[Federal Register Volume 83, Number 84 (Tuesday, May 1, 2018)]
[Rules and Regulations]
[Pages 18951-18965]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08025]



[[Page 18951]]

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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 54 and 64

[WC Docket Nos. 10-90, 14-58, 07-135, CC Docket No. 01-92; FCC 18-29]


Connect America Fund, ETC Annual Reports and Certifications, 
Establishing Just and Reasonable Rates for Local Exchange Carriers, 
Developing a Unified Intercarrier Compensation Regime

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this document, the Federal Communications Commission 
(Commission) takes the next step in closing the digital divide through 
actions and proposals designed to stimulate broadband deployment in 
rural areas. To reach the Commission's objective, it must continue to 
reform its existing high-cost universal support programs. Building on 
earlier efforts to modernize high-cost universal support, it seeks to 
offer greater certainty and predictability to rate-of-return carriers 
and create incentives to bring broadband to the areas that need it the 
most.

DATES: Effective May 31, 2018, except for Sec. Sec.  54.313(f)(4) and 
54.1305(j) which contains information collection requirements that have 
not been approved by OMB. The FCC will publish a document in the 
Federal Register announcing the effective date of those rules awaiting 
OMB approval.

FOR FURTHER INFORMATION CONTACT: Suzanne Yelen, Wireline Competition 
Bureau, (202) 418-7400 or TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order and Third Order on Reconsideration in WC Docket Nos. 10-90, 
14-58, 07-135, CC Docket No. 01-92; FCC 18-29, adopted on March 14, 
2018 and released on March 23, 2018. 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: https://transition.fcc.gov/Daily_Releases/Daily_Business/2018/db0323/FCC-18-29A1.pdf. The Notice 
of Proposed Rulemaking (NPRM) that was adopted concurrently with the 
Report and Order and Third Order on Reconsideration was published in 
the Federal Register on April 25, 2018.

I. Introduction

    1. Universal service can--and must--play a critical role in helping 
to bridge the digital divide to ensure that rural America is not left 
behind as broadband services are deployed. The directive articulated by 
the Commission in 2011 remains as true today as it did then: ``The 
universal service challenge of our time is to ensure that all Americans 
are served by networks that support high-speed internet access.'' 
Though the Commission has made progress for rural Americans living in 
areas served by our nation's largest telecommunications companies, the 
rules governing smaller, community-based providers--rate-of-return 
carriers--appear to make it more difficult for these providers to serve 
rural America. As a result, approximately 11 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 while 34 percent lack access to 25 Mbps downstream/3 Mbps 
upstream (25/3 Mbps). It is time to close this gap and ensure that all 
of those living in rural America have the high-speed broadband they 
need to participate fully in the digital economy.
    2. By improving access to modern communications services, the 
Commission can help provide individuals living in rural America with 
the same opportunities that those in urban areas enjoy. Broadband 
access fosters employment and educational opportunities, stimulates 
innovations in health care and telemedicine and promotes connectivity 
among family and communities. And as important as these benefits are in 
America's cities, they can be even more important in America's more 
remote small towns, rural, and insular areas. Rural Americans deserve 
to reap the benefits of the internet and participate in the 21st 
century society--not run the risk of falling yet further behind.
    3. In the Report and Order and Third Order on Reconsideration, the 
Commission takes the next step in closing the digital divide through 
actions designed to stimulate broadband deployment in rural areas. To 
reach its objective, the Commission must continue to reform its 
existing high-cost universal support programs. Building on earlier 
efforts to modernize high-cost universal service support, the 
Commission seeks to offer greater certainty and predictability to rate-
of-return carriers and create incentives to bring broadband to the 
areas that need it most.
    4. Specifically, in this Report and Order the Commission takes 
several steps to increase broadband deployment in rural areas. First, 
to maximize available funding for broadband networks, the Commission 
codifies existing rules that protect the high-cost universal service 
support program from waste, fraud, and abuse by explicitly prohibiting 
the use of federal high-cost support for expenses that are not used for 
the provision, maintenance, and upgrading of facilities and services 
for which the high-cost support is intended. The Commission also adopts 
additional compliance obligations that will assist us in determining 
whether high-cost recipients comply with the requirement to spend high-
cost funds only on eligible expenses. Additionally, for rate-of-return 
carriers, the Commission adopts a presumption against recovery through 
interstate rates for specific types of expenses not used and useful in 
the ordinary course and identify other expenses that the Commission 
presumes are not used and useful unless customary for similarly 
situated companies. Second, in exchange for increased broadband 
deployment obligations, the Commission offers additional high-cost 
support to those rate-of-return carriers that previously accepted 
model-based support. Next, to ensure stability in the contribution 
factor pending ongoing implementation of various high-cost reforms, the 
Commission directs the Universal Service Administrative Company (USAC) 
to continue forecasting a uniform quarterly amount of high-cost demand 
pending further Commission action.
    5. In the Third Order on Reconsideration, the Commission resolves 
or clarifies a number of issues raised in several petitions for 
reconsideration of the Commission's 2016 Rate-of-Return Reform Order, 
81 FR 24282, April 25, 2016. Taken together, the Commission expects 
that these actions will provide greater stability and certainty in the 
high-cost program and therefore spur additional broadband deployment to 
the areas that need it most.

