursuant to an interconnection agreement, incumbent LECs have 
asked the Commission to make clear that they have the ability to compel 
other LECs and CMRS providers to negotiate to reach an interconnection 
agreement. This is a concern for incumbent LECs because under sections 
251 and 252 of the Act, 47 U.S.C. 251, 252, although LECs and CMRS 
providers can compel incumbent LECs to negotiate in good faith and 
invoke arbitration if negotiations fail, incumbent LECs generally lack 
the ability to compel other LECs and CMRS providers to negotiate for 
payment for traffic that is not exchanged pursuant to a tariff. In 
particular, parties have asked the Commission to expand upon the 
Commission's findings in the T-Mobile Order, which found that incumbent 
LECs can compel CMRS providers to negotiate to reach an interconnection 
agreement.
    569. After reviewing the record, the Commission concludes it is 
appropriate to clarify certain aspects of the obligations the 
Commission adopted in the T-Mobile Order. As a result, in this section, 
the Commission reaffirms the findings in the T-Mobile Order that 
incumbent LECs can compel CMRS providers to negotiate in good faith to 
reach an interconnection agreement, and makes clear the Commission's 
authority to do so pursuant to 47 U.S.C. 332, 201, 251 as well as its 
ancillary authority under 4(i). The Commission also clarifies that this 
requirement does not impose any 47 U.S.C. 251(c) obligations on CMRS 
providers, nor does it extend section 252 of the Act, 47 U.S.C. 252, to 
CMRS providers.
    570. The Commission declines, at this time, to extend the 
obligation to negotiate in good faith and the ability to compel 
arbitration to other contexts. For example, the T-Mobile Order did not 
address relationships involving competitive LECs or among other 
interconnecting service providers. Subsequently, competitive LECs have 
requested that the Commission expand the scope of the T-Mobile Order 
and require CMRS providers to negotiate agreements with competitive 
LECs under the section 251/252 framework, just as they do with 
incumbent LECs. In addition, rural incumbent LECs urged the Commission 
to ``extend the T-Mobile Order to give ILECs the right to demand 
interconnection negotiations with all carriers.'' The Commission does 
not believe the record is currently sufficient to justify doing so, but 
ask further questions about the policy implications as well as the 
Commission's legal authority to do so in the USF/ICC Transformation 
FNPRM.
a. Petitions for Reconsideration of the T-Mobile Order
    571. As described below, the Commission resolves the challenges 
several parties have made to the Commission's authority to adopt 
sections 20.11(d) and (e), 47 CFR 20.11(d), (e). The Commission 
concludes that the Commission has both direct and ancillary authority 
to permit incumbent LECs to request interconnection from a CMRS 
provider and invoke the negotiation and arbitration procedures of 
section 252 of the Act, 47 U.S.C. 252. Given this clarification of the 
Commission's exercise of its authority, the Commission finds that these 
requirements, codified in section 20.11(e) of the Commission's rules, 
47 CFR 20.11(e), are consistent with the Act. The Commission also 
concludes that the adoption of those requirements in the T-Mobile Order 
was procedurally proper, and it consequently denies requests to 
reconsider that rule.
i. Authority To Adopt Section 20.11(e) of the Commission's Rules
    572. In its petition for reconsideration, RCA claims that the 
Commission lacked authority to adopt section 20.11(e) of the 
Commission's rules, 47 CFR 20.11(e), arguing that the Commission cannot 
directly apply 47 U.S.C. 251(c) of the Act to CMRS providers by 
requiring them to interconnect directly with ILECs, or submit to 
compulsory arbitration pursuant to 47 U.S.C. 252 of the Act. RCA 
misinterprets the nature of the Commission's action in the T-Mobile 
Order, however, viewing it as the direct application of 47 U.S.C. 
251(c) and 252 to CMRS providers. Properly understood, the Commission 
did not apply 47 U.S.C. 251(c) and 252 in that manner. Rather, the T-
Mobile Order obligations imposed on CMRS providers, codified in section 
20.11(e) of the Commission's rules, 47 CFR 20.11(e), implement the 
Commission's authority under sections 201 and 332, and are reasonably 
ancillary to the implementation of its statutorily mandated 
responsibilities under 47 U.S.C. 201, 251(a)(1), 251(b)(5) and 332.
    573. Direct Authority Under Sections 201 and 332. Sections 201 and 
332 of the Act, 47 U.S.C. 201, 332, provide a basis for rules allowing 
an incumbent LEC to request interconnection, including associated 
compensation, from a CMRS provider and invoke the negotiation and 
arbitration procedures set forth in 47 U.S.C. 252 of the Act. Section 
332(c)(1)(B), 47 U.S.C. 332(c)(1)(B), states that ``[u]pon reasonable 
request of any person providing commercial mobile service, the 
Commission shall order a common carrier to establish physical 
connections with such service'' pursuant to the provisions of section 
201 of the Act, 47 U.S.C. 201. Section 201(a), 47 U.S.C. 201(a), 
provides that ``every common carrier engaged in interstate or foreign 
communication by wire or radio'' shall: (i) ``furnish such 
communication service upon reasonable request therefore;'' and (ii) 
``in accordance with the orders of the Commission, in cases where the 
Commission, after opportunity for hearing, finds such action necessary 
or desirable in the public interest, to establish physical connections 
with other carriers, to establish through routes and charges applicable 
thereto and the divisions of such charges, and to establish and provide 
facilities and regulations for operating such through routes.'' 
Although 47 U.S.C. 201(a) requires an opportunity for hearing, the 
Commission's previous use of notice and comment procedures to satisfy 
the 47 U.S.C. 201 hearing requirement was expressly confirmed by the 
U.S. Court of Appeals for the Third Circuit. As discussed below, the 
Commission provided notice and received comment here. Consequently, the 
Commission rejects arguments that the Commission cannot rely on its 47 
U.S.C. 201(a) authority to require interconnection through a rulemaking 
proceeding. The Commission has long relied on these provisions to 
regulate the terms of LEC-CMRS interconnection, including associated 
compensation.
    574. Historically, interconnection requirements imposed under these 
provisions were understood to encompass not only the technical linking 
of networks, but also the associated compensation. For example, 
intercarrier compensation under the access charge regime had, as its 
origin, the need to ``ensur[e] interconnection at reasonable rates, as 
required under Section 201 of the Act, 47 U.S.C. 201.'' Likewise, the 
Commission previously has specified not only the intercarrier 
compensation required in conjunction

[[Page 81636]]

with interconnection by, and with, CMRS providers, but also the 
mechanism for implementing those compensation obligations. Even prior 
to the adoption of section 332 of the Act, 47 U.S.C. 332, the 
Commission relied on its section 201 authority to require LECs and CMRS 
providers to negotiate interconnection agreements in good faith 
governing the physical interconnections among these carriers, as well 
as the associated charges. Following the adoption of 47 U.S.C. 332, the 
Commission affirmed that ``LECs [must] provide reasonable and fair 
interconnection for all commercial mobile radio services,'' including 
``mutual compensation'' by each interconnected carrier for ``the 
reasonable costs incurred by such providers in terminating traffic'' 
that originated on the other carrier's facilities. At that time the 
Commission retained its then-existing implementation framework, which 
primarily relied on negotiated agreements with only a limited role 
expressly identified for tariffing, while observing that this framework 
would be subject to ``review and possible revision.''
    575. In the T-Mobile Order the Commission built upon the existing 
rules governing interconnection and compensation for non-access traffic 
exchanged between LECs and CMRS providers, incorporating the right of 
incumbent LECs to request interconnection with a CMRS provider, 
including associated compensation, and adopting an implementation 
mechanism. It established obligations surrounding the pre-existing duty 
both CMRS providers and ILECs have to establish connections between 
their respective networks, as well as exercising the Commission's 
authority over the pre-existing tariffing regime. The Commission finds, 
in light of the analysis and precedent above, that these actions are 
supported by the Commission's authority under sections 201 and 332 of 
the Act, 47 U.S.C. 201, 332.
    576. Ancillary Authority. Ancillary authority also supports the T-
Mobile Order requirement that CMRS providers comply with the 
negotiation and arbitration procedures set forth in section 252 of the 
Act, 47 U.S.C. 252. Ancillary jurisdiction may be employed, at the 
Commission's discretion, when two conditions are satisfied: ``(1) The 
Commission's general jurisdictional grant under Title I of the Act 
covers the regulated subject and (2) the regulations are reasonably 
ancillary to the Commission's effective performance of its statutorily 
mandated responsibilities.'' Both incumbent LECs and CMRS providers are 
telecommunications carriers, over which the Commission has clear 
jurisdiction. Further, to meaningfully implement intercarrier 
compensation requirements established pursuant to 47 U.S.C. 201, 332, 
and 251(b)(5) against the backdrop of mandatory interconnection and 
prohibitions on blocking traffic under 47 U.S.C. 201 and 251(a)(1), it 
was appropriate for the T-Mobile Order to impose requirements on CMRS 
providers beyond those expressly covered by the language of 47 U.S.C. 
252.
    577. As discussed above, pursuant to the authority of 47 U.S.C. 201 
and 332, the Commission required interconnected LECs and CMRS providers 
to pay mutual compensation for the non-access traffic that they 
exchange. Even if 47 U.S.C. 201 and 332 were not viewed as providing 
direct authority to require that CMRS providers negotiate 
interconnection agreements with incumbents LECs for the exchange of 
non-access traffic under the 47 U.S.C. 252 framework, such action 
clearly is reasonably ancillary to the Commission's authority under 
those provisions, including the associated requirement to pay mutual 
compensation. Likewise, although 47 U.S.C. 251(b)(5) does not itself 
require CMRS providers to enter reciprocal compensation arrangements, 
the Commission brought intraMTA LEC-CMRS traffic within that framework. 
CMRS providers received certain benefits from this regime, and the 
Commission likewise anticipated that they would enter agreements under 
which they would both ``receive reciprocal compensation for terminating 
certain traffic that originates on the networks of other carriers, and 
* * * pay such compensation for certain traffic that they transmit and 
terminate to other carriers.'' Further, when carriers are indirectly 
interconnected pursuant to 47 U.S.C. 251(a)(1), as is often the case 
for LECs and CMRS providers, the carriers' interconnection arrangements 
can be relevant to addressing the appropriate reciprocal compensation, 
as the Commission recently recognized.
    578. Given that the Commission prohibited tariffing of wireless 
termination charges for non-access traffic on a prospective basis, LECs 
needed to enter into agreements with CMRS providers providing for 
compensation under those regimes. Because LEC-CMRS interconnection is 
compelled by section 251(a)(1) of the Act, 47 U.S.C. 251(a)(1), and 
section 201 of the Act, 47 U.S.C. 201, also generally restricts 
carriers from blocking traffic, experience revealed that incumbent LECs 
would have limited practical ability to ensure that CMRS providers 
negotiated and entered such agreements because they could not avoid 
terminating the traffic even in the absence of an agreement to pay 
compensation. To ensure that the balance of regulatory benefits 
intended for each party under the LEC-CMRS interconnection and 
compensation regimes was not frustrated, it was necessary for the 
Commission to establish a mechanism by which incumbent LECs could 
request interconnection, and associated compensation, from CMRS 
providers, and ensure that those providers would negotiate those 
agreements, subject to an appropriate regulatory backstop. Thus, the 
Commission's 47 U.S.C. 154(i) authority also supports the T-Mobile 
Order requirement that CMRS providers negotiate interconnection 
agreements with incumbent LECs in good faith under the 47 U.S.C. 252 
framework.
ii. Consistency With the Communications Act and the Administrative 
Procedures Act
    579. In response to the concerns of some Petitioners, the 
Commission clarifies that the negotiation and arbitration requirements 
adopted for CMRS providers in the T-Mobile Order did not impose 47 
U.S.C. 251(c) on CMRS providers. As commenters observe, with one 
exception, the requirements of 47 U.S.C. 251(c) expressly apply to 
incumbent LECs, and nothing in the T-Mobile Order attempts to extend 
those statutory requirements to CMRS providers. Nor does the reference 
to ``interconnection'' in Sec.  20.11(e) of the Commission's rules, 47 
CFR 20.11(e), apply to CMRS providers the statutory interconnection 
obligations governing incumbent LECs under 47 U.S.C. 251(c)(2). As the 
T-Mobile Order makes clear, the primary focus of that rule is to 
provide a mechanism to implement mutual compensation for non-access 
traffic between incumbent LECs and CMRS providers. However, the 
Commission's mutual compensation rules were adopted in the context of 
addressing LEC-CMRS interconnection, against a backdrop where 
``interconnection'' regulations were understood to encompass not only 
the physical connection of networks, but also the associated 
intercarrier compensation. The Commission thus concludes that the 
definition of ``interconnection'' in Sec.  51.5 of the Commission's 
rules, 47 CFR 51.5, is not dispositive of the interpretation of that 
term here. This rule was codified in part 20, not part 51. In addition, 
as the

[[Page 81637]]

Commission recently recognized, interconnection arrangements can bear 
on the resolution of disputes regarding reciprocal compensation under 
the 47 U.S.C. 252 framework. For example, while interconnection for the 
exchange of access traffic does not currently implicate 47 U.S.C. 
251(b), an interconnection agreement for the exchange of reciprocal 
compensation traffic may contain terms relevant to determining 
appropriate rates under the statute and Commission rules. Moreover, 
Sec.  20.11(e) of the Commission's rules, 47 CFR 20.11(e), does not 
supplant or expand the otherwise-applicable interconnection obligations 
for CMRS providers, as some contend. Thus, in response to a request by 
an incumbent LEC for interconnection under Sec.  20.11(e), 47 CFR 
20.11(e), CMRS providers are not required to enter into direct 
interconnection, and may instead satisfy their obligation to 
interconnect through indirect arrangements.
    580. Similarly, the Commission did not interpret 47 U.S.C. 252 as 
binding on CMRS providers in the same manner as incumbent LECs. Rather, 
the Commission exercised its authority under 47 U.S.C. 201, 332, 251 
and 154(i) to apply to CMRS providers' duties analogous to the 
negotiation and arbitration requirements expressly imposed on incumbent 
LECs under 47 U.S.C. 252. Although Congress did not expressly extend 
these requirements this broadly in section 252 of the Act, 47 U.S.C. 
252, the Commission's subsequent experience with interconnection and 
intercarrier compensation, as described above, demonstrate the need for 
the duties imposed on CMRS providers in the T-Mobile Order. Thus, the 
Commission sensibly required CMRS providers to negotiate 
interconnection agreements with incumbent LECs in good faith, subject 
to arbitration by the state or, where the state lacks authority or 
otherwise fails to act, by the Commission. This approach also is 
supported by the concept of cooperative federalism, which is reasonably 
contemplated by sections 251 and 252 of the Act, 47 U.S.C. 251, 252. 
Because of the cooperative federalism embodied by 47 U.S.C. 251 and 
252, and the role of the Commission in arbitrating interconnection 
disputes under the 47 U.S.C. 252 framework when states lack authority 
or otherwise fail to act, the Commission also reject claims that the T-
Mobile Order constituted an unlawful delegation to the states.
    581. The Commission also does not interpret silence in certain 
provisions of the Act regarding the duties of CMRS providers as 
precluding the Commission's action in the T-Mobile Order. For one, the 
Commission rejects requests that it ignore the Commission's experience 
with interconnection and intercarrier compensation and treat Congress' 
silence regarding the rights of incumbent LECs to invoke negotiation 
and arbitration in section 252 of the Act as equivalent to a statutory 
prohibition on extending such rights. Nor is the Commission persuaded 
that the language of 47 U.S.C. 332(c)(1)(B) precludes the Commission's 
extension of section 252-type procedures in this manner. RCA observes 
that 47 U.S.C. 332(c)(1)(B) only expressly discusses requests by CMRS 
providers for interconnection, and contends that precludes rules that 
would enable incumbent LECs to request interconnection from CMRS 
providers. As a threshold matter, the Commission observes that CMRS 
providers are required to interconnect with other carriers under 47 
U.S.C. 251(a) of the Act, and that 47 U.S.C. 201 also provides the 
Commission authority to require CMRS providers to interconnect. The 
Commission thus disagrees with RCA's suggestion that 47 U.S.C. 332 
should be read to preclude CMRS providers from being subject to such 
requests. With respect to the procedures for implementing such 
requests, however, it notes that the Commission previously has 
suggested ``that the procedures of section 252 are not applicable in 
matters involving section 251(a) alone.'' The Commission finds it 
appropriate to interpret the obligations imposed on CMRS providers 
under Sec.  20.11(e), 47 CFR 20.11(e), in a manner consistent with the 
Commission's interpretation of the scope of the comparable requirements 
of 47 U.S.C. 252 from which it was derived. The Commission thus makes 
clear that Sec.  20.11(e), 47 CFR 20.11(e), does not apply to requests 
for direct or indirect physical interconnection alone, but only 
requests that also implicate the rates and terms for exchange of non-
access traffic.
    582. The Commission further finds that the rules adopted in the T-
Mobile Order were procedurally proper, contrary to the contentions of 
some petitioners. The Commission's 2001 Intercarrier Compensation NPRM, 
Developing a Unified Intercarrier Compensation Regime, CC Docket No. 
01-92, Notice of Proposed Rulemaking, 66 FR 28410, May 23, 2001 
(Intercarrier Compensation NPRM), expressly sought ``comment on the 
rules [the Commission] should adopt to govern LEC interconnection 
arrangements with CMRS providers, whether pursuant to section 332, or 
other statutory authority,'' and ``on the relationship between the CMRS 
interconnection authority assigned to the Commission under sections 201 
and 332, and that granted to the states under sections 251 and 252.'' 
The T-Mobile petition was incorporated into the docket in that 
proceeding, and in response to the Commission's request for comment on 
that petition, the issue of LECs being able to request interconnection 
negotiations with CMRS carriers was raised in the record. The 
Commission thus is not persuaded that parties lacked adequate notice 
and an opportunity to comment on the requirements ultimately imposed in 
Sec.  20.11(e) of the Commission's rules, 47 CFR 20.11(e).
b. Requests for Clarification
    583. A number of petitions seek clarification regarding the 
operation of the T-Mobile Order and/or the state of the law that 
existed prior to such decision. Except insofar as discussed above, or 
in the Commission's actions regarding wireless intercarrier 
compensation generally, the Commission declines to provide such 
clarification here. The Commission has discretion whether to issue a 
declaratory ruling, and rather than addressing these requests here, the 
Commission can address issues as they arise.
c. Extending T-Mobile to Other Contexts
    584. The Commission declines, at this time, to extend the 
obligations enumerated in the T-Mobile Order to other contexts. As 
discussed above, the T-Mobile Order imposed on CMRS providers the duty 
to negotiate interconnection agreements with incumbent LECs under the 
47 U.S.C. 252 framework. However, the T-Mobile Order did not address 
relationships involving competitive LECs or among other interconnecting 
service providers. Subsequently, competitive LECs have requested that 
the Commission expand the scope of the T-Mobile Order and require CMRS 
providers to negotiate agreements with competitive LECs under the 
section 251/252 framework, just as they do with incumbent LECs. In 
addition, rural incumbent LECs urged the Commission to ``give small 
carriers some legal authority to demand a negotiated interconnection 
agreement,'' and argued that ``the Commission should extend the T-
Mobile Order to give ILECs the right to demand interconnection 
negotiations with all carriers.'' Policy and legal issues surrounding 
the possible extension of the T-Mobile Order are insufficiently 
addressed in the current record, and as

[[Page 81638]]

such the Commission seeks comment in the accompanying USF/ICC 
Transformation FNPRM on whether to extend T-Mobile Order obligations to 
other contexts.
    585. However, this issue remains highly relevant notwithstanding 
the adoption of bill-and-keep as the default for reciprocal 
compensation between LECs and CMRS providers under 47 U.S.C. 251(b)(5). 
Under a bill-and-keep methodology, carriers still will need to address 
issues such as the ``edge'' for defining the scope of bill-and-keep, 
subject to arbitration where they cannot reach agreement. These issues 
do not lend themselves well to one-size-fits-all approaches as would be 
required under a tariffing regime. Imposing a duty to negotiate, 
subject to arbitration, will negate the need for Commission 
intervention in this context and will facilitate more market-based 
solutions. Because the Commission also maintains its existing 
requirements regarding interconnection and prohibitions on blocking 
traffic, its experience suggests that carriers under no legal 
compulsion to come to the table may have no incentive to do so, thus 
frustrating the efforts of interconnected carriers to resolve open 
questions. The section 252 framework--already in place in other 
contexts under the terms of the Act--may be a reasonable mechanism to 
use to address these situations.

