[Federal Register Volume 78, Number 53 (Tuesday, March 19, 2013)]
[Rules and Regulations]
[Pages 16808-16816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06322]


-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[WC Docket Nos. 10-90, 05-337; FCC 13-16]


Connect America Fund; High-Cost Universal Service Support

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In this document, the Federal Communications Commission 
(Commission) addresses several issues related to changes made to high-
cost universal service support for rate-of-return carriers in the USF/
ICC Transformation Order, including granting in part requests to modify 
the high cost loop support (HCLS) benchmarks.

DATES: Effective March 19, 2013.

FOR FURTHER INFORMATION CONTACT: Heidi Lankau, Wireline Competition 
Bureau, (202) 418-2876 or TTY: (202) 418-0484.

[[Page 16809]]


SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Sixth 
Order on Reconsideration and Memorandum Opinion and Order in WC Docket 
Nos. 10-90, 05-337; FCC 13-16, adopted on January 31, 2013 and released 
on February 27, 2013. The full text of this document is available for 
public inspection during regular business hours in the FCC Reference 
Center, Room CY-A257, 445 12th Street SW., Washington, DC 20554. Or at 
the following Internet address: http://transition.fcc.gov/Daily_Releases/Daily_Business/2013/db0227/FCC-13-16A1.pdf

I. Introduction

    1. In the USF/ICC Transformation Order, 76 FR 73830, November 29, 
2011, the Commission comprehensively reformed universal service and 
intercarrier compensation, adopting fiscally responsible, incentive-
based policies to preserve and advance voice- and broadband-capable 
networks while requiring accountability from companies receiving 
support and ensuring fairness for consumers who pay into the universal 
service fund. Modernizing these systems, the Commission concluded, was 
critical to meet the universal service challenge of our time: ensuring 
consumers have access to high-speed Internet access as well as voice 
service. As part of this undertaking, the Commission reformed legacy 
high-cost universal service support mechanisms for rate-of-return 
carriers. Rate-of-return carriers serve fewer than five percent of U.S. 
access lines, but operate in many of the country's most difficult areas 
to serve. Total universal service support for such carriers was 
approaching $2 billion annually--more than 40 percent of the 
Commission's $4.5 billion overall budget for the reformed high-cost 
program. The Commission's reforms for rate-of-return carriers begin the 
transition toward a more incentive-based form of regulation to 
encourage efficient operation and to support the widest possible 
availability of broadband.
    2. In this Order, we address several issues related to the changes 
made to high-cost universal service support for rate-of-return carriers 
in the USF/ICC Transformation Order. First, we address a number of 
issues raised in petitions for reconsideration or clarification of the 
benchmarking rule adopted in the USF/ICC Transformation Order. That 
rule establishes reasonable limits on capital and operating 
expenditures eligible for high-cost universal service support for rate-
of-return carriers, providing better incentives for carriers to invest 
prudently and operate efficiently than the prior support mechanism, 
while providing additional support for carriers below their caps to 
extend broadband to rural consumers. (Rate-of-return carriers 
previously faced no limits on their overall spending, and received 100 
percent reimbursement of loop costs above a certain level, creating a 
``race-to-the-top'' in spending). We reconsider one aspect of the 
benchmark rule, but decline to reconsider adoption of the rule in 
general. We then consider a number of applications for review of the 
Wireline Competition Bureau's (Bureau's) HCLS Benchmarks Implementation 
Order, 77 FR 30411, May 23, 2012, which implemented the benchmarking 
rule for purposes of calculating high-cost loop support (HCLS), and 
modify certain aspects of the Bureau's order. In addition, we decline 
requests to reconsider the monthly per-line cap of $250 in total high-
cost federal universal service support for all telephone companies, and 
we reaffirm the extension of the corporate operations expense cap to 
interstate common line support (ICLS). Finally, we take the opportunity 
to address requests from certain rate-of-return carriers that the 
Commission slow our implementation of other aspects of the USF/ICC 
Transformation Order, emphasizing the importance of continuing with the 
implementation of reform, but reiterating our commitment to a data-
driven process.
    3. As we have previously noted, the USF/ICC Transformation Order 
represents a careful balancing of policy goals, equities, and budgetary 
constraints. This balance was required in order to advance the 
fundamental goals of universal service and intercarrier compensation 
reform within a defined budget, while simultaneously providing 
sufficient transitions for stakeholders to adapt. We observe that, 
under Commission rules, if a petition for reconsideration simply 
repeats arguments that were previously fully considered and rejected in 
the proceeding, it will not likely warrant reconsideration. This 
standard informs our analysis below.

