[Federal Register Volume 81, Number 79 (Monday, April 25, 2016)]
[Rules and Regulations]
[Pages 24282-24346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08375]



[[Page 24281]]

Vol. 81

Monday,

No. 79

April 25, 2016

Part IV





 Federal Communications Commission





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





47 CFR Parts 51, 54, 65, et al.





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

  Federal Register / Vol. 81 , No. 79 / Monday, April 25, 2016 / Rules 
and Regulations  

[[Page 24282]]


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

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 51, 54, 65, and 69

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


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

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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

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

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

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

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order, Order and Order on Reconsideration in WC Docket Nos. 10-90, 
14-58; CC Docket No. 01-92; FCC 16-33, adopted on March 23, 2016 and 
released on March 30, 2016. The full text of this document is available 
for public inspection during regular business hours in the FCC 
Reference Center, Room CY-A257, 445 12th Street SW., Washington, DC 
20554. Or at the following Internet address: http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0330/FCC-16-33A1.pdf. The Further 
Notice of Proposed Rulemaking (FNPRM) that was adopted concurrently 
with the Report and Order, Order and Order on Reconsideration are 
published elsewhere in this issue of the Federal Register.

I. Introduction

    1. With this Report and Order, Order and Order on Reconsideration, 
and concurrently adopted Further Notice of Proposed Rulemaking (FNPRM), 
the Commission adopts significant reforms to place the universal 
service program on solid footing for the next decade to ``preserve and 
advance'' voice and broadband service in areas served by rate-of-return 
carriers. In 2011, the Commission unanimously adopted transformational 
reforms to modernize universal service for the 21st century, creating 
programs to support explicitly broadband-capable networks. In this 
Report and Order, Order, Order on Reconsideration, and concurrently 
adopted FNPRM, the Commission takes necessary and crucial steps to 
reform our rate-of-return universal service mechanisms to fulfill our 
statutory mandate of ensuring that all consumers ``have access to . . . 
advanced telecommunications and information services.'' In particular, 
after extensive coordination and engagement with carriers and their 
associations, the Commission modernizes the rate-of-return program to 
support the types of broadband offerings that consumers increasingly 
demand, efficiently target support to areas that need it the most, and 
establish concrete deployment obligations to ensure demonstrable 
progress in connecting unserved consumers. This will provide the 
certainty and stability that carriers seek in order to invest for the 
future in the years to come. The Commission welcomes ongoing input and 
partnership as the Commission moves forward to implementing these 
reforms.
    2. Rate-of-return carriers play a vital role in the high-cost 
universal service program. Many of them have made great strides in 
deploying 21st century networks in their service territories, in spite 
of the technological and marketplace challenges to serving some of the 
most rural and remote areas of the country. At the same time, millions 
of rural Americans remain unserved. In 2011, the Commission unanimously 
concluded that extending broadband service to those communities that 
lacked any service was one of core objectives of reform. At that time, 
it identified a rural-rural divide, observing that ``some parts of 
rural America are connected to state-of-the art broadband, while other 
parts of rural America have no broadband access.'' The Commission 
focuses now on the rural divide that exists within areas served by 
rate-of-return carriers. According to December 2014 Form 477 data, an 
estimated 20 percent of the housing units in areas served by rate-of-
return carriers lack access to 10 Mbps downstream/1 Mbps upstream (10/1 
Mbps) terrestrial fixed broadband service. It is time to close the gap, 
and take action to bring service to the consumers served by rate-of-
return carriers that lack access to broadband. The Commission needs to 
modernize comprehensively the rate-of-return universal service program 
in order to benefit rural consumers throughout the country.
    3. For years, the Commission has worked with active engagement from 
a wide range of interested stakeholders to develop new rules to support 
broadband-capable networks. One shortcoming of the current high-cost 
rules identified by rate-of-return carriers is that support is not 
provided if consumers choose to drop voice service, often referred to 
as ``stand-alone broadband'' or ``broadband-only'' lines. In the April 
2014 Connect America FNPRM, 79 FR 39196, July 9, 2014, the Commission 
unanimously articulated four general principles for reform to address 
this problem, indicating that new rules should provide support within 
the established budget for areas served by rate-of-return carriers; 
distribute support equitably and efficiently, so that all rate-of-
return carriers have the opportunity to extend broadband service where 
it is cost-effective to do so; support broadband-capable networks in a 
manner that is forward looking; and ensure no double-recovery of costs. 
The package of reforms outlined below solve the stand-alone broadband 
issue and update the rate-of-return program consistent with those 
principles. The Commission also takes important steps to act on the 
recommendation of the Governmental Accountability Office to ensure 
greater accountability and transparency in the high-cost program.
    4. The Report and Order establishes a new forward-looking, 
efficient mechanism for the distribution of support in rate-of-return 
areas. Specifically, the Commission adopts a voluntary path under which 
rate-of-return carriers may elect model-based support for a term of 10 
years in exchange for meeting defined build-out obligations. The 
Commission emphasizes the voluntary nature of this mechanism; no 
carrier will be required to take model-based support. This action will 
advance the Commission's longstanding objective of adopting fiscally 
responsible, accountable and incentive-based policies to replace 
outdated rules and programs. The cost model, which has proven 
successful in distributing support for price cap carriers, has been 
adjusted in multiple ways over more than a year to take into account 
the circumstances of rate-of-return carriers. The Commission makes

[[Page 24283]]

all necessary decisions to finalize the Alternative Connect America 
Cost Model (A-CAM) and direct the Wireline Competition Bureau (Bureau) 
to publish support amounts for this new component of the Connect 
America Fund (CAF ACAM) and associated deployment obligations for 
potential consideration by rate-of-return carriers. The Commission will 
make available up to an additional $150 million annually from existing 
high-cost reserves to facilitate this voluntary path to the model over 
the next decade. This approach will spur additional broadband 
deployment in unserved areas, while preserving additional funding in 
the high-cost account for other high-cost reforms.
    5. The Commission also makes technical corrections to modernize our 
existing interstate common line support (ICLS) rules to provide support 
in situations where the customer no longer subscribes to traditional 
regulated local exchange voice service, i.e. stand-alone broadband. 
Going forward, this reformed mechanism will be known as Connect America 
Fund Broadband Loop Support (CAF BLS). This simple, forward-looking 
change to the existing mechanism will provide support for broadband-
capable loops in an equitable and stable manner, regardless of whether 
the customer chooses to purchase traditional voice service, a bundle of 
voice and broadband, or only broadband. This will create incentives for 
carriers to deploy modern networks and encourage adoption of broadband. 
The Commission expects this approach will provide carriers, including 
those that no longer receive high cost loop support (HCLS), with 
appropriate support going forward to invest in broadband networks, 
while not disrupting past investment decisions.
    6. One of the core principles of reform since 2011 has been to 
ensure that support is provided in the most efficient manner possible, 
recognizing that ultimately American consumers and businesses pay for 
the universal service fund (USF). The Commission continues to move 
forward with our efforts to ensure that companies do not receive more 
support than is necessary and that rate of return carriers have 
sufficient incentive to be prudent and efficient in their expenditures, 
and in particular operating expenses. Therefore, the Commission adopts 
a method to limit operating costs eligible for support under rate-of-
return mechanisms, based on a proposal submitted by the carriers. The 
Commission also adopts measures that will limit the extent to which USF 
support is used to support capital investment by those rate-of-return 
carriers that are above the national average in broadband deployment in 
order to help target support to those areas with less broadband 
deployment. Lastly, in order to ensure disbursed high-cost support 
stays within the established budget for rate-of-return carriers, 
building on proposals in the record, the Commission adopts a self-
effectuating mechanism to control total support distributed pursuant to 
the HCLS and CAF-BLS mechanisms. The Commission recognizes that many 
carriers are eager to upgrade their existing broadband networks to 
provide service that exceeds the minimum standards that the Commission 
has established for recipients of high-cost support. But first, the 
Commission must ensure that our baseline service is truly universal. 
Each dollar spent on upgrading networks that already are capable of 
delivering 10/1 Mbps service is a dollar not available to extend 
service to those consumers that lack such service. Taken together, the 
Commission anticipates that these controls and limitations will 
encourage efficient spending by rate-of-return carriers, thereby 
enabling universal service support to be more effectively targeted to 
support investment in broadband-capable facilities in areas that remain 
unserved.
    7. One of the core tenets of reform for the Commission in 2011 was 
to ``require accountability from companies receiving support to ensure 
that public investments are used wisely to deliver intended results.'' 
The Commission stated its expectation that rate-of-return carriers 
would deploy scalable broadband in their communities, but it declined 
at that time to adopt specific build-out milestones for rate-of-return 
carriers. Instead, it concluded that it would allow carriers to extend 
service upon reasonable request. Since that time, rate-of-return 
carriers have continued to extend service, with a 45 percent increase 
in availability of 10/1 Mbps service between 2012 and 2014. To build on 
that progress, the Commission now adopts specific broadband deployment 
obligations for all rate-of-return carriers, and not just for those 
that elect the voluntary path to the model. The Commission adopts 
deployment obligations for all rate-of-return carriers that can be 
measured and monitored, while tailoring those obligations to the unique 
circumstances of individual carriers. Those obligations will be 
individually sized for each carrier not electing model support, based 
on the extent to which it has already deployed broadband and its 
forecasted CAF BLS, taking into account the relative amount of 
depreciated plant and the density characteristics of individual 
carriers.
    8. Another core tenet of reform adopted by the Commission in 2011, 
and unanimously reaffirmed in 2014, was to target support to areas that 
the market will not serve absent subsidy. To direct universal service 
support to those areas where it is most needed, the Commission adopts a 
rule prohibiting rate-of-return carriers from receiving CAF-BLS support 
in those census blocks that are served by a qualifying unsubsidized 
competitor. The Commission adopts a robust challenge process to 
determine which areas are in fact served by a qualifying unsubsidized 
competitor. The Commission does not expect the challenge process to be 
completed before the end of 2016, with support adjustments occurring no 
earlier than 2017. Carriers may elect one of several options for 
disaggregating support for those areas found to be competitive. Any 
support reductions resulting from implementation of this rule will be 
more effectively targeted to support existing and new broadband 
infrastructure in areas lacking a competitor.
    9. Finally, the Commission takes action to modify our existing 
reporting requirements in light of lessons learned from their 
implementation. The Commission revises eligible telecommunications 
carriers' (ETC) annual reporting requirements to better align those 
requirements with our statutory and regulatory objectives. The 
Commission concludes that the public interest will be served by 
eliminating the requirement to file a narrative update to the five-year 
plan. Instead, the Commission adopts narrowly tailored reporting 
requirements regarding the location of new deployment offering service 
at various speeds, which will better enable the Commission to determine 
on an annual basis how high-cost support is being used to ``improve 
broadband availability, service quality, and capacity at the smallest 
geographic area possible.''
    10. In the Order and Order on Reconsideration, as part of our 
modernization of the rules governing rate-of-return carriers, the 
Commission represcribes the currently authorized rate of return from 
11.25 percent to 9.75 percent. The rate of return is a key input in a 
rate-of-return incumbent local exchange carrier (LEC) revenue 
requirement calculation, which is the basis for both its common line 
and special access rates, and high-cost support as applicable. The 
current 11.25 percent rate of return is no longer consistent with the 
Act and today's

[[Page 24284]]

financial conditions. Relying primarily on the methodology and data 
contained in a Bureau Staff Report--with some minor corrections and 
adjustments--the Commission identifies a more robust zone of 
reasonableness and adopts a new rate of return at the upper end of this 
range. This reform will be phased in over six years. This change not 
only will improve the efficiency of the high-cost program, but also 
will lower prices for rate-of-return customers in rural areas.
    11. The actions the Commission takes today, combined with the rate-
of-return reforms undertaken in the past two years, will allow us to 
continue to advance the goal of ensuring deployment of advanced 
telecommunications and information services networks throughout ``all 
regions of the nation.'' Importantly, they build on proposals from and 
collaboration with the carriers and their associations. Through the 
coordinated reforms the Commission takes today, they will provide rate-
of-return carriers with equitable and sustainable support for 
investment in the deployment and operation of 21st century broadband 
networks throughout the country, providing stability for the future. 
Achieving universal access to broadband will not occur overnight, but 
today marks another step on the path toward that goal.

II. Report and Order

A. Voluntary Path to the Model

1. Discussion
    12. In this section, the Commission adopts a voluntary path for 
rate-of-return carriers to elect to receive model-based support in 
exchange for deploying broadband-capable networks to a pre-determined 
number of eligible locations. By creating a voluntary pathway to model-
based support, the Commission will spur new broadband deployment in 
rural areas, which will help close the digital divide among rate-of-
return carriers. As noted above, there is a wide disparity among rate-
of-return study areas regarding the extent of coverage meeting the 
Commission's minimum standard of 10/1 Mbps service: Based on December 
2014 FCC Form 477 data, an estimated 20 percent of housing units in 
census blocks served by rate-of-return carriers lack access to 10/1 
Mbps terrestrial fixed broadband service, while other rate-of-return 
carriers have deployed 10/1 Mbps to nearly all of their study area. The 
option of receiving model-based support will provide the opportunity 
for carriers that have made less progress in their broadband deployment 
than other rate-of-return carriers to ``catch up.'' By creating defined 
performance and deployment obligations for specific and predictable 
support amounts, the Commission is completing the framework envisioned 
by the Commission in the 2011 USF/ICC Transformation Order, 76 FR 
73830, November 29, 2011. The Commission also is taking additional 
steps to fulfill the Commission's longstanding objective of providing 
support based on forward-looking efficient costs. And finally, the 
model path may well be a viable option for high-cost companies that no 
longer receive HCLS due to the past operation of the indexed cap on 
HCLS, often referred to as the ``cliff effect.'' The Commission took 
steps to address this problem in December 2014 by modifying the 
methodology used to adjust HCLS to fit within the existing cap, but 
that did not restore HCLS to those companies that previously had fallen 
off the cliff.
    13. As discussed more fully below, the election of model-based 
support places those carriers in a different regulatory paradigm. They 
no longer will be subject to rate-of-return regulation for common line 
offerings, and they no longer will participate in the National Exchange 
Carrier Association's (NECA's) common line pool. Effectively, the 
carriers that choose to take the voluntary path to the model are 
electing incentive regulation for common line offerings.
    14. Term of Support. The Commission adopts a 10-year term for rate-
of-return carriers electing to receive model-based support. Carriers 
electing this option will have the certainty of receiving specific and 
predictable monthly support amounts over the 10 years. Predictable 
support will enhance the ability of these carriers to deploy broadband 
throughout the term. In year eight, the Commission expects they will 
conduct a rulemaking to determine how support will be determined after 
the end of the 10-year period. The Commission expects that prior to the 
end of the 10-year term, the Commission will have adjusted its minimum 
broadband performance standards for all ETCs, and other changes may 
well be necessary then to reflect marketplace realities at that time.
    15. Broadband Speed Obligations. In December 2014, the Commission 
adopted a minimum speed standard of 10/1 Mbps for price-cap and rate-
of-return carriers receiving high-cost support. As a result, price cap 
carriers accepting model-based support are required to offer at least 
10/1 Mbps broadband service to the requisite number of high-cost 
locations by the end of a six-year support term. And rate-of-return 
carriers were required to offer at least 10/1 Mbps broadband service 
upon reasonable request. At that time, the Commission also decided that 
10/1 Mbps should not be our end goal for the 10-year term for providers 
awarded support through the Connect America Phase II bidding process.
    16. Similarly, here, the Commission recognizes that their minimum 
requirements for rate-of-return carriers will likely evolve over the 
next decade. NTCA argues that a universal service program premised upon 
achieving speeds of 10/1 Mbps risks locking rural America into lower 
service levels. The Commission agrees that our policies should take 
into account evolving standards in the future. At the same time, the 
Commission recognizes that it is difficult to plan network deployment 
not knowing the performance obligations that might apply by the end of 
the 10-year term. The Commission finds that establishing speed and 
other performance requirements now for carriers electing model-based 
support is preferable to doing so at some point mid-way through the 10-
year term, as it will provide more certainty for carriers electing this 
voluntary path. Rate-of-return carriers that comply with the 
performance requirements the Commission establishes today for the 
duration of the 10-year term will be deemed in compliance even if the 
Commission subsequently establishes different standards that are 
generally applicable to the high-cost support mechanisms before the end 
of the 10-year term.
    17. The Commission concludes that rate-of-return carriers electing 
model support will be required to maintain voice and existing broadband 
service and to offer at least 10/1 Mbps to all locations ``fully 
funded'' by the model, and at least 25/3 Mbps to a certain percentage 
of those locations, by the end of the support term. The Commission 
adopts with minor modifications ITTA and USTelecom's proposal to 
require carriers with a state-level density of more than ten locations 
per square mile to offer at least 25/3 Mbps to at least 75 percent of 
the fully funded locations in the state by the end of the 10-year term. 
For administrative convenience, the Commission will determine these 
density thresholds based on housing units, rather than locations in the 
model, because other density measures adopted in this Order will rely 
on U.S. Census data for housing units. The Commission concludes that 
carriers with a state-level density of ten or fewer, but more than 
five, housing units per square mile will be required to offer at least 
25/3 Mbps to at least 50 percent

[[Page 24285]]

of the fully funded locations in the state by the end of the 10-year 
term, and carriers with five or fewer housing units per square mile 
will be required to offer at least 25/3 Mbps to at least 25 percent of 
the fully funded locations, as suggested by WTA and other commenters. 
The density of each carrier's study area or study areas in a state will 
be determined using the final 2015 study area boundary data collection 
information submitted by carriers, and the number of locations will be 
determined using U.S. Census data. The Commission directs the Bureau to 
publish a list showing the state-level density for each carrier prior 
to issuing the public notice announcing the final version of the 
adopted model, so carriers will know in advance of the timeframe for 
electing model-based support which deployment obligations will be 
applicable.
    18. In addition, the Commission establishes defined requirements 
for making progress towards extending broadband to capped locations 
within their service areas. Specifically, carriers electing model 
support will be required to offer at least 4/1 Mbps to a defined number 
of locations that are not fully funded (i.e., with a calculated average 
cost above the ``funding cap''). The Commission adopts a modified 
version of ITTA's proposal, again using housing units to determine 
density. The Commission will require carriers with a state-level 
density of more than 10 housing units per square mile to offer at least 
4/1 Mbps to 50 percent of all capped locations in the state by the end 
of the 10-year term. Carriers with a state-level density of 10 or fewer 
housing units per square mile will be required to offer at least 4/1 
Mbps to 25 percent of all capped locations in the state by the end of 
the 10-year term The remaining capped locations will be subject to the 
reasonable request standard, and the Commission will monitor progress 
in connecting these locations as well. The Commission encourages 
carriers electing the voluntary path to the model to identify any 
census blocks where they expect not to extend broadband, so that such 
census blocks may be included in an upcoming auction where parties, 
including the current provider, may bid for support. The Bureau will 
announce a date by public notice, no sooner than 60 days after 
elections are finalized, by which carriers electing model-support may 
identify any such census blocks. Our goal is to ensure that all 
consumers have an opportunity to receive service within a reasonable 
timeframe. If carriers know that support provided through the voluntary 
path to the model will be insufficient to reach certain parts of their 
territories within 10 years, identifying these territories now, rather 
than 10 years from now, will enable the Commission to find another, 
more timely path to bring broadband to consumers in these areas. 
Carriers that provide the Commission notice within the requisite time 
would not be required to provide service upon reasonable request in the 
identified areas.
    19. Usage and Latency. In the April 2014 Connect America FNPRM, the 
Commission proposed to apply the same usage allowances and latency 
standards that the Bureau previously had adopted for price cap carriers 
accepting model-based support to rate-of-return carriers that are 
subject to broadband performance obligations. The Commission now adopts 
a usage threshold for rate-of-return carriers electing model support 
that should ensure that consumers in these areas have access to an 
evolving level of service over the 10-year term: The Commission 
requires them to offer a minimum usage allowance of 150 GB per month, 
or a usage allowance that reflects the average usage of a majority of 
consumers, using Measuring Broadband America data or a similar data 
source, whichever is higher. The first prong of the usage requirement--
the 150 GB usage allowance--is similar to the approach adopted by the 
Bureau for price cap carriers to set an evolving level of service over 
the term of support: The Commission requires them to offer a usage 
allowance that meets or exceeds the usage level of 80 percent of cable 
or fiber-based fixed broadband subscribers, whichever is higher, 
according to the most current publicly available Measuring Broadband 
America usage data. According to the Commission's 2015 Measuring 
Broadband America data, 80 percent of cable broadband subscribers used 
156 GB or less per month. For simplicity, the Commission adopts a 
monthly usage allowance of 150 GBs for rate-of-return carriers electing 
to receive CAF-ACAM support. The second prong of the usage 
requirement--to provide a usage allowance that will allow consumers to 
use their connections in a way similar to usage of a majority of 
consumers nationwide--ensures that consumers served by rate-of-return 
carriers will be not be offered service that is significantly different 
than what is available in urban areas over the full 10-year term. The 
Commission expects that carriers accepting model-based support will 
have economic incentives irrespective of these mandates to provide 
consumers with an evolving array of service offerings, and adopt this 
second prong as a regulatory backstop to ensure that this happens.
    20. In addition, the Commission adopts our proposal to require 
rate-of-return carriers accepting model-based support to certify that 
95 percent or more of all peak period measurements of network round-
trip latency are at or below 100 milliseconds. No party objected to 
adopting this standard for public interest obligations for rate-of-
return carriers. This latency standard will apply to all locations that 
are fully funded. As discussed below, the Commission recognizes there 
may be need for relaxed standards in areas that are not fully funded, 
where carriers may use alternative technologies to meet their public 
interest obligations.
    21. Deployment Obligations. The Commission require rate-of-return 
carriers accepting the offer of model-based support to offer at least 
10/1 Mbps broadband service to the number of locations identified by 
the model where the average cost is above the funding benchmark and 
below the funding per location cap, and at least 25/3 Mbps to a subset 
of those locations. These are the locations that are ``fully funded'' 
with model-based support. In contrast to the approach taken in price 
cap areas, where the Commission did not provide support to locations 
above an extremely high-cost threshold, in rate-of-return areas the 
Commission will provide support to all census blocks with average costs 
above the funding benchmark. However, each location within census 
blocks where the average cost exceeds the funding cap will receive the 
same amount of support. This funding for locations above the funding 
cap should be sufficient to preserve existing service and allow 
carriers to extend broadband service to a defined number of the capped 
locations, and to the remaining locations upon reasonable request, 
using alternative technologies where appropriate. If a carrier 
identifies census blocks that it will not be able to serve by the date 
specified by public notice, as discussed above, its support will be 
reduced to reflect the fewer number of locations, and it will not be 
subject to the reasonable request standard for those locations if 
another provider wins those areas in an auction.
    22. The Commission declines to adopt an approach that would base a 
company's build-out obligations solely on the extent to which its 
model-based support exceeds its legacy support. The Commission agrees 
with proponents of such an approach that the locations to which a 
company will be required to

[[Page 24286]]

deploy broadband should be based on the A-CAM modeled cost 
characteristics of each company, but the Commission finds that our 
approach is preferable and more consistent with the overall framework 
of providing model-based support. Like CAM, A-CAM estimates ``the full 
average monthly cost of operating and maintaining an efficient, modern 
network,'' and includes both capital and operating costs. Although 
actual costs may differ from forward-looking economic costs at any 
particular point in time, allowing monthly recovery of the model's 
levelized cost means, on average, all carriers will earn an amount that 
would allow them to maintain the specified level of service going 
forward over the longer term.
    23. The Commission is not persuaded by the argument that they 
should tie broadband deployment obligations only to the supplemental 
support in excess of legacy support and determine the extent of new 
broadband deployment obligations based on modeled capital costs. Our 
methodology is based on modeled capital and operating costs for each 
census block and provides the entire support amount calculated for 
areas above the funding benchmark and below the per-location funding 
cap; that is, these locations will be ``fully funded'' by the model 
under our method.
    24. Interim Deployment Milestones. The Commission adopts evenly 
spaced annual interim milestones over the 10-year term for rate-of-
return carriers electing model-based support, as proposed by ITTA, 
NTCA, USTelecom, and WTA with a minor modification. The Commission 
adopts enforceable milestones beginning in year four, whereas the 
enforceable milestones proposed by the rural associations would begin 
in year five. As shown in the chart below, the Commission requires 
carriers receiving model-based support to offer to at least 10/1 Mbps 
broadband service to 40 percent of the requisite number of high-cost 
locations in a state by the end of the fourth year, an additional 10 
percent in subsequent years, with 100 percent by the end of the 10-year 
term. The Commission does not set interim milestones for the deployment 
of broadband speeds of 25/3 Mbps; the Commission requires carriers 
receiving model-based support to offer to at least 25/3 Mbps broadband 
service carriers to 25 percent or 75 percent of the requisite locations 
by the end of the 10-year term, depending upon the state-level density 
discussed above.

 Deployment Milestones for Rate-of-Return Carriers Receiving Model-Based
                                 Support
------------------------------------------------------------------------
                                                              Percent
------------------------------------------------------------------------
Year 1 (2017)...........................................              **
Year 2 (2018)...........................................              **
Year 3 (2019)...........................................              **
Year 4 (2020)...........................................              40
Year 5 (2021)...........................................              50
Year 6 (2022)...........................................              60
Year 7 (2023)...........................................              70
Year 8 (2024)...........................................              80
Year 9 (2025)...........................................              90
Year 10 (2026)..........................................             100
------------------------------------------------------------------------

    25. The Commission also concludes that rate-of-return carriers 
receiving model-based support should have some flexibility in their 
deployment obligations to address unforeseeable challenges to meeting 
these obligations. When the Commission adopted flexibility in 
deployment obligations for price cap carriers accepting model-based 
support, they recognized that the ``facts on the ground'' when they are 
deploying facilities may necessitate some flexibility regarding the 
number of required locations. Because rate-of-return carriers electing 
model-based support may face similar circumstances, the Commission 
finds that providing the same flexibility and allowing deployment to 
less than 100 percent of the requisite locations is equally appropriate 
for these carriers as well. The Commission therefore will permit them 
to deploy to 95 percent of the required number of locations by the end 
of the 10-year term. To the degree an electing carrier deploys to less 
than 100 percent of the requisite locations, the remaining percentage 
of locations would be subject to the deployment obligations for the 
carrier's capped locations. The Commission does not require rate-of-
return carriers to refund support if they deploy to at least 95% of the 
required locations, but not 100%, because they will use that support to 
maintain service and deploy new broadband to unserved customers under 
the standard for capped locations adopted above. And, as noted above, 
to the extent the electing carrier does not foresee being able to serve 
some fraction of the remaining five percent of locations in any way, 
not even with alternative technologies, the Commission encourages them 
to identify such census blocks for inclusion in an upcoming auction.
    26. The Commission also notes that the customer location data 
utilized in the model reflect location data at a particular point in 
time. The precise number of locations in some funded census blocks is 
likely to change for a variety of reasons, which in some circumstances 
would make it impossible for a carrier to meet its deployment 
obligations. Carriers that discover there is a widely divergent number 
of locations in their funded census blocks as compared to the model 
should have the opportunity to seek an adjustment to modify the 
deployment obligations. Consistent with our action for Phase II in 
price cap territories, the Commission delegates authority to the Bureau 
to address these discrepancies by adjusting the number of funded 
locations downward and reducing associated funding levels.
    27. The Commission is not persuaded that they should decline to 
impose intermediate deployment milestones for small rate-of-return 
carriers serving 10,000 or fewer locations in a state, as proposed by 
WTA. WTA argues that a 5,000 line carrier that is 60 percent built out 
and needs to extend broadband to 2,000 more locations cannot 
economically build out to 200 new locations each year, and that the 
most efficient way to proceed is to construct all 2,000 locations 
during one or two construction seasons. The deployment milestones the 
Commission adopts do not require evenly spaced new deployment each 
year, as WTA appears to assume. For instance, the carrier could fully 
complete its deployment obligation in years 5 and 6, if it found it 
more efficient to do the whole project over two construction seasons. 
The Commission would be concerned if such a hypothetical carrier were 
to wait until years 8 and 9 to begin extending broadband to its 
unserved customers; they would expect to see some progress toward 
deploying new broadband after receiving eight years of model-based 
support. Moreover, carriers that feel uncomfortable with intermediate 
deadlines may prefer to stay on legacy mechanisms.
    28. A-CAM. The Commission makes the following decisions regarding 
the final version A-CAM that will be used to calculate support for 
carriers that voluntarily elect to receive model-based support. The 
Commission adopts the model platform and current input values in 
version 2.1 for purposes of calculating the cost of serving census 
blocks in rate-of-return areas, with a modification regarding updates 
to the broadband coverage data. Consistent with the rate represcription 
decision below, the Commission adopts an input value of 9.75 percent 
for the cost of money in the model for rate-of-return carriers, which 
is higher than the input value used for price cap carriers.
    29. The Commission also makes all necessary decisions to calculate 
support

[[Page 24287]]

amounts for rate-of-return carriers electing to receive model-based 
support. The model will utilize a $200 per-location funding cap to 
provide support for all locations above a funding benchmark of $52.50, 
which is subject to reduction if necessary to meet demand for model-
based support. In addition, the Commission will exclude from support 
calculations those census blocks where the incumbent or any affiliated 
entity is providing 10/1 Mbps or better broadband using either FTTP or 
cable technologies. The Commission concludes that they will update the 
broadband coverage for unsubsidized competitors in the model to reflect 
the recently released June 2015 FCC Form 477 data, which will be 
subject to a streamlined challenge process. The Commission directs the 
Bureau to take all necessary steps to release the adopted version of 
the model for purposes calculating support amounts for rate-of-return 
carriers electing to receive model support.
    30. As noted above, over the past year, the Bureau has been 
continually working on refining the model so that it would be more 
suitable for use in rate-of-return areas. During this time, rate-of-
return carriers and their associations have actively participated in 
this process, providing input on ways further to improve the model. For 
instance, the Bureau received and included certain data from nearly 
half of the approximately 1,100 study areas to better reflect their 
costs. As a result of this feedback and the resulting adjustments 
detailed below, the Commission believes that the final version of A-CAM 
will sufficiently estimate the costs of serving rate-of-return areas 
and that further adjustments are not necessary.
    31. The first version of A-CAM, released in December 2014, was 
fundamentally the same as CAM 4.2 to provide a baseline for subsequent 
modifications. Although the cost model was originally developed for use 
in price cap areas, it always has included a size adjustment factor--
based on rate-of-return company data--to scale operating expenses for 
``small, x-small, and xx-small'' companies, and has reflected cost 
differences based on density. Thus, even though the model estimates the 
forward-looking costs of an efficient provider, it takes into account 
the higher operating expenses of small rate-of-return carriers 
operating in rural areas.
    32. The Commission recognized the importance of accurate study area 
boundaries in using a model to calculate support for rate-of-return 
carriers. Whereas CAM used a commercial data source, GeoResults, to 
determine study area boundaries for the price cap carriers, the 
Commission directed the Bureau to incorporate the results of the 
Bureau's study area boundary data collection into A-CAM. From November 
2014 to April 2015, the Bureau undertook a four-step process for 
adapting the study area boundary data for use in the model. The first 
step determined study area boundaries for purposes of the A-CAM by 
addressing overlaps that remained after the Bureau provided an 
opportunity to resolve overlaps and voids in the data originally 
submitted. The second step aligned the exchanges submitted by rate-of-
return carriers (or state commissions on behalf of the incumbent) in 
the study area data collection with the study area boundaries to be 
used in the model and modified the exchanges to match the edges of the 
study area boundary where the submitted boundary of the exchanges 
differed from the modified study area boundary. The third step 
determined the potential locations to be used in the model for the 
placement of the central office (``Node0'' in A-CAM) within each 
exchange. The final step ensured that each exchange was associated with 
a single Node0 location. In April 2015, the Bureau posted on the 
Commission's Web site the A-CAM map based on the study area boundary 
and exchange data that had been certified by the carriers and submitted 
to the Bureau.
    33. Proposed corrections to study area and service area boundaries 
and Node0 locations were submitted by parties to the proceeding over 
the next several months. Recognizing that it would take several months 
to evaluate and incorporate study area boundary and Node0 locations 
submitted by interested parties in A-CAM, the Bureau continued to work 
on updating the model in other ways. In addition, with subsequent 
versions of the model the Bureau released illustrative results so that 
interested parties could better understand and evaluate how different 
assumptions used in calculating support impact the potential support 
calculated for a particular study area.
    34. A-CAM contains two modules: A cost module that calculates costs 
for all areas of the country, and a support module, which calculates 
the support for each area based on those costs. The support module 
allows users to ``filter'' the cost data to focus on specific 
geographic areas, such as census blocks that are not served by an 
unsubsidized competitor. Support amounts depend on the funding 
benchmark that determines which areas are funded: Areas with an average 
cost below the funding benchmark are not funded because it is assumed 
that end user revenues are sufficient to cover the cost of serving such 
areas. Support amounts also depend on the mechanism utilized to keep 
total support calculated under the model within a given budget.
    35. In March 2015, the Bureau released A-CAM version 1.0.1, which 
incorporated changes to broadband coverage using a minimum speed 
standard of 10/1 Mbps to determine the presence of a cable or fixed 
wireless competitor. The Bureau also released illustrative results 
under seven scenarios illustrating how different assumptions used in 
calculating support impact the potential support calculated for a 
particular study area. Five of the seven scenarios used a funding 
benchmark of $52.50, the same benchmark used to calculate support for 
price cap carriers. Two of these scenarios used an extremely high-cost 
threshold as the mechanism to keep total calculated support with the 
total budget for rate-of-return carriers. A third scenario utilized a 
different approach to keep total calculated support within the total 
budget for rate-of-return carriers: A per-location funding cap. Two 
scenarios used a $60 funding benchmark, which was suggested by parties 
to the proceeding as a mechanism to keep total support within the 
budget. This approach presumed that areas with an average cost per 
location less than $60 are competitively served by cable operators and 
therefore should be ineligible for support, which reduced support 
evenly across all locations in order to meet the budget. These two 
scenarios and two additional scenarios all exceeded the rate-of-return 
budget, however, but were published by the Bureau so that parties could 
consider alternative measures to maintain overall support within the 
budget, such as a dollar amount reduction in support per location, a 
percentage reduction in support per location, or a cap on support per 
location.
    36. In May 2015, the Bureau published a revised A-CAM study area 
boundary map that updated the data used to identify a small number of 
Node0 locations, which improved the default locations if carriers did 
not propose any corrections, and provided additional time for carriers 
to submit Node0 locations. In July 2015, the Bureau announced upcoming 
modifications to A-CAM, including a code change to enable the use of 
company-specific plant mix (aerial, buried, and conduit) input values, 
instead of the state-wide default values, and invited parties to submit 
plant mix values for individual study areas. The

[[Page 24288]]

plant mix values (aerial, buried, and conduit) are broken out 
separately for urban, suburban, and rural areas, for feeder, 
distribution, and interoffice facilities. In response to parties filing 
study area specific plant mix values, the Bureau posted a table showing 
the classification of census block groups as rural, suburban, and urban 
used in A-CAM.
    37. On August 31, 2015, the Bureau released A-CAM version 1.1, 
which updated the model to reflect FCC Form 477 broadband deployment 
data as of December 31, 2014. The prior version of A-CAM (v1.0.1) used 
SBI/NBM data as of June 30, 2013. FCC Form 477 data offers several 
advantages over the SBI/NBM data. The Form 477 data collection is 
mandatory, and Form 477 filers must certify to the accuracy of their 
data. The Bureau also released illustrative results produced using A-
CAM v1.1 under three scenarios that illustrate how different per-
location funding caps used in calculating support impact the potential 
support calculated for each rate-of-return study area in the country.
    38. On October 8, 2015, the Bureau released A-CAM version 2.0, 
which incorporated the results of the Bureau's study area boundary data 
collection and further updated the model for use in rate-of-return 
areas. After months of review by the Bureau, A-CAM v2.0 incorporated 
updated exterior study area boundaries, interior service area 
boundaries, and/or Node0 locations for approximately 400 study areas. 
The network topology was updated to reflect these changes, and to 
address the fact that American Samoa and some coastal islands are 
served by a rate-of-return carriers. The middle mile network topology 
was updated to include an undersea route for American Samoa and 
submarine routes for service areas not connected by roads within the 
continental United States. To reflect the fact that rate-of-return 
carriers may have higher middle mile costs, A-CAM v2.0 added two 
connections from each regional access tandem ring to an Internet access 
point to account for the cost of connecting to the public Internet.
    39. Previous versions of A-CAM included five size categories for 
investments related to land and buildings associated with central 
offices, and the smallest size central office was for those with fewer 
than 1,000 lines. Because some service areas in A-CAM have fewer than 
250 locations, the updated capital expenditures input table created a 
new size category for central offices serving fewer than 250 locations, 
with lower land and building investment for these very small areas than 
exchanges with 250 to 1,000 locations. A-CAM v2.0 also was modified to 
incorporate study-area specific plant mix values, but because the 
Bureau was still reviewing these carrier submissions at that time, they 
were not reflected in this version of the model.
    40. The Bureau also released A-CAM version 2.0 results that 
illustrate how three different per-location funding caps impact 
potential support. Although illustrative results for previous versions 
of A-CAM showed support using a per-location funding cap, A-CAM users 
could only approximate the Bureau's estimates. In A-CAM v2.0 and 
subsequent versions of the model, support can be calculated and 
reported using either an extremely high-cost threshold or a per-
location funding cap. Support in A-CAM v2.0 is calculated using the 
average cost at the census block level for each study area (i.e., costs 
are averaged at the census block level), meaning all locations in a 
census block within a carrier's study area are either funded or not 
funded. This version of the model calculates cost at the sub-block 
level only in cases where a census block crosses a study area boundary.
    41. On December 17, 2015, the Bureau released A-CAM v2.1, which 
incorporated study area-specific plant mix values submitted by rate-of-
return carriers, updated broadband coverage data to address issues 
raised by rate-of-return commenters regarding reported competitive 
coverage, and provided an alternative coverage option that excludes 
from support calculations census blocks served with either FTTP or 
cable, as requested by one industry association. The Bureau also 
released results that illustrate how the two different coverage 
assumptions used in calculating support impact the potential support 
calculated for a particular study area; both sets of results are 
calculated using a $200 per-location funding cap. On February 17, 2016, 
the Bureau released additional illustrative results utilizing input 
values reflecting a 9.75 percent cost of money. Raising the cost of 
money increased costs for all study areas.
    42. As directed, the Bureau incorporated the study area data and 
made other appropriate adjustments to A-CAM over the past year. The 
Commission finds that these modifications are sufficient for purposes 
of calculating support amounts for rate-of-return carriers electing to 
receive model support. A forward-looking cost model is designed to 
capture the costs of an efficient provider and does not generally use 
company-specific inputs values. As noted above, however, the A-CAM 
model takes into account the higher operating expenses of small, rate-
of-return carriers operating in rural areas with a company size 
adjustment factor for operating expenses and cost differences based on 
density. The most significant modification is the incorporation of the 
study area boundary data. Although the commercial data set was an 
appropriate source for price cap carriers, the Commission recognizes 
that they serve significantly larger study areas than any of the more 
than 1,100 rate-of-return study areas. Because rate-of-return carriers 
serve smaller areas, it also was appropriate to provide for company-
specific plant mix values if carriers found that the state-specific 
default values did not reflect their outside plant. The Commission 
notes that the average calculated A-CAM loop cost is greater than the 
largest embedded loop cost reported to NECA over the last fifteen years 
for the more than 500 study areas that submitted plant mix values.
    43. As discussed in detail below, as part of our modernization of 
the framework for rate-of-return carriers for both high-cost support 
and special access ratemaking, the Commission represcribes the 
currently authorized rate of return from 11.25 percent to 9.75 percent. 
The Commission primarily relies on the methodology and data contained 
in the Wireline Competition Bureau's Staff Report, with some minor 
corrections and adjustments, identifies a more robust zone of 
reasonableness between 7.12 percent and 9.75 percent, and adopts a new 
rate of return at the upper end of this range. A-CAM currently uses an 
input value for the cost of money of 8.5 percent. The Bureau relied on 
the same methodology when it adopted that value for use in CAM, but 
focused solely on data from price cap carriers to select the input 
value for the price-cap carrier model. Consistent with the Commission's 
decision below regarding the authorized rate of return for rate-of-
return carriers, now adopt an input value of 9.75 percent for the cost 
of money in A-CAM, thereby reflecting our consideration of the 
circumstances affecting rate-of-return carriers.
    44. The Commission directs the Bureau to calculate support using a 
$200 per-location funding cap, rather than an extremely high-cost 
threshold. The Commission concludes that this methodology is preferable 
because it provides some support to all locations above the funding 
threshold. Even though the locations at or above the funding cap are 
not ``fully funded'' with model support, carriers will receive a 
significant amount of funding--

[[Page 24289]]

specifically, $200 per month for each of the capped locations--which 
will permit them to maintain existing voice service and expand 
broadband in these highest-cost areas to a defined number of locations 
depending on density, or upon reasonable request, using alternative, 
less costly technologies where appropriate. This will allow 
significantly more high-cost locations to be served than if the 
Commission were to use a lower funding cap. The Commission notes that a 
$200 per-location funding cap is significantly higher than what was 
adopted for purposes of the offer of support to price cap carriers: 
Price cap carriers only receive a maximum amount of $146.10 in support 
per location ($198.60 minus the $52.50 funding benchmark), while the 
approach the Commission adopts for rate-of-return areas will provide 
full support for locations where the average cost is $252.50 per 
location.
    45. The Commission adopts a funding benchmark of $52.50, which is 
the same benchmark the Bureau adopted in its final version of CAM for 
purposes of making the offer of model-based support to price cap 
carriers. Based on the extensive record in the Connect America Phase II 
proceeding, the Bureau adopted a methodology for establishing a funding 
benchmark based on reasonable end user revenues. The Bureau adopted a 
blended average revenue per user (ARPU) of $75 that reflected revenues 
a carrier could reasonably expect to receive from each subscriber for 
providing voice, broadband, or a combination of those services. At the 
time, the speed standard was 4/1 Mbps, and the Bureau relied on 
information in the record regarding service offerings at or close to 
that speed. Now, the carriers electing model-based support will be 
required to offer 10/1 Mbps service, and 25/3 Mbps service to some 
subset of their customers, and therefore may earn higher revenues from 
their broadband services. The Bureau also adopted an expected 
subscription rate of 70 percent for purposes of estimating the amount 
of revenues a carrier may reasonably recover from end-users, and by 
extension, the funding benchmark. Applying an assumed ARPU of $75 and 
the 70 percent expected subscription rate, the funding benchmark is 
$52.50 per location. The record before the Bureau for CAM contained 
varying estimates and the Bureau acknowledged that forecasting 
potential ARPU for recipients of model-based support and the expected 
subscription rate necessarily requires making a number of predictive 
judgments. Nothing in the record before us now persuades us that 
consumers in rate-of-return carriers are less likely to subscribe to 
broadband where it is available than consumers served by price cap 
carriers.
    46. The Commission is not persuaded that they should establish a 
different funding benchmark for purposes of making the offer of model-
based support to rate-of-return carriers. During the A-CAM development 
process, the Bureau has released 15 versions of illustrative results 
and all but two used a funding benchmark of $52.50. Two versions used a 
$60 benchmark because commenters had suggested that a higher benchmark 
may be an alternative method for excluding areas served by an 
unsubsidized competitor. These and other commenters now support using a 
per-location funding cap rather than a higher benchmark.
    47. One commenter argues that a subscription rate of 70 percent is 
too high and that the Commission should use 50 percent, because the 
adoption rate for the 10 Mbps speed tier in rural areas was only 47 
percent in the 2015 Broadband Progress Report. Given the increasing 
demand for higher broadband speeds, the Commission does not find that a 
47 percent adoption rate is a realistic prediction of adoption rates in 
rural areas over the 10-year term. One reason that subscription rates 
are lower, on average, in rural areas today is the fact that 10/1 Mbps 
broadband service is not available to the same extent as urban areas. 
As broadband service is deployed more widely in high-cost areas with 
assistance from the federal high-cost program, as well as additional 
funding from state programs, the Commission would expect subscription 
rates in rural areas to become more similar to rates in urban areas. In 
addition, carriers will be required to provide broadband to some 
locations receiving capped funding, so the Commission expects carriers 
will be receiving broadband revenue from these customers, as well as 
any voice revenues. A 50 percent subscription rate would result in a 
funding benchmark of only $35, a much lower per-location funding cap, 
and would reduce the amount of support going to the highest-cost areas 
given that the amount of money across carriers electing the model will 
be finite. The Commission declines to adopt a measure that would have 
the effect of skewing support so drastically to the companies that are, 
relatively speaking, lower cost compared to other rate-of-return 
carriers.
    48. The Commission also concludes that it should prioritize model 
support to those areas that currently are unserved and direct the 
Bureau to exclude from the support calculations those census blocks 
where the incumbent rate-of-return carrier (or its affiliate) is 
offering voice and broadband service that meets the Commission's 
minimum standards for the high-cost program using FTTP or cable 
technology. For purposes of implementing this directive, the Bureau 
shall utilize June 2015 FCC Form 477 data that has been submitted and 
certified to the Commission prior to the date of release of this order; 
carriers may not resubmit their previously filed data to reduce their 
reported FTTP or cable coverage. While the Commission recognizes that 
these deployed census blocks require ongoing funding both to maintain 
existing service and in some cases to repay loans incurred to complete 
network deployments, it concludes that it is appropriate to make this 
adjustment to the model in order to advance our policy objective of 
advancing broadband deployment to unserved customers. Our decision to 
exclude from support calculations this subset of census blocks in no 
way indicates a belief that once networks are deployed, they no longer 
require support; rather, the Commission assumes that the carriers that 
have already deployed FTTP or cable broadband have done so within the 
existing legacy support framework. They will continue to receive HCLS 
and support through the reformed ICLS mechanism, and thus there is no 
need for a new mechanism to support their existing deployment. Those 
carriers are not required to elect model-based support and therefore 
this decision does not drastically reduce their support, as some 
allege.
    49. When the Commission directed the Bureau ``to undertake further 
work to update the Connect America Cost Model to incorporate the study 
area boundary data, and such other adjustments as may be appropriate,'' 
the Commission did not envision revisiting the fundamental decisions 
made by the Bureau in developing CAM, such as the decision to develop a 
FTTP model. Adopting a significantly different model, such as a digital 
subscriber line (DSL) model for use in rate-of-return areas, would have 
significantly delayed this process and would have been backwards 
looking. The Commission concludes the changes adopted above should 
provide sufficient support for carriers interested in the model and 
account for most of the unique circumstances of different rate-of-
return carriers. Therefore, the Commission declines to make further 
changes to data