X. Recovery Mechanism

A. Summary

    586. The recovery mechanism has two basic components. First, the 
Commission defines the revenue incumbent LECs are eligible to recover, 
which the Commission refers to as ``Eligible Recovery.'' Second, the 
Commission specifies how incumbent LECs may recover Eligible Recovery 
through limited end-user charges and, where eligible and a carrier 
elects to receive it, CAF support. Competitive LECs are free to recover 
reduced revenues through end-user charges.
    587. Eligible Recovery.
     Price cap incumbent LECs' Baseline for recovery will be 90 
percent of their Fiscal Year 2011 (FY2011) interstate and intrastate 
access revenues for the rates subject to reform and net reciprocal 
compensation revenues. The Commission defines ``fiscal year'' 2011 for 
these purposes as October 1, 2010 through September 30, 2011. For price 
cap carriers' study areas that participated in the Commission's 2000 
CALLS reforms, and thus have had interstate access rates essentially 
frozen for almost a decade, Price Cap Eligible Recovery (i.e., revenues 
subject to the recovery mechanism) will be the difference between: (a) 
the Price Cap Baseline, subject to 10 percent annual reductions; and 
(b) the revenues from the reformed intercarrier compensation rates in 
that year, based on estimated MOUs multiplied by the associated default 
rate for that year. For carriers that have more recently converted to 
price cap regulation and did not participate in the CALLS plan, the 
Commission phases in the reductions after five years, so that the 
initial 10 percent reduction occurs in year six. Estimated MOUs will be 
calculated as FY2011 minutes for all price cap carriers, and will be 
reduced 10 percent annually for each year of reform to reflect MOU 
trends over the past several years. Because such demand reductions have 
applied equally to all price cap carriers, the Commission does not make 
any distinction among price cap carriers for purposes of this 
calculation. The Commission adopts this straight line approach to 
determining MOUs, rather than requiring carriers to report actual 
minutes each year, because it will be more predictable for carriers and 
less burdensome to administer.
     Rate-of-return incumbent LECs' Baseline for recovery, 
which is somewhat more complex, will be based on their 2011 interstate 
switched access revenue requirement (which is recovered today through 
interstate access revenues and local switching support (LSS), if 
applicable), plus FY2011 intrastate terminating switched access 
revenues and FY2011 net reciprocal compensation revenue. Rate-of-Return 
Eligible Recovery will be the difference between: (a) the Rate-of-
Return Baseline, subject to five percent annual reductions; and (b) the 
revenues from the reformed intercarrier compensation rates in that 
year, based on actual MOUs multiplied by the associated default rate 
for that year. The annual Rate-of-Return Baseline reduction used in the 
calculation of Rate-of-Return Eligible Recovery revenue reflects two 
considerations. First, in recent years rate-of-return carriers' 
interstate switched access revenue requirements have been declining on 
average at approximately three percent annually due to declining 
regulated costs, with corresponding declines in interstate access 
revenues; such declines are projected to continue each year for the 
next several years. In addition, rate-of-return carriers' intrastate 
revenues have been declining on average at 10 percent per year as MOU 
decline, with state regulatory systems that typically do not have 
annual, automatic mechanisms to increase rates to account for declining 
demand. Weighing these considerations, the Commission finds it 
appropriate to reduce rate-of-return carriers' Eligible Recovery by 
five percent annually. This approach to revenue recovery will put most 
rate-of-return carriers in a better financial position--and will 
provide substantially more certainty--than the status quo path absent 
reform, where MOU declines would continue to be large and unpredictable 
and would significantly reduce intrastate revenues. This approach also 
provides carriers with the benefit of any costs savings and 
efficiencies they can achieve by enabling carriers to retain revenues 
even if their switched access costs decline. And it avoids creating 
misaligned incentives for carriers to inefficiently increase costs to 
grow their intercarrier compensation revenue requirement and thereby 
draw more access replacement from the CAF.
    588. Recovery from End Users. Consistent with past ICC reforms, the 
Commission permits carriers to recover a limited portion of their 
Eligible Recovery from their end users through a monthly fixed charge 
called an Access Recovery Charge or ``ARC.'' The Commission takes 
measures to ensure that any ARC increase on consumers does not impact 
affordability of rates, including by limiting the annual increase in 
consumer ARCs to $0.50. The Commission also makes clear that carriers 
may not charge an ARC on any Lifeline customers. This charge is 
calculated independently from, and has no bearing on, existing SLCs, 
although for administrative and billing efficiencies the Commission 
does permit carriers to combine the charges as a single line item on a 
bill.
     Recovery Fairly Balanced Across All End Users. The 
Commission does not, as some commenters urge, put the entire burden of 
access recovery on consumers. Rather, consistent with the Commission's 
approach in past reforms, under which business customers also 
contributed to offset declines in access charges, the Order balances 
consumer and single-line business recovery with recovery from multi-
line businesses. The Commission also adopts additional measures to 
protect consumers of incumbent LECs that elect not to receive CAF 
funding, by limiting the proportion of Eligible Recovery that can come 
from consumers and single-line businesses based on a weighted share of 
a carrier's residential versus business lines. This limitation is only 
necessary for carriers that are not eligible or elect not to receive 
CAF funding because carriers recovering from CAF will have the full ARC 
imputed to them.

[[Page 81639]]

     Protections for Consumers Already Paying Rebalanced Rates. 
To protect consumers, including in states that have already rebalanced 
rates through prior state intercarrier compensation reforms, the 
Commission adopts a Residential Rate Ceiling that prohibits imposing an 
ARC on any consumer paying an inclusive local monthly phone rate of $30 
or more.
     Protections for Multi-Line Businesses. Although the 
Commission does not adopt a business rate ceiling, nor were there 
proposals in the record to do so, the R&O takes measures to ensure that 
multi-line businesses' total SLC plus ARC line items are just and 
reasonable. The current multi-line business SLC is capped at $9.20. 
Some carriers, particularly smaller rate of return and mid-size 
carriers, are at or near the cap, while larger price cap carriers may 
have business SLCs as low as $5.00. To minimize the burden on multi-
line businesses, the Commission does not permit LECs to charge a multi-
line business ARC where the SLC plus ARC would exceed $12.20 per line. 
This limits the ARC for multi-line businesses for entities at the 
current $9.20 cap to $3.00. The Commission finds this limitation for 
multi-line businesses consistent with the reasons the Commission places 
an overall limit on the residential ARCs discussed below.
     To recover Eligible Recovery, price cap incumbent LECs are 
permitted to implement monthly end user ARCs with five annual increases 
of no more than $0.50 for residential/single-line business consumers, 
for a total monthly ARC of no more than $2.50 in the fifth year; and 
$1.00 (per month) per line for multi-line business customers, for a 
total of $5.00 per line in the fifth year, provided that: (1) Any such 
residential increases would not result in regulated residential end-
user rates that exceed the $30 Residential Rate Ceiling; and (2) any 
multi-line business customer's total SLC plus ARC does not exceed 
$12.20. The monthly ARC that could be charged to any particular 
consumer cannot increase by more than $0.50 annually, and in fact the 
Commission estimates that the average increase in the monthly ARC that 
would be permitted across all consumer lines over the period of reform, 
based on the amount of eligible recovery, is approximately $0.20 
annually. However, the Commission expects that not all carriers will 
elect or be able to charge the ARC due in part to competitive 
pressures, and the Commission therefore predicts the average actual 
increase across all consumers to be approximately $0.10-$0.15 each 
year, peaking at approximately $0.50 to $0.90 after five or six years, 
and declining thereafter.
     To recover Eligible Recovery, rate-of-return incumbent 
LECs are permitted to implement monthly end user ARCs with six annual 
increases of no more than $0.50 (per month) for residential/single-line 
business consumers, for a total ARC of no more than $3.00 in the sixth 
year; and $1.00 (per month) per line for multi-line business customers 
for a total of $6.00 per line in the sixth year, provided that: (1) 
Such increases would not result in regulated residential end-user rates 
that exceed the $30 Residential Rate Ceiling; and (2) any multi-line 
business customer's total SLC plus ARC does not exceed $12.20.
     Competitive LECs, which are not subject to the 
Commission's end-user rate regulations today, may recover reduced 
intercarrier revenues through end-user charges.
    589. Explicit Support from the CAF. The Commission has recognized 
that some areas are uneconomic to serve absent implicit or explicit 
support. ICC revenues have traditionally been a means of having other 
carriers (who are now often competitors) implicitly support the costs 
of the local network. As the Commission continues the transition from 
implicit to explicit support that the Commission began in 1997, 
recovery from the CAF for incumbent LECs will be provided to the extent 
their Eligible Recovery exceeds their permitted ARCs. For price cap 
carriers that elect to receive CAF support, such support is 
transitional, phasing out over three years beginning in 2017. This 
phase out reflects, in part, the fact that such carriers will be 
receiving additional universal service support from the CAF that will 
phase in over time and is designed to reflect the efficient costs of 
providing service over a voice and broadband network. For rate-of-
return carriers, ICC-replacement CAF support will phase down as 
Eligible Recovery decreases over time, but will not be subject to other 
reductions.
     All incumbent LECs that elect to receive CAF support as 
part of this recovery mechanism will be subject to the same 
accountability and oversight requirements adopted above. For rate-of-
return carriers, the obligations for deploying broadband upon 
reasonable request specified in the CAF section above apply as a 
condition of receiving ICC-replacement CAF. For price cap carriers that 
elect to receive ICC-replacement CAF support, the Commission requires 
such support be used for building and operating broadband-capable 
networks used to offer their own retail service in areas substantially 
unserved by an unsubsidized competitor of fixed voice and broadband 
services. Thus, all CAF support will directly advance broadband 
deployment. This approach is consistent with carriers' representations 
that they currently use ICC revenues for broadband deployment.
     Competitive LECs, which have greater freedom in setting 
rates and determining which customers they wish to serve, will not be 
eligible for CAF support to replace reductions in ICC revenues.

B. Policy Approach to Recovery

    590. As discussed above, the Commission's reforms seek to enable 
more widespread deployment of broadband networks, to foster the 
transition to IP networks, and to reduce marketplace distortions. The 
Commission recognizes that this transition affects different--but 
overlapping--segments of consumers in different ways. The Commission 
therefore seeks to adopt a balanced approach to reform that benefits 
consumers as a whole.
    591. The overall reforms adopted in this R&O will enable expanded 
build-out of broadband and advanced mobile services to millions of 
consumers in rural America who do not currently have broadband service. 
These ICC reforms will fuel new investment by making incumbent LECs' 
revenue more predictable and certain. Indeed, incumbent LECs receiving 
CAF support as part of this recovery mechanism will have broadband 
deployment obligations.
    592. In addition, as discussed above, the Commission anticipates 
that reductions in intercarrier compensation charges will result in 
reduced prices for network usage, thereby enabling more customers to 
use unlimited all-distance service plans or plans with a larger volume 
of long distance minutes, and also leading to increased investment and 
innovation in communications networks and services. Moreover, 
consistent with previous ICC reforms, which gave rise to substantial 
benefits from lower long distance prices, the Commission expects 
consumers to realize substantial benefits from this reform. This is 
especially true for customers of carriers for which intercarrier 
compensation charges historically have been a significant cost, such as 
wireless providers and long distance carriers.
    593. Today, carriers receive payments from other carriers for 
carrying traffic on their networks at rates that are based on 
recovering the average cost of the

[[Page 81640]]

network, plus expenses, common costs, overhead, and profits, which 
together far exceed the incremental costs of carrying such traffic. The 
excess of the payments over the associated costs constitutes an 
implicit annual subsidy of local phone networks--a subsidy paid by 
consumers and businesses everywhere in the country. This distorts 
competition, placing actual and potential competitors that do not 
receive these same subsidies at a market disadvantage, and denying 
customers the benefits of competitive entry.
    594. As the Commission pursues the benefits of reforming this 
system, it also seeks to ensure that the transition to a reformed 
intercarrier compensation and universal service system does not 
undermine continued network investment--and thus harm consumers. 
Consequently, the recovery mechanism is designed to provide 
predictability to incumbent carriers that had been receiving implicit 
ICC subsidies, to mitigate marketplace disruption during the reform 
transition, and to ensure that intercarrier compensation reforms do not 
unintentionally undermine the Commission's objectives for universal 
service reform. As the State Members observe, for example, ``[b]ankers 
and equity investors need to be able to see that both past and future 
investments will be backed by long-term support programs that are 
predictable.'' Similarly, they note that ``abrupt changes in support 
levels can harm consumers.'' Predictable recovery during the 
intercarrier compensation reform transition is particularly important 
to ensure that carriers ``can maintain/enhance their networks while 
still offering service to end-users at reasonable rates.'' Providing 
this stability does not require revenue neutrality, however.
    595. Ultimately, consumers bear the burden of the inefficiencies 
and misaligned incentives of the current ICC system, and they are the 
ultimate beneficiaries of ICC reform. In structuring a reasonable 
transition path for ICC reform, the Commission seeks to balance fairly 
the burdens borne by various categories of end users, including 
consumers already paying high residential phone rates, consumers paying 
artificially low residential phone rates, and consumers that contribute 
to the universal service fund. Given nationwide disparities in local 
rates, it would be unfair to place the entire burden of the ICC 
transition on USF contributors. Just as the Commission has undertaken 
some intercarrier compensation reforms since the 1996 Act, shifting 
away from implicit intercarrier subsidies to end-user charges and 
universal service for recovery, some states have done so, as well. For 
example, Alaska has recently reformed its intrastate access system, 
establishing a Network Access Fee of $5.75, and increasing the role of 
the Alaska USF in subsidizing carriers' intrastate revenues with a 
state USF surcharge of 9.4 percent. Similarly, in Wyoming, which has 
also rebalanced rates, many rural customers face total charges for 
basic residential phone service in excess of $40 per month. The 
Nebraska Companies note total out-of-pocket local residential rates in 
that state already exceed $30 per month and should not be increased 
under any federal reforms contemplated by the Commission. Were the 
Commission to place the entire burden of ICC recovery on USF 
contributors, not only would consumers in each of these states be 
forced to contribute more, but USF, which is also supported through 
consumer contributions, could not stay within the budget discussed 
above. Meanwhile, other states have retained high intrastate 
intercarrier compensation rates to subsidize artificially low local 
rates--including some as low as $5 per month--effectively shifting the 
costs of those local networks to long distance and wireless customers 
across the country. In this context, the Commission finds it reasonable 
to allow carriers to seek some recovery from their own customers, 
subject to protection for consumers already paying rates for local 
phone service at or near $30 per month. The Commission also prevents 
carriers from charging an ARC on any Lifeline customers. The Commission 
also protects consumers by limiting any increases in consumer ARCs 
based upon actual or imputed increases in ARCs for business customers.
    596. Some commenters argued that a variety of other regulatory 
considerations should alter the Commission's approach to recovery. For 
example, some express concerns about the level of existing federal 
subscriber line charges (SLCs) and special access rates and the extent 
to which carriers use the ratepayer- and universal service-funded local 
network to provide unregulated services. Although the Commission 
addresses certain of those issues below, the Commission is not 
persuaded that it should delay comprehensive intercarrier compensation 
and universal reform pending resolution of those outstanding questions, 
given the urgency of advancing the country's broadband goals. Nor does 
the Commission treat those issues as a static, unchanging backdrop to 
the reforms the Commission adopts in the R&O. In the USF/ICC 
Transformation FNPRM, the Commission reevaluates existing SLCs, 
including by seeking comment on whether SLCs today are set at an 
excessive level and should be reduced. To attempt to account for these 
concerns through reduced recovery here, particularly given potential 
changes that the Commission might consider, would unduly complicate--
and significantly delay--badly needed reform that the Commission 
believes will result in significant consumer benefits. Consequently, 
the Commission believes that the consumer protections incorporated in 
the recovery mechanism and the transitional nature of the recovery 
strike the right balance for consumers as a whole.
    597. Although the preceding has been focused on the substantial 
benefits of the reform to consumers, in crafting these reforms the 
Commission also took account of costs and benefits to industry. The 
Commission's reforms are minimally burdensome to carriers, imposing 
only minor incremental costs (i.e., costs that would not be otherwise 
incurred without the reforms). The incremental costs of reform arise 
primarily from implementation, meaning that they are one-time costs of 
the transition that are not incurred on an ongoing basis. Further, 
these costs are heavily outweighed by efficiency benefits that 
carriers, as well as other industry participants and consumers, will 
experience. For carriers as well as end users, these benefits include 
significantly more efficient interconnection arrangements. Carriers 
will provide existing services more efficiently, make better pricing 
decisions for those services, and innovate more efficiently. Carriers' 
incentives to engage in inefficient arbitrage will also be reduced, and 
carriers will face lower costs of metering, billing, recovery, and 
disputes related to intercarrier compensation. Further, carriers, firms 
more generally, and consumers, facing more efficient prices for voice 
services, will make more use of voice services to greater effect, and 
more efficient innovation will result. In contrast to the transitional, 
one-time costs of reform, these efficiency benefits are ongoing and 
will compound over time.

C. Carriers Eligible To Participate in the Recovery Mechanism

    598. The Commission sought comment in the USF/ICC Transformation 
NPRM on whether recovery should be limited to certain carriers, or 
whether it should extend

[[Page 81641]]

more broadly to all LECs. The Commission extends the recovery 
mechanisms adopted in this R&O to all incumbent LECs because regulatory 
constraints on their pricing and service requirements otherwise limit 
their ability to recover their costs. If an incumbent LEC receives 
recovery of any costs or revenues that are already being recovered as 
Eligible Recovery through ARCs or the CAF, that LEC's ability to 
recover reduced switched access revenue from ARCs or the CAF shall be 
reduced to the extent it receives duplicative recovery. Incumbent LECs 
seeking revenue recovery will be required to certify as part of their 
tariff filings to both the FCC and to any state commission exercising 
jurisdiction over the incumbent LEC's intrastate costs that the 
incumbent LEC is not seeking duplicative recovery in the state 
jurisdiction for any Eligible Recovery subject to the recovery 
mechanism. To monitor and ensure that this does not occur, the 
Commission requires carriers participating in the recovery mechanism, 
whether ARC and/or CAF, to file data annually. All incumbent LECs have 
built out their networks subject to COLR obligations, supported in part 
by ongoing intercarrier compensation revenues. Thus, incumbent LECs 
have limited control over the areas or customers that they serve, 
having been required to deploy their network in areas where there was 
no business case to do so absent subsidies, including the implicit 
subsidies from intercarrier compensation. At the same time, incumbent 
LECs generally are subject to more statutory and regulatory constraints 
than other providers in the retail pricing of their local telephone 
service. This includes both Commission regulation of the federal SLC 
and, frequently, state regulation of retail local telephone service 
rates as well. Thus, incumbent LECs are limited in their ability to 
increase rates to their local telephone service customers as a whole to 
offset reduced implicit subsidies.
    599. Proposals to limit the recovery mechanism to only some classes 
of incumbent LECs, such as rate-of-return carriers, neglect these 
considerations, and in particular ignore that price cap incumbent LECs 
typically are also subject to regulatory constraints on end-user 
charges. The Commission does, however, recognize the differences faced 
by price cap and rate-of-return carriers under the status quo absent 
reform, and therefore adopts different recovery mechanisms for price 
cap and rate-of-return carriers, as explained below.
    600. Competitive LECs. The Commission declines to provide an 
explicit recovery mechanism for competitive LECs. Unlike incumbent 
LECs, because competitive carriers have generally been found to lack 
market power in the provision of telecommunications services, their 
end-user charges are not subject to comparable rate regulation, and 
therefore those carriers are free to recover reduced access revenue 
through regular end-user charges. Some competitive LECs have argued 
that their rates are constrained by incumbent LEC rates (as 
supplemented by regulated end-user charges and CAF support); to the 
extent this is true, the Commission would expect this competition to 
constrain incumbent LECs' ability to rely on end-user recovery as well. 
Moreover, competitive LECs typically have not built out their networks 
subject to COLR obligations requiring the provision of service when no 
other provider will do so, and thus typically can elect whether to 
enter a service area and/or to serve particular classes of customers 
(such as residential customers) depending upon whether it is profitable 
to do so without subsidy.
    601. In light of those considerations, the Commission disagrees 
with parties that advocate making the recovery mechanism the Commission 
adopts today available to all carriers, both incumbent and competitive, 
or to all carriers that currently receive access charge revenues. 
Competitive LECs are free to choose where and how they provide service, 
and their ability to recover costs from their customers is generally 
not as limited by statute or regulation as it is for incumbent LECs.
    602. The Commission likewise declines to permit competitive LECs to 
reduce their access rates over a longer period of time than incumbent 
LECs. Instead, the Commission believes that the approach adopted in the 
CLEC Access Charge Order, 66 FR 27892, May 21, 2001, under which 
competitive LECs benchmark access rates to incumbent LECs' rates, is 
the better approach. That benchmarking rule was designed as a tool to 
constrain competitive LECs' access rates to just and reasonable levels 
without the need for extensive, ongoing accounting oversight and 
detailed evaluation of competitive LECs' costs. Deviating from that 
framework for purposes of the access reform transition would create new 
opportunities for arbitrage and require increased regulatory oversight, 
notwithstanding the fact that competitive LECs' access rates under the 
CLEC Access Charge Order were not based on any demonstrated level of 
need associated with those carriers' networks or operations. Nor has 
any commenter provided sufficient evidence to warrant departure from 
the benchmarking approach in this context. The Commission therefore 
declines to adopt a separate transition path for competitive LECs. 
Rather, consistent with the general benchmarking rule that had been 
used for interstate access service, competitive LECs will benchmark to 
the default rates of the incumbent LEC in the area they serve as 
specified under this R&O.