II. Benchmarking Rule

1. Petitions for Reconsideration

    4. We begin by addressing petitions for reconsideration of the 
benchmarking rule. For the reasons set forth below, we reconsider the 
Commission's original rule insofar as it requires the Bureau to rerun 
the benchmark regression annually and direct the Bureau to consider 
whether running the regression analyses less frequently will better 
serve the purposes advanced by the benchmarking rule. We deny, however, 
petitions for reconsideration filed by the National Exchange Carrier 
Association, Inc. (NECA), Organization for the Promotion and 
Advancement of Small Telecommunications Companies (OPASTCO), and 
Western Telecommunications Alliance (WTA), (jointly, the Rural 
Associations) and Accipiter Communications Inc. (Accipiter) to the 
extent they request that the Commission reconsider its benchmarking 
rule. We also clarify how support will be redistributed under that 
rule.
a. Rural Associations' Petition
    5. The Rural Associations ask the Commission to reconsider several 
aspects of its limitations on reimbursable capital and operating 
expenses. We address certain of these arguments here.
    6. First, the Rural Associations argue that the Commission's 
decision to use regression analyses to limit reimbursable capital costs 
and operating expenses in the USF/ICC Transformation Order was 
``premature and improper,'' and that the Commission should instead have 
stated that it would ``examine a regression analysis approach * * * 
subject to adequate notice and comment.'' They claim that the 
Commission's decision to use regression analyses to develop the 
benchmarks ``leaves no room to argue that other approaches might be 
used in whole or in part as a substitute to achieve the kinds of 
constraints sought by the Commission,'' such as limiting new investment 
based on depreciation of existing plant, as the Associations previously 
proposed.
    7. Contrary to the Rural Associations' allegations, the Commission 
provided ample opportunities for parties to comment ``on specific 
methods to be utilized'' to limit carriers expenses. In its February 
2011 Notice of Proposed Rulemaking, 76 FR 11632, March 2, 2011, the 
Commission explained that under then-existing rules, rate-of-return 
carriers with high loop costs could have 100 percent of their marginal 
loop costs above a certain threshold reimbursed through the federal 
universal service fund while other carriers that took measures to 
control expenses could find themselves losing support to carriers that 
increased costs. Those effects, the Commission explained, meant that 
the rules did not create appropriate incentives to control costs and 
invest rationally. The Commission proposed to address these concerns by 
using regression analyses to estimate appropriate levels of capital and

[[Page 16810]]

operating expenses, sought comment on this proposal, and adopted its 
benchmarking rule after considering the comments received, including 
those filed by the Rural Associations. The Commission found that the 
approach it adopted is a ``reasonable way to place limits on recovery 
of loop costs'' and specifically rejected the Rural Associations' 
proposed alternative because it ``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.'' The Associations raise no 
new arguments to change this conclusion, and therefore we reject their 
petition to reconsider the adoption of benchmarks or the regression 
approach generally.
    8. Second, the Rural Associations ask the Commission to reconsider 
its decision to change the caps annually based on a ``refreshed'' run 
of the regression analyses, arguing that the Commission should instead 
leave any caps in place for at least seven years. They argue that if 
the regressions are updated each year, carriers could be encouraged to 
invest less to avoid being affected by the caps because ``it appears 
that a carrier could actually reduce or maintain existing investment 
and expense levels during a given year but still suffer unexpected 
reductions in its HCLS * * * if its `peer group' has changed or if its 
existing peers have reduced their costs faster.''
    9. Since filing their petition, the Rural Associations have 
modified this request for relief. They no longer request that the 
Commission freeze any regression-based caps for at least seven years. 
Pending further updating and analysis of the regression methodology, 
they urge the Commission to ``hold the caps constant for a period of 
several years starting in 2014,'' and then analyze the regression 
methodology ``to determine whether there are more optimal methods than 
such a default rule to address concerns with respect to predictability 
in the longer-term.''
    10. We note, as an initial matter, that the Bureau chose to use the 
same regression coefficients in 2013 as those calculated for 2012 
during the phase-in of the initial benchmarks (i.e., it ``froze'' the 
2012 coeffecients for 2013). Accordingly, carriers have been able to 
determine their benchmarks, and estimate their support, throughout the 
phase-in period. In effect, during the phase-in, the Bureau's approach 
is consistent with the Rural Associations' request. In addition, as 
discussed in more detail below, we direct the Bureau to revise the 
benchmark methodology to generate a single cap for each study area; 
these updated benchmarks will apply beginning in 2014. The issue before 
us now, therefore, is how frequently the new benchmarks should be 
updated beginning 2015.
    11. As the Rural Associations recognize, the decision whether and 
if so, how to freeze the expense benchmarks involves a number of 
tradeoffs. On the one hand, as the Rural Associations point out, more 
frequent updates create the possibility of changes in carriers' support 
levels. If carriers cannot estimate likely future support levels with a 
reasonable degree of certainty, frequent updates may deter even 
efficient investment. On the other hand, in practice, annual updates 
may produce only small changes for all or nearly all carriers. In fact, 
a comparison of the 2012 benchmarks with 2013 benchmarks, calculated as 
if the Bureau had not frozen the 2012 coefficients, shows that the 
ratio of an individual carrier's costs to its caps in 2012 is strongly 
predictive of whether the carrier would have been capped in 2013. 
Moreover, if the benchmarks are updated less frequently, over time they 
may fail to reflect industry-wide cost trends and cap carrier spending 
at levels that are either too high or too low. And if the benchmarks 
are updated infrequently, each update could cause larger and more 
sudden changes in support levels, at least for a subset of carriers. 
Updating the benchmarks less frequently also risks treating similarly 
situated carriers differently based on the timing of their investments. 
For example, a study area that has higher costs due to investment would 
not have those investments reflected in its benchmark if its benchmark 
cap were frozen. A freeze could therefore also distort carriers' 
investment decisions by encouraging them to time their investments to 
maximize their benchmarks rather than to invest efficiently. In 
addition, while there are many potential means to limit the volatility 
of the benchmarks from year to year, each potential approach would 
have, necessarily, a different ultimate effect on each study area's 
benchmarks, and thus its own costs and benefits.
    12. In light of these considerations, we reconsider the 
Commission's decision to the extent it requires the Bureau to update 
the regressions annually. We direct the Bureau, as it updates the 
benchmarks for 2014, to consider whether these benchmarks should be 
held constant for multiple years, and, if so, which mechanism would 
best advance our objectives to preserve and advance the deployment of 
voice- and broadband-capable networks while providing better incentives 
for carriers to invest prudently and operate efficiently. In doing so, 
the Bureau should carefully consider the extent to which annual updates 
are likely to cause significant year-over-year changes in support 
levels. We expect the Bureau to adopt an approach that will provide 
carriers sufficient certainty regarding future years' benchmarks to 
encourage efficient investment while maintaining the balance struck in 
the Commission's reforms to encourage efficient spending by HCLS 
recipients.
    13. Finally, the Rural Associations ask the Commission to 
reconsider its decision regarding the reductions resulting from the 
HCLS benchmarks and ``find instead that the entirety of those 
reductions will be redistributed to other [rural carriers]--including 
those impacted by new caps--within the overall capped HCLS mechanism.'' 
They argue that not redistributing reductions to capped carriers 
results in a ``double cap'' on HCLS.
    14. We decline to reconsider the Commission's decision to 
redistribute HCLS only to those carriers whose loop costs are not 
capped by the benchmarks. We find that providing additional support to 
carriers with the highest costs relative to their peers is contrary to 
the purposes of the benchmarking rule. Moreover, by providing 
redistributed support only to carriers that are below their benchmarks, 
the rule provides an additional incentive for carriers to operate 
efficiently and keep costs below their caps. In addition, we note that 
the Rural Associations appear to assume that by allowing carriers 
capped by the benchmarks to receive redistributed support, they would 
have the chance to recover ``more but still not all'' of their high 
loop costs. To the contrary, the Rural Associations' proposal could 
permit some carriers limited by the benchmarks to receive more in 
redistributed support than they would lose through the benchmark 
reductions.
    15. While we disagree with the Rural Associations' proposal to 
redistribute HCLS to carriers whose support is capped by the 
benchmarks, we take this opportunity to clarify that there is no 
``double cap'' on HCLS. That is, we clarify that all HCLS reductions 
will be redistributed, though only to carriers whose loop costs are not 
limited by the benchmarks. In discussing the proposed methodology for 
creating benchmarks the Commission estimated that only approximately 
half of the HCLS reductions experienced by carriers limited by the 
benchmarks would be