II. Report and Order

    6. In this Report and Order, the Commission adopts reforms to 
ensure that high-cost universal service support provided to eligible 
telecommunications carriers (ETCs) is used only for the provision, 
maintenance, and upgrading of facilities and services for which the 
high-cost support is intended pursuant to section 254(e) of the Act. 
The Commission also adopts reforms to ensure that the investments and

[[Page 18952]]

expenses that rate-of-return carriers recover through interstate rates 
are reasonable pursuant to section 201(b) of the Act. The Commission's 
findings here do not prevent rate-of-return carriers from incurring any 
particular investment or expense, but simply clarify the extent to 
which investments and expenses may be recovered through federal high-
cost support and interstate rates. The rules the Commission adopts are 
prospective but the underlying obligations are preexisting and many of 
the rules the Commission adopts codify existing precedent. The 
Commission's rules and the used and useful standard have long governed 
ETCs and rate-of-return carriers' behavior. Nothing the Commission does 
in this Report and Order is intended to undermine its precedent.
    7. Discussion.--Recent events by carriers involving large-scale 
abuses in the recovery of expenses that are unrelated to the provision 
of a universal service supported services give us cause to provide more 
specific rules for compliance with section 254(e). The Commission has a 
duty to the public to protect against waste, fraud, and abuse and 
ensure ETCs utilize finite universal service funds most effectively for 
their intended purpose. Unrelated expenses detract from universal 
service goals. The Commission finds that section 254(e) provides that 
carriers can recover those expenses from high-cost support to the 
extent those expenses are used only for, directly related to, and 
incurred for the sole purpose of, the provision, maintenance, and 
upgrading of facilities and services for which the support is intended, 
i.e., supported voice and broadband. The use by Congress of the word 
``only'' to modify the description of the uses of universal service 
support indicates that such support must be used exclusively for 
providing, maintaining and upgrading of facilities and services, so 
that support is not used for purposes other than those ``for which the 
support is intended.'' To the extent an expense is incurred in part for 
a recoverable business use and in part for a non-recoverable use, 
carriers may only recover from high-cost support that portion of 
expenses incurred for the provision, maintenance, and upgrading of 
facilities for which support is intended.
    8. Because the Commission establishes the contours of universal 
service programs under section 254, the statute vests it with the 
authority to determine the scope of expenditures ``for which support is 
intended.'' Having reviewed the record, the Commission now codifies a 
simple, clear, and carefully defined, non-exclusive, list of expense 
categories that are precluded from recovery via the high-cost programs 
of the Fund because the Commission finds it is not used ``for the 
provision, maintenance and upgrading of facilities and services for 
which the support is intended.'' In codifying a list of ineligible 
expenses, the Commission incorporates, with some modifications, expense 
categories the Commission previously identified as ineligible for high-
cost support in the High-Cost Oct. 19, 2015 Public Notice and in the 
Rate-of-Return Reform Further Notice of Proposed Rulemaking (FNPRM), 81 
FR 21511, April 12, 2016, and the Commission provides guidance going 
forward on the eligibility of expenses on which the Commission sought 
comment in the Rate-of-Return Reform FNPRM. The Commission recognizes 
that its approach differs from that proposed by the rural associations; 
however, the Commission finds that its approach is more consistent with 
the statutory requirements that high-cost support be used only for the 