D. Determining Eligible Recovery

    603. The first step in the recovery mechanism is defining the 
amount, called ``Eligible Recovery,'' that incumbent LECs will be given 
the opportunity to recover.
1. Establishing the Price Cap Baseline
    604. Costs vs. Revenues. The USF/ICC Transformation NPRM sought 
comment on whether, in adopting a recovery mechanism, the Commission 
should base recovery on carrier costs, carrier revenues, or some 
combination thereof. For the reasons set forth below, for price cap 
carriers, the Commission will provide recovery based upon Fiscal Year 
2011 (``FY2011'' or ``Baseline'') access revenues that are reduced as 
part of the reforms the Commission adopts, plus FY2011 net reciprocal 
compensation revenues. Selecting FY2011 ensures that gaming or any 
disputes or nonpayment that may occur after the release of the R&O does 
not impact carriers' Baseline revenues. For rate-of-return carriers, 
the Commission adopts a bifurcated approach based on: (1) Their 2011 
interstate switched access revenue requirement; and (2) their FY2011 
intrastate switched access revenues for services with rates to be 
reduced as part of the reforms the Commission adopts today, plus FY2011 
net reciprocal compensation revenues. For a rate-of-return carrier that 
participated in the NECA 2011 annual switched access tariff filing, its 
2011 interstate switched access revenue requirement will be its 
projected interstate switched access revenue requirement associated 
with the NECA 2011 annual interstate switched access tariff filing. For 
a rate-of-return carrier subject to Sec.  61.38 of the Commission's 
rules, 47 CFR 61.38, that filed its own annual access tariff in 2010 
and did not participate in the NECA 2011 annual switched access tariff 
filing, its 2011 interstate switched access revenue requirement will be 
its projected interstate switched access revenue requirement in its 
2010 annual interstate switched access tariff filing. For a rate-of-
return carrier subject to Sec.  61.39 of the Commission's rules, 47

[[Page 81642]]

CFR 61.39, that filed its own annual switched access tariff in 2011, 
its revenue requirement will be its historically-determined annual 
interstate switched access revenue requirement filed with its 2011 
annual interstate switched access tariff filing. Carriers have not 
demonstrated here that the existing intercarrier compensation revenues 
that the Commission uses as part of the Baseline calculations are 
confiscatory or otherwise unjustly or unreasonably low, and the 
Commission thus finds them to be an appropriate starting point for 
calculations under the recovery mechanism. To the extent that it 
subsequently is determined that an incumbent LEC's rates during the 
Baseline time period were not just and reasonable because they were too 
low, that carrier may seek additional recovery as needed through the 
Total Cost and Earnings Review Mechanism.
    605. The Commission concludes that, where it lacks data, it is 
preferable to rely on revenues for determining recovery, as most 
commenters suggest. Defining carriers' costs today would be a 
burdensome undertaking that could significantly delay implementation of 
ICC reform. ``Cost'' would first have to be defined for these purposes, 
which is a difficult and time-consuming exercise. Indeed, price cap 
carriers' access charges are not based on current costs, and reliable 
cost information is not readily available. It is not clear that a 
reliable cost study based on current network configuration could be 
completed without undue delay, and doing so could be a complicated, 
time consuming, and expensive process, nor is it clear that a 
regulatory proceeding could come up with a definition of ``cost'' 
appropriate for recovery that is any better than the revenues approach 
the Commission adopts.
    606. Moreover, the Commission has long recognized that intercarrier 
compensation rates include an implicit subsidy because they are set to 
recover the cost of the entire local network, rather than the actual 
incremental cost of terminating or originating another call. Given the 
Commission's commitment to a gradual transition with no flash cuts, the 
focus on revenues is appropriate to ensure carriers have a measured 
transition away from this implicit support on which they have been 
permitted to rely for many years.
    607. For rate-of-return carriers, however, interstate switched 
access rates today are determined based on their interstate switched 
access revenue requirement, which is calculated in a manner that 
includes their ``regulated interstate switched access costs'' as the 
Commission has historically defined them, plus a prescribed rate of 
return on the net book value of their interstate switched access 
investment. Although rate-of-return carriers' revenue requirement might 
not be based on the precise measure of cost the Commission might 
otherwise adopt if it were starting anew, the Commission believes that 
using those carriers' interstate revenue requirement is sensible for 
purposes of determining their Eligible Recovery. For one, this 
information is readily available today. The Commission will carefully 
monitor material changes in cost allocation to categories where 
recovery remains based on actual cost to ensure that carriers do not 
shift costs properly associated with switched access. The Commission 
relies on the revenue requirement information available at the time of 
the initial tariff filings required to implement this recovery 
framework. This not only enables implementation of the recovery 
mechanism in the specified timeframes, but also addresses possible 
incentives to engage in gaming if carriers were able to increase the 
Rate-of-Return Baseline subsequently. If a carrier subsequently can 
demonstrate that it is materially harmed by the use of the projected, 
rather than final, 2011 interstate revenue requirement, it may seek a 
waiver of the rule specifying the Rate-of-Return Baseline to allow it 
to rely on an increased Rate-of-Return Baseline amount. Any such waiver 
would be subject to the Commission's traditional ``good cause'' waiver 
standard, rather than the Total Cost and Earnings Review specified 
below. In addition, use of the revenue requirement avoids 
implementation issues surrounding disputed or uncollectable interstate 
access revenues, providing greater predictability and substantially 
insulating small carriers from the harms of arbitrage schemes such as 
phantom traffic. This approach likewise prevents carriers that may have 
been earning in excess of their permitted rate of return from locking 
in those revenues and continuing such overearnings in perpetuity.
    608. The Commission's approach is also consistent with the reforms 
to local switching support (LSS) the Commission adopts above. 
Historically, smaller carriers have received LSS as a subsidy for 
certain switching costs, effectively satisfying a portion of their 
interstate switched access revenue requirement. As discussed above, 
defining Eligible Recovery based on carriers' interstate switched 
access requirement allows the Commission to eliminate LSS as a separate 
universal service support mechanism for rate-of-return carriers. 
Eligible Recovery will be calculated from carriers' entire interstate 
switched access revenue requirement--whether it historically was 
recovered through access charges or LSS. Thus, in essence, carriers 
receiving LSS today will be eligible to receive support as part of 
their Eligible Recovery.
    609. At the same time, although rate-of-return carriers do track 
certain costs to establish their interstate revenue requirement for 
switched access services, the same information is not readily 
available--or necessarily relevant--for intrastate switched access 
services or net reciprocal compensation. As a result, their Eligible 
Recovery will be based on their FY2011 intrastate switched access 
revenues addressed as part of the reform adopted today plus FY2011 net 
reciprocal compensation as of April 1, 2012. Rate-of-return carriers 
may elect to have NECA or another entity perform the annual analysis. 
The underlying data must be submitted to the relevant state 
commissions, to the Commission, and, for carriers that are eligible for 
and elect to receive CAF, to USAC.
    610. The USF/ICC Transformation NPRM also sought comment on 
whether, under a revenues-based approach, to base carriers' recovery on 
gross intercarrier revenue or alternatively to use net intercarrier 
compensation, defined as ``a company's total intercarrier compensation 
revenue * * * less its intercarrier compensation expense'' including 
expenses paid by affiliates. The Commission received a mixed record in 
response. For the reasons described below, the approach the basis for a 
carrier's recovery the Commission adopts is neither a pure net revenue 
approach nor a pure gross revenue approach.
    611. Although the Commission is sympathetic to requests to 
determine recovery based on net revenues, the Commission declines to do 
so for several reasons. Most importantly, the Commission is committed 
to a gradual transition with sufficient predictability to enable 
continued investment, and a net revenue approach could reduce that 
predictability, especially for non-facilities-based providers of long 
distance service who pay intercarrier compensation expenses indirectly 
through their purchase of wholesale long distance service from third 
parties.
    612. There also are other difficulties, substantive and 
administrative, involved in calculating net revenues, which cannot be 
adequately addressed based on the information in the record. For 
example, although reductions in an individual incumbent LEC's ICC 
revenue is tied to a particular study

[[Page 81643]]

area, its affiliated IXC or wireless carrier may operate across 
multiple study areas, and the record does not suggest an administrable 
method for accurately identifying the cost savings associated with a 
particular incumbent LEC. Moreover, determinations of which affiliates 
should be counted, whether they are fully owned by the incumbent LEC or 
not, and to what extent, would be highly company-specific and could 
lead to inequitable treatment of similarly-situated carriers.
    613. Such an approach also could create inefficient incentives 
during the transition regarding the acquisition of exchanges with ICC 
revenue reductions. For example, if an incumbent LEC has a large 
reduction in ICC revenue that is offset by affiliates' ICC cost 
savings, other carriers that lack affiliates with comparable ICC cost 
savings will be deterred from acquiring such exchanges if they would 
not be able to obtain additional recovery once it acquired that 
exchange. Conversely, if a carrier that lacked affiliates with 
comparable ICC cost savings would be entitled to new recovery if it 
acquired that exchange, a net revenue recovery approach could create 
inefficient incentives to acquire such exchanges given the potential 
for expanded CAF support (and thus also risk unconstrained growth in 
universal service).
    614. Finally, although the record does not enable the Commission to 
determine the precise extent to which savings will be passed through 
from IXC to incumbent LEC, competition in the long distance market is 
likely to lead IXCs to pass on significant savings to incumbent LECs, 
rendering 100 percent gross revenues likely more generous than 
necessary for incumbent LECs. This is further complicated by incumbent 
LECs with affiliated IXCs that provide wholesale long distance service; 
counting the cost savings associated with wholesale long distance 
service against the recovery need for the affiliated incumbent LEC 
could create disincentives for the IXC to simultaneously pass through 
those cost savings in lower wholesale long distance rates, thereby 
reducing the potential for lower retail long distance rates.
2. Calculating Eligible Recovery for Price Cap Incumbent LECs
    615. For price cap carriers, the recovery mechanism allows them to 
determine at the outset exactly how much their Eligible Recovery will 
be each year. The certainty regarding this recovery will enable price 
cap carriers to better manage the transition away from intercarrier 
compensation for recovery. The recovery approach will use historical 
trends regarding changes in demand to project future changes in demand 
(typically MOU), in conjunction with the default rates specified by the 
Commission's reforms, to determine Eligible Recovery. The Commission 
recognizes that its transitional intercarrier compensation framework 
sets default rates but leaves carriers free to negotiate alternatives. 
The Commission's approach to recovery relies on the default rates 
specified by the transition and will impute those rates for purposes of 
determining recovery, even if carriers negotiate a lower ICC rate with 
particular providers. Price Cap Eligible Recovery will be calculated 
from a Baseline of 90 percent of relevant FY2011 revenues, reduced on a 
straight-line basis at a rate of ten percent annually starting in year 
one (2012). This is consistent with the historical trajectory of 
decreasing MOU, with which price cap carriers' intercarrier 
compensation revenues decline today. The Commission concludes that this 
approach provides the necessary predictability for carriers without 
reducing their incentives to seek efficiencies or to maximize use of 
their network. The Commission will not annually true-up actual MOU for 
price cap carriers, instead likewise using a straight line decline of 
10 percent relative to FY2011 MOU, which is a more predictable and 
administratively less burdensome approach. If MOU decline is less than 
10 percent, carriers will receive the benefit of additional revenues. 
Conversely, if MOU decline accelerates, the risk of decreased revenues 
falls on the carriers. This allocation of risk incents carriers to be 
more efficient and retain customers.
    616. Specifically, the Price Cap Baseline for price cap incumbent 
LECs' recovery will be the total switched access revenues that: (1) Are 
being reduced as part of reform adopted today; (2) are billed for 
service provided in FY2011; and (3) for which payment has been received 
by March 31, 2012. In addition, the Baseline will include net 
reciprocal compensation revenues for FY2011, based on net payments as 
of March 31, 2012. Carriers will be required to submit to the states 
data regarding all FY2011 switched access MOU and rates, broken down 
into categories and subcategories corresponding to the relevant 
categories of rates being reduced. With this information, states with 
authority over intrastate access charges will be able to monitor 
implementation of the recovery mechanism and compliance with the 
Commission's rules, and help guard against cost-shifting or double 
dipping by carriers. A price cap incumbent LEC that is eligible to 
receive CAF shall also file this information with USAC for purposes of 
implementing CAF ICC support, and the Commission delegates to the 
Wireline Competition Bureau authority to work with USAC to develop and 
implement processes for administration of CAF ICC support. These 
figures will establish the Base Minutes for each relevant category, and 
shall not include disputed revenues or revenues otherwise not 
recovered, for whatever reason, or the MOU associated with such 
revenues. Every carrier, in support of its annual access tariff filing, 
must also provide data necessary to justify its ability to impose an 
ARC, including the potential impact of the ARC for residential and 
multi-line business customers.
    617. In determining the recovery mechanism, the Commission declines 
to provide 100 percent revenue neutrality relative to today's revenues. 
Rather, the Commission adopts an approach that is informed in part 
based on the status quo path facing price cap carriers today, where 
intercarrier compensation revenues decline as MOU decline, but also 
adopt some additional reductions for carriers that have had the benefit 
of interstate rates essentially being frozen for almost a decade, 
rather than being reduced annually as would typically occur under price 
cap regulation. Although the Commission adopts rules to help address 
concerns about traffic identification and establish a prospective 
intercarrier compensation framework for VoIP-PSTN traffic, absent the 
actions in this R&O, issues regarding compensation for that traffic 
would not have been resolved. Because the Commission is considering the 
status quo path absent reform, its recovery framework is based on 
historical declining demand notwithstanding reforms that potentially 
could mitigate some of that decline. Thus, for study areas of carriers 
that participated in the CALLS plan, which is approximately 95 percent 
of all price cap lines, and 90 percent of all lines across the country, 
the Commission adopts a 10 percent initial reduction in price cap 
incumbent LECs' Eligible Recovery to reflect the fact that these 
carriers' productivity gains have generally not been accounted for in 
their regulated rates for many years. Incentive regulation typically 
provides a mechanism for sharing the benefits of productivity gains 
with ratepayers. Prior to the CALLS Order, 65 FR 38684, June 21, 2000, 
the Commission included a productivity adjustment to the price cap 
indices to

[[Page 81644]]

ensure that savings would be shared. The CALLS Order did not include a 
productivity-related adjustment, however, providing instead a 
transitional ``X-factor'' designed simply to target the lower rates 
specified in that reform plan. After the targeted rates were achieved, 
which occurred by 2002 for 96 percent of study areas for carriers 
participating in the CALLS plan, the X-factor was set equal to 
inflation for the carriers originally subject to the CALLS plan and 
provided no additional consumer benefit from any productivity gains. As 
a result, study areas of price cap LECs that participated in the CALLS 
plan have had no X-Factor reductions to their price cap indices (PCIs), 
productivity-related or otherwise, for any PCI at least since 2004, and 
some price cap carriers' X-Factor reductions to their switched access-
related PCIs stopped even earlier than that. Because price cap carriers 
reached their target rates at different times, the inflation-only X-
factor took effect at different times for different price cap carriers. 
In the CALLS Remand Order, 68 FR 50077, August 20, 2003, the Commission 
concluded that price cap carriers serving 36 percent of total 
nationwide price cap access lines had achieved their target rates by 
their 2000 annual access filing. By the 2001 annual accessing filings 
the number grew to carriers serving 75 percent of total access lines, 
and by the 2002 annual access filings, carriers serving 96 percent of 
total access lines had achieved their target rates.
    618. The record supports the use of a productivity factor such as 
the X-factor previously applied to price-cap carriers to reduce the 
amount carriers are eligible to recover through a recovery mechanism. A 
productivity factor would require recovery to decrease annually by a 
predetermined amount designed to capture for consumers the efficiencies 
found to apply generally to the industry. For example, if the 
Commission had maintained a five percent annual X-factor, rates for 
carriers that had reached their target rates would have been subject to 
caps reduced by five percent each year, so by today those rate caps 
would have been reduced by approximately 30 percent. Although the 
record does not contain the detailed analysis required to support a 
particular productivity factor that would apply on an ongoing basis, 
the Commission finds this initial 10 percent reduction for study areas 
of price cap LECs that participated in the CALLS Plan to be a 
conservative approach given the absence of any sharing of productivity 
or other X-factor reductions for a number of years, particularly when 
supplemented by other justifications for revenue reductions that the 
Commission does not otherwise account for in the standard recovery 
mechanism.
    619. The Commission recognizes, however, that the industry has 
changed significantly since the 2000 CALLS Order, with some price cap 
CALLS carriers merging with or acquiring carriers that did not 
participate in the CALLS plan and/or newly converted price cap carriers 
acquiring study areas that did participate in the CALLS plan. For this 
reason, the Commission concludes it is necessary to apply the 10 
percent reduction on a study area basis for CALLS participants, which 
the Commission collectively defines as ``CALLS study areas.'' Thus, the 
Commission will apply the 10 percent reduction to all price cap study 
areas that participated in the CALLS plan.
    620. The Commission also recognizes, however, some price cap LECs 
converted to price cap regulation from rate-of-return regulation within 
the last five years and therefore such carriers did not participate in 
the CALLS plan. Thus, not all price cap carriers have had the benefit 
of productivity gains associated with reaching their target rates by 
2002. Indeed, there are a few study areas that have converted to price 
cap regulation in the last two years and are still in the process of 
reducing their interstate rates to meet their CALLS target rate. As a 
result, for non-price cap study areas that were not part of the CALLS 
plan, the Commission believes a more incremental approach is warranted. 
In particular, for non-CALLS study areas, the Commission will delay the 
implementation of the 10 percent reduction to Eligible Recovery for 
five years, which is approximately the difference in time between when 
96 percent of study areas of CALLS price cap carriers reached their 
target rates in 2002 and when the non-CALLS price cap carriers began 
converting from rate-of-return in 2007. The Commission believes doing 
so enables carriers that more recently converted to price cap 
regulation, carriers which are typically smaller, to have additional 
time to adjust to the intercarrier compensation rate reductions. In 
year six, the 10 percent reduction to Eligible Recovery will apply 
equally to all price cap carriers.
    621. In addition, as discussed in the USF/ICC Transformation NPRM, 
Commission data and the record confirm that carriers are losing lines 
and experiencing a significant and ongoing decrease in minutes-of-use. 
Incumbent LEC interstate switched access minutes have decreased each 
year since 2000, as shown in the chart below.

[[Page 81645]]

[GRAPHIC] [TIFF OMITTED] TR28DE11.003

    622. This represents an average annual decrease of over 10 percent 
and a total decrease of over 36 percent since 2006. Further, the 
percentage loss of MOU is accelerating--it increased each year between 
2006 and 2010, and exceeded 13 percent in 2010. Based on the record, it 
is the Commission's predictive judgment that significant declines in 
MOU will continue. Accordingly, the Commission will reduce Price Cap 
Eligible Recovery by 10 percent annually for price cap carriers to 
reflect a conservative prediction regarding the loss of MOU, and 
associated loss of revenue, that would have occurred absent reform.
    623. As a result, for price cap carriers, Base Minutes will be 
reduced by 10 percent annually beginning in 2012 to reflect decline in 
MOU. For example, Year One or ``Y1'' (2012) Intrastate Minutes will be 
.9 x Intrastate Base Minutes; Y2 (2013) Intrastate Minutes will be .81 
x Intrastate Base Minutes (i.e., .9 x .9 x Intrastate Base Minutes); 
etc.
    624. Price Cap Eligible Recovery. Price Cap Eligible Recovery in a 
given year is the cumulative reduction in a particular intercarrier 
compensation rate since the base year multiplied by the pre-determined 
minutes for that rate for that year, as defined above.

    Price Cap Example. A price cap carrier has a 2011 intrastate 
terminating access rate for transport and switching of $.0028, an 
interstate terminating access rate for transport and switching of 
$.0020, and 10,000,000 Intrastate Base Minutes. Its Eligible 
Recovery for intrastate switched access revenue would be determined 
as follows:
    Year 1. Reduce intrastate terminating access rate for transport 
and switching, if above the carrier's interstate access rate, by 50 
percent of the differential between the rate and the carrier's 
interstate access rate.
    The carrier's Year 1 (Y1) Minutes equal 9,000,000 (10,000,000 x 
.9). Its intrastate terminating access rate for transport and 
switching, $.0028 in 2011, is reduced by $.0004 (($.0028-$.0020) x 
50 percent)) to $.0024. Its Y1 Eligible Recovery is $3,600 ($.0004 x 
9,000,000). For a CALLS study areas, Eligible Recovery would be 
reduced by an additional 10 percent to $3,240 ($3,600 x .9). For a 
non-CALLS study area, such reductions will begin in year six.
    Year 2. Reduce intrastate terminating access rate for transport 
and switching, if above the carrier's interstate access rate, to the 
carrier's interstate access rate.
    The carrier's Year 2 (Y2) Minutes equal 8,100,000 (9,000,000 x 
.9). Its intrastate terminating access rate for transport and 
switching is reduced by an additional $.0004 from $.0024 to $.0020, 
for a cumulative reduction of $.0008. Its Y2 Eligible Recovery is 
$6,480 ($.0008 x 8,100,000). For a CALLS study area, Eligible 
Recovery would be reduced by an additional 10 percent to $5,832 
($6,480 x .9). For a non-CALLS study area, such reductions will 
begin in year six.
    This is a simplified example of the calculation of Price Cap 
Eligible Recovery for a price cap carrier's reduction in intrastate 
terminating access resulting from the reforms the Commission adopts 
for illustrative purposes only. It is not intended to encompass all 
necessary calculations applicable in determining Price Cap Eligible 
Recovery in the periods discussed in the example for all possible 
rates addressed by the R&O.

    625. This Approach to Recovery for Price Cap Carriers Provides 
Certainty and Encourages Efficiency. Under the Act, the Commission has 
``broad discretion in selecting regulatory tools, [which] specifically 
includes `selecting methods * * * to make and oversee rates,' '' and is 
not compelled to follow any ``particular regulatory model.'' The 
approach to defining Price Cap Eligible Recovery continues to give 
those incumbent LECs incentives for efficiency while also providing 
greater predictability for carriers and consumers. Under price cap 
regulation, incumbent LECs already have significant incentives to 
control their costs associated with services provided to end-users, but 
have not had the same incentives to limit the costs imposed on IXCs for 
terminating calls on the price cap incumbent LECs' networks. These 
costs are ultimately borne by the IXCs' customers generally, rather 
than by the price cap LECs' customers specifically. By phasing out 
those termination charges and providing recovery in part through 
limited end-user charges, the Commission's reform will provide price 
cap LECs incentives to minimize such costs as they transition to 
broadband networks.
    626. The Commission has considered a number of alternative 
proposals regarding the elimination of intercarrier terminating 
switched access charges and finds that the approach the Commission 
adopts constitutes a hybrid of a variety of proposals that best 
protects consumers while facilitating the reasonable transition to an 
all-

[[Page 81646]]

broadband network. Some commenters have argued that no additional 
recovery should be allowed absent a specific showing that denying 
recovery would constitute a taking. Based upon the record in this 
proceeding, the Commission concludes that such a denial would represent 
a flash-cut for price cap LECs, which is inconsistent with the 
Commission's commitment to a gradual transition and could threaten 
their ability to invest in extending broadband networks. The Commission 
also finds that denying any recovery pending the adjudication of a 
request for an exogenous low-end adjustment under the price cap rules 
would be unduly burdensome for carriers and for the Commission because 
of the number of claims the carriers would be required to file and the 
Commission would be required to adjudicate. The definition of Price Cap 
Eligible Recovery for both CALLS and non-CALLS study areas gives 
predictability not only to price cap carriers, but also to consumers 
and universal service contributors, given the fluctuations that could 
result from a true-up approach for these large carriers.
3. Calculating Eligible Recovery for Rate-of-Return Incumbent LECs
    627. For rate-of-return incumbent LECs, the Commission adopts a 
recovery mechanism that provides more certainty and predictability than 
exists today, while also rewarding carriers for efficiencies achieved 
in switching costs. Specifically, the recovery mechanism will allow 
interstate rate-of-return carriers to determine at the outset of the 
transition their total ICC and recovery revenues for all transitioned 
rate elements, for each year of the transition: Eligible Recovery will 
be adjusted as necessary with annual true ups to ensure that rate-of-
return carriers have the opportunity to receive their Baseline Revenue, 
notwithstanding changes in demand for their intercarrier compensation 
rates being capped or reduced under the R&O. The Commission finds that 
providing this greater degree of certainty for rate-of-return carriers, 
which are generally smaller and less able to respond to changes in 
market conditions than are price cap carriers, is necessary to provide 
a reasonable transition from the existing intercarrier compensation 
system.
    628. As the starting point for calculating the Rate-of Return-
Baseline, the Commission will use a rate of return carrier's 2011 
interstate switched access revenue requirement, plus FY2011 intrastate 
switched access revenues and FY2011 net reciprocal compensation 
revenues. Average schedule carriers will use projected settlements 
associated with 2011 annual interstate switched access tariff filing. 
The Commission will then adjust this Baseline over time to reflect 
trends in the status quo absent reform. Under the interstate regulation 
that has historically applied to them, rate-of-return carriers were 
able to increase interstate access rates to offset declining MOU, which 
has averaged 10 percent per year, and consequently had insufficient 
incentive to reduce costs despite rapidly decreasing demand. However, 
the record indicates that, in the aggregate, rate-of-return carriers' 
interstate switched access revenue requirement has been declining 
approximately three percent each year, reflecting declines in switching 
costs. As a result, interstate switched access revenues have been 
declining at approximately three percent annually. NECA and a number of 
rate-of-return carriers project that the revenue requirement will 
continue to decline at approximately three percent a year over the next 
five years, because switching costs are declining dramatically given 
the availability of IP-based softswitches, which are significantly less 
costly and more efficient than the TDM-based switches they replace. 
Similarly, the record reveals that legacy LSS, which is being 
incorporated in the recovery mechanism for rate-of-return carriers, is 
projected to decline approximately two percent per year, likewise 
resulting in reduced interstate revenues for carriers receiving LSS.
    629. In the intrastate jurisdiction, moreover, the majority of 
states do not have an annual true-up mechanism; intrastate rates 
generally do not automatically increase as demand declines and as a 
result, most rate-of-return carriers have been experiencing significant 
annual declines in intercarrier compensation revenue. In particular, 
aggregate data from more than 600 rate-of-return carriers reveal an 
average decline in intrastate MOUs of approximately 11 percent, and an 
average decline in intrastate access revenues of approximately 10 
percent annually. The recovery mechanism accounts for this existing 
revenue loss, which would continue to occur under the status quo path 
absent reform, as illustrated in the figure below.