[[Page 24290]]

sources or model design as requested by some commenters.
    50. Finally, the Commission rejects arguments in the record that 
the model should not be adopted because it produces support amounts 
that vary, in some cases significantly, from the amounts that 
particular carriers are currently receiving under the legacy mechanisms 
or that vary from actual costs of fiber-to-the-home construction. Some 
commenters cite a study conducted by Vantage Point comparing A-CAM 
results to FTTP engineering estimates and actual outside plant costs 
from 144 wire-center-wide projects to support their arguments that the 
model is not accurate. The Commission does not find that the Vantage 
Point analysis of variability between model results and its proprietary 
engineering data to be a useful comparison for several reasons. In 
particular, the Commission is not persuaded by the case study, node-by-
node comparisons because the engineering data reflect a different 
network architecture than the network modeled in A-CAM. A-CAM assumes a 
Gigabit-Capable Passive Optical Network (GPON), with splitters in the 
field. Vantage Point's examples place the splitters in the central 
office, with one dedicated fiber for each end-user location. Instead of 
sharing one high-capacity fiber for up to 32 locations for some 
distance from the central office, the Vantage Point approach includes 
the cost for up to 32 fibers along the entire distance covered by 
outside plant. The Commission recognizes that placing splitters in the 
central office can lead to higher utilization and lower cost per 
location for splitters; however, they generally expect the higher cost 
for fiber materials and installation (including, for example, much 
greater splicing expense) greatly to outweigh any savings gained from 
better splitter utilization. Vantage Point did not provide enough 
information in its filings to quantify the impact of dedicated fibers 
in the feeder plant. In addition, Vantage Point's claim that the model 
shows consistent deviation based on cost per subscriber is misleading 
because Vantage Point uses cost per actual subscriber, whereas A-CAM 
uses cost per location passed. Even if there were no variation in cost, 
areas that would be more expensive on a per-subscriber basis would have 
lower A-CAM calculated costs unless the take rate were 100 percent.
    51. As discussed above, A-CAM estimates the average monthly 
forward-looking economic cost of operating and maintaining an 
efficient, modern network, and is not intended to replicate the actual 
costs of a specific company at any particular point in time. Although 
one might expect forward-looking costs to capture greater efficiencies 
and, therefore, be lower than embedded costs, in fact, the forward-
looking loop costs from A-CAM for most study areas are higher than 
embedded loop costs reported by rate-of-return carriers to NECA. In 
many cases, model-based support is less than legacy support, not 
because A-CAM calculates lower costs for a particular study area, but 
because the model excludes from support calculations those census 
blocks that are presumed to be served by an unsubsidized competitor 
offering voice and 10/1 Mbps service. This is consistent with the 
Commission's policy adopted in the 2011 USF/ICC Transformation Order to 
condition Connect America Fund broadband obligations for fixed 
broadband on not spending the funds in areas already served by an 
unsubsidized a competitor. In other cases, model-based support is more 
than legacy support, not because the model overestimates the cost of 
serving an area, but because some companies serving high-cost areas 
previously have ``fallen off the cliff'' and lost HCLS due to the past 
operation of the indexed cap. Other companies may have underinvested in 
their networks. Providing model-based support to these carriers would 
not provide a ``windfall,'' as some have suggested, but rather would 
further the Commission's policy goal of providing appropriate 
incentives to extend broadband to unserved and underserved areas.
    52. Budget. Given the benefits and certainty of the model, the 
Commission believes it is appropriate to use additional high-cost 
funding from the high-cost reserve account to encourage companies to 
elect model support. The Commission notes that the Commission 
previously instructed USAC that if contributions to support the high-
cost support mechanisms exceed high-cost demand, excess contributions 
were to be credited to a Connect America Fund reserve account. USF/ICC 
Transformation Order. The Commission concludes there is no need to 
maintain a separate reserve account. To simplify the accounting 
treatment of high-cost reforms going forward, the Commission now 
directs USAC to eliminate the Connect America Fund reserve account and 
transfer the funds to the high-cost account. Going forward, USAC shall 
credit excess contributions to support the high-cost mechanism to the 
high-cost account and shall use funds from the high-cost account to 
reduce high-cost demand to $1.125 billion in any quarter that would 
otherwise exceed $1.125 billion. USF/ICC Transformation Order, 26 FCC 
Rcd at 17847, para. 562. The Commission therefore adopts a budget of up 
to an additional $150 million annually, or up to $1.5 billion over the 
10-year term, utilizing existing high-cost funds to facilitate the 
voluntary path to the model. By making this funding available to those 
carriers that are willing to meet concrete and defined broadband 
deployment obligations, including those who will see reductions in 
their support, the Commission will advance our objective of extending 
broadband to currently unserved consumers.
    53. At this point it is difficult to predict the extent to which 
companies may be interested in the voluntary path to the model and what 
the overall budgetary impact might be of such carrier elections. Even 
so, the Commission predicts that such additional funding will be 
sufficient to cover significant deployment and support elections to the 
model, including for those who will receive transition payments for a 
limited time in addition to model-based support. The Commission 
recognizes that carriers may have a variety of reasons for electing 
model support. In general, those carriers for whom A-CAM produces a 
significant increase in support over legacy support are more likely to 
elect model support than those who see little increase or a decrease, 
assuming that they view the increase in support as sufficient to meet 
the associated deployment obligations. At the same time, the Commission 
does not expect that all carriers for whom model-based support is 
significantly greater than legacy support will make the election: Some 
companies may not be prepared to meet the specific defined broadband 
build-out obligations that come with such support, while others may not 
be ready at this time to move to incentive regulation for their common 
line offering. The Commission describes below how they will adjust the 
offer of support and obligations to meet the defined CAF-ACAM budget.
    54. The first step in determining the budgetary impact is to 
identify the universe of carriers that will potentially elect model-
based support. After the final A-CAM results implementing the decisions 
the Commission adopts today are released, carriers will indicate within 
90 days whether they are interested in electing model-based support. 
The final released results for the adopted model effectively will 
create a ceiling--the maximum amount of CAF-ACAM support a carrier may 
receive with the maximum number of

[[Page 24291]]

associated locations. Once the carriers indicate their interest, the 
Bureau will total the amount of model-based support for electing 
carriers and determine the extent to which, in the aggregate, their 
model-based support plus transition payments exceed the total legacy 
support received for 2015 by that subset of rate-of-return carriers. 
For purposes of this calculation, the Bureau will sum the model-based 
support amounts and transition payments, if any, for carriers for whom 
model-based support is less than 2015 legacy HCLS and ICLS support. If 
that increase is $150 million or less, no adjustment to the offered 
support amounts or deployment obligations will be necessary, the 
Commission will not lower the $200 per location funding cap, and those 
carriers that indicated their interest will be deemed to have elected 
the voluntary path to the model. If demand can be met with the amounts 
adopted today, unused funding will remain in the high-cost account. The 
Commission at that time may consider whether circumstances warrant 
allocation of an additional $50 million in order to maintain the $200 
per location funding cap. In either of these situations, the initial 
indication of interest is irrevocable. Absent an additional allocation, 
the Bureau will lower the per-location funding cap to a figure below 
$200 per location to ensure that total support for carriers electing 
the model remains within the budget for this path.
    55. Reducing the funding cap per location would have the effect of 
reducing the number of fully funded locations that will be subject to 
defined broadband deployment obligations. Recognizing that these 
electing carriers may require more time to consider a revised offer, 
the Commission will require them to confirm their acceptance of the 
revised offer within 30 days.
    56. Election Process. The Bureau will release a Public Notice 
showing the offer of model-based support for each carrier in a state, 
predicated upon a monthly funding cap per location of $200. In addition 
to support amounts for these carriers, the Bureau will identify their 
deployments obligations, including the number of locations that are 
``fully funded'' and the number that would receive capped support. 
Carriers then will be required to make their elections.
    57. The Commission adopts our proposal to require participating 
carriers to make a state-level election, comparable to what the 
Commission required of price cap carriers. Our approach prevents rate-
of-return carriers from cherry-picking the study areas in a state where 
model support is greater than legacy support, and retaining legacy 
support in those study areas where legacy support is greater. Requiring 
carriers with multiple study areas in a state to make a state-level 
election will allow them to make business decisions about managing 
different operating companies on a more consolidated basis. Carriers 
considering this voluntary path to the model will need to evaluate on a 
state-level basis whether the support received for multiple study 
areas, on balance, is sufficient to meet the state-level number of 
locations that must be served.
    58. Because the Commission intends that the model-based path spur 
additional broadband deployment in those areas lacking service, they 
conclude that they will not make the offer of model-based support to 
any carrier that has deployed 10/1 broadband to 90 percent or more of 
its eligible locations in a state, based on June 2015 FCC Form 477 data 
that has been submitted as of the date of release of this Order. This 
will preserve the benefits of the model for those companies that have 
more significant work to do to extend broadband to unserved consumers 
in high-cost areas, and will prevent companies from electing model-
based support merely to lock in existing support amounts. The 
Commission recognizes that carriers that are fully deployed in some 
cases have taken out loans to finance such expansion and therefore may 
have significant loan repayment obligations for years to come. Carriers 
that have heavily invested in recent years are likely to be receiving 
significant amounts of HCLS, however, and will continue to receive HCLS 
as well as CAF BLS, which is essentially equivalent to ICLS. Therefore, 
they are not prejudiced by their inability to elect the voluntary path 
to the model.
    59. Carriers should submit their acceptance letters to the Bureau 
at [email protected]. To accept the support amount for a state or 
states, a carrier must submit a letter signed by an officer of the 
company confirming that the carrier elects model-based support amount 
as specified in the Public Notice and commits to satisfy the specific 
service obligations associated with that amount of model support. A 
carrier may elect to decline funding for a given state by submitting a 
letter signed by an officer of the company noting it does not accept 
model-based support for that state. Alternatively, if a carrier fails 
to submit any final election letter by the close of the 90-day election 
period, it will be deemed to have declined model-based support.
    60. As noted above, after receipt of the acceptances, the Bureau 
then will determine whether the model support of electing carriers 
exceeds the overall 10-year budget for the model path set by the 
Commission. If necessary, the Bureau will publish revised model-based 
support amounts and revised deployment obligations, available only to 
those carriers that initially indicated they would take the voluntary 
election of model-based support. Carriers will be required to confirm 
within 30 days of release of this Public Notice that they are willing 
to accept the revised final offer; if they fail to do so, they will be 
deemed to have declined the revised offer.
    61. If the Commission proceeds to the second step of the election 
process, those carriers that initially accepted but subsequently 
decline to accept the revised offer will continue to receive support 
through the legacy mechanisms, as otherwise modified by this Order. If 
the carrier received more support from the legacy mechanisms in 2015 
than it was offered by the final model run, the overall budget for all 
carriers that receive support through the rate-of-return mechanisms 
(HCLS and reformed ICLS) will be reduced by the difference between the 
carrier's 2015 legacy support amount and the final amount of model 
support offered to that carrier. That difference will already have been 
redistributed amongst the remaining model carriers.
    62. Broadband Coverage. The current version of the model contains 
December 2014 Form 477 broadband deployment data and voice subscription 
data. The Commission recognizes that FCC Form 477 filers certifying 
that they offer broadband at the requisite speeds to a particular 
census block may not fully cover all locations in a census block. The 
Commission finds, however, that targeting the model-based support to 
the census blocks where no competitor has certified that it is offering 
service is a reasonable way to ensure that they do not provide support 
to census blocks that have some competitive coverage. Like our decision 
to exclude from model-support calculations those blocks where the 
incumbent already has deployed FTTP, the Commission seek to target 
support to areas of greater need.
    63. The current version of A-CAM utilizes FCC Form 477 broadband 
deployment data as of December 31, 2014. While it is unlikely there has 
been a significant increase in broadband coverage in the intervening 
year by unsubsidized competitors in the specific blocks eligible for 
support in rate-of-

[[Page 24292]]

return areas, i.e. those that are higher cost, the Commission does want 
to take steps to ensure that support is not provided to overbuild areas 
where another provider already is providing voice and broadband service 
meeting the Commission's requirements. The Commission therefore adopts 
a streamlined challenge process. The Commission directs the Bureau to 
incorporate into the model the recently released June 2015 FCC Form 477 
data, and to provide a final opportunity for commenters to challenge 
the competitive coverage contained in the updated version of the model. 
Comments to challenge the coverage data or provide other relevant 
information will be due 21 days from public notice of the updated 
version of the model. The Commission notes that Form 477 filers are 
under a continuing obligation to make corrections to their filings. 
Indeed, in the wake of releasing version 2.1 of the A-CAM, a number of 
carriers have submitted letters noting corrections in Form 477 filings. 
The Commission directs the Bureau to review and incorporate as 
appropriate any Form 477 corrections to June 2015 data that are 
received in this challenge process, so that these updates are reflected 
in the final version of the model that is released for purposes of the 
offer of support.
    64. Tiered Transitions. The Commission adopts a three-tiered 
transition for electing carriers for whom model-based support is less 
than legacy support, based on the ITTA/USTelecom proposed glide path. 
In addition to model-based support, these carriers will receive a 
transition amount based on the difference between model support and 
legacy support. Based on our review of the record received in response 
to the concurrently adopted FNPRM, they now conclude that a tiered 
transition is preferable because it recognizes the magnitude of the 
difference in support for particular carriers. At the same time, the 
transition is structured in a way that prevents carriers for whom 
legacy support is greater than CAF-ACAM support from locking in higher 
amounts of support for an extended period of time.
    65. Tier 1. If the difference between a carrier's model support and 
its 2015 legacy support is 10 percent or less, in addition to model-
based support, it will receive 50 percent of that difference in year 
one, and then will receive model support in years two through ten.
    66. Tier 2. If the difference between a carrier's model support and 
its 2015 legacy support is 25 percent or less, but more than 10 
percent, in addition to model-based support, it will receive an 
additional transition payment for up to four years, and then will 
receive model support in years five through ten. The transition 
payments will be phased-down twenty percent per year, provided that 
each phase-down amount is at least five percent of the total legacy 
amount. If twenty percent of the difference between model support and 
legacy support is less than five percent of the total legacy amount, 
the carrier would transition to model support in less than five years.
    67. Tier 3. If the difference between a carrier's model support and 
its 2015 legacy support is more than 25 percent, in addition to model-
based support, it will receive an additional transition payment for up 
to nine years, and then will receive model support in year ten. The 
transition payments will be phased-down ten percent per year, provided 
that each phase-down amount is at least five percent of the total 
legacy amount. If ten percent of the difference between model support 
and legacy support is less than five percent of the total legacy 
amount, the carrier would transition to model support in less than ten 
years.
    68. The Commission declines to adopt one commenter's proposed 
``safety net'' that would limit a carrier's decrease in support in any 
year to five percent. The Commission concludes that a maximum of 10 
years is sufficient time for electing carriers to transition down fully 
to their model-based support amount. By specifying in advance how this 
transition will occur, carriers will have all the information necessary 
to evaluate the possibility of electing model support. Carriers that 
find ten years insufficient time to transition to a lower amount remain 
free to remain on the reformed legacy mechanisms. The Commission 
requires rate-of-return carriers receiving transition payments in 
addition to model-based support to use the additional support to extend 
broadband service to locations that are fully-funded or that receive 
capped support.
    69. Oversight and Non-Compliance. The Commission has previously 
adopted for ``ETCs that must meet specific build-out milestones . . . a 
framework for support reductions that are calibrated to the extent of 
an ETC's non-compliance with these deployment milestones.'' Today, the 
Commission adopts specific defined deployment milestones for rate-of-
return carriers electing model-based support and therefore the 
previously adopted non-compliance measures will apply.
    70. As established in the general oversight and compliance 
framework in the December 2014 Connect America Order, 80 FR 4446, 
January 27, 2015, a default will occur if an ETC is receiving support 
to meet defined obligations and then fails to meet its high-cost 
support obligations. In section 54.320(d), the Commission has already 
set forth in detail the support reductions for ETCs that fail to meet 
their defined build-out milestones. The table below summarizes the 
regime previously adopted by the Commission for non-compliance with 
build-out milestones.

                         Non-Compliance Measures
------------------------------------------------------------------------
          Compliance gap                   Non-compliance measure
------------------------------------------------------------------------
5% to less than 15%...............  Quarterly reporting.
15% to less than 25%..............  Quarterly reporting + withhold 15%
                                     of monthly support.
25% to less than 50%..............  Quarterly reporting + withhold 25%
                                     of monthly support.
50% or more.......................  Quarterly reporting + withhold 50%
                                     of monthly support for six months;
                                     after six months withhold 100% of
                                     monthly support and recover
                                     percentage of support equal to
                                     compliance gap plus 10% of support
                                     disbursed to date.
------------------------------------------------------------------------

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

[[Page 24293]]

B. Reforms of Existing Rate of Return Carrier Support Mechanism

    72. For rate-of-return carriers that do not elect to receive high-
cost universal service support based on the A-CAM model, the Commission 
modernizes its embedded cost support mechanisms to encourage broadband 
deployment and support standalone broadband. Specifically, the 
Commission makes technical rule changes to our existing ICLS rules to 
support the provision of broadband service to consumers in areas with 
high loop-related costs, without regard to whether the loops are also 
used for traditional voice services. The Commission renames ICLS 
``Broadband Loop Support'' as a component within the Connect America 
Fund (CAF BLS). Further, building on proposals in the record from the 
carriers, the Commission adopts operating expense limits, capital 
expenditure allowances, and budgetary controls that will be applicable 
to the HCLS and CAF BLS mechanisms to ensure efficient use of our 
finite federal universal service resources. These reforms together will 
better target support to advance the Commission's longstanding 
objective of closing the rural-rural divide in which some rural areas 
of the country have state-of-the-art broadband, while other parts of 
rural America have no broadband at all. The Commission expects that the 
combined effect of these measures will be to distribute support 
equitably and efficiently, and that all rate-of-return carriers will 
benefit from the opportunity to extend broadband service where it is 
cost-effective to do so.
1. Support for Broadband-Only Loop Costs for Rate-of-Return Carriers
    73. The Commission now adopts technical changes to our existing 
ICLS rule to provide support for rate-of-return carriers' broadband-
capable network loop costs, without regard to whether the loops are 
used to provide voice or broadband-only services. As explained above, 
although our existing HCLS and ICLS rules both support the loop costs 
associated with broadband-capable networks, they were developed 
specifically to support the costs of voice networks and do not provide 
cost recovery for loop costs associated with broadband-only services. 
After careful consideration of the various alternatives presented in 
the record, the Commission concludes that the simplest, most effective 
and administratively feasible means to address this concern is to 
expand the ICLS mechanism to permit recovery of consumer broadband loop 
costs. In a pending Petition for Reconsideration and Clarification of 
the USF/ICC Transformation Order, NECA, OPASTCO, and WTA argued, among 
other claims, that the Commission should adopt a Connect America Fund 
mechanism prior to imposing broadband obligations on rate-of-return 
carriers. Petition for Reconsideration and Clarification of the 
National Exchange Carrier Association, Inc.; Organization for the 
Promotion and Advancement of Small Telecommunications Companies; and 
Western Telecommunications Alliance, WC Docket 10-90, et al. at 2-6 
(filed Dec. 29, 2011) (NECA et al. Petition). Our existing mechanisms 
have provided support for broadband-capable networks for more than a 
decade, and the Commission are now adopting changes to our rules to 
provide support explicitly for broadband-only lines. The Commission 
therefore denies the Petition as moot. As noted above, to recognize the 
scope of the expanded mechanism and fulfillment of our commitment to 
create a Connect America Fund for rate-of-return carriers, the 
Commission changes the name of ICLS to CAF BLS.
    74. By providing support for the costs of broadband-only loops, 
while continuing to provide cost recovery for voice-only and voice-
broadband loops, the expanded CAF-BLS mechanism will create appropriate 
incentives for carriers to deploy modern broadband-capable networks and 
to encourage consumer adoption of broadband services. The difference in 
loop-related expenses between broadband-only and traditional voice 
service over broadband-capable loops tends to be quite small, but the 
cost recovery varies significantly. Indeed, different treatment of loop 
cost recovery can be triggered by a customer's decision to drop the 
voice component of a voice-data bundle, without any other changes in 
service by the carrier. Similar changes to loop cost recovery occur if 
a carrier offers an IP-based voice service rather than a traditional 
voice service: only loops used to provide regulated local exchange 
voice service (including voice-data bundles) are eligible for high-cost 
universal service under our current rules. Supporting all consumer 
loops will minimize the discrepancies in treatment between those 
service offerings, while removing potential regulatory barriers to 
taking steps to offer new IP-based services in innovative ways. Thus, 
this step advances the statutory goal of providing access to advanced 
telecommunications and information services in all regions of the 
Nation, particularly in rural and high-cost areas, and the principle 
adopted in the USF/ICC Transformation Order that universal service 
support should be directed where possible to networks that provide 
advanced services, as well as voice services.
    75. Implementing this expansion of the traditional ICLS mechanism 
requires several actions. As noted above, the current ICLS mechanism 
operates by providing each carrier with the difference between its 
interstate common line revenue requirement and its interstate common 
line revenues. Going forward, CAF-BLS also will provide cost recovery 
for the difference between a carrier's loop costs associated with 
providing broadband-only service, called the ``consumer broadband-only 
loop revenue requirement'' and its consumer broadband-only loop 
revenues. In this Order, the Commission adopts rules that define the 
consumer broadband-only loop costs as the same, on a per-line basis, as 
the costs that are currently recoverable for a voice-only or voice/
broadband line in ICLS. To avoid double-recovery, an amount equal to 
the consumer broadband-only revenue requirement will also be removed 
from the special access cost category. Carriers will be required to 
certify to USAC, as part of their CAF-BLS data filings, that they have 
complied with our cost allocation rules and are not recovering any of 
the consumer broadband-only loop cost through the special access cost 
category. For consumer broadband-only loop revenue, CAF-BLS will 
initially impute the lesser of $42 per loop per month or its total 
consumer broadband loop revenue requirement. For true-up purposes, CAF 
BLS will impute the consumer broadband rate the carrier was permitted 
charge, if it is higher than the amount that would be imputed 
otherwise. As described below, the Commission also adopts today a 
budgetary constraint on the total aggregate amount of HCLS and CAF-BLS 
support provided for rate-of-return carriers to ensure that support 
remains within the established budget for rate-of-return territories. 
To the extent that budgetary constraint reduces CAF-BLS support in any 
given year, any CAF BLS provided will be first applied to ensure that 
each carrier's interstate common line revenue requirement is met. If, 
due to the application of the budgetary constraint, additional revenue 
is required to meet its consumer broadband loop revenue requirement, 
that revenue may be recovered through consumer broadband loop rates, 
even if that results in a carrier charging a broadband loop amount 
greater than $42 per loop per month.

[[Page 24294]]

    76. This approach meets the four principles of reform that the 
Commission previously articulated in the April 2014 Connect America 
Further Notice, while also being simple and easy for affected carriers 
to understand and implement. The budget constraint ensures that the 
support amounts will remain within the existing rate-of-return budget. 
The CAF-BLS mechanism distributes support fairly and equitably among 
carriers. Consistent with our authority to encourage the deployment of 
the types of facilities that will best achieve the principles set forth 
in section 254(b), it will allow carriers to receive federal high-cost 
universal service support for their network investment regardless of 
what services are ultimately purchased by the customer. When combined 
with the capital expense and operational expense limitations adopted 
below, CAF BLS will help ensure that no carrier collects support for 
excessive expenditures. The CAF-BLS mechanism is forward-looking 
because it completes the Commission's modernization of the high-cost 
program to focus on broadband, consistent with the evolution of 
technology toward IP networks.
    77. And finally, the reforms the Commission adopts today avoid 
double-recovery of costs by removing from special access the costs 
associated with broadband-only loops and then ensuring that the 
carriers' regulated revenues match their revenue requirements. The 
Commission finds this approach administratively preferable to 
alternative approaches. For example, one possibility would be to expand 
both ICLS and HCLS to include broadband-only loops. However, HCLS was 
designed to support local (i.e., intrastate) voice rates and does not 
take into account the costs or revenues from broadband-only services. 
In addition, the schedule for developing HCLS amounts is incompatible 
with the schedule for developing wholesale transmission tariffs for 
broadband services. As a result, the Commission's principle of avoiding 
double recovery could not be met without making significant changes to 
either the HCLS rules or the tariff process. Alternatively, the 
Commission could adopt a separate mechanism to support broadband-only 
loops, as proposed by NTCA. In practice, the expanded CAF-BLS mechanism 
will be operationally similar to NTCA's proposed DCS mechanism. Both 
essentially provide support for broadband-only costs to the extent that 
they exceed an imputed revenue amount, but allow the carrier to recover 
additional revenues through tariffs to the extent that the budgetary 
constraint prevents them from meeting their revenue requirement. The 
Commission finds, however, that expanding the CAF-BLS mechanism to 
include broadband-only loops will further reduce unnecessary 
distinctions between the two categories of loops, which will advance 
our objective to move the existing program to broadband. Finally, the 
Commission considered the ``bifurcated'' approach developed in the 
record by USTelecom with significant input from other parties.
    78. The latter approach would create a wholly new mechanism and 
bifurcate investment and associated expenses between old and new 
mechanisms. The Commission appreciates the good faith efforts of 
numerous parties to determine how such a mechanism might be implemented 
and to estimate its potential impact. While it had a number of merits, 
the Commission has come to the conclusion that the approach they adopt 
today is simpler and sufficient to accomplish our goals for reform. The 
Commission therefore chooses to build upon the framework of an existing 
rule that carriers are familiar with, which will not require 
significant changes to their internal existing accounting systems and 
other processes for the development of cost studies. Carriers should be 
able readily to estimate their future support flows under this revision 
to the existing rule.
    79. Consumer broadband loop revenue benchmark. For the purpose of 
calculating CAF BLS, the Commission adopts a revenue imputation of $42 
per loop per month, or $504 per loop per year for consumer broadband-
only loops, except as described below. This amount is consistent with 
other recent estimates of reasonable end-user revenues, when adjusted 
for context. For example, in adopting a cost model to be used for the 
Phase II offer of support to price cap carriers, the Bureau based its 
support threshold for model-based support on an average revenue per 
user (ARPU) of $75. That ARPU, however, was an all-inclusive estimate 
of end-user revenues for broadband and voice services, while the 
benchmark the Commission adopts here presumes that carriers would still 
need additional end-user revenues to cover non-loop related costs, such 
as middle-mile costs. Similarly, for a broadband service of 10/1 Mbps 
and unlimited usage, the Commission's 2015 reasonable comparability 
benchmark was $77.81. NECA estimated a median non-loop cost of $34.95 
per month to provide 10/1 Mbps for its member carriers that participate 
in its ``DSL voice-data'' tariff. Subtracting the monthly revenue 
associated with those non-loop revenues from the ARPU used for the 
model support threshold or the reasonable comparability benchmark for 
retail broadband Internet access suggests that $42 is an appropriate 
estimate for monthly end-user revenue for the consumer broadband loop 
costs, the remainder of which will be recovered through CAF BLS, 
subject to the budgetary constraint discussed below.
    80. There are two cases in which the Commission will impute a 
different consumer broadband loop revenue amount than $42 per loop per 
month. First, when a carrier's consumer broadband loop revenue 
requirement is less than $42 per loop per month, CAF BLS will only 
impute the actual consumer broadband loop revenue requirement. For 
example, if a carrier has 1,000 consumer broadband-only loops with an 
average cost of $41 per month, its imputed annual revenue would be 
$492,000 ($41 * 1,000 * 12), rather than $504,000 ($42 * 1,000 * 12). 
Without this exception, consumer broadband loops could create 
``negative'' CAF-BLS amounts for some carriers in its initial 
calculation. The effect of the negative CAF-BLS amounts would be to 
reduce overall CAF BLS and require above-cost consumer broadband rates 
to replace lost CAF BLS that would otherwise subsidize voice loops. 
This exception will prevent a cross-subsidy of voice service by 
consumer broadband-only service that may not otherwise be necessary.
    81. The second exception is that, solely for the purpose of 
calculating true-ups, CAF BLS will impute the consumer broadband rate 
the carrier was permitted to charge, if it is higher than the amount 
that would be imputed otherwise. For example, if a carrier had 1,000 
loops and, as a result of the operation of the budgetary constraint, 
its consumer broadband loop rate was $43 per month, the annual revenue 
imputation would be $516,000 ($43 * 1,000 * 12), rather than $504,000. 
Using actual revenues for true-ups in this way will recognize 
additional revenue that the carrier would have received and prevent 
duplication of cost recovery between CAF BLS and special access rates. 
This will result in a carrier having imputed consumer broadband-only 
revenue that exceeds its consumer broadband-only revenue requirement, 
but that is necessary to ensure that both its interstate common line 
revenue requirement and its consumer broadband loop revenue requirement 
are met even when the budgetary constraint is applied.

[[Page 24295]]

2. Operating Expense Limitation
    82. Discussion. The Commission adopts the regression methodology 
submitted by industry representatives with a few modifications to 
conform the limits better to the nature of the data. The Commission 
defers implementation of this rule change for Alaska carriers pending 
Commission consideration of the unified plan for incentive regulation 
submitted by the Alaska Telephone Association on behalf of Alaska rate-
of-return carriers and mobile wireless providers. The Commission finds 
that a mechanism to limit operating costs eligible for support under 
rate-of-return mechanisms, both HCLS and CAF BLS, will encourage 
efficient spending by rate-of-return carriers and will increase the 
amount of universal service support available for investment in 
broadband-capable facilities. These opex limits will apply to cost 
recovery under HCLS and CAF BLS and will be applied proportionately to 
the accounts used to determine a carrier's eligible operating expense 
for HCLS and CAF BLS. The Commission notes that a small number of 
carriers have not provided this information in the past. Carriers that 
do not provide study area level cost studies to NECA will have to 
provide USAC with data from the following four accounts: (1) Account 
6310: Information origination/termination expenses; (2) Account 6510: 
Other property plant and equipment expenses; (3) Account 6610: Customer 
operations expense: Marketing; and (4) Account 6620: Customer 
operations expense: Services. For example, if the regression 
methodology determines that a carrier's eligible operating expense 
should be reduced by 10 percent, then each account used to determine 
that carrier's eligible operating expense shall be reduced by 10 
percent.
    83. Consistent with the general approach submitted by the industry 
associations, operating expense costs will be limited by comparing each 
study area's opex cost per location to the regression model-generated 
opex per location plus 1.5 standard deviations. The regression formula 
to be used is as follows:

Y = [alpha] + [beta]1X1 + 
[beta]2X2 + [beta]3X3,

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

[alpha] is the coefficient on the constant (i.e., 1) in the regression,

X1 is the natural log of the number of housing units in the 
study area, with a regression coefficient [beta]1,

X2 is the natural log of density (number of housing units 
per square mile), with a regression coefficient [beta]2, and

X3 is the square of the natural log of density, with a 
regression coefficient [beta]3.

    84. The Commission does not agree with commenters who argue that 
they should only limit operating expenses for carriers with costs above 
the two standard deviations. Indeed, the Commission notes that using 
two standard deviations would subject only an estimated 17 study areas 
to an opex limit. The Commission concludes that using 1.5 standard 
deviations--which they estimate, based on last year's data, would have 
impacted roughly 50 carriers--more appropriately advances the 
Commission's goal of providing better incentives for carriers to invest 
prudently and operate more efficiently. Because any support reductions 
associated with this limit will then be available to other rate-of-
return carriers, our budget for high-cost support should enable more 
broadband deployment than if the Commission continued funding excessive 
operating expenses for certain companies at current levels.
    85. The Commission declines to set different limits based on the 
separate density categories initially proposed by the industry because 
density is already taken into account as a variable in the regression 
analysis. The Commission sees no legal or economic justification for 
modifying the allowable opex expense a second time. Using density again 
in this fashion has the effect of arbitrarily raising the allowable 
opex expense limit for some rural carriers at the direct expense of the 
other carriers serving high-cost areas that are nearly as sparsely 
populated. Moreover, even if the Commission were inclined to do so, the 
proponents of this approach have failed to explain in the record why it 
would be appropriate to draw the line at 1.5 locations per square mile, 
as opposed to 2 locations per square mile, 4 locations per square mile, 
or some other figure. Therefore, the Commission adopts a uniform 
standard deviation formula for purposes of setting a limit based on the 
regression results.
    86. In addition, unlike the industry's original proposal, the 
Commission includes corporate expenses (calculated according to the 
current limitation) within the regression. These expenses are a 
significant portion of carrier operating expenses, and the Commission 
concludes that they should be subject to limitation as well. Indeed, 
corporate expenses alone account for approximately 15 percent of the 
total costs assigned to the loop for rate-of-return cost companies. 
Moreover, the Commission is concerned that leaving corporate expenses 
outside of this overall limitation will provide an opportunity for 
inappropriate cost shifting from an account where they are above the 
limit to an account where they are below the limit.
    87. NTCA has argued that ``reasonable transitions'' are necessary 
when implementing limitations on support. The Commission concludes that 
a transition is appropriate to allow carriers time to adjust their 
operating expenditures. Therefore, the Commission concludes that for 
the first year in which the opex cap is implemented, the eligible 
operating expense of those carriers subject to the cap will be reduced 
by only one-half of the percentage amount determined by the regression 
methodology. For example, if the regression methodology determines that 
a carrier's eligible operating expense should be reduced by 10 percent 
for the first year in which the opex cap is implemented, then each 
account used to determine that carrier's eligible operating expense 
shall be reduced by only 5 percent. However, in all subsequent years, 
the carrier's eligible operating expense shall be reduced by the full 
percentage amount determined by the regression methodology.
    88. Within 30 days of the effective date of this Report and Order, 
the Commission directs NECA to submit to USAC a schedule of companies 
subject to limits under the adopted formula. The Commission directs 
NECA to exclude data for Alaska carriers when making these 
calculations. The Commission also directs NECA to provide USAC with the 
dollar amount of reductions in HCLS and CAF-BLS to which each carrier 
subject to limits under the adopted formula will be subject. USAC shall 
validate all calculations received from NECA before making 
disbursements subject to any such support reductions.
3. Capital Investment Allowances
    89. Discussion. The Commission adopts the revised capex allowance 
proposed by the rate-of-return industry associations with minor 
modifications. The Commission defers implementation of this rule change 
for Alaska carriers pending Commission consideration of the unified 
plan for incentive regulation submitted by the Alaska Telephone 
Association on behalf of Alaska rate-of-return carriers and mobile 
wireless providers. The Commission believes that this mechanism will 
help target support to those areas with less broadband deployment so 
that carriers serving those areas have the opportunity to catch up to 
the average level of broadband deployment in areas served

[[Page 24296]]

by rate-of-return carriers. The Commission directs the Bureau to 
announce the updated weighted average broadband deployment for all 
rate-of-return carriers, and the relevant deployment figure for each 
individual carrier, based on the more recent June 2015 FCC Form 477 
data for the initial implementation of this rule, and to publish 
similar figures reflecting current FCC Form 477 data on an annual 
basis. Although it is the Commission's goal to ensure broadband 
deployment throughout all areas, finite universal service resources 
must be used where they are most needed. Therefore, the Commission 
finds that on a going forward basis, directing increased support to 
those areas lagging behind the national average in broadband 
availability will ensure a more equitable distribution of deployment, 
thereby achieving one of the goals for reform articulated by the 
Commission in the April 2014 Connect America FNPRM. The Commission 
does, however, make several adjustments to the industry's proposal. 
Vantage Point Solutions argues that an inflation factor with a higher 
labor component would be more appropriate than the GDP-CPI because 
Vantage Point's experience shows that approximately 70% of construction 
costs in rural LEC areas are associated with labor. Letter from Larry 
D. Thompson, Vantage Point Solutions, to Marlene H. Dortch, Secretary, 
FCC, WC Docket No. 10-90, et al. at 2 (filed Jan. 28, 2016). However, 
the Commission has used the GDP-CPI, which includes both capital and 
labor costs, in its HCLS calculations since 2001, and Vantage Point 
presents no compelling reason as to why an alternative inflation 
measure should be used here. To the extent any individual carrier has 
unique circumstances that might warrant an adjustment in its capex 
allowance, it is free to seek a waiver pursuant to section 1.3 of the 
Commission's rules.
    90. First, the Commission uses the TALPI as the basis for 
calculating loop plant investment limitations for both HCLS and CAF-
BLS, not just for HCLS. To ensure the most efficient use of limited 
universal service resources, the capital budget limitation must apply 
to HCLS, which supports the intrastate portion of the exchange loop, 
and CAF-BLS, which supports the interstate portion. Second, the 
Commission modifies the investment categories proposed by the 
associations to determine a carrier's TALPI so that they correspond to 
those used to determine a carrier's HCLS and CAF BLS. The Commission 
notes that a small number of carriers have not provided this 
information in the past. Carriers that do not provide study area level 
cost studies to NECA will have to provide USAC with data from the 
relevant categories and accounts. Amounts in excess of a carrier's 
AALPI will be removed from the relevant categories or accounts either 
on a direct basis when the amounts of the new loop plant investment can 
be directly assigned to a category or account, or on a pro-rata basis 
according to each category or account's proportion to the total amount 
in each of the above categories and accounts when the new loop plant 
cannot be directly assigned.
    91. Third, the Commission refines the AALPI adjustment for areas 
covered by a pre-existing loan. The Commission concludes that the AALPI 
should only be adjusted for areas covered by a pre-existing loan for 
which a previously planned loan disbursement has been made and that 
loan disbursement was used to increase the annual loop expenditure for 
the year, or years, in which the AALPI adjustment is taken. The 
Commission makes this modification because an outstanding loan does not 
per se warrant an increase in a carrier's AALPI unless a previously 
planned disbursement of that loan leads to an increase in the carrier's 
loop plant investment.
    92. Fourth, rather than adjusting the AALPI by only one half of a 
percentage point for every percentage point that a carrier's deployment 
differs from the target availability, the Commission adjusts the AALPI 
by one percentage point. The Commission finds that an adjustment of 
only one half of a percentage point will not have a sufficient impact 
to moderate expenditures by companies that are above average, and also 
will not provide a sufficient opportunity to catch up to those carriers 
that must increase their deployment. An increase of one percentage 
point will allow those carriers that must catch up to the target 
availability more funds with which to do so.
    93. Within 30 days of the effective date of this Report and Order, 
and for each subsequent quarterly or annual data reporting period, the 
Commission directs NECA to submit to USAC the following information for 
each study area:

 Total Allowed Loop Plant Infrastructure
 AALPI for the Current Reporting Period (Current AALPI)
 Current AALPI Adjustment for Percent of Broadband Deployment
 Current AALPI Adjustment for Loan Disbursements
 Current AALPI Adjustment for Broadband Deployment Obligations
 AALPI Amounts Carried Forward from Previous Reporting Periods
 Total AALPI (Equals Current AALPI plus All Adjustments plus 
Carry Forward)
 Dollar amount of the reduction, if any, in capital expense 
eligible for HCLS and/or CAF-BLS due to the Total AALPI for the 
relevant reporting period
 Dollar amount of the reductions, if any, in HCLS and/or CAF 
BLS due to the carrier's capital expense reduction caused by the Total 
AALPI for the relevant reporting period

    94. USAC shall validate all calculations received from NECA before 
making disbursements subject to any support reductions due to the 
Capital Investment Allowance.
4. Eliminating Subsidies in Areas Served by an Qualifying Competitor
    95. In this section, the Commission takes further steps to target 
high-cost support efficiently to those areas that will not be served by 
private sector investment alone. First, the Commission prohibits rate-
of-return carriers from receiving CAF BLS in areas that are served by a 
qualifying unsubsidized competitor. Second, the Commission adopts a 
challenge process to determine which areas are served by unsubsidized 
competitors building on proposals submitted in the record. Third, as 
proposed by several commenters, the Commission adopts several options 
to disaggregate support in areas determined to be served by qualifying 
competitors: Carriers will be free to elect one of several mechanisms 
to disaggregate their support. Fourth, the Commission adopts a phased 
reduction in disaggregated support for competitive areas, as suggested 
by USTelecom and NTCA. The net result of these changes will be to more 
effectively target CAF BLS to areas where support is needed to ensure 
consumers are served with voice and broadband services.
    96. Discussion. In order to meet our objective of utilizing 
universal service funds to extend broadband to high-cost and rural 
areas where the marketplace alone does not currently provide a minimum 
level of broadband connectivity, the Commission has emphasized its 
desire to ``distribute universal service funds as efficiently and 
effectively as possible.'' Support should be used to further the goal 
of universal voice and broadband, and not to subsidize competition in 
areas where an unsubsidized competitor is providing service. Universal 
service is ultimately paid for by consumers and businesses

[[Page 24297]]

across the country. Providing support to a rate-of-return carrier to 
compete against an unsubsidized provider distorts the marketplace, is 
not necessary to advance the principles in section 254(b), and is not 
the best use of our finite resources.
    97. To ensure that high-cost universal service support is used 
efficiently, consistent with the intent of providing universal service 
where it otherwise would be lacking, the Commission now adopts a rule 
to eliminate CAF BLS in competitive areas. Building on proposals 
submitted in the record by NTCA and USTelecom, and taking into account 
our experience implementing similar requirements in price cap areas and 
the 100 percent overlap rule in rate-of-return areas, a census block 
will be deemed to be ``served by a qualifying competitor'' for this 
purpose if the competitor holds itself out to the public as offering 
``qualifying voice and broadband service'' to at least 85 percent of 
the residential locations in a given census block. For purposes of 
meeting the requirement to ``offer'' service, the competitor must be 
willing and able to provide qualifying voice and broadband service to a 
requesting customer within ten business days.
    98. The first step in implementing such a rule is to conduct a 
process to determine which census blocks are competitively served. The 
Commission now adopts a challenge process building on lessons learned 
from both the challenge process utilized to finalize the offer of Phase 
II model-based support to price cap carriers and the process used to 
implement the 100 percent overlap rule for rate-of-return carriers. 
Under this process, the Bureau will publish a Public Notice with a link 
to a preliminary list of competitors serving specific census blocks 
according to FCC Form 477 data. As suggested by NTCA and USTelecom, in 
order for a challenge for a particular census block to go forward, 
those competitors will be required to certify that they are offering 
service to at least 85 percent of the locations in the census block, 
and must provide evidence sufficient to show the specific geographic 
area in which they are offering service. If they fail to submit such 
information in response to the Bureau's Public Notice, the block will 
not be deemed competitively served. To the extent the competitor 
provides the required filing in response to the Bureau's Public Notice, 
incumbents and any other interested parties such as state public 
utility commissions and Tribal governments will have the opportunity to 
contest those assertions. The ultimate burden of persuasion will rest 
on the competitor to establish that it offers service to at least 85 
percent of the locations in the census block, based on all the evidence 
in the record. The challenge process will be conducted by the Bureau as 
set forth more fully below.
    99. The Bureau will rely on Form 477 broadband deployment data to 
make the preliminary determination of which census blocks are served by 
providers offering broadband service. The Form 477 data collection is 
mandatory, and Form 477 filers must certify to the accuracy of their 
data. The Commission directs the Bureau to utilize the most recent 
publicly available data at the time it releases the initial Public 
Notice.
    100. To be considered an unsubsidized competitor in a given census 
block, a fixed broadband provider must offer service in accordance with 
the Commission's current service obligations on speed, latency, and 
usage allowances. In December 2014, the Commission adopted a new 
minimum speed standard for carriers receiving high-cost support: They 
must offer actual speeds of at least 10/1 Mbps. Therefore, the 
Commission directs the Bureau to use 10/1 Mbps as the threshold for 
determining competitors when developing the preliminary list for the 
initial implementation of this rule.
    101. The Commission is not persuaded by NTCA's proposal that the 
Commission utilize the current section 706 speed benchmark, at least 25 
Mbps downstream and 3 Mbps upstream (25/3 Mbps), as the basis to 
identify locations where a competitor is present. Although the 
Commission has determined that 25/3 Mbps reflects ``advanced'' 
capabilities, the Commission has explained that ``[b]y setting a lower 
baseline for Connect America funding, they establish a framework to 
ensure a basic level of service to be available for all Americans, 
while at the same time working to provide access to advanced services. 
The areas served by rate-of-return carriers encompass ``many rural and 
remote areas of the country.'' Similarly, the Commission is not 
persuaded by WTA's proposal that a competitor must be offering service 
with speeds at least as high as the highest speed service offering of 
the incumbent in order to be deemed a qualifying competitor. The 
Commission finds that using a 10/1 Mbps threshold at the present time 
for identification of competitors is consistent with the Commission's 
section 254 goal of ensuring that universal service funding is used in 
the most efficient and effective manner to provide consumers in rural 
and high-cost areas of the country with voice and broadband service.
    102. The Commission currently does not collect comprehensive, 
block-level data on broadband latency or monthly usage allowances, as 
it does for broadband speed. However, data collected by the Commission 
through the Measuring Broadband America program suggest that the 
latencies associated with most fixed broadband services are low enough 
to allow for real time applications, including Voice over Internet 
Protocol. In addition, data from the Commission's urban rate survey 
indicate that many fixed broadband providers offer unlimited data usage 
or usage allowances well in excess of the 150 GBs per month that they 
now establish as our baseline requirement for purposes of implementing 
the competitive overlap rule. Therefore, the Commission concludes it is 
reasonable to presume that providers meeting the speed criteria also 
meet the latency and usage-allowance criteria, for purposes of 
preparing the preliminary list.
    103. This is similar to the approach taken by the Bureau in the 
Connect America Fund Phase II challenge process. One of the lessons 
learned from the Phase II challenge process was that no party was able 
to demonstrate high latency by competitors, and very few providers 
prevailed in a challenge exclusively focused on a competitor's usage/
price. This provides us with confidence that, as a general matter, it 
is reasonable to assume, for purposes of preparing the preliminary 
list, that a provider that in fact is in the area providing the 
requisite speed is also meeting the latency and usage requirements.
    104. Under our existing rule, to be considered an unsubsidized 
competitor, a provider must be a facilities-based provider of 
residential fixed voice service, as well as fixed broadband. Form 477 
provides the best data available on whether broadband providers also 
offer fixed voice service, but the data are not reported at the census 
block level. Therefore, to determine whether a broadband provider also 
offers voice service, for purposes of preparing the preliminary list, 
the Bureau will assume if a broadband provider reported any fixed voice 
connections in a state in its Form 477 filing, then it offers voice 
service throughout its entire broadband service area in that state. The 
Commission notes that in order to file Form 477, a VoIP provider must 
be offering interconnected VoIP, which means that the provider is 
required to provide E911 and comply with CALEA, among other things.
    105. The Commission will exclude competitive Eligible

[[Page 24298]]

Telecommunications Carriers (CETCs) receiving universal service 
support, as well as affiliates of incumbent LECs, from the analysis 
undertaken to develop the preliminary list. CETCs that receive 
universal service support will be excluded from the preliminary 
determination because these providers are not ``unsubsidized.'' The 
Commission also concludes, for purposes of preparing the preliminary 
list that an affiliate that an incumbent LEC is using to meet its 
broadband public interest obligation in a given census block shall not 
be treated as an unsubsidized competitor. If the Commission were to 
conclude otherwise, a rate-of-return carrier would automatically be 
precluded from receiving support for new investment in census blocks 
wherever its affiliate is offering broadband and voice service as a 
condition of receiving high-cost support. To the extent the Form 477 
data indicate that a particular rate-of-return carrier has deployed 
more than one technology in a given census block, the Commission will 
presume, for purposes of preparing the preliminary list, that the 
carrier is utilizing different technologies within a given census block 
to serve its customers.
    106. Once the preliminary list is published, the next step in the 
process will be for identified competitors to confirm that they are in 
fact offering voice and broadband service within the specific census 
block where they report broadband deployment on FCC Form 477. Based on 
the Phase II challenge experience, the Commission has learned that it 
is extremely difficult for an incumbent provider to prove a negative--
that a competitor is not serving an area. Rather, the purported 
competitor is in a much better position to confirm that it is offering 
service in a given area.
    107. Upon publication of the preliminary list, there will a comment 
period in which competitors must certify that they offer both voice and 
broadband meeting the requisite requirements in a particular census 
block in order for that block potentially to be subject to a 
competitive overlap determination. Specifically, as suggested by 
several parties, they must offer: (1) Fixed voice service at rates 
under the then applicable reasonable comparability benchmark, and (2) 
fixed terrestrial broadband service with actual downstream speed of at 
least 10 Mbps and actual upload speed of at least 1 Mbps; with latency 
suitable for real time applications, including Voice over Internet 
Protocol; with usage capacity that is reasonably comparable to 
offerings in urban areas; and at rates that are reasonably comparable 
to those in urban areas. To the extent the competitor is meeting the 
voice service obligation through interconnected VoIP, it will already 
be subject to requirements for E911 and CALEA, as noted above. The 
Commission also requires that the competitor be able to port telephone 
numbers in that census block, as suggested by several commenters. In 
order to make this certification, a competitor must have hold itself 
out to the public as offering service to at least 85 percent of the 
locations in the census block, and be willing and able to provide 
service to a requesting customer within ten business days. For purposes 
of this certification, the number of locations shall be based on the 
most recently available U.S. Census data regarding the number of 
housing units in a given census block. The Commission notes that our 
existing rule defines an unsubsidized competitor as a provider of fixed 
residential voice and broadband service. 47 CFR 54.5 (emphasis added). 
The Commission is mindful of the burden on the competitor but also need 
to ensure that information is sufficient for the Commission to evaluate 
any potential challenges. The Commission clarifies that a mere officer 
certification is insufficient to establish the presence of qualifying 
service. As noted above, competitors will be required to submit 
additional evidence in support of that certification clearly to 
establish where they are providing service. Even so, because the 
Commission is cognizant of the potential burden, they do not require 
competitors to submit geocoded locations but encourage competitors to 
submit as much information as possible, including neighborhoods served 
and, for cable companies, boundaries of their franchising agreement.
    108. If the competitor fails to submit such a certification and any 
evidence, the block will be deemed non-competitive, and there will be 
no need for the incumbent to respond. If, however, the competitor 
submits the requisite certification that it is offering both qualifying 
voice and qualifying broadband service in the census block, with 
supporting information identifying with specificity the geographic 
areas served, the Commission will then accept submissions from the 
incumbent or other interested parties seeking to contest the showing 
made by the competitor. Examples of information that may be persuasive 
to establish that service is not being offered includes evidence that a 
provider's online service availability tool shows ``no service 
available'' for customers in the geographic area that the carrier 
certifies it serves or filings from consumers residing in the 
geographic area that the competitor has certified is served that they 
were unable to obtain service meeting the specified requirements from 
the purported competitor within the relevant time frame.
    109. Consistent with the approach taken in the Phase II challenge 
process, the Commission will not consider any additional evidence or 
submissions filed by any party after the deadline for reply comments, 
absent extraordinary circumstances. The Commission thus adopts a 
procedural requirement that competitive overlap submissions for both 
purported competitors and incumbents must be complete as filed. After 
the conclusion of the comment cycle, the Bureau will make a final 
determination of which census blocks are competitively served, weighing 
all of the evidence in the record. The Commission delegates authority 
to the Bureau to take all necessary steps to implement the challenge 
process they adopts today.
    110. The Commission is not persuaded by arguments that it may be 
premature for the Commission to implement a competitive overlap rule 
prior to full implementation of the 100 percent overlap rule. The 
Commission has learned a great deal through developing and implementing 
both the Phase II challenge process for price cap areas and the 100 
percent overlap process. The Commission is adopting a challenge process 
that builds on lessons learned from both experiences. The Commission 
concludes that utilizing the procedural requirements adopted for the 
Phase II challenge process, coupled with putting the burden of proof on 
the competitor to establish that it serves a census block, will best 
meet the Commission's objectives for ensuring that support is not 
provided in areas where other providers are providing service without 
subsidies.
    111. The Commission is not persuaded that it should require 
competitors to certify they serve 100 percent of the locations in a 
given census block in order for that census block to be considered 
``served.'' Our experience with the implementation of the 100 percent 
overlap rule shows that such a standard will rarely, if ever be met, 
even though there may be a significant degree of competitive overlap. 
The Commission concludes that adopting an evidentiary showing that the 
competitor must certify that it serves 85 percent or more--a 
substantial majority--of residential locations in a census block are 
served strikes the right balance between the approach used in