provision, maintenance, and upgrading of facilities and services for 
which the support is intended. To the extent the Commission adopts new 
prohibitions on expenses that may be recovered from high-cost support, 
the Commission's rules apply on a prospective basis.
    9. The Commission organizes the types of goods and services as 
ineligible for support into three broad expense categories--personal 
expenses, expenses unrelated to operations, and corporate luxury 
goods--and within each broad category specify certain types of goods 
and services not eligible for support. The Commission cautions that 
this list is based on the record before us. As specified in the 
Commission's revised rules, this list is not a comprehensive list of 
expenses ineligible for high-cost support. This list provides a 
codified bright-line prohibition on seeking high-cost support for some 
types of expenses. However, the Commission reminds carriers that it is 
also prohibited from seeking support for any expenses that are not used 
only for the provision, maintenance, and upgrading of facilities and 
services for which the support is intended. The Commission intends to 
remain vigilant in protecting the Fund from waste, fraud, and abuse.
    10. Personal Expenses.--Initially, the Commission codifies the 
existing prohibition on recovery from the high-cost program for 
personal expenses of employees, board members, family members of 
employees and board members, contractors, or any other individuals 
affiliated with the ETC, including but not limited to personal expenses 
for personal travel, personal vehicles, housing, such as rent, 
mortgages, or housing allowances, childcare, employee gifts, and 
entertainment-related expenses including food and beverage, regardless 
of whether such expenses are paid directly by the individual or 
indirectly by the carrier in the form of allowances or gifts. Personal 
expenses are clearly not used for the provision of supported services 
and thus may not be recovered through high-cost support. Furthermore, 
the Commission cautions recipients of high-cost support that recovering 
these types of expenses from high-cost support may constitute outright 
fraud, waste, and abuse on the Fund, subjecting employees, executives, 
and board members to personal civil and criminal liability.
    11. The Commission already explicitly excludes personal travel 
expenses from high-cost support recovery. Personal travel expenses 
include airfare, car rentals, gas, lodging, and meals for personal use. 
Commenters overwhelmingly agree that personal travel is unrelated to 
the provision of a supported service and may not be recovered through 
high-cost support. In response to concerns raised by commenters, the 
Commission finds that, in contrast to personal travel expenses, 
reasonable work-related travel expenses are recoverable to the extent 
they are used for the provision, maintenance, and upgrading of 
facilities and services for which high-cost support is intended. For 
example, if an ETC's technician travels to repair a supported facility 
and such travel requires overnight accommodation, the ETC may recover 
that employee's reasonable hotel costs.
    12. The Commission already explicitly excludes expenses for 
personal vehicles and housing for personal use from high-cost support 
recovery. Commenters supported the continued exclusion. For example, an 
ETC is prohibited from recovering from high-cost support the purchase 
of a vehicle and home for personal use. To the extent a vehicle is used 
for both legitimate business purposes and non-business purposes, an ETC 
may only recover from high-cost support that portion of expenses 
incurred in connection with the provision, maintenance, and upgrading 
of supported services and facilities for which high-cost support is 
intended.
    13. Subject to the very narrow exception the Commission describes 
below, the prohibition concerning housing for personal use precludes 
ETCs from using high-cost support to provide housing allowances for 
employees. Some commenters claim that housing allowances are necessary 
to