[[Page 81647]]

[GRAPHIC] [TIFF OMITTED] TR28DE11.004

    630. Accounting for both the declining interstate revenue 
requirement and the ongoing loss of intrastate revenue with declining 
MOU, the record establishes a range of reasonable potential annual 
reductions in the Baseline from which Rate-of-Return Eligible Recovery 
is calculated; within that range the Commission initially adopts a five 
percent annual decrease. At the lower end of the range, an annual 
decrease of three percent would represent rate-of-return carriers' 
approximate annual interstate revenue decline absent reform. Limiting 
the Baseline adjustment to three percent would make these carriers 
substantially better off with respect to their intrastate access 
revenues, however. As discussed above, carriers in many states do not 
have annual true-ups under state access rate regulations so as MOU 
decline, intrastate access revenues decline as well. Data indicate that 
this intrastate access revenue decline has been approximately 10 
percent. Combining these interstate and intrastate declines weighted by 
the relative portion of aggregate rate-of-return revenues subject to 
the mechanism attributable to each category could justify a possible 
Baseline reduction of approximately seven percent annually. Because the 
Commission recognizes that the approach to recovery may require 
adjustments by rate-of-return carriers, the Commission initially adopts 
a conservative approach and limit the decline in the Baseline amount 
from which Rate-of-Return Eligible Recovery is calculated to five 
percent annually.
    631. Moreover, the Commission notes that the annual five percent 
decline does not include the proposal in the USF/ICC Transformation 
NPRM and from the Rural Associations to apply the corporate operations 
expense limitation to LSS. LSS offsets a portion of rate-of-return 
carriers' interstate switched access revenue requirement. Applying the 
corporate operations expense limitations to LSS, or more generally to 
the entire switched access interstate revenue requirement, would have 
resulted in one-time reduction of almost three percent. By foregoing 
this reduction before setting the Baseline, the R&O ensures that the 
five percent decline is appropriately conservative, while still 
consistent with overall goals to encourage efficiency and cost savings.
    632. Rate-of-return carriers will receive each year's Baseline 
revenue amount from three sources. First, they will continue to have an 
opportunity to receive intercarrier compensation revenues, pursuant to 
the rate reforms described above. Second, they will have an opportunity 
to collect ARC revenue from their customers, subject to the consumer 
protection limitations set forth below. Third, they will have an 
opportunity to collect any remaining Baseline revenue from the CAF. 
Together, the second and third sources comprise the Rate-of-Return 
Eligible Recovery.
    633. Specifically, Rate-of-Return Eligible Recovery will be 
calculated from the Rate of Return Baseline by subtracting an amount 
equal to each carrier's opportunity to collect ICC from the rate 
elements reformed by this R&O. In each year, this ICC opportunity will 
be calculated as actual demand for each reformed rate element times the 
default intercarrier compensation rate for that element in that year. 
The intercarrier glide path adopted above sets default transitional ICC 
rates, and permits carriers to negotiate alternatives. In computing the 
opportunity to collect ICC, the Commission will use the default rates 
rather than any actual rate to prevent carriers from negotiating low 
rates simply to prematurely shift intercarrier compensation revenues to 
the CAF. Thus, in the event that a carrier negotiates intercarrier 
compensation rates lower than those specified, the Commission will 
still impute the full default rates, for the purpose of computing the 
amount each carrier has an opportunity to collect from ICC. To do so, 
carriers are required to file data annually to ensure that carriers do 
not recover more than they are entitled under the recovery mechanism.
    634. Carriers will annually estimate their anticipated MOU for each 
relevant intercarrier compensation rate capped or reduced by this R&O. 
The Commission notes that carriers already use forecasts today in their 
annual access filings to determine interstate switched access charges 
and the Commission is requiring carriers to use similar methodology to 
forecast intercarrier compensation for use in determining Rate-of-
Return Eligible Recovery. Because estimated minutes likely will differ 
from actual minutes, there will be a true-up in two years to adjust the 
carrier's Rate-of-Return

[[Page 81648]]

Eligible Recovery for that year to account for the difference between 
forecast MOU and actual MOU in the year being trued-up. These data on 
MOU will establish the Base Minutes for each relevant category, and 
shall not include MOU for which revenues were not recovered, for 
whatever reason. Carriers may, however, request a waiver of the rules 
defining the Baseline to account for revenues billed for terminating 
switched access service or reciprocal compensation provided in FY 2011 
but recovered after the March 31, 2012 cut-off as the result of the 
decision of a court or regulatory agency of competent jurisdiction. The 
adjusted Baseline will not include settlements regarding charges after 
the March 31, 2012 cut-off, and any carrier requesting such 
modification to its Baseline shall, in addition to otherwise satisfying 
the waiver criteria, have the burden of demonstrating that the revenues 
are not already included in its Baseline, including providing a 
certification to the Commission to that effect. Any request for such a 
waiver also should include a copy of the decision requiring payment of 
the disputed intercarrier compensation. Any such waiver would be 
subject to the Commission's traditional ``good cause'' waiver standard, 
rather than the Total Cost and Earnings Review specified below. See 47 
CFR 1.3. Rate-of-return carriers will be required to submit to the 
states the data used in these calculations, allowing state regulators 
to monitor implementation of the recovery mechanism. A rate-of-return 
incumbent LEC that is eligible to receive CAF shall also file this 
information with USAC, and the Commission delegates to the Wireline 
Competition Bureau authority to work with USAC to develop and implement 
processes for administration of CAF ICC support. In support of the 
carriers' annual access tariff filing, each carrier will provide the 
necessary data used to justify any ARC to the Commission.
    635. Rate-of-Return Eligible Recovery. A rate-of-return carrier's 
baseline for recovery (``Rate-of-Return Baseline'') is its 2011 
interstate switched access revenue requirement, plus its FY 2011 
intrastate switched access intercarrier compensation revenues for rates 
capped or reduced by this R&O, plus its FY 2011 net reciprocal 
compensation revenues. A rate-of-return carrier's Eligible Recovery 
(``Rate-of-Return Eligible Recovery''), in turn, is: (a) Its Rate-of-
Return Baseline reduced by five percent each year; less (b) its ICC 
recovery opportunity for that year, defined as: (i) Its estimated MOU 
for each rate element subject to reform times; (ii) the default 
transition rate for that rate element for that year; plus (3) any 
necessary true-ups based on the prior year's actual MOUs.

    Rate of Return Example. A rate-of-return carrier has a 2011 
interstate switched access revenue requirement of $200,000, FY2011 
intrastate switched access revenues of $50,000, and net reciprocal 
compensation revenues of $5,000. Its Eligible Recovery would be 
determined as follows:
    Year 1. The carrier is entitled to collect $242,250 ($255,000 x 
.95). The carrier will subtract from this total its ICC recovery 
opportunity from switched access charges capped or reduced in this 
R&O (both intrastate and interstate) and net reciprocal 
compensation, defined as its forecast MOU times the default rates 
specified by this R&O. The remainder is Eligible Recovery.
    Year 2. Prior to adjustment for any under- or over-estimation of 
minutes in Year 1, the carrier is entitled to recover $230,137.50 
($242,250 x .95). This figure is adjusted up or down in the annual 
true-up to reflect any difference between forecast minutes in Year 1 
and actual minutes in Year 1. For example, if the carrier had fewer 
minutes than estimated in Year 1, such that its ICC recovery 
opportunity was $500 less than forecast, its recovery in Year 2 
would be adjusted upward by $500 and it would be permitted to 
recover $230,637.50 in Year 2 ($230,137.50 + $500). Conversely, if 
the carrier had a higher number of MOU than had been forecast and 
provided the carrier an opportunity for $500 more ICC recovery, its 
recovery in Year 2 would be adjusted downward to $229,637.50 
($230,137.50 - $500). The carrier will then subtract from this total 
its Year 2 ICC recovery opportunity, based on its Year 2 forecast 
minutes and the Year 2 default rates specified by this R&O. The 
remainder is Eligible Recovery.
    This is a simplified example of the calculation of Rate-of-
Return Eligible Recovery for a rate-of-return carrier's reduction in 
intrastate terminating access resulting from the reforms the 
Commission adopts for illustrative purposes only. It is not intended 
to encompass all necessary calculations applicable in determining 
Rate-of-Return Eligible Recovery in the periods discussed in the 
example for all possible rates addressed by the R&O.

    636. This Approach to Recovery for Interstate Rate-of-Return 
Carriers Provides Certainty, Minimizes Burdens to Consumers, and 
Constrains the Size of USF. Exercising flexibility under the Act to 
design specific regulatory tools, the R&O adopts an approach to Rate-
of-Return Eligible Recovery that takes interstate rate-of-return 
carriers off of rate-of-return based recovery specifically for 
interstate switched access revenues, but provides them more predictable 
recovery than exists under the status quo. In addition, to the extent 
that any interstate rate-of-return carriers also are subject to rate-
of-return regulation at the state level, the recovery mechanism for 
switched access services replaces that, as well. The Commission 
observes that the recovery mechanism otherwise leaves unaltered the 
preexisting rate regulations for these carriers' other services, such 
as common line and special access. Nonetheless, the Commission 
recognizes that this approach represents a potentially significant 
regulatory change for those carriers and adopts a longer transition for 
these carriers for this reason. In addition to the benefits of the 
standard recovery mechanism discussed below, the Total Cost and 
Earnings Review mechanism the Commission adopts will ensure that this 
recovery mechanism will not deprive any carrier of the opportunity to 
earn a reasonable return. Price cap carriers today already the bear the 
risk that costs increase and have no true up mechanism for declines in 
demand. For this reason, the recovery mechanism the Commission adopts 
for rate-of-return carriers is different than the recovery mechanism 
the Commission adopts for price cap carriers. Although rate-of-return 
carriers have a true up process to the Eligible Recovery for actual 
demand, this is akin to how such carriers are regulated today. The 
true-up process also protects carriers resulting from changes with 
regard to, for example, reforms related to various arbitrage schemes. 
The record does not allow us to quantify with precision the impact of 
these arbitrage-related reforms on rate-of-return carriers. At the same 
time, however, the Commission declines to conduct true-ups with regard 
to rate-of-return carriers' switched access costs; accordingly, 
carriers will have incentives to become more efficient and to reduce 
switching costs, including by investing in more efficient technology 
and by sharing switches. Carriers that are more efficient will be able 
to retain the benefits of the cost savings. The Commission believes the 
rural LEC forecast with regard to reduced switched access costs is 
conservative, and carriers will have additional opportunities to 
recognize efficiencies with regard to these costs. The Commission 
discusses these issues in greater detail below.
    637. As discussed above, incumbent LECs are experiencing 
consistent, substantial, and accelerating declines in demand for 
switched access services. The effect of current interstate rate 
regulation is to insulate rate-of-return carriers from revenue loss due 
to competitive pressures that result in declining lines and MOU, but 
rapidly increasing access rates have exacerbated these carriers' risk 
of revenue

[[Page 81649]]

uncertainty due to arbitrage, and carriers themselves project declining 
costs--and thus declining revenues--under the status quo. In the 
intrastate jurisdiction, as described above, carriers are often unable 
to automatically increase rates as they experience a decline in demand 
caused by competition and changing consumer usage, leading to declining 
intrastate revenues.
    638. The Commission's framework allows rate-of-return carriers to 
profit from reduced switching costs and increased productivity, 
ultimately benefitting consumers. The Commission notes in this regard 
that the transition to broadband networks affords smaller carriers 
opportunities for efficiencies not previously available. For example, 
small carriers may be able to realize efficiencies through measures 
such as sharing switches, measures that preexisting regulations, such 
as the thresholds for obtaining LSS support, may have deterred. Under 
the new recovery framework, carriers that realize these efficiencies 
will not experience a resulting reduction in support. In addition, the 
new recovery framework--in conjunction with the overall reforms adopted 
in this Order--provides revenue certainty, stability, and predictable 
support, as well as promoting continued investment, consistent with 
advantages some historically have associated with rate-of-return 
regulation.
    639. Importantly, the Commission's approach also avoids the risk of 
unconstrained escalation in the burden on end-user customers and 
universal service contributors. The Commission agrees with commenters 
that, absent incentives for efficiency, determining recovery based on 
the historical approach to these carriers' rate regulation could cause 
the CAF to grow significantly and without constraint. This prediction 
is consistent with the Commission's past recognition that rate-of-
return regulation can create incentives for inefficient investment, 
which would flow through to the recovery mechanism. Although some 
commenters contend that Commission accounting regulations and oversight 
adequately protect against inefficient investment, the effectiveness of 
Commission accounting regulations and oversight is limited in certain 
respects, as the Commission itself previously has recognized. More 
broadly, as commenters observe, retaining rate-of-return regulation as 
historically employed by the Commission risks ``perpetuat[ing the] 
isolated, ILEC-as-an island operation,'' thus increasing the costs 
subject to recovery to the extent that, for example, each individual 
incumbent LEC purchases its own facilities, rather than sharing 
infrastructure with other carriers where efficient. Of particular 
relevance here, as one commenter observes, under the preexisting 
regulatory framework ``there is little evidence of shared investment in 
local switching, even though such sharing would be engaged in by 
rational carriers subject to market incentives,'' while, ``[i]n 
contrast, there is evidence of at least some efforts to engage in joint 
ventures to invest in transport and tandem switching assets for which 
there are fewer regulatory incentives for rate-of-return carriers to 
invest in their own equipment and facilities.'' The Commission is 
committed to constraining the growth of the CAF, and the recovery 
mechanism the Commission adopts for interstate rate-of-return carriers 
advances that goal. To this end, states that have jurisdiction over 
intrastate access rates should monitor intrastate tariffs filed 
pursuant to the rules and reforms adopted in this Order to ensure 
carriers do not shift costs from services subject to incentive 
regulation to services still subject to rate-of-return regulation.
    640. The Commission declines to adopt the recovery mechanism 
proposed by associations of rate-of-return carriers. Although these 
carriers contend that their approach would allow intercarrier 
compensation reform for rate-of-return carriers that would limit the 
burdens placed on the CAF, the Commission is not persuaded by a number 
of the assumptions that lead them to this conclusion. The rate-of-
return carriers project that their revenue requirement for switched 
access will decline three percent annually for the next five years. The 
Commission's approach locks in this historical trend, adjusted to 
account for the intrastate status quo. In the absence of locking in 
this historical trend, however, the Commission has concerns about 
whether such declines in the revenue requirement actually will occur. 
As commenters observe, because ICC costs will be shifted primarily to 
the CAF to make rate-of-return carriers whole, carriers would face 
incentives for inefficient investment, and such incentives could be 
heightened to the extent that carriers seek to offset the effects of 
intercarrier compensation rate reductions. A more realistic view of the 
assumptions underlying the associations' projections suggests that the 
financial impact on the CAF of the associations' proposal is likely far 
greater than they project. Consequently, adopting their proposal 
appears likely to lead to one of two results--the CAF would grow 
significantly, or intercarrier compensation reform would stop once CAF 
demands outstripped the available budget.

E. Recovering Eligible Recovery

    641. The Commission now explains the two-step mechanism by which 
carriers will be allowed to recover their Eligible Recovery. First, 
incumbent LECs will be permitted to recover Eligible Recovery through 
limited end-user charges. If these charges are insufficient, carriers 
will be entitled to CAF support equal to the remaining Eligible 
Recovery. Carriers electing to forego recovery from the ARC or the CAF 
must indicate their intention to do so in their 2012 tariff filing. 
Carriers may also elect to forgo CAF reform in any subsequent tariff 
filing. A carrier cannot, however, elect to receive CAF funding after a 
previous election not to do so. Notwithstanding a carrier's election to 
forego recovery from the ARC or the CAF, tariff filings may require 
carriers to provide the information necessary to justify the rates and 
terms in the tariff. Because the Commission views the recovery 
mechanism as a transitional tool, the Commission implements several 
measures to ensure it is truly temporary in nature. First, the Eligible 
Recovery that incumbent LECs are permitted to recover phases down over 
time, based on a predetermined glide path for price cap carriers and a 
more gradual framework for rate-of-return carriers. Second, ICC-
replacement CAF support for price cap carriers is subject to a defined 
sunset date. Finally, in the USF/ICC Transformation FNPRM, the 
Commission seeks further comment on the timing for eliminating the 
recovery mechanism--including end-user recovery-- in its entirety. 
Carriers recovering eligible recovery will be required to certify 
annually that they are entitled to receive the recovery they are 
claiming and that they are complying with all rules pertaining to such 
recovery.
1. End User Recovery
    642. The USF/ICC Transformation NPRM sought comment on the role 
that interstate SLCs should play in intercarrier compensation reform 
and the ongoing relevance of the SLC as the marketplace moves to IP 
networks. The subsequent USF/ICC Transformation Public Notice, 76 FR 
154, August 10, 2011, sought further comment on particular alternatives 
for using SLCs as part of any recovery mechanism. Although the record 
reveals a wide variety of proposals, most parties commenting on the 
matter supported an

[[Page 81650]]

increase in end-user charges as a necessary part of ICC reform. In 
developing the recovery mechanism, the Commission seeks to balance the 
interests of both end-user customers and USF contributors. The 
Commission thus agrees that it is appropriate to first look to 
customers paying lower rates for some limited, reasonable recovery, and 
adopt a number of safeguards to ensure that rates remain affordable and 
that consumers are not required to contribute an inequitable share of 
lost intercarrier revenues.
    643. In addition to balancing the needs of ratepayers and USF 
contributors, the R&O also accounts for differences among different 
ratepayers, adopting particular protections for consumers. For example, 
some proposals in the record would require that end-user recovery be 
borne in the first instance by consumers. Instead, acknowledging that 
all end users benefit from the network, and consistent with the 
Commission's approach to end-user recovery in prior intercarrier 
compensation reform, the Commission concludes that all end users should 
contribute to reasonable end-user recovery from the beginning of ICC 
reform.
    644. The Commission adopts a transitional ARC that is subject to 
three important constraints. First, in no case will the monthly ARC 
increase more than $0.50 per year for a residential or single-line 
business customer, or more than $1.00 (per line) per year for a multi-
line business customer. Price cap incumbent LECs are allowed to 
increase ARCs for no more than five years; rate-of-return incumbent 
LECs for no more than six years. The Commission believes that the 
consumer ARC adopted here, which, even if fully imposed, represents a 
smaller percentage increase than SLC increases adopted by the 
Commission in prior reforms, strikes the proper balance. Second, in no 
case will the consumer ARC increase if that increase would result in 
certain residential end-user rates exceeding the Residential Rate 
Ceiling, which the Commission discusses below. Third, ARCs can only be 
charged in a particular year to recover an incumbent LEC's Eligible 
Recovery for that year; total revenue from ARCs cannot exceed Eligible 
Recovery. Thus if a carrier's Eligible Recovery decreases from one year 
to the next, the total amount of ARCs it may charge its end users will 
also decrease. Importantly, carriers also are not required to charge 
the ARC.
    645. To minimize the consumer burden, the R&O limits increases in 
the monthly consumer ARC to $0.50 per year. The Commission also makes 
clear that carriers may not charge any Lifeline customers an ARC. As a 
result, incumbent LECs' calculation of ARCs for purposes of the 
recovery mechanism must identify and exclude such customers. Given that 
the intercarrier compensation reforms also do not alter the operation 
of the existing SLC, these intercarrier compensation reforms will not 
affect the Lifeline universal service support mechanism. Furthermore, 
while some commenters advocate end-user charges only for residential 
and single-line business customers, the Commission rejects requests to 
place the entire recovery burden on consumers. The R&O provides for 
increases in the monthly ARC for multi-line business customers of $1.00 
(per line) per year, and the Commission will require potential revenue 
from such increases to be imputed to carriers, reducing the total 
amount of consumer ARCs they may charge. Doing so is consistent with 
the Commission's prior intercarrier compensation reforms, which 
recognized that ``universal service concerns are not as great for 
multi-line business lines.'' Consequently, in previous reforms, the 
Commission has adopted higher increases in end-user charges for multi-
line business customers than for consumers, and on a more accelerated 
timeline. For example, in the Access Charge Reform Order, 62 FR 31868, 
June 11, 1997, the Commission did not raise the SLC cap for primary 
residential and single-line business users, but concluded that 
universal service concerns were not as great for multi-line business 
users, for example, and raised the SLC caps for such users from $6.00 
to $9.00 per line. In the 2008 ICC/USF Order and NPRM, 73 FR 66821, 
November 12, 2008, the Commission proposed increasing the residential 
and single-line business and the non-primary residential line SLC by 
$1.50 and the multi-line business SLC by $2.30. In the USF/ICC 
Transformation NPRM the Commission sought comment on those amounts 
again. Commenters supported this increase. In fact, some commenters 
advocated for a higher SLC increase. The ARC adopted today, which is 
lower on an annual basis than the annual SLC increase proposed in 2008, 
balances the burdens on consumers and businesses. However, the 
Commission has taken measures to ensure that charges for multi-line 
businesses remain just and reasonable. In particular, to ensure that 
multi-line businesses' total SLC plus ARC line items are just and 
reasonable and to minimize the burden on businesses, the R&O limits the 
maximum SLC plus ARC fee to $12.20. This limits the ARC for multi-line 
businesses for entities at the current $9.20 cap to $3.00, comparable 
to the overall limit on residential ARCs.
    646. The R&O permits carriers to determine at the holding company 
level how Eligible Recovery will be allocated among their incumbent 
LECs' ARCs. By providing this flexibility, carriers will be able to 
spread the recovery of Eligible Recovery among a broader set of 
customers, minimizing the increase experienced by any one customer. 
This also will enable carriers to more fully recover Eligible Recovery 
from end-users with rates below the $30 Residential Rate Ceiling, 
limiting the potential impact on the CAF. For carriers that elect to 
receive CAF support, the Commission will impute to each carrier the 
full ARC revenues they are permitted to collect, regardless of whether 
they actually collect any or all such revenues. If the imputed amount 
is insufficient to cover all their Eligible Recovery, they are 
permitted to recover the remainder from CAF ICC support.
    647. In the event a carrier elects not to receive CAF ICC support, 
the Commission takes measures to limit the burden on residential and 
single-line business customers. The decision to elect not to receive 
ICC replacement CAF support, discussed below, is distinct from the 
decision to assess the full authorized ARC. Absent doing so, carriers 
potentially could use their holding company-level flexibility to target 
their ARC recovery primarily or exclusively to residential and single-
line business customers, rather than larger multi-line business 
customers. The Commission therefore requires that a carrier allocate 
its Eligible Recovery by a proportion of a carrier's mix of residential 
versus business lines. However, because line counts alone would not 
reflect the fact that there is a lower cap on ARC increases for 
residential and single-line business lines ($0.50 per line) than for 
multi-line business lines ($1.00 per line), the Commission adopts a 
double-weighting of multi-line business lines for purposes of this 
calculation. The percentage of ARC revenues a carrier is eligible to 
recover from residential and single-line business customers cannot 
exceed the percentage of total residential lines assessed a SLC by such 
customers where multi-line business lines are given double weight. In 
addition, this calculation will exclude lines for Lifeline customers 
because the Commission prevents carriers from assessing an ARC on any 
Lifeline customer. For example, if a carrier had 1000 residential and 
single-line business lines and 200 multi-line