[[Page 24299]]

the Phase II context (where a block was deemed served if the competitor 
only served as single location) and the 100 percent overlap rule (which 
required 100 percent coverage for all residential and business 
locations in all census blocks in the study area) and will serve our 
overarching policy objectives. Moreover, to the extent the competitor 
today only serves 85 percent of the requisite number of residential 
locations in a given census block, it may expand its footprint to serve 
the entire census block once it no longer is facing a subsidized 
competitor.
    112. The Commission also declines to impose other requirements 
suggested in the record by WTA, such as requiring a competitor to have 
an interconnection agreement with the incumbent, be subject to section 
251, offer Lifeline, own or lease all of the facilities needed to 
deliver service, not receive any other forms of federal or state 
support, including universal service support other than Lifeline, not 
charge any fees for site visits to determine if service can be 
provided, even if that fee is credited upon service installation, and 
comply with state service quality and other regulatory requirements 
applicable to the incumbent for voice service. WTA fails to provide any 
explanation of the policy rationale for each of these proposals, many 
of which seem intended to subject the competitor to the same regulatory 
requirements as the incumbent. In any event, the net result of these 
proposals would be to ensure that no entity ever could qualify as an 
unsubsidized competitor. Nor is the Commission persuaded by WTA's 
argument that only future new investment should be subject to a 
competitive overlap rule, and that no support should be reduced for 
existing investments. The Commission notes that they only are 
disaggregating and reducing CAF BLS in areas found to be served by 
unsubsidized competitors, rather than both HCLS and CAF BLS, which will 
lessen the impact of this rule on affected carriers.
    113. As suggested by NTCA and USTelecom, the Commission will 
conduct the competitive overlap challenge process outlined above every 
seven years. This will ensure that the Commission periodically revisits 
the competitive overlap analysis, but not impose excessive burden on 
incumbents, potential competitors, or Commission staff. Re-examining 
the extent of competitive overlap in this time frame will provide 
stability and consistency for all interested stakeholders.
    114. Upon the completion of the competitive overlap determination, 
the Commission concludes that carriers should be able to select one of 
several methods to disaggregate support between competitive and non-
competitive areas, as suggested by several commenters. The Commission 
notes that the Commission took a similar approach when it allowed 
incumbents to disaggregate ICLS in 2001, allowing carriers to select 
one of several disaggregation paths subject to general parameters 
established by the Commission. The Commission agrees with commenters 
that they should utilize a disaggregation mechanism that ensures that 
sufficient support is provided to those areas where the incumbent is 
the sole provider of voice and broadband, and the Commission recognizes 
that competitive areas are likely to be lower cost and non-competitive 
areas are likely to be relatively higher cost. The Commission therefore 
adopts a rule to permit carriers, on their own election, to utilize one 
of the following methods suggested by commenters to disaggregate their 
CAF BLS between competitive and non-competitive areas. Providing 
carriers options will enable each carrier the flexibility to determine 
which approach best reflects the unique characteristics of their 
service territory. First, carriers may choose to disaggregate their CAF 
BLS based on the relative density of competitive and non-competitive 
areas. Second, carriers may choose to disaggregate their CAF BLS based 
on the ratio of competitive to non-competitive square miles in a study 
area, as proposed by Hargray. Third, carriers may choose to 
disaggregate their CAF BLS based on the ratio of A-CAM calculated for 
competitive areas compared to A-CAM support for the study area. The 
Commission outlines each of these disaggregation mechanisms below.
    115. Consistent with the approach previously taken by the 
Commission for disaggregation of support, total support in a study area 
shall not exceed the support that otherwise would be available in the 
study area absent disaggregation. Similar to the former disaggregation 
rule, the Commission may, on its own motion, or in response to a 
petition from an interested party, examine the results of any one of 
the adopted disaggregation methods to ensure that it fulfills the 
Commission's intended objectives.
    116. Carriers may choose to disaggregate their CAF BLS based on a 
methodology using the density of competitive and non-competitive areas, 
as proposed by NTCA/USTelecom. In particular, this method allocates the 
revenue requirement between competitive and non-competitive areas, 
based on the relative density of competitive and non-competitive areas. 
As explained by NTCA/USTelecom, ``[t]he ratio of the calculated non-
competitive area's revenue requirement to the sum of the calculated 
competitive and non-competitive revenue requirements is applied to the 
study area's actual revenue requirements to ensure the total actual 
revenue requirement is equal to the sum of the competitive and non-
competitive areas' revenue requirements.''
    117. The allocation between competitive and non-competitive areas 
is achieved by calculating a separate cost per loop for competitive and 
non-competitive areas based on the differing densities of the 
competitive and non-competitive areas. To calculate the disaggregated 
revenue requirements using these costs per loop, each cost per loop is 
multiplied by the number of loops in the corresponding (i.e. 
competitive or non-competitive) area. The number of loops in each area 
is calculated by multiplying the total number of loops by the density 
ratio for the study area. Although NTCA/USTelecom proposed that density 
for each area be calculated based on the sum of residential and 
business locations, the Commission is unaware of a publicly available 
source for business location data. Therefore, consistent with the 
approach taken for other rule changes adopted in this order that rely 
on density calculations, the Commission will use U.S. Census housing 
unit data for the density calculations required for this disaggregation 
method.
    118. Carriers may also may choose to disaggregate their CAF BLS 
using a ratio of competitive to non-competitive square miles in a study 
area, as proposed by Hargray. Lower-cost areas are generally lower cost 
because of the presence of a dense cluster of consumers, which causes 
the cost per loop to be lower. Hargray submitted analysis into the 
record showing how support is reduced in a non-linear manner based on 
the rate of decline that would be expected if it were possible to 
specifically capture the loops and costs associated with non-
competitive areas. As competitive overlap in a study area increases, 
utilizing this method CAF BLS would be reduced in a non-linear manner 
that accelerates as competitive overlap reaches 100 percent. In 
particular, under this disaggregation method, support would be reduced 
using the following schedule:

[[Page 24300]]



------------------------------------------------------------------------
                                                             Reduction
                   Competitive ratio %                        ratio %
------------------------------------------------------------------------
0-20....................................................             3.3
30......................................................             6.7
35......................................................            10.0
40......................................................            13.3
45......................................................            16.7
50......................................................            20.0
55......................................................            25.0
60......................................................            30.0
65......................................................            35.0
70......................................................            40.0
75......................................................            45.0
80......................................................            50.0
85......................................................            62.5
90......................................................            75.0
95......................................................            87.5
100.....................................................             100
------------------------------------------------------------------------

    119. By utilizing this mechanism, carriers would not be required to 
undertake steps to ensure the accuracy of location data or undertake a 
census block by census block determination of density. Therefore, by 
selecting this mechanism, carriers will enjoy relative ease of 
administration.
    120. As a third option, the Commission will permit carriers subject 
to a reduction in support for competitive overlap to elect to utilize 
an allocation derived from the A-CAM, as suggested by NTCA. In this 
Order, the Commission adopts a forward-looking cost model that has been 
modified for use to determine support amounts for rate-of-return 
carriers that voluntarily elect to receive universal service support. 
As the Commission explained, the A-CAM contains a support module, which 
calculates support on a per-location basis based on its calculation of 
the costs to serve the locations in every census block. For purposes of 
the voluntary offer of model-based support, support is only calculated 
for blocks that are not served by an unsubsidized competitor. The 
support module can be adjusted, however, to calculate support for the 
blocks that are competitively served, as well. Thus, support can be 
divided at the study area level between competitive and non-competitive 
census blocks. This ratio can be applied to CAF-BLS support to 
disaggregate support for competitive areas. The Commission notes that 
competitively served census blocks are likely to be the lower cost, 
more densely populated portions of the study area, in many instances 
where the model calculates little or even no support. In such cases, a 
carrier electing this method would see little to no support reduction 
using the A-CAM allocator, because the model provides support only for 
the higher cost areas.
    121. The Commission agrees with commenters that support reductions 
associated with competitive areas should be phased in. As suggested by 
USTelecom and NTCA, the Commission adopts the following transition for 
reductions in CAF BLS in areas that are deemed to be competitively 
served: Where the reduction of CAF BLS from competitive census block(s) 
represents less than 25 percent of the total CAF BLS support the 
carrier would have received in the study area in the absence of this 
rule, disaggregated support associated with the competitive census 
blocks will be reduced 33 percent in the first year, 66 percent in the 
second year, with that support associated with the competitive census 
blocks fully phased-out by the beginning of the third year. Where the 
reduction of CAF BLS from competitive census blocks represents more 
than 25 percent of the total CAF BLS support the carrier would have 
received in the study area in the absence of this rule, disaggregated 
support associated with the competitive census blocks will be reduced 
17 percent in the first year, 34 percent in the second year, 51 percent 
in the third year, 68 percent in the fourth year, 85 percent in the 
fifth year, and fully phased-out by the beginning of the sixth year. 
The Commission also emphasizes that carriers affected by implementation 
of this rule are free to seek a waiver of support reductions under our 
existing precedent.
5. Budgetary Controls
    122. The Commission previously adopted an overall budget of $4.5 
billion for the high-cost program, and a budget within that amount of 
$2 billion per year for high-cost support for rate-of-return carriers. 
It did not, however, adopt a method for enforcing the budget for rate-
of-return carriers. The Commission now adopts a self-effectuating 
mechanism for controlling total support distributed pursuant to HCLS 
and CAF BLS to stay within the budget for rate-of-return carriers.
    123. The components of the high-cost program other than those for 
rate-of-return carriers are structured in a fashion that ensures each 
stays within its respective portion of the $4.5 billion budget. Because 
ICLS and CAF ICC are not capped, there is no mechanism today to keep 
disbursements of high-cost funds to rate-of-return carriers within that 
$2 billion budget. Indeed, NECA forecasts that over the next several 
years, absent any further reforms, total high-cost support (that is, 
the sum of HCLS, ICLS, and CAF ICC) for the rate-of-return industry 
will exceed the $2 billion budget. It therefore is imperative that the 
Commission takes further steps now to ensure the budget is not 
exceeded, in the event growth in CAF BLS were to cause total rate-of-
return support to exceed the defined budget. Adopting an overall budget 
control mechanism will provide a predictable and reliable method in the 
event that demand exceeds the available budget. The Commission notes, 
of course, that the budget control will only be implemented in the 
event total support is forecasted to exceed the budget in a given year.
    124. In implementing measures to stay with the previously adopted 
budget, the Commission notes that the Tenth Circuit has affirmed the 
Commission's decision to set the rate-of-return budget at $2.0 billion. 
The court found reasonable the Commission's determination ``that 
budgetary sufficiency for . . . rate-of-return carriers could be 
achieved through a combination of measures, including but not limited 
to: (1) Maintaining current USF funding levels while reducing or 
eliminating waste and inefficiencies that existed in the prior USF 
funding scheme; (2) affording carriers the authority to determine which 
requests for broadband service are reasonable; (3) allowing carriers, 
when necessary, to use the waiver process; and (4) conducting a 
budgetary review by the end of six years.'' In this Order, the 
Commission retains each of these measures to safeguard the sufficiency 
of the budget. Though some parties have suggested in general terms that 
the budget should be increased, they have not provided the type of 
detailed information about why the overall budget is insufficient for 
the Commission to meet its goal of achieving universal service, nor 
have they presented individualized circumstances necessary to evaluate 
their claims. As discussed below, any carrier may seek waiver if it is 
necessary and in the public interest to ensure that consumers in the 
area continue to receive service.
    125. Budget Amount. As noted above, the Commission has set a budget 
for rate-of-return support of $2 billion per year, but only one of the 
existing legacy high-cost mechanisms is subject to a defined cap. To 
calculate the amount of support that will be available for disbursement 
under HCLS and CAF BLS, the Universal Service Administrator will first 
determine total demand from rate-of-return carriers (both those that 
elected model-based support and those that remain on the reformed 
legacy support mechanisms). Then, USAC will deduct CAF-ICC support for 
rate-of-return carriers (not including affiliates of price cap 
carriers) as specified under Commission's rules.

[[Page 24301]]

Then, during the ten-year term of CAF-ACAM support, the Administrator 
will further deduct the amount of model-based support disbursements to 
those rate-of-return carriers choosing model-based support and 
transition payments, as applicable. The additional support provided to 
facilitate the voluntary path to the model is temporary, and after the 
end of the ten-year term, the budget control mechanism will apply to 
all rate-of-return carriers. The amount remaining will be the total 
support available to be disbursed under HCLS and CAF BLS. This amount 
will first be calculated as of July 2016, and will be recalculated on 
an annual basis to reflect changes in the CAF-ICC amounts paid to 
carriers.
    126. Budget Control Mechanism. The budget control mechanism the 
Commission adopts is a variation on the NTCA budget control proposal 
that NTCA suggested should be applied solely to its DCS broadband-only 
mechanism. In essence, this proposal represents a compromise between 
carriers with relatively small numbers of lines but with very high 
costs and carriers with relatively more lines but with only moderately 
high costs. The Commission finds that it strikes a fair balance among 
differently-situated carriers.
    127. Our budget control mechanism, as described in detail below, 
will be applied to forecasted disbursements each quarter. For this 
purpose, forecasted disbursements include payments made for HCLS, 
payments for CAF BLS based on forecasted data for current period, and 
true-ups associated with prior years but being disbursed during the 
current period. There will be no retroactive application of the budget 
control mechanism.
    128. First, a target amount is identified for each mechanism--HCLS 
and CAF BLS--so that in the aggregate disbursements for the mechanisms 
equal the budgeted amount for rate-of-return carriers. This targeted 
amount is calculated by multiplying the forecasted disbursements for 
each mechanism by the ratio of the budgeted amount to the total 
calculated support for the mechanisms. In this case, disbursements 
include CAF BLS provided on a projected basis, as well as true ups of 
that mechanism that apply to prior periods. This target amount will be 
calculated for each mechanism once per year prior to the annual filing 
of the tariffs.
    129. The reduction of support under each mechanism will be split 
between a per-line reduction and a pro rata reduction applied to each 
study area. The per-line reduction will be calculated by dividing one 
half the difference between the calculated support and the target 
amount for each mechanism by the total number of eligible loops in the 
mechanism. Because some study areas may have per-line support amounts 
that are less than the per-line reduction, the per-line reductions as 
applied may not precisely equal one-half the difference between the 
calculated support and the target amount. In that case, the remaining 
reductions will be achieved through the pro-rata reduction. The pro 
rata reduction will then be applied as necessary to achieve the target 
amount. For CAF-BLS, the per-line and pro rata reductions will 
calculated once per year, prior to the annual filing of tariffs. For 
HCLS, the per-line and pro rata reductions will be calculated 
quarterly, using the most recently announced target amount.
    130. HCLS Cap. As the Commission has done previously when carriers 
have lost their eligibility for HCLS due to their status as affiliates 
of price-cap carriers, the Commission directs NECA to rebase the cap on 
HCLS to reflect the election of model-based support by HCLS-eligible 
rate-of-return carriers. In the first annual HCLS filing following the 
election of model-based support, NECA shall calculate the amount of 
HCLS that those carriers would have received in the absence of their 
election, subtract that amount from the HCLS cap, then recalculate HCLS 
for the remaining carriers using the rebased amount.
    131. Attribution of CAF BLS to Common Line and Consumer Broadband 
Loop Categories. To permit carriers to submit tariffs that provide a 
reasonable opportunity to meet their revenue requirements, it is 
necessary to attribute the CAF BLS that a carrier receives, after any 
reductions due to the budgetary constraint, to various cost categories. 
Accordingly, a carrier will first apply the CAF BLS it receives to 
ensure that its interstate common line and consumer broadband revenue 
requirements are being met for the periods currently being trued up. 
For example, from July 1, 2019, to June 30, 2020, true-ups will be made 
with respect to the 2017 calendar year, and CAF BLS disbursements will 
first be attributed to the extent necessary to ensure their revenues 
meet their revenue requirements for 2017. Next, CAF BLS will be applied 
to meet the carrier's forecasted interstate common line revenue 
requirement for the current tariff year. This assignment of support 
plus the revenues from end-user charges will meet the carrier's 
interstate common line revenue requirement. A carrier will then apply 
the remainder of its CAF BLS to the forecasted revenue requirement for 
the new consumer broadband-only loop category during the current tariff 
year. Any remaining unmet consumer broadband loop revenue requirement 
will be met through the consumer broadband loop rate. This process will 
permit, in some cases, consumer broadband-only loop rates to rise above 
$42. The Commission notes that $42 is well below the reasonably 
comparable rate for retail broadband service of $77.81. FCC, Reasonable 
Comparability Benchmark Calculator, https://www.fcc.gov/encyclopedia/reasonable-comparability-benchmark-calculator (last visited Mar.4, 
2016). On the whole, our actions in this Order will significantly 
reduce the retail rates paid by broadband-only subscribers, improving 
the reasonable comparability of rates. The Commission will, however, 
continue to monitor consumer broadband-only rates to ensure that our 
policies support reasonable comparability. On the whole, this process 
targets the budgetary constraint to the broadband-only component of the 
CAF-BLS mechanism, similar to NTCA's proposal to target the budgetary 
constraint to its broadband-only DCS mechanism.
6. Broadband Deployment Obligations
    132. In this section, the Commission takes steps to promote 
``accountability from companies receiving support to ensure that public 
investments are used wisely to deliver intended results.'' 
Specifically, the Commission adopts specific, defined deployment 
obligations that are a condition of the receipt of high-cost funding 
for those carriers continuing to receive support based on embedded 
costs. These measures will help ensure that ``[c]onsumers in all 
regions of the Nation . . . have access to telecommunications and 
information services . . . that are reasonably comparable to those 
services provided in urban areas.'' The Commission notes that USTelecom 
and NTCA recognize that defined buildout obligations are ``essential to 
a broadband reform effort.''
    133. Discussion. In this section, to ensure that the Commission 
makes progress towards achievement of universal service, consistent 
with the statute, they adopt defined performance and deployment 
obligations for rate-of-return carriers. The Commission's goal is to 
utilize universal service funds to extend broadband to high-cost and 
rural areas where the marketplace alone does not currently provide a 
minimum level of broadband connectivity, and ``to distribute universal 
service funds as

[[Page 24302]]

efficiently and effectively as possible.'' As noted above, in the USF/
ICC Transformation Order, the Commission built upon the existing 
reasonable request standard, adopted a requirement to report 
unfulfilled service requests, and required carriers to develop a five-
year plan to ensure that consumers in hard-to-serve areas have 
sufficient access to broadband, while also ensuring universal service 
support is utilized as effectively as possible. Through the adoption of 
rules to transform ICLS into the CAF-BLS mechanism, the Commission now 
builds on the foundation the Commission established in the USF/ICC 
Transformation Order to distribute support equitably and efficiently 
and advance the Commission's longstanding objective of closing the 
rural-rural divide.
    134. The Commission concludes that it now is time to establish 
defined deployment obligations for every carrier to ensure it has a 
framework to achieve our goal of universal service. As noted above, 
ETCs are currently required to ``describe with specificity proposed 
improvements or upgrades'' to their network throughout their service 
area in their five-year plans.'' The Commission did not specify 
specific numerical targets for those five-year plans, however, which 
has hampered our ability to judge whether carriers are in fact taking 
reasonable steps to extend broadband service. The Commission notes that 
although many rate-of-return carriers have aggressively deployed 
broadband service within their study areas, that progress has not been 
evenly distributed. Indeed, while some carriers have deployed 10/1 Mbps 
service to 99-100 percent of the census blocks within their study 
areas, other carriers have not deployed to any.
    135. Given the lack of any deployment by some providers and 
extremely low levels of deployment by others, the Commission concludes 
that some concrete standards for deployment are necessary to achieve 
the Commission's goal of extending broadband to those areas of the 
country where it is lacking. Indeed, the Commission has seen little to 
no progress in deployment since the USF/ICC Transformation Order for 
some areas, and there is no evidence that consumers in those areas will 
receive access to broadband absent a more objective, measurable 
requirement to do so.
    136. To ensure that universal service support is utilized as 
effectively as possible in furtherance of the Commission's goal to 
achieve universal service, the five-year plan must operate as a 
meaningful tool for Commission oversight and possess quantifiable 
objective goals that can be easily measured and monitored. In this 
Order, the Commission has replaced ICLS with Broadband Loop Support so 
that all rate-of-return carriers can receive support for broadband-only 
lines. The Commission is eager to see that this support results in more 
widespread deployment. Moreover, in this Order, the Commission sets 
allowances for capital expenses, which will result in a larger budget 
for carriers whose deployment is less than the national average. 
However, that reform, by itself, does not guarantee that a carrier will 
make the investments needed to connect unserved consumers. Accordingly, 
in conjunction with our adoption of the updated CAF-BLS mechanism and 
capital expense allowances, the Commission adopts refinements to the 
current five-year plan requirements designed to increase accountability 
and ensure the extension of broadband to those areas of the country 
where it is lacking. In particular, the Commission adopts a specific 
methodology to determine each carrier's deployment obligation over a 
defined five-year period, which will be used to monitor carrier 
performance.
    137. Methodology for Establishing Deployment Obligations. In this 
section the Commission describes the specific methodology used to 
determine each carrier's deployment location obligation over a defined 
five-year period. The deployment obligation will be based on the 
carrier's forecasted CAF BLS, and a cost per location metric, using one 
of two methods, as suggested by commenters. To enable each carrier the 
flexibility to determine which approach best reflects the unique 
characteristics of their service territory, a carrier may choose to 
either have its deployment obligation determined based on (1) the 
average cost of providing 10/1 Mbps service, based on the actual costs 
of carriers with similar density that have widely deployed 10/1 
service, or (2) the A-CAM's calculation of the cost of providing 10/1 
Mbps service in the unserved census blocks in the carrier's study area. 
Carriers will be required to notify USAC which method they elect. USAC 
will perform the mathematical calculations and provide to the Bureau a 
schedule of broadband obligations for each carrier, which then will be 
published in a public notice. The Commission describes more fully each 
of these methods below.
    138. Under the first step in this methodology, the Commission will 
develop a five-year forecast of the total CAF-BLS support for each 
rate-of-return carrier, which will include support for stand-alone 
broadband loops. The Commission directs NECA to prepare forecasts 
utilizing these assumptions in consultation with the Bureau and submit 
them to USAC within 60 days of the effective date of this Order. USAC 
is directed to validate any calculations submitted by NECA to ensure 
they are accurate and reflect the specified assumptions. The Commission 
agrees with commenters that knowing the level of anticipated support is 
helpful when developing any associated deployment obligations. 
Therefore, the Commission is confident that basing the new deployment 
obligation on a support forecast will give carriers the relative 
certainty they desire in their support going forward, allowing them to 
plan new investment. The Commission notes that if a carrier's CAF BLS 
is subsequently reduced based on the implementation of competitive 
overlap rule adopted above, USAC will then recalculate that carrier's 
deployment obligation based on a revised forecast of that carrier's CAF 
BLS. Carriers cannot use locations in areas determined to be 
competitive based on the competitive overlap determination to meet 
their deployment obligation.
    139. Each rate-of-return carrier that continues to receive support 
based on the reformed legacy mechanisms will be required to target a 
defined percentage of its five-year forecasted CAF-BLS support to the 
deployment of broadband service where it is currently lacking. The 
percentage of support will be determined on a carrier-by-carrier basis 
for a five-year period. Specifically, consistent with the framework 
suggested by the rural associations, rate-of-return carriers with less 
than 20 percent deployment of 10/1 Mbps broadband service in their 
entire study area, based on June 2015 FCC Form 477 data, will be 
required to utilize 35 percent of their five-year forecasted CAF-BLS 
support specifically for the deployment of 10/1 Mbps broadband service 
where it is currently lacking. Rate-of-return carriers with more than 
20 percent or greater but less than 40 percent deployment of 10/1 Mbps 
broadband service in their entire study areas, will be required to 
utilize 25 percent of their five-year forecasted CAF-BLS support 
specifically for the deployment of broadband service where it is 
currently lacking. Rate-of-return carriers with 40 percent or greater 
but less than 80 percent deployment of 10/1 Mbps broadband service in 
their entire study areas, will be required to utilize 20 percent of 
their five-year forecasted CAF-BLS support specifically for the

[[Page 24303]]

deployment of broadband service where it is currently lacking.
    140. Deployment obligations will then be determined by dividing the 
dollar amount of the targeted CAF BLS by a cost-per-location figure. 
First, the Bureau will prepare a list of all rate-of-return carriers 
with at least 95 percent deployment of 10/1 Mbps broadband service 
within their study areas, based on the most recent publicly available 
FCC Form 477 data. The Commission believes it is reasonable to assume 
that if a rate-of-return carrier is nearly fully deployed with 10/1 
Mbps broadband service, the carrier has recently upgraded its network 
and its current cost per loop is a reasonably good proxy for the cost 
per line associated with extending 10/1 Mbps broadband. The Bureau will 
sort the carriers into a number of groups based on the density of 
housing units per square mile, utilizing publicly available U.S. Census 
data. Any carriers subject to the current $250 per line per month cap 
and the newly adopted opex limits will be excluded from the analysis. 
The Bureau also may exclude any carrier whose costs appear to be an 
outlier within a given density grouping. Then, USAC will determine the 
weighted average cost per loop for the carriers that are 95 percent or 
greater deployed for each density grouping, based on NECA cost data. 
Carriers with 95 percent or greater deployment of 10/1 Mbps broadband 
are likely to have deployed broadband relatively recently, so the 
average should be generally reflective of the cost that carriers have 
incurred to upgrade their networks. The Commission finds that this 
process is reasonable because a carrier's weighted average cost per 
loop is based on its particular density grouping, thus taking into 
account costs for similarly-situated carriers. USAC also will determine 
the weighted average of the cost per loop for carriers in the same 
density band with a similar level of deployment, and then will increase 
that figure by 150 percent. This is similar to the approach advocated 
by NTCA and USTelecom, who suggested that the Commission use a figure 
that is ``at least 150 percent of the average cost per loop'' of those 
carriers with comparable density and deployment. It is reasonable to 
assume that many of the locations left unserved will have costs higher 
than the current average cost per loop, which by definition averages 
the lowest cost and the higher cost locations. Given that the carriers 
subject to the defined deployment are those that have deployed 10/1 
Mbps broadband to less than 80% of their locations, it also is 
reasonable to assume that they would choose to meet their deployment 
obligations by extending service to their least costly unserved 
locations, and not the most expensive unserved locations. Therefore, 
the Commission concludes that a 150 percent increase above the weighted 
average cost per loop of companies with similar density and deployment 
levels is a reasonable approach that takes into account that costs will 
likely higher when carriers extend broadband into unserved areas.
    141. If the 150 percent of the weighted average of companies with 
similar density and deployment is greater than the figure derived from 
companies of similar density that have deployed to 95 percent or more 
of locations, that larger figure will be the cost per location metric 
used to size the obligation to deploy 10/1 Mbps broadband service. USAC 
then will divide each carrier's specific five-year forecasted CAF-BLS 
support amount by the specific embedded cost per location figure. The 
quotient of this calculation will result in the exact number of 
locations a carrier electing this option is required to deploy 10/1 
Mbps broadband service to pursuant to its five-year plan.
    142. As an alternative to the approach outlined above, carriers may 
elect to have their deployment obligations determined based on the cost 
per loop for that carrier as reflected in the adopted version of the A-
CAM, as suggested by NTCA and USTelecom. For this purpose, the relevant 
figure will be the calculated cost for those census blocks that are 
unserved with 10/1 Mbps, using the cost module. USAC will divide each 
carrier's specific five-year forecasted CAF-BLS support amount by the 
A-CAM calculated, carrier specific, average cost per loop for unserved 
areas. The quotient of this calculation will result in the exact number 
of locations a carrier electing this option is required to deploy 10/1 
Mbps broadband service to pursuant to its five-year plan.
    143. Deployment Requirements. In this section, the Commission 
discusses in more detail the specific obligations of rate-of-return 
carriers subject to the refined five-year plan requirements. The 
Commission recognizes that certain locations in rate-of-return areas 
may be very costly to serve, and requiring buildout to these locations 
could place high demands on both rate-of-return carriers and consumers 
across the United States who ultimately pay for USF. That is why the 
Commission concludes--much like the Commission did in the April 2014 
Connect America Order, 79 FR 39164, July 9, 2014--that it will not 
require deployment using terrestrial wireline technology for any rate-
of-return carrier in any census block if doing so would result in total 
support per line in the study area to exceed the $250 per-line per-
month cap. The Commission also notes that, pursuant to the capital 
budget allowance they adopt, rate-of-return carriers may not exceed 
$10,000 per location/per project when deploying broadband service 
utilizing terrestrial wireline technology.
    144. The Commission concludes that rate-of-return carriers with 80 
percent or greater deployment of 10/1 Mbps broadband service in their 
entire study areas, as determined by the Bureau based on June 2015 FCC 
Form 477 data, will not have specific buildout obligations as a 
condition of receiving CAF-BLS support. However, those carriers must 
continue to deploy 10/1 Mbps or better broadband service where cost-
effective and utilize alternative technologies where terrestrial 
wireline infrastructure is too costly, and report, as part of their 
annual Form 481 filing, progress on the number of locations where 10/1 
Mbps or better broadband service have been deployed within their study 
area in the prior calendar year. The Commission emphasizes that any 
CAF-BLS funding earmarked for the purpose of extending 10/1 Mbps 
service to census blocks lacking such service may not be used to 
improve speeds for those locations to which 10/1 Mbps service has 
already been deployed. The Commission will continue to monitor the 
deployment progress of these carriers: They may revisit this framework 
in the future if such carriers do not continue to make reasonable 
progress on extending broadband.
    145. The Commission concludes that carriers subject to a defined 
five-year deployment obligation may choose to meet their obligation at 
any time during the five-year period. For example, a carrier can evenly 
space out construction to targeted locations on an annual basis or 
complete all of its required deployment within a single year. However, 
should any carrier subject to a defined five-year deployment obligation 
fail to complete the deployment within the stipulated five-year period, 
the carrier is potentially subject to reductions in support pursuant to 
section 54.320(c) of the Commission's rules, to be determined on a 
case-by-case basis. In situations where the carrier makes no progress 
towards meeting its defined five-year deployment obligation, and fails 
to establish extenuating circumstances, the Commission reserves the 
right to include such census blocks in an upcoming auction.

[[Page 24304]]

    146. The Commission recognizes that even after the conclusion of 
the initial five-year period, additional efforts will be necessary ``to 
encourage continued investment in broadband networks throughout rural 
American to ensure that all consumers have access to reasonably 
comparable services at reasonably comparable rates.'' Therefore, the 
Commission concludes that carriers with less than 80 percent deployment 
of broadband service meeting then-current standards in their study 
areas will be required to utilize a specified percentage of their five-
year forecasted CAF BLS to deploy broadband service meeting the 
Commission's standards where it is lacking in subsequent five-year 
periods. The same methodology will be used, with USAC updating the 
average cost per loop amounts, based on the then-current NECA cost 
data, and the Bureau updating the density groupings and percentage of 
deployment figures, as appropriate.
    147. The Commission concludes that the approach outlined above 
improves on the proposal initially submitted by NTCA, USTelecom, and 
WTA that rate-of-return carriers in receipt of BUSS support utilize at 
least 10 percent of their support ``toward the goal of delivering 
broadband at the then-current 706 broadband speed to `4/1[Mbps] 
Unserved Locations.' '' The associations' earlier proposal failed to 
include any quantifiable deployment objectives, making it an 
ineffective tool for Commission oversight. Moreover, the Associations' 
proposal placed too much emphasis on achieving the deployment of 
advanced telecommunications capability, rather than the standards that 
the Commission has established as its minimum expectation for universal 
service. The Commission notes that USTelecom and NTCA more recently 
indicated their support for the framework adopted in this Order. To 
ensure that universal service support is used as effectively as 
possible to close the rural-rural divide, the Commission must be able 
to measure and monitor the deployment objectives outlined in a 
carrier's five-year plan. As noted above, deployment has not been 
consistent across all rural areas. Therefore, it is critical that the 
Commission have a method to evaluate progress towards meeting the 
established minimum 10/1 Mbps standard for high-cost support in each 
study area and determine if remedial action is warranted.
    148. On an ongoing basis, the Commission will assess broadband 
deployment progress for all rate-of-return carriers based on carriers' 
annual reporting on the progress of their broadband deployment, and 
make adjustments, where warranted.
    149. Reasonable Request Standard. In addition to defined 
obligations to extend service to a subset of locations within a five-
year period, rate-of-return carriers remain subject to the reasonable 
request standard for their remaining locations. Rate-of-return carriers 
are required to demonstrate in an audit or other inquiry that they have 
a documented process for evaluating requests for service under the 
reasonable request standard and produce the methodology for determining 
where upgrades are reasonable. Carriers that make no progress in 
extending broadband to locations unserved with 10/1 Mbps broadband over 
an extended period of time should be prepared to explain why that is 
the case.
    150. The Commission also takes further action to implement the 
existing reasonable request standard to ensure that consumers in remote 
areas are served. The Commission previously sought detailed comment on 
implementation of the Remote Areas Fund, including the option of using 
a competitive process to award support for such areas. Carriers will be 
invited later this year to identify those census blocks where they do 
not anticipate being able to deploy service under the existing 
reasonable request standard (i.e. where it is unreasonable to extend 
broadband meeting the Commission's current requirements) for inclusion 
in the next Commission auction. The Commission directs the Bureau to 
issue a public notice setting a deadline for identifying such census 
blocks in advance of the timeframe for finalizing the list of eligible 
areas that will be subject to auction.
    151. The Commission notes that should a carrier choose to place 
census blocks in the next Commission auction and another entity is 
authorized to receive support for those census blocks to provide voice 
and broadband service subsequent to the auction, the incumbent will not 
be subject to the reasonable request standard and no longer will 
receive support for those areas.
7. Impact of These Reforms
    152. The adoption of the voluntary path to the model, coupled with 
our update to the existing ICLS mechanism to provide support for 
broadband-only loops, should be beneficial to carriers that are high-
cost, but no longer receive HCLS support due to the so-called ``cliff 
effect.'' The Commission notes that the revenue benchmark they set for 
broadband-only loops is lower than the effective benchmark for HCLS, 
which only provides support for carriers with an average loop cost of 
at least 115 percent of the frozen NACPL. Because the NACPL is frozen 
at $647.42, a carrier only receives HCLS if its average cost per loop 
on an annual basis is higher than $744.53, or $62.04 per month. Thus, 
our reformed CAF-BLS mechanism will provide cost recovery for 
broadband-only loops for many carriers that no longer are eligible for 
HCLS support. This is one of the reasons why the Commission concludes 
that over the long run, CAF BLS will be more sustainable and equitable 
than HCLS and the former ICLS, supporting new broadband deployment to 
areas where providers have been unable to build absent some subsidy.
    153. The Commission will monitor the progress in broadband 
deployment under the strengthened requirements for broadband deployment 
and may take further action in the future should it appear that despite 
these reforms, some high-cost areas remain unserved. The Commission 
solicits input from all interested parties in the concurrently adopted 
FNPRM as to whether there are other changes they could make to our 
high-cost program, working within the defined budget, that would create 
additional incentives to deploy broadband for companies in areas where 
end user revenues alone are insufficient to make a business case to 
deploy broadband.
    154. In our predictive judgment, the mechanisms that the Commission 
adopts today to keep disbursements within the previously adopted budget 
will provide rate-of-return carriers with support that is sufficient to 
meet the Commission's universal service goals. If any carrier believes 
that the support it receives is insufficient, it may seek a waiver of 
our rules. As the Commission noted in the USF/ICC Transformation Order, 
``any carrier negatively affected by the universal service reforms . . 
. [may] 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.'' 
The Commission stated that ``[w]e envision 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.'' It expressly noted that 
parties requesting such a waiver would be subject to ``a process

[[Page 24305]]

comparable to a total earnings review.'' The Commission indicated that 
it did not anticipate granting waiver requests routinely or for 
``undefined duration[s]'' and provided guidance on the types of 
information that would be relevant for such requests. In the Fifth 
Order on Reconsideration, 78 FR 3837, January 17, 2013, the Commission 
further clarified that ``the Commission envisions granting relief to 
incumbent telephone companies only in those circumstances in which the 
petitioner can demonstrate that consumers served by such carriers face 
a significant risk of losing access to a broadband-capable network that 
provides both voice as well as broadband today, at reasonably 
comparable rates, in areas where there are no alternative providers of 
voice or broadband.'' The Commission notes that the Tenth Circuit 
upheld the Commission's decision to set the high-cost universal service 
budget for rate-of-return carriers at $2.0 billion, and endorsed the 
use of the waiver process as a means to address any special 
circumstances when the application of the budget may result support 
that is insufficient for a carrier to meet its universal service 
obligations. The Commission further notes that to the extent parties 
seek a waiver on the ground that support is insufficient, it may 
request additional documentation pursuant to section 220(c) of the Act, 
to ensure that it has a full and complete basis for decision.
    155. Finally, the Commission notes that the promotion of universal 
service remains a federal-state partnership. The Commission expects and 
encourage states to maintain their own universal service funds, or to 
establish them if they have not done so. The expansion of the existing 
ICLS mechanism to support broadband-only loops and the voluntary path 
to model-based support should not be viewed as eliminating the role of 
the states in advancing universal service; far from it. The deployment 
and maintenance of a modern voice and broadband-capable network in 
rural and high-cost areas across this nation is a massive undertaking, 
and the continued efforts of the states to help advance that objective 
is necessary to advance our shared goals.
8. Administrative Issues
    156. It is our desire to implement these revisions to our rules as 
soon as possible. The Commission recognizes, however, that implementing 
some of these changes will require new or revised information 
collections requiring approval from the Office of Management and Budget 
pursuant to the Paperwork Reduction Act. Further, some of the changes 
the Commission adopts must be coordinated with the Commission's 
existing cost accounting and tariffing rules. Given the administrative 
requirements the Commission has noted, it does not anticipate that full 
implementation of the new Connect America Fund Broadband Loop Support 
and related changes will occur prior to October 1, 2016. The Commission 
delegates authority to the Bureau to take all necessary administrative 
steps to implement the reforms adopted in this Order.
    157. USAC Oversight. USAC, working with the Bureau, will take all 
actions necessary to implement these rule changes adopted in this 
Order. The Commission notes that USAC has a right to obtain--at any 
time and in unaltered format--all cost and revenue submissions and 
related information provided by carriers to NECA that is used to 
calculate payments under any high-cost support mechanism. The 
Commission expects USAC to implement processes to validate any 
calculations performed by NECA to ensure that accurate amounts are 
disbursed, consistent with our decisions.
    158. Administrative Schedule--In general. The administration of the 
CAF-BLS mechanism will, as much as possible, follow the existing 
precedent of the ICLS mechanism. In order to facilitate the operation 
of the CAF-BLS mechanism, the Commission eliminates the June 30 updates 
and revisions that had been permitted pursuant to ICLS. Accordingly, 
the Commission specifies the following schedule:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
March 31..........................  Carriers file with USAC projected
                                     cost and revenue data, including
                                     projected voice and broadband-only
                                     loops, necessary to calculate a
                                     provisional CAF-BLS amount for each
                                     carrier for the following July 1 to
                                     June 30 tariff year (ex. on March
                                     31, 2017, carriers will file
                                     projected data for July 1, 2017, to
                                     June 30, 2018).
May 1.............................  USAC files with the Commission in
                                     Docket No. xx-xxx provisional CAF-
                                     BLS amounts, having applied the
                                     budgetary control based on CAF BLS
                                     data filed on March 31, as well
                                     previously known HCLS data and CAF-
                                     BLS true-up information.
June 16...........................  Tariffs filed by this date may be
                                     deemed lawful for the following
                                     July 1 to June 30 tariff year (ex.
                                     on June 16, 2017, NECA files
                                     tariffs for July 1, 2017, to June
                                     30, 2018, relying on May 1 CAF-BLS
                                     amounts).
July 1 to June 30.................  USAC disburses provisional CAF-BLS
                                     amounts to carriers (July 1, 2017
                                     to June 30, 2018, in this example).
December 31.......................  Carriers file actual cost and
                                     revenue data and line count data
                                     necessary to calculate final CAF-
                                     BLS for prior calendar year (ex. on
                                     December 31, 2018, carriers file
                                     data for January 1, 2017, to
                                     December 31, 2017).
July 1 to June 30.................  USAC disburses true-ups for final
                                     CAF-BLS amounts to carriers (ex.
                                     true-ups associated with calendar
                                     year 2017 disbursed from July 1,
                                     2019, to June 30, 2020). To ensure
                                     a consistent effect on the
                                     budgetary constraint through the
                                     year, the Commission modifies the
                                     true-up process conducted under
                                     ICLS so that under CAF BLS such
                                     that true-ups are spread between
                                     July 1 to June 30 of each tariff
                                     year, rather than applying the true-
                                     ups to the third and fourth
                                     quarters of the calendar year, as
                                     is currently done.
------------------------------------------------------------------------

C. Pricing Considerations

    159. In the following subsections, the Commission addresses cost 
allocation and tariff-related issues raised by adoption of the new CAF-
ACAM and CAF-BLS mechanisms discussed above. The implementation of 
those support programs and the cost allocation and pricing issues 
addressed below will be coordinated so that the appropriate cost 
allocation and tariff revisions will occur when the new mechanisms 
become effective.
1. Cost Allocation Issues
    160. Today, broadband-only loops are generally offered through 
interstate special access tariffs. The costs associated with those 
loops are allocated 100 percent to the interstate jurisdiction by the 
separations procedures in Part 36 and then to the special access 
category by subparts D and E of Part 69. Under this process, the 
interstate broadband-only loop costs are included in the special access 
revenue requirement upon which cost-based special access rates are 
determined. When the new high-cost support rules take effect, a carrier 
may receive support for a portion of its broadband-only loop costs. 
Unless an adjustment is made, a carrier could recover the costs 
associated with the broadband-only loop twice--once through the CAF-BLS 
mechanism and a second time through special access rates based on the 
existing special access revenue requirement.

[[Page 24306]]

    161. To avoid this situation, the Commission amends Part 69 in two 
ways to implement the goal articulated in the April 2014 Connect 
America Fund FNPRM of ensuring that no double recovery occurs. First, 
the Commission creates a new service category known as the ``Consumer 
Broadband-Only Loop'' category for the broadband-only loop costs that 
are the subject of this Order. This new category in Part 69 will 
encompass the costs of the consumer broadband-only loop facilities that 
today are recovered through special access rates for the transmission 
associated with wireline broadband Internet access service. For 
purposes of this discussion, wireline broadband Internet access service 
refers to a mass-market retail service by wire that provides the 
capability to transmit data to and receive data from all or 
substantially all Internet endpoints, including any capabilities that 
are incidental to and enable the operation of the communications 
service, but excluding dial-up Internet access service. This retail 
service offered by rate-of-return carriers or their affiliates is 
subject to the reasonable comparability benchmark. The wholesale input 
discussed in this Order--the transmission component used to provide the 
retail service--is subject to the Commission's rate-of-return 
regulation, including the changes adopted herein, unless a carrier 
seeks to convert to price cap regulation. A carrier electing price cap 
regulation becomes subject to the rules governing price cap carrier 
rates and obligations, including the transition path and recovery rules 
applicable to price cap carrier switched access charges. See 47 CFR 
51.907, 51.905. This category will be included along with the common 
line category in the new CAF-BLS mechanism.
    162. Second, the Commission revises part 69 of our rules to 
reallocate costs to avoid double recovery. These revisions require a 
carrier to move the costs of consumer broadband-only loops from the 
special access category to the new Consumer Broadband-Only Loop 
category. Today, the facilities associated with the common line and the 
consumer broadband loop run between the end-user premises and the 
central office, and are often the same technology or share some common 
transmission capacity. Thus, it is reasonable to conclude that the 
costs associated with these two types of lines are very similar. The 
interstate Common Line revenue requirement includes 25 percent of the 
total unseparated loop costs, while the consumer broadband-only loops 
will include 100 percent of the total unseparated loop costs. For 
purposes of deriving the amount of consumer broadband loop expenses to 
be removed from the Special Access category. This does not revise any 
rule associated with calculating the actual common line investment and 
expenses. It is solely for the purpose of establishing the amount of 
consumer broadband-only loop investment and expenses to remove from the 
special access category, carriers will calculate common line investment 
and expenses using an interstate allocation of 100, rather than 25. The 
common line expenses produced by this calculation will then be divided 
by the number of voice and voice/data lines in the study area to derive 
the interstate common line expenses per line. The interstate common 
line expenses per line will be multiplied by the number of consumer 
broadband-only loops to derive the consumer broadband-only loop 
expenses to be removed from the special access category. The Commission 
takes this approach because it includes the broadest definition of loop 
costs feasible based on our current cost accounting rules. These 
actions will segregate the broadband-only loop investment and expenses 
from other special access costs currently included in the special 
access category, and also preclude cross-subsidization. The Commission 
will oversee NECA's actions to ensure that these changes are 
implemented consistent with the Commission's intent.
2. Tariffing Issues
    163. Assessment of end-user charges. Today, rate-of-return carriers 
assess SLCs on voice and voice/broadband lines. The SLCs are capped at 
the lower of cost or $6.50 for residential and single-line business 
lines and $9.20 for multiline business lines. Rate-of-return carriers 
will continue to offer voice and voice/broadband lines under the 
revised support mechanisms. Carriers will continue to be eligible to 
assess SLCs on end-user customers of voice and voice/broadband lines 
subject to the current rules. Carriers will also be permitted to assess 
an Access Recovery Charge (ARC) on any line that can be assessed a SLC, 
the same as today. Consistent with the existing rules, SLCs and ARCs 
may not be assessed on lines eligible to receive Lifeline support.
    164. Currently, a rate-of-return carrier may offer broadband-only 
loops through its interstate special access tariff. The consumer 
broadband-only loop service is the telecommunications input to a 
wireline broadband Internet access service. When the revised rules 
adopted herein become effective, a rate-of-return carrier may tariff a 
consumer broadband-only loop charge for the consumer broadband-only 
loop service. Alternatively, a carrier may detariff such a charge. If 
the rate-of-return carrier chooses to detariff its wholesale consumer 
broadband-only loop offering, it no longer will be voluntarily offering 
the transmission as a service that is assessable for contributions 
purposes. As such, it would not have a contributions obligation for 
that service, similar to other carriers that previously chose not to 
offer a separate tariffed broadband transmission service. The carrier 
may not, however, tariff the charge to some customers, while 
detariffing it for others. Because that service is not rate regulated, 
no carrier should in any way represent or create the impression that 
the broadband-only loop charge is mandated by the Commission. This 
limitation is designed to preclude a carrier from using this 
flexibility to discriminate among customers taking broadband-only 
services.
    165. Consumer broadband-only loop charge for a carrier electing 
model-based support. A portion of the support a rate-of-return carrier 
electing model-based support receives will be to cover a portion of the 
costs of the consumer broadband-only loop. The broadband loop provides 
a connection between the end user's premises and the ISP--either an 
affiliated or nonaffiliated entity. The broadband-only loop is a 
wholesale input into the retail broadband service offered by the ISP. 
The cost of that loop is currently included in the Special Access 
category, but will be shifted to the new Consumer Broadband-Only Loop 
category by this Order. Support received under the model will not 
replace all the carrier's consumer broadband-only loop costs. Thus, the 
carrier may choose (but is not required) to develop a rate to recover 
the remainder of its costs to assess on either the end user or the ISP, 
depending on the pricing relationship established between the ISP and 
the consumer. Above, the Commission found that $42 per month per line 
represented a reasonable revenue amount that could be expected to be 
recovered through such a charge for a broadband-only loop. The 
Commission will allow--but does not require--a rate-of-return carrier 
electing model-based support to assess a wholesale consumer broadband-
only loop charge that does not exceed $42 per line per month. If a 
carrier chooses to assess a tariffed wholesale consumer broadband-only 
loop charge, the revenues for that transmission service are subject to 
a contribution obligation.