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attract qualified employees and may be essential if affordable housing 
is not available in rural areas. Another commenter asserts that housing 
allowances are not a common operating expenditure. Regardless of 
whether such allowances are beneficial or commonly provided, they are 
not generally used for the provision, maintenance, and upgrading of 
facilities and services. Expenses for employee housing allowances are 
no different than other personal expenses for housing, which are 
disallowed, and the Commission codifies this prohibition.
    14. However, the Commission recognizes that it may be appropriate 
to seek high-cost support to recover the cost of providing temporary or 
seasonal lodging for employees providing service in remote areas with 
rugged terrain and extreme weather conditions where no other lodging is 
available. The Commission views this situation as analogous to per diem 
travel expenses for lodging, which can be a recoverable operating 
expense when such travel meets the statutory test for recoverable 
expenses. Reasonable temporary or seasonal lodging may only be 
recovered if used for the provision, maintenance, and upgrading of 
services and facilities for which high-cost support is intended. 
Housing allowances outside of this very narrow exception are prohibited 
and are excluded from high-cost support.
    15. Childcare expenses are not recoverable from high-cost support. 
Commenters argue that childcare is important to ``attract and retain 
qualified employees.'' Another commenter asserts that the ``vast 
majority'' of rural incumbent LECs are ``too small to afford 
childcare'' which they do not provide. Although the provision of 
childcare may be desirable and beneficial, such expenses are not used 
only for the provision, maintenance, and upgrading of supported 
facilities and services. Accordingly, such expenses are excluded from 
high-cost support.
    16. It is undisputed that gifts to employees may not be recovered 
through high-cost support. Gifts to employees are unrelated to the 
provision, maintenance, and upgrading of facilities and services for 
which high-cost support is intended, and therefore are excluded from 
high-cost support.
    17. Entertainment and food and beverage expenses, including but not 
limited to expenses incurred for meals to celebrate personal events, 
such as weddings, births, or retirements, are explicitly not 
recoverable through high-cost support. Some commenters agree that 
entertainment expenses in particular have not been recoverable in the 
past. Other commenters disagree, claiming that recovering entertainment 
expenses incurred for ``client or vendor meetings, or attendance at 
board meetings'' is a ``common and accepted practice.'' Some commenters 
maintain that they should be able to include food and beverage and 
entertainment expenses related to annual meetings, employee 
recognition, parties or picnics because such events build morale and 
improve service quality. The question is whether these expenses are 
used only for the provision, maintenance, and upgrading of facilities 
and services for which high-cost support is intended--not whether they 
are beneficial, desirable or common practice. Because these expenses do 
not meet the Commission's interpretation of what the statutory standard 
requires, the Commission excludes them from high-cost support. As noted 
above, the Commission acknowledges that meals provided during business-
related travel may qualify as a reasonable per diem travel expense 
recoverable from high-cost support consistent with the Commission's 
interpretation of section 254(e).
    18. Finally, some commenters misread Sec.  32.6720(j) of the 
Commission's rules as permitting universal service recovery for ```food 
services (e.g., cafeterias, lunch rooms and vending facilities).''' 
While cafeterias and dining facilities should be recorded in corporate 
operations accounts (Account 6720), it does not follow that these 
expenses can be recovered from high-cost support. Commenters argue that 
such costs are ``insignificant and immaterial'' and ``offset by 
increased efficiencies.'' At the same time, some commenters acknowledge 
that the vast majority of rate-of-return carriers do not provide 
cafeterias and dining facilities. Most rate-of-return carriers are able 
to serve their customers without having cafeterias and dining 
facilities for their employees precisely because these expenses are not 
solely related to the provision, maintenance, and upgrading of 
facilities and services for which the support is intended. Thus, 
consistent with the Commission's interpretation of section 254(e), ETCs 
may not recover from high-cost support expenses for food services and 
dining facilities, including cafeterias, lunch rooms, and vending 
facilities.
    19. Expenses Unrelated To Operations.--The Commission next codifies 
the existing prohibitions on recovering support for expenses unrelated 
to operations--including political contributions, charitable donations, 