[[Page 81651]]

business lines, and Eligible Recovery of $600 monthly, under the 
limitation, it would be permitted to collect no more than 71.43 percent 
of that amount--approximately $429--from residential and single-line 
business customers based on the calculation: 1000 residential and 
single line business lines/(1000 residential and single-line business 
lines + 2 x 200 multi-line business lines) = 71.43 percent.
    648. The Commission declines to implement end user recovery through 
increases to the pre-existing SLC, as some commenters suggest. SLCs 
today are designed to recover common line revenues as defined by 
Commission regulation. The Commission is not formally recategorizing 
any costs or revenues to be included in that regulatory category, and 
the calculation of Eligible Recovery for purposes of the reforms the 
Commission adopts is completely independent of SLC rate calculations. 
As a result, the Commission leaves current SLCs unmodified for now. 
Carriers whose current SLCs are below the caps are not otherwise 
permitted to increase their SLCs to recover revenues reduced by 
interstate and intrastate access charge reforms, i.e., the Commission 
is not permitting carriers to raise their SLCs beyond the level they 
are currently authorized to charge, even if that level is below the 
relevant regulatory SLC cap. The Commission seeks comment in the 
accompanying USF/ICC Transformation FNPRM regarding whether existing 
regulation of SLCs is appropriate, including whether SLCs should be 
reduced or phased-out over time. Instead, the new ARC will be 
separately calculated, reduced over time, and separately tariffed and 
reported to the Commission to enable monitoring to ensure carriers are 
not assessing ARCs in excess of their Eligible Recovery. The ARC can, 
however, be combined in a single line item with the SLC on the 
customer's bill. Moreover, the Commission finds that it is appropriate 
to reevaluate its SLC rules, and does so in the USF/ICC Transformation 
FNPRM.
    649. Residential Rate Ceiling. In the USF/ICC Transformation Public 
Notice, the Commission sought comment on the appropriate level and 
operation of a ceiling to limit rate increases in states that already 
had undertaken some intercarrier compensation reforms. To ensure that 
consumer telephone rates remain affordable and to recognize states that 
have already undertaken reform, the Commission adopts a Residential 
Rate Ceiling of $30 per month for all incumbent LECs, both price cap 
and rate-of-return. Although the Residential Rate Ceiling does not 
generally limit rates carriers can charge, it prevents carriers from 
charging an ARC on residential consumers already paying $30 or more.
    650. For purposes of comparison with the Residential Rate Ceiling, 
the Commission considers the rate for basic local service, including 
additional charges that a consumer actually pays each month in 
conjunction with that service (referred to collectively as rate ceiling 
component charges). The rate ceiling component charges consist of the 
federal SLC and the ARC; the flat rate for residential local service, 
mandatory extended area service charges, and state subscriber line 
charges; per-line state high cost and/or access replacement universal 
service contributions; state E911 charges; and state TRS charges. 
Carriers are not permitted to charge ARCs to the extent that ARCs would 
result in rate ceiling component charges exceeding the Residential Rate 
Ceiling for any residential customer. For example, a consumer in 
Parsons, Kansas may have a rate of $13.90, a SLC of $6.40, a mandatory 
contribution to the Kansas Universal Service Fund of $6.75, a mandatory 
EAS charge of $1.70, and a TRS charge of $1.00--his or her aggregate 
rate ceiling component charges before the ARC would be $29.75. 
Accordingly, a carrier could only charge this consumer an ARC of $0.25 
before reaching the $30 Residential Rate Ceiling. (The carrier could 
still charge multi-line business customers a $1.00 per line ARC, 
provided that any multi-line business customer's total SLC plus ARC 
does not exceed $12.20). Consistent with the goal of the Residential 
Rate Ceiling, because non-primary residential SLC lines are charged to 
residential customers the Commission limits carriers' ARC for non-
primary residential SLC lines to an amount equal to the ARC charged for 
such consumers' primary residential lines. Thus, to the extent that the 
Residential Rate Ceiling limits the ARC that can be assessed on 
residential customers' primary lines, it effectively will limit the ARC 
that can be charged on their non-primary lines, as well. After the ARC, 
any additional Eligible Recovery would have to be recovered from the 
CAF rather than from end-users.
    651. The Residential Rate Ceiling particularly helps protect 
consumers in states that have already begun state intercarrier 
compensation reform. As part of such reform, some states are 
rebalancing rates, with local rate increases phasing in over time, 
including potentially after January 1, 2012. These local rate increases 
will be included in the calculation of end-users rates for comparison 
to the Residential Rate Ceiling . Further, as part of its universal 
service reforms, the Commission is adopting an intrastate rate minimum 
benchmark designed to avoid over-subsidizing carriers whose intrastate 
rates are not minimally reasonable. To ensure that states are not 
disincented from rebalancing artificially low local retail rates after 
January 1, 2012, and to ensure that the Residential Rate Ceiling 
continues to protect consumers in those states, the Commission will use 
the higher of the relevant rates in effect on January 1, 2012 or of 
January 1 in the year in which the ARC is to be charged for comparison 
to the Residential Rate Ceiling, thus accounting for possible increases 
in consumer rates over time.
    652. The Commission finds the $30 Residential Rate Ceiling will 
help ensure that consumer rates remain affordable and set at reasonable 
levels by preventing any ARC increases to consumers who already pay $30 
or more. The Commission notes that it also adopts a ``local rate 
benchmark'' as part of universal service reform of HCLS and HCMS. The 
CAF benchmark serves a different purpose and has a different function 
from the Residential Rate Ceiling. The CAF benchmark is focused on 
ensuring that universal service does not overly subsidize carriers with 
artificially low local rates. As a result, it focuses more narrowly on 
the specific rates of concern, especially flat-rated local service 
charges, state SLCs, and state USF contributions and sets a lower bound 
to encourage carriers to charge reasonably comparable local rates. HCLS 
and HCMS are federal universal service mechanisms that pick up 
intrastate loop costs, and the Commission will not use limited 
universal service funding to subsidize artificially low rates. The CAF 
benchmark therefore serves as a floor. Although some commenters propose 
using a $25 (or lower) rate, the Commission notes that several states 
that have rebalanced rates already have rates above $30, suggesting 
that this rate is affordable and set at reasonable levels. To the 
extent that prior surveys of urban rates yielded an average of 
approximately $25, the Commission observes that the surveys encompassed 
a more limited set of charges than the Residential Rate Ceiling. As 
demonstrated by the rates in a number of states that have undertaken 
significant intercarrier compensation reform--which the Commission 
finds to be a more relevant data set in this context than average urban 
rates--rates

[[Page 81652]]

including the full ranges of charges can be close to or more than $30. 
The Commission also declines to adopt separate rate ceilings for 
different carriers, and instead agree with commenters that it would 
``be inappropriate--and inconsistent with Section 254--for the 
Commission to adopt different benchmarks for different geographic areas 
or providers.'' Such an approach would mandate rate disparities between 
geographic areas, contrary to the Commission's goal of promoting 
reasonably comparable rates throughout the country. The Commission thus 
concludes that the $30 Residential Rate Ceiling strikes the right 
balance between ensuring that consumers pay their fair share of 
recovery and protecting consumers in states that already have 
undertaken substantial reforms.
2. CAF Recovery
    653. The Commission has recognized that, as the Commission moves 
away from implicit support, some high cost, rural areas may need new 
explicit support from the universal service fund. Consequently, in the 
USF/ICC Transformation NPRM, the Commission sought comment on the 
appropriate role of universal service support to offset some 
intercarrier revenues lost through reform. The Commission agrees with 
the many commenters advocating that transitional recovery should, in 
part, come through the CAF. In particular, the limits on ARCs and the 
Residential Rate Ceiling place important constraints on end user 
recovery. Consequently, the Commission anticipates that end user 
recovery alone will not provide the full recovery permitted by the 
mechanism for many incumbent LECs, particularly rate-of-return 
carriers. Given the Commission's desire to ensure a measured, 
predictable transition, the Commission thus finds it appropriate to 
supplement end user recovery with transitional ICC-replacement CAF 
support.
    654. To that end, as part of the new CAF universal service 
mechanism, the Commission permits incumbent LECs to recover Eligible 
Recovery that they do not have the opportunity to recover through 
permitted ARCs. The ICC-replacement CAF support for carriers that are 
eligible and elect to receive it is the remainder of Eligible Recovery 
not recovered through ARCs. As a result, those same data will enable 
USAC to calculate CAF support as well. Thus, the Commission directs 
carriers to file those same data with USAC for purposes of CAF 
distribution under the recovery mechanism. The Commission notes that 
although incumbent LECs will experience intercarrier compensation 
reductions on a study area-by-study area basis, they have flexibility 
at the holding company level to determine where and how to charge ARCs. 
Thus, USAC needs an approach to attributing those revenues to 
particular study areas to determine the amount of CAF funding to 
provide to each such area. In this regard, the Commission notes that 
one benefit of its universal service reform is the greater 
accountability associated with the CAF support mechanism. Given that, 
the Commission directs USAC to attribute ARC revenue to all of the 
holding company's study areas in proportion to the Eligible Recovery 
associated with that study area. This will ensure that some study areas 
are not insulated from the CAF accountability measures by having 
sufficient ARC revenue attributed to meet their entire Eligible 
Recovery need. The same oversight and accountability obligations the 
Commission adopts above apply to CAF support received as part of the 
recovery mechanism. In addition, all rate-of-return CAF ICC recipients, 
whether a current recipient of high cost universal service support or 
not, must satisfy the same public interest obligations as carriers 
receiving high-cost universal service support. All price cap CAF ICC 
recipients must use such support for building and operating broadband-
capable networks used to offer their own retail broadband service in 
areas substantially unserved by an unsubsidized competitor of fixed 
voice and broadband services. The Commission believes it is appropriate 
to adopt slightly different obligations for receipt of CAF ICC support 
for price cap and rate-of-return carriers. For one, the price cap CAF 
support is transitional, and phasing out completely over time as the 
Commission has adopted a long-term phase II CAF support for areas 
served by price cap carriers. Thus, the Commission has a mechanism to 
advance its goal of universal voice and broadband to areas served by 
price cap carriers that are unserved today. For rate-of-return 
carriers, however, the Commission has not adopted a different long-term 
approach for receipt of universal service support. Therefore, the 
Commission believes it is appropriate to impose the same obligations 
that such carriers have for receipt of all universal service support 
that the Commission adopts above, which requires carriers to extend 
broadband upon reasonable request. Finally, the Commission allows a 
carrier to elect not to receive ICC replacement CAF support (and 
therefore to avoid the obligations that accompany support) even if it 
would otherwise be entitled to do so under the Eligible Recovery 
calculation. The election to decline CAF support will be made in the 
carrier's July 1, 2012 tariff filing. A carrier that elects not to 
receive CAF cannot subsequently change this election. A carrier can, 
however, initially elect to receive CAF support but elect to end that 
support at any time. Moreover, like forgone ARC recovery, forgone CAF 
will be imputed to a carrier seeking any additional recovery under the 
Total Cost and Earnings Review, discussed below.
    655. Providing CAF recovery is consistent with the Commission's 
mandate under 47 U.S.C. 254 and the Commission's use of universal 
service funding as a component of prior intercarrier compensation 
reforms. In light of the broadband obligations the Commission adopts, 
the decision to establish this funding mechanism is also consistent 
with the Commission's general authority under section 4(i) of the Act, 
47 U.S.C. 154(i), and section 706 of the 1996 Act, 47 U.S.C. 1302, 
because it furthers the Commission's universal service objectives and 
promotes the deployment of advanced services.
    656. For price cap carriers that elect to receive ICC-replacement 
CAF support, such support is transitional and phases out in three 
years, beginning in 2017. Although the Commission does not adopt a 
similar sunset for rate-of-return carriers' ICC-replacement CAF support 
in this Order, the Commission seeks comment on alternatives in this 
regard in the ICC/USF Transformation FNPRM.
3. Monitoring Compliance With Recovery Mechanism
    657. To monitor compliance with this R&O, the Commission requires 
all incumbent LECs that participate in the recovery mechanism, 
including by charging any end user an ARC, to file data on an annual 
basis regarding their ICC rates, revenues, expenses, and demand for the 
preceding fiscal year. The Commission also encourages, but does not 
require, all competitive LECs and CMRS providers to similarly file such 
data. All such information may be filed under protective order and will 
be treated as confidential.
    658. These data are necessary to monitor compliance with the 
provisions of this R&O and accompanying rules, including to ensure that 
carriers are not charging ARCs that exceed their Eligible Recovery and 
that ARCs are reduced as Eligible Recovery decreases. The data are also 
needed to monitor the impact of the reforms the Commission adopts

[[Page 81653]]

and to enable the Commission to resolve the issues teed up in the USF/
ICC Transformation FNPRM regarding the appropriate transition to bill-
and-keep and, if necessary, the appropriate recovery mechanism for rate 
elements not reduced in this R&O, including originating access and many 
transport rates. Such data will enable the Commission to determine the 
impact that any transition would have on a particular carrier or group 
of carriers, and to evaluate the trend of ICC revenues, expenses, and 
minutes and compare such data uniformly across all carriers.
    659. To minimize any burden, filings will be aggregated at the 
holding company level, limited to the preceding fiscal year, and will 
include data carriers must monitor to comply with the recovery 
mechanism rules. For carriers eligible and electing to receive CAF ICC 
support, the Commission will ensure that the data filed with USAC are 
consistent with the Commission's request, so that carriers can use the 
same format for both filings. To ensure consistency and further 
minimize any burden on carriers, the Commission delegates to the 
Wireline Competition Bureau the authority to adopt a template for 
submitting the data, which should be done in conjunction with the 
development of data necessary to be filed with USAC for receipt of CAF 
ICC support, which has also been delegated to the Wireline Competition 
Bureau. Given that carriers must be monitoring these data to comply 
with the revised tariff rules, the Commission requires incumbent LECs 
to file electronically annually at the same time as their annual 
interstate access tariff filings.

F. Requests for Additional Support

    660. Although the Commission provides an opportunity for revenue 
recovery to promote an orderly transition away from terminating access 
charges, the Commission declines to adopt a revenue-neutral approach as 
advocated by some commenters. Rather, the Commission agrees with 
commenters who maintain that the Commission has no legal obligation to 
ensure that carriers recover access revenues lost as a result of 
reform, absent a showing of a taking. The Commission establishes a 
rebuttable presumption that the reforms adopted in the R&O, including 
the recovery of Eligible Recovery from the ARC and CAF, allow incumbent 
LECs to earn a reasonable return on their investment. The Commission 
establishes a ``Total Cost and Earnings Review,'' through which a 
carrier may petition the Commission to rebut this presumption and 
request additional support. The Commission believes the Total Cost and 
Earnings Review procedure alone is sufficient to meet its legal 
obligations with regard to recovery. The Commission identifies below 
certain factors in addition to switched access costs and revenues that 
may affect the analysis of requests for additional support, including: 
(1) Other revenues derived from regulated services provided over the 
local network, such as special access; (2) productivity gains; (3) 
incumbent LEC ICC expense reductions and other cost savings, and (4) 
other services provided over the local network. Particularly given 
these factors, it is the Commission's predictive judgment that the 
limited recovery permitted will be more than sufficient to provide 
carriers reasonable recovery for regulated services, both as a matter 
of the constitutional obligations underlying the Commission's rate 
regulation and as a policy matter of providing a measured transition 
away from incumbent LECs' historical reliance on intercarrier 
compensation revenues to recovery that better reflects today's 
marketplace. Nonetheless, the Commission also adopts a Total Cost and 
Earnings Review to allow individual carriers to demonstrate that this 
rebuttable presumption is incorrect and that additional recovery is 
needed to prevent a taking.
    661. To show that the standard recovery mechanism is legally 
insufficient, a carrier would face a ``heavy burden,'' and need to 
demonstrate that the regime ``threatens [the carrier's] financial 
integrity or otherwise impedes [its] ability to attract capital.'' As 
the Supreme Court has long recognized, when a regulated entity's rates 
``enable the company to operate successfully, to maintain its financial 
integrity, to attract capital, and to compensate its investors for the 
risks assumed,'' the company has no valid claim to compensation under 
the Takings Clause, even if the current scheme of regulated rates 
yields ``only a meager return'' compared to alternative rate-setting 
approaches. For the reasons described above, the Commission believes 
that its recovery mechanisms provide recovery well beyond any 
constitutionally-required minimum, and the Commission finds no 
convincing evidence in the record here that the standard recovery 
mechanism will yield confiscatory results.
    662. Specifically, a carrier can petition for a Total Cost and 
Earnings Review to request additional CAF ICC support and/or waiver of 
CAF ICC support broadband obligations. In analyzing such petitions, the 
Commission will consider the totality of the circumstances, to the 
extent permitted by law. The Commission's analysis will consider all 
factors affecting a carrier and its ability to earn a return on its 
relevant investment, including the factors described below. As a result 
of this analysis of costs and revenues, the Commission will be able to 
determine the constitutionally required return and will not be bound by 
any return historically used in rate-setting nor any specific return 
resulting from the intercarrier compensation recovery mechanism adopted 
in this R&O, or possible rate represcription as discussed in the USF/
ICC Transformation FNPRM. Given the extensive discussion of reform 
proposals over the years, a carrier could not reasonably ``rely 
indefinitely'' on the existing system of intercarrier compensation, 
``but would simply have to rely on the constitutional bar against 
confiscatory rates'' in the event the Commission revised its 
compensation rules. Verizon Communications Inc. v. FCC, 535 U.S. 467, 
528 (2002).
    663. As the Commission seeks to protect consumers from undue rate 
increases or increases in contributions to USF, the Commission will 
conduct the most comprehensive review of any requests for additional 
support allowed by law. The recovery mechanism goes beyond what might 
strictly be required by the constitutional takings principles 
underlying historical Commission regulations. Therefore, although the 
standard recovery mechanism does not seek to precisely quantify and 
address all considerations relevant to resolution of a takings claim, 
carriers will need to address these considerations to the extent that 
they seek to avail themselves of the Total Cost and Earnings Review 
procedure based on a claim that recovery is legally insufficient.
    664. Revenues Derived from Other Regulated Services Provided Over 
the Local Network. The Commission agrees with those who argue that it 
is appropriate for the Commission to consider the implications of 
services other than switched access that are provided using supported 
facilities, to the extent constitutionally permitted. Notwithstanding 
intercarrier compensation reform, carriers will continue to receive 
revenues from other uses of the local network. For example, although 
the reforms adopted in this R&O will bring many intercarrier 
compensation rates into a bill-and-keep framework, other intercarrier 
compensation rates will be subject to minimal--or no--reforms at this 
time. Consequently, incumbent LECs will continue to collect 
intercarrier