[[Page 24307]]

This rate cap allows a carrier the opportunity to recover its costs not 
covered by the model, while limiting the ability of a carrier to engage 
in a price squeeze against a non-affiliated ISP offering retail 
broadband service. Although the retail service provided to the end user 
customer is not constrained by this limitation such service is subject 
to the reasonable comparability benchmark.
    166. Participation in the NECA common line pool and tariff by 
carriers electing model-based support. Some carriers that elect model-
based support may currently participate in the NECA pooling and 
tariffing process for their common line offerings. Model-based support 
replaces the high-cost support (i.e. HCLS, ICLS) amounts a carrier 
would receive, as well as any CAF-BLS associated with consumer 
broadband-only loops it would have been eligible to receive if it had 
not elected model-based support. Carriers electing model-based support 
will be treated as if they had received their full support amounts 
under traditional ratemaking procedures. As a result, the only revenue 
requirement remaining for the Common Line and Consumer Broadband-Only 
Loop categories are those amounts associated with end-user charges. For 
carriers electing model-based support, the Commission sees little 
benefit from pooling their common line or consumer broadband-only loop 
costs. In fact, it would likely increase the costs of administering the 
pooling process with no concurrent benefit for carriers. The Commission 
accordingly concludes that carriers electing model-based support will 
not be eligible to participate in the NECA common line pooling 
mechanism.
    167. The Commission does find, however, that rate-of-return 
carriers electing model-based support could benefit from continued 
participation in the NECA tariffs. The Commission accordingly decides 
to preserve the option for carriers to use NECA to tariff these 
charges. The charges shall be capped at current levels for existing 
charges, and at $42 for the consumer broadband-only loop charge. This 
approach allows the carriers electing model-based support to benefit 
from the administrative efficiencies associated with participating in 
the NECA tariff.
    168. Ratemaking for carriers not electing model-based support. Each 
carrier that does not elect model-based support will have an interstate 
revenue requirement for its Consumer Broadband-Only Loop category, as 
determined pursuant to the procedures set forth in Part 69. The 
projected Consumer Broadband-Only Loop revenue requirement is then 
reduced by the projected amount of CAF-BLS attributed to that category 
in accordance with the procedures in Part 54 defining such amounts. The 
remaining projected revenue requirement is the basis for developing the 
rates the carrier may assess, based on projected loops, A carrier may 
not deaverage this rate within a study area. NECA shall employ 
comparable procedures in its pooling process.
    169. A carrier may tariff different pricing models for the loop 
service, but it must select one model for a study area. A carrier in 
the NECA pool that elects to detariff its consumer broadband-only loop 
service must remove all of its Consumer Broadband-Only Loop category 
revenue requirement from the pooling process. It will retain the 
support that would have been applied to the Consumer Broadband-Only 
Loop category revenue requirement if it had not detariffed its consumer 
broadband-only loop rates, plus any revenue resulting from its 
detariffed rates.

D. CAF-ICC Considerations

    170. Discussion. The Eligible Recovery mechanism adopted in the 
USF/ICC Transformation Order was a carefully balanced approach. The 
plan to provide support for certain broadband lines adopted here will 
alter the balance struck in the USF/ICC Transformation Order in two 
significant ways, and CAF-ICC support could increase in a manner not 
contemplated. As discussed below, the Commission revises our recovery 
rules to account for the support changes adopted in this Order.
    171. The first effect from providing support to consumer broadband-
only loops is a likely migration of some end users from their current 
voice/broadband offerings to supported broadband-only lines due to 
increased affordability of these services. Although the Commission 
cannot predict the extent of this migration, such changes will reduce 
the number of ARC-eligible lines under the current rules and thus the 
amount of Eligible Recovery that the carrier can recover via ARC 
charges. As explained above, recovery from CAF-ICC will be provided to 
the extent carriers Eligible Recovery exceeds their permitted ARCs. 
Thus, under the existing recovery rules, a migration of end users to 
consumer broadband-only loop service would upset the careful balancing 
of burdens as between end-user ARC charges and universal service 
support, i.e., CAF-ICC. It is not our intent to alter significantly the 
balance struck in the USF/ICC Transformation Order. To insure that our 
actions today do not unintentionally increase CAF-ICC support, the 
Commission requires that rate-of-return carriers impute an amount equal 
to the ARC charge they assess on voice/broadband lines to their 
supported consumer broadband-only lines. The projected demand for this 
imputation will be subject to the same type of true-up as are the ARCs 
assessed on voice/broadband lines.
    172. The second effect that will occur from the adoption of support 
for consumer broadband-only loops is that, as voice/broadband lines are 
lost, a carrier's switched access revenue will go down. Absent 
Commission action, the recovery mechanism would produce a higher 
Eligible Recovery for the carrier and a higher CAF-ICC amount. 
Nevertheless, the likelihood exists that some of the facilities used to 
support the lost switched access services will be reused to provide a 
portion of the broadband-only service. This is especially true with 
respect to transport and circuit equipment, although it could include 
other facilities as well. Thus, in some cases, the carrier would be 
receiving some special access revenue recovering the costs of 
facilities formerly used to provide switched access services. Such 
circumstances would result in double recovery under the rules adopted 
in the USF/ICC Transformation Order because the carrier would receive 
CAF-ICC as well as special access revenues for the service being 
offered--either tariffed or detariffed. The Commission accordingly 
clarifies that a carrier must reflect any revenues recovered for use of 
the facilities previously used to provide the supported service as 
double recovery in its Tariff Review Plans filed with the Commission, 
which will reduce the amount of CAF-ICC it will receive. This minimizes 
the effect today's decision will have on the level of CAF-ICC support. 
The reporting of any double recovery will be covered by the 
certifications carriers must file with the Commission, state 
commissions, and USAC as part of their Tariff Review Plans.

E. ETC Reporting Requirements

    173. In light of our experience in implementing our high-cost 
reporting requirements to date and our desire to respond to the 
recommendation of the Government Accountability Office to improve the 
accountability and transparency of high-cost funding, the Commission 
now makes several changes to our reporting rules. In this section, the 
Commission streamlines and revises rate-of-return ETCs' annual 
reporting requirements to better align those

[[Page 24308]]

requirements with our statutory and regulatory objectives. First, the 
Commission amends our rules to require rate-of-return ETCs to provide 
additional detail regarding their broadband deployment during each 
year, as suggested by several parties. Specifically, the Commission now 
requires all rate-of-return ETCs to provide location and speed 
information of newly served locations. The Commission also requires 
rate-of-return ETCs electing model-based support to provide information 
for the locations already served at the time of election. In 
conjunction with these changes, the Commission eliminates the 
requirement that rate-of-return ETCs file a five-year plan and annual 
progress reports on that plan. The net result of these two changes will 
be more targeted, useful information for the Commission, states, Tribal 
governments and the general public. Second, given the reporting rules 
the Commission adopts today for rate-of-return carriers, for 
administrative efficiency, they make conforming changes to the 
reporting rules for carriers that elected Phase II model-based support 
(hereinafter ``price cap carriers''). Third, the Commission directs 
USAC to publish in open, electronic formats all non-confidential 
information submitted by recipients of high-cost support. The 
Commissions concludes that these changes ensure that our reporting 
requirements continue to be tailored appropriately to meet our 
statutory and regulatory objectives.
1. Discussion
    174. Broadband Reporting Requirements. The Commission now updates 
our annual reporting requirements for rate-of-return ETCs as a 
necessary component of our ongoing efforts to update the support 
mechanisms for such ETCs to reflect our dual objectives of supporting 
existing voice and broadband service, while extending broadband to 
those areas of the country where it is lacking. The Commission 
concludes that the public interest will be served by adopting broadband 
location reporting requirements for rate-of-return carriers similar to 
those they adopted for price cap carriers and authorized bidders in the 
rural broadband experiments. This targeted rule change is critical for 
the Commission to determine if universal service funds are being used 
for their intended purposes. As recommended by the Government 
Accountability Office, such data will enable the Commission and USAC to 
analyze the data provided by carriers and determine how high-cost 
support is being used to ``improve broadband availability, service 
quality, and capacity at the smallest geographic area possible.''
    175. Specifically, similar to the current requirements for price 
cap ETCs, the Commission adopts a rule requiring all rate-of-return 
ETCs, starting in 2017, and on a recurring basis thereafter, to submit 
to USAC the geocoded locations to which they have newly deployed 
broadband. These data will provide an objective metric showing the 
extent to which rate-of-return ETCs are using funds to advance as well 
as preserve universal service in rural areas, demonstrating the extent 
to which they are upgrading existing networks to connect rural 
consumers to broadband. USTelecom, NTCA, WTA and ITTA propose that 
rate-of-return carriers submit the number of locations that are newly 
served in the prior year, with both USTelecom and ITTA explicitly 
proposing that ETCs electing CAF-ACAM support submit geocodes for such 
locations. Rate-of-return ETCs will also be required to report the 
number of locations at the minimum speeds required by our rules. The 
location and speed data will be used to determine compliance with the 
associated deployment obligations the Commission adopts today. The 
geocoded location information should reflect those locations that are 
broadband-enabled where the company is prepared to offer service 
meeting the Commission's minimum requirements for high-cost recipients 
subject to broadband public interest obligations, within ten business 
days.
    176. The Commission expects ETCs to report the information on a 
rolling basis. A best practice would be to submit the information no 
later than 30 days after service is initially offered to locations in 
satisfaction of their deployment obligations, to avoid any potential 
issues with submitting large amounts of information at year end. The 
Commission concludes that the submission of information in near real-
time as construction is completed will be beneficial to all carriers 
and particularly useful to smaller carriers. For instance, ETC 
technicians will be able to upload the location information as part of 
the routine process of updating its customer service availability 
database upon completion of construction or in conjunction with 
initiation of marketing efforts for the newly available service, 
instead of having to record the location and transferring all of that 
information to an annual report six to 18 months later. It should also 
minimize the strain on USAC's information technology systems to avoid a 
massive amount of bulk uploads centered on a single, annual deadline. 
The Commission notes that the amount of information to be uploaded at 
the end of the calendar year is likely to relatively low, as December 
is not construction season in many locales. While rate-of-return ETCs 
will have until March 1 to file their location data for the prior 
calendar year, reporting on a rolling basis before then will allow 
filers to receive real-time validation from USAC's system prior to the 
deadline and thereby provide the opportunity to timely correct any 
errors or avoid delays due to system overload.
    177. The Commission finds that the benefits in collecting this 
location-specific broadband deployment information outweigh any 
potential burdens from reporting this data, particularly because rate-
of-return ETCs already collect location information for other purposes. 
Rate-of-return carriers presumably maintain records of addresses that 
are newly enabled with service, so that they can begin to market such 
service to those customers. Moreover, rate-of-return carriers already 
are required under our existing rules to maintain records for assets 
placed in service indicating the description, location, date of 
placement, and the essential details of construction. Thus, both for 
marketing and regulatory purposes, rate-of-return carriers already are 
tracking where they extend fiber and install other facilities, and 
should be able to determine through commonly accepted engineering 
standards which locations should be able to receive service at 
specified speeds. The Commission directs the Bureau to work with USAC 
to develop a means of accepting alternative information in those 
instances where a postal code or other standardized means of geocoding 
is not readily available. Furthermore, the Commission delegates 
authority to the Bureau to act on individual requests for waiver of 
this requirement in those cases where the parties can demonstrate other 
unique circumstances that make compliance with the geocoding 
requirement for a subset of locations impracticable.
    178. Similar to the regime adopted for the price cap carriers that 
elected Phase II model-based support, companies that elect model-based 
support will include in their total location count any locations that 
already have broadband meeting the Commission's minimum standards. 
While the Commission encourages carriers to submit geocoded location 
information for their existing broadband locations no later than the 
deadline for the 2017 reporting, they recognize the possibility that 
some smaller companies may not already

[[Page 24309]]

have complete lists of geocoded locations for their existing broadband 
infrastructure that was deployed under the legacy rules. Accordingly, 
while carriers electing the A-CAM model support are strongly urged to 
report new construction on a rolling basis starting in 2017, the 
Commission will provide an additional year for them to file geocodes 
for pre-existing broadband-capable locations, with such information 
required to be submitted to USAC no later than March 1, 2019. Two years 
should be enough time for carriers to collect the necessary data on any 
pre-existing deployment, while providing the Commission and USAC the 
specific locations well in advance of the first interim deployment 
obligation with a defined target.
    179. The Commission concludes that it is necessary to establish a 
standardized and automated system to collect the volume of location 
level data on carrier progress in meeting deployment obligations. 
Below, the Commission directs the Bureau to work with USAC to develop 
an online portal that will be available for rate-of-return carriers to 
submit location information on a rolling basis throughout the year. The 
Commission directs USAC, working with the Bureau, to prepare a plan for 
the efficient collection, analysis and access to this location data. 
The plan should be provided to the Bureau within two months of release 
of this Order and address the use of automated reminders for year-end 
submission due dates, standardized data elements to the extent 
possible, and the time frame necessary to implement an online portal.
    180. The Commission also establishes certifications to be filed 
with ETCs' location submission, to ensure ETCs' compliance with their 
public interest obligations. Each rate-of-return ETC electing CAF-ACAM 
support must certify that it met its 40 percent interim deployment 
obligation at the time it files its final location report for 2020, due 
no later than March 1, 2021, and file similar certifications annually 
thereafter. Rate-of-return ETCs remaining on embedded cost mechanisms 
must file a similar certification within 60 days of the deadline for 
meeting their defined deployment obligations, i.e. March 1, 2022 and 
March 1, 2027. The Bureau has delegated authority to adjust these 
deadlines as necessary to align the timing of the implementation of the 
various reforms. To ensure the uniform enforcement of ETCs' reporting 
requirements, rate-of-return ETCs that fail to file their geolocation 
data and associated deployment certifications due by March 1 of each 
year in a timely manner will be subject to the same penalties that 
currently apply to ETCs for failure to file the information required by 
section 54.313 on July 1 of each year.
    181. In conjunction with adopting the location reporting 
requirements above to track rate-of-return ETCs' build-out progress, 
the Commission now eliminates the requirement for rate-of-return ETCs 
to file a service quality improvement plan. The purpose of the five-
year plan and annual updates was to ensure that ``ETCs [ ] use their 
support in a manner consistent with achieving the universal 
availability of voice and broadband.'' With the reforms adopted in this 
order, rate-of-return ETCs are now subject to detailed broadband 
buildout obligations, which provide a more defined yardstick by which 
to measure their progress towards the universal availability of voice 
and broadband service in their areas. The Commission therefore finds 
that it is unnecessary for rate-of-return ETCs to file a five-year 
service quality improvement plan. Moreover, the Commission concludes 
that because there is no longer a requirement to file a service quality 
improvement plan, they also should eliminate the obligation in our 
rules for rate of return ETCs to file updates on that plan under our 
authority to eliminate rules that are no longer applicable. The 
Commission also modifies, on the same basis, other rules to remove 
references to the service quality improvement plan.
    182. Once the Commission receives Paperwork Reduction Act approval 
for the revised requirement to report geocoded locations and the 
elimination of our progress reporting requirement, rate-of-return ETCs 
will no longer be required to file a progress report containing maps 
and a narrative explanation of ``how much universal service support was 
received, and how it was used to improve service quality, coverage or 
capacity and an explanation regarding any network improvement targets 
that have not been met . . . at the wire center level or census block 
as appropriate.'' The Commission concludes that the geocoded location 
lists that each recipient will be required to submit on an annual basis 
will provide the Commission with more precisely targeted information to 
monitor the recipients' progress towards meeting their public interest 
obligations, and at that point there will no longer be a need for 
recipients to file annual progress reports.
    183. Connect America Phase II Reporting Requirements. Because USAC 
will develop a unified reporting portal for geocoded location 
information, the Commission finds good cause to make conforming changes 
to the relevant reporting requirements for those price cap ETCs that 
accepted Phase II model-based support. The Commission finds good cause 
to change the timing of the submission of geocoded location information 
without notice and comment to promote administrative efficiency for 
both carriers and USAC. Instead of reporting such information in their 
annual report, due July 1 for the prior calendar year, the Commission 
concludes that it will serve the public interest for price cap carriers 
to report on deployment by a deadline that is close to the end of the 
calendar year, rather than six months later. This will enable USAC to 
perform validations of compliance with the interim and final deployment 
milestones more quickly than otherwise would be the case, and impose 
remedial measures as necessary. Moreover, this change will unify 
location reporting for all ETCs providing service to fixed locations, 
minimizing administrative costs to USAC and simplifying monitoring of 
progress by the Commission, USAC, states, other stakeholders, and the 
public.
    184. Specifically, upon the relevant Paperwork Reduction Act 
approvals, price cap ETCs will be required to submit the requisite 
information to USAC no later than March 1 of each year, for locations 
newly enabled in the prior year. Because these changes will not go into 
effect by the time the 2015 Form 481 is due on July 1, 2016, the form 
and content of that filing will remain unaffected. They will be free--
and indeed, encouraged--to submit information on a rolling basis 
throughout the year, as soon as service is offered, so as to avoid 
filing all of their locations at the deadline. By filing locations in 
batches as construction is completed and service is offered, they will 
avoid any last minute problems with submitting large quantities of 
information and be able to receive confirmation prior to the deadline 
that information was received by USAC. As they do now, price cap 
carriers will continue to make annual certifications that they are 
meeting their public interest obligations, but will do so when 
submitting the information to USAC by this deadline, rather than in 
their annual reports. The Commission makes conforming edits to our 
rules by moving the certifications in section 54.313(e)(3)-(e)(6) to 
new section 54.316. In light of our unification of reporting 
obligations, the Commission deletes the section of our rules regarding 
price cap ETCs' deployment obligations

[[Page 24310]]

and certification of compliance (47 CFR 54.313(e)(2)(i)), (e)(2)(iii), 
(e)(3)-(e)(6)), and the Commission moves price cap ETCs' existing 
geocoding and certification obligations to the new section 54.316, 
which now contains all ETCs' deployment and the majority of ETCs' 
public interest certification obligations. Additionally, price cap 
ETCs' geolocation data and associated deployment certifications will no 
longer be provided pursuant to the schedule in section 54.313. The 
penalties in section 54.313(j) for failure to timely file that 
information would not apply absent additional conforming modifications 
to our rules. Therefore, as is the case for rate-of-return ETCs, the 
penalties for price cap ETCs to fail to timely file geolocation data 
and associated deployment certifications will be located in new section 
54.316(c).
    185. Finally, for the reasons explained above for rate-of-return 
ETCs, the Commission eliminates the requirement for price cap ETCs to 
file a service quality improvement plan and to file annual updates, as 
well as make conforming changes to our rules.
    186. Improving Access to High-Cost Program Data. The Commission 
directs USAC to timely publish through electronic means all non-
confidential high-cost data in open, standardized, electronic formats, 
consistent with the principles of the Office of Management and Budget's 
Open Data Policy. In 2014, the Commission directed USAC to publish non-
confidential program information for the schools and libraries 
mechanism in an open and accessible format, and today's action extends 
that same directive to the high-cost program, which represented roughly 
50 percent of the entire USF in 2015. USAC must provide the public with 
the ability to easily view and download non-confidential high-cost 
information, including non-confidential information collected on the 
Form 481 and the geocoded location information adopted above, for both 
individual carriers and in aggregated form. The Commission directs USAC 
to develop a map that will enable the public to visualize service 
availability as it expands over time.
    187. The Commission directs the Bureau to work with USAC to put 
appropriate protections in place for ETCs to seek confidential 
treatment of limited subset of the information. Entities, such as 
states and Tribal governments, which already have access to 
confidentially filed information for ETCs' within their jurisdiction, 
will continue to have access to such information through the online 
database. The Commission finds that making such data publicly available 
will increase transparency and enable ETCs, the Commission and other 
stakeholders to assess ETCs' progress in deploying broadband throughout 
their networks as well as compliance with our rules. Once these updated 
systems are operational, the Commission anticipates that it would no 
longer require ETCs to submit duplicative information with the 
Commission through ECFS and with state commissions. Rather, all such 
information will be submitted to the Administrator, with federal and 
state regulators, and Tribal governments where applicable, having full 
access to such information. The Commission seeks comment on this 
proposal in the concurrently adopted FNPRM.
    188. As ETCs comply with the new public interest and reporting 
requirements and broadband public interest obligations in this Order, 
the Commission will continue to monitor their behavior and performance. 
Based on that experience, the Commission may make additional 
modifications as necessary to our reporting requirements.

F. Rule Amendments

    189. The Commission takes this opportunity to make several non-
substantive rule amendments. The Commission finds that notice and 
comment is unnecessary for rule changes that reflect prior Commission 
decisions to eliminate several support mechanisms that inadvertently 
were not reflected in the Code of Federal Regulations (CFR). Similarly, 
the Commission finds notice and comment is not necessary for rule 
amendments to ensure consistency in terminology and cross references 
across various rules, to correct inadvertent failures to make 
conforming changes when prior rule amendments occurred, and to delete 
references to rules governing past time periods that no longer are 
applicable.
    190. First, the Commission removes section 54.301, Local switching 
support, from the CFR. The Commission eliminated local switching 
support (LSS) as a support mechanism in the USF/ICC Transformation 
Order, but did not remove the LSS rule at that time. Second, the 
Commission removes the first sentence of section 54.305(a), Sale or 
transfer of exchanges, as it pertains to prior time periods and refers 
to a rule, section 54.311, which no longer exists in the CFR. Third, 
the Commission modifies two provisions of section 54.313(a) requiring 
ETCs to submit a letter certifying that its pricing is in compliance 
with our rules. The Commission concludes that a requirement for an ETC 
to certify its compliance with a rule is substantially similar to the 
requirement to provide a certification letter and the current letter 
requirements may impose a burden without a material benefit. Fourth, 
the Commission corrects the language regarding the existing 
certification requirement in section 54.313(f)(1) to reflect the 
Commission's decision in the December 2014 Connect America Order to 
require rate-of-return carriers to offer at least 10/1 Mbps upon 
reasonable request. Fifth, the Commission deletes paragraph 
54.313(e)(2)(i) and modify language in paragraph 54.313(f)(1)(iii) of 
our rules because the language in duplicative of language in other 
parts of section 54.313. Sixth, as discussed above, in light of our 
changes to our location reporting rules and our decision to no longer 
require ETCs to file service quality improvement plans, the Commission 
deletes references in our rules to the filing of progress reports for 
those plans, delete our existing rule regarding price cap ETCs' 
obligation to report geocoded locations and the rule requiring 
certification of compliance with such ETCs' deployment obligations and 
moves those requirements to new section 54.316. Seventh, the Commission 
deletes subpart J of Part 54; the Commission eliminated the Interstate 
Access Support (IAS) support mechanism for price cap carriers in the 
USF/ICC Transformation Order, but did not at that time delete the 
associated IAS rules from the CFR. Eighth, the Commission eliminates 
section 54.904, the ICLS certification requirement, to reflect the 
Commission's decision in the USF/ICC Transformation Order to eliminate 
that rule and instead impose annual reporting requirements in section 
54.313. Ninth, the Commission amends section 54.707 Audit controls so 
that it reflects accurate cross references to rules that currently are 
in existence and applicable. The Commission renames the existing rule, 
section 54.707, as paragraph (a) and add new paragraphs (b) and (c) to 
reflect rules that were adopted by the Commission in the USF/ICC 
Transformation Order, but inadvertently not codified. Tenth, the 
Commission amends sections 69.104(n)(ii) and 69.415(a)-(c) to remove 
language that is no longer applicable. Eleventh, the Commission amends 
section 69.603(g), Association functions, to remove references to 
support mechanisms that no longer exist or functions that NECA no 
longer performs, and to update terminology to reflect terms now used in 
Part 54.

III. Order and Order on Reconsideration

    191. As part of our modernization of the framework for rate-of-
return support, the Commission also

[[Page 24311]]

represcribes the currently authorized rate of return from 11.25 percent 
to 9.75 percent in all situations where a Commission-prescribed rate of 
return is used for incumbent LECs. The rate of return is a key input in 
a rate-of-return incumbent LEC's revenue requirement calculation, which 
is the basis for both its common line and special access rates and its 
universal service support. This action is a critical piece of our 
reform of the rate-of-return support mechanisms. A rate of return 
higher than necessary to attract capital to investment results in 
excessive profit for rate-of-return carriers and unreasonably high 
prices for consumers. It also inefficiently distorts carrier 
operations, resulting in waste in the sense that, but for these 
distortions, more services, including broadband services, would be 
provided at the same cost.
    192. It is important that the Commission takes such comprehensive 
action to ensure the prescribed rate of return is commensurate with the 
investment risks incumbent LECs are undertaking today, such as 
broadband network investments, and at the same time reflects current 
market conditions. Our adoption today of self-effectuating measures to 
ensure that high-cost support remains within the budget established by 
the Commission in no way lessens the rationale for represcribing the 
authorized rate of return. Our adopted rate of return will provide 
rate-of-return carriers with economically efficient incentives to 
deploy broadband to meet the needs of their customers. An unnecessarily 
high rate of return inefficiently allocates funds away from carriers 
with relatively low capital to other expense ratios toward those with 
higher ratios. Moreover, an excessive rate of return inefficiently 
distorts individual rate-of-return carriers' investment and other 
decisions, reducing what can be achieved with available universal 
service resources. While an excessive rate of return might provide a 
minimally stronger incentive for rate-of-return carriers to extend 
broadband network deployment, this would only be so for marginal 
projects, which would likely be a minority of all potential projects. 
As a general matter, deployment decisions are not sensitive to small 
changes in profitability. In any case, the Commission concludes that it 
is preferable to achieve our deployment objectives directly and 
transparently through the adoption of defined mandates and appropriate 
targeting of subsidies, rather than in a concealed manner by 
maintaining an inefficiently high rate of return, which creates 
distortions and also creates other unintended and difficult to predict 
consequences. In addition to ensuring responsible stewardship of finite 
universal service funds, our action here will also reduce certain rates 
for customers in rural areas.
    193. As described in detail below, the represcribed rate of return 
will apply in all situations where a Commission-prescribed rate of 
return is used. The rate of return is used to calculate interstate 
common line rates, consumer broadband-only loop rates, as discussed 
elsewhere in this Order, and business data service (i.e., special 
access) rates and some forms of universal service support. Accordingly, 
the new 9.75 percent rate of return will be used to calculate common 
line rates, special access rates and universal service support for 
rate-of-return incumbent LECs where applicable. In represcribing the 
rate of return here, the Commission does not intend to affect the 
calculation of and recovery amounts associated with switched access 
rates that are currently capped or transitioning pursuant to the USF/
ICC Transformation Order. Relying primarily on the methodology and data 
contained in the Wireline Competition Bureau's Staff Report--with some 
minor corrections and adjustments in part to respond to issues raised 
in the record--the Commission now identifies a more robust zone of 
reasonableness between 7.12 to 9.75 percent. The Commission then adopts 
a new rate of return at the top end of this range at 9.75 percent and a 
transition to this authorized rate of return.

A. Discussion

1. Procedural Issues
    194. Section 205(a) of the Communications Act requires the 
Commission to give ``full opportunity for hearing'' before prescribing 
a rate including the authorized rate of return for rate-of-return 
carriers. However, as the Commission explained in the USF/ICC 
Transformation Order, a formal evidentiary hearing is not required 
under section 205, and the Commission has on multiple occasions 
prescribed individual rates in notice and comment rulemaking 
proceedings. In the USF/ICC Transformation Order, the Commission 
specified the process for a new rate of return prescription proceeding 
using notice and comment procedures, and on the Commission's own 
motion, waived certain procedural rules to facilitate a more efficient 
process, including specific paper filing requirements. The Commission 
also sought comment in the USF/ICC Transformation FNPRM, 76 FR 78384, 
December 16, 2011, on the rate of return calculation and the related 
data and methodology to so calculate. In addition, as noted above, the 
Bureau issued a Staff Report recommending a zone of reasonableness for 
the rate of return and sought comment on its approach in a public 
notice.
    195. On December 29, 2011, NECA, the Organization for the Promotion 
and Advancement of Small Telecommunications Companies, and the Western 
Telecommunications Alliance (collectively, Petitioners) filed a joint 
petition for reconsideration of the USF/ICC Transformation Order that 
remained pending at the time the Staff Report was released. Petitioners 
challenge, among other things, the procedures adopted in the USF/ICC 
Transformation Order as ``insufficient to meet the hearing requirement 
of section 205(a)'' and relevant provisions of the Administrative 
Procedure Act (APA). Specifically, Petitioners argue that the 
Commission must first address ``identified flaws'' in its rules 
governing represcription before conducting a hearing based on those 
rules, using procedures that are ``sufficiently rigorous for the 
adjudicative, adversarial fact-finding process required under section 
205(a) of the Act and the APA.'' The Rural Associations raised similar 
issues in their comments on the Staff Report, which the Commission also 
addresses.
a. Whether Commission Should Revise Prescription Rules Before 
Represcribing Rate of Return
    196. Petitioners argue that, prior to represcribing, the Commission 
must first adopt revised rules addressing alleged ``flaws'' in the 
prescription rules. According to Petitioners, the Commission ``admitted 
its methodology for determining `comparable firms' was deficient'' in 
that it did not know how to account for the fact that many rate-of-
return incumbent LECs are locally owned and not publicly traded. 
Petitioners argue that the Commission should correct these alleged 
``flaws'' in the rules before represcribing the rate of return. 
Similarly, the Rural Associations and GVNW argue that having waived 
Part 65 procedural rules governing prescription, the Commission must 
establish clear replacement rules to govern the process under section 
205. The Rural Associations note that in the 2001 MAG Order, 66 FR 
59719, November 30, 2001, the Commission stayed the effectiveness of 
section 65.101 to allow the Commission comprehensively to review the 
Part 65 rules to ensure that decisions they make are consonant with 
current conditions

[[Page 24312]]

in the marketplace but assert that ``complete review'' has yet to 
occur.
    197. The Commission disagrees with Petitioners and hereby deny 
their Petition with respect to these claims. Petitioners 
mischaracterize the Commission's prescription process as rigid 
adherence to set methodologies. The rules provide a framework, but 
leave the Commission discretion to qualitatively and quantitatively 
estimate a rate of return. The Commission's prescription rules specify 
the calculations for computing the rate of return, i.e., the cost of 
capital and its component parts, ``unless the record in that 
[prescription] proceeding shows that their use would be unreasonable.'' 
The orders cited by Petitioners in support addressed deficiencies with 
the record, not necessarily with the rules themselves, and the 
Commission has revised those rules since those orders cited were 
released. Petitioners cite generally the 1990 Prescription Order, 55 FR 
51423, December 14, 1990, as support for their arguments. The 
Commission in the 1990 Prescription Order, however, rejected the notion 
that the rules were so flawed that the rulemaking docket related to 
Part 65 methodologies for calculating the rate of return would need to 
be complete before represcribing, finding that ``while some refinements 
might be desirable, the Part 65 procedures had worked quite well'' when 
it initiated the prescription proceeding. Similarly, the Rural 
Associations cite the 2001 MAG Order that stayed the section 65.101 to 
allow time to review the Part 65 rules. The Commission, however, 
reviewed the Part 65 rules in the 2011 USF/ICC Transformation Order & 
FNRPM, waiving certain rules to facilitate a more efficient process. 
Bureau staff also reviewed Part 65 rules in the Staff Report subject to 
notice and comment proposing waiving certain provisions that are no 
longer reasonable. By this Order, the Commission addresses instances 
where strict application of our prescription rules would be 
inconsistent with a methodologically sound estimate of the rate of 
return. For example, the Commission revises the cost of debt formula as 
discussed in further detail below, and waive the rule requirement to 
calculate the WACC based on the cost of preferred stock. Where the 
Commission finds that strict application of the rules would be 
unreasonable, such as relying on ARMIS data from RHCs that is no longer 
collected, they rely on reasonable alternatives. The Commission does, 
however, conclude that the prescription rules and its calculations on 
the cost of capital continue to provide an effective starting point by 
which to determine an appropriate rate of return.
    198. The Commission rejects Petitioners' claims that our 
``methodology for determining `comparable firms' was deficient,'' and 
that they do not know how to account for the fact that many rate-of-
return incumbent LECs are ``locally owned and not publicly traded.'' As 
discussed in further detail below, the most widely used methods of 
calculating the cost of equity, a key component in calculating the rate 
of return, call for data from publicly traded firms, yet the vast 
majority of rate-of-return carriers are not publicly traded. To address 
this concern, the Commission selects below an appropriate set of 
publicly-traded surrogate or proxy firms, for which financial data is 
available publicly to infer the cost of equity for these carriers. Any 
deficiencies in the methodology used to calculate the rate of return 
and use of a proxy group can be and have been addressed in the Staff 
Report and were subject to numerous rounds of notice and comment, which 
the Commission considers and addresses again in this order.
b. Notice and Comment Procedures Satisfy Section 205(a) Hearing 
Requirement
    199. Petitioners also argue that the notice and comment procedures 
the Commission adopted in the USF/ICC Transformation Order do not 
satisfy the section 205(a) hearing requirement. The Rural Associations 
and GVNW similarly argue that the procedural process seeking comment on 
the Staff Report did not provide parties with the ``full opportunity 
for hearing'' required by section 205(a). The Rural Associations assert 
that this is because ``prior rate prescription hearings have often 
involved multiple submissions from parties, giving each side a fair 
chance to address and rebut proffered facts and arguments'' and parties 
have ``reasonable access to discovery (mainly interrogatories and 
document requests), either directly or as part of a required filing.'' 
Similarly, Petitioners argue that the Commission should clarify 
procedures governing presentation of data and discovery. Petitioners 
assert that the Commission did not explain why ``the need for 
adjudicative fact-finding--which underlie the Part 65 rules--are no 
longer operative.'' Petitioners assert that key to the ``ability to 
participate fully in a rate-of-return prescription hearing is access to 
two basic tools: (1) Disclosure of the information and assumptions 
underlying the factual submissions of any parties seeking lower rates 
of return; and (2) the ability to probe others' submissions for 
weaknesses and errors.'' Finally, Petitioners argue that the Commission 
should ``reinstate the 60-60-21-day time frames for adversarial filings 
set forth in section 65.103 of its rules'' because this is ``critical'' 
for rate-of-return incumbent LECs with ``limited resources to develop 
the data needed to prepare direct cases, to obtain the services of 
qualified experts to analyze this data, and to respond fully to 
adversarial filings.''
    200. The Commission rejects these assertions because, consistent 
with AT&T v. FCC, interested parties have had an opportunity to 
participate in multiple rounds of comments. The Commission finds that 
interested parties had sufficient notice and opportunity to comment on 
the rate of return prescription process consistent with the APA and 
section 205 of the Act. As the Commission observed in the USF/ICC 
Transformation Order, a formal evidentiary hearing is not required 
under section 205, and the Commission has on multiple occasions 
prescribed individual rates in notice and comment rulemaking 
proceedings. In fact, the Commission expressly rejected the proposition 
that it could not ``lawfully use simple notice and comment procedures 
to prescribe the rate of return authorized for LEC interstate access 
services.'' In the USF/ICC Transformation Order, the Commission 
explicitly waived outdated and onerous procedures historically 
associated with represcription to streamline and modernize this 
process. Indeed, the Commission noted that interested parties now file 
documents electronically making it less burdensome for parties to 
participate in the prescription proceeding. Accordingly, the Commission 
determined that the paper hearing process was no longer necessary to 
ensure adequate public participation.
    201. Moreover, interested parties have had no less than three 
different opportunities to participate in the represcription process. 
In response to the USF/ICC Transformation NPRM, 76 FR 11632, March 2, 
2011, interested parties had the opportunity to comment on whether to 
initiate a represcription proceeding. Subsequently in response to the 
USF/ICC Transformation FNPRM, interested parties had an opportunity to 
comment on the methodologies used to calculate the WACC and rate of 
return. The Commission received multiple submissions from parties, 
which the Commission's Electronic Comment Filing System (ECFS) 
generally makes available within 24 hours. The vast

[[Page 24313]]

majority of interested parties have had access to these materials via 
the Internet, giving each side a fair chance to timely address and 
rebut proffered facts and arguments. Based on these comments, the 
Commission could have gone straight to order prescribing the rate of 
return, but instead took the extra step of preparing, releasing and 
seeking comment on the Staff Report.
    202. In the USF/ICC Transformation Order, the Commission waived the 
onerous section 65.103(b) 60-60-21 day filing schedule to coincide with 
the pleading cycle of the USF/ICC Transformation FNPRM. As a result, 
interested parties had 50 days to file comments and 30 days to file 
replies on how the Commission should represcribe the rate of return. 
Furthermore, interested parties had an additional 40 days to file 
comments and 30 days to file reply comments on the data and 
methodologies proposed by staff to calculate the rate of return in the 
Staff Report. The Commission finds that interested parties had more 
than sufficient time and opportunity to address significant arguments 
and methodologies to calculate the rate of return in the record.
    203. Although the Commission waived the section 65.101 requirement 
that the Commission publish notice of the cost of debt, cost of 
preferred stock, and capital structure computed in the section 
65.101(a) notice initiating prescription, they find that all interested 
parties had adequate notice of these calculations in the Staff Report. 
Interested parties had an opportunity to review and comment on the 
Staff Report, including numerous appendices calculating the embedded 
cost of debt, betas, cost of equity, WACC, capital structure and times-
interest-earned ratios as well as the peer review reports on the Staff 
Report. Furthermore, there was nothing to prevent parties from filing 
direct cases or written interrogatories and requests for documents 
directed to any rate of return submission as permitted under the 
Commission's rules. In sum, the Commission finds that interested 
parties had several opportunities to comment on the actual rate of 
return calculations, thereby easily satisfying the APA and section 205 
procedural requirements. Accordingly, the Commission denies the 
Petition to the extent described herein.
2. Identifying and Obtaining Data To Compute WACC
    204. The first step in the process to represcribe the rate of 
return is to identify the appropriate data and methodologies to use in 
calculating the WACC. To calculate the WACC for a company or group of 
companies, Commission rules require the determination of: (1) The 
company's capital structure, i.e., the proportions of debt, equity, and 
preferred stock a company uses to finance its operations; and (2) the 
cost of debt, equity and preferred stock. The rules specify the 
calculations for computing components of the WACC, including capital 
structure and the cost of debt and preferred stock, to determine a 
composite for all incumbent LECs with annual revenues equal to or above 
an indexed revenue threshold, adjusted for inflation. The rules do not, 
however, require the Commission to use the results of those 
calculations to determine the rate of return ``if the record in that 
proceeding shows that their use would be unreasonable.'' The rules also 
do not specify how to calculate the cost of equity, but there are 
several widely-used asset pricing methods that the Commission should 
consider in estimating the cost of equity, including the Capital Asset 
Pricing Model (CAPM) and the Discounted Cash Flow Model (DCF). Both 
models calculate the cost of equity based on an analysis of publicly 
traded representative firms' common stock. While a firm's cost of debt 
can generally be estimated from its accounts, or other public reports 
of its borrowing costs, direct estimates of the cost of equity for 
firms that are not publicly traded are not typically possible to make 
(exceptions being if the firm was sold recently, or the occurrence of 
some other event that revealed information about the expected income 
stream and market value of the firm). In such cases, it is not uncommon 
to infer equity costs from data on firms that are publicly traded.
    205. The rules specify that the WACC be calculated using Regional 
Bell Holding Companies (RHCs) data reported to the Commission through 
Automated Reporting Management Information System (ARMIS) reports. When 
the Commission last represcribed in 1990, it could rely on ARMIS 
reports to estimate the cost of debt and capital structure, which came 
from incumbent LECs with investment-grade bond ratings--companies 
engaged in substantially the same wireline operations as the small 
incumbent LECs also subject to rate-of-return regulation. The 
Commission, however, has forborne from collecting ARMIS reports from 
the RHCs so this data is no longer readily available. In the USF/ICC 
Transformation FNPRM, the Commission sought comment on what additional 
data the Commission should require and rely upon in the absence of 
ARMIS data.
    206. The Commission's rate of return prescription rules envision 
calculating the WACC based on data from a proxy group of telephone 
companies that are intended to represent the universe of rate-of-return 
carriers. In the past, the Commission used the RHCs as proxy firms to 
determine capital structure and the costs of debt, equity, and 
preferred stock for all incumbent LECs. Today, with ARMIS reports a 
thing of the past, and with the largest RHCs increasingly dissimilar 
from the smaller rate-of-return incumbent LECs, the Commission must 
expand its analysis beyond the RHCs to ensure that its analysis 
reasonably reflects the nature of today's rate-of-return incumbent 
LECs. The Commission finds that it is no longer reasonable to rely 
exclusively on RHC data based on reports no longer collected as 
specified in our rules. Accordingly, the Commission finds that they 
must identify a comparable proxy group representing the universe of 
rate-of-return carriers from which to draw data to calculate the WACC.
3. Identifying an Appropriate Proxy Group for Rate-of-Return Carriers
    207. The reliability of our WACC calculation depends on the 
representativeness of the proxy group the Commission selects. The 
Commission sought comment in the USF/ICC Transformation FNPRM on the 
group of companies that should be selected as proxies. Staff considered 
comments filed in response, proposing that the Commission use data from 
a proxy group of 16 companies consisting of (1) RHCs (RHC Proxies), (2) 
mid-sized price cap incumbent LECs (Mid-Size Proxies), and (3) 
publicly-traded rate-of-return incumbent LECs (Publicly-Traded RLEC 
Proxies). Staff developed its recommended proxy group based on 
qualitative comparison between rate-of-return carriers for which the 
WACC is being calculated and potential proxies, considering whether the 
proposed proxies face similar risks, which the cost of capital is a 
function of, and whether they have a similar institutional setup. Staff 
used a three-part test to select its proxy group looking at (1) whether 
companies' operations consisted of significant incumbent LEC price-
regulated interstate telecommunications services, (2) the extent to 
which firms offer the same or similar services as rate-of-return 
carriers based on market and regulatory risks, and (3) the reliability 
of financial data.
    208. Commenters criticize staff's methodology for selecting its 
proposed

[[Page 24314]]

proxy group with which it estimated the WACC. The Rural Associations 
criticize the analysis for `` `streetlight effect' bias--i.e., the 
tendency to use data simply because it is available, not because it is 
relevant.'' The Commission disagrees and find that staff reasonably 
relied on available data that was both relevant and reliable.
    209. As an initial matter, there is scant reliable publicly 
available data for estimating the cost of capital specific to rate-of-
return incumbent LECs. The most widely used methods of estimating the 
cost of equity in particular call for data only available from 
publicly-traded firms, yet the vast majority of rate-of-return carriers 
are not publicly traded. A publicly-traded company's stock price and 
dividend payments are observable, while those of a privately held firm, 
including the overwhelming majority of rate-of-return incumbent LECs, 
are not. Therefore, using the models used most often to estimate the 
cost of equity, the cost of equity for firms that are not publicly 
traded is inferred based on data from firms that are publicly traded. 
Because the vast majority of rate-of-return carriers are not publicly 
traded, the Commission must select an appropriate proxy group of 
incumbent LECs, for which financial data is publicly available and 
which face similar risks as rate-of-return carriers to calculate the 
cost of capital.
    210. Furthermore, staff selected the proxy group based in part on 
the reliability of financial data such as the frequency equity is 
traded and overall financial health. These factors were not, however, 
the only factors. Staff also relied on publicly-available data and 
observable stock prices for a proxy group of publicly-traded 
telecommunications companies that would enable the development of 
estimates that as closely as possible reflect the risk of the market 
for regulated interstate telecommunications services. To select this 
proxy group, staff applied a qualitative analysis that included a 
number of different factors, including the extent to which a company's 
operations could be classified as price-regulated interstate 
telecommunications services and similarity to rate-of-return 
operations. The Commission finds that staff's qualitative approach was 
reasonable, not simply relying on available data, but data that was 
both reliable and relevant to the analysis.
    211. As one key criterion for selection, staff required that a 
proxy firm derive 10 percent or more of its revenues from price-
regulated interstate telecommunications services as an incumbent LEC. 
The Rural Associations characterize this selection criteria as 
``arbitrary'' and without justification, which it claims is lower than 
the rate-of-return incumbent LECs as a group. While the Commission 
agrees with the Rural Associations that 10 percent is a relatively low 
number, they find the proxy group of firms selected after applying the 
10 percent threshold (along with the other criteria used in the Staff 
Report) to be reasonable. Staff looked at earnings and revenues 
reported on companies' Securities and Exchange Commission (SEC) Form 
10-Ks to identify its proxy group. SEC Form 10-Ks for the proxy group 
reveal that notwithstanding diversification, most, if not all, of the 
firms in the proxy group derive a substantial, and in many cases, the 
largest, portion of their revenues from facilities-based wireline 
telecommunications services provided over networks that they own, 
finance, build, operate, and maintain, which is exactly what rate-of-
return incumbent LECs do. Staff excluded from the proxy group 
telecommunications companies that provide a different core or set of 
core services, and/or different assets, scale, scope, customer base, 
marketing strategy, market or market niche, and/or competitive position 
than facilities-based wireline telecommunications services.
    212. The WACC estimates the cost of capital for price-regulated 
interstate special access and common line services which are 
facilities-based wireline telecommunications services. The proposed 
proxy group consisted of firms where, in addition to their price-
regulated business operations, a substantial portion of their business 
operations that are not price-regulated provide facilities-based 
wireline telecommunications services. Thus, an overall WACC estimate 
for the firm as a whole should be a reasonable approximation of the 
WACC for the price-regulated interstate access service. In fact, many 
of the wireline network assets, e.g., wire centers, nodes, fiber or 
copper, conduit, trenches, manholes, telephone poles, etc., are shared 
among these different wireline services. Moreover, some of the 
different wireline services are sold to the same customers. Thus, given 
at least roughly similar supply-side characteristics, and roughly 
similar demand-side characteristics, the risk of the facilities-based 
price-regulated interstate access services and the risk of these 
companies' other facilities-based services would reasonably be expected 
to have roughly similar, though not precisely the same, level of risk. 
There are no pure-play, price-regulated providers of wireline 
interstate access services that issue publicly-traded stock on which to 
base WACC estimates. The Commission therefore finds that staff's 
application of the 10 percent threshold produces a reasonable proxy on 
which to base estimates of the WACC for price-regulated interstate 
access services.
    213. The Rural Associations criticize staff's proxy group for 
including RHCs Proxies, Mid-Size Proxies and Publicly-Traded RLEC 
Proxies as unrepresentative of the market risks that rate-of-return 
incumbent LECs face affecting their ability to attract capital. For 
example, the Rural Associations proposed estimating the cost of capital 
using rate-of-return incumbent LEC-specific data rather than data 
assembled from staff's proxy companies. ICORE asserts that the RHC 
Proxies and Mid-Size Proxies have more diverse offerings than rate-of-
return incumbent LECs which therefore face higher costs of capital. Ad 
Hoc rebuts that argument, noting that it does not necessarily follow 
that less diverse operations means higher cost of capital and 
criticizes such arguments as ``pure speculation'' lacking any 
evidentiary basis. AT&T notes that critics of staff's proxy group did 
not submit data into the record to negate the need for proxies or 
proxies more representative of rate-of-return incumbent LECs than 
staff's proposed proxy. The Commission finds the staff's selection of 
the proxy group reasonable for the reasons given above and reject the 
Rural Associations' proposed proxy group for the reasons below.
    214. In addition, the Rural Associations, the Alaska Rural 
Coalition and peer reviewer Professor Bowman question the inclusion in 
the proxy group of firms that had recently emerged from bankruptcy 
proceedings, including FairPoint Communications, Inc. (FairPoint), 
Hawaiian Telecom, as well as certain ``financially unhealthy'' Mid-Size 
Proxies. Professor Bowman argues in general that rate-of-return 
regulation is appropriate for companies that are financially healthy, 
and that an operation that is subject to rate-of-return regulation 
would not be expected to go bankrupt. Staff acknowledged in the Staff 
Report that a company's overall financial health makes its financial 
data more reliable in determining the cost of equity than that of a 
company in financial difficulty, which was part of staff's three-part 
test in selecting the proxy group.
    215. FairPoint entered bankruptcy in October 2009 and exited in 
January 2011, while Hawaiian Telecom entered bankruptcy in December 
2008 and exited in October 2010. In the Staff