scholarships, membership fees and dues in clubs and organizations, 
sponsorships of conferences or community events, and penalties or fines 
for statutory or regulatory violations, penalties or fees for late 
payments on debt, loans, or other payments--from high-cost support. 
ETCs calculate high-cost universal support, including high cost loop 
support (HCLS) and Connect America Fund Broadband Loop Support (CAF 
BLS) (formerly interstate common line support (ICLS)), based on their 
eligible capital investment and operating expenses pursuant to Sec.  
54.303. Expenses unrelated to operations, however, are not currently 
included in these high-cost support calculations. Instead, under the 
Commission's current rules, ``nonoperating expenses''--including 
political contributions, contributions for charitable, social, or 
community welfare purposes, membership fees and dues in social, service 
and recreational or athletic clubs and organizations, and penalties and 
fines on account of violations of statutes--are recorded in Account 
7300, presumed excluded from the costs of service in setting rates, and 
not included in high-cost support calculations. Expenses unrelated to 
operations have historically not been recoverable from high-cost 
support because by definition these expenses are not operational in 
nature and are ancillary to core business objectives. Expenses must 
fall within the scope of the statutory requirement that support be used 
``only for the provision, maintenance, and upgrading of facilities and 
services for which support is intended.'' Below the Commission finds 
that various expenses unrelated to operations, including various 
Account 7300 nonoperating expenses, do not satisfy this standard and, 
thus, may not be recovered from high-cost support.
    20. Political contributions are expenses unrelated to operations 
that may not be recovered from high-cost support. The record supports 
the continued exclusion of political contributions from recovery 
through high-cost support. No commenter opposed this. Political 
contributions are not used only for the provision, maintenance, and 
upgrading of facilities and services for which support is intended. 
ETCs are still, of course, free to make political contributions to the 
extent permitted by other laws, but they cannot recover those expenses 
from high-cost support.
    21. In a related vein, the National Exchange Carrier Association 
(NECA) sought clarification on the extent to which the costs of 
```[m]aintaining relations with government, regulators,

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other companies and the general public' such as `performing public 
relations and non-product-related corporate image advertising 
activities''' (Account 6720) should be included in universal service 
data submissions. At the outset, no commenter has provided any 
persuasive basis for determining how non-product-related corporate 
image advertising expenses are used for the provision, maintenance, and 
upgrading of supported services and facilities. Accordingly, corporate 
image advertising expenses may not be recovered from high-cost support. 
By contrast, expenses incurred to meet state, local, or federal 
regulatory requirements or obligations to provide supported services 
including preparing tariff and service cost filings and obtaining plant 
construction permits are allowable under section 254(e) to the extent 
that they are a precondition to providing supported services. 
Additionally, contracting expenses (excluding sales contracts) such as 
negotiating pole attachment rights-of-way and interconnection 
agreements that are a precondition to providing supported service are 
recoverable from the high-cost program consistent with the Act.
    22. Charitable donations and scholarships are expenses unrelated to 
operations that may not be recovered from high-cost support. The 
Commission recognizes the benefits charitable donations provide to the 
community, as raised by multiple commenters. However, charitable 
donations are unrelated to the provision, maintenance, and upgrading of 
facilities and services for which the high-cost support is intended.
    23. Membership fees and dues in clubs and organizations, including 
social, service, and recreational or athletic clubs and organizations, 
as well as trade associations and organizations that provide 
professional or trade certifications such as state bar associations, 
are expenses unrelated to operations excluded from high-cost support. 
Commenters agree that these expenses related to social and recreational 
clubs and organizations are already excluded from high-cost support 
recovery. But those same and other commenters also argue that 
membership fees and dues in trade associations, chambers of commerce, 
state bar associations and professional certifications for specialized 
employees should be recoverable. The Commission recognizes the 
educational and training benefits that trade associations provide and 