[[Page 81654]]

compensation for originating access and dedicated transport, providing 
continued revenue flows--including the underlying implicit subsidies--
from those sources during the transition outlined in this R&O, although 
the Commission has determined that such rates ultimately will reach 
bill-and-keep as well. Carriers acknowledge that the subsidies in these 
remaining intercarrier compensation rates are used for investment in 
their network to provide regulated services such as special access 
service. In addition, there was debate in the record regarding whether, 
and how, to consider special access revenues in this regard. At this 
time the Commission does not prescribe general rules considering such 
revenue, but, as with other services that rely on the local network, 
the Commission will consider such earnings and may reconsider this 
decision if warranted upon conclusion of the Commission's ongoing 
special access proceeding.
    665. Productivity Gains. As discussed above, although incentive 
regulation commonly involves sharing the benefits of productivity gains 
between carriers and ratepayers, such a mechanism has not been in place 
for many years. The standard recovery mechanism adopts a 10 percent 
reduction in CALLS price cap incumbent LECs' baseline revenues, 
initially for CALLS price cap study areas, and after five years for 
non-CALLS price cap study areas to reflect this. However, because the 
Commission believe that is a conservative approach, the Commission 
finds it appropriate to consider efficiency gains for particular price 
cap carriers on an individual basis in the Total Cost and Earnings 
Review, as well.
    666. LEC Cost Savings and Increased Revenue. Currently, carriers 
are frequently embroiled in costly litigation over payment, 
jurisdiction, and type of traffic. The reforms the Commission adopts in 
this R&O should substantially reduce such disputes, and the Commission 
anticipates that comprehensive intercarrier compensation reform will 
further reduce carriers' costs of administering intercarrier 
compensation. Likewise, the Commission's actions regarding phantom 
traffic and intercarrier compensation for VoIP traffic may increase the 
proportion of traffic for which intercarrier compensation can be 
collected. Finally, the Commission notes that the reforms should result 
in expense savings in other lines of business, such as the provision of 
long distance services. Although the Commission does not adopt a ``net 
revenues'' approach as part of the standard recovery mechanism, in 
appropriate circumstances the Commission believes an analysis of 
intercarrier expenses could be warranted in the examination of an 
individual carrier's claim under the more fact- and carrier-specific 
Total Costs and Earnings Review mechanism. The Commission will consider 
these factors to the extent legally permissible, including but not 
limited to the following categories:
     Revenue for Exchanging VoIP Traffic. A number of carriers 
have alleged that they are not receiving compensation for exchanging 
VoIP traffic. In this R&O the Commission adopts rules clarifying the 
obligation of VoIP traffic to pay intercarrier compensation charges 
during the transition to bill and keep. The decisions the Commission 
adopts will provide LECs, including incumbent LECs, with more certain 
revenue throughout the transition, and will also allow them to avoid 
the litigation expense associated with attempts to collect access 
charges for VoIP traffic.
     Reduced Phantom Traffic. Similarly, the rules adopted in 
this R&O will enable carriers to identify and bill for phantom traffic. 
These rules thus should enable carriers to collect intercarrier 
compensation charges throughout the transition that they are not 
currently able to collect. The Commission also anticipates that 
incumbent LECs will be able to reduce administrative and litigation 
costs associated with such traffic.
     Other Reduced Litigation Costs and Administrative 
Expenses. In addition to reduced litigation costs and administrative 
expense associated with VoIP and phantom traffic as a result of the 
reforms the Commission adopts in this R&O, the record indicates that 
carriers will benefit more generally from the clarity and relative 
simplicity of the rules the Commission adopts. The Commission 
anticipates that this will be reflected in additional savings in 
litigation and administration costs.
     Other Services Provided Over the Local Network. In 
addition to regulated services provided over the local network, many 
carriers also provide unregulated services, such as broadband and 
video. Although parties have identified some uncertainty regarding the 
Commission's ability to consider revenues from such services in 
calculating a carrier's return on investment in the local network, the 
Commission will, at a minimum, carefully scrutinize the allocation of 
costs associated with such services. As one commenter states, ``[i]t 
simply no longer makes any sense (if it ever did) for the agency to 
allow rural carriers to spend as much as they can on their networks, 
earning a rate of return on these historical costs while only 
considering the small sliver of regulated local telephony revenues 
earned using these USF subsidized networks.''
    667. The Commission notes that some carriers argued that the 
Commission should not rely on revenue from unregulated services to 
offset a carrier's defined eligible revenue, but that if it did, it 
should only use net unregulated revenue, considering both the costs and 
revenues from those services. In addition, although there are a range 
of possible approaches for allocating many types of costs, a number of 
commenters recognized that historical accounting underlying 
intercarrier compensation rates and other charges fail to reflect the 
marketplace reality of the number and types of services provided over 
the local network. For example, the record revealed concerns about the 
extent to which loop costs have been allocated to regulated services 
such as voice telephone service versus services such as broadband 
Internet access service. Consequently, the Commission will give 
appropriate consideration to these services as part of the Total Cost 
and Earnings Review, including an analysis of both the revenue 
generated by such other services and whether the cost of such services, 
both regulated and unregulated, have been properly allocated.
    668. Cost Allocation. The USF/ICC Transformation NPRM sought 
comment on the implications of the jurisdictional separations process, 
including ongoing reform efforts, on intercarrier compensation reforms. 
The jurisdictional separations process, which has been frozen for some 
time, is currently the subject of a referral to the Separations Joint 
Board. Any carrier seeking additional recovery will be required to 
conduct a separations study to demonstrate the current use of its 
facilities. Although this is a burdensome requirement, it is not unduly 
so given the importance of protecting consumers and the universal 
service fund.

XI. Intercarrier Compensation for VOIP Traffic

    669. Under the new intercarrier compensation regime, all traffic--
including VoIP-PSTN traffic--ultimately will be subject to a bill-and-
keep framework. As part of the transition to that end point, the 
Commission adopts a prospective intercarrier compensation framework for 
VoIP traffic. In particular, the Commission addresses the prospective 
treatment of VoIP-PSTN traffic by adopting a transitional compensation 
framework for such traffic

[[Page 81655]]

proposed by commenters in the record. Although the Commission adopts an 
approach similar to that proposed by some commenters, the approach to 
adopting and implementing this framework differs in certain respects. 
For one, the Commission is not persuaded on this record that all VoIP-
PSTN traffic must be subject exclusively to federal regulation, and as 
a result, to adopt this prospective regime the Commission relies on its 
general authority to specify a transition to bill-and-keep for 47 
U.S.C. 251(b)(5) traffic. As a result, tariffing of charges for toll 
VoIP-PSTN traffic can occur through both federal and state tariffs. In 
addition, given the recognized concerns with the use of telephone 
numbers and other call detail information to establish the geographic 
end-points of a call, the Commission declines to mandate their use in 
that regard. The Commission does, however, recognize concerns regarding 
providers' ability to distinguish VoIP-PSTN traffic from other traffic, 
and, consistent with the recommendations of a number of commenters, 
permits LECs to address this issue through their tariffs, much as they 
do with jurisdictional issues today.
    670. The Commission believes that this prospective framework best 
balances the competing policy goals during the transition to the final 
intercarrier compensation regime. By declining to apply the entire 
preexisting intercarrier compensation regime to VoIP-PSTN traffic 
prospectively, the Commission recognizes the shortcomings of that 
regime. At the same time, the Commission is mindful of the need for a 
measured transition for carriers that receive substantial revenues from 
intercarrier compensation. Although the Commission's action clarifying 
the prospective intercarrier compensation treatment of VoIP-PSTN 
traffic does not resolve the numerous existing industry disputes, it 
should minimize future uncertainty and disputes regarding VoIP 
compensation, and thereby meaningfully reduce carriers' future costs.

A. Widespread Uncertainty and Disagreement Regarding Intercarrier 
Compensation for VoIP Traffic

    671. Against this backdrop, and the fact that the current 
uncertainty and associated disputes are likely deterring innovation and 
introduction of new IP services to consumers, the Commission finds it 
appropriate to address the prospective intercarrier compensation 
obligations associated with VoIP-PSTN traffic. Indeed, despite the 
varied opinions in the record regarding the appropriate approach to 
VoIP-PSTN intercarrier compensation, there is widespread agreement that 
the Commission needed to act to address that issue now.

B. Prospective Intercarrier Compensation Obligations for VoIP-PSTN 
Traffic

1. Scope of VoIP-PSTN Traffic
    672. The prospective intercarrier compensation regime the 
Commission adopts for a LEC's exchange of VoIP traffic with another 
carrier focuses on what the Commission refers to as ``VoIP-PSTN'' 
traffic. The Commission uses the term ``VoIP-PSTN'' as shorthand. The 
Commission recognizes that carriers have been converting portions of 
their networks to IP technology for years. Nonetheless, many carriers 
today continue to rely extensively on circuit-switched technology 
particularly for the exchange of traffic subject to intercarrier 
compensation rules. Likewise the definition of ``interconnected VoIP'' 
uses the term ``PSTN'' as distinct from at least certain types of VoIP 
services. Thus, in the context of VoIP-PSTN intercarrier compensation 
rules, the reference to ``PSTN'' refers to the exchange of traffic 
between carriers in (Time Division Multiplexing) TDM format. For 
purposes of this R&O, the Commission adopts the definition of traffic 
proposed in the Joint Letter: ``VoIP-PSTN traffic'' is ``traffic 
exchanged over PSTN facilities that originates and/or terminates in IP 
format.'' Although the Commission's prospective VoIP-PSTN intercarrier 
compensation is not circumscribed by the definition of ``interconnected 
VoIP service'' in section 3(25) of the Act, 47 U.S.C. 153(25) 
(referencing section 9.3 of the Commission's rules) or the definition 
of ``non-interconnected VoIP service'' in section 3(36) of the Act, 47 
U.S.C. 153(36), nonetheless, informed by those definitions, the 
Commission believes it is appropriate to focus on traffic for services 
that require ``Internet protocol-compatible customer premises 
equipment.'' Sections 3(25) and 3(36) of the Act, 47 U.S.C.153(25), 
(26), were adopted in section 101 of the Twenty-First Century 
Communications and Video Accessibility Act of 2010, Pub. L. No. 111-
260, section 103(b), 124 Stat. 2751 (2010). In this regard, the 
Commission focuses specifically on whether the exchange of traffic 
between a LEC and another carrier occurs in Time-Division Multiplexing 
(TDM) format (and not in IP format), without specifying the technology 
used to perform the functions subject to the associated intercarrier 
compensation charges.
    673. Although the USF/ICC Transformation NPRM proposed focusing 
specifically on interconnected VoIP services, the Commission notes that 
its existing definition of interconnected VoIP would exclude traffic 
associated with some VoIP services that are originated or terminated on 
the PSTN, such as ``one-way'' services that allow end-users either to 
place calls to, or receive calls from, the PSTN, but not both. Although 
these one-way services do not meet the definition of interconnected 
VoIP, carriers are likely to be providing origination or termination 
functions with respect to this traffic comparable to that of ``two-
way'' traffic that meets the existing definition of interconnected 
VoIP. Moreover, intercarrier compensation disputes have encompassed all 
forms of what the Commission defines as VoIP-PSTN traffic, and 
addressing this traffic more comprehensively helps guard against new 
forms of arbitrage. Various commenters recommended including such 
traffic within the scope of the intercarrier compensation framework for 
VoIP or otherwise expressed support for the approach taken in the ABC 
Plan and Joint Letter. Based on the foregoing considerations, the 
Commission is persuaded to adopt that approach.
    674. The Commission agrees with concerns raised by NCTA and find it 
appropriate to adopt a symmetrical framework for VoIP-PSTN traffic, 
under which providers that benefit from lower VoIP-PSTN rates when 
their end-user customers' traffic is terminated to other providers' 
end-user customers also are restricted to charging the lower VoIP-PSTN 
rates when other providers' traffic is terminated to their end-user 
customers. The Commission thus declines to adopt an asymmetric approach 
that would apply VoIP-specific rates for only IP-originated or only IP-
terminated traffic, as some commenters propose. The Commission has 
recognized concerns about asymmetric payment associated with VoIP 
traffic today, including marketplace distortions that give one category 
of providers an artificial regulatory advantage in costs and revenues 
relative to other market participants. An approach that addressed only 
IP-originated traffic would perpetuate--and expand--such concerns. 
Commenters advocating a focus solely on IP-originated traffic 
implicitly recognize as much, noting that providers with IP networks 
could benefit relative to providers with TDM

[[Page 81656]]

networks under such an intercarrier compensation regime.
2. Intercarrier Compensation Charges for VoIP-PSTN Traffic
    675. The Commission adopts a prospective intercarrier compensation 
framework that brings all VoIP-PSTN traffic within the 47 U.S.C. 
251(b)(5) framework. As discussed below, the Commission has authority 
to bring all traffic within the 47 U.S.C. 251(b)(5) framework for 
purposes of intercarrier compensation, including traffic that otherwise 
could be encompassed by the interstate and intrastate access charge 
regimes, and the Commission exercises that authority now for all VoIP-
PSTN traffic.
    676. The Commission adopts transitional rules specifying, 
prospectively, the default compensation for VoIP-PSTN traffic: Default 
charges for ``toll'' VoIP-PSTN traffic will be equal to interstate 
access rates applicable to non-VoIP traffic, both in terms of the rate 
level and rate structure; default charges for other VoIP-PSTN traffic 
will be the otherwise-applicable reciprocal compensation rates; and 
LECs are permitted to tariff these default charges for toll VoIP-PSTN 
traffic in relevant federal and state tariffs in the absence of an 
agreement for different intercarrier compensation.
    677. The intercarrier compensation framework for VoIP-PSTN traffic 
will apply prospectively, during the transition between existing 
intercarrier compensation rules and the new regulatory regime adopted 
in this R&O, and is subject to the reductions in intercarrier 
compensation rates required as part of that transition. The Commission 
does not address preexisting law, including whether or how the ESP 
exemption might have applied previously, and the Commission makes clear 
that, whatever its possible relevance historically, the ESP exemption 
is not relevant or applicable prospectively in determining the 
intercarrier compensation obligations for VoIP-PSTN traffic.
a. The Prospective VoIP-PSTN Intercarrier Compensation Framework Best 
Balances the Relevant Policy Considerations
    678. The Commission believes that its prospective, intercarrier 
compensation regime for VoIP-PSTN traffic best balances the relevant 
policy considerations of providing certainty regarding the prospective 
intercarrier compensation obligations for VoIP-PSTN traffic while 
acknowledging the flaws with preexisting intercarrier compensation 
regimes, and providing a measured transition to the new intercarrier 
compensation framework. The framework for VoIP-PSTN traffic will also 
reduce disputes and provide greater certainty to the industry regarding 
intercarrier compensation revenue streams while also reflecting the 
Commission's move away from the pre-existing, flawed intercarrier 
compensation regimes that have applied to traditional telephone 
service.
    679. Although commenters did not all agree on the treatment of 
VoIP-PSTN traffic, there was widespread consensus among commenters 
that, whatever the outcome, it was essential that the Commission 
address that issue now. The framework seeks to facilitate discussions 
among the providers exchanging VoIP-PSTN traffic, lessening the need 
for prescriptive Commission regulations. At the same time, the USF/ICC 
Transformation NPRM recognized the disruptive nature of some providers' 
unilateral actions regarding VoIP intercarrier compensation, and we 
seek to prevent such actions here going forward.
    680. The Commission is not persuaded by the arguments of some 
commenters to subject VoIP traffic to the pre-existing intercarrier 
compensation regime that applies in the context of traditional 
telephone service, including full interstate and intrastate access 
charges. For one, many of the advocates of such an approach 
subsequently endorsed the ABC Plan and Joint Letter. Further, such an 
outcome would require the Commission to enunciate a policy rationale 
for expressly imposing that regime on VoIP-PSTN traffic in the face of 
the known flaws of existing intercarrier compensation rules and 
notwithstanding the recognized need to move in a different direction. 
Moreover, requiring payment of all existing intercarrier compensation 
rates applicable to traditional telephone service traffic as part of a 
transitional regime for VoIP-PSTN traffic would, in the aggregate, 
increase providers' reliance on intercarrier compensation at the same 
time the Commission's broader reform efforts seek to move providers 
away from reliance on intercarrier compensation revenues. Nor is the 
Commission persuaded that such an outcome is necessary to advance 
competitive or technological neutrality. As discussed above, the 
prospective regime for VoIP-PSTN intercarrier compensation is 
symmetrical, and thus avoids the marketplace distortions that could 
arise from an asymmetrical approach to compensation. In particular, the 
record does not demonstrate that the approach advantages in the 
aggregate providers relying on TDM networks relative to VoIP providers 
or vice versa, nor that it advantages in the aggregate certain IXCs 
relative to others. The transitional VoIP-PSTN intercarrier 
compensation regime the Commission adopts here can reduce both the 
intercarrier compensation revenues and long distance and wireless costs 
associated with VoIP-PSTN traffic. Further, to the extent that 
particular carriers historically have relied on access revenues to 
subsidize local services, the record is clear that many providers did 
not pay the same intercarrier compensation rates for VoIP traffic that 
would have applied to traditional telephone service traffic. 
Additionally, the transitional VoIP-PSTN intercarrier compensation 
framework provides the opportunity for some revenues in conjunction 
with other appropriate recovery opportunities adopted as part of 
comprehensive intercarrier compensation and universal service reform.
    681. Many of these commenters also argue that comparable uses of 
the network should be subject to comparable intercarrier compensation 
charges. The Commission agrees with that policy principle, but observes 
that the intercarrier compensation regime applicable to traditional 
telephone service--which they seek to apply to VoIP-PSTN traffic--is at 
odds with that policy. The pre-existing intercarrier compensation 
regime imposes significantly different charges for the same use of the 
network depending upon, among other things, the jurisdiction of the 
traffic at issue. A more uniform intercarrier compensation framework 
for all uses of the network will arise from the end-point of reform 
adopted in this R&O. For purposes of the transition, the Commission 
concludes that its approach best balances the relevant policy 
considerations.
    682. The Commission also is unpersuaded by concerns that an 
intercarrier compensation regime for VoIP-PSTN traffic could lead to 
further arbitrage or undermine the Commission-established transition 
adopted for intercarrier compensation reform more broadly. An 
underlying assumption of those arguments is that the carriers 
delivering traffic for termination will be able to unilaterally 
determine the portion of their traffic to be subject to the VoIP-PSTN 
regime. As discussed in greater detail below, the implementation 
mechanisms for the Commission's approach protect against that outcome, 
both through protections that can be implemented in tariffs and through 
the option of negotiated agreements, subject

[[Page 81657]]

to arbitration, regarding the portion of traffic subject to the VoIP-
PSTN intercarrier compensation regime. The Commission also permits LECs 
to include language in their tariffs to address the identification of 
VoIP-PSTN traffic, much as they do to identify the jurisdiction of 
traffic today.
b. Legal Authority
    683. Authority To Address VoIP-PSTN Traffic Under Section 
251(b)(5). Although the Commission has not classified interconnected 
VoIP services or similar one-way services as ``telecommunications 
services'' or ``information services,'' VoIP-PSTN traffic nevertheless 
can be encompassed by 47 U.S.C. 251(b)(5). As discussed in greater 
detail above, 47 U.S.C. 251(b)(5) includes ``the transport and 
termination of all telecommunications exchanged with LECs'' with the 
exception of ``traffic encompassed by section 251(g) * * * except to 
the extent that the Commission acts to bring that traffic within its 
scope.'' The Commission previously has recognized that interconnected 
VoIP providers are providers of telecommunications. Moreover, the 
Commission has previously concluded that interconnected VoIP services 
involve ``transmission of [voice] by aid of wire, cable, or other like 
connection'' and/or ``transmission by radio,'' and went on to conclude 
that ``[t]he telecommunications carriers involved in originating or 
terminating a [VoIP] communication via the PSTN are by definition 
offering `telecommunications.' '' Further, although classification 
questions remain regarding retail VoIP services, commenters observe 
that the exchange of VoIP-PSTN traffic that is relevant to the 
Commission's intercarrier compensation regulations typically occurs 
between two telecommunications carriers, one or both of which are 
wholesale carrier partners of retail VoIP service providers. Nor does 
anything in the record persuade us that a different conclusion is 
warranted in the context of other VoIP-PSTN traffic.
    684. Authority To Adopt Transitional Rates for VoIP-PSTN Traffic. 
The legal authority that enables us to specify transitional rates for 
comprehensive intercarrier compensation reform also enables the 
Commission to adopt its transitional VoIP-PSTN intercarrier 
compensation framework pending the transition to bill-and-keep. For 
one, the Commission's pre-existing regimes for establishing reciprocal 
compensation rates for 47 U.S.C. 251(b)(5) traffic have been upheld as 
lawful, and can be applied to non-toll VoIP-PSTN traffic as provided by 
the transitional intercarrier compensation rules. The Commission also 
has authority to adopt the transitional framework for toll VoIP-PSTN 
traffic based on its rulemaking authority to implement 47 U.S.C. 
251(b)(5). As discussed above, interpreting the Commission's rulemaking 
authority in this manner is consistent with court decisions recognizing 
that avoiding ``market disruption pending broader reforms is, of 
course, a standard and accepted justification for a temporary rule.'' 
Sections 201 and 332, 47 U.S.C. 201, 332, provide additional legal 
authority specifically for interstate traffic and all traffic exchanged 
with CMRS providers.
    685. Application of Section 251(g). Additionally, as described 
above, 47 U.S.C. 251(g) supports the view that the Commission has 
authority to adopt transitional intercarrier compensation rules, 
preserving the access charge regimes that pre-dated the 1996 Act 
``until [they] are explicitly superseded by regulations prescribed by 
the Commission.'' The Commission rejects the claims of some commenters 
that VoIP-PSTN traffic did not exist prior to the 1996 Act, and thus 
cannot be part of the access charge regimes ``grandfathered'' by 47 
U.S.C. 251(g). This argument flows from a mistaken interpretation of 47 
U.S.C. 251(g). The essential question under 47 U.S.C. 251(g) is not 
whether a particular service, or traffic involving a particular 
transmission protocol, existed prior to the 1996 Act. VoIP traffic 
existed prior to the 1996 Act, although the record here does not reveal 
whether LECs were exchanging IP-originated or IP-terminated VoIP 
traffic at that time. Because the Commission otherwise rejects the 
claim that intercarrier compensation for VoIP-PSTN traffic is 
categorically excluded from 47 U.S.C. 251(g), the Commission needs not, 
and does not, consider further the nature and extent of VoIP traffic 
that existed prior to the 1996 Act. Rather, the question is whether 
there was a ``pre-Act obligation relating to intercarrier compensation 
for'' particular traffic exchanged between a LEC and `` `interexchange 
carriers and information service providers.'''
    686. Pre-1996 Act Obligations. Regardless of whether particular 
VoIP services are telecommunications services or information services, 
there are pre-1996 Act obligations regarding LECs' compensation for the 
provision of exchange access to an IXC or an information service 
provider. Interexchange VoIP-PSTN traffic is subject to the access 
regime regardless of whether the underlying communication contained 
information-service elements. Indeed, the Commission has already found 
that toll telecommunications services transmitted (although not 
originated or terminated) in IP were subject to the access charge 
regime, and the same would be true to the extent that 
telecommunications services originated or terminated in IP. Similarly, 
to the extent that interexchange VoIP services are transmitted to the 
LEC directly from an information service provider, such traffic is 
subject to pre-1996 Act obligations regarding ``exchange access,'' 
although the access charges imposed on information service providers 
were different from those paid by IXCs. Specifically, under the ESP 
exemption, rather than paying intercarrier access charges, information 
service providers were permitted to purchase access to the exchange as 
end users, either by purchasing special access services or ``pay[ing] 
local business rates and interstate subscriber line charges for their 
switched access connections to local exchange company central 
offices.'' But although the nature of the charge is different from the 
access charges paid by IXCs, the Commission has always recognized that 
information-service providers providing interexchange services were 
obtaining exchange access from the LECs. Accordingly, because they were 
subject to these exchange access charges, interexchange information 
service traffic was subject to the over-arching Commission rules 
governing exchange access prior to the 1996 Act, and therefore subject 
to the grandfathering provision of 47 U.S.C. 251(g).
    687. The DC Circuit's WorldCom decision, cited by some commenters, 
does not compel a different result. In WorldCom, the court considered 
whether dial-up, ISP-bound traffic was covered by 47 U.S.C. 251(g)'s 
grandfathering provision. Consistent with the language of 47 U.S.C. 
251(g), the court focused on whether there was a ``pre-Act obligation 
relating to intercarrier compensation for ISP-bound traffic'' and found 
it ``uncontested--and the Commission declared in the Initial Order''--
that there was not. Although the court also stated that ``[t]he best 
the Commission can do'' in indentifying a pre-1996 Act obligation ``is 
to point to pre-existing LEC obligations to provide interstate access 
for ISPs,'' the discussion in the initial ISP-Bound Traffic Order cited 
by the court emphasized the uncertainty at that time regarding the 
regulatory classification of the functions provided by the carrier