[[Page 24315]]

Report, staff generally based the betas, a variable included in the 
CAPM cost of equity calculation that measures a company's stock 
volatility relative to the market, on weekly data for the 5-year period 
ending September 18, 2012. However, staff accounted for the FairPoint 
and Hawaiian Telecom bankruptcies by basing their betas instead on 
post-bankruptcy data. As a result, none of the data on which their 
betas are based reflects the business changes FairPoint or Hawaiian 
Telecom undertook during the periods prior to and during bankruptcy. 
Staff's adjustment should minimize any potential error in the CAPM 
estimates of the cost of equity for FairPoint and Hawaiian Telecom 
relating to bankruptcy. As neither FairPoint nor Hawaiian Telecom pays 
dividends, staff did not use the DCF model to estimate the cost of 
equity for these two companies in the Staff Report. Further, capital 
structure estimates are based on post-bankruptcy data, which should 
minimize errors to the WACC estimates. In response to Bowman's 
assumption that rate-of-return companies would not be expected to go 
bankrupt, the Commission notes that there were other rate-of-return 
incumbent LECs that went bankrupt that staff excluded from its proxy 
group that otherwise would have met its three-part test. Thus, staff 
was careful to calculate the rate of return based on data from its 
proxy group that it felt were representative of most rate-of-return 
companies.
    216. The Rural Associations also criticize the financial health of 
the Mid-Size Proxies included in staff's proxy group. Staff 
acknowledged in the Staff Report that the Mid-Size Proxies in general 
have a large share of debt in their capital structures, low times-
interest-earned ratios, and non-investment-grade debt ratings, and thus 
are less than ideal for estimating the cost of capital. Staff also 
found, however, that the Mid-Size Proxies are less diversified than 
RHCs and thus match more closely the majority of rate-of-return 
incumbent LECs' wireline service offerings. Staff further found that 
the Mid-Size Proxies, like the majority of rate-of-return incumbent 
LECs, but in contrast to the RHCs, have a significant fraction of their 
incumbent LEC operations in sparsely populated, high cost, rural areas 
of the country. Further, staff found that the Mid-Size Proxies have a 
relatively large number of analysts' growth estimates compared to the 
Publicly-Traded RLEC Proxies which is reflected in the consensus growth 
rate used in the DCF model to estimate the cost of equity. Thus, in the 
Staff Report, staff recommended that the Commission include the Mid-
Size Proxies in calculating a composite WACC, but not rely on them 
exclusively.
    217. The Commission agrees with the staff recommendation in the 
Staff Report to include, but not rely exclusively on the Mid-Size 
Proxies in the overall proxy group. The Rural Associations raised 
concerns with the Mid-Size Proxies other than Windstream, because in 
its view these firms are not in good financial health. The Rural 
Associations, however, did not offer any concrete definition of good 
financial health, nor any objective and practical criteria that might 
be used to measure the health of the firms and to determine whether 
they should be excluded from the process of estimating the WACC. 
Although these Mid-Size Proxies might be less than ideal proxies for 
estimating the cost of capital, the Commission is reluctant to exclude 
them from the overall proxy group and thus lose the value these proxies 
contribute generally to the data and WACC estimates. These incumbent 
LECs operate in areas similar to the sparsely populated, high cost, 
rural areas in which rural rate-of-return incumbent LECs operate, and 
are publicly-traded and studied by financial professionals, making it 
possible to develop WACC estimates for these companies using standard 
cost of capital methodologies. In our judgement, averaging WACC 
estimates for these Mid-Size Proxies along with estimates for the other 
companies in the overall proxy group to develop an overall WACC 
estimate for rate-of-return incumbent LECs is more likely than not to 
improve the accuracy of the overall estimate, notwithstanding the 
potential for error in the WACC estimates for the Mid-Size Proxies. 
There is no perfect WACC estimate, as a WACC estimate made for any 
company always will have some amount of error, which is why the 
Commission considers a range of possible results.
    218. In sum, the Commission finds that staff's approach to 
identifying a representative proxy group to be reasonable, including 
its decision to include RHC Proxies, Mid-Size Proxies, and Publicly-
Traded RLECs Proxies in the proxy group. Notably, joint peer reviewers 
Albon and Gibbard found that the selections made appropriately balanced 
the trade-offs of a proxy group that is too small, which results in 
measurement errors, and a proxy group that is too large, which is 
unrepresentative. The Commission reiterates and agrees with staff's 
position that, collectively, the three groups represent a wide spectrum 
of incumbent LEC operations, include both price cap and rate-of-return 
regulated operations, and include those incumbent LECs with the most 
widely traded equity, allowing greater confidence in the calculations 
that rely on the public trading of stock, especially given that it is 
highly uncertain where within that spectrum non-publicly-traded rate-
of-return incumbent LECs lie.
4. Data Relied on in Staff Report
    219. The allowable rate of return should reflect a reasonable 
estimate of the current cost of capital. The Bureau released the Staff 
Report on May 16, 2013, calculating the WACC based on data then-
available. This raises the question whether the Commission should 
continue to rely on such data to calculate the rate of return. The 
Commission finds that changes to monthly average yields on Treasury 
securities and corporate bond yields since the Staff Report was issued 
are not significant enough to warrant a complete update of the data 
used by staff to calculate the cost of capital. Accordingly, for the 
reasons explained below, the Commission continues to rely on data in 
the Staff Report used to calculate the WACC.
    220. Section 65.101(a) of our rules specifies that the Commission 
should initiate the rate of return prescription process when they 
determine that the monthly average yields on 10-year 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. As the cost of capital is 
constantly changing as a result of the interactions in the financial 
markets between buyers and sellers of debt and equities, our rule 
recognizes that the existing rate of return is based on financial data 
that is a snapshot in time and as such might not reflect the prevailing 
cost of capital. Likewise, the data reflected in the Staff Report is a 
snapshot in time that might not reflect the current cost of capital at 
a different point in time. The rule implicitly recognizes that the cost 
of debt and equity, in general, can be expected to move roughly 
together over time, as debt and equity investors seek to optimize their 
portfolios, choosing among alternative investments by balancing the 
tradeoff between the expected risk and return of these alternatives, 
and as firms seek to optimize their capital structures, choosing 
between debt and equity to

[[Page 24316]]

finance their assets. The Commission also now has the benefit of 
commenters' and peer reviewers' scrutiny of the Staff Report, including 
the data relied on in that report.
    221. The Commission therefore analyzes interest rates, similar to 
the analysis contemplated under section 65.101(a), to determine whether 
the data relied in the Staff Report to calculate the WACC is 
appropriately current for represcribing the rate of return in this 
Order. For this analysis, the Commission uses two different six-month 
benchmarks against which to compare more recent interest rates. First, 
the Commission calculates the average of the monthly average yields in 
effect for the consecutive six-month period beginning October 2012 and 
ending March 2013. To be thorough, the Commission calculates this six-
month average not only for 10-year Treasury securities, but also for 5-
, 7-, 20-, and 30-year securities, as published online by the Federal 
Reserve and Moody's Aaa and Baa corporate bond yields which are 
published online by the Federal Reserve. The Commission chooses this 
six-month period because in the Staff Report (1) the expected risk-free 
rate reflected in the CAPM was the rate in effect as of the market 
close on March 26, 2013, (2) the stock prices and dividend payments 
reflected in the DCF model were as of the market close on March 26, 
2013, and (3) the growth rates used in the DCF model were as of March 
27, 2013. For the second six-month benchmark, the Commission averages 
the monthly average yields in effect for the consecutive six-month 
period beginning July 2012 and ending December 2012. The Commission 
calculates six-month averages for the same securities identified above. 
The Commission chooses this six-month period because in the Staff 
Report (1) the cost of debt is based on 2012 interest expense and debt 
and equity outstanding data, and (2) the estimate of the expected 
market risk premium used in the CAPM is based on stock price and 
interest rate data for the years 1928 to 2012.
    222. The Commission compares the most recent monthly yields on the 
various Treasury and corporate securities to these two benchmarks. With 
respect to the October 2012-March 2013 benchmark, the monthly average 
yield on 10-year Treasury securities, the key benchmark in rule 
65.101(a), in September 2015, the most recent month for which yield 
data are published by the Federal Reserve, is 2.17 percent, as compared 
to the six-month average of the average monthly yields, 1.83 percent. 
This difference is only 34 basis points, a spread significantly less 
than 150 basis points, the standard reflected in rule 65.101(a). The 
differences between the September 2015 average yields on the 5-, 7-, 
20-, and 30-year Treasury securities and on Aaa and Baa corporate 
bonds, as compared to the six-month average of the monthly average for 
each security, respectively, are as follows: 73, 66, 34, 2, -5, 36, and 
65 basis points. The greatest difference between the six-month average 
and any monthly average for any of these securities is the 107 basis 
point difference that existed in December 2013 and January 2014 for 7-
year Treasury securities and December 2013 for 10-year Treasury 
securities, but the average of these differences for these securities 
were only 76 and 57 basis points, respectively, over the entire period. 
The fact that greatest difference between the six-month average and any 
monthly average for any of these securities is only 107 basis points 
demonstrates that the difference was never as large as 150 basis points 
relative to a single month, let alone for six consecutive months, the 
standard under the Commission's rule. The average of the differences 
between the six-month average and monthly averages throughout the 
period for the 5-, 20- and 30-year Treasury securities and Aaa and Baa 
corporate bonds were only 74, 36, 24, 42, and 27 basis points, 
respectively.
    223. With respect to the July 2012-December 2012 benchmark, the 
monthly average yields on 5-, 7-, 10-, 20-, and 30-year Treasury 
securities and Aaa and Baa corporate bonds in September 2015 as 
compared to the six-month average of the average monthly yields for 
each security, respectively, are as follows: 81, 78, 50, 21, 15, 57, 
and 62 basis points. The greatest difference between the six-month 
average and any monthly average for any of these securities is the 123 
basis point difference that existed in December 2013 for 10-year 
Treasury securities, but the average of these differences for this 
security was only 68 basis points over the entire period. The average 
of the differences between the six-month average and monthly averages 
throughout the period for the 5-, 7-, 20- and 30-year Treasury 
securities and Aaa and Baa corporate securities were only 75, 82, 53, 
43, 61, and 22 basis points, respectively.
    224. Based on these findings, the Commission concludes that 
interest rate changes have not been sufficiently large between release 
of the Staff Report and this Order adopting the new rate of return to 
warrant updating the data in the Staff Report. The yields today on 
Treasury securities and on Aaa and Baa corporate bonds are not 
significantly different from the yields on these securities that 
existed at the time of the study--the differences in all cases are much 
less than 150 basis points. Accordingly, the Commission will rely on 
the data reflected in the Staff Report, except in those instances where 
the Commission makes adjustments to reflect valid concerns expressed by 
the commenters and peer reviewers in the record of this proceeding. In 
those cases, the Commission will use data of the same time periods as 
the data in the Staff Report to ensure consistency.
5. Calculating the WACC
    225. As discussed above, the WACC estimates the rate of return that 
the incumbent LECs must earn on their investment in facilities used to 
provide regulated interstate services in order to attract sufficient 
capital investment. The Commission's rules specify that the composite 
WACC is the sum of the cost of debt, the cost of preferred stock, and 
the cost of equity, each weighted by its proportion in the capital 
structure of the telephone companies:

WACC = [(Equity/(Debt + Equity + Preferred Stock)) * Cost of Equity] + 
[(Debt/(Debt + Equity + Preferred Stock)) * Cost of Debt] + [(Preferred 
Stock/(Debt + Equity + Preferred Stock)) * Cost of Preferred Stock]

    226. The Commission's rules currently require that the capital 
structure be calculated using the observed book values of debt, 
preferred stock, and equity. Under the Commission's rules, capital 
structure is calculated as follows:

Capital Structure = Book Value of a Particular Component/(Book Value of 
Debt + Book Value of Preferred Stock + Book Value of Equity)

    227. In the Staff Report, staff recommended calculating capital 
structure using market values instead of book values as a better 
indicator of a firm's target capital structure. The book value of a 
firm is the book value of its equity plus the book value of its 
liabilities whereas the market value is the amount that would have to 
be paid in a competitive market to purchase the company and fulfill all 
of its financial obligations, i.e., the sum of market values of debt 
and equity. Staff found that several carriers within the proxy group 
have book value capital structures in excess of 100 percent debt plus 
equity, which is nonsensical because presumably a firm's stock trades 
at a positive price. Because a firm normally has a positive equity 
value, its debt should be less than 100 percent debt plus equity. 
Accordingly, staff

[[Page 24317]]

concluded that book values did not provide reasonable data with respect 
to capital structure as required by section 65.300. Instead, staff 
proposed using market values as a more accurate approximation of 
capital structure. Commenters did not weigh in on staff's proposed 
approach. Professor Bowman recommends an alternative approach be 
considered for calculating capital structure based on the capital 
structure that would be appropriate to ``encourage a new entrant in a 
(quasi) regulated competitive market.'' Bowman notes, however, that 
this method is ``unavoidably subjective to a degree beyond that of the 
standard estimations developed in [the Staff Report].'' Staff noted a 
similar alternative approach in the Staff Report, a hypothetical 
capital structure that regulators sometimes use to develop WACC 
estimates. The Commission finds that the firms themselves know more 
about their businesses than they could, therefore it will not 
substitute our judgement for firms' real-world decision-making as to 
the choice between debt and equity financing, as reflected in the data. 
Moreover, a capital structure that would encourage market entry is 
difficult to estimate and, as Bowman asserts, is subjective, as there 
is no widely accepted theory on the debt-equity choice. Therefore, the 
Commission declines to adopt this approach. The Commission finds that 
staff's approach using market values instead of book values to estimate 
capital structure is reasonable and adopt this approach.
a. Cost of Debt
    228. The embedded cost of debt is the cost of debt (expressed as a 
rate of interest) issued by the firm in the past and on which it paid 
interest over an historical accounting period (e.g., the most recent 
calendar year). The current cost of debt is the cost of debt that the 
firm would issue today and on which it would pay interest going forward 
(and thus sometimes is said to be a forward-looking cost). In the Staff 
Report, staff calculated the cost of debt based on the embedded cost of 
debt formula specified in the Commission's rules with data derived from 
staff's proxy group SEC Form 10-Ks. In the alternative, staff 
considered calculating the cost of debt based on the current cost of 
debt, which would be based on the current yield on bonds that have the 
same rating as the proxy firms, and for a maturity period comparable to 
the maturity period typical for the debt issued by the proxy firms. 
Staff found, however, that estimating the current cost of debt would be 
too imprecise because it would have to account for the many 
characteristics of debt that affect the yields paid in debt, including 
maturity, fixed versus variable interest rates, seniority, and callable 
versus convertible debt. Staff also reasoned that a more precise 
calculation might also require knowledge of how much of each type of 
debt instrument each company uses. Ultimately, staff concluded that, on 
average, the embedded cost of debt and the current cost of debt should 
not differ significantly among the proxy group given declining interest 
rates and that companies in good financial health are able to 
refinance, provided there have not been substantial changes in the cost 
of debt since the last filed SEC Form 10-K. Therefore, staff 
recommended estimating the cost of debt based on the embedded cost of 
debt formula in the Commission's rules, as corrected. The Commission 
agrees with staff's general approach with corrections to the embedded 
cost of debt formula recommended and noted below.
    229. The Commission's rules provide that the cost of debt is 
calculated as follows:

Embedded Cost of Debt = Total Annual Interest Expense/Average 
Outstanding Debt

where ``Total Annual Interest Expense'' is equal to ``the total 
interest expense for the most recent two years for all local exchange 
carriers with annual revenues equal to or above the indexed revenue 
threshold as defined in section 32.9000'' and ``Average Outstanding 
Debt'' is equal to ``the average of the total debt for the most recent 
two years for all local exchange carriers with annual revenues equal to 
or above the indexed revenue threshold as defined in section 32.9000.''
    230. As noted in the Staff Report, this formula overstates the cost 
of debt because it uses two years' interest expense divided by an 
average of two years' total debt. This would approximately double the 
embedded cost of debt, resulting in an incorrect input to the WACC. The 
Commission finds that the changes the Staff Report made to the 
definitions used in the equation in the Commission's rules for 
calculating the embedded cost of debt are correct and will use these 
revised definitions to estimate the cost of debt for purposes of 
represcription. The Commission therefore adopts the following formula 
from the Staff Report for calculating the embedded cost of debt based 
on the most recent year's interest expense:

Embedded Cost of Debt = Previous Year's Interest Expense/Average of 
Debt Outstanding at the Beginning and at the End of the Previous Year

    231. While the Staff Report did correctly modify the Commission's 
existing formula, it failed to implement the revised formula correctly, 
as USTelecom and AT&T point out. In particular, staff used 2012 total 
interest expense in the numerator of the revised formula and the 
average of outstanding non-current long-term debt at the end of 2011 
and 2012 in the denominator. This calculation understates the total 
amount of debt in the denominator because it excludes the current 
portion of long-term debt on which the carriers continue to pay 
interest. Thus, the Staff Report overstated the cost of debt.
    232. USTelecom proposes an alternative approach that eliminates 
this error and that purports to capture a more forward-looking cost of 
debt. In particular, USTelecom proposes that company financial reports 
(i.e., SEC Form 10-Ks) be used to develop the cost of debt by dividing 
reported long-term debt interest payment obligations for 2013 by total 
long-term debt as of December 31, 2012. As an initial matter, this is 
not a true ``forward-looking'' (i.e., a current cost) methodology 
because it is based on the interest payment obligations on debt that 
was issued in prior years, not on interest obligations on newly issued 
debt. For the reasons given in the Staff Report, as discussed above, 
the Commission will not estimate the current cost of debt but will rely 
on the embedded cost of debt formula, as corrected, in the Commission's 
rules.
    233. In addition, USTelecom's proposed approach uses data from a 
section of the SEC Form 10-K reports that at least for some carriers 
does not account for the fact that bonds often are sold at a discount 
below or a premium above the face value of the bond. Thus, the 
numerator in USTelecom's debt calculation is based on interest 
``payments,'' which does not account for discounts and premiums, rather 
than based on interest expense, which does account for discounts and 
premiums, under generally accepted accounting principles (GAAP). 
Meanwhile, the debt in the denominator is the principal or payoff 
amount of the debt, which does not account for discounts and premiums, 
rather than the amount of debt outstanding, net of discounts and 
premiums, as recorded on the balance sheet. As a result, the cost of 
debt under this approach would understate the effective rate of 
interest for a bond sold at a discount or overstate this rate for a 
bond sold at a premium. The Commission therefore declines to adopt 
USTelecom's proposed approach.
    234. The Commission's rules further specify that total interest 
expense be used in the numerator of the embedded

[[Page 24318]]

cost formula. The Commission interprets the word ``total'' in the 
phrase ``total interest expense'' to refer to the total of both short- 
and long-term interest expense, not just long-term expense, as was used 
in this formula in the Staff Report. In the 1990 Represcription Order, 
55 FR 51423, December 14, 1990, the Commission included in the 
numerator of its embedded cost of debt calculation both short- and 
long-term interest expense. The Commission's formula for estimating the 
embedded cost of debt includes the average of total debt in the 
denominator. The Commission interprets the word ``total'' in the phrase 
``total debt'' to refer to the total of short- and long-term debt, not 
just long-term debt, as is used in this formula in the Staff Report. It 
necessarily also includes the current portion of the long-term debt 
because interest must be paid on the current portion of long-term debt, 
and this interest would be reflected in the numerator as part of total 
interest expense. If the interest expense related to the current 
portion of long-term debt is in the numerator, then to be logically 
consistent the current portion of long-term itself would have to be 
included as part of the total debt in the denominator. In the 1990 
Represcription Order, the Commission included in the denominator of its 
embedded cost of debt calculation both short- and long-term debt and 
presumably the current portion of the long-term debt.
    235. The Commission includes as part of total debt in the 
denominator of the embedded cost of debt calculation, obligations under 
capital leases, including the current portion of capital leases. It is 
not entirely clear whether the Commission included capital leases in 
its debt calculation in the 1990 Represcription Order. Obligations 
under capital leases, however, were identified at that time as part of 
total long-term debt in FCC Form M and ARMIS reports. Likewise, 
interest expense related to capital leases was included as part of 
total interest and related items in these reports. Thus, including 
obligations under capital leases and the related interest expense in 
the cost of debt calculation seemingly would have been consistent with 
the accounting reflected in the FCC Form M and ARMIS reports. The 
Commission includes capital leases here as part of total debt because 
the leasee assumes some of the ownership risks of the asset that is 
being leased, while it benefits from the productive deployment of that 
asset. Moreover, an asset (e.g., the equipment that is being leased) 
and a liability (the lease payment obligations) are recorded on the 
leasee's balance sheet, while the depreciation of that asset and the 
interest portion of the lease payment are reflected as expenses on the 
income statement. And as a practical matter, including capital leases 
in the cost of debt calculation is the easiest way to ensure 
consistency between total interest expense in the numerator and total 
debt in the denominator in the cost of debt calculation for each 
company, and consistency in this calculation among all companies, given 
the complexities and the lack of standardization among SEC Form 10-K 
reports.
    236. Professor Bowman states that the Staff Report is not clear on 
what is considered debt in its reported capital structure data. While 
Bowman is addressing capital structure, his point is also relevant to 
our discussion of how the cost of debt is calculated because the 
Commission concludes the specific types of debt included in the debt 
portion of the capital structure should be consistent with the types of 
debt for which the cost of debt is calculated, to the extent possible. 
Bowman posits that all interest bearing debt should be used, arguing 
that the fact that an interest bearing debt is due in less than one 
year does not change its characteristic of being debt, while non-
interest bearing liabilities should not be classified as debt. Bowman's 
preferred definition of debt is consistent with the definition 
reflected in our rules for estimating the embedded cost of debt and 
with the data the Commission used for this calculation in the 1990 
represcription proceeding. The Commmission concludes that, consistent 
with Professor Bowman's recommendation and our rules, the embedded cost 
of debt calculation should reflect short- and long-term debt, including 
the current portion of long-term debt, capital leases, including the 
current portion of long-term leases, all of the interest expense 
related to such debt and leases, and should account for premiums and 
discounts on the long-term debt. Based on data from each proxy's SEC 
Form 10-K, the Commission revises the embedded cost of debt calculation 
reflected in the Staff Report accordingly.
    237. In the Staff Report, staff estimated the cost of debt for the 
proxy group of 16 carriers used in that report to be 6.19 percent. 
Under the revised calculation, the Commission now estimates the 
embedded cost of debt for the proxy group of 16 carriers used in the 
Staff Report to be 5.87 percent. The Commission also will revise the 
WACC estimate to reflect this revised cost of debt calculation for each 
carrier in the proxy group. The Commission also concludes that the 
definition of debt reflected in the estimate of capital structure 
should be the same as the one reflected in the estimate of the embedded 
cost of debt. Accordingly, the Commission revises the estimate of the 
capital structure developed in the Staff Report so that it reflects the 
same definition that they adopt in this order for estimating the 
embedded cost of debt. The average of the revised estimate of the 
capital structure for the proxy group is 54.34 percent debt and 45.66 
percent equity.
b. Cost of Equity
    238. The Commission's rules do not specify how the cost of equity 
is to be calculated, and there are several methods that might be used 
to estimate the cost of equity. The Capital Asset Pricing Model (CAPM) 
is the most widely used method in commerce, while the Commission relied 
on the Discounted Cash Flow Model (DCF) to calculate the cost of 
capital in the 1990 Represcription Order. Both models calculate the 
cost of equity based upon an analysis of firms' common stock, among 
other inputs. Staff recommended using both CAPM and DCF to determine 
the cost of equity, and to create a zone of reasonableness, because 
both models have different advantages and limitations.
(i) Capital Asset Pricing Model (CAPM)
    239. CAPM is widely used by financial practitioners to calculate 
the cost of equity of publicly traded firms. The required rate of 
return in CAPM is the sum of the risk free interest rate and an asset 
beta times a market premium. The required rate of return in CAPM is:

Asset rate of return = Risk free interest rate + (Asset Beta * Market 
Premium)
(a) Primary Variables in CAPM
    240. Risk-Free Interest Rate. The risk free interest rate is the 
return that investors expect to earn on their money having the 
certainty that there will be no default. AT&T, the Rural Associations, 
Alaska Rural Coalition and GVNW assert that the way staff in the Staff 
Report calculated the risk-free rate of return interest rate is 
artificially low because staff chose a 10-year Treasury interest rate 
for a single day. Staff used the then-current 10-year Treasury note, 
1.92 percent on March 26, 2013, as the risk free interest rate. The 
Alaska Rural Coalition and AT&T assert that use of this interest rate 
fails to acknowledge that interest rates were at historic lows at this 
point in time. In the alternative, AT&T proposes taking

[[Page 24319]]

an average of 20-year Treasury bond rates over the past six months. 
AT&T argues that while use of the most current day's rate of interest 
might be an unbiased predictor, it has a large variance, and so an 
average rate calculated over a period such as the past six-months 
should be used instead. Professor Bowman agrees with staff that ``the 
WACC, and hence the costs of debt and equity, should be a forward 
looking estimates'' and ``[c]urrent rates on Treasury bonds reflect 
future interest rates.'' However, Professor Bowman recommends averaging 
over a reasonably long period of time, perhaps three to six months.
    241. Staff used as the expected risk-free rate the then-current 
rate of interest at the market's close on March 26, 2013, rather than 
an historical average of past interest rates calculated over a period 
of time, a forecast, or a rate based on some other methodology. Staff 
reasoned that the current interest rate as of a single day was the best 
predictor of the future interest rate on government securities 
incorporating investors' current expectations about the future rate. 
Staff noted that the current interest rate frequently is a better 
predictor of future interest rates than professional forecasts. Staff 
relied on an efficient market theory, taking as an assumption that bond 
markets are efficient, meaning that interest rates factor in all 
publicly-available information, and that current interest rates adjust 
quickly to reflect new public information as it becomes available. 
Staff noted criticisms of the efficient market theory in the Staff 
Report. Efficient markets do not mean perfect markets--public 
information that is thought to be reflected in interest rates is not 
always accurate; bond markets are surprised by and overreact or 
underreact to new events and new or revised information. At the same 
time, many practitioners recognize that professional forecasts have 
value, though these forecasts always will have error, and commenters 
express a concern that use of a single day's rate as the predictor of 
future rates ignores the relatively low level of today's interest 
rates.
    242. Accordingly, instead of relying solely on efficient market 
theory and use of the then-current, March 26, 2013 rate of interest on 
the 10-year Treasury note as the expected risk-free rate, the 
Commission concludes that a blended approach taking all these factors 
into account would be preferable. The Commission therefore derives the 
risk-free rate of return interest rate by weighting equally: (1) The 
March 2013 average 10-year rate, thus recognizing in part the tenets of 
efficient market theory; and (2) the 3.70 percent 10-year forecast for 
the 10-year Treasury rate by produced by the Survey of Professional 
Forecasters for the first quarter of 2013 published by the Research 
Department of the Federal Reserve Bank of Philadelphia, and referenced 
by the Rural Associations in their comments, thus also recognizing the 
value of professional forecasts. The Commission believes that this 
blended approach reasonably reflects the acknowledged, albeit 
imperfect, predictive value of current interest rates, and the value of 
the informed, though imprecise, judgement of professional forecasters.
    243. Use of the March 2013 average 10-year Treasury rate as part of 
this revised approach is consistent with AT&T's and Professor Bowman's 
suggestions that an average interest rate be used rather than the rate 
on a single day. The Commission disagrees, however, with their 
suggestions that this average should be calculated looking back over a 
period as long as three or six months. The Commission believes that 
capital markets are reasonably efficient. The primary reason for using 
a historical average, in our view, is to ensure that any temporary 
aberration in the interest rate on any given day not be erroneously 
reflected in the estimate. In other words, the purpose is to smooth out 
any large, though random, variation that might be in the interest rate 
on any given day, especially during a period in which markets might be 
particularly volatile. The Commission believes that a one-month average 
is long enough to ensure that the estimate does not reflect any such 
aberration. At the same time, a one month average is short enough that 
it is reasonably consistent with the notion that bond markets are 
efficient, so that it reflects reasonably fresh, publicly-available 
information.
    244. The March 2013 average 10-year rate is 1.96 percent, slightly 
higher than the March 26, 2013 interest rate of 1.92 percent used in 
the Staff Report, and also higher than the three-month average of 1.95 
percent from January 2013 to March 2013, and the six-month average of 
1.83 percent from October 2012 to March 2013. The 3.70 percent 10-year 
forecast for the 10-year Treasury rate produced by the Survey of 
Professional Forecasters, the other part of the blended approach to 
estimating the risk-free rate, is the mean of the forecasts reported by 
26 professionals surveyed by the Federal Reserve Bank of Philadelphia. 
While the Commission might be able to obtain forecasts of this rate 
made by other professionals, they rely on this forecast because it has 
been subject to the scrutiny of the parties to this proceeding, and no 
such party has given any reason as to why it might be unreliable or 
should not be used. The Commission concludes that use of this forecast 
further informs the estimate of the risk-free rate, and is responsive 
to criticisms that the Staff Report failed to account for the 
relatively low level of today's interest rates. The Commission 
therefore finds that a reasonable estimate of the risk-free interest 
rate is 2.83 percent, the average of the March 2013 average 10-year 
Treasury rate and the 10-year forecast for this rate.
    245. Betas. A company's beta is the coefficient on market returns 
resulting from a simple regression of the security's returns on market 
returns, i.e., it is a measurement of the volatility of a company's 
stock compared to the volatility of the market. For purposes of 
determining a point estimate, staff choose weekly return intervals and 
an adjustment for the tendency of the regression estimate to revert to 
the aggregate mean of one. Professor Bowman raised a concern with 
including the beta estimate for one of the Publicly-Traded RLEC 
Proxies, New Ulm, whose beta fluctuates dramatically when measured as 
daily, weekly or monthly, which has a significant impact, increasing 
the average beta for this proxy group. Professor Bowman explains that 
as the explanatory power of the regression equation approaches zero, 
the regression coefficient (beta) must also approach zero and posits 
that betas measured with explanatory power less than five percent, if 
not higher, are biased downward, and thus he recommends that the 
Commission exclude New Ulm's beta from the analysis. The Commission 
agrees with Professor Bowman that the beta for New Ulm may cause a bias 
in the average beta for the Publicly-Traded RLEC Proxies. Thus, the 
Commission will not use the CAPM estimate of New Ulm's cost of equity 
in developing an overall WACC estimate. Instead, as explained below, 
the Commission will use a sensitivity analysis to account for New Ulm's 
cost of equity as part of determining that overall WACC estimate.
    246. Flotation Costs. The Commission also sought comment in the 
USF/ICC Transformation NPRM on the importance of flotation costs--those 
costs associated with the issuance of stocks or bonds--for our cost of 
equity calculations but received little comment. Staff did not 
incorporate flotation costs into calculations of the cost of equity and 
debt meant to be representative of rate-of-return incumbent LECs in 
general. Professor Bowman notes that the flotation costs for debt or 
equity can be ``substantial,''

[[Page 24320]]

which must be annualized if they are to be included in the cost of debt 
which in his experience are in the order of 10 to 20 basis points. 
Professor Bowman notes that there is research showing that the ``cost 
of private debt is marginally higher than for public debt, offsetting 
the differences in issuance costs'' but concludes that because the life 
of equity is not specified, it is likely to be much smaller and 
reasonable to ignore. As explained above, staff did not include bond 
flotation costs in the cost of debt estimate because staff used an 
embedded cost of debt approach, including the use of interest expense 
obtained from the income statements found in SEC Form 10-Ks of the 
proxy group of firms. That interest expense would have included an 
amount for the expense associated with the amortization of bond 
flotation costs calculated pursuant to GAAP in effect at the time of 
the study. Because flotation costs tend to be proportionately small and 
infrequent, and are primarily relevant for public companies issuing new 
securities, staff reasoned that they are not significant for the vast 
majority of rate-of-return incumbent LECs (which are not publicly 
traded) and were not incorporated into calculations meant to be 
representative of rate-of-return incumbent LECs in general. For the 
reasons explained by staff, the Commission agrees with their approach.
    247. Market Risk Premiums. The market premium is defined in the 
CAPM as the difference between the return one can expect to earn 
holding a market portfolio and the risk-free interest rate. In the 
Staff Report, staff concluded that, calculating a historical market 
premium would be the best approach given the data available to the 
Commission. Staff considered whether small capitalization firms such as 
rural incumbent LECs require an additional risk premium but declined to 
adopt such an additional premium because the size effect seems to vary 
over time or even disappears, with common stock returns for smaller 
firms in the United States not performing significantly better than 
larger firms from 1980 onward.
    248. Several commenters argue in favor of an additional market risk 
premium based on the size of the firm because they claim small firms 
face higher risks and illiquidity effects due to not being publicly 
traded, among other reasons. Ad Hoc notes, however, that critics of the 
Staff Report fail to provide any actual evidence of higher risk 
premiums being required of smaller rate-of-return rate-return incumbent 
LECs than larger publicly-traded incumbent LECs. Ad Hoc also argues 
that the regulated environment in which rate-of-return carriers operate 
alters the risks rate-of-return incumbent LECs face, reducing the 
importance of economies of scale due to targeting prices to a specific 
rate of return and guarantees of universal service funding.
    249. AT&T offers a number of reasons why a size premium should not 
be considered in the CAPM WACC calculation. AT&T argues that the 
majority of rate-of-return incumbent LECs are members of the NECA pools 
and these pools allow its members not only to pool their costs and 
revenues, but also effectively pool their risks. AT&T further argues 
that any risks that the smaller rate-of-return incumbent LECs might 
face are further reduced by rate-of-return regulation that protects 
them against under-earning, and the Federal Universal Service Fund and 
its true-up mechanisms. AT&T adds that some rate-of-return incumbent 
LECs have established holding company structures and resemble larger 
firms in terms of market and product diversification. Finally, AT&T 
argues that many of these rate-of-return LECs may be subject to lesser 
market risks, since they tend to serve more rural and less densely 
populated areas where competition has been slower to develop or has yet 
to develop. Professor Bowman favors making an adjustment when 
appropriate, but notes that it is not clear that firms subject to the 
cost of equity resulting from represcription are as small as firms that 
have been shown to manifest the small firm effect, and therefore 
staff's analysis may not warrant an adjustment.
    250. As staff noted in the Staff Report, the size effect seems to 
vary over time or even disappears, with smaller firms in the United 
States not performing significantly better or worse than large firms 
from 1980 onward. Accordingly, the Commission concludes that there is 
insufficient evidence in the record to support a market risk premium 
specifically for rate-of-return incumbent LECs based on small firm 
effects. While some of the finance literature and some practitioners 
might suggest that relatively small and privately-held companies have a 
higher cost of capital than relatively large companies this is a 
general proposition based on examinations of different types of firms 
throughout the economy. As such, this analysis fails to isolate and 
weigh the specific advantages and disadvantages of a rate-of return 
incumbent LEC, such as those cited in the record and discussed above, 
and thus does not necessarily apply to such carriers. Because the 
record does not demonstrate in a quantifiable way how the rate-of-
return incumbent LECs compare to the typical small firm that operates 
in the U.S. economy as a whole, it is difficult to conclude that an 
adjustment for firm-size effects to the cost of capital for these 
carriers is warranted. Moreover, the Commission is aware of no state 
regulatory agency that has adjusted the allowable rate of return 
applicable to rate-of-return incumbent LECs on the basis that these 
incumbent LECs are relatively small, and no commenter has cited to such 
an instance. Therefore, the Commission declines to adopt a market risk 
premium based on size effects.
    251. Staff estimated the cost of equity using the CAPM with 
adjusted betas that were calculated using weekly data, along with its 
estimates for the risk-free rate and market premium, the latter based 
on the average historical market premium above the 10-year risk free 
rate for the period 1928-2012 developed by Professor Aswath Damodaran. 
Staff's calculation of the average of the CAPM cost of equity estimates 
for the 16 proxy companies is 7.18 percent, which staff determined was 
low compared to the cost of debt estimates, including estimates for six 
firms that are below the cost of debt estimates. Estimates of the cost 
of equity should be significantly higher than the cost of debt because 
equity is more risky than debt as debtholders are paid before equity 
holders in the event of financial difficultly, bankruptcy or 
liquidation. Staff noted that the difference between the arithmetic 
averages of large company stock returns and the long-term bond returns 
was 5.7 percentage points (570 basis points) over the period 1926 to 
2010, while the difference between the average cost of debt estimate 
for the 16 proxy companies of 6.19 percent, as compared to the 7.18 
percent cost of equity estimate, is only 0.99 percentage points (99 
basis points). This suggests staff's cost of debt estimate is too high, 
or staff's cost of equity estimate is too low, or both--an issue the 
Commission addresses below.
(b) Revised CAPM WACC Estimate
    252. The Commission now estimates the CAPM cost of equity using our 
revised estimate for the risk-free interest rate, 2.83 percent, along 
with the adjusted betas and market premium used in the Staff Report. 
Given the concern regarding the quality of the beta estimate for New 
Ulm Telephone (New Ulm) as discussed above, the Commission calculates 
the average of these estimates based on (1) the proxy group, including 
New Ulm, (2) the proxy group, excluding New Ulm, and (3) the CAPM 
estimates for the 15 firms

[[Page 24321]]

and setting the cost of equity for New Ulm equal to its cost of debt 
estimate plus the average of the differences between the cost of debt 
and equity estimates of the 15 firms. This enables us to measure the 
sensitivity of the CAPM cost of equity estimates to different cost of 
equity estimates for New Ulm, and is similar to the sensitivity 
analysis of estimates for Windstream and ACS above. The Commission does 
not calculate the average based on setting the estimate of New Ulm's 
cost of equity equal to its estimate of the cost of debt because the 
revised CAPM estimate of the cost of equity for New Ulm is greater than 
its revised cost of debt estimate (as noted above, debtholders are paid 
ahead of equity holders in a bankruptcy so the cost of equity should 
exceed the cost of debt).
    253. The average of the revised CAPM cost of equity estimates for 
all 16 firms, including New Ulm, is 8.09 percent. Notably, the cost of 
equity estimate is less than the cost of equity estimate for just one 
of the 16 firms, Hawaiian Telecom (7.21 percent versus 7.45 percent). 
Meanwhile, the difference between the average cost of debt for the 16 
proxy companies, 5.87 percent, and this average cost of equity estimate 
is 2.22 percent (222 basis points), a difference that is still 
relatively low, but is more than double and is more reasonably in line 
with expectations of the relationship between debt and equity costs 
found in the Staff Report, which was 0.99 percentage points (99 basis 
points). The average of the revised CAPM cost of equity estimates for 
15 firms, excluding New Ulm, is 8.25 percent. The average of the 
revised CAPM estimates for the 15 firms and the estimate obtained by 
setting the cost of equity for New Ulm equal to its cost of debt 
estimate plus the average of the differences between the cost of debt 
and equity estimates is 8.20 percent. Thus, the average of the cost of 
equity estimates is not significantly affected by these alternative 
estimates of the cost of equity for New Ulm. Nevertheless, the 
Commission will account for this sensitivity in developing a reasonable 
range for CAPM WACC estimates.
(c) CAPM WACC Range
    254. The Commission also addresses the issue of relatively low CAPM 
cost of equity estimates in determining the reasonable CAPM WACC Range, 
as did staff in the Staff Report. The Staff Report developed a range 
for the market premium used in the CAPM to obtain a reasonable range 
for CAPM WACC estimates. As a starting point, staff developed a 95 
percent confidence interval around the arithmetic average of the 
difference between the annual return on the S&P 500, and the return on 
the 10-year U.S. government bond including capital returns, based on 
statistics developed by Professor Damodaran. This average is 5.88 
percent (and is the risk-premium used in the CAPM in the above 
calculations), and a 95 percent confidence interval around this average 
is 1.22-10.54 percent. Staff noted that it is common to rely on as long 
a time series as possible when calculating the average historical 
market premium, and that Professor Damodaran's historical average of 
5.88 percent lies well within these ranges identified in a number of 
different surveys. Staff next truncated the lower end of the confidence 
interval to ensure that every carrier's cost of equity estimate 
exceeded its cost of debt estimate, recognizing the basic economic 
principle that the cost of equity has to be higher than the cost of 
debt because equity is riskier than debt. Recognizing that it is 
necessary to ensure that every carriers' cost of equity is not less 
than their cost of debt staff found that the reasonable range for an 
estimate of the WACC for the proxy firms is between 7.39 and 8.58 
percent.
    255. The Rural Associations argue that staff's truncation of the 
confidence interval renders staff's associated cost of capital 
recommendations unreliable. The Commission disagrees. First, the 
Commission views the range between 1.22-10.54 percent as an objective 
and unconditional range for the market risk premium. It reflects the 
variance in statistical terms in the market premium over many years and 
many different business cycles. The Commission also views the interval, 
as adjusted by staff's truncation, as a conditional market premium, one 
that recognizes the reality of current capital market conditions, in 
particular, today's relationship between the cost of debt and the cost 
of equity, and the basic principle that the cost of equity always will 
exceed the cost of debt. Increasing the lower bound as staff did also 
is consistent, though not necessarily in a precise quantifiable way, 
with Professor Bowman's argument that based on his own research and 
that of others, the expected risk premium is inversely correlated with 
the level of interest rates. Thus, when interest rates are low, as they 
are today, the expected risk premium is higher. Also, use of the higher 
lower bound for the risk premium should minimize any concerns that the 
approach the Commission takes in this order to develop a risk free rate 
for use in the CAPM does not adequately acknowledge today's low level 
of interest rates.
    256. The Rural Associations observed and staff itself acknowledged 
that this adjustment to the 95 percent confidence interval is not 
precise. As staff noted, to the extent our estimates of the cost of 
debt are too high, this choice would bias upward our estimates of the 
return on equity. Because the cost of equity typically would materially 
exceed the cost of debt, however, assuming a cost of equity that equals 
the cost of debt tends to bias our estimates downwards. It is not clear 
which of these two offsetting biases is likely to be larger. In 
practice, this is not a significant concern because this adjustment 
affects only the lower bound, not the upper bound of the CAPM WACC 
range of reasonable estimates. As a long as the Commission does not 
select an estimate that is at or near the bottom of this range, that 
estimate and the resulting allowable rate of return should be 
reasonable. Moreover, the Commission also has the DCF WACC range of 
reasonable estimates on which to rely. The WACC and DCF have different 
strengths and weaknesses, and the Commission reduces the likelihood of 
error by developing WACC estimates using both models. As long as the 
Commission also selects an estimate that is consistent with the DCF 
WACC range, then that estimate should be a reasonable estimate.
    257. The Commission now estimates new lower and upper bounds for 
the range of reasonable WACC CAPM using our revised estimate for the 
risk-free rate, 2.83 percent, along with the adjusted betas and the 
staff's approach for establishing a range for the market premium. The 
Commission develops different lower and upper bounds based on: (1) The 
proxy group, including New Ulm, (2) the proxy group, excluding New Ulm, 
and (3) the CAPM estimates for the 15 firms and setting the cost of 
equity for New Ulm equal to its cost of debt estimate plus the average 
of the differences between the cost of debt and equity estimates of the 
15 firms. Taking this approach, the Commission now finds that the range 
of reasonable WACC CAPM estimates is 7.12-8.83 percent if the proxy 
group includes New Ulm; 7.24-9.01 percent if it excludes New Ulm; and 
7.17-8.92 percent based on setting the cost of equity for New Ulm equal 
to its cost of debt estimate plus the average of the differences 
between the cost of debt and equity estimates of the 15 firms. The 
highest of upper bound values and the lowest of the lower bound values, 
provide an overall range of 7.12-9.01 percent.