that membership in chambers of commerce may help stimulate business. 
However, as other commenters acknowledge, a function of many of these 
organizations is advocacy on behalf of their members for the purpose of 
influencing public policy which is not used for the provision, 
maintenance, and upgrading of facilities and services for which support 
is intended. Just as ETCs may not recover lobbying expenses under the 
Commission's rules, similarly, they may not recover membership fees in 
organizations that engage in lobbying. Further, professional 
affiliations or certifications such as state bar associations, 
accounting associations, or other professional groups may facilitate 
general corporate functions but are not used only for the provision of 
supported facilities and services.
    24. No commenter opposed the prohibition on using high-cost support 
to sponsor conferences or community events. As the Commission has 
explained, sponsorships may be related to community interests but are 
not used for the provision, maintenance, and upgrading of facilities 
and services for which support is intended. The Commission continues to 
recognize that sponsorships of conferences or community events may 
benefit the community and the ETC, but such expenses do not satisfy the 
statutory standard for recovery.
    25. Costs incurred as penalties or fines on account of violations 
of statutes, including judgments and payments in settlement of civil 
and criminal suits alleging antitrust violations, are excluded from 
high-cost support. Such expenses are not used for the provision, 
maintenance, and upgrading of facilities and services for which the 
support is intended. Commenters did not take issue with this exclusion.
    26. Similar to penalties or fines for statutory or regulatory 
violations, costs incurred as penalties or fees for any late payments 
on debts, loans, or other payments are not used for the provision, 
maintenance, and upgrading of facilities and services for which the 
support is intended. Indeed, commenters recognize that such expenses 
``have typically not been recoverable in the past.'' Penalties or fees 
for late payments on debt, loans, or other payments arguably are costs 
of doing business and mistakes will happen, but the costs of these 
mistakes and inefficiencies should not be borne by universal service 
contributors.
    27. Corporate Luxury Goods.--The Commission next codifies the 
prohibition on recovery from the high-cost program of expenses for 
corporate luxury goods, including artwork and other objects which 
possess aesthetic value, and corporate aircraft, watercraft, and other 
vehicles, with limited exception discussed below and codify the 
existing prohibitions on using high-cost support for tangible luxury 
goods, including consumer electronics for personal use, and tangible 
property used for entertainment purposes. None of these goods is used 
only for the provision, maintenance, and upgrading of facilities and 
services for which high-cost support is intended. Likewise, kitchen 
appliances are unrecoverable with a limited exception noted below.
    28. No commenter argues that artwork is used only for the 
provision, maintenance, or upgrading of facilities; instead commenters 
claim that artwork creates a pleasant work environment. While this may 
be the case, it is irrelevant to the question of whether such expenses 
meet the statutory standard. Because artwork is not used for the 
provision, maintenance, and upgrading of supported facilities and 
services, expenses for artwork must be excluded from high-cost support.
    29. Corporate aircraft, boats, and other off-road vehicles to the 
extent used by executives or board members are more akin to luxuries 
for personal benefit and not used for provision, maintenance, and 
upgrading of supported facilities and services. The Commission's 
proposed rule in the Rate-of-Return Reform FNPRM did make allowances 
``insofar as necessary to access inhabited portions of the study area 
not reachable by motor vehicles traveling on roads.'' Commenters 
supported this exception and opposed a blanket exclusion of aircraft, 
watercraft, and the like as contrary to the Commission's objective of 
reducing waste and promoting efficiency. The Commission is persuaded 
that the use of aircraft and off-road vehicles often can be the 
``fastest, safest, most reliable and most efficient and least expensive 
way for technicians to reach remote areas to install, inspect or repair 
facilities.'' The Commission encourages such efficiencies because they 
reduce burdens on the Fund and thus reduce universal service fees for 
subscribers. The Commission cautions ETCs that they may only recover 
from high-cost support that portion of aircraft, watercraft, and other 
vehicle expenses used for the provision, maintenance, and upgrading of 
supported services and facilities, not expenses used for the benefit of 
corporate executives and board members. Thus, the Commission will 
closely scrutinize these expenses, and ETCs seeking to recover these 