[[Page 81658]]

serving the ISP--i.e., whether it was providing local service, 
interexchange service, or exchange access. As the DC Circuit ultimately 
observed, the fact that the carrier serving the ISP was acting as a 
LEC--rather than an interexchange carrier or information service 
provider--would be dispositive that compensation for that traffic 
exchange could not be encompassed by 47 U.S.C. 251(g). Here, by 
contrast, there is no evidence that the exchange of toll VoIP-PSTN 
traffic inherently involves the exchange of traffic between two LECs. 
Moreover, the Commission notes that to the extent VoIP-PSTN traffic is 
not ``toll'' traffic, it is subject to the preexisting reciprocal 
compensation regime under 47 U.S.C. 251(b)(5) rather than the 
transitional framework for toll VoIP-PSTN traffic that the Commission 
adopts in this R&O.
c. Implementation
    688. Role of Tariffs. During the transition, the Commission permits 
LECs to tariff reciprocal compensation charges for toll VoIP-PSTN 
traffic equal to the level of interstate access rates. CMRS providers 
currently are subject to detariffing, and nothing in the intercarrier 
compensation framework for VoIP-PSTN traffic disrupts that regulatory 
approach. Under the permissive tariffing regime, providers likewise are 
free not to file federal and/or state tariffs for VoIP-PSTN traffic, 
and instead seek compensation solely through interconnection agreements 
(or, if they wish, to forgo such compensation). Although the Commission 
is addressing intercarrier compensation for all VoIP-PSTN traffic under 
the 47 U.S.C. 251(b)(5) framework, the Commission is doing so as part 
of an overall transition from current intercarrier compensation 
regimes--which rely extensively on tariffing specifically with respect 
to access charges--and a new framework more amenable to negotiated 
intercarrier compensation arrangements. The Commission therefore 
permits LECs to file tariffs that provide that, in the absence of an 
interconnection agreement, toll VoIP-PSTN traffic will be subject to 
charges not more than originating and terminating interstate access 
rates. This prospective regime thus facilitates the benefits that can 
arise from negotiated arrangements without sacrificing the revenue 
predictability traditionally associated with tariffing regimes. For 
interstate toll VoIP-PSTN traffic, the relevant language will be 
included in a tariff filed with the Commission, and for intrastate toll 
VoIP-PSTN traffic, the rates may be included in a state tariff. In this 
regard, the Commission notes that the terms of an applicable tariff 
would govern the process for disputing charges.
    689. Contrary to some proposals, however, the Commission does not 
require the use of particular call detail information to dispositively 
distinguish toll VoIP-PSTN traffic from other VoIP-PSTN traffic, given 
the recognized limitations of such information. For example, the 
Commission has recognized that telephone numbers do not always reflect 
the actual geographic end points of a call. Further, although the 
phantom traffic rules are designed to ensure the transmission of 
accurate information that can help enable proper billing of 
intercarrier compensation, standing alone, those rules do not ensure 
the transmission of sufficient information to determine the 
jurisdiction of calls in all instances. Rather, consistent with the 
tariffing regime for access charges discussed above, carriers today 
supplement call detail information as appropriate with the use of 
jurisdictional factors or the like when the jurisdiction of traffic 
cannot otherwise be determined. The Commission finds this approach 
appropriate here, as well.
    690. The Commission does, however, clarify the approach to 
identifying VoIP-PSTN traffic for purposes of complying with this 
transitional intercarrier compensation regime. Although intercarrier 
compensation rates for VoIP-PSTN traffic during the transition will 
differ from other rates for only a limited time, the Commission 
recognizes commenters' concerns regarding the mechanism to distinguish 
VoIP-PSTN traffic, and thus sought specific comment on that issue. In 
response, a number of commenters argued that the industry should be 
permitted to ``work cooperatively'' to address this issue, recognizing 
that ``[o]ver the years, carriers have developed reasonable methods for 
distinguishing between calls for billing purposes * * * and can be 
expected to do so here.'' The Commission agrees that, ``to help manage 
the transition'' LECs should be permitted to incorporate specific 
tariff provisions in their intrastate tariffs that ``could, for 
example, require carriers delivering traffic for termination to 
identify the percentage of traffic that is'' subject to the 
transitional VoIP-PSTN intercarrier compensation regime ``and to 
support those figures with traffic studies or other reasonable analyses 
that are subject to audit.'' Just as such a tariffing framework already 
is used to address jurisdiction of traffic, such an approach is a 
reasonable tool (in addition to information the terminating LEC has 
about VoIP customers it is serving) to identify the relevant traffic 
subject to the VoIP-PSTN intercarrier compensation regime. In addition, 
one commenter noted the potential to rely on interconnected VoIP 
subscriber and wireline line count data from Form 477 to develop a safe 
harbor. Thus, as an alternative, the Commission permits the LEC instead 
to specify in its intrastate tariff that the default percentage of 
traffic subject to the VoIP-PSTN framework is equal to the percentage 
of VoIP subscribers in the state based on the Local Competition Report, 
as released periodically, unless rebutted by the other carrier. In 
particular, under this approach, the default percentage of VoIP-PSTN 
traffic in a state would be the total number of incumbent LEC and non-
incumbent LEC VoIP subscriptions in a state divided by the sum of those 
reported VoIP subscriptions plus incumbent LEC and non-incumbent LEC 
switched access lines. Further, although the Commission does not 
mandate other approaches as part of its tariffing regime, individual 
providers remain free to rely on signaling or call detail information, 
or other measures, to the extent that they enter alternative 
compensation arrangements through interconnection agreements. In 
particular, contrary to some suggestions, the Commission does not 
require filing of certifications with the Commission regarding 
carriers' reported VoIP-PSTN traffic. Such certifications would be 
required from not only IXCs but also originating and terminating 
providers nationwide, even though these issues may be of little or no 
practical concern in states with intrastate access rates that already 
are at or near interstate rates. Given the likely significant 
overbreadth in the burden that would impose, the Commission declines to 
adopt such a requirement.
    691. Although the Commission will allow tariffs during the 
transition to bill-and-keep, the Commission reaffirms its decision in 
the T-Mobile Order that good-faith negotiations generally are 
preferable to tariffing as a means of implementing carriers' 
compensation obligations. Under the circumstances here, the Commission 
does not believe that the policies underlying the prohibition of 
wireless termination tariffs for non-access traffic in the T-Mobile 
Order requires us to prohibit use of tariffs for toll VoIP-PSTN traffic 
during the transition. Although the Commission likewise is moving to 
facilitate negotiated arrangements for intercarrier compensation more 
broadly, significant portions of the legacy intercarrier compensation 
regime have

[[Page 81659]]

traditionally relied on tariffs, and the Commission believes flash 
cutting the whole industry to a new regime would be unduly disruptive. 
Further, in place of tariffing, the T-Mobile Order required CMRS 
providers to negotiate interconnection agreements in good faith subject 
to 47 U.S.C. 252 negotiation and arbitration processes at the request 
of incumbent LECs--a set of requirements that the Commission has not 
extended more broadly. Thus, maintaining a continuing role for tariffs 
during the transition to a new intercarrier compensation framework is a 
reasonable approach. Further, CMRS providers had expressed concerns 
about potentially excessive rates in wireless termination tariffs. 
Here, rates are ultimately subject to Commission oversight, including 
the mandated reductions in those charges as part of comprehensive 
intercarrier compensation reform. The Commission thus concludes that 
this approach strikes the right balance here.
    692. Reliance on Interconnection Agreements and SGATs. As discussed 
above, the transitional intercarrier compensation framework permits 
tariffing of charges for toll VoIP-PSTN traffic, but permits carriers 
to negotiate agreements that reflect alternative rates. In the case of 
incumbent LECs, they must negotiate in good faith in response to 
requests for agreements addressing reciprocal compensation for VoIP-
PSTN traffic. In this regard, the Commission notes that reciprocal 
compensation charges generally have been imposed through 
interconnection agreements or state-approved statements of generally 
available terms and conditions (SGATs), which carriers may accept in 
lieu of negotiating individual interconnection agreements. Various 
commenters also describe the benefits that can arise from an 
interconnection and intercarrier compensation framework that allows 
parties to negotiate mutually agreeable outcomes, rather than all 
parties being categorically bound to a single regime. Likewise, the 
interconnection and intercarrier compensation framework adopted in 
sections 251 and 252 of the 1996 Act, 47 U.S.C. 251, 252, reflect a 
policy favoring negotiated agreements, where possible.
    693. The Commission recognizes the concerns of some commenters that 
instances of disparate negotiating leverage can occur and that, absent 
an appropriate regulatory backstop, a regime purely relying on 
commercial negotiations could systematically disadvantage providers 
with limited negotiating leverage. These concerns arise in part based 
on the variations in size and make-up of the customers of different 
networks, and in part based on certain underlying legal requirements, 
including the general policy against blocking traffic and the lack of a 
statutory compulsion for certain entities to enter interconnection 
agreements.
    694. The transitional regime for VoIP-PSTN intercarrier 
compensation accommodates these disparities in several ways. For one, 
the ability to tariff these charges ensures that LECs have the 
opportunity to obtain the intercarrier compensation provided for by the 
rules. In addition, the section 252 framework applicable to 
interconnection agreements provides procedural protections. For 
example, it provides carriers the opportunity, outside the tariffing 
framework, to specify a mutually agreeable approach for determining the 
amount of traffic that is VoIP-PSTN traffic. To this end, carriers 
could include an alternative approach in a state-approved SGAT or 
negotiate such an approach as part of an interconnection agreement. To 
the extent that the parties pursue a negotiated agreement but cannot 
agree upon the particular means of determining the amount of traffic 
that is VoIP-PSTN traffic, this can be subject to arbitration. Although 
most incumbent LECs are subject to this duty by virtue of the Act, 
while other carriers, such as competitive LECs, are not, the Commission 
notes that its rules already anticipate the possibility that two non-
incumbent LECs might elect to bring a reciprocal compensation dispute 
before a state for arbitration under the section 252 framework. To the 
extent that a state fails to arbitrate a dispute regarding VoIP-PSTN 
intercarrier compensation, it will be subject to Commission 
arbitration.
    695. Scope of Charges Imposed by Retail VoIP Providers' LEC 
Partners. Some commenters express concern that, absent Commission 
clarification, certain LECs that provide wholesale inputs to retail 
VoIP services might not be able to collect all the same intercarrier 
compensation charges as LECs relying entirely on TDM networks. In 
particular, providers cite disputes arising from their use of IP 
technology as well as the structure of the relationship between retail 
VoIP service providers and their wholesale carrier partners. For the 
reasons described above, the Commission believes a symmetric approach 
to VoIP-PSTN intercarrier compensation is warranted for all LECs. One 
of the goals of the Commission's reform is to promote investment in and 
deployment of IP networks. Although the Commission believes that its 
comprehensive reforms best advance this goal, during the transition it 
does not want to disadvantage providers that already have made these 
investments. Consequently, the Commission allows providers that have 
undertaken or choose to undertake such deployment the same opportunity, 
during the transition, to collect intercarrier compensation under its 
prospective VoIP-PSTN intercarrier compensation regime as those 
providers that have not yet undertaken that network conversion. 
Further, recognizing that these specific questions have given rise to 
disputes, the Commission believes that addressing this issue under its 
transitional intercarrier compensation framework will reduce 
uncertainty and litigation, freeing up resources for investment and 
innovation. The Commission therefore adopts rules clarifying LECs' 
ability to impose charges in such circumstances under its transitional 
regime, as discussed below.
    696. The transitional VoIP-PSTN intercarrier compensation rules 
focus specifically on whether the exchange of traffic occurs in TDM 
format (and not in IP format), without specifying the technology used 
to perform the functions subject to the associated intercarrier 
compensation charges. The Commission thus adopts rules making clear 
that origination and termination charges may be imposed under its 
transitional intercarrier compensation framework, including when an 
entity ``uses Internet Protocol facilities to transmit such traffic to 
[or from] the called party's premises.''
    697. With respect to the issue of whether particular functions are 
performed by the wholesale LEC or its retail VoIP partner, the 
Commission recognizes that under the Commission's historical approach 
in the access charge context, when relying on tariffs, LECs have been 
permitted to charge access charges to the extent that they are 
providing the functions at issue. In light of the policy considerations 
implicated here, the Commission adopts a different approach to address 
concerns about double billing. As discussed above, the Commission 
brings all access traffic within 47 U.S.C. 251(b)(5). The Commission 
had not previously addressed LECs' rights to tariff such charges in 
that context. Nonetheless, for convenience, the transitional 
intercarrier compensation framework builds upon rules, or rule 
language, from the access charge context in a number of ways, and the 
Commission therefore modifies aspects of that language in the manner 
discussed above, based on the record received on this issue.
    698. The Commission believes that a symmetrical approach to VoIP-
PSTN

[[Page 81660]]

intercarrier compensation is the best policy, and thus believe that 
competitive LECs should be entitled to charge the same intercarrier 
compensation as incumbent LECs do under comparable circumstances. 
Because the Commission has not broadly addressed the classification of 
VoIP services, however, retail VoIP providers that take the position 
that they are offering unregulated services therefore are not carriers 
that can tariff intercarrier compensation charges. Consequently, just 
as retail VoIP providers rely on wholesale carrier partners for, among 
other things, interconnection, access to numbers, and compliance with 
911 obligations--a type of arrangement the Commission has endorsed in 
the past--so too do they rely on wholesale carrier partners to charge 
tariffed intercarrier compensation charges. Given these distinct 
circumstances, the Commission adopts rules that permit a LEC to charge 
the relevant intercarrier compensation for functions performed by it 
and/or by its retail VoIP partner, regardless of whether the functions 
performed or the technology used correspond precisely to those used 
under a traditional TDM architecture. The Commission notes that, 
notwithstanding its rules, to the extent that these charges are imposed 
via tariff, a carrier may not impose charges other than those provided 
for under the terms of its tariff. However, the rules include measures 
to protect against double billing, and the Commission also makes clear 
that its rules do not permit a LEC to charge for functions performed 
neither by itself or its retail service provider partner.
    699. This approach is supported by the fact that the Commission is 
bringing all traffic within 47 U.S.C. 251(b)(5). Under Commission 
precedent in that context, to the extent that a competitive LEC's rates 
were set based on the incumbent LEC's reciprocal compensation charges, 
the Commission's rules were not as limiting regarding the scope of 
those reciprocal compensation charges as historically was the case in 
the access charge context. Indeed, in addition to tariffing, providers 
also remain free to negotiate compensation arrangements for this 
traffic through interconnection agreements, and to define the scope of 
charges by mutual agreement or, if relevant, arbitration.
d. Other Issues
i. Interconnection and Traffic Exchange
    700. Use of Section 251(c)(2) Interconnection Arrangements. 
Although the Commission brings all VoIP-PSTN traffic within 47 U.S.C. 
251(b)(5), and permit compensation for such arrangements to be 
addressed through interconnection agreements, the Commission recognizes 
that there is potential ambiguity in existing law regarding carriers' 
ability to use existing 47 U.S.C. 251(c)(2) interconnection facilities 
to exchange VoIP-PSTN traffic, including toll traffic. Consequently, 
the Commission makes clear that a carrier that otherwise has a 47 
U.S.C. 251(c)(2) interconnection arrangement with an incumbent LEC is 
free to deliver toll VoIP-PSTN traffic through that arrangement, as 
well, consistent with the provisions of its interconnection agreement. 
The Commission previously held that 47 U.S.C. 251(c)(2) interconnection 
arrangements may not be used solely for the transmission of 
interexchange traffic because such arrangements are for the exchange of 
``telephone exchange service'' or ``exchange access'' traffic--and 
interexchange traffic is neither. However, as long as an 
interconnecting carrier is using the 47 U.S.C. 251(c)(2) 
interconnection arrangement to exchange some telephone exchange service 
and/or exchange access traffic, 47 U.S.C. 251(c)(2) does not preclude 
that carrier from relying on that same functionality to exchange other 
traffic with the incumbent LEC, as well. This interpretation of 47 
U.S.C. 251(c)(2) is consistent with the Commission's prior holding that 
carriers that otherwise have 47 U.S.C. 251(c)(2) interconnection 
arrangements are free to use them to deliver information services 
traffic, as well. Likewise, it is consistent with the Commission's 
interpretation of the unbundling obligations of 47 U.S.C. 251(c)(3), 
where it held that, as long as a carrier is using an unbundled network 
element (UNE) for the provision of a telecommunications service for 
which UNEs are available, it may use that UNE to provide other 
services, as well. With respect to the broader use of 47 U.S.C. 
251(c)(2) interconnection arrangements, however, it will be necessary 
for the interconnection agreement to specifically address such usage 
to, for example, address the associated compensation.
    701. No Blocking. In addition to the protections discussed above to 
prevent unilateral actions disruptive to the transitional VoIP-PSTN 
intercarrier compensation regime, the Commission also finds that 
carriers' blocking of VoIP calls is a violation of the Communications 
Act and, therefore, is prohibited just as with the blocking of other 
traffic. As such, it is appropriate to discuss the Commission's general 
policy against the blocking of such traffic. As the Commission has long 
recognized, permitting blocking or the refusal to deliver voice 
telephone traffic, whether as a means of ``self-help'' to address 
perceived unreasonable intercarrier compensation charges or otherwise, 
risks ``degradation of the country's telecommunications network.'' 
Consequently, ``the Commission, except in rare circumstances[,] * * * 
does not allow carriers to engage in call blocking'' and ``previously 
has found that call blocking is an unjust and unreasonable practice 
under section 201(b) of the Act.'' Although the Commission generally 
has not classified VoIP services, as discussed above, the exchange of 
VoIP-PSTN traffic implicating intercarrier compensation rules typically 
involves two carriers. As a result, those carriers are directly bound 
by the Commission's general prohibition on call blocking with respect 
to VoIP-PSTN traffic, as with other traffic.
    702. The Commission recognizes, however, that blocking also could 
be performed by interconnected VoIP providers, or by providers of 
``one-way'' VoIP service that allows customers to receive calls from, 
or place calls to the PSTN, but not both. Just as call blocking 
concerns regarding interexchange carriers and wireless providers arose 
in an effort to avoid high access charges, VoIP providers likewise 
could have incentives to avoid such rates, which they would pay either 
directly or through the rates they pay for wholesale long distance 
service. If interconnected VoIP services or one-way VoIP services are 
telecommunications services, they already are subject to restrictions 
on blocking under the Act. If such services are information services, 
the Commission exercises its ancillary authority and prohibits blocking 
of voice traffic to or from the PSTN by those providers just as the 
Commission does for carriers. For example, an interexchange carrier 
that is a wholesale partner of such a VoIP provider could evade the 
directly-applicable restrictions on blocking under 47 U.S.C. 201 of the 
Act by having the blocking performed by the VoIP provider instead. An 
IXC generally would be prohibited from refusing to deliver calls to 
telephone numbers associated with high intercarrier compensation 
charges. If that IXC's VoIP provider wholesale customer were free to 
block calls to such numbers, the IXC thus could evade the directly-
applicable restrictions on blocking (and the VoIP provider would 
benefit from lower wholesale long distance costs to the extent that, 
for

[[Page 81661]]

example, its agreement provided for a pass-through of the intercarrier 
compensation charges paid by the IXC). In addition, blocking or 
degrading of a call from a traditional telephone customer to a customer 
of a VoIP provider, or vice-versa, would deny the traditional telephone 
customer the intended benefits of telecommunications interconnection 
under 47 U.S.C. 251(a)(1).
ii. Other Pending Matters
    703. The conclusions in this R&O effectively address, in whole or 
in part, certain pending petitions. For one, Global NAPS filed a 
petition for declaratory ruling regarding the manner and extent to 
which VoIP traffic could be subject to access charges generally, and 
intrastate access charges in particular. AT&T also filed a petition 
requesting that, on a transitional basis, the Commission declare that 
interstate and intrastate access charges may be imposed on VoIP traffic 
in certain circumstances, as well as limited waivers that would enable 
it to offset forgone revenues from voluntary reductions in intrastate 
terminating access charges. In addition, Vaya Telecom (Vaya) filed a 
petition seeking a declaration that ``a LEC's attempt to collect 
intrastate access charges on LEC-to-LEC VoIP traffic exchanges is an 
unlawful practice.'' Because the transitional intercarrier compensation 
framework for VoIP-PSTN declines to apply all existing intercarrier 
compensation regimes as they currently exist, Global NAPS's and Vaya's 
petitions are granted in part and AT&T's is denied in part. To the 
extent that AT&T proposes a specific approach for alternative rate 
reforms and revenue recovery, the Commission finds the mechanisms 
adopted in this R&O to be more appropriate for the reasons discussed 
above, and thus deny its requests in that regard. Further, Grande filed 
a petition seeking a Commission declaration that carriers categorically 
may rely on a customer's certification that traffic originated in IP 
and therefore is enhanced and not subject to access charges. To the 
extent that this would deviate from the regime the Commission adopts, 
the petition is denied. The Commission declines to address the 
classification of VoIP services generally at this time, nor does the 
Commission otherwise elect to grant the other requests for declaratory 
rulings raised by the Global NAPS, Vaya, AT&T, and Grande petitions.