[[Page 16811]]

redistributed. Other language in the USF/ICC Transformation Order made 
clear, however, that the Commission was not mandating partial 
redistribution. Specifically, the Commission said ``we 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.'' We note that 
under the phase-in adopted by the Bureau, all HCLS reductions were 
redistributed in 2012. And now we clarify that all reductions will be 
redistributed in future years as well.
b. Accipiter Petition
    16. Accipiter argues that the Commission's decision to adopt cost 
benchmarks is flawed because such benchmarks cannot distinguish between 
carriers that ``may legitimately be outliers due to particular 
considerations, including population density, terrain, and operating 
environment,'' and carriers that ``are outliers due to waste, fraud or 
abuse, or other inefficiencies.'' Accipiter claims the failure to make 
this distinction is ``irrational'' and reflects a failure to consider 
the specific challenges facing Accipiter and other carriers.
    17. We disagree. The Commission's benchmarking approach is designed 
precisely to compare each individual carrier's costs to those of 
similarly situated carriers, accounting for the most significant 
drivers of cost such as ``density, terrain, and operating 
environment.'' It is reasonable for the Commission to adopt a general 
rule to identify carriers with costs that are significantly higher than 
most of their similarly situated peers instead of relying on more 
costly and administratively burdensome alternatives such as audits. 
Carriers that believe that the benchmarks do not adequately address 
unique circumstances that they face can seek a waiver of the 
Commission's rules. Accipiter's petition for reconsideration reads more 
like a petition for waiver, and in fact, Accipiter sought, and the 
Bureau granted, a temporary waiver of the benchmarking rule and other 
new rules that would limit its support.
    18. In its petition for reconsideration, Accipiter makes a variety 
of other arguments that relate not to the Commission's rule as adopted, 
but rather to the benchmarking methodology proposed in the USF/ICC 
Transformation FNPRM, 76 FR 78384, December 16, 2011. But those 
complaints are not relevant to our reconsideration of the Commission's 
benchmarking rule. The Commission delegated to the Bureau the authority 
to adopt and implement a final methodology, which the Bureau did in its 
April 2012 HCLS Benchmarks Implementation Order. Several parties, 
including Accipiter, filed separate applications for review of the 
Bureau's HCLS Benchmarks Implementation Order. We turn to that order 
now.