[[Page 24322]]

    258. Professor Bowman argues that the CAPM WACC range should be at 
least three percentage points (300 basis points), if not higher, given 
the uncertainty with which CAPM input values are estimated (our range 
is 1.89 percentage points or 189 basis points). However, the Commission 
finds our CAPM WACC range, 1.89 percentage points (189 basis points), 
is sufficiently large because that range reflects the lower and upper 
bounds of our market risk premium. The lower bound of the market 
premium is constrained by our estimates of the cost of debt, while the 
upper bound is at the top of the ranges used by most practitioners. 
Absent the lower bound constraint, the range would have been much 
larger reflecting greater uncertainty in the market premium estimate, 
but including that lower portion and allowing that uncertainty 
potentially to be reflected in the cost of equity estimates and thus 
the WACC estimates would be contrary to economic theory. Furthermore, 
the Commission has DCF WACC estimates on which to rely, in addition to 
WACC CAPM estimates, as mentioned above.
(ii) Discounted Cash Flow (DCF) Model
    259. In addition to calculating the cost of equity using CAPM, in 
the Staff Report staff also calculated the cost of equity using the 
constant-growth DCF model based upon four different data sources used 
in the 1990 prescription proceeding. This model incorporates in its 
calculation of the cost of equity a constant growth rate, which staff 
calculated using generally available earnings per share (EPS) growth 
forecasts instead of dividend per share growth forecasts, which are not 
generally available. Industry analysts routinely rely on ESP forecasts 
as dividends tend to grow as earnings grow. The most widely used 
modified version of the general DCF model, the constant growth, or 
standard, DCF model, calculates the cost of equity as:

Cost of Equity = (Dividends per Share1/Price per 
Share0) + g

where Cost of Equity = cost of common stock equity; Dividends per 
Share1 = annual dividends per share in period 1; Price per 
Share0 = price per share in period 0; g = constant growth 
rate in dividends per share in the future; and D1 = (1 + g) 
times D0, the annual dividends per share in period 0.
(a) DCF Cost of Equity Results
    260. Staff estimated the cost of equity using the constant-growth 
DCF model for each of the 11 proxy firms that pay common stock 
dividends and had readily-available, long-run growth rate forecasts. To 
do this, staff identified the low and the high estimates among the 
estimates available from four different sources for each firm, 
determined the midpoint between these two estimates, and used this 
value as the growth rate in the DCF model for each firm. Based on this 
analysis, staff determined that the average cost of equity estimate for 
the 11 firms was 9.90 percent.
    261. Staff found, however, that the DCF analysis did not appear to 
produce reliable estimates for Windstream and ACS. The published growth 
rates for these two firms were low, and use of these rates in most 
cases resulted in cost of equity estimates that were less than the cost 
of debt estimates. Staff reasoned that these results are questionable 
because equity is more risky than debt; no rational investor would ever 
purchase any firm's common stock if that firm's debt is expected to 
provide a higher rate of return. Staff noted that the Commission had 
applied a screen designed to remove from consideration those firms for 
which the cost of debt exceeded the cost of equity when developing 
estimates of the cost of equity in the 1990 Represcription Order.
    262. Staff therefore analyzed the sensitivity of the average of the 
cost of equity estimates to the estimates for Windstream and ACS. 
First, staff excluded Windstream and ACS from the sample, leading to an 
average cost of equity for the nine remaining firms of 11.25 percent, 
as compared to the average of 9.90 percent when these two firms were 
included. Second, staff set the cost of equity estimate equal to the 
cost of debt estimate for the two firms, leading to an average cost of 
equity estimate of 10.54 percent for the 11 firms. Third, staff 
calculated the average difference between the cost of equity estimates 
and the cost of debt estimates for the other nine firms, and added this 
increment to the cost of debt estimates for Windstream and ACS, to 
obtain equity estimates for these two firms, leading to an average cost 
of equity estimate of 11.58 percent for the 11 firms. The Commission 
agrees with staff's conclusion that where the use of these growth rates 
produces cost of equity estimates that have no economic meaning, such 
estimates should be omitted or, at the very least, the impact of 
including such questionable equity costs estimates on the overall 
estimate must be taken into account.
    263. No party challenges staff's DCF methodology. The Commission 
therefore adopts the approach applied in the Staff Report to developing 
estimates for the cost equity based on the DCF model, including the use 
of sensitivity estimates for Windstream and ACS.
    264. Given the revisions the Commission makes above to the 
estimation of total debt outstanding and interest expense in the Staff 
Report, and therefore to the estimates of the cost of debt, the results 
of the above sensitivity analysis change slightly as follows. First, 
excluding Windstream and ACS from the sample, the average cost of 
equity for the nine remaining firms remains 11.25 percent, as compared 
to an estimate of 9.90 percent when these two firms are included, as 
these numbers are unaffected by the cost of debt estimates. Second, 
setting the cost of equity estimate equal to the cost of debt estimate 
for the two firms now leads to an average cost of equity estimate of 
10.47 percent for the 11 firms. Third, calculating the average 
difference between the cost of equity estimates and the cost of debt 
estimates for the other nine firms, and adding this increment to the 
cost of debt estimate for Windstream and ACS, to obtain equity 
estimates for these two firms, now leads to an average cost of equity 
estimate of 11.54 percent for the 11 firms.
(b) DCF WACC Range
    265. Based on this DCF analysis, the Commission finds that the 
lower bound of a reasonable cost of equity estimate is 10.47 percent, 
while the upper bound is 11.54 percent. As a rough check on the 
reasonableness of these upper and lower bound cost of equity estimates, 
similar to the check in the Staff Report, the Commission notes that the 
difference between the average cost of debt for the 11 firms, 5.88 
percent, and the lower bound cost of equity estimate, 10.47 percent, is 
4.59 percentage points (or 459 basis points). Meanwhile, the difference 
between the average cost of debt for these firms and the upper bound 
cost of equity estimate, 11.54 percent, is 5.66 percentage points (or 
566 basis points). By comparison, these lower and upper bound debt-
equity differences are somewhat greater than the 4.39 percentage point 
(439 basis points) difference between the cost of debt, 8.8 percent, 
and the cost of equity, 13.19 percent, on which the Commission's 
current 11.25 percent authorized rate of return is based. And these 
lower and upper bound equity-debt estimate differences are somewhat 
less than the average difference between the large company stock 
return, i.e., S&P 500 companies, and the long-term corporate bond 
return, from 1926-2010, 5.7 percent (570 basis points). Neither of 
these comparisons suggests in a compelling way that our lower and

[[Page 24323]]

upper bound estimates for the cost of equity are unreasonable.
    266. Based upon these slight modifications to DCF analysis 
presented in the Staff Report, the Commission finds that a reasonable 
lower and the upper bound DCF WACC Range is 8.28 percent to 8.57 
percent. As in the Staff Report, this range is based on the three 
average WACC estimates found by using: (1) DCF estimates for the nine 
firms excluding Windstream and ACS; (2) DCF estimates for the nine 
firms plus the first of the two sensitivity cost of equity estimates 
described above for these two firms (equity estimates for each equal to 
debt estimates); and (3) DCF estimates for the nine firms plus the 
second sensitivity cost of equity estimates described above for these 
two firms (debt estimates for each plus the average of the debt-equity 
estimate differences found for the other nine firms). In each case, the 
growth rates used in the DCF are the mid-point growth rates. In each 
case, WACC estimates are also based on cost of debt and capital 
structure estimates that reflect the modifications discussed above to 
the estimation of total debt outstanding and interest expense.
(iii) Free Cash Flow Model
    267. The Rural Associations estimate the WACC for a rate-of-return 
incumbent LEC by dividing an estimate of free cash flow (FCF) by an 
estimate of firm value, based on rate-of-return incumbent LEC data. 
GVNW and TCA supported the Rural Associations' FCF approach. While the 
Rural Associations' approach differs from the standard approach that 
the Commission uses here to estimate the WACC, and is not set out in 
our rules, they cannot say, based on the record that this is an 
unacceptable approach, at least in concept. The Commission is reluctant 
to dismiss too quickly any approach that could potentially aid the 
Commission now or in the future to produce better WACC estimates, 
especially given the difficulty to estimate the WACC for privately-held 
rate-of-return incumbent LECs. While the Commission does not find this 
approach to be unacceptable in concept, they do find flaws in the way 
that it is implemented by the Rural Associations. Thus, the Commission 
rejects the Rural Associations' estimates.
    268. The Rural Associations base firm value, as reflected in the 
denominator of its WACC formula, on per connection sales prices for 
rate-of-return and price cap incumbent LEC exchanges for the period 
from 2008-2012. The Rural Associations develop a range of WACC 
estimates by varying its estimates of firm value. The Commission finds 
that this sample of prices is too small, and too many of its prices are 
for sales that occurred too long ago to provide a reliable basis for 
estimating firm value for a typical rate-of-return incumbent LEC. In 
particular, the sample included only one sale price for each year from 
2010 to 2012. One observation per year, for the most recent three 
years, is far too few to obtain reliable firm valuations for these 
years, especially given the large variation in sale prices since 2008 
($1,053 to $3,205 per connection) and since 2003 ($1,013 to $8,000 per 
connection). As the perceived value of different exchanges varies 
significantly, as this price variation demonstrates, the value of the 
information reflected in one observation a year is of limited value for 
estimating the value of these firms today. Nor does one observation a 
year provide a strong basis for concluding that the level of these 
observed prices continues a trend from prior years, or that such a 
trend reliably could be used to estimate a firm's value today. While 
the sample included five sales prices for both 2008 and 2009, not only 
is this number of observations too small to estimate firm value with a 
high level of confidence, especially given the variation in prices, but 
these prices are too old to provide reliable estimates of firm value 
today.
    269. The Rural Associations use the FCF WACC formula to develop a 
range of WACC estimates based on a sample of 633 rate-of-return 
incumbent LECs. Staff took issue with NECA et al.'s use of the median 
value of the WACC estimates for these rate-of-return incumbent LECs to 
establish a range for the WACC. In response, the Rural Associations, 
including NECA, recalculated its analysis using the average value 
weighted by access connections. This resulted in a large decrease in 
the range of WACC estimates (11.75 to 23.49 percent versus 8.69 percent 
to 17.39 percent).
    270. Given that large decrease, the Commission now takes a closer 
look at the details of the Rural Associations' analysis. Based on our 
review, there is an enormous variance among the 633 rate-of-return 
incumbent LEC WACC estimates that the Rural Associations developed. 
There are many very high and very low WACC estimates. For example, 
focusing on the estimates based on the Rural Associations' midpoint 
valuation number, $1,800 per line, the values of the ten lowest 
estimates are: -271, -277, -305, -308, -320, -372, -429, -489, -631, 
and -862 percent. The values of the ten highest estimates, given this 
midpoint valuation, are: 121, 123, 124, 147, 155, 187, 201, 296, 393, 
and 838 percent. These high and low numbers, and there are more than 
just these 20, are implausibly high and low. The Commission is unaware 
of any wave of bankruptcies among the rate-of-return incumbent LECs, 
for as long as the Commission's allowable rate of return of 11.25 
percent has been effect, and none of the commenters has suggested that 
the allowable rate of return for these carriers should be as high as 
the Rural Associations' estimates. Similarly, a negative expected rate 
of return, i.e., cost of capital, makes no economic sense.
    271. Statistically speaking, and again focusing on the estimates 
based on the Rural Associations' midpoint valuation number, the median 
value WACC is 15.66 percent, the weighted average is 11.59 percent, the 
simple average is 8.64 percent, and the standard deviation relative to 
the simple average is 83.18 percent, a figure that is approximately 10 
times greater than the simple average. Given this dispersion and the 
implausibly high and low WACC estimates, none of the typical measures 
of central tendency, i.e., the median, weighted average, or simple 
average, would provide an overall estimate, or even a range of overall 
estimates, on which the Commission could rely. There would seem to be 
too strong of likelihood of large error in many of the individual 
estimates, and the Commission cannot simply assume that these errors 
would offset each other by averaging the WACC estimates, or rely on the 
use of the middle-value estimate (i.e., the median) to remove the 
impact of these errors. Thus, the Commission rejects the Rural 
Associations' WACC estimates.
c. Cost of Preferred Stock
    272. The Commission's rules specify that the WACC calculations 
incorporate the cost of preferred stock which is stock that entitles 
its holders to receive a share of corporate assets before common 
stockholders do, in the event of liquidation of the firm, and offers 
other benefits, such as priority when dividends are paid. Staff 
recommended in the Staff Report that the Commission waive or eliminate 
the requirement to include the cost of preferred stock in the WACC 
calculation because the cost of preferred stock is either not available 
to us or not publicly reported. This approach is consistent with the 
Commission's 1990 represcription which did not factor in the cost of 
preferred stock. In the Staff Report, staff explained that including 
the cost of preferred stock would not significantly alter the WACC 
calculation because the proxy firms do not typically raise

[[Page 24324]]

capital through the issuance of preferred stock and that preferred 
stock is only a small share of the capital structure for the proxies 
that have such stock. The Commission agrees for the reasons articulated 
by staff explained above. Further, no commenters filed in opposition to 
staff's approach. Accordingly, the Commission finds good cause exists 
to waive the requirement to calculate the WACC based on the cost of 
preferred stock.
d. WACC Results
    273. Appendices J & K to this Order shows the WACCs resulting from 
using both CAPM and DCF, together with the component values of each 
model and the estimates of the cost of debt and capital structure.
e. Establishing the WACC Zone of Reasonableness
    274. In determining the authorized rate of return, the Commission's 
starting point is to establish a zone of reasonable financial model-
based estimates of the overall WACC. After identifying this WACC zone 
of reasonableness, the Commission may determine, based on policy 
considerations, where to prescribe the unitary rate of return. To 
determine a WACC zone of reasonableness, staff recommended comparing 
the range of WACCs produced when the cost of equity is determined using 
CAPM with varying market premiums, and the range produced when the cost 
of equity is determined using DCF.
    275. The Commission finds above that a reasonable range for CAPM 
WACC estimates is 7.12 to 9.01 percent, while a reasonable range for 
DCF WACC estimates is 8.28 percent to 8.57 percent. Taken together, the 
overall range for reasonable WACC estimates is 7.12 to 9.01 percent, if 
there is no reason to believe that either model provides better 
estimates. The record is critical of the CAPM analysis in the Staff 
Report, while the DCF analysis is largely unchallenged. In response to 
these criticisms, the Commission adjusted the CAPM analysis to produce 
more reliable estimates. In particular, the Commission revises the 
estimate of the risk-free rate, and account for what might be an 
unreliable beta estimate for the proxy New Ulm. Nevertheless, given the 
record, the Commission would be reluctant to select a rate of return 
that is below the DCF WACC range. The bottom of the WACC range relies 
on a truncated confidence interval that might not reflect a precise 
accounting of the premium in terms of the rate of return that equity 
holders require in comparison to debtholders. Even without this concern 
and that record, it would be difficult to prescribe a rate of return 
below the WACC DCF range given that both the DCF and the CAPM have 
different strengths and weaknesses and the value of performing both 
analyses is that these models have the potential to provide 
corroborating evidence.
f. Prescribing a New Authorized Rate of Return
    276. The reasonable range of WACC estimates discussed above are 
based on the cost of capital which serves as a useful and reliable 
starting point in rate of return represcription. The Commission, 
however, may consider other relevant factors as well. It is well 
established that rate of return prescription under the Act's ``just and 
reasonable'' standard requires a balancing of ratepayer and shareholder 
interests. A rate-of-return carrier must be allowed the opportunity to 
earn a return that is high enough to maintain the financial integrity 
of the company and to attract new capital. At the same time, to be 
reasonable, the rate of return must not produce excessive rates at the 
expense of the ratepayer. Courts have recognized that there is a zone 
of reasonableness within which reasonable rates may fall, and that the 
regulatory agencies are entitled to exercise judgment in selecting a 
rate of return within that zone. In general, the zone of reasonableness 
balances financial interests of the regulated company and relevant 
public interests. The Commission has substantial discretion when 
setting the authorized rate of return, and may consider a broad array 
of evidence and methodologies in prescribing the authorized rate of 
return. The Commission may also consider non-cost policy considerations 
in setting the rate of return.
    277. The Commission is particularly mindful of the economic impact 
represcription will have on rate-of-return incumbent LECs. As Professor 
Bowman notes, companies subject to regulation face regulatory risk 
which increases the cost of capital. In this regard, the Commission 
agrees with Professor Bowman's argument that as a consequence of the 
asymmetry of social costs and benefits, and the uncertainties in the 
estimates of the true cost of capital, they should err on the high side 
when establishing the rate of return zone of reasonableness to minimize 
expected losses in social welfare through investment effects. 
Accordingly, expanding the zone of reasonableness above the top of the 
reasonable WACC estimates is supported in the record.
    278. The Commission concludes that they should expand the upper end 
of the rate of return zone of reasonableness beyond the WACC estimates 
based on policy considerations and adopt the rate of return from the 
upper end of this zone. First, by expanding the zone of reasonableness, 
the Commission provides an additional cushion for rate-of-return 
incumbent LECs that may have a relatively high cost of capital compared 
to our proxies. There are hundreds of rate-of-return incumbent LECs. 
Some will have a relatively high and some a relatively low cost of 
capital. At the same time, the Commission adopts an authorized rate of 
return that applies to all of these carriers. To maximize the 
likelihood that the unitary rate of return is fully compensatory, even 
for firms with a relatively high cost of capital, the Commission 
expands the zone of reasonableness above the top of the range of WACC 
estimates developed above. Second, the Commission adds this cushion to 
the zone to account for regulatory lag--the time between recognition of 
the need for regulatory change in light of changing circumstances, in 
this case the need to prescribe a different rate of return, as capital 
markets change significantly, and regulatory action, in this case 
actually prescribing a new rate of return. The Commission therefore 
adds about three-quarters of a percentage point to the top of the WACC 
range developed above to account for these two factors, expanding the 
overall zone of reasonableness for the rate of return estimates to 7.12 
to 9.75 percent.
    279. The Commission notes that the WACC is supposed to compensate 
equity holders and debtholders who provide the funds used to finance 
the firm's assets. Given a rate of return set equal to 9.75 percent, an 
average capital structure based on our estimates of 54.34 percent debt, 
and a cost of debt based on our estimates of 5.87 percent, the implied 
cost of equity is 14.37 percent. The Commission finds that not only is 
the WACC of 9.75 percent high enough adequately to compensate the 
firm's debtholders, but the implied rate of return on equity also 
provides equity holders with the opportunity to earn a reasonable rate 
of return on their investment. As support for our finding that a 9.75 
percent rate of return is reasonable, the Commission examines some 
benchmarks.
    280. The difference between the implied cost of equity and the cost 
of debt estimate is 8.5 percentage points (850 basis points). By 
comparison, this 850 basis point difference exceeds the 439 basis point 
difference between the

[[Page 24325]]

estimates of the cost of debt, 8.8 percent, and the cost of equity, 
13.19 percent, on which the Commission's current 11.25 percent 
authorized rate of return is based. That rate of return was developed 
in 1990 based on estimates of the cost of debt and equity that would 
have reflected investors' perception of incumbent LEC risks and the 
conditions in the financial market at the time. So this benchmark 
provides a useful rough check on our estimates. The 850 basis point 
difference also exceeds the average difference between the large 
company stock return, i.e., Standard & Poor's 500 (S&P 500) index 
companies, and the long-term corporate bond return, from 1926-2010, 570 
basis points. The 850 basis point difference is not as large as the 
difference between small company stock returns and the long-term 
corporate bond returns, from 1926-2010, 10.5 percent (1005 basis 
points). However, the difference between the average cost of debt 
estimate for the six Publicly-Traded RLEC Proxies that have access to 
loans made through rural-company programs (such as those administered 
by the Rural Utilities Service and CoBank), 4.38 percent, and the 
implied cost of equity for this smaller group, which is 14.15 percent, 
given this group's capital structure estimate of 45.02 percent debt, is 
977 basis points, which is reasonably close to the 1005 historical 
basis points difference for small companies. The Commission uses this 
small company benchmark while pointing out that it might be true that, 
as other analysis suggests, returns to small companies are no longer 
statistically different from those of larger companies. If so, then 
this small company benchmark does not provide any insights beyond the 
benchmark for larger firms, which then suggests in an even more 
compelling way that the WACC of 9.75 percent will provide reasonable 
compensation to owners of these smaller rate-of-return incumbent LECs. 
Collectively, these benchmarks provide evidence that a WACC and thus an 
allowable rate of return of 9.75 percent provides a reasonable level of 
compensation.
g. Specific Rates of Return
    281. Tribally-Owned Carrier Specific Rate of Return. In the USF/ICC 
Transformation FNPRM, the Commission sought comment on how to account 
for Tribally-owned carriers in this prescription, and whether a 
different rate of return is warranted for these carriers. Gila River, 
NTTA and MATI argue in favor a separate, higher, rate of return for 
Tribally-owned carriers operating in Tribal areas due to illiquidity of 
Tribal assets and inability to access credit and capital. Gila River 
further argues that low income population on Tribal lands, reliance on 
Rural Utilities Service loans and universal service support, lack of 
infrastructure on Tribal lands, and unique ``environmental and cultural 
preservation review processes'' warrant a separate rate of return for 
Tribally-owned carriers. The purpose of the unitary rate of return is 
to reflect the industry-wide rate of return. Section 65.102(b) provides 
a process for carriers such as Gila River to apply for exclusion from 
unitary treatment and receive individual treatment in determining the 
authorized rate of return. A petition for exclusion from unitary 
treatment must plead with particularity the exceptional facts and 
circumstances that justify individual treatment. The showing shall 
include a demonstration that the exceptional facts and circumstances 
are not of transitory effect, such that exclusion for a period of at 
least two years is justified. To the extent a Tribally-owned carrier or 
any other rate-of-return regulated carrier contends that a specific, 
non-unitary, rate of return is justified, it can seek an exclusion via 
the process outlined in section 65.102(b). As stated above, such 
applications must be plead with particularity and no rate-of-return 
incumbent LEC has petitioned for exclusion or otherwise met this 
burden. Accordingly, at this time, the Commission declines to grant an 
exception to the authorized unitary rate of return for Tribally-owned 
carriers as the specific circumstances surrounding each carrier may 
vary substantially.
6. Implementing the New Rate of Return
    282. The Commission has authority under section 205 to prescribe a 
9.75 percent unitary rate of return effective immediately. The 
Commission recognizes, however, that for almost 25 years rate-of-return 
carriers have made significant infrastructure investments on which they 
have had the opportunity to earn a rate of return of 11.25 percent 
until now, and that represcribing the rate of return will have a 
financial impact on these carriers. ICORE proposes that if the 
Commission lowers the rate of return, it should do so ``in the most 
gradual and least disruptive manner possible.'' The Moss Adams 
companies propose that ``any changes that the FCC makes should be 
measured and spread over time.'' USTelecom and NTCA recognize that rate 
represcription is ``essential to a broadband reform effort'' and 
suggest a multi-year transition to 9.75 percent. The Commission agrees. 
The Commission recognizes that rate-of-return incumbent LECs have been 
subject to significant regulatory changes in recent years, and that 
such changes are occurring at a time when these carriers are attempting 
to transition their networks and service offerings to a broadband 
world. At the same time, the Commission finds that they must 
represcribe the almost 25-year old rate of return to meet our statutory 
obligations. To minimize the immediate financial impacts that 
represcription may impose on carriers, the Commission adopts, for the 
first time, a transitional approach to represcription.
    283. Under this transitional approach, as proposed by USTelecom and 
NTCA, the 11.25 percent rate of return will be reduced by 25 basis 
points per year until the Commission reach the represcribed 9.75 
percent rate of return. For administrative simplicity, the Commission 
choose July 1, 2016 as the effective date for the initial transitional 
rate of return of 11.0 percent followed by subsequent annual 25 basis 
point reductions consistent with the table below until July 1, 2021 
when the 9.75 percent rate of return the Commission represcribes today 
shall be effective.

------------------------------------------------------------------------
                                                             Authorized
             Effective date of rate of return                  rate of
                                                             return (%)
------------------------------------------------------------------------
July 1, 2016..............................................         11.0
July 1, 2017..............................................         10.75
July 1, 2018..............................................         10.5
July 1, 2019..............................................         10.25
July 1, 2020..............................................         10.0
July 1, 2021..............................................          9.75
------------------------------------------------------------------------

IV. Procedural Matters

A. Paperwork Reduction Act Analysis

    284. This document contains new information collection requirements 
subject to the PRA. It 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. In addition, the Commission notes that pursuant to the 
Small Business Paperwork Relief Act of 2002, they previously sought 
specific comment on how the Commission might further reduce the 
information collection burden for small business concerns with fewer 
than 25 employees. The Commission describes impacts that might affect 
small businesses, which includes most businesses with fewer than 25 
employees, in the Final Regulatory Flexibility Analysis (FRFA) in 
Appendix B, infra.

B. Final Regulatory Flexibility Analysis

    285. As required by the Regulatory Flexibility Act of 1980 (RFA), 
as

[[Page 24326]]

amended, Initial Regulatory Flexibility Analyses (IRFAs) were 
incorporated in the Notice of Proposed Rulemaking and Further Notice of 
Proposed Rulemaking (USF/ICC Transformation NPRM), in the Notice of 
Inquiry and Notice of Proposed Rulemaking (USF Reform NOI/NPRM), in the 
Notice of Proposed Rulemaking (Mobility Fund NPRM), Order and Further 
Notice of Proposed Rulemaking (USF/ICC Transformation Order or FNPRM), 
and in the Report and Order, Declaratory Ruling, Order, Memorandum 
Opinion and Order, Seventh Order on Reconsideration, and Further Notice 
of Proposed Rulemaking (April 2014 Connect America FNPRM) for this 
proceeding. The Commission sought written public comment on the 
proposals in the USF/ICC Transformation FNPRM and April 2014 Connect 
America FNPRM, including comment on the IRFA. The Commission did not 
receive comments on the USF/ICC Transformation FNPRM IRFA or April 2014 
Connect America FNPRM IRFA. This present Final Regulatory Flexibility 
Analysis (FRFA) conforms to the RFA.
1. Need for, and Objective of, the Order
    286. In the Report and Order, the Commission establishes a new 
forward-looking, efficient mechanism for the distribution of support in 
rate-of-return areas. Specifically, the Commission adopts a voluntary 
path under which rate-of-return carriers may elect model-based support 
for a term of 10 years in exchange for meeting defined build-out 
obligations. The Commission emphasizes the voluntary nature of this 
mechanism; no carrier will be required to take model-based support, and 
the cost model has been adjusted in multiple ways over more than a year 
to take into account the circumstances of rate-of-return carriers. The 
Commission will make available up to an additional $150 million 
annually from existing high-cost reserves to facilitate this voluntary 
path to the model over the next decade.
    287. The Commission also reforms the existing mechanisms for the 
distribution of support in rate-of-return areas for those carriers that 
do not elect to receive model-based support. The Commission makes 
technical corrections to modernize our existing interstate common line 
support (ICLS) rules to provide support in situations where the 
customer no longer subscribes to traditional regulated local exchange 
voice service, i.e., stand-alone broadband. Going forward, this 
reformed mechanism will be known as Connect America Fund Broadband Loop 
Support (CAF BLS). This simple, forward-looking change to the existing 
mechanism will provide support for broadband-capable loops in an 
equitable and stable manner, regardless of whether the customer chooses 
to purchase traditional voice service, a bundle of voice and broadband, 
or only broadband. The Commission expects this approach will provide 
carriers, including those that no longer receive high cost loop support 
(HCLS), with appropriate support going forward to invest in broadband 
networks, while not disrupting past investment decisions.
    288. One of the core principles of reform since 2011 has been to 
ensure that support is provided in the most efficient manner possible, 
recognizing that ultimately American consumers and businesses pay for 
the universal service fund (USF). The Commission continues to move 
forward with our efforts to ensure that companies do not receive more 
support than is necessary and that rate of return carriers have 
sufficient incentive to be prudent and efficient in their expenditures, 
and in particular operating expenses. Therefore, the Commission adopts 
a method to limit operating costs eligible for support under rate-of-
return mechanisms, based on a proposal submitted by the carriers. The 
Commission also adopts measures that will limit the extent to which USF 
support is used to support capital investment by those rate-of-return 
carriers that are above the national average in broadband deployment in 
order to help target support to those areas with less broadband 
deployment. Lastly, to ensure disbursed high-cost support stays within 
the established budget for rate-of-return carriers, the Commission 
adopts a self-effectuating mechanism to control total support 
distributed pursuant to the HCLS and CAF-BLS mechanisms.
    289. In 2011, the Commission also stressed the need to ``require 
accountability from companies receiving support to ensure that public 
investments are used wisely to deliver intended results.'' To this end, 
the Commission adopts deployment obligations that can be measured and 
monitored for all rate-of-return carriers, while tailoring those 
obligations to the unique circumstances of individual carriers. Those 
obligations will be individually sized for each carrier not electing 
model support, based on the extent to which it has already deployed 
broadband and its forecasted CAF BLS, taking into account the relative 
amount of depreciated plant and the density characteristics of 
individual carriers.
    290. Another core tenet of reform adopted by the Commission in 
2011, and unanimously reaffirmed in 2014, was to target support to 
areas that the market will not serve absent subsidy. To direct 
universal service support to those areas where it is most needed, the 
Commission adopts a rule prohibiting rate-of-return carriers from 
receiving CAF-BLS support in those census blocks that are served by a 
qualifying unsubsidized competitor. The Commission adopts a robust 
challenge process to determine which areas are in fact served by a 
qualifying unsubsidized competitor. Carriers may elect one of several 
options for disaggregating support for those areas found to be 
competitive. Any support reductions resulting from implementation of 
this rule will be more effectively targeted to support existing and new 
broadband infrastructure in areas lacking a competitor.
    291. The Commission also addresses cost allocation and tariff-
related issues raised by adoption of the reforms to high-cost support 
adopted in this Order for the provision of broadband-only loops. The 
Commission first creates a new service category known as the ``Consumer 
Broadband-Only Loop'' category, which will include the costs of the 
consumer broadband-only loop facilities that today are recovered 
through special access rates. Second, the Commission requires a carrier 
to move the costs of consumer broadband-only loops from the special 
access category to the new Consumer Broadband-Only Loop category. These 
actions will segregate the broadband-only loop investment and expenses 
from other special access costs currently included in the special 
access category and preclude double recovery of any costs assigned to 
the Consumer Broadband-Only Loop category.
    292. The Commission will allow a rate-of-return carrier electing 
model-based support to assess a wholesale Consumer Broadband-Only Loop 
charge that does not exceed $42 per line per month. This rate cap 
allows a carrier the opportunity to recover its costs not covered by 
the model, while limiting the ability of a carrier to engage in a price 
squeeze against a non-affiliated ISP offering retail broadband service. 
The retail service provided to the end-user customer is not constrained 
by this limitation. Carriers electing model-based support that 
participate in the NECA common line tariff will be allowed to use the 
NECA tariff to offer their Consumer Broadband-Only Loop service to 
obtain the administrative benefits of a single tariff filing. They will 
not be eligible to participate in the NECA common line pooling 
mechanism, however, because the

[[Page 24327]]

model-based support mechanism is inconsistent with cost pooling.
    293. A carrier that does not elect model-based support will have an 
interstate revenue requirement for its Consumer Broadband-Only Loop 
category. The projected Consumer Broadband-Only Loop revenue 
requirement will be reduced by the projected amount of CAF BLS 
attributed to that category in accordance with the procedures in Part 
54. The remaining projected revenue requirement is the basis for 
developing the rates the carrier may assess, based on projected loops. 
Finally, providing support to consumer broadband-only loops likely will 
result in the migration of some end users from their current voice/
broadband offerings thereby affecting the careful balancing of the 
recovery mechanism adopted in the USF/ICC Transformation Order. To 
insure that our actions today do not unintentionally increase CAF-ICC 
support, the Commission requires that rate-of-return carriers impute an 
amount equal to the ARC charge they would assess on voice/broadband 
lines to their supported consumer broadband-only lines. Second, the 
Commission clarifies that a carrier must reflect any revenues recovered 
for use of the facilities previously used to provide the supported 
service as double recovery in its Tariff Review Plans, which will 
reduce the amount of CAF ICC it will receive.
    294. Finally, the Commission takes action to modify our existing 
reporting requirements in light of lessons learned from their 
implementation. The Commission revises eligible telecommunications 
carriers' (ETC) annual reporting requirements to align better those 
requirements with our statutory and regulatory objectives. The 
Commission concludes that the public interest will be served by 
eliminating the requirement to file a narrative update to the five-year 
plan. Instead, the Commission adopts narrowly-tailored reporting 
requirements regarding the location of new deployment offering service 
at various speeds, which will better enable the Commission to determine 
on an annual basis how high-cost support is being used to ``improve 
broadband availability, service quality, and capacity at the smallest 
geographic area possible.''
    295. In the Order and Order on Reconsideration, the Commission 
represcribes the currently authorized rate of return from 11.25 percent 
to 9.75. The Commission explains that a rate of return higher than 
necessary to attract capital to investment results in excessive profit 
for rate-of-return carriers and unreasonably high prices for consumers. 
It also inefficiently distorts carrier operations, resulting in waste 
in the sense that, but for these distortions, more services, including 
broadband services, would be provided at the same cost. Relying 
primarily on the methodology and data contained in a Commission staff 
report and public comments, the Commission identifies a more robust 
zone of reasonableness and adopt a new rate of return at the upper end 
of this range at 9.75 percent. As part of its estimation of the rate of 
return, the Commission revises its rule for calculating the cost of 
debt, an input in the cost of capital formula used to estimate the rate 
of return, to account for an overstatement of the interest expense 
contained in the rules. The new rate of return of 9.75 percent will be 
phased-in gradually over a six-year period.
2. Summary of Significant Issues Raised by Public Comments in Response 
to the IRFA
    296. There were no comments raised that specifically addressed the 
proposed rules and policies presented in the USF/ICC Transformation 
FNRPM IRFA or April 2014 Connect America FNPRM IRFA. Nonetheless, the 
Commission considered the potential impact of the rules proposed in the 
IRFA on small entities and reduced the compliance burden for all small 
entities in order to reduce the economic impact of the rules enacted 
herein on such entities.
3. Response to Comments by the Chief Counsel for Advocacy of the Small 
Business Administration
    297. Pursuant to the Small Business Jobs Act of 2010, which amended 
the RFA, the Commission is required to respond to any comments filed by 
the Chief Counsel of the Small Business Administration (SBA), and to 
provide a detailed statement of any change made to the proposed rule(s) 
as a result of those comments.
    298. The Chief Counsel did not file any comments in response to the 
proposed rule(s) in this proceeding.
4. Description and Estimate of the Number of Small Entities to Which 
the Rules Would Apply
    299. The RFA directs agencies to provide a description of, and 
where feasible, an estimate of the number of small entities that may be 
affected by the proposed rules, if adopted. The RFA generally defines 
the term ``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).
5. Total Small Entities
    300. Our proposed action, if implemented, may, over time, affect 
small entities that are not easily categorized at present. The 
Commission therefore describes here, at the outset, three 
comprehensive, statutory small entity size standards. First, 
nationwide, there are a total of approximately 28.2 million small 
businesses, according to the SBA, which represents 99.7% of all 
businesses in the United States. In addition, a ``small organization'' 
is generally ``any not-for-profit enterprise which is independently 
owned and operated and is not dominant in its field.'' Nationwide, as 
of 2007, there were approximately 1,621,215 small organizations. 
Finally, the term ``small governmental jurisdiction'' is defined 
generally as ``governments of cities, towns, townships, villages, 
school districts, or special districts, with a population of less than 
fifty thousand.'' Census Bureau data for 2011 indicate that there were 
90,056 local governmental jurisdictions in the United States. The 
Commission estimates that, of this total, as many as 89,327 entities 
may qualify as ``small governmental jurisdictions.'' Thus, the 
Commission estimates that most governmental jurisdictions are small.
6. Broadband Internet Access Service Providers
    301. The rules adopted in the Order apply to broadband Internet 
access service providers. The Economic Census places these firms, whose 
services might include Voice over Internet Protocol (VoIP), in either 
of two categories, depending on whether the service is provided over 
the provider's own telecommunications facilities (e.g., cable and DSL 
ISPs), or over client-supplied telecommunications connections (e.g., 
dial-up ISPs). The former are within the category of Wired 
Telecommunications Carriers, which has an SBA small business size 
standard of 1,500 or fewer employees. These are also labeled 
``broadband.'' The latter are within the category of All Other 
Telecommunications, which has a size standard of annual receipts of 
$32.5 million or less. These are labeled non-broadband. According to 
Census Bureau data for 2007, there were 3,188 firms in the first 
category, total, that operated for

[[Page 24328]]

the entire year. Of this total, 3144 firms had employment of 999 or 
fewer employees, and 44 firms had employment of 1,000 employees or 
more. For the second category, the data show that 2,383 firms operated 
for the entire year. Of those, 2,346 had annual receipts below $32.5 
million per year. Consequently, the Commission estimates that the 
majority of broadband Internet access service provider firms are small 
entities.
    302. The broadband Internet access service provider industry has 
changed since this definition was introduced in 2007. The data cited 
above may therefore include entities that no longer provide broadband 
Internet access service, and may exclude entities that now provide such 
service. To ensure that this FRFA describes the universe of small 
entities that our action might affect, the Commission discusses in turn 
several different types of entities that might be providing broadband 
Internet access service. The Commission notes that, although the 
Commission has no specific information on the number of small entities 
that provide broadband Internet access service over unlicensed 
spectrum, the Commission includes these entities in our Final 
Regulatory Flexibility Analysis.
7. Wireline Providers
    303. Incumbent Local Exchange Carriers (Incumbent LECs). Neither 
the Commission nor the SBA has developed a small business size standard 
specifically for incumbent LEC services. The closest applicable size 
standard under SBA rules is for the category Wired Telecommunications 
Carriers. Under that size standard, such a business is small if it has 
1,500 or fewer employees. According to Commission data, 1,307 carriers 
reported that they were incumbent LEC providers. Of these 1,307 
carriers, an estimated 1,006 have 1,500 or fewer employees and 301 have 
more than 1,500 employees. Consequently, the Commission estimates that 
most providers of incumbent LEC service are small businesses that may 
be affected by rules adopted pursuant to the Order.
    304. Competitive Local Exchange Carriers (Competitive LECs), 
Competitive Access Providers (CAPs), Shared-Tenant Service Providers, 
and Other Local Service Providers. Neither the Commission nor the SBA 
has developed a small business size standard specifically for these 
service providers. The appropriate size standard under SBA rules is for 
the category Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 1,442 carriers reported that they were 
engaged in the provision of either competitive local exchange services 
or competitive access provider services. Of these 1,442 carriers, an 
estimated 1,256 have 1,500 or fewer employees and 186 have more than 
1,500 employees. In addition, 17 carriers have reported that they are 
Shared-Tenant Service Providers, and all 17 are estimated to have 1,500 
or fewer employees. In addition, 72 carriers have reported that they 
are Other Local Service Providers. Of the 72, seventy have 1,500 or 
fewer employees and two have more than 1,500 employees. Consequently, 
the Commission estimates that most providers of competitive local 
exchange service, competitive access providers, Shared-Tenant Service 
Providers, and other local service providers are small entities that 
may be affected by rules adopted pursuant to the Order.
    305. The Commission has included small incumbent LECs in this 
present RFA analysis. As noted above, a ``small business'' under the 
RFA is one that, inter alia, meets the pertinent small business size 
standard (e.g., a telephone communications business having 1,500 or 
fewer employees), and ``is not dominant in its field of operation.'' 
The SBA's Office of Advocacy contends that, for RFA purposes, small 
incumbent LECs are not dominant in their field of operation because any 
such dominance is not ``national'' in scope. The Commission has 
therefore included small incumbent LECs in this RFA analysis, although 
the Commission emphasizes that this RFA action has no effect on 
Commission analyses and determinations in other, non-RFA contexts.
    306. Interexchange Carriers. Neither the Commission nor the SBA has 
developed a small business size standard specifically for providers of 
interexchange services. The appropriate size standard under SBA rules 
is for the category Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 359 carriers have reported that they are 
engaged in the provision of interexchange service. Of these, an 
estimated 317 have 1,500 or fewer employees and 42 have more than 1,500 
employees. Consequently, the Commission estimates that the majority of 
IXCs are small entities that may be affected by rules adopted pursuant 
to the Order.
    307. Operator Service Providers (OSPs). Neither the Commission nor 
the SBA has developed a small business size standard specifically for 
operator service providers. The appropriate size standard under SBA 
rules is for the category Wired Telecommunications Carriers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 33 carriers have reported that 
they are engaged in the provision of operator services. Of these, an 
estimated 31 have 1,500 or fewer employees and two have more than 1,500 
employees. Consequently, the Commission estimates that the majority of 
OSPs are small entities that may be affected by rules adopted pursuant 
to the Order.
    308. Prepaid Calling Card Providers. Neither the Commission nor the 
SBA has developed a small business size standard specifically for 
prepaid calling card providers. The appropriate size standard under SBA 
rules is for the category Telecommunications Resellers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 193 carriers have reported that they are 
engaged in the provision of prepaid calling cards. Of these, an 
estimated all 193 have 1,500 or fewer employees and none have more than 
1,500 employees. Consequently, the Commission estimates that the 
majority of prepaid calling card providers are small entities that may 
be affected by rules adopted pursuant to the Order.
    309. Local Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 213 carriers have reported 
that they are engaged in the provision of local resale services. Of 
these, an estimated 211 have 1,500 or fewer employees and two have more 
than 1,500 employees. Consequently, the Commission estimates that the 
majority of local resellers are small entities that may be affected by 
rules adopted pursuant to the Order.
    310. Toll Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 881 carriers have reported 
that they are engaged in the provision of toll resale services. Of 
these, an estimated 857 have 1,500 or fewer employees and 24 have more 
than 1,500 employees. Consequently, the Commission estimates that the 
majority of toll resellers are small entities that may be

[[Page 24329]]

affected by rules adopted pursuant to the Order.
    311. Other Toll Carriers. Neither the Commission nor the SBA has 
developed a size standard for small businesses specifically applicable 
to Other Toll Carriers. This category includes toll carriers that do 
not fall within the categories of interexchange carriers, operator 
service providers, prepaid calling card providers, satellite service 
carriers, or toll resellers. The closest applicable size standard under 
SBA rules is for Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 284 companies reported that their primary 
telecommunications service activity was the provision of other toll 
carriage. Of these, an estimated 279 have 1,500 or fewer employees and 
five have more than 1,500 employees. Consequently, the Commission 
estimates that most Other Toll Carriers are small entities that may be 
affected by the rules and policies adopted pursuant to the Order.
    312. 800 and 800-Like Service Subscribers. Neither the Commission 
nor the SBA has developed a small business size standard specifically 
for 800 and 800-like service (toll free) subscribers. The appropriate 
size standard under SBA rules is for the category Telecommunications 
Resellers. Under that size standard, such a business is small if it has 
1,500 or fewer employees. The most reliable source of information 
regarding the number of these service subscribers appears to be data 
the Commission collects on the 800, 888, 877, and 866 numbers in use. 
According to our data, as of September 2009, the number of 800 numbers 
assigned was 7,860,000; the number of 888 numbers assigned was 
5,588,687; the number of 877 numbers assigned was 4,721,866; and the 
number of 866 numbers assigned was 7,867,736. The Commission does not 
have data specifying the number of these subscribers that are not 
independently owned and operated or have more than 1,500 employees, and 
thus are unable at this time to estimate with greater precision the 
number of toll free subscribers that would qualify as small businesses 
under the SBA size standard. Consequently, the Commission estimates 
that there are 7,860,000 or fewer small entity 800 subscribers; 
5,588,687 or fewer small entity 888 subscribers; 4,721,866 or fewer 
small entity 877 subscribers; and 7,867,736 or fewer small entity 866 
subscribers.
8. Wireless Providers--Fixed and Mobile
    313. The broadband Internet access service provider category 
covered by this Order may cover multiple wireless firms and categories 
of regulated wireless services. Thus, to the extent the wireless 
services listed below are used by wireless firms for broadband Internet 
access service, the proposed actions may have an impact on those small 
businesses as set forth above and further below. In addition, for those 
services subject to auctions, the Commission notes that, as a general 
matter, the number of winning bidders that claim to qualify as small 
businesses at the close of an auction does not necessarily represent 
the number of small businesses currently in service. Also, the 
Commission does not generally track subsequent business size unless, in 
the context of assignments and transfers or reportable eligibility 
events, unjust enrichment issues are implicated.
    314. Wireless Telecommunications Carriers (except Satellite). Since 
2007, the Census Bureau has placed wireless firms within this new, 
broad, economic census category. Under the present and prior 
categories, the SBA has deemed a wireless business to be small if it 
has 1,500 or fewer employees. For the category of Wireless 
Telecommunications Carriers (except Satellite), census data for 2007 
show that there were 1,383 firms that operated for the entire year. Of 
this total, 1,368 firms had employment of 999 or fewer employees and 15 
had employment of 1,000 employees or more. Since all firms with fewer 
than 1,500 employees are considered small, given the total employment 
in the sector, the Commission estimates that the vast majority of 
wireless firms are small.
    315. Wireless Communications Services. This service can be used for 
fixed, mobile, radiolocation, and digital audio broadcasting satellite 
uses. The Commission defined ``small business'' for the wireless 
communications services (WCS) auction as an entity with average gross 
revenues of $40 million for each of the three preceding years, and a 
``very small business'' as an entity with average gross revenues of $15 
million for each of the three preceding years. The SBA has approved 
these definitions.
    316. 218-219 MHz Service. The first auction of 218-219 MHz spectrum 
resulted in 170 entities winning licenses for 594 Metropolitan 
Statistical Area (MSA) licenses. Of the 594 licenses, 557 were won by 
entities qualifying as a small business. For that auction, the small 
business size standard was an entity that, together with its 
affiliates, has no more than a $6 million net worth and, after federal 
income taxes (excluding any carry over losses), has no more than $2 
million in annual profits each year for the previous two years. In the 
218-219 MHz Report and Order and Memorandum Opinion and Order, 64 FR 
59656, November 3, 1999, the Commission established a small business 
size standard for a ``small business'' as an entity that, together with 
its affiliates and persons or entities that hold interests in such an 
entity and their affiliates, has average annual gross revenues not to 
exceed $15 million for the preceding three years. A ``very small 
business'' is defined as an entity that, together with its affiliates 
and persons or entities that hold interests in such an entity and its 
affiliates, has average annual gross revenues not to exceed $3 million 
for the preceding three years. These size standards will be used in 
future auctions of 218-219 MHz spectrum.
    317. 2.3 GHz Wireless Communications Services. This service can be 
used for fixed, mobile, radiolocation, and digital audio broadcasting 
satellite uses. The Commission defined ``small business'' for the 
wireless communications services (``WCS'') auction as an entity with 
average gross revenues of $40 million for each of the three preceding 
years, and a ``very small business'' as an entity with average gross 
revenues of $15 million for each of the three preceding years. The SBA 
has approved these definitions. The Commission auctioned geographic 
area licenses in the WCS service. In the auction, which was conducted 
in 1997, there were seven bidders that won 31 licenses that qualified 
as very small business entities, and one bidder that won one license 
that qualified as a small business entity.
    318. 1670-1675 MHz Services. This service can be used for fixed and 
mobile uses, except aeronautical mobile. An auction for one license in 
the 1670-1675 MHz band was conducted in 2003. One license was awarded. 
The winning bidder was not a small entity.
    319. Wireless Telephony. Wireless telephony includes cellular, 
personal communications services, and specialized mobile radio 
telephony carriers. As noted, the SBA has developed a small business 
size standard for Wireless Telecommunications Carriers (except 
Satellite). Under the SBA small business size standard, a business is 
small if it has 1,500 or fewer employees. According to Commission data, 
413 carriers reported that they were engaged in wireless telephony. Of 
these, an

[[Page 24330]]

estimated 261 have 1,500 or fewer employees and 152 have more than 
1,500 employees. Therefore, a little less than one third of these 
entities can be considered small.
    320. Broadband Personal Communications Service. The broadband 
personal communications services (PCS) spectrum is divided into six 
frequency blocks designated A through F, and the Commission has held 
auctions for each block. The Commission initially defined a ``small 
business'' for C- and F-Block licenses as an entity that has average 
gross revenues of $40 million or less in the three previous calendar 
years. For F-Block licenses, an additional small business size standard 
for ``very small business'' was added and is defined as an entity that, 
together with its affiliates, has average gross revenues of not more 
than $15 million for the preceding three calendar years. These small 
business size standards, in the context of broadband PCS auctions, have 
been approved by the SBA. No small businesses within the SBA-approved 
small business size standards bid successfully for licenses in Blocks A 
and B. There were 90 winning bidders that claimed small business status 
in the first two C-Block auctions. A total of 93 bidders that claimed 
small business status won approximately 40 percent of the 1,479 
licenses in the first auction for the D, E, and F Blocks. On April 15, 
1999, the Commission completed the reauction of 347 C-, D-, E-, and F-
Block licenses in Auction No. 22. Of the 57 winning bidders in that 
auction, 48 claimed small business status and won 277 licenses.
    321. On January 26, 2001, the Commission completed the auction of 
422 C and F Block Broadband PCS licenses in Auction No. 35. Of the 35 
winning bidders in that auction, 29 claimed small business status. 
Subsequent events concerning Auction 35, including judicial and agency 
determinations, resulted in a total of 163 C and F Block licenses being 
available for grant. On February 15, 2005, the Commission completed an 
auction of 242 C-, D-, E-, and F-Block licenses in Auction No. 58. Of 
the 24 winning bidders in that auction, 16 claimed small business 
status and won 156 licenses. On May 21, 2007, the Commission completed 
an auction of 33 licenses in the A, C, and F Blocks in Auction No. 71. 
Of the 12 winning bidders in that auction, five claimed small business 
status and won 18 licenses. On August 20, 2008, the Commission 
completed the auction of 20 C-, D-, E-, and F-Block Broadband PCS 
licenses in Auction No. 78. Of the eight winning bidders for Broadband 
PCS licenses in that auction, six claimed small business status and won 
14 licenses.
    322. Specialized Mobile Radio Licenses. The Commission awards 
``small entity'' bidding credits in auctions for Specialized Mobile 
Radio (SMR) geographic area licenses in the 800 MHz and 900 MHz bands 
to firms that had revenues of no more than $15 million in each of the 
three previous calendar years. The Commission awards ``very small 
entity'' bidding credits to firms that had revenues of no more than $3 
million in each of the three previous calendar years. The SBA has 
approved these small business size standards for the 900 MHz Service. 
The Commission has held auctions for geographic area licenses in the 
800 MHz and 900 MHz bands. The 900 MHz SMR auction began on December 5, 
1995, and closed on April 15, 1996. Sixty bidders claiming that they 
qualified as small businesses under the $15 million size standard won 
263 geographic area licenses in the 900 MHz SMR band. The 800 MHz SMR 
auction for the upper 200 channels began on October 28, 1997, and was 
completed on December 8, 1997. Ten bidders claiming that they qualified 
as small businesses under the $15 million size standard won 38 
geographic area licenses for the upper 200 channels in the 800 MHz SMR 
band. A second auction for the 800 MHz band was held on January 10, 
2002 and closed on January 17, 2002 and included 23 BEA licenses. One 
bidder claiming small business status won five licenses.
    323. The auction of the 1,053 800 MHz SMR geographic area licenses 
for the General Category channels began on August 16, 2000, and was 
completed on September 1, 2000. Eleven bidders won 108 geographic area 
licenses for the General Category channels in the 800 MHz SMR band and 
qualified as small businesses under the $15 million size standard. In 
an auction completed on December 5, 2000, a total of 2,800 Economic 
Area licenses in the lower 80 channels of the 800 MHz SMR service were 
awarded. Of the 22 winning bidders, 19 claimed small business status 
and won 129 licenses. Thus, combining all four auctions, 41 winning 
bidders for geographic licenses in the 800 MHz SMR band claimed status 
as small businesses.
    324. In addition, there are numerous incumbent site-by-site SMR 
licenses and licensees with extended implementation authorizations in 
the 800 and 900 MHz bands. The Commission does not know how many firms 
provide 800 MHz or 900 MHz geographic area SMR service pursuant to 
extended implementation authorizations, nor how many of these providers 
have annual revenues of no more than $15 million. One firm has over $15 
million in revenues. In addition, the Commission does not know how many 
of these firms have 1,500 or fewer employees, which is the SBA-
determined size standard. The Commission assumes, for purposes of this 
analysis, that all of the remaining extended implementation 
authorizations are held by small entities, as defined by the SBA.
    325. Lower 700 MHz Band Licenses. The Commission previously adopted 
criteria for defining three groups of small businesses for purposes of 
determining their eligibility for special provisions such as bidding 
credits. The Commission defined a ``small business'' as an entity that, 
together with its affiliates and controlling principals, has average 
gross revenues not exceeding $40 million for the preceding three years. 
A ``very small business'' is defined as an entity that, together with 
its affiliates and controlling principals, has average gross revenues 
that are not more than $15 million for the preceding three years. 
Additionally, the lower 700 MHz Service had a third category of small 
business status for Metropolitan/Rural Service Area (MSA/RSA) 
licenses--``entrepreneur''--which is defined as an entity that, 
together with its affiliates and controlling principals, has average 
gross revenues that are not more than $3 million for the preceding 
three years. The SBA approved these small size standards. An auction of 
740 licenses (one license in each of the 734 MSAs/RSAs and one license 
in each of the six Economic Area Groupings (EAGs)) commenced on August 
27, 2002, and closed on September 18, 2002. Of the 740 licenses 
available for auction, 484 licenses were won by 102 winning bidders. 
Seventy-two of the winning bidders claimed small business, very small 
business or entrepreneur status and won a total of 329 licenses. A 
second auction commenced on May 28, 2003, closed on June 13, 2003, and 
included 256 licenses: 5 EAG licenses and 476 Cellular Market Area 
licenses. Seventeen winning bidders claimed small or very small 
business status and won 60 licenses, and nine winning bidders claimed 
entrepreneur status and won 154 licenses. On July 26, 2005, the 
Commission completed an auction of 5 licenses in the Lower 700 MHz band 
(Auction No. 60). There were three winning bidders for five licenses. 
All three winning bidders claimed small business status.
    326. In 2007, the Commission reexamined its rules governing the 700