XII. Intercarrier Compensation for Wireless Traffic

A. LEC-CMRS Non-Access Traffic

    704. Given the adoption of a uniform, federal framework for 
comprehensive intercarrier compensation reform, the Commission believes 
it is now appropriate to clarify the system of intercarrier 
compensation applicable to non-access traffic exchanged between LECs 
and CMRS providers. As outlined above, two compensation regimes 
currently apply to non-access LEC-CMRS traffic, and the Commission has 
not clarified the intersection between the two. The Commission 
concludes, based on the record, that it is appropriate for the 
Commission to clarify the relationship between the obligations in 47 
CFR 20.11 and 47 U.S.C. 251(b)(5).
    705. To bring the 47 CFR 20.11 and 47 U.S.C. 251 obligations in 
line, the Commission first harmonizes the scope of the compensation 
obligations in Sec.  20.11, 47 CFR 20.11 and those in part 51, 47 CFR 
part 51. The Commission accordingly concludes that 47 CFR 20.11 applies 
only to LEC-CMRS traffic that, since the Local Competition First Report 
and Order, has been subject to the reciprocal compensation framework 
under 47 U.S.C. 251(b)(5) of the Act. Thus, 47 CFR 20.11 does not apply 
to access traffic that, prior to this R&O, was subject to 47 U.S.C. 
251(g). Furthermore, the Commission clarifies that the terms ``mutual 
compensation'' in Sec.  20.11 and ``reciprocal compensation'' in 47 
U.S.C. 251(b)(5) and Part 51 are synonymous when applied to non-access 
LEC-CMRS traffic.
    706. Next, the Commission finds that it is in the public interest 
to establish a default federal pricing methodology for determining 
reasonable compensation under 47 CFR 20.11. Commenters urge the 
Commission to address the current absence of guidance on compensation 
rates for traffic between competitive LECs and CMRS providers and to 
address the growing problem of traffic stimulation. They argue that the 
decision in the North County Order to defer setting of reasonable 
compensation under 47 CFR 20.11 for intrastate traffic to the states 
without providing any guidance has led to CLECs seeking terminating 
compensation rates far above cost and to a dramatic increase in 
litigation as CLECs seek to establish or enforce termination rates in 
state administrative and judicial forums. They recommend that the 
Commission resolve this problem by establishing a default federal 
termination rate for CLEC-CMRS traffic of $0.0007 or by adopting a 
bill-and-keep methodology.
    707. Currently, reciprocal compensation under the part 51 rules, 47 
CFR part 51, is subject to a federal pricing methodology. Reciprocal 
compensation under 47 CFR 20.11, however, is not currently subject to a 
federal pricing methodology. As the Commission recently explained in 
the North County Order, it has instead traditionally regarded state 
commissions as the ``more appropriate forum for determining the 
reasonable compensation rate [under Sec.  20.11] for * * * termination 
of intrastate, intraMTA traffic,'' and have to date declined to provide 
guidance to the states on how to carry out that responsibility. The 
Commission has long made clear, however, that it ``would not hesitate 
to preempt any rates set by the states that would undermine the federal 
policy that encourages CMRS providers and LECs to interconnect.'' And 
the Commission observed in the North County Order that the various 
``policy arguments'' in favor of a greater federal role in implementing 
47 CFR 20.11 were ``better suited to a more general rulemaking 
proceeding,'' citing this proceeding in particular.
    708. The Commission now concludes, based on the record in this 
proceeding, that the Commission should establish a federal methodology 
for implementing 47 CFR 20.11's reasonable compensation mechanism. 
Although the Commission believed in the North County Order that the 
interconnection process under 47 CFR 20.11 would likely not be 
``procedurally onerous,'' the record shows that the absence of a 
federal methodology has been a growing source of confusion and 
litigation. MetroPCS, for example, states that it is embroiled in 
disputes over traffic stimulation schemes in a number of jurisdictions 
and notes other proceedings in New York and Michigan. The California 
commission, the state commission implicated by the North County Order, 
also ``recommends that the FCC provide guidance on what factors should 
be considered in setting a `reasonable rate' for such arrangements.'' 
Adoption of a federal pricing methodology promotes the policy goals of 
avoiding wasteful arbitrage opportunities caused by disparate 
intercarrier compensation rates and modernizing and unifying the 
intercarrier compensation system to promote efficiency and network 
investment. It is also necessary to effectuate the decision to 
harmonize 47 CFR 20.11 with 47 U.S.C. 251(b)(5), which, as noted, has 
long been governed by a federal pricing methodology.

[[Page 81662]]

    709. The Commission has already concluded above that a bill-and-
keep methodology for intercarrier compensation, including reciprocal 
compensation, best serves the policy goals and requirements of the Act. 
Consistent with that determination and the clarification above that 
compensation obligations under Sec.  20.11 are coextensive with 
reciprocal compensation requirements, the Commission concludes that 
bill-and-keep should also be the default pricing methodology between 
LECs and CMRS providers under Sec.  20.11 of the rules, 47 CFR 20.11. 
By default, the Commission means that bill-and-keep will satisfy 
terminating compensation obligations except where carriers mutually 
agree to the contrary. Thus, the Commission concludes that bill-and-
keep should be the default applicable to LEC-CMRS reciprocal 
compensation arrangements under both 47 CFR 20.11 or part 51, 47 CFR 
part 51. The Commission rejects claims that a default rate set via a 
bill-and-keep methodology under any circumstances would be inadequate 
because it would be less than the actual cost of terminating calls that 
originate with a CMRS provider. As the Commission explains above, a 
bill-and-keep regime requires each carrier to recover its costs from 
its own end-users.
    710. The Commission further concludes that, under either 47 CFR 
20.11 or the Part 51 rules, 47 CFR part 51, for traffic to or from a 
CMRS provider subject to reciprocal compensation under either 47 CFR 
20.11 or the Part 51 rules, 47 CFR part 51, the bill-and-keep default 
should apply immediately. Although the Commission has adopted a glide 
path to a bill-and-keep methodology for access charges generally and 
for reciprocal compensation between two wireline carriers, it finds 
that a different approach is warranted for non-access traffic between 
LECs and CMRS providers for several reasons. First, the Commission 
finds a greater need for immediate application of a bill-and-keep 
methodology in this context to address traffic stimulation. The record 
demonstrates there is a significant and growing problem of traffic 
stimulation and regulatory arbitrage in LEC-CMRS non-access traffic. In 
contrast, the Commission finds little evidence of such problems with 
regard to traffic between two LECs, where traffic stimulation appears 
to be occurring largely within the access regime, rather than for 
traffic currently subject to reciprocal compensation payments. This 
likely reflects in part the fact that the applicable ``local calling 
area'' for CMRS providers within which calls are subject to reciprocal 
compensation is much larger than it is for LECs. Thus, what would be 
access stimulation if between a LEC and an IXC will in many cases arise 
under reciprocal compensation when a CMRS provider is involved. For 
similar reasons, CMRS providers are more likely to be exposed to 
traffic stimulation that is not subject to the measures the Commission 
adopts above to address this problem within the access traffic regime. 
Further, although the record reflects that LEC-CMRS intraMTA traffic 
stimulation is growing most rapidly in traffic terminated by 
competitive LECs, the Commission is concerned that absent any measures 
to address traffic stimulation for intraMTA LEC-CMRS traffic, incumbent 
LECs that sought revenues from access stimulation may quickly adapt 
their stimulation efforts to wireless reciprocal compensation. For 
these reasons, the Commission finds that addressing the traffic 
stimulation problem in reciprocal compensation is more urgent for LEC-
CMRS traffic, and the bill-and-keep default methodology the Commission 
adopts should eliminate the opportunity for parties to engage in such 
practices in connection with such traffic.
    711. Although, as discussed above, the Commission finds that 
adopting a gradual glide path to a bill-and-keep methodology for 
intercarrier compensation generally, including reciprocal compensation 
between LECs, will help avoid market disruption to service providers 
and consumers, the Commission concludes that an immediate transition 
for reciprocal compensation traffic exchanged between LECs and CMRS 
providers presents a far smaller risk of market disruption than would 
an immediate shift to a bill-and-keep methodology for intercarrier 
compensation more generally. First, for reciprocal compensation between 
CMRS providers and competitive LECs, the Commission has until recently 
had no pricing methodology applicable to competitive LEC-CMRS traffic, 
as reflected in the fact that the carriers in the recent North County 
Order had specifically asked the Commission to establish one for the 
first time. Competitive LECs thus had no basis for reliance on such a 
methodology in their business models, and the Commission sees no reason 
why, in setting a methodology for the first time, it should not require 
competitive LECs to meet that methodology immediately, particularly 
given that competitive LECs are not subject to retail rate regulation 
in the manner of incumbents, and therefore have flexibility to adapt 
their businesses more quickly.
    712. Even for incumbent LECs, the Commission is confident the 
impact is not significant, particularly when balanced against the 
overall benefits of providing the clarification. For one, incumbent 
LECs and CMRS providers that fail to pursue an interconnection 
agreement do not receive any compensation for intraMTA traffic today. 
For incumbent LECs that do have agreements for compensation for 
intraMTA traffic, most large incumbent LECs have already adopted 
$0.0007 or less as their reciprocal compensation rate. For rate-of-
return carriers, there is no allegation in the record that reforming 
LEC-CMRS reciprocal compensation obligations in this manner would have 
a harmful impact on them. And, in any event, the Commission has adopted 
mechanisms that should address any such impacts. First, the Commission 
adopts a new recovery mechanism, which includes recovery for net 
reciprocal compensation revenues, to provide all incumbent LECs with a 
stable, predictable recovery for reduced intercarrier compensation 
revenues. Second, the Commission adopts an additional measure to 
further ease the move to bill-and-keep LEC-CMRS traffic for rate-of-
return carriers. Specifically, the Commission limits rate-of-return 
carriers' responsibility for the costs of transport involving non-
access traffic exchanged between CMRS providers and rural, rate-of-
return regulated LECs.
    713. Some commenters proposed a rule allocating the responsibility 
for transport costs for non-access traffic to the non-rural terminating 
provider, stating that in the absence of such a rule, rural LECs could 
be forced to incur unrecoverable transport costs at a time when ICC 
reforms may already have a negative impact on network cost recovery. 
The Commission recognizes that immediately moving to a default bill-
and-keep methodology for intraMTA traffic raises issues regarding the 
default point at which financial responsibility for the exchange of 
traffic shifts from the originating carrier to the terminating carrier. 
Therefore, in the attached USF/ICC Transformation FNPRM, the Commission 
seeks comment on whether and how to address this aspect of bill-and-
keep arrangements. The Commission finds it appropriate, however, to 
establish an interim default rule allocating responsibility for 
transport costs applicable to non-access traffic exchanged between CMRS 
providers and rural, rate-of-return regulated LECs to provide a gradual 
transition for such

[[Page 81663]]

carriers. Given the Commission's commitment to providing a measured 
transition, the Commission believes it is appropriate to help ensure no 
flash cuts for rate-of-return carriers. The Commission notes that price 
cap carriers did not raise concerns about transport costs, and the 
Commission concludes that no particular transition is required or 
warranted for traffic exchanged between CMRS providers and these 
carriers.
    714. Specifically, for such traffic, the rural, rate-of-return LEC 
will be responsible for transport to the CMRS provider's chosen 
interconnection point when it is located within the LEC's service area. 
When the CMRS provider's chosen interconnection point is located 
outside the LEC's service area, the Commission provides that the LEC's 
transport and provisioning obligation stops at its meet point and the 
CMRS provider is responsible for the remaining transport to its 
interconnection point. Although the Commission does not prejudge its 
consideration of what allocation rule should ultimately apply to the 
exchange of all telecommunications traffic, including traffic that is 
considered access traffic today, under a bill-and-keep methodology, the 
Commission believes that this rule is warranted for the interim period 
to help minimize disputes and provide greater certainty until rules are 
adopted to complete the transition to a bill-and-keep methodology for 
all intercarrier compensation.
    715. Beyond adopting these measures, the Commission also emphasizes 
that, although it establishes bill-and-keep as an immediately 
applicable default methodology, the Commission is not abrogating 
existing commercial contracts or interconnection agreements or 
otherwise allowing for a ``fresh look'' in light of the reforms. Thus, 
incumbent LECs may have an extended period of time under existing 
compensation arrangements before needing to renegotiate subject to the 
new default bill-and-keep methodology. As a result, while the 
Commission is concerned that an immediate transition from reciprocal 
compensation to a bill-and-keep methodology more generally would risk 
overburdening the universal service fund that underlies the interim 
recovery mechanism, the Commission thinks that the impact on the fund 
resulting from an immediate transition for LEC-CMRS reciprocal 
compensation alone will not do so. Adoption of bill-and-keep for this 
subset of traffic will also inform the Commission's understanding of 
the potential impact that the larger transition to bill-and-keep will 
have and, although the Commission does not envision any concerns 
arising based on the reforms adopted in this R&O, would enable the 
Commission, if necessary, to make any adjustments as part of that 
larger transition. For the reasons discussed, the Commission finds that 
an immediate transition away from reciprocal compensation to a bill-
and-keep methodology in this context is practical.
    716. As the Commission found above, the Commission believes that 47 
U.S.C. 251 and 252 affirmatively provide us authority to establish 
bill-and-keep as the default methodology applicable to traffic within 
the scope of 47 U.S.C. 251(b)(5), including for traffic exchanged 
between LECs and CMRS providers. Further, as the Commission has 
concluded above that it has authority under 47 U.S.C. 332 to regulate 
intrastate access traffic exchanged between LECs and CMRS providers and 
thus authority to specify a transition to bill-and-keep for such 
traffic, the Commission concludes for similar reasons that it has the 
authority to regulate intrastate reciprocal compensation between LECs 
and CMRS providers. Indeed, in Iowa Utilities Board, the Eighth Circuit 
specifically upheld Commission rules regulating LEC-CMRS reciprocal 
compensation based on these provisions.
    717. In the North County Order, the Commission found that any 
decision to reverse course and regulate intrastate rates under 47 CFR 
20.11 at the federal level was more appropriately addressed in a 
general rulemaking proceeding. Now that the Commission is considering 
the issue in the context of this rulemaking proceeding, it finds it 
appropriate to take this step for the reasons discussed above, and the 
Commission concludes that its decision to establish a federal default 
pricing methodology for termination of LEC-CMRS intraMTA traffic as 
part of its broader effort in this proceeding to reform, modernize, and 
unify the intercarrier compensation system is consistent with its 
authority under the Act.

B. IntraMTA Rule

    718. In the Local Competition First Report and Order, the 
Commission stated that calls between a LEC and a CMRS provider that 
originate and terminate within the same Major Trading Area (MTA) at the 
time that the call is initiated are subject to reciprocal compensation 
obligations under 47 U.S.C. 251(b)(5), rather than interstate or 
intrastate access charges. As noted above, this rule, referred to as 
the ``intraMTA rule,'' also governs the scope of traffic between LECs 
and CMRS providers that is subject to compensation under 47 CFR 
20.11(b). The USF/ICC Transformation NPRM sought comment, inter alia, 
on the proper interpretation of this rule.
    719. The record presents several issues regarding the scope and 
interpretation of the intraMTA rule. Because the changes the Commission 
adopts in this R&O maintain, during the transition, distinctions in the 
compensation available under the reciprocal compensation regime and 
compensation owed under the access regime, parties must continue to 
rely on the intraMTA rule to define the scope of LEC-CMRS traffic that 
falls under the reciprocal compensation regime. The Commission 
therefore takes this opportunity to remove any ambiguity regarding the 
interpretation of the intraMTA rule.
    720. The Commission first addresses a dispute regarding the 
interpretation of the intraMTA rule. Halo Wireless (Halo) asserts that 
it offers ``Common Carrier wireless exchange services to ESP and 
enterprise customers'' in which the customer ``connects wirelessly to 
Halo base stations in each MTA.'' It further asserts that its ``high 
volume'' service is CMRS because ``the customer connects to Halo's base 
station using wireless equipment which is capable of operation while in 
motion.'' Halo argues that, for purposes of applying the intraMTA rule, 
``[t]he origination point for Halo traffic is the base station to which 
Halo's customers connect wirelessly.'' On the other hand, ERTA claims 
that Halo's traffic is not from its own retail customers but is instead 
from a number of other LECs, CLECs, and CMRS providers. NTCA further 
submitted an analysis of call records for calls received by some of its 
member rural LECs from Halo indicating that most of the calls either 
did not originate on a CMRS line or were not intraMTA, and that even if 
CMRS might be used ``in the middle,'' this does not affect the 
categorization of the call for intercarrier compensation purposes. 
These parties thus assert that by characterizing access traffic as 
intraMTA reciprocal compensation traffic, Halo is failing to pay the 
requisite compensation to terminating rural LECs for a very large 
amount of traffic. Responding to this dispute, CTIA asserts that ``it 
is unclear whether the intraMTA rules would even apply in that case.''
    721. The Commission clarifies that a call is considered to be 
originated by a CMRS provider for purposes of the intraMTA rule only if 
the calling party initiating the call has done so through a CMRS 
provider. Where a provider is

[[Page 81664]]

merely providing a transiting service, it is well established that a 
transiting carrier is not considered the originating carrier for 
purposes of the reciprocal compensation rules. Thus, the Commission 
agrees with NECA that the ``re-origination'' of a call over a wireless 
link in the middle of the call path does not convert a wireline-
originated call into a CMRS-originated call for purposes of reciprocal 
compensation and the Commission disagrees with Halo's contrary 
position.
    722. The Commission also clarifies that the intraMTA rule means 
that all traffic exchanged between a LEC and a CMRS provider that 
originates and terminates within the same MTA, as determined at the 
time the call is initiated, is subject to reciprocal compensation 
regardless of whether or not the call is, prior to termination, routed 
to a point located outside that MTA or outside the local calling area 
of the LEC. Similarly, intraMTA traffic is subject to reciprocal 
compensation regardless of whether the two end carriers are directly 
connected or exchange traffic indirectly via a transit carrier.
    723. Further, in response to the USF/ICC Transformation NPRM, T-
Mobile proposed that the Commission expand the scope of the intraMTA 
rule to reflect the fact that CMRS licenses are now issued for REAGs, 
geographic areas that are larger than MTAs. T-Mobile notes that the 
intraMTA rule was promulgated at a time the MTA was the largest CMRS 
license area. T-Mobile argues that the REAG is currently the largest 
license being used to provide CMRS and that this change would move more 
telecommunications traffic under the reciprocal compensation umbrella 
pending the unification of all intercarrier compensation rates. The 
Commission declines to adopt T-Mobile's proposal. Given the long 
experience of the industry dealing with the current rule, the very 
broad scope of the changes to the intercarrier compensation rules being 
made in this R&O that will, after the transition period, make the rule 
irrelevant, and the limited support in the record for the suggested 
change even from CMRS commenters, the Commission does not believe it is 
either necessary or appropriate to expand the scope of this rule as 
proposed by T-Mobile.

XIII. Interconnection

    724. The Commission anticipates that the reforms it adopts herein 
will further promote the deployment and use of IP networks. However, IP 
interconnection between providers also is critical. As such, the 
Commission agrees with commenters that, as the industry transitions to 
all IP networks, carriers should begin planning for the transition to 
IP-to-IP interconnection, and that such a transition will likely be 
appropriate before the completion of the intercarrier compensation 
phase down. The Commission seeks comment in the accompanying USF/ICC 
Transformation FNPRM regarding specific elements of the policy 
framework for IP-to-IP interconnection. The Commission makes clear, 
however, that its decision to address certain issues related to IP-to-
IP interconnection in the USF/ICC Transformation FNPRM should not be 
misinterpreted to suggest any deviation from the Commission's 
longstanding view regarding the essential importance of interconnection 
of voice networks.
    725. In particular, even while the USF/ICC Transformation FNPRM is 
pending, the Commission expects all carriers to negotiate in good faith 
in response to requests for IP-to-IP interconnection for the exchange 
of voice traffic. The duty to negotiate in good faith has been a 
longstanding element of interconnection requirements under the 
Communications Act and does not depend upon the network technology 
underlying the interconnection, whether TDM, IP, or otherwise. 
Moreover, the Commission expects such good faith negotiations to result 
in interconnection arrangements between IP networks for the purpose of 
exchanging voice traffic. As the Commission evaluates specific elements 
of the appropriate interconnection policy framework for voice IP-to-IP 
interconnection in the USF/ICC Transformation FNPRM, it will be 
monitoring marketplace developments, which will inform the Commission's 
actions in response to the USF/ICC Transformation FNPRM.

XIV. Procedural Matters

A. Paperwork Reduction Act Analysis

    726. The Report and Order contains new information collection 
requirements subject to the Paperwork Reduction Act of 1995 (PRA), 
Public Law 104-13. The new requirements will be submitted to the Office 
of Management and Budget (OMB) for review under section 3507(d) of the 
PRA. OMB, the general public, and other Federal agencies are invited to 
comment on the new information collection requirements contained in 
this proceeding. We note that pursuant to the Small Business Paperwork 
Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we 
previously sought specific comment on how the Commission might 
``further reduce the information collection burden for small business 
concerns with fewer than 25 employees.'' We describe impacts that might 
affect small businesses, which includes most businesses with fewer than 
25 employees, in the Final Regulatory Flexibility Analysis, infra.

B. Congressional Review Act

    727. On Friday December 2, 2011, the Commission sent a copy of this 
Report and Order to Congress and the Government Accountability Office 
pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).

C. Final Regulatory Flexibility Analysis

    [[See 76 FR 73829, 73834 (page where the FRFA starts)]]

    Federal Communications Commission
Marlene H. Dortch,
Secretary.
[FR Doc. 2011-32411 Filed 12-27-11; 8:45 am]
BILLING CODE 6712-01-P