2. Applications for Review

    19. We next address a number of arguments raised in the context of 
applications for review of the Bureau's HCLS Benchmarks Implementation 
Order, and we modify the Bureau's order in three respects. 
Specifically, (1) we direct the Bureau to develop a regression 
methodology that will generate a single total loop cost cap for each 
study area beginning in 2014; (2) as an interim measure toward a single 
cost cap, for purposes of calculating HCLS support in 2013, we sum 
capex and opex caps generated by the Bureau's current methodology; and 
(3) we modify the phase-in of the benchmarks for 2013. We do not 
otherwise modify the Bureau's HCLS Benchmarks Implementation Order at 
this time. In taking these actions, we address certain of the arguments 
raised in the applications for review, and we defer consideration of 
the other issues raised in those applications for review.
    20. Single Total Cost Cap. Consistent with the Commission's 
direction, the Bureau's HCLS Benchmarks Implementation Order generated 
limits on reimbursable capital expenses and operating expenses for 
purposes of determining HCLS; compared companies' costs to those of 
similarly situated companies; and used statistical techniques to 
determine which companies shall be deemed similarly situated. 
Consistent with the Commission's delegation of authority, the Bureau 
also considered and tested additional variables and made further 
improvements to the methodology based on the comments from two peer 
reviewers and interested parties, and its own analysis. The most 
significant change in the methodology that the Bureau made was using 
two regressions to generate only two caps for each company--a capex 
limit and an opex limit--rather than generating eleven caps as 
originally proposed in Appendix H of the USF/ICC Transformation FNPRM.
    21. We agree with the Bureau's decision to use fewer regressions 
than proposed in the USF/ICC Transformation FNPRM. The Bureau explained 
that doing so ``enables carriers to account for the needs of individual 
networks and recognizes the fact that carriers may have higher costs in 
one category that may be offset by lower costs in others.'' The Bureau 
adopted two regressions even though ``[u]sing a greater number of 
regressions makes it possible to identify outliers at a granular 
level.'' Although one peer reviewer and some commenters recommended 
using a single regression to limit total cost, the Bureau decided that 
approach ``would provide fewer safeguards against overspending.'' 
Because ``[c]apital and operating expenditures reflect fundamentally 
different measures of business performance,'' the Bureau reasoned that 
``[u]sing two regressions instead of one provides carriers flexibility 
to manage their operations, while still enabling the Commission to 
identify more instances where carriers spend markedly more in either 
category than their similarly-situated peers.''
    22. We agree with commenters that the Bureau's methodology was an 
improvement over the proposed methodology that used eleven regressions, 
and we recognize that there are trade-offs in choosing the number of 
regressions. On balance, we conclude that going forward, it would be 
better to use one regression to generate a single cap on total loop 
costs for each study area. A single cap will provide carriers with 
greater flexibility to account for the specific needs of their locales 
and networks. This approach recognizes that carriers often consider the 
trade-offs between capital costs and operating expenses when making 
investment decisions. For example, in its Application for Review, 
Central Texas argues that it ``balanced the costs of using aerial 
cables against the costs of burying cable and determined that it costs 
less overall to bury cable, rather than constantly maintain and replace 
aerial cable in the windy, tough, varmint-ridden Texas terrain. By 
keeping its cable maintenance costs low, Central Texas receives no 
credit from the regression model for doing so even though it has much 
lower operational expenditures.''
    23. The record before the Bureau when it adopted two regressions 
instead of eleven regressions also contained support for using a single 
regression. For example, as noted above, one of the peer reviewers of 
the benchmark methodology, Paroma Sanyal, stated that ``individual cost 
capping [i.e. capping individual types of costs rather than total 
costs] ignores any complementar[it]y or substitutability between the 
various cost components,'' which may discourage overall cost-

[[Page 16812]]