[[Page 24331]]

MHz band in the 700 MHz Second Report and Order, 72 FR 48814, August 
24, 2007. An auction of 700 MHz licenses commenced January 24, 2008 and 
closed on March 18, 2008, which included, 176 Economic Area licenses in 
the A Block, 734 Cellular Market Area licenses in the B Block, and 176 
EA licenses in the E Block. Twenty winning bidders, claiming small 
business status (those with attributable average annual gross revenues 
that exceed $15 million and do not exceed $40 million for the preceding 
three years) won 49 licenses. Thirty three winning bidders claiming 
very small business status (those with attributable average annual 
gross revenues that do not exceed $15 million for the preceding three 
years) won 325 licenses.
    327. Upper 700 MHz Band Licenses. In the 700 MHz Second Report and 
Order, the Commission revised its rules regarding Upper 700 MHz 
licenses. On January 24, 2008, the Commission commenced Auction 73 in 
which several licenses in the Upper 700 MHz band were available for 
licensing: 12 Regional Economic Area Grouping licenses in the C Block, 
and one nationwide license in the D Block. The auction concluded on 
March 18, 2008, with 3 winning bidders claiming very small business 
status (those with attributable average annual gross revenues that do 
not exceed $15 million for the preceding three years) and winning five 
licenses.
    328. 700 MHz Guard Band Licensees. In 2000, in the 700 MHz Guard 
Band Order, 65 FR 17594, April 4, 2000, the Commission adopted size 
standards for ``small businesses'' and ``very small businesses'' for 
purposes of determining their eligibility for special provisions such 
as bidding credits and installment payments. A small business in this 
service is an entity that, together with its affiliates and controlling 
principals, has average gross revenues not exceeding $40 million for 
the preceding three years. Additionally, a very small business is an 
entity that, together with its affiliates and controlling principals, 
has average gross revenues that are not more than $15 million for the 
preceding three years. SBA approval of these definitions is not 
required. An auction of 52 Major Economic Area licenses commenced on 
September 6, 2000, and closed on September 21, 2000. Of the 104 
licenses auctioned, 96 licenses were sold to nine bidders. Five of 
these bidders were small businesses that won a total of 26 licenses. A 
second auction of 700 MHz Guard Band licenses commenced on February 13, 
2001, and closed on February 21, 2001. All eight of the licenses 
auctioned were sold to three bidders. One of these bidders was a small 
business that won a total of two licenses.
    329. Cellular Radiotelephone Service. Auction 77 was held to 
resolve one group of mutually exclusive applications for Cellular 
Radiotelephone Service licenses for unserved areas in New Mexico. 
Bidding credits for designated entities were not available in Auction 
77. In 2008, the Commission completed the closed auction of one 
unserved service area in the Cellular Radiotelephone Service, 
designated as Auction 77. Auction 77 concluded with one provisionally 
winning bid for the unserved area totaling $25,002.
    330. Private Land Mobile Radio (``PLMR''). PLMR systems serve an 
essential role in a range of industrial, business, land transportation, 
and public safety activities. These radios are used by companies of all 
sizes operating in all U.S. business categories, and are often used in 
support of the licensee's primary (non-telecommunications) business 
operations. For the purpose of determining whether a licensee of a PLMR 
system is a small business as defined by the SBA, the Commission uses 
the broad census category, Wireless Telecommunications Carriers (except 
Satellite). This definition provides that a small entity is any such 
entity employing no more than 1,500 persons. The Commission does not 
require PLMR licensees to disclose information about number of 
employees, so the Commission does not have information that could be 
used to determine how many PLMR licensees constitute small entities 
under this definition. The Commission notes that PLMR licensees 
generally use the licensed facilities in support of other business 
activities, and therefore, it would also be helpful to assess PLMR 
licensees under the standards applied to the particular industry 
subsector to which the licensee belongs.
    331. As of March 2010, there were 424,162 PLMR licensees operating 
921,909 transmitters in the PLMR bands below 512 MHz. The Commission 
notes that any entity engaged in a commercial activity is eligible to 
hold a PLMR license, and that any revised rules in this context could 
therefore potentially impact small entities covering a great variety of 
industries.
    332. Rural Radiotelephone Service. The Commission has not adopted a 
size standard for small businesses specific to the Rural Radiotelephone 
Service. A significant subset of the Rural Radiotelephone Service is 
the Basic Exchange Telephone Radio System (BETRS). In the present 
context, the Commission will use the SBA's small business size standard 
applicable to Wireless Telecommunications Carriers (except Satellite), 
i.e., an entity employing no more than 1,500 persons. There are 
approximately 1,000 licensees in the Rural Radiotelephone Service, and 
the Commission estimates that there are 1,000 or fewer small entity 
licensees in the Rural Radiotelephone Service that may be affected by 
the rules and policies proposed herein.
    333. Air-Ground Radiotelephone Service. The Commission has 
previously used the SBA's small business size standard applicable to 
Wireless Telecommunications Carriers (except Satellite), i.e., an 
entity employing no more than 1,500 persons. There are approximately 
100 licensees in the Air-Ground Radiotelephone Service, and under that 
definition, the Commission estimates that almost all of them qualify as 
small entities under the SBA definition. For purposes of assigning Air-
Ground Radiotelephone Service licenses through competitive bidding, the 
Commission has defined ``small business'' as an entity that, together 
with controlling interests and affiliates, has average annual gross 
revenues for the preceding three years not exceeding $40 million. A 
``very small business'' is defined as an entity that, together with 
controlling interests and affiliates, has average annual gross revenues 
for the preceding three years not exceeding $15 million. These 
definitions were approved by the SBA. In May 2006, the Commission 
completed an auction of nationwide commercial Air-Ground Radiotelephone 
Service licenses in the 800 MHz band (Auction No. 65). On June 2, 2006, 
the auction closed with two winning bidders winning two Air-Ground 
Radiotelephone Services licenses. Neither of the winning bidders 
claimed small business status.
    334. Aviation and Marine Radio Services. Small businesses in the 
aviation and marine radio services use a very high frequency (VHF) 
marine or aircraft radio and, as appropriate, an emergency position-
indicating radio beacon (and/or radar) or an emergency locator 
transmitter. The Commission has not developed a small business size 
standard specifically applicable to these small businesses. For 
purposes of this analysis, the Commission uses the SBA small business 
size standard for the category Wireless Telecommunications Carriers 
(except Satellite), which is 1,500 or fewer employees. Census data for 
2007, which supersede data contained in the 2002 Census, show that 
there were 1,383 firms that operated that year. Of those 1,383, 1,368 
had fewer than 100 employees, and 15 firms had more than 100 employees. 
Most

[[Page 24332]]

applicants for recreational licenses are individuals. Approximately 
581,000 ship station licensees and 131,000 aircraft station licensees 
operate domestically and are not subject to the radio carriage 
requirements of any statute or treaty. For purposes of our evaluations 
in this analysis, the Commission estimates that there are up to 
approximately 712,000 licensees that are small businesses (or 
individuals) under the SBA standard. In addition, between December 3, 
1998 and December 14, 1998, the Commission held an auction of 42 VHF 
Public Coast licenses in the 157.1875-157.4500 MHz (ship transmit) and 
161.775-162.0125 MHz (coast transmit) bands. For purposes of the 
auction, the Commission defined a ``small'' business as an entity that, 
together with controlling interests and affiliates, has average gross 
revenues for the preceding three years not to exceed $15 million 
dollars. In addition, a ``very small'' business is one that, together 
with controlling interests and affiliates, has average gross revenues 
for the preceding three years not to exceed $3 million dollars. There 
are approximately 10,672 licensees in the Marine Coast Service, and the 
Commission estimates that almost all of them qualify as ``small'' 
businesses under the above special small business size standards and 
may be affected by rules adopted pursuant to the Order.
    335. Advanced Wireless Services (AWS) (1710-1755 MHz and 2110-2155 
MHz bands (AWS-1); 1915-1920 MHz, 1995-2000 MHz, 2020-2025 MHz and 
2175-2180 MHz bands (AWS-2); 2155-2175 MHz band (AWS-3)). For the AWS-1 
bands, the Commission has defined a ``small business'' as an entity 
with average annual gross revenues for the preceding three years not 
exceeding $40 million, and a ``very small business'' as an entity with 
average annual gross revenues for the preceding three years not 
exceeding $15 million. For AWS-2 and AWS-3, although the Commission 
does not know for certain which entities are likely to apply for these 
frequencies, they note that the AWS-1 bands are comparable to those 
used for cellular service and personal communications service. The 
Commission has not yet adopted size standards for the AWS-2 or AWS-3 
bands but proposes to treat both AWS-2 and AWS-3 similarly to broadband 
PCS service and AWS-1 service due to the comparable capital 
requirements and other factors, such as issues involved in relocating 
incumbents and developing markets, technologies, and services.
    336. 3650-3700 MHz band. In March 2005, the Commission released a 
Report and Order and Memorandum Opinion and Order that provides for 
nationwide, non-exclusive licensing of terrestrial operations, 
utilizing contention-based technologies, in the 3650 MHz band (i.e., 
3650-3700 MHz). As of April 2010, more than 1270 licenses have been 
granted and more than 7433 sites have been registered. The Commission 
has not developed a definition of small entities applicable to 3650-
3700 MHz band nationwide, non-exclusive licensees. However, the 
Commission estimates that the majority of these licensees are Internet 
Access Service Providers (ISPs) and that most of those licensees are 
small businesses.
    337. Fixed Microwave Services. Microwave services include common 
carrier, private-operational fixed, and broadcast auxiliary radio 
services. They also include the Local Multipoint Distribution Service 
(LMDS), the Digital Electronic Message Service (DEMS), and the 24 GHz 
Service, where licensees can choose between common carrier and non-
common carrier status. At present, there are approximately 36,708 
common carrier fixed licensees and 59,291 private operational-fixed 
licensees and broadcast auxiliary radio licensees in the microwave 
services. There are approximately 135 LMDS licensees, three DEMS 
licensees, and three 24 GHz licensees. The Commission has not yet 
defined a small business with respect to microwave services. For 
purposes of the FRFA, the Commission will use the SBA's definition 
applicable to Wireless Telecommunications Carriers (except satellite)--
i.e., an entity with no more than 1,500 persons. Under the present and 
prior categories, the SBA has deemed a wireless business to be small if 
it has 1,500 or fewer employees. The Commission does not have data 
specifying the number of these licensees that have more than 1,500 
employees, and thus is unable at this time to estimate with greater 
precision the number of fixed microwave service licensees that would 
qualify as small business concerns under the SBA's small business size 
standard. Consequently, the Commission estimates that there are up to 
36,708 common carrier fixed licensees and up to 59,291 private 
operational-fixed licensees and broadcast auxiliary radio licensees in 
the microwave services that may be small and may be affected by the 
rules and policies adopted herein. The Commission notes, however, that 
the common carrier microwave fixed licensee category includes some 
large entities.
    338. Offshore Radiotelephone Service. This service operates on 
several UHF television broadcast channels that are not used for 
television broadcasting in the coastal areas of states bordering the 
Gulf of Mexico. There are presently approximately 55 licensees in this 
service. The Commission is unable to estimate at this time the number 
of licensees that would qualify as small under the SBA's small business 
size standard for the category of Wireless Telecommunications Carriers 
(except Satellite). Under that SBA small business size standard, a 
business is small if it has 1,500 or fewer employees. Census data for 
2007, which supersede data contained in the 2002 Census, show that 
there were 1,383 firms that operated that year. Of those 1,383, 1,368 
had fewer than 100 employees, and 15 firms had more than 100 employees. 
Thus, under this category and the associated small business size 
standard, the majority of firms can be considered small.
    339. 39 GHz Service. The Commission created a special small 
business size standard for 39 GHz licenses--an entity that has average 
gross revenues of $40 million or less in the three previous calendar 
years. An additional size standard for ``very small business'' is: An 
entity that, together with affiliates, has average gross revenues of 
not more than $15 million for the preceding three calendar years. The 
SBA has approved these small business size standards. The auction of 
the 2,173 39 GHz licenses began on April 12, 2000 and closed on May 8, 
2000. The 18 bidders who claimed small business status won 849 
licenses. Consequently, the Commission estimates that 18 or fewer 39 
GHz licensees are small entities that may be affected by rules adopted 
pursuant to the Order.
    340. Broadband Radio Service and Educational Broadband Service. 
Broadband Radio Service systems, previously referred to as Multipoint 
Distribution Service (MDS) and Multichannel Multipoint Distribution 
Service (MMDS) systems, and ``wireless cable,'' transmit video 
programming to subscribers and provide two-way high speed data 
operations using the microwave frequencies of the Broadband Radio 
Service (BRS) and Educational Broadband Service (EBS) (previously 
referred to as the Instructional Television Fixed Service (ITFS)). In 
connection with the 1996 BRS auction, the Commission established a 
small business size standard as an entity that had annual average gross 
revenues of no more than $40 million in the previous three calendar 
years. The BRS auctions

[[Page 24333]]

resulted in 67 successful bidders obtaining licensing opportunities for 
493 Basic Trading Areas (BTAs). Of the 67 auction winners, 61 met the 
definition of a small business. BRS also includes licensees of stations 
authorized prior to the auction. At this time, the Commission estimates 
that of the 61 small business BRS auction winners, 48 remain small 
business licensees. In addition to the 48 small businesses that hold 
BTA authorizations, there are approximately 392 incumbent BRS licensees 
that are considered small entities. After adding the number of small 
business auction licensees to the number of incumbent licensees not 
already counted, the Commission finds that there are currently 
approximately 440 BRS licensees that are defined as small businesses 
under either the SBA or the Commission's rules.
    341. In 2009, the Commission conducted Auction 86, the sale of 78 
licenses in the BRS areas. The Commission offered three levels of 
bidding credits: (i) A bidder with attributed average annual gross 
revenues that exceed $15 million and do not exceed $40 million for the 
preceding three years (small business) received a 15 percent discount 
on its winning bid; (ii) a bidder with attributed average annual gross 
revenues that exceed $3 million and do not exceed $15 million for the 
preceding three years (very small business) received a 25 percent 
discount on its winning bid; and (iii) a bidder with attributed average 
annual gross revenues that do not exceed $3 million for the preceding 
three years (entrepreneur) received a 35 percent discount on its 
winning bid. Auction 86 concluded in 2009 with the sale of 61 licenses. 
Of the ten winning bidders, two bidders that claimed small business 
status won 4 licenses; one bidder that claimed very small business 
status won three licenses; and two bidders that claimed entrepreneur 
status won six licenses.
    342. In addition, the SBA's Cable Television Distribution Services 
small business size standard is applicable to EBS. There are presently 
2,436 EBS licensees. All but 100 of these licenses are held by 
educational institutions. Educational institutions are included in this 
analysis as small entities. Thus, the Commission estimates that at 
least 2,336 licensees are small businesses. Since 2007, Cable 
Television Distribution Services have been defined within the broad 
economic census category of Wired Telecommunications Carriers; that 
category is defined as follows: ``This industry comprises 
establishments primarily engaged in operating and/or providing access 
to transmission facilities and infrastructure that they own and/or 
lease for the transmission of voice, data, text, sound, and video using 
wired telecommunications networks. Transmission facilities may be based 
on a single technology or a combination of technologies.'' The SBA has 
developed a small business size standard for this category, which is: 
All such firms having 1,500 or fewer employees. To gauge small business 
prevalence for these cable services the Commission must, however, use 
the most current census data that are based on the previous category of 
Cable and Other Program Distribution and its associated size standard; 
that size standard was: All such firms having $13.5 million or less in 
annual receipts. According to Census Bureau data for 2007, there were a 
total of 996 firms in this category that operated for the entire year. 
Of this total, 948 firms had annual receipts of under $10 million, and 
48 firms had receipts of $10 million or more but less than $25 million. 
Thus, the majority of these firms can be considered small.
    343. Narrowband Personal Communications Services. In 1994, the 
Commission conducted an auction for Narrowband PCS licenses. A second 
auction was also conducted later in 1994. For purposes of the first two 
Narrowband PCS auctions, ``small businesses'' were entities with 
average gross revenues for the prior three calendar years of $40 
million or less. Through these auctions, the Commission awarded a total 
of 41 licenses, 11 of which were obtained by four small businesses. To 
ensure meaningful participation by small business entities in future 
auctions, the Commission adopted a two-tiered small business size 
standard in the Narrowband PCS Second Report and Order, 65 FR 35843, 
June 6, 2000. A ``small business'' is an entity that, together with 
affiliates and controlling interests, has average gross revenues for 
the three preceding years of not more than $40 million. A ``very small 
business'' is an entity that, together with affiliates and controlling 
interests, has average gross revenues for the three preceding years of 
not more than $15 million. The SBA has approved these small business 
size standards. A third auction was conducted in 2001. Here, five 
bidders won 317 (Metropolitan Trading Areas and nationwide) licenses. 
Three of these claimed status as a small or very small entity and won 
311 licenses.
    344. Paging (Private and Common Carrier). In the Paging Third 
Report and Order, 64 FR 33762, June 24, 1999, the Commission developed 
a small business size standard for ``small businesses'' and ``very 
small businesses'' for purposes of determining their eligibility for 
special provisions such as bidding credits and installment payments. A 
``small business'' is an entity that, together with its affiliates and 
controlling principals, has average gross revenues not exceeding $15 
million for the preceding three years. Additionally, a ``very small 
business'' is an entity that, together with its affiliates and 
controlling principals, has average gross revenues that are not more 
than $3 million for the preceding three years. The SBA has approved 
these small business size standards. According to Commission data, 291 
carriers have reported that they are engaged in Paging or Messaging 
Service. Of these, an estimated 289 have 1,500 or fewer employees, and 
two have more than 1,500 employees. Consequently, the Commission 
estimates that the majority of paging providers are small entities that 
may be affected by our action. An auction of Metropolitan Economic Area 
licenses commenced on February 24, 2000, and closed on March 2, 2000. 
Of the 2,499 licenses auctioned, 985 were sold. Fifty-seven companies 
claiming small business status won 440 licenses. A subsequent auction 
of MEA and Economic Area (``EA'') licenses was held in the year 2001. 
Of the 15,514 licenses auctioned, 5,323 were sold. One hundred thirty-
two companies claiming small business status purchased 3,724 licenses. 
A third auction, consisting of 8,874 licenses in each of 175 EAs and 
1,328 licenses in all but three of the 51 MEAs, was held in 2003. 
Seventy-seven bidders claiming small or very small business status won 
2,093 licenses. A fourth auction, consisting of 9,603 lower and upper 
paging band licenses was held in the year 2010. Twenty-nine bidders 
claiming small or very small business status won 3,016 licenses.
    345. 220 MHz Radio Service--Phase I Licensees. The 220 MHz service 
has both Phase I and Phase II licenses. Phase I licensing was conducted 
by lotteries in 1992 and 1993. There are approximately 1,515 such non-
nationwide licensees and four nationwide licensees currently authorized 
to operate in the 220 MHz band. The Commission has not developed a 
small business size standard for small entities specifically applicable 
to such incumbent 220 MHz Phase I licensees. To estimate the number of 
such licensees that are small businesses, the Commission applies the 
small business size standard under the SBA rules applicable to Wireless 
Telecommunications Carriers (except Satellite). Under this category, 
the SBA

[[Page 24334]]

deems a wireless business to be small if it has 1,500 or fewer 
employees. The Commission estimates that nearly all such licensees are 
small businesses under the SBA's small business size standard that may 
be affected by rules adopted pursuant to the Order.
    346. 220 MHz Radio Service--Phase II Licensees. The 220 MHz service 
has both Phase I and Phase II licenses. The Phase II 220 MHz service is 
subject to spectrum auctions. In the 220 MHz Third Report and Order, 62 
FR 15978, April 3, 1997, the Commission adopted a small business size 
standard for ``small'' and ``very small'' businesses for purposes of 
determining their eligibility for special provisions such as bidding 
credits and installment payments. This small business size standard 
indicates that a ``small business'' is an entity that, together with 
its affiliates and controlling principals, has average gross revenues 
not exceeding $15 million for the preceding three years. A ``very small 
business'' is an entity that, together with its affiliates and 
controlling principals, has average gross revenues that do not exceed 
$3 million for the preceding three years. The SBA has approved these 
small business size standards. Auctions of Phase II licenses commenced 
on September 15, 1998, and closed on October 22, 1998. In the first 
auction, 908 licenses were auctioned in three different-sized 
geographic areas: Three nationwide licenses, 30 Regional Economic Area 
Group (EAG) Licenses, and 875 Economic Area (EA) Licenses. Of the 908 
licenses auctioned, 693 were sold. Thirty-nine small businesses won 
licenses in the first 220 MHz auction. The second auction included 225 
licenses: 216 EA licenses and 9 EAG licenses. Fourteen companies 
claiming small business status won 158 licenses.
9. Satellite Service Providers
    347. Satellite Telecommunications Providers. Two economic census 
categories address the satellite industry. The first category has a 
small business size standard of $30 million or less in average annual 
receipts, under SBA rules. The second has a size standard of $30 
million or less in annual receipts.
    348. The category of Satellite Telecommunications ``comprises 
establishments primarily engaged in providing telecommunications 
services to other establishments in the telecommunications and 
broadcasting industries by forwarding and receiving communications 
signals via a system of satellites or reselling satellite 
telecommunications.'' For this category, Census Bureau data for 2007 
show that there were a total of 570 firms that operated for the entire 
year. Of this total, 530 firms had annual receipts of under $30 
million, and 40 firms had receipts of over $30 million. Consequently, 
the Commission estimates that the majority of Satellite 
Telecommunications firms are small entities that might be affected by 
our action.
    349. The second category of Other Telecommunications comprises, 
inter alia, ``establishments primarily engaged in providing specialized 
telecommunications services, such as satellite tracking, communications 
telemetry, and radar station operation. This industry also includes 
establishments primarily engaged in providing satellite terminal 
stations and associated facilities connected with one or more 
terrestrial systems and capable of transmitting telecommunications to, 
and receiving telecommunications from, satellite systems.'' For this 
category, Census Bureau data for 2007 show that there were a total of 
1,274 firms that operated for the entire year. Of this total, 1,252 had 
annual receipts below $25 million per year. Consequently, the 
Commission estimates that the majority of All Other Telecommunications 
firms are small entities that might be affected by our action.
10. Cable Service Providers
    350. Because section 706 requires us to monitor the deployment of 
broadband using any technology, the Commission anticipates that some 
broadband service providers may not provide telephone service. 
Accordingly, the Commission describes below other types of firms that 
may provide broadband services, including cable companies, MDS 
providers, and utilities, among others.
    351. Cable and Other Program Distributors. Since 2007, these 
services have been defined within the broad economic census category of 
Wired Telecommunications Carriers; that category is defined as follows: 
``This industry comprises establishments primarily engaged in operating 
and/or providing access to transmission facilities and infrastructure 
that they own and/or lease for the transmission of voice, data, text, 
sound, and video using wired telecommunications networks. Transmission 
facilities may be based on a single technology or a combination of 
technologies.'' The SBA has developed a small business size standard 
for this category, which is: All such firms having 1,500 or fewer 
employees. To gauge small business prevalence for these cable services 
the Commission must, however, use current census data that are based on 
the previous category of Cable and Other Program Distribution and its 
associated size standard; that size standard was: All such firms having 
$13.5 million or less in annual receipts. According to Census Bureau 
data for 2007, there were a total of 2,048 firms in this category that 
operated for the entire year. Of this total, 1,393 firms had annual 
receipts of under $10 million, and 655 firms had receipts of $10 
million or more. Thus, the majority of these firms can be considered 
small.
    352. Cable Companies and Systems. The Commission has also developed 
its own small business size standards, for the purpose of cable rate 
regulation. Under the Commission's rules, a ``small cable company'' is 
one serving 400,000 or fewer subscribers, nationwide. Industry data 
that there are currently 4,600 active cable systems in the United 
States. Of this total, all but nine cable operators are small under the 
400,000 subscriber size standard. In addition, under the Commission's 
rules, a ``small system'' is a cable system serving 15,000 or fewer 
subscribers. Current Commission records show 4,945 cable systems 
nationwide. Of this total, 4,380 cable systems have less than 20,000 
subscribers, and 565 systems have 20,000 or more subscribers, based on 
the same records. Thus, under this standard, the Commission estimates 
that most cable systems are small entities.
    353. Cable System Operators. The Communications Act of 1934, as 
amended, also contains a size standard for small cable system 
operators, which is ``a cable operator that, directly or through an 
affiliate, serves in the aggregate fewer than 1 percent of all 
subscribers in the United States and is not affiliated with any entity 
or entities whose gross annual revenues in the aggregate exceed 
$250,000,000.'' The Commission has determined that an operator serving 
fewer than 677,000 subscribers shall be deemed a small operator, if its 
annual revenues, when combined with the total annual revenues of all 
its affiliates, do not exceed $250 million in the aggregate. Based on 
available data, the Commission finds that all but ten incumbent cable 
operators are small entities under this size standard. The Commission 
notes that the Commission neither requests nor collects information on 
whether cable system operators are affiliated with entities whose gross 
annual revenues exceed $250 million, and therefore they are unable to 
estimate more accurately the number of cable system operators that 
would qualify as small under this size standard.
    354. The open video system (``OVS'') framework was established in 
1996, and is one of four statutorily recognized options for the 
provision of video

[[Page 24335]]

programming services by local exchange carriers. The OVS framework 
provides opportunities for the distribution of video programming other 
than through cable systems. Because OVS operators provide subscription 
services, OVS falls within the SBA small business size standard 
covering cable services, which is ``Wired Telecommunications 
Carriers.'' The SBA has developed a small business size standard for 
this category, which is: All such firms having 1,500 or fewer 
employees. According to Census Bureau data for 2007, there were a total 
of 955 firms in this previous category that operated for the entire 
year. Of this total, 939 firms had employment of 999 or fewer 
employees, and 16 firms had employment of 1,000 employees or more. 
Thus, under this second size standard, most cable systems are small and 
may be affected by rules adopted pursuant to the Order. In addition, 
the Commission notes that they have certified some OVS operators, with 
some now providing service. Broadband service providers (``BSPs'') are 
currently the only significant holders of OVS certifications or local 
OVS franchises. The Commission does not have financial or employment 
information regarding the entities authorized to provide OVS, some of 
which may not yet be operational. Thus, again, at least some of the OVS 
operators may qualify as small entities.
11. Electric Power Generators, Transmitters, and Distributors
    355. Electric Power Generators, Transmitters, and Distributors. The 
Census Bureau defines an industry group comprised of ``establishments, 
primarily engaged in generating, transmitting, and/or distributing 
electric power. Establishments in this industry group may perform one 
or more of the following activities: (1) Operate generation facilities 
that produce electric energy; (2) operate transmission systems that 
convey the electricity from the generation facility to the distribution 
system; and (3) operate distribution systems that convey electric power 
received from the generation facility or the transmission system to the 
final consumer.'' The SBA has developed a small business size standard 
for firms in this category: ``A firm is small if, including its 
affiliates, it is primarily engaged in the generation, transmission, 
and/or distribution of electric energy for sale and its total electric 
output for the preceding fiscal year did not exceed 4 million megawatt 
hours.'' Census Bureau data for 2007 show that there were 1,174 firms 
that operated for the entire year in this category. Of these firms, 50 
had 1,000 employees or more, and 1,124 had fewer than 1,000 employees. 
Based on this data, a majority of these firms can be considered small.
12. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements for Small Entities
    356. In the Report and Order, the Commission requires all rate-of-
return ETCs to submit annually a list of the geocoded locations to 
which they have newly deployed facilities capable of delivering 
broadband in lieu of annual narrative reporting. To lessen the burden, 
in the Report and Order the Commission directs the Bureau to work with 
USAC to develop an online portal that will enable carriers to submit 
the requisite information on a rolling basis throughout the year as 
construction is completed and service becomes commercially available, 
with any final submission no later than March 1 of the following year.
13. Steps Taken To Minimize the Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered
    357. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include (among others) the following four alternatives: (1) 
The establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities. The Commission has considered all of these factors subsequent 
to receiving substantive comments from the public and potentially 
affected entities. The Commission has considered the economic impact on 
small entities, as identified in comments filed in response to the USF/
ICC Transformation NPRM and FNRPM and their IRFAs, in reaching its 
final conclusions and taking action in this proceeding.
    358. The rules that the Commission adopts in the Report and Order 
and Order and Order on Reconsideration take steps to provide greater 
certainty and flexibility to rate-of-return carriers, many of which are 
small entities. For example, the Commission adopts a voluntary path for 
rate-of-return carriers to elect to receive model-based support in 
exchange for deploying broadband-capable networks to a pre-determined 
number of eligible locations. The Commission recognizes that permitting 
rate-of-return carriers to elect to receive specific and predictable 
monthly support amounts over the ten years will enhance the ability of 
these carriers to deploy broadband throughout the term and free them 
from the administrative burdens associated with doing cost studies to 
receive high-cost support. Additionally, to provide further 
flexibility, the Commission adopts even-spaced annual interim 
milestones over the 10-year term for rate-of-return carriers electing 
model-based support, and decline to set interim milestones requiring 
deployment of speeds at or above 25/3 Mbps. By doing so, the Commission 
minimizes deployment burdens by permitting flexibility in design and 
deployment of broadband networks. The Commission also concludes that 
rate-of-return carriers receiving model-based support should have some 
flexibility in their deployment obligations to address unforeseeable 
challenges to meeting these obligations. Therefore, the Commission 
permitted rate-of-return carriers to deploy to 95 percent of the 
required number of locations by the end of the 10-year term.
    359. In the Report and Order, the Commission also removes a 
deterrent for rate-of-return carriers to offer standalone broadband 
service by making technical rule changes to our existing ICLS rules to 
support the provision of broadband service to consumers in areas with 
high loop-related costs (including small carriers and those that wish 
to transfer or acquire parts of exchanges), without regard to whether 
the loops are also used for traditional voice services. By supporting 
broadband lines, the Commission removes potential regulatory barriers 
to taking steps to offer new IP-based services in innovative ways, and 
provides rate-of-return carriers strategic flexibility in their service 
offerings.
    360. The Commission adopts a mechanism to limit operating costs 
eligible for support under HCLS and CAF BLS to encourage efficient 
spending by rate-of-return carriers and increase the amount of 
universal service support available for investment in broadband-capable 
facilities. However, to soften the impact of this expense limitation, 
the Commission concludes that a transition is appropriate to allow 
carriers time to adjust their operating expenditures. The Commission 
also adopts a capex allowance proposed by the rate-of-return industry 
associations to help target support to those areas

[[Page 24336]]

with less broadband deployment so that carriers serving those areas 
have the opportunity and support to catch up to the average level of 
broadband deployment in areas served by rate-of-return carriers. The 
Commission also concludes that if any rate-of-return carrier believes 
that the support it receives is insufficient, it may seek a waiver of 
the Commission's rules to obtain the flexibility and certainty it needs 
to continue operating its business.
    361. Next, in the Report and Order, the Commission takes steps to 
prohibit rate-of-return carriers from receiving CAF BLS in areas that 
are served by a qualifying unsubsidized competitor. However, the 
Commission limits the reduction in support to only those census blocks 
that are overlapped in at least 85 percent of their locations. The 
Commission recognized that competitive areas are likely to be lower 
cost and non-competitive areas are likely to be relatively higher cost, 
and therefore ensured that rate-of-return carriers subject to this rule 
may disaggregate their support in areas determined to be served by 
qualifying competitors by one of several options. The Commission 
provides further flexibility to those rate-of-return carriers affected 
by this rule by adopting a phased reduction in disaggregated support 
for competitive areas. By permitting this flexibility, the Commission 
provides these small entities with the ability to make reasoned 
business decisions to advance their deployment goals.
    362. To promote ``accountability from companies receiving support 
to ensure that public investments are used wisely to deliver intended 
results,'' the Commission adopts defined deployment obligations that 
are a condition of the receipt of high-cost funding for those carriers 
continuing to receive support based on embedded costs. To provide rate-
of-return carriers with the certainty needed to invest in their 
networks, the Commission adopted a specific methodology to determine 
each carrier's deployment obligation over a defined five-year period, 
which will be used to monitor carrier performance. The Commission 
recognizes that rate-of-return carriers subject to defined five-year 
deployment obligations may choose different timelines to meet their 
deployment obligations and therefore allows carriers the flexibility to 
choose to meet their obligation at any time during the five-year 
period.
    363. In modifying its pricing rules, the Commission minimizes the 
burden on small carriers by deriving the costs for the Consumer 
Broadband-Only Loop category using existing data and allows NECA to 
tariff the Consumer Broadband-Only Loop rate for carriers electing 
model-based support because of the administrative efficiencies of 
employing a single tariff. The Commission also consolidates the 
certification that consumer broadband-only loop costs are not being 
double recovered into an existing certification, thus streamlining the 
process for small carriers.
    364. The Commission also takes action to modify our existing 
reporting requirements. The Commission revises ETCs' annual reporting 
requirements to align better those requirements with the Commission's 
statutory and regulatory objectives. To reduce the administrative 
burden on rate-of-return carriers, the Commission concludes that the 
public interest would be served by eliminating the requirement to file 
a narrative update to the five-year plan. Instead, the Commission 
adopts narrowly tailored reporting requirements regarding the location 
of new deployment offering service at various speeds, which will better 
enable the Commission to determine on an annual basis how high-cost 
support is being used to ``improve broadband availability, service 
quality, and capacity at the smallest geographic area possible.'' Taken 
as a whole, these modifications to the reporting requirements for rate-
of-return carriers will reduce their administrative burden and provide 
certainty as to what must be filed and when.
    365. In the Order and Order on Reconsideration, the Commission is 
particularly mindful of the economic impact rate represcription will 
have on rate-of-return incumbent LECs, many of which are small 
entities. Accordingly, the Commission takes a number of steps to 
minimize the economic impact of the new rate of return. As an initial 
matter, the Commission expands the upper end of the rate of return zone 
of reasonableness beyond the WACC estimates obtained using financial 
models based on policy considerations and adopt the rate of return from 
the upper end of this zone. In so doing, the Commission attempts to 
maximize the likelihood that the unitary rate of return is fully 
compensatory, even for small firms with a relatively high cost of 
capital. In addition, to help minimize the immediate financial impacts 
that represcription may impose on small carriers, the Commission 
adopts, for the first time, a transitional approach to represcription. 
Under this approach, the rate of return is reduced by 25 basis points 
per year beginning July 1, 2016 until it reaches the represcribed 9.75 
percent rate of return. Together, these measures are intended to reduce 
the significant economic impact of the new rate of return on small 
carriers.

C. Report to Congress

    366. The Commission will send a copy of the Order, including this 
FRFA, in a report to be sent to Congress and the Government 
Accountability Office pursuant to the Small Business Regulatory 
Enforcement Fairness Act of 1996. In addition, the Commission will send 
a copy of the Order, including the FRFA, to the Chief Counsel for 
Advocacy of the Small Business Administration. A copy of the Order and 
FRFA (or summaries thereof) will also be published in the Federal 
Register.

D. Congressional Review Act

    367. The Commission will send 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).
    368. People with Disabilities. To request materials in accessible 
formats for people with disabilities (braille, large print, electronic 
files, audio format), send an email to [email protected] or call the 
Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-
418-0432 (tty).
    369. Additional Information. For additional information on this 
proceeding, contact Suzanne Yelen of the Wireline Competition Bureau, 
Industry Analysis and Technology Division, [email protected], (202) 
418-7400 or Alexander Minard of the Wireline Competition Bureau, 
Technology Access Policy Division, [email protected], (202) 418-
7400.

V. Ordering Clauses

    370. Accordingly, IT IS ORDERED, pursuant to the authority 
contained in sections 1, 2, 4(i), 5, 10, 201-206, 214, 218-220, 251, 
252, 254, 256, 303(r), 332, 403, and 405 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), 155, 201-206, 214, 218-220, 251, 252, 
254, 256, 303(r), 332, 403, 405, 1302, and sections 1.1, 1.3, 1.421, 
1.427, and 1.429 of the Commission's rules, 47 CFR 1.1, 1.3, 1.421, 
1.427, and 1.429, that this Report and Order, Order and Order on 
Reconsideration, and concurrently adopted Further Notice of Proposed 
Rulemaking IS ADOPTED, effective thirty (30) days after publication of 
the text or summary thereof in the Federal Register, except for those 
rules and requirements involving Paperwork Reduction Act burdens, which 
shall

[[Page 24337]]

become effective immediately upon announcement in the Federal Register 
of OMB approval. It is our intention in adopting these rules that if 
any of the rules that the Commission retains, modifies, or adopts 
herein, or the application thereof to any person or circumstance, are 
held to be unlawful, the remaining portions of the rules not deemed 
unlawful, and the application of such rules to other persons or 
circumstances, shall remain in effect to the fullest extent permitted 
by law.
    371. IT IS FURTHER ORDERED that parts 51, 54, 65, and 69 of the 
Commission's rules, 47 CFR parts 51, 54, 65, and 69, ARE AMENDED as set 
forth in Appendix B, and such rule amendments SHALL BE EFFECTIVE thirty 
(30) days after publication of the rules amendments in the Federal 
Register, except to the extent they contain information collections 
subject to PRA review. The rules that contain information collections 
subject to PRA review SHALL BECOME EFFECTIVE immediately upon 
announcement in the Federal Register of OMB approval.
    372. IT IS FURTHER ORDERED that pursuant to Section 1.3 of the 
Commission's rules, 47 CFR 1.3, sections 65.300 and 65.303 of the 
Commission's rules, 47 CFR 65.300, 65.303, are WAIVED to the extent 
provided herein.
    373. IT IS FURTHER ORDERED that, pursuant to the authority 
contained in sections 1, 2, 4(i), 5, 10, 201-206, 214, 218-220, 251, 
252, 254, 256, 303(r), 332, 403, and 405 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), 155, 201-206, 214, 218-220, 251, 252, 
254, 256, 303(r), 332, 403, 405, 1302, and sections 1.1, 1.3, 1.421, 
1.427, and 1.429 of the Commission's rules, 47 CFR 1.1, 1.3, 1.421, 
1.427, and 1.429, NOTICE IS HEREBY GIVEN of the proposals and tentative 
conclusions described in this Further Notice of Proposed Rulemaking.
    374. IT IS FURTHER ORDERED that pursuant section 1.429(i) of the 
Commission's rules, 47 CFR 1.429(i), that the Petition for 
Reconsideration and Clarification of the National Exchange Carrier 
Association, Inc., Organization for the Promotion and Advancement of 
Small Telecommunications Companies, and Western Telecommunications 
Alliance, filed December 29, 2011, is DISMISSED and DENIED to the 
extent provided herein.
    375. IT IS FURTHER ORDERED that the Commission SHALL SEND a copy of 
this Report and Order, Order and Order on Reconsideration, and 
concurrently adopted Further Notice of Proposed Rulemaking to Congress 
and the Government Accountability Office pursuant to the Congressional 
Review Act, see 5 U.S.C. 801(a)(1)(A).
    376. IT IS FURTHER ORDERED, that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, SHALL SEND a 
copy of this Report and Order, Order and Order on Reconsideration, and 
concurrently adopted Further Notice of Proposed Rulemaking, including 
the Initial Regulatory Flexibility Analysis and the Final Regulatory 
Flexibility Analysis, to the Chief Counsel for Advocacy of the Small 
Business Administration.

List of Subjects

47 CFR Part 51

    Communications common carriers, Telecommunications.

47 CFR Part 54

    Communications common carriers, Health facilities, Infants and 
children, Internet, Libraries, Reporting and recordkeeping 
requirements, Schools, Telecommunications, Telephone.

47 CFR Part 65

    Administrative practice and procedure, Communications common 
carriers, Reporting and recordkeeping requirements, Telephone.

47 CFR Part 69

    Communications common carriers, Reporting and recordkeeping 
requirements, Telephone.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

Final Rule

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR parts 51, 54, 65, and 69 as 
follows:

PART 51--INTERCONNECTION

0
1. The authority citation for part 51 is revised to read as follows:

    Authority:  47 U.S.C. 151-55, 201-05, 207-09, 218, 220, 225-27, 
251-54, 256, 271, 303(r), 332, 1302.


0
2. In Sec.  51.917, add paragraph (f)(4) to read as follows:


Sec.  51.917  Revenue recovery for Rate-of-Return Carriers.

* * * * *
    (f) * * *
    (4) A Rate-of-Return Carrier must impute an amount equal to the 
Access Recovery Charge for each Consumer Broadband-Only Loop line that 
receives support pursuant to Sec.  54.901 of this chapter, with the 
imputation applied before CAF-ICC recovery is determined. The per line 
per month imputation amount shall be equal to the Access Recovery 
Charge amount prescribed by paragraph (e) of this section, consistent 
with the residential or single-line business or multi-line business 
status of the retail customer.

PART 54--UNIVERSAL SERVICE

0
3. The authority citation for part 54 is revised to read as follows:

    Authority:  47 U.S.C. 151, 154(i), 155, 201, 205, 214, 219, 220, 
254, 303(r), 403, and 1302 unless otherwise noted.


Sec.  54.301  [Removed].

0
4. Remove Sec.  54.301.
0
5. Add Sec.  54.303 to subpart D to read as follows:


Sec.  54.303  Eligible Capital Investment and Operating Expenses.

    (a) Eligible Operating Expenses. Each study area's eligible 
operating expenses for purposes of calculating universal service 
support pursuant to subparts K and M of this part shall be adjusted as 
follows:
    (1) Total eligible annual operating expenses per location shall be 
limited as follows plus one standard deviation:

Y = [alpha] + [beta]1X1 + 
[beta]2X2 + [beta]3X3,

Where:

Y = is the natural log of the total operating cost per housing unit,
[alpha] is the coefficient on the constant
[beta] is the regression coefficient for each of the regressions,
X1 is the natural log of the number of housing units in 
the study area,
X2 is the natural log of the number of density (number of 
housing units per square mile), and
X3 is the square of the natural log of the density

    (2) Eligible operating expenses are the sum of Cable and Wire 
Facilities Expense, Central Office Equipment Expense, Network Support 
and General Expense, Network Operations Expense, Limited Corporate 
Operations Expense, Information Origination/Termination Expense, Other 
Property Plant and Equipment Expenses, Customer Operations Expense: 
Marketing, and Customer Operations Expense: Services.
    (3) For purposes of this section, the number of housing units will 
be determined per the most recently available U.S Census data for each 
census block in that study area. If a census block is partially within 
a study area, the number of housing units in that portion of the census 
block will be determined based upon the percentage geographic area of 
the census block within the study area.

[[Page 24338]]

    (4) Notwithstanding the provisions of paragraph (a) of this 
section, total eligible annual operating expenses for 2016 will be 
limited to the total eligible annual operating expenses as defined in 
this section plus one half of the amount of total eligible annual 
expense as calculated prior to the application of this section.
    (5) For any study area subject to the limitation described in this 
paragraph, a required percentage reduction will be calculated for that 
study area's total eligible annual operating expenses. Each category or 
account used to determine that study area's total eligible annual 
operating expenses will then be reduced by this required percentage 
reduction.
    (b) Loop Plant Investment allowances. Data submitted by rate-of-
return carriers for purposes of obtaining high-cost support under 
subparts K and M of this part may include any Loop Plant Investment as 
described in paragraph (c)(1) of this section and any Excess Loop Plant 
Investment as described in paragraph (h) of this section, but may not 
include amounts in excess of the Annual Allowed Loop Plant Investment 
(AALPI) as described in paragraph (d) of this section. Amounts in 
excess of the AALPI will be removed from the categories or accounts 
described in paragraph (c)(1) of this section either on a direct basis 
when the amounts of the new loop plant investment can be directly 
assigned to a category or account, or on a pro-rata basis in accordance 
with each category or account's proportion to the total amount in each 
of the categories and accounts described in paragraph (c)(1) of this 
section when the new loop plant cannot be directly assigned. This 
limitation shall apply only with respect to Loop Plant Investment 
incurred after the effective date of this rule. If a carrier's required 
Loop Plant Investment exceeds the limitations set forth in this section 
as a result of deployment obligations in Sec.  54.308(a)(2), the 
carrier's Total Allowed Loop Plant Investment will be increased to the 
actual Loop Plant Investment required by the carrier's deployment 
obligations, subject to the limitations of the Construction Allowance 
Adjustment in paragraph (f) of this section.
    (c) Definitions. For purposes of determining loop plant investment 
allowances, the following definitions apply:
    (1) Loop Plant Investment includes amounts booked to the accounts 
used for subparts K and M of this part, loop plant investment.
    (2) Total Loop Plant Investment equals amounts booked to the 
categories described in paragraph (b)(1) of this section, adjusted for 
inflation using the Department of Commerce's Gross Domestic Product 
Chain-type Price Index (GDP-CPI), as of December 31 of the Reference 
Year. Inflation adjustments shall be based on vintages where possible 
or otherwise calculated based on the year plant was put in service.
    (3) Total Allowed Loop Plant Investment equals Total Loop Plant 
Investment multiplied by the Loop Depreciation Factor.
    (4) Loop Depreciation Factor equals the ratio of total loop 
accumulated depreciation to gross loop plant during the Reference Year.
    (5) Reference Year is the year prior to the year the AALPI is 
determined.
    (d) Determination of AALPI. A carrier subject to this section shall 
have an AALPI set equal to its Total Loop Plant Investment for each 
study area multiplied by an AALPI Factor equal to (0.15 times the Loop 
Depreciation Factor + 0.05). The Administrator will calculate each rate 
of return carrier's AALPI for each Reference Year.
    (e) Broadband Deployment AALPI adjustment. The AALPI calculated in 
paragraph (c) of this section shall be adjusted by the Administrator 
based upon the difference between a carrier's broadband availability 
for each study area as reported on that carrier's most recent Form 477, 
and the weighted national average broadband availability for all rate-
of-return carriers based on Form 477 data, as announced annually by the 
Wireline Competition Bureau in a Public Notice. For every percentage 
point that the carrier's broadband availability exceeds the weighted 
national average broadband availability for the Reference Year, that 
carrier's AALPI will be reduced by one percentage point. For every 
percentage point that the carrier's broadband availability is below the 
weighted national average broadband availability for the Reference 
Year, that carrier's AALPI will be increased by one percentage point.
    (f) Construction allowance adjustment. Notwithstanding any other 
provision of this section, a rate-of-return carrier may not include in 
data submitted for purposes of obtaining high-cost support under 
subpart K or subpart M of this part any Loop Plant Investment 
associated with new construction projects where the average cost of 
such project per location passed exceeds a Maximum Average Per Location 
Construction Project Limitation as determined by the Administrator 
according to the following formula:
    (1) Maximum Average Per Location Construction Project Loop Plant 
Investment Limitation equals the inflation adjusted equivalent to 
$10,000 in the Reference Year calculated by multiplying $10,000 times 
the applicable annual GDP-CPI. This inflation adjusted amount will be 
normalized across all study areas by multiplying the product above by 
(the Loop Cap Adjustment Factor times the Construction Limit Factor)

Where:

the Loop Cap Adjustment Factor equals the annualized monthly per 
loop limit described in Sec.  54.302 (i.e., $3,000) divided by the 
unadjusted per loop support amount for the study area (the annual 
HCLS and CAF-BLS support amount per loop in the study not capped by 
Sec.  54.302)

and

the Construction Limitation Factor equals the study area Total Loop 
Investment per Location divided by the overall Total Loop Investment 
per Location for all rate-of-return study areas.