minimization and fails to recognize that carriers face different trade-
offs between types of expenses. Sanyal suggested that ``[a] more 
flexible approach may be to estimate the 90th percentile over the total 
cost,'' which ``would be more in line with theoretical cost-
minimization approaches where * * * expenditure caps can enhance 
efficiency under a rate-of-return regulation.'' Similarly, Roger 
Koenker, one of the economists who developed quantile regression 
analysis, opined that his ``primary criticism of the proposed FCC 
methodology [in Appendix H] lies in the way that cost estimates for 
individual cost components are aggregated. * * * A preferable, and 
simpler, approach would be to develop one conditional quantile model 
for aggregate costs.'' Koenker concluded that the proposed aggregation 
of cost categories ``yields cost limits that may be unduly stringent in 
some cases, and unduly lenient in others.''
    24. For these reasons, we are persuaded that using a single total 
loop cost benchmark would be preferable to using separate capex and 
opex caps. Accordingly, we direct the Bureau to develop a regression 
methodology that will generate a single cap for each study area. We 
note that the Bureau also will be incorporating into its analysis 
revised study area boundaries, which will be obtained through an 
upcoming data collection. We direct the Bureau to analyze the impact of 
various approaches prior to adopting its new methodology, which we 
anticipate will be implemented for distribution of HCLS beginning in 
2014.
    25. Summing Capex and Opex Caps for 2013. We recognize that the 
Bureau needs time to develop and seek comment on a new methodology, and 
therefore, absent some interim measure, carriers would continue to 
operate under two separate caps until 2014. We therefore conclude it is 
appropriate to combine or ``sum'' the existing caps as an interim 
measure. As a result, for purposes of providing HCLS, starting the 
first full month after the effective date of this Order and for the 
rest of 2013, we will account for the trade-offs carriers make between 
capital expenditures and operating expenses by summing the capex and 
opex caps as an interim measure. That is, we will add each study area's 
capex and opex benchmarks together to establish a new limit on total 
unseparated loop costs for purposes of determining HCLS. In the short 
term, summing the capex and opex benchmarks together will provide an 
administratively feasible means to recognize the trade-offs between 
capital and operating expenses that carriers have made over time, while 
the Bureau works to develop a new single-equation regression. We note 
that external parties and one peer reviewer have expressed concern 
about summing benchmarks based on quantiles. As a matter of statistics, 
the sum of the quantiles is not the quantile of the sums, which is to 
say that summing two 90th percentile benchmark caps does not produce 
the same result as would setting a cap based on the 90th percentile of 
total costs. Although summing is imperfect as an estimate of the 90th 
percentile of overall costs, we find that as an interim measure it 
provides a reasonable way to recognize that there are tradeoffs between 
capital and operating expenditures. For example, to the extent a 
carrier's costs are over the capex benchmark but under the opex 
benchmark because it has made large investments to lower its operating 
costs and overall costs, summing the benchmarks will provide additional 
allowances for these expenditures.
    26. Phase-In. We also slightly modify the phase-in of the HCLS 
benchmarks adopted by the Bureau. Applications for review of the HCLS 
Benchmarks Implementation Order ask us to either set it aside or delay 
the implementation of the HCLS benchmarks until the Commission 
addresses various concerns. Although we deny requests to delay the 
implementation, we modify the phase-in to limit the amount by which any 
one carrier's support may be reduced in 2013. In 2012, HCLS was reduced 
by twenty-five percent of the difference between the support calculated 
using the study area's reported cost per loop and the support as 
limited by the benchmarks, unless that reduction would exceed ten 
percent of the study area's support as otherwise would be calculated 
based on NECA cost data. The Bureau's phase-in for 2013, as adopted in 
HCLS Benchmarks Implementation Order, will reduce support by fifty 
percent of the difference between the support calculated using the 
study area's reported cost per loop and the support as limited by the 
benchmarks in effect for 2013, but remove the limit on the total impact 
on individual carriers. We maintain the Bureau's fifty percent phase-in 
for 2013. However, starting the first full month after the effective 
date of this Order and for the rest of 2013, we will limit the amount 
of the reduction to no more than fifteen percent of the study area's 
support as otherwise would be calculated based on NECA cost data, 
absent implementation of the benchmark rule. We conclude that this 
strikes a reasonable balance between continuing the phase-in of the 
benchmark rule, while giving those carriers most heavily impacted 
additional time to adjust, particularly as the Bureau updates the 
benchmarks for 2014.
    27. Other Issues. In this section we address a number of other 
issues raised in the applications for review; we defer consideration of 
the remaining issues to a future order.
    28. Predictability. Several parties argue that the Bureau's 
benchmark methodology results in support amounts that are unpredictable 
in violation of section 254(b)(5) of the Communications Act of 1934, as 
amended (the Act). Central Texas, for example, claims that the dynamic, 
annually changing nature of the regression caps does not allow carriers 
to predict future HCLS based on current and near-future expenditures. 
And Accipiter argues that the results are so unpredictable that the 
Bureau's methodology ``effectively prohibits companies from making 
reasonable and rational investment decisions.'' We disagree.
    29. As the United States Court of Appeals for the Fifth Circuit 
explained in Alenco, the Commission can satisfy the statute by adopting 
predictable rules that govern distribution of subsidies; its rules need 
not provide precisely predictable funding amounts. Yet what these 
parties seek is precisely the predictable funding amounts the statute 
does not require. In any event, as noted above, the Bureau provided 
that same regression coefficients would be used in 2013 as those 
calculated for 2012 in order to ensure that carriers would be able to 
calculate their benchmark caps for the phase-in period well in advance. 
Accordingly, at least with respect 2012 and 2013, the carriers were, in 
fact, provided with the certainty they request. And, as discussed 
above, for 2014 and beyond, we direct the Bureau to revise its 
methodology to set a single total cost benchmark for each study area 
and to consider how frequently that regression should be updated. We do 
so with the expectation that the Bureau will adopt an approach that 
will provide carriers sufficient certainty regarding future years' 
benchmarks to encourage efficient investment while maintaining the 
balance struck in the Commission's reforms to encourage efficient 
spending by HCLS recipients. For these reasons, we reject the claim 
that the Bureau's order violates the Act because it provides 
insufficient predictability.
    30. Similarly-Situated Companies. We also disagree with the Rural 
Associations' claim that the ``Bureau's methodology does not rely on 
statistical analysis of `similarly situated'

[[Page 16813]]

companies, as the Commission's USF/ICC Transformation Order directed. 
In fact, the actual formulas do not establish any comparator groups.'' 
They argue that the benchmark ``formulas impose limitations on 
companies without regard to whether their per-unit costs are excessive 
or relatively high compared to `peers.''' On the contrary, we find that 
the Bureau's regression analysis was consistent with Commission's 
direction. We note that the Rural Associations never explain how they 
would propose to define ``similarly situated'' companies. We conclude 
that the Bureau took a reasonable approach, taking into account all the 
significant variables in determining the caps, in effect comparing each 
company to all other companies to the degree to which the companies are 
similar in regard to the variables found to be significant (i.e., the 
degree to which they are similarly situated).
    31. Trigger. We also reject the argument made by several parties in 
their applications for review that ``a regression model should be used 
only to trigger a harder look to determine whether a carrier's costs 
were truly `inefficient.''' The Commission did not provide the Bureau 
with the discretion to use the regression methodology in that manner. 
Moreover, as explained above in the context of the petitions for 
reconsideration, we conclude that it was reasonable for the Commission 
to adopt a general rule to identify carriers with costs that are 
significantly higher than their peers instead of relying on more costly 
and burdensome approaches like audits, as would be required if the 
regression methodology were used merely as a trigger.
    32. Finally, while we have, in this Order, addressed a number of 
significant issues raised in the applications for review, we recognize 
that a number of issues remain pending. We otherwise defer 
consideration of issues not addressed herein.

III. Limits on Total Per-Line High-Cost Support

    33. We deny both petitions for reconsideration. In the USF/ICC 
Transformation Order, the Commission concluded that a $250 cap would be 
reasonable after finding that ``support drawn from limited public funds 
in excess of $250 per-line monthly * * * should not be provided without 
further justification.'' The Commission also noted that ``virtually all 
(99 percent) of incumbent LEC study areas currently receiving 
[universal service] support are under the $250 per-line monthly 
limit.'' Even so, to provide affected carriers a measured transition, 
the Commission delayed the implementation of the $250 cap for six 
months to ``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.'' Moreover, after the six-month delay, the Commission 
phased-in the $250 cap ``to ease the potential impact of this 
transition.'' As a result, effective July 1, 2012, carriers subject to 
the $250 cap received support of no more than $250 per-line plus two-
thirds the difference between their uncapped per-line amount and $250, 
and effective July 1, 2013, carriers will receive no more than $250 
per-line plus one-third the difference between their uncapped per-line 
amount and $250 through June 30, 2014.
    34. Petitioners have not presented any new evidence or arguments 
that persuade us to reconsider adoption of the $250 per-line per month 
cap. And, we disagree with the Rural Associations' claims that the 
Commission failed to adequately explain the basis for adopting the $250 
cap. The Commission provided a thorough, reasoned analysis of the basis 
for adopting the $250 cap. By phasing-in the $250 cap, the Commission 
also provided carriers time to adjust, while promoting the Commission's 
goal of fiscal responsibility. Moreover, the USF/ICC Transformation 
Order acknowledged that if there are unique circumstances, carriers 
should utilize the waiver process. We recently modified and clarified 
the Commission's guidance for the waiver process in our Fifth Order on 
Reconsideration, 78 FR 3837, January 17, 2013.
    35. We note that, in 2011, there were 26 incumbent study areas that 
received $250 per month or more in per-line support. Of those 26 study 
areas, the Commission has received nine waiver petitions arguing that 
waiver of the cap is necessary for the company to continue to serve its 
community; one of those petitions subsequently was withdrawn. That the 
carriers serving the remaining study areas have not filed for waivers 
suggests that the measured transition adopted by the Commission 
provides an appropriate amount of time for affected companies to adjust 
their operations without disrupting service to consumers.
    36. We deny the requests of Accipiter and the Rural Associations 
that the Commission apply the $250 cap ``on a prospective basis only.'' 
The Commission decided, after fully considering the record, that the 
immediate adoption of the $250 cap would advance its goal of imposing 
responsible fiscal limits on universal service support. Accipiter 
claims that applying the cap ``to previously-incurred expenses is in no 
way consistent with the Congressional directive that support be 
`predictable,' and would punish carriers for reasonable investment 
decisions that cannot be reversed to account for the Commission's new 
rules.'' The Commission fully considered and rejected such arguments in 
the USF/ICC Transformation Order, explaining that section 254 of the 
Act ``does not create any entitlement or expectation that ETCs will 
receive any particular level of support or even any support at all.'' 
In fact, ``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.'' In addition, the Commission 
upheld the principle that universal service mechanisms be predictable 
by adopting a measured transition to the implementation of the $250 cap 
for all carriers that made clear how much support carriers could expect 
to receive as the cap was phased in. As discussed above, rather than 
``punish'' carriers for previously incurred expenses, the Commission 
made efforts to ``ease the potential impact'' of the transition on all 
carriers by delaying the implementation of the cap for six months, 
phasing in the cap over a period of three years, and providing a waiver 
process for those carriers that face unique circumstances.

IV. ICLS Corporate Operations Expense Cap

    37. Accipiter and the Rural Associations provide no new evidence 
and introduce no new arguments that persuade us to reverse or otherwise 
modify this approach, and therefore we deny these petitions for 
reconsideration. Accipiter claims that any immediate extension of the 
corporate operations expense cap to ICLS will have ``devastating 
financial implications'' on carriers that are in the process of growing 
their operations to serve rural areas. Accipiter notes that 
``[c]orporate operations expenses must be incurred before a carrier can 
add its first line,'' while acknowledging that ``per-line corporate 
operations costs are quickly averaged down as new subscribers are 
added.'' But the Commission has already made accommodations for 
carriers with limited subscribership. The Commission retained the rule 
that permits carriers with 6,000 or fewer working loops to recover a 
minimum