    (2) This limitation shall apply only with respect to Loop Plant 
Investment for which invoices were received by the carrier after the 
effective date of this rule.
    (3) A carrier subject to this section will maintain documentation 
necessary to demonstrate compliance with the above limitation.
    (g) Study area data. For each Reference Year, the Administrator 
will publish the following data for each study area of each rate-of-
return carrier:
    (1) AALPI
    (2) The Broadband Deployment AALPI Adjustment
    (3) The Maximum Average Per Location Construction Project Loop 
Plant Investment Limitation
    (4) The Loop Cap Adjustment Factor
    (5) The Construction Limit Factor
    (h) Excess Loop Plant Investment carry forward. Loop Plant 
Investment in a Reference Year in excess of the AALPI may be carried 
forward to future years and included in AALPI for such subsequent 
years, but may not cause the AALPI to exceed the Total Allowed Loop 
Plant Investment.
    (i) A carrier subject to this section will maintain subsidiary 
records of accumulated Excess Loop Plant Investment for accounts 
referenced in paragraph (c)(1) of this section in addition to the 
corresponding depreciation accounts. In the event a carrier makes Loop 
Plant Investment for an account at a level below the AALPI for the 
account, the carrier may reduce accumulated Excess Loop Plant 
Investment effective for the Reference Year by an amount up to, but not 
in

[[Page 24339]]

excess of the amount by which AALPI for the Reference Year exceeds Loop 
Plant Investment for the account during the same year.
    (j) Treatment of unused AALPI. In the event a carrier's Loop Plant 
Investment is below its AALPI in a given Reference Year, there will be 
no carry forward to future years of unused AALPI. The Administrator's 
recalculation of AALPI for each Reference Year will reflect the revised 
AALPI, Loop Depreciation Factor, Total Loop Plant Investment, and Total 
Allowed Loop Plant Investment for the Reference Year.
    (k) Special circumstances. The AALPI for Loop Plant Investment may 
be adjusted by the Administrator by adding the applicable adjustment 
below to the amount of AALPI for the year in which additions to plant 
are booked to the accounts described in paragraph (c)(1) of this 
section, associated with any of the following:
    (1) Geographic areas within the study area where there are 
currently no existing wireline loop facilities;
    (2) Geographic areas within the study area where grant funds are 
used for Loop Plant Investment;
    (3) Geographic areas within the study area for which loan funds 
were disbursed for the purposes of Loop Plant Investment before the 
effective date of this rule; and
    (4) Construction projects for which the carrier, prior to the 
effective date of this rule, had awarded a contract to a vendor for a 
loop plant construction project within the study area.
    (l) Documentation requirements. The Administrator will not make 
these adjustments without appropriate documentation from the carrier.
    (m) Minimum AALPI. If a carrier has an AALPI that is less than $4 
million in any given year, the carrier shall be allowed to increase its 
AALPI for that year to the lesser of $4 million or its Total Allowed 
Loop Plant Investment.

0
6. In Sec.  54.305, revise paragraph (a) to read as follows:


Sec.  54.305  Sale or transfer of exchanges.

    (a) The provisions of this section shall not be used to determine 
support for any price cap incumbent local exchange carrier or a rate-
of-return carrier, as that term is defined in Sec.  54.5, that is 
affiliated with a price cap incumbent local exchange carrier.
* * * * *

0
7. In Sec.  54.308, revise paragraph (a) to read as follows:


Sec.  54.308  Broadband public interest obligations for recipients of 
high-cost support.

    (a) Rate-of-return carrier recipients of high-cost support are 
required to offer broadband service, at speeds described below, with 
latency suitable for real-time applications, including Voice over 
Internet Protocol, and usage capacity that is reasonably comparable to 
comparable offerings in urban areas, at rates that are reasonably 
comparable to rates for comparable offerings in urban areas. For 
purposes of determining reasonable comparability of rates, recipients 
are presumed to meet this requirement if they offer rates at or below 
the applicable benchmark to be announced annually by public notice 
issued by the Wireline Competition Bureau.
    (1) Carriers that elect to receive Connect America Fund-Alternative 
Connect America Cost Model (CAF-ACAM) support pursuant to Sec.  54.311 
are required to offer broadband service at actual speeds of at least 10 
Mbps downstream/1 Mbps upstream to a defined number of locations as 
specified by public notice, with a minimum usage allowance of 150 GB 
per month, subject to the requirement that usage allowances remain 
consistent with median usage in the United States over the course of 
the ten-year term. In addition, such carriers must offer other speeds 
to subsets of locations, as specified below:
    (i) Fully funded locations. Fully funded locations are those 
locations identified by the Alternative-Connect America Cost Model (A-
CAM) where the average cost is above the funding benchmark and at or 
below the funding cap. Carriers are required to offer broadband speeds 
to locations that are fully funded, as specified by public notice at 
the time of authorization, as follows:
    (A) Carriers with a state-level density of more than 10 housing 
units per square mile, as specified by public notice at the time of 
election, are required to offer broadband speeds of at least 25 Mbps 
downstream/3 Mbps upstream to 75 percent of all fully funded locations 
in the state by the end of the ten-year period.
    (B) Carriers with a state-level density of 10 or fewer, but more 
than five, housing units per square mile, as specified by public notice 
at the time of election, are required to offer broadband speeds of at 
least 25 Mbps downstream/3 Mbps upstream to 50 percent of fully funded 
locations in the state by the end of the ten-year period.
    (C) Carriers with a state-level density of five or fewer housing 
units per square mile, as specified by public notice at the time of 
election, are required to offer broadband speeds of at least 25 Mbps 
downstream/3 Mbps upstream to 25 percent of fully funded locations in 
the state by the end of the ten-year period.
    (ii) Capped locations. Capped locations are those locations in 
census blocks for which A-CAM calculates an average cost per location 
above the funding cap. Carriers are required to offer broadband speeds 
to locations that are receiving capped support, as specified by public 
notice at the time of authorization, as follows:
    (A) Carriers with a state-level density of more than 10 housing 
units per square mile, as specified by public notice at the time of 
election, are required to offer broadband speeds of at least 4 Mbps 
downstream/1 Mbps upstream to 50 percent of all capped locations in the 
state by the end of the ten-year period.
    (B) Carriers with a state-level density of 10 or fewer housing 
units per square mile, as specified by public notice at the time of 
election, are required to offer broadband speeds of at least 4 Mbps 
downstream/1 Mbps upstream to 25 percent of capped locations in the 
state by the end of the ten-year period.
    (C) Carriers shall provide to all other capped locations, upon 
reasonable request, broadband at actual speeds of at least 4 Mbps 
downstream/1 Mbps upstream.
    (2) Rate-of-return recipients of Connect America Fund Broadband 
Loop Support (CAF BLS) shall be required to offer broadband service at 
actual speeds of at least 10 Mbps downstream/1 Mbps upstream, over a 
five-year period, to a defined number of unserved locations as 
specified by public notice, as determined by the following methodology:
    (i) Percentage of CAF BLS. Each rate-of-return carrier is required 
to target a defined percentage of its five-year forecasted CAF-BLS 
support to the deployment of broadband service to locations that are 
unserved with 10 Mbps downstream/1 Mbps upstream broadband service as 
follows:
    (A) Rate-of-return carriers with less than 20 percent deployment of 
10/1 Mbps broadband service in their study areas, as determined by the 
Wireline Competition Bureau, will be required to utilize 35 percent of 
their five-year forecasted CAF-BLS support to extend broadband service 
where it is currently lacking.
    (B) Rate-of-return carriers with more than 20 percent but less than 
40 percent deployment of 10/1 Mbps broadband service in their study 
areas, as determined by the Wireline Competition

[[Page 24340]]

Bureau, will be required to utilize 25 percent of their five-year 
forecasted CAF-BLS support to extend broadband service where it is 
currently lacking.
    (C) Rate-of-return carriers with more than 40 percent but less than 
80 percent deployment of 10/1 Mbps broadband service in their study 
areas, as determined by the Wireline Competition Bureau, will be 
required to utilize 20 percent of their five-year forecasted CAF-BLS 
support to extend broadband service where it is currently lacking.
    (ii) Cost per location. The deployment obligation shall be 
determined by dividing the amount of support set forth in paragraph 
(a)(2)(i) of this section by a cost per location figure based on one of 
two methodologies, at the carrier's election:
    (A) The higher of:
    (1) The weighted average unseparated cost per loop for carriers of 
similar density that offer 10/1 Mbps or better broadband service to at 
least 95 percent of locations, based on the most current FCC Form 477 
data as determined by the Wireline Competition Bureau, but excluding 
carriers subject to the current $250 per line per month cap set forth 
in Sec.  54.302 and carriers subject to limitations on operating 
expenses set forth in Sec.  54.303; or
    (2) 150% of the weighted average of the cost per loop for carriers 
of similar density, but excluding carriers subject to the current $250 
per line per month cap set forth in Sec.  54.302 and carriers subject 
to limitations on operating expenses set forth in Sec.  54.303, with a 
similar level of deployment of 10/1 Mbps or better broadband based on 
the most current FCC Form 477 data, as determined by Wireline 
Competition Bureau; or
    (B) The average cost per location for census blocks lacking 10/1 
Mbps broadband service in the carrier's study area as determined by the 
A-CAM.
    (iii) Restrictions on deployment obligations. (A) No rate-of-return 
carrier shall deploy terrestrial wireline technology in any census 
block if doing so would result in total support per line in the study 
area to exceed the $250 per-line per-month cap in Sec.  54.302.
    (B) No rate-of-return carrier shall deploy terrestrial wireline 
technology to unserved locations to meet this obligation if that would 
exceed the $10,000 per location/per project capital investment 
allowance set forth in Sec.  54.303.
    (iv) Future deployment obligations. Prior to publishing the 
deployment obligations for subsequent five-year periods, the 
Administrator shall update the unseparated average cost per loop 
amounts for carriers with 95 percent or greater deployment of the then-
current standard, based on the then-current NECA cost data, and the 
Wireline Competition Bureau shall examine the density groupings and 
make any necessary adjustments based on then-current U.S. Census data.
* * * * *

0
8. Add Sec.  54.311 to subpart D to read as follows:


Sec.  54.311  Connect America Fund Alternative-Connect America Cost 
Model Support.

    (a) Voluntary election of model-based support. A rate-of-return 
carrier (as that term is defined in Sec.  54.5) receiving support 
pursuant to subparts K or M of this part shall have the opportunity to 
voluntarily elect, on a state-level basis, to receive Connect America 
Fund-Alternative Connect America Cost Model (CAF-ACAM) support as 
calculated by the Alternative-Connect America Cost Model (A-CAM) 
adopted by the Commission in lieu of support calculated pursuant to 
subparts K or M of this part. Any rate-of-return carrier not electing 
support pursuant to this section shall continue to receive support 
calculated pursuant to those mechanisms as specified in Commission 
rules for high-cost support.
    (b) Geographic areas eligible for support. CAF-ACAM model-based 
support will be made available for a specific number of locations in 
census blocks identified as eligible for each carrier by public notice. 
The eligible areas and number of locations for each state identified by 
the public notice shall not change during the term of support 
identified in paragraph (c) of this section.
    (c) Term of support. CAF-ACAM model-based support shall be provided 
to the carriers that elect to make a state-level commitment for a term 
that extends until December 31, 2026.
    (d) Interim deployment milestones. Recipients of CAF-ACAM model-
based support must complete deployment to 40 percent of fully funded 
locations by the end of 2020, to 50 percent of fully funded locations 
by the end of 2021, to 60 percent of fully funded locations by the end 
of 2022, to 70 percent of fully funded locations by the end of 2023, to 
80 percent of fully funded locations by the end of 2024, to 90 percent 
of fully funded locations by the end of 2025, and to 100 percent of 
fully funded locations by the end of 2026. By the end of 2026, carriers 
must complete deployment of broadband meeting a standard of at least 25 
Mbps downstream/3 Mbps upstream to the requisite number of locations 
specified in Sec.  54.308(a)(1)(i) through (iii). Compliance shall be 
determined based on the total number of fully funded locations in a 
state. Carriers that complete deployment to at least 95 percent of the 
requisite number of locations will be deemed to be in compliance with 
their deployment obligations. The remaining locations that receive 
capped support are subject to the standard specified in Sec.  
54.308(a)(1)(iv).
    (e) Transition to CAF-ACAM Support. Carriers electing CAF-ACAM 
model-based support whose final model-based support is less than the 
carrier's high-cost loop support and interstate common line support 
disbursements for 2015, will transition to model-based support as 
follows:
    (1) If the difference between a carrier's model-based support and 
its 2015 high-cost support, as determined in paragraph (e)(4) of this 
section, is 10 percent or less, it will receive, in addition to model-
based support, 50 percent of that difference in year one, and then will 
receive model support in years two through ten.
    (2) If the difference between a carrier's model-based support and 
its 2015 high-cost support, as determined in paragraph (e)(4) of this 
section, is 25 percent or less, but more than 10 percent, it will 
receive, in addition to model-based support, an additional transition 
payment for up to four years, and then will receive model support in 
years five through ten. The transition payments will be phased-down 20 
percent per year, provided that each phase-down amount is at least five 
percent of the total 2015 high-cost support amount. If 20 percent of 
the difference between a carrier's model-based support and its 2015 
high-cost support is less than five percent of the total 2015 high-cost 
support amount, the transition payments will be phased-down five 
percent of the total 2015 high-cost support amount each year.
    (3) If the difference between a carrier's model-based support and 
its 2015 high-cost support, as determined in paragraph (e)(4) of this 
section, is more than 25 percent, it will receive, in addition to 
model-based support, an additional transition payment for up to nine 
years, and then will receive model support in year ten. The transition 
payments will be phased-down ten percent per year, provided that each 
phase-down amount is at least five percent of the total 2015 high-cost 
support amount. If ten percent of the difference between a carrier's 
model-based support and its 2015 high-cost support is less than five 
percent of the total 2015 high-cost support amount, the transition 
payments will be phased-

[[Page 24341]]

down five percent of the total 2015 high-cost support amount each year.
    (4) The carrier's 2015 support for purposes of the calculation of 
transition payments is the amount of high-cost loop support and 
interstate common line support disbursed to the carrier for 2015 
without regard to prior period adjustments related to years other than 
2015, as determined by the Administrator as of January 31, 2016 and 
publicly announced prior to the election period for the voluntary path 
to the model.

0
9. Amend Sec.  54.313 by removing and reserving paragraph (a)(1), 
revising paragraphs (a)(10), (e)(1), and paragraph (e)(2) introductory 
text, removing and reserving paragraphs (e)(2)(i) and (iii), removing 
paragraphs (e)(3) through (6), and revising paragraphs (f)(1) 
introductory text, and (f)(1)(i) and (iii).
    The revisions read as follows:


Sec.  54.313  Annual reporting requirements for high-cost recipients.

    (a) * * *
    (10) Beginning July 1, 2013. A certification that the pricing of 
the company's voice services is no more than two standard deviations 
above the applicable national average urban rate for voice service, as 
specified in the most recent public notice issued by the Wireline 
Competition Bureau and Wireless Telecommunications Bureau; and
* * * * *
    (e) * * *
    (1) On July 1, 2016, a list of the geocoded locations already 
meeting the Sec.  54.309 public interest obligations at the end of 
calendar year 2015, and the total amount of Phase II support, if any, 
the price cap carrier used for capital expenditures in 2015.
    (2) On July 1, 2017, and every year thereafter ending July 1, 2021, 
the following information:
* * * * *
    (f) * * *
    (1) Beginning July 1, 2015 and Every Year Thereafter. The following 
information:
    (i) A certification that it is taking reasonable steps to provide 
upon reasonable request broadband service at actual speeds of at least 
10 Mbps downstream/1 Mbps upstream, with latency suitable for real-time 
applications, including Voice over Internet Protocol, and usage 
capacity that is reasonably comparable to comparable offerings in urban 
areas as determined in an annual survey, and that requests for such 
service are met within a reasonable amount of time.
* * * * *
    (iii) A certification that it bid on category one 
telecommunications and Internet access services in response to all 
reasonable requests in posted FCC Form 470s seeking broadband service 
that meets the connectivity targets for the schools and libraries 
universal service support program for eligible schools and libraries 
(as described in Sec.  54.501) within its service area, and that such 
bids were at rates reasonably comparable to rates charged to eligible 
schools and libraries in urban areas for comparable offerings.
* * * * *

0
10. Add Sec.  54.316 to subpart D to read as follows:


Sec.  54.316  Broadband deployment reporting and certification 
requirements for high-cost recipients.

    (a) Broadband deployment reporting. Rate-of Return ETCs and ETCs 
that elect to receive Connect America Phase II model-based support 
shall have the following broadband reporting obligations:
    (1) Recipients of high-cost support with defined broadband 
deployment obligations pursuant to Sec.  54.308(a) or Sec.  54.310(c) 
shall provide to the Administrator on a recurring basis information 
regarding the locations to which the eligible telecommunications 
carrier is offering broadband service in satisfaction of its public 
interest obligations, as defined in either Sec.  54.308 or Sec.  
54.309.
    (2) Recipients subject to the requirements of Sec.  54.308(a)(1) 
shall report the number of locations for each state and locational 
information, including geocodes, separately indicating whether they are 
offering service providing speeds of at least 4 Mbps downstream/1 Mbps 
upstream, 10 Mbps downstream/1 Mbps upstream, and 25 Mbps downstream/3 
Mbps upstream.
    (3) Recipients subject to the requirements of Sec.  54.308(a)(2) 
shall report the number of newly served locations for each study area 
and locational information, including geocodes, separately indicating 
whether they are offering service providing speeds of at least 4 Mbps 
downstream/1 Mbps upstream, 10 Mbps downstream/1 Mbps upstream, and 25 
Mbps downstream/3 Mbps upstream.
    (4) Recipients subject to the requirements of Sec.  54.310(c) shall 
report the number of locations for each state and locational 
information, including geocodes, where they are offering service 
providing speeds of at least 10 Mbps downstream/1 Mbps upstream.
    (b) Broadband deployment certifications. Rate-of Return ETCs and 
ETCs that elect to receive Connect America Phase II model-based support 
shall have the following broadband deployment certification 
obligations:
    (1) Price cap carriers that elect to receive Connect America Phase 
II model-based support shall provide: No later than March 1, 2017, and 
every year thereafter ending on no later than March 1, 2021, a 
certification that by the end of the prior calendar year, it was 
offering broadband meeting the requisite public interest obligations 
specified in Sec.  54.309 to the required percentage of its supported 
locations in each state as set forth in Sec.  54.310(c).
    (2) Rate-of-return carriers electing CAF-ACAM support pursuant to 
Sec.  54.311 shall provide:
    (i) No later than March 1, 2021, and every year thereafter ending 
on no later than March 1, 2027, a certification that by the end of the 
prior calendar year, it was offering broadband meeting the requisite 
public interest obligations specified in Sec.  54.308 to the required 
percentage of its fully funded locations in the state, pursuant to the 
interim deployment milestones set forth in Sec.  54.311(d).
    (ii) No later than March 1, 2027, a certification that as of 
December 31, 2026, it was offering broadband meeting the requisite 
public interest obligations specified in Sec.  54.308 to all of its 
fully funded locations in the state and to the required percentage of 
its capped locations in the state.
    (3) Rate-of-return carriers receiving support pursuant to subparts 
K and M of this part shall provide:
    (i) No later than March 1, 2022, a certification that it fulfilled 
the deployment obligation meeting the requisite public interest 
obligations as specified in Sec.  54.308(a)(2) to the required number 
of locations as of December 31, 2021.
    (ii) Every subsequent five-year period thereafter, a certification 
that it fulfilled the deployment obligation meeting the requisite 
public interest obligations as specified in Sec.  54.308(a)(4).
    (c) Filing deadlines. (1) In order for a recipient of high-cost 
support to continue to receive support for the following calendar year, 
or retain its eligible telecommunications carrier designation, it must 
submit the annual reporting information required by March 1 as 
described in paragraphs (a) and (b) of this section. Eligible 
telecommunications carriers that file their reports after the March 1 
deadline shall receive a reduction in support pursuant to the following 
schedule:
    (i) An eligible telecommunications carrier that files after the 
March 1 deadline, but by February 7, will have

[[Page 24342]]

its support reduced in an amount equivalent to seven days in support;
    (ii) An eligible telecommunications carrier that files on or after 
February 8 will have its support reduced on a pro-rata daily basis 
equivalent to the period of non-compliance, plus the minimum seven-day 
reduction,
    (2) Grace period. An eligible telecommunications carrier that 
submits the annual reporting information required by this section after 
March 1 but before March 1 will not receive a reduction in support if 
the eligible telecommunications carrier and its holding company, 
operating companies, and affiliates, as reported pursuant to Sec.  
54.313(a)(8) in their report due July 1 of the prior year, have not 
missed the March 1 deadline in any prior year.

0
11. In Sec.  54.319, revise paragraph (a) and add paragraphs (d) 
through (h) to read as follows:


Sec.  54.319  Elimination of high-cost support in areas with an 
unsubsidized competitor.

    (a) High-cost loop support provided pursuant to subparts K and M of 
this part shall be eliminated in an incumbent rate-of-return local 
exchange carrier study area where an unsubsidized competitor, or 
combination of unsubsidized competitors, as defined in Sec.  54.5, 
offer(s) to 100 percent of the residential and business locations in 
the study area voice and broadband service at speeds of at least 10 
Mbps downstream/1 Mbps upstream, with latency suitable for real-time 
applications, including Voice over Internet Protocol, and usage 
capacity that is reasonably comparable to comparable offerings in urban 
areas, at rates that are reasonably comparable to rates for comparable 
offerings in urban areas.
* * * * *
    (d) High-cost universal service support pursuant to subpart K of 
this part shall be eliminated for those census blocks of an incumbent 
rate-of-return local exchange carrier study area where an unsubsidized 
competitor, or combination of unsubsidized competitors, as defined in 
Sec.  54.5, offer(s) voice and broadband service meeting the public 
interest obligations in Sec.  54.308(a)(2) to at least 85 percent of 
residential locations in the census block. Qualifying competitors must 
be able to port telephone numbers from consumers.
    (e) After a determination that a particular census block is served 
by a competitor as defined in paragraph (d) of this section, support 
provided pursuant to subpart K of this part shall be disaggregated 
pursuant to a method elected by the incumbent local exchange carrier. 
The sum of support that is disaggregated for competitive and non-
competitive areas shall equal the total support available to the study 
area without disaggregation.
    (f) For any incumbent local exchange carrier for which the 
disaggregated support for competitive census blocks represents less 
than 25 percent of the support the carrier would have received in the 
study area in the absence of this rule, support provided pursuant to 
subpart K of this part shall be reduced according to the following 
schedule:
    (1) In the first year, 66 percent of the incumbent's disaggregated 
support for the competitive census block will be provided;
    (2) In the second year, 33 percent of the incumbent's disaggregated 
support for the competitive census blocks will be provided;
    (3) In the third year and thereafter, no support shall be provided 
pursuant to subpart K of this part for any competitive census block.
    (g) For any incumbent local exchange carrier for which the 
disaggregated support for competitive census blocks represents more 
than 25 percent of the support the carrier would have received in the 
study area in the absence of this rule, support shall be reduced for 
each competitive census block according to the following schedule:
    (1) In the first year, 85 percent of the incumbent's disaggregated 
support for the competitive census blocks will be provided;
    (2) In the second year, 68 percent of the incumbent's disaggregated 
support for the competitive census blocks will be provided;
    (3) In the third year, 51 percent of the incumbent's disaggregated 
support for the competitive census blocks will be provided;
    (4) In the fourth year, 34 percent of the incumbent's disaggregated 
support the competitive census block will be provided;
    (5) In the fifth year, 17 percent of the incumbent's disaggregated 
support the competitive census blocks will be provided;
    (6) In the sixth year and thereafter, no support shall be paid 
provided pursuant to subpart K of this part for any competitive census 
block.
    (h) The Wireline Competition Bureau shall update its analysis of 
competitive overlap in census blocks every seven years, utilizing the 
current public interest obligations in Sec.  54.308(a)(2) as the 
standard that must be met by an unsubsidized competitor.
0
12. Revise Sec.  54.707 to read as follows:


Sec.  54.707  Audit controls.

    (a) The Administrator shall have the authority to audit 
contributors and carriers reporting data to the Administrator. The 
Administrator shall establish procedures to verify discounts, offsets 
and support amounts provided by the universal service support programs, 
and may suspend or delay discounts, offsets, and support amounts 
provided to a carrier if the carrier fails to provide adequate 
verification of discounts, offsets, or support amounts provided upon 
reasonable request, or if directed by the Commission to do so. The 
Administrator shall not provide reimbursements, offsets or support 
amounts pursuant to subparts D, K, L and M of this part to a carrier 
until the carrier has provided to the Administrator a true and correct 
copy of the decision of a state commission designating that carrier as 
an eligible telecommunications carrier in accordance with Sec.  54.202.
    (b) The Administrator has the right to obtain all cost and revenue 
submissions and related information, at any time and in unaltered 
format, that carriers submit to NECA that are used to calculate support 
payments pursuant to subparts D, K, and M of this part.
    (c) The Administrator (and NECA, to the extent the Administrator 
does not directly receive information from carriers) shall provide to 
the Commission upon request all underlying data collected from eligible 
telecommunications carriers to calculate payments pursuant to subparts 
D, K, L and M of this part.

Subpart J-- [Removed and Reserved]

0
13. Remove and reserve subpart J, consisting of Sec. Sec.  54.800 
through 54.809.
0
14. Revise Sec.  54.901 to read as follows:


Sec.  54.901  Calculation of Connect America Fund Broadband Loop 
Support.

    (a) Connect America Fund Broadband Loop Support (CAF BLS) available 
to a rate-of-return carrier shall equal the Interstate Common Line 
Revenue Requirement per Study Area, plus the Consumer Broadband-Only 
Revenue Requirement per Study Area as calculated in accordance with 
part 69 of this chapter, minus:
    (1) The study area revenues obtained from end user common line 
charges at their allowable maximum as determined by Sec.  69.104(n) and 
(o) of this chapter;
    (2) Imputed Consumer Broadband-only Revenues, to be calculated as:
    (i) The lesser of $42 * the number of consumer broadband-only loops 
* 12 or the Consumer Broadband-Only Revenue Requirement per Study Area; 
or

[[Page 24343]]

    (ii) For the purpose of calculating the reconciliation pursuant to 
Sec.  54.903(b)(3), the greater of the amount determined pursuant to 
paragraph (a)(2)(i) of this section or the carrier's allowable Consumer 
Broadband-only rate calculated pursuant to Sec.  69.132 of this chapter 
* the number of consumer broadband-only loops * 12;
    (3) The special access surcharge pursuant to Sec.  69.115 of this 
chapter; and
    (4) The line port costs in excess of basic analog service pursuant 
to Sec.  69.130 of this chapter.
    (b) For the purpose of calculating support pursuant to paragraph 
(a) of this section, the Interstate Common Line Revenue Requirement and 
Consumer Broadband-only Revenue Requirement shall be subject to the 
limits on operating expenses and capital investment allowances pursuant 
to Sec.  54.303.
    (c) For purposes of calculating the amount of CAF BLS, determined 
pursuant to paragraph (a) of this section, that a non-price cap carrier 
may receive, the corporate operations expense allocated to the Common 
Line Revenue Requirement or the Consumer Broadband-only Loop Revenue 
Requirement, pursuant to Sec.  69.409 of this chapter, shall be limited 
to the lesser of:
    (1) The actual average monthly per-loop corporate operations 
expense; or
    (2) The portion of the monthly per-loop amount computed pursuant to 
Sec.  54.1308(a)(4)(iii) that would be allocated to the Interstate 
Common Line Revenue Requirement or Consumer Broadband-only Loop Revenue 
Requirement pursuant to Sec.  69.409 of this chapter.
    (d) In calculating support pursuant to paragraph (a) of this 
section for periods prior to when the tariff charge described in Sec.  
69.132 of this chapter becomes effective, only Interstate Common Line 
Revenue Requirement and Interstate Common line revenues shall be 
included.
    (e) To the extent necessary for ratemaking purposes, each carrier's 
CAF BLS shall be attributed as follows:
    (1) First, support shall be applied to ensure that the carrier has 
met its Interstate Common Line Revenue Requirement for the prior period 
to which true-up payments are currently being applied.
    (2) Second, support shall be applied to ensure that the carrier has 
met its Consumer Broadband-only Loop Revenue Requirement for the prior 
period to which true-up payments are currently being applied.
    (3) Third, support shall be applied to ensure that the carrier will 
meet, on a forecasted basis, its Interstate Common Line Revenue 
Requirement during the current tariff year.
    (4) Finally, support shall be applied as available to the Consumer 
Broadband-only Loop Revenue Requirement during the current tariff year.
    (f) CAF BLS Support is subject to a reduction as necessary to meet 
the overall cap on support established by the Commission for support 
provided pursuant to this subpart and subpart M of this part. 
Reductions shall be implemented as follows:
    (1) On May 1 of each year, the Administrator will publish a target 
amount for CAF BLS in the aggregate and the amount of CAF BLS that each 
study area will receive during the upcoming July 1 to June 30 tariff 
year. The target amount shall be the forecasted disbursement amount 
times a reduction factor. The reduction factor shall be the budget 
amount divided by the total forecasted disbursement amount for both 
High Cost Loop Support and CAF BLS for recipients in the aggregate. The 
forecasted disbursement for CAF BLS is the forecasted total 
disbursements for all recipients of CAF BLS, including both projections 
and true-ups in the upcoming July 1 to June 30 tariff year.
    (2) The Administrator shall apply a per-line reduction to each 
carrier's CAF BLS equal to one-half the difference between the 
forecasted disbursement amount and the target amount divided by the 
total number of loops eligible for support. To the extent that per-line 
reduction is greater than the amount of CAF BLS per loop for a given 
carrier, that excess amount shall be subject to reduction through the 
method described in paragraph (f)(3) of this section.
    (3) The Administrator shall apply an additional pro rata reduction 
to CAF BLS for each recipient of CAF BLS as necessary to achieve the 
target amount.
    (g) For purposes of this subpart and consistent with Sec.  69.132 
of this chapter, a consumer broadband-only loop is a line provided by a 
rate-of-return incumbent local exchange carrier to a customer without 
regulated local exchange voice service, for use in connection with 
fixed Broadband Internet access service, as defined in Sec.  8.2 of 
this chapter.

0
15. Revise Sec.  54.902 to read as follows:


Sec.  54.902  Calculation of CAF BLS Support for transferred exchanges.

    (a) In the event that a rate-of-return carrier acquires exchanges 
from an entity that is also a rate-of-return carrier, CAF BLS for the 
transferred exchanges shall be distributed as follows:
    (1) Each carrier may report its updated line counts to reflect the 
transfer in the next quarterly line count filing pursuant to Sec.  
54.903(a)(1) that applies to the period in which the transfer occurred. 
During a transition period from the filing of the updated line counts 
until the end of the funding year, the Administrator shall adjust the 
CAF BLS Support received by each carrier based on the updated line 
counts and the per-line CAF BLS, categorized by customer class and, if 
applicable, disaggregation zone, of the selling carrier. If the 
acquiring carrier does not file a quarterly update of its line counts, 
it will not receive CAF BLS for those lines during the transition 
period.
    (2) Each carrier's projected data for the following funding year 
filed pursuant to Sec.  54.903(a)(3) shall reflect the transfer of 
exchanges.
    (3) Each carrier's actual data filed pursuant to Sec.  54.903(a)(4) 
shall reflect the transfer of exchanges. All post-transaction CAF BLS 
shall be subject to true up by the Administrator pursuant to Sec.  
54.903(b)(3).
    (b) In the event that a rate-of-return carrier acquires exchanges 
from a price-cap carrier, absent further action by the Commission, the 
exchanges shall receive the same amount of support and be subject to 
the same public interest obligations as specified in Sec.  54.310 or 
Sec.  54.312, as applicable.
    (c) In the event that an entity other than a rate-of-return carrier 
acquires exchanges from a rate-of-return carrier, absent further action 
by the Commission, the carrier will receive model-based support and be 
subject to public interest obligations as specified in Sec.  54.310.
    (d) This section does not alter any Commission rule governing the 
sale or transfer of exchanges, including the definition of ``study 
area'' in part 36 of this chapter.
0
16. Revise Sec.  54.903 to read as follows:


Sec.  54.903  Obligations of rate-of-return carriers and the 
Administrator.

    (a) To be eligible for CAF BLS, each rate-of-return carrier shall 
make the following filings with the Administrator.
    (1) Each rate-of-return carrier shall submit to the Administrator 
in accordance with the schedule in Sec.  54.1306 the number of lines it 
serves, within each rate-of-return carrier study area showing 
residential and single-line business line counts, multi-line business 
line counts, and consumer broadband-only line counts separately. For 
purposes of this report, and for purposes of computing support under 
this subpart, the residential and single-

[[Page 24344]]

line business class lines reported include lines assessed the 
residential and single-line business End User Common Line charge 
pursuant to Sec.  69.104 of this chapter, the multi-line business class 
lines reported include lines assessed the multi-line business End User 
Common Line charge pursuant to Sec.  69.104 of this chapter, and 
consumer broadband-only lines reported include lines assessed the 
Consumer Broadband-only Loop rate charged pursuant to Sec.  69.132 of 
this chapter or provided on a detariffed basis. For purposes of this 
report, and for purposes of computing support under this subpart, lines 
served using resale of the rate-of-return local exchange carrier's 
service pursuant to section 251(c)(4) of the Communications Act of 
1934, as amended, shall be considered lines served by the rate-of-
return carrier only and must be reported accordingly.
    (2) A rate-of-return carrier may submit the information in 
paragraph (a) of this section in accordance with the schedule in Sec.  
54.1306, even if it is not required to do so. If a rate-of-return 
carrier makes a filing under this paragraph, it shall separately 
indicate any lines that it has acquired from another carrier that it 
has not previously reported pursuant to paragraph (a) of this section, 
identified by customer class and the carrier from which the lines were 
acquired.
    (3) Each rate-of-return carrier shall submit to the Administrator 
annually by March 31 projected data necessary to calculate the 
carrier's prospective CAF BLS, including common line and consumer 
broadband-only loop cost and revenue data, for each of its study areas 
in the upcoming funding year. The funding year shall be July 1 of the 
current year through June 30 of the next year. The data shall be 
accompanied by a certification that the cost data is compliant with the 
Commission's cost allocation rules and does not reflect duplicative 
assignment of costs to the consumer broadband-only loop and special 
access categories.
    (4) Each rate-of-return carrier shall submit to the Administrator 
on December 31 of each year the data necessary to calculate a carrier's 
Connect America Fund CAF BLS, including common line and consumer 
broadband-only loop cost and revenue data, for the prior calendar year. 
Such data shall be used by the Administrator to make adjustments to 
monthly per-line CAF BLS amounts to the extent of any differences 
between the carrier's CAF BLS received based on projected common line 
cost and revenue data, and the CAF BLS for which the carrier is 
ultimately eligible based on its actual common line and consumer 
broadband-only loop cost and revenue data during the relevant period. 
The data shall be accompanied by a certification that the cost data is 
compliant with the Commission's cost allocation rules and does not 
reflect duplicative assignment of costs to the consumer broadband-only 
loop and special access categories.
    (b) Upon receiving the information required to be filed in 
paragraph (a) of this section, the Administrator shall:
    (1) Perform the calculations described in Sec.  54.901 and 
distribute support accordingly;
    (2) [Reserved]
    (3) Perform periodic reconciliation of the CAF BLS provided to each 
carrier based on projected data filed pursuant to paragraph (a)(3) of 
this section and the CAF BLS for which each carrier is eligible based 
on actual data filed pursuant to paragraph (a)(4) of this section; and
    (4) Report quarterly to the Commission on the collection and 
distribution of funds under this subpart as described in Sec.  
54.702(h). Fund distribution reporting will be by state and by eligible 
telecommunications carrier within the state.


Sec.  54.904  [Removed].

0
17. Remove Sec.  54.904.

0
18. In Sec.  54.1308, revise paragraph (a) introductory text to read as 
follows:


Sec.  54.1308  Study Area Total Unseparated Loop Cost.

    (a) For the purpose of calculating the expense adjustment, the 
study area total unseparated loop cost equals the sum of the following, 
however, subject to the limitations set forth in Sec.  54.303:
* * * * *

0
19. In Sec.  54.1310, add paragraph (d) to read as follows:


Sec.  54.1310  Expense adjustment.

* * * * *
    (d) High Cost Loop Support is subject to a reduction as necessary 
to meet the overall cap on support established by the Commission for 
support provided pursuant to this subpart and subpart K of this 
chapter. Reductions shall be implemented as follows:
    (1) On May 1 of each year, the Administrator will publish an annual 
target amount for High-Cost Loop Support in the aggregate. The target 
amount shall be the forecasted disbursement amount times a reduction 
factor. The reduction factor shall be the budget amount divided by the 
total forecasted disbursement amount for both High Cost Loop Support 
and Broadband Loop Support for recipients in the aggregate. The 
forecasted disbursement for High Cost Loop Support is the High Cost 
Loop Support cap determined pursuant to Sec.  54.1302 as reflected in 
the most recent annual filing pursuant to Sec.  54.1305.
    (2) Each quarter, the Administrator shall adjust each carrier's 
High Cost Loop Support disbursements as follows:
    (i) The Administrator shall apply a per-line reduction to each 
carrier's High Cost Loop Support equal to one-half the difference 
between the forecasted disbursement amount and the target amount 
divided by the total number of loops eligible for support. To the 
extent that per-line reduction is greater than the amount of High Cost 
Loop Support per loop for a given carrier, that excess amount will be 
subject to reduction through the method described in paragraph 
(d)(2)(ii) of this section.
    (ii) The Administrator shall apply an additional pro rata reduction 
to High Cost Loop Support for each recipient of High Cost Loop Support 
as necessary to achieve the target amount.

PART 65--INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND 
METHODOLOGIES

0
20. The authority citation for part 65 is revised to read as follows:

    Authority:  47 U.S.C. 151, 154(i), 155, 201, 205, 214, 219, 220, 
254, 303(r), 403, and 1302 unless otherwise noted.


0
21. Revise Sec.  65.302 to read as follows:


Sec.  65.302  Cost of debt.

    The formula for determining the cost of debt is equal to:
    [GRAPHIC] [TIFF OMITTED] TR25AP16.010
    
Where:

``Total Annual Interest Expense'' is the total interest expense for 
the most recent year for all local exchange carriers with annual 
revenues equal to or above the

[[Page 24345]]

indexed revenue threshold as defined in Sec.  32.9000 of this 
chapter.
``Average Outstanding Debt'' is the average of the total debt 
outstanding at the beginning and at the end of the most recent year 
for all local exchange carriers with annual revenues equal to or 
above the indexed revenue threshold as defined in Sec.  32.9000 of 
this chapter.

PART 69--ACCESS CHARGES

0
22. The authority citation for part 69 is revised to read as follows:

    Authority:  47 U.S.C. 154, 201, 202, 203, 205, 218, 220, 254, 
403.


0
23. In Sec.  69.4, add paragraph (k) to read as follows:


Sec.  69.4  Charges to be filed.

* * * * *
    (k) A non-price cap incumbent local exchange carrier may include a 
charge for the Consumer Broadband-Only Loop.

0
24. In Sec.  69.104,revise paragraphs (n)(1) introductory text, 
(n)(1)(ii), and (o)(1) introductory text, remove paragraphs 
(n)(1)(ii)(A) through (C), and add paragraph (s).
    The revisions and addition read as follows:


Sec.  69.104  End user common line for non-price cap incumbent local 
exchange carriers.

* * * * *
    (n)(1) Except as provided in paragraphs (r) and (s) of this 
section, the maximum monthly charge for each residential or single-line 
business local exchange service subscriber line shall be the lesser of:
* * * * *
    (ii) $6.50.
* * * * *
    (o)(1) Except as provided in paragraphs (r) and (s) of this 
section, the maximum monthly End User Common Line Charge for multi-line 
business lines will be the lesser of:
* * * * *
    (s) End User Common Line Charges for incumbent local exchange 
carriers not subject to price cap regulation that elect model-based 
support pursuant to Sec.  54.311 of this chapter are limited as 
follows:
    (1) The maximum charge a non-price cap local exchange carrier that 
elects model-based support pursuant to Sec.  54.311 of this chapter may 
assess for each residential or single-line business local exchange 
service subscriber line is the rate in effect on the last day of the 
month preceding the month for which model-based support is first 
provided.
    (2) The maximum charge a non-price cap local exchange carrier that 
elects model-based support pursuant to Sec.  54.311 of this chapter may 
assess for each multi-line business local exchange service subscriber 
line is the rate in effect on the last day of the month preceding the 
month for which model-based support is first provided.

0
25. In Sec.  69.115, revise paragraph (b) and add paragraph (f) to read 
as follows:


Sec.  69.115  Special access surcharges.

* * * * *
    (b) Except as provided in paragraph (f) of this section, such 
surcharge shall be computed to reflect a reasonable approximation of 
the carrier usage charges which, assuming non-premium interconnection, 
would have been paid for average interstate or foreign usage of common 
lines, end office facilities, and transport facilities, attributable to 
each Special Access line termination which is not exempt from 
assessment pursuant to paragraph (e) of this section.
* * * * *
    (f) The maximum special access surcharge a non-price cap local 
exchange carrier that elects model-based support pursuant to Sec.  
54.311 of this chapter may assess is the rate in effect on the last day 
of the month preceding the month for which model-based support is first 
provided.

0
26. Revise Sec.  69.130 to read as follows:


Sec.  69.130  Line port costs in excess of basic analog service.

    (a) To the extent that the costs of ISDN line ports, and line ports 
associated with other services, exceed the costs of a line port used 
for basic, analog service, non-price cap local exchange carriers may 
recover the difference through a separate monthly end-user charge, 
provided that no portion of such excess cost may be recovered through 
other common line access charges, or through Connect America Fund 
Broadband Loop Support.
    (b) The maximum charge a non-price cap local exchange carrier that 
elects model-based support pursuant to Sec.  54.311 of this chapter may 
assess is the rate in effect on the last day of the month preceding the 
month for which model-based support is first provided.

0
27. Add Sec.  69.132 to subpart B to read as follows:


Sec.  69.132  End user Consumer Broadband-Only Loop charge for non-
price cap incumbent local exchange carriers.

    (a) This section is applicable only to incumbent local exchange 
carriers that are not subject to price cap regulation as that term is 
defined in Sec.  61.3(ee) of this chapter.
    (b) A charge that is expressed in dollars and cents per line per 
month may be assessed upon end users that subscribe to Consumer 
Broadband-Only Loop service. Such charge shall be assessed for each 
line without regulated local exchange voice service provided by a rate-
of-return incumbent local exchange carrier to a customer, for use in 
connection with fixed Broadband Internet access service, as defined in 
Sec.  8.2 of this chapter.
    (c) For carriers not electing model-based support pursuant to Sec.  
54.311 of this chapter, the single-line rate or charge shall be 
computed by dividing one-twelfth of the projected annual revenue 
requirement for the Consumer Broadband-Only Loop category by the 
projected average number of consumer broadband-only service lines in 
use during such annual period.
    (d) The maximum monthly per line charge for each Consumer 
Broadband-Only Loop provided by a non-price cap local exchange carrier 
that elects model-based support pursuant to Sec.  54.311 of this 
chapter shall be $42.


Sec.  69.306  [Amended]

0
28. In Sec.  69.306, remove and reserve paragraph (d)(2).
0
29. Add Sec.  69.311 to subpart D to read as follows:


Sec.  69.311  Consumer Broadband-Only Loop investment.

    (a) Each non-price cap local exchange carrier shall remove consumer 
broadband-only loop investment assigned to the special access category 
by Sec. Sec.  69.301 through 69.310 from the special access category 
and assign it to the Consumer Broadband-Only Loop category when the 
tariff charge described in Sec.  69.132 of this part becomes effective.
    (b) The consumer broadband-only loop investment to be removed from 
the special access category shall be determined using the following 
estimation method.
    (1) To determine the investment in Common Line facilities (Category 
1.3) as if 100 percent were allocated to the interstate jurisdiction, a 
carrier shall use 100 percent as the interstate allocator in 
determining Category 1.3 investment and the allocation of investment to 
the common line category under part 36 of this chapter and this part.
    (2) The result of paragraph (b)(1) of this section shall be divided 
by the number of voice and voice/data lines in the study area to 
produce an average investment per line.
    (3) The average investment per line determined by paragraph (b)(2) 
of this section shall be multiplied by the

[[Page 24346]]

number of Consumer Broadband-only Loops in the study area to derive the 
investment to be shifted from the Special Access category to the 
Consumer Broadband-only Loop category.


Sec.  69.415  [Amended].

0
30. In Sec.  69.415, remove and reserve paragraphs (a) through (c).

0
31. Add Sec.  69.416 to subpart E to read as follows:


Sec.  69.416  Consumer Broadband-Only Loop expenses.

    (a) Each non-price cap local exchange carrier shall remove consumer 
broadband-only loop expenses assigned to the Special Access category by 
Sec. Sec.  69.401 through 69.415 from the special access category and 
assign them to the Consumer Broadband-Only Loop category when the 
tariff charge described in Sec.  69.132 of this Part becomes effective.
    (b) The consumer broadband-only loop expenses to be removed from 
the special access category shall be determined using the following 
estimation method.
    (1) The expenses assigned to the Common Line category as if the 
common line expenses were 100 percent interstate shall be determined 
using the methodology employed in Sec.  69.311(b)(1).
    (2) The result of paragraph (b)(1) of this section shall be divided 
by the number of voice and voice/data lines in the study area to 
produce an average expense per line.
    (3) The average expense per line determined by paragraph (b)(2) of 
this section shall be multiplied by the number of Consumer Broadband-
only Loops in the study area to derive the expenses to be shifted from 
the Special Access category to the Consumer Broadband-only Loop 
category.

0
32. In Sec.  69.603, revise paragraphs (g) and (h)(4) through (6) to 
read as follows:


Sec.  69.603  Association functions.

* * * * *
    (g) The association shall divide the expenses of its operations 
into two categories. The first category (``Category I Expenses'') shall 
consist of those expenses that are associated with the preparation, 
defense, and modification of association tariffs, those expenses that 
are associated with the administration of pooled receipts and 
distributions of exchange carrier revenues resulting from association 
tariffs, those expenses that are associated with association functions 
pursuant to paragraphs (c) through (g) of this section, and those 
expenses that pertain to Commission proceedings involving this subpart. 
The second category (``Category II Expenses'') shall consist of all 
other association expenses. Category I Expenses shall be sub-divided 
into three components in proportion to the revenues associated with 
each component. The first component (``Category I.A Expenses'') shall 
be in proportion to High Cost Loop Support revenues. The second 
component (``Category I.B Expenses'') shall be in proportion to the sum 
of the association End User Common Line revenues and the association 
Special Access Surcharge revenues. Interstate Common Line Support 
Revenues and Connect America Fund Broadband Loop Support revenues shall 
be included in the allocation base for Category I.B expenses. The third 
component (``Category I.C Expenses'') shall be in proportion to the 
revenues from all other association interstate access charges.
    (h) * * *
    (4) No distribution to an exchange carrier of High Cost Loop 
Support revenues shall include adjustments for association expenses 
other than Category I.A. Expenses.
    (5) No distribution to an exchange carrier of revenues from 
association End User Common Line charges shall include adjustments for 
association expenses other than Category I.B Expenses. Interstate 
Common Line Support and Connect America Fund Broadband Loop Support 
shall be subject to this provision.
    (6) No distribution to an exchange carrier of revenues from 
association interstate access charges other than End User Common Line 
charges and Special Access Surcharges shall include adjustments for 
association expenses other than Category I.C Expenses.
* * * * *
[FR Doc. 2016-08375 Filed 4-22-16; 8:45 am]
 BILLING CODE 6712-01-P