[[Page 16814]]

amount per working loop if they would receive less than that minimum 
under the application of the ICLS corporate operations expense cap 
formula (i.e., $42.337--(.00328 x number of total working loops)). 
Specifically, such carriers can recover monthly for each working loop: 
$63,000 divided by their total number of working loops. Moreover, if 
carriers believe that due to their unique characteristics, they need to 
recover more corporate operations expenses through ICLS than allowed 
for under the cap, they remain free to petition for a waiver of the cap 
pursuant to the Commission's waiver process.
    38. The Rural Associations request that the Commission delay the 
implementation of the ICLS corporate operations expense cap ``until no 
sooner than January 1, 2013.'' They argue that the Commission should 
not implement the corporate operations expense cap before carriers 
``have adequate opportunity to adjust their operations for compliance'' 
with the new operating expense caps that the Commission proposed to 
develop through regression analysis in the FNPRM. The Rural 
Associations have not provided any evidence, however, demonstrating why 
extending the HCLS corporate operations expense limit to ICLS was 
inappropriate or why it would be necessary to delay a critical reform 
that advances the Commission's goals of improving fiscal discipline and 
accountability.
    39. We also deny Accipiter's claim that the Commission violated 47 
U.S.C. 254(b)(5) by applying the ICLS corporate operations expense cap 
to support for 2012, which is determined with reference to 2010 
expenses. The company argues that it ``reasonably and rationally made 
decisions about 2010 investments and expenses based on the rules that 
were in place in 2010.'' But as we discussed above and addressed 
repeatedly in the USF/ICC Transformation Order, section 254 does not 
entitle carriers to recover USF support simply because they expected to 
receive that support. Accipiter does not cite any additional legal 
authority that persuades us otherwise.
    40. Finally, we are not persuaded by Accipiter's argument that a 
``one size fits all rule,''--i.e., using a nationwide formula to cap 
ICLS--is ``inappropriate and inflexible'' due to the variability in 
corporate operations expenses between different regions in the country. 
Accipiter has not provided any evidence to explain why a nationwide 
formula is unreasonable. Indeed, the Commission has used a nationwide 
formula to limit the recovery of corporate operations expenses for HCLS 
ever since it adopted that corporate operations expense cap in 1997. 
Accipiter has failed to explain how ICLS differs from HCLS in such a 
way that it would be unreasonable for the Commission to extend the HCLS 
nationwide formula to ICLS.

V. Implementation of Further Reforms for Rate-of-Return Carriers

    41. Finally, we take this opportunity to address some general 
arguments made by a number of rate-of-return carrier associations that 
the Commission should undertake ``a careful data-driven process that 
takes measure of * * * reforms just now being implemented,'' including 
those reforms described above, ``in lieu of racing forward with 
additional changes.'' Although we disagree with these carriers insofar 
as they suggest we stop our implementation of the Commission's USF/ICC 
Transformation Order, we agree that a careful data-driven process is 
consistent with--and indeed critical to--that implementation. We 
emphasize our continued commitment to such a process, and we direct the 
Bureau, as it implements the modifications described above and proceeds 
with other reforms adopted in the USF/ICC Transformation Order, to 
continue taking all appropriate steps to seek input from affected 
stakeholders, and gather relevant data on the effect of reforms as they 
proceed. As an additional measure, we direct the Bureau to report to 
the Commission, within two years of release of the USF/ICC 
Transformation Order, i.e., November 18, 2013, on the progress of 
implementation, and on the impact of reforms based on relevant, 
available data at that time.

VI. Procedural Matters

A. Paperwork Reduction Act

    42. This document does not contain proposed information 
collection(s) subject to the Paperwork Reduction Act of 1995 (PRA), 
Public Law 104-13. In addition, therefore, it does not contain any new 
or modified information collection burden for small business concerns 
with fewer than 25 employees, pursuant to the Small Business Paperwork 
Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4).

B. Final Regulatory Flexibility Act Certification

    43. The Regulatory Flexibility Act (``RFA'') requires that agencies 
prepare a regulatory flexibility analysis for notice-and-comment 
rulemaking proceedings, unless the agency certifies that ``the rule 
will not have a significant economic impact on a substantial number of 
small entities.'' The RFA generally defines ``small entity'' as having 
the same meaning as the terms ``small business,'' ``small 
organization,'' and ``small governmental jurisdiction.'' In addition, 
the term ``small business'' has the same meaning as the term ``small 
business concern'' under the Small Business Act. A small business 
concern is one which: (1) is independently owned and operated; (2) is 
not dominant in its field of operation; and (3) satisfies any 
additional criteria established by the Small Business Administration 
(SBA).
    44. This document modifies and clarifies the benchmarking rule 
adopted by the Commission in USF/ICC Transformation Order, and modifies 
the Wireline Competition Bureau's implementation of that rule. These 
modifications and clarifications do not create any burdens, benefits, 
or requirements that were not addressed by the Final Regulatory 
Flexibility Analysis attached to USF/ICC Transformation Order. The 
Commission will send a copy of the Order including a copy of this final 
certification, in a report to Congress pursuant to the Small Business 
Regulatory Enforcement Fairness Act of 1996, see 5 U.S.C. 801(a)(1)(A). 
In addition, the Order and this certification will be sent to the Chief 
Counsel for Advocacy of the Small Business Administration, and will be 
published in the Federal Register. See 5 U.S.C. 605(b).

C. Congressional Review Act

    45. The Commission will send a copy of this Order to Congress and 
the Government Accountability Office pursuant to the Congressional 
Review Act.

D. Effective Date

    46. We conclude that good cause exists to make this Order effective 
immediately upon publication in the Federal Register, pursuant to 
section 553(d)(3) of the Administrative Procedure Act. Agencies 
determining whether there is good cause to make a rule revision take 
effect less than 30 days after Federal Register publication must 
balance the necessity for immediate implementation against principles 
of fundamental fairness that require that all affected persons be 
afforded a reasonable time to prepare for the effective date of a new 
rule. As we note above, summing the capex and opex benchmarks together 
is an important interim step to recognize the trade-offs that carriers 
have made in investment, and will therefore mitigate or eliminate the 
effect of the existing benchmarks cap mechanism on carriers that are 
capped under one or the other

[[Page 16815]]

benchmark but not both. It will also reduce the amount of support 
redistributed to uncapped carriers by a corresponding amount. Because 
many more carriers receive redistributed support than are capped under 
the existing mechanism, the effect of summing the caps on any carrier 
receiving redistributed support will generally be much less significant 
than the effect on those carriers that are currently capped. Moreover, 
we note that high cost loop support is generally subject to true-ups 
over time. Carriers, accordingly, generally have no certain expectation 
of the precise amount of support they will receive. We conclude under 
these circumstances that the public interest is best served by 
immediate implementation of our new interim rule, and that, on balance 
carriers that will experience a minor reduction in redistributed 
support do not require additional time to prepare for implementation of 
a rule change that affects them only modestly.
    47. In addition, we modified the phase-in of the HCLS benchmarks to 
limit the amount of reduction of support to no more than fifteen 
percent of the study area's support absent implementation of the 
benchmark rule to give carriers that are heavily impacted by the 
benchmarks more time to adjust. We find that implementing the 
modification to the phase-in as expeditiously as possible furthers the 
Commission's objective of ensuring that carriers experience a more 
gradual implementation of the benchmarks overall which obviates the 
necessity of providing carriers additional 30 day notice before 
implementation.

VII. Ordering Clauses

    48. Accordingly, it is ordered, pursuant to the authority contained 
in sections 1, 2, 4(i), 201-206, 214, 218-220, 251, 252, 254, 256, 
303(r), 332, and 403 of the Communications Act of 1934, as amended, and 
section 706 of the Telecommunications Act of 1996, 47 U.S.C. 151, 152, 
154(i), 201-206, 214, 218-220, 251, 252, 254, 256, 303(r), 332, 403, 
1302, and Sec. Sec.  1.1 and 1.429 of the Commission's rules, 47 CFR 
1.1, 1.429, that this Sixth Order on Reconsideration is adopted, 
effective upon publication of the text or summary thereof in the 
Federal Register.
    49. It is further ordered that, pursuant to the authority contained 
in section 405 of the Communications Act of 1934, as amended, 47 U.S.C. 
405 and Sec. Sec.  0.291 and 1.429 of the Commission's rules, 47 CFR 
0.291 and 1.429, that the Petition for Reconsideration filed by the 
National Exchange Carrier Association, Inc., Organization for the 
Promotion and Advancement of Small Telecommunications Companies, and 
Western Telecommunications Alliance on December 29, 2011 is granted in 
part to the extent described herein, and is denied in part to the 
extent described herein.
    50. It is further ordered that, pursuant to the authority contained 
in section 405 of the Communications Act of 1934, as amended, 47 U.S.C. 
405 and Sec. Sec.  0.291 and 1.429 of the Commission's rules, 47 CFR 
0.291 and 1.429, that the Petition for Reconsideration filed by 
Accipiter Communications Inc. on December 29, 2011 is denied in part to 
the extent described herein.
    51. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by 
Central Texas Telephone Cooperative, Inc. on May 25, 2012 is granted in 
part to the extent described herein, and is denied in part to the 
extent described herein.
    52. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by the 
National Exchange Carrier Association, Inc., National 
Telecommunications Cooperative Association, Organization for the 
Promotion and Advancement of Small Telecommunications Companies, and 
Western Telecommunications Alliance on May 25, 2012 is denied in part 
to the extent described herein.
    53. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by East 
Ascension Telephone Company, LLC on May 25, 2012 is denied in part to 
the extent described herein.
    54. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by Silver 
Star Telephone Company, Inc. on May 25, 2012 is granted in part to the 
extent described herein, and is denied in part to the extent described 
herein.
    55. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Supplement to Application for Review 
filed by Silver Star Telephone Company, Inc. on June 22, 2012 is 
granted in part to the extent described herein, and is denied in part 
to the extent described herein.
    56. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by Blue 
Valley Telephone Telecommunications, Inc. on June 22, 2012 is granted 
in part to the extent described herein, and is denied in part to the 
extent described herein.
    57. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by 
Blooston Rural Broadband Carriers on May 25, 2012 is granted in part to 
the extent described herein, and is denied in part to the extent 
described herein.
    58. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by 
Accipiter Communications Inc. on May 25, 2012 is granted in part to the 
extent described herein, and is denied in part to the extent described 
herein.
    59. It is further ordered that, pursuant to the authority contained 
in section 155(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 155(c) and Sec. Sec.  0.291 and 1.115 of the Commission's rules, 
47 CFR 0.291 and 1.115, that the Application for Review filed by United 
States Telecom Association on June 22, 2012 is granted in part to the 
extent described herein, and is denied in part to the extent described 
herein.
    60. It is further ordered that the Commission shall send a copy of 
this Order to Congress and the Government Accountability Office 
pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).
    61. It is further ordered, that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Order, including the Final Regulatory Flexibility 
Certification, to the Chief Counsel for Advocacy of the Small Business 
Administration.


[[Page 16816]]


Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 2013-06322 Filed 3-18-13; 8:45 am]
BILLING CODE 6712-01-P