costs from high-cost support must retain records of their use in 
sufficient detail to justify recovery.

[[Page 18955]]

    30. Consumer electronics for personal use may not be recovered from 
high-cost support. Consumer electronics such as video games, 
televisions, and radios designed, marketed, and sold for everyday 
personal use by consumers, not business use, are analogous to a 
personal expense or an entertainment expense, both of which are not 
recoverable from high-cost support. The Commission acknowledges that 
consumer electronic devices such as laptops, monitors, smart phones, or 
other hand-held devices may serve valid business purposes. Accordingly, 
ETCs may only seek high-cost support for that portion of the expense 
associated with work use, consistent with the Commission's narrow 
interpretation of section 254(e). The Commission emphasizes that 
consumer electronics for personal use are never used for the provision, 
maintenance, and upgrading of facilities and services for which high-
cost support is intended.
    31. Tangible property used for entertainment purposes (e.g., pool 
tables) may not be recovered from high-cost support. Commenters argue 
that property used for entertainment purposes builds morale and 
improves overall service quality. But, these expenses have no direct 
nexus to the provision, maintenance, or upgrading of facilities or 
supported services.
    32. Except in narrow circumstances referenced above, kitchen 
appliances may not be recovered from high-cost support except to the 
extent provided as part of temporary or seasonal lodging for employees 
providing supported service in rugged, remote areas as explained above. 
Commenters argued that kitchen appliances are useful for employees in 
``fulfillment of their company obligations in rural areas'' and 
``relatively inexpensive and last for years.'' The Commission 
recognizes that kitchen appliances may be a good investment for rural 
providers, but ultimately the standard is whether the item is used only 
for the ``provision, maintenance, and upgrading of facilities and 
services for which the support is intended,'' and kitchen appliances do 
not meet this standard, except in the very narrow circumstance 
described above.
    33. Compliance.--Based on the record received in response to the 
Rate-of-Return Reform FNPRM, the Commission adopts measures to ensure 
carrier compliance with the permitted expense rules adopted above for 
universal service support. Specifically, the Commission requires rate-
of-return ETCs to identify on their annual FCC Form 481 (Carrier Annual 
Reporting Data Collection Form) their cost consultants and cost 
consulting firm, or other third party, if any, used to prepare cost 
studies, or other calculations used to calculate high-cost support for 
their submission. Disclosure of an ETC's cost consultants is a low-
burden measure that will help the Commission identify waste, fraud, and 
abuse during audits. As at least one commenter explained, it is common 
business practice for rate-of-return carriers to hire cost consultants 
to prepare their financial and operations data disclosures used to 
justify high-cost support. The Commission agrees with commenters that 
discrepancies in permitted expenses disclosed on Form 481 prepared by a 
cost consultant may flow through to other carriers' represented by the 
same cost consultant. Identifying a carrier's cost consultants and cost 
consulting firms will help NECA, the Commission, and USAC identify and 
rectify patterns of noncompliance, and potentially fraud, during 
audits. This disclosure will ultimately help preserve the integrity of 
the Fund by ensuring that carriers only recover permitted expenses.
    34. The Commission declines at this time, however, to adopt a 
number of other compliance measures proposed in the Rate-of-Return 
Reform FNPRM. Specifically, the Commission declines to require a new 
certification from carriers attesting that they have not included any 
prohibited expenses in their cost submissions used to calculate high-
cost support. Carriers' corporate officers are already required to 
certify that they are compliant with the Commission's rules. Carriers 
are also required to certify to the accuracy of their cost studies used 
to calculate HCLS pursuant to Sec.  69.601(c) and CAF BLS pursuant to 
Sec.  54.903(a)(3) and (4). The Commission further requires similar 
certifications for filings with NECA, Tariff Review Plans (TRPs), 
tariff filings for carriers that elect to receive CAF support, cost 
studies used to calculate high-cost support submitted to NECA and USAC 
and high-cost support. For example, willful false statements in data 
submissions to NECA or USAC are punishable by fine or imprisonment 
pursuant to U.S. Code, Title 18, Section 1001. Requiring carriers to 
submit an additional certification would not further encourage 
compliance but would be needlessly duplicative and burdensome. To the 
extent a carrier's corporate officer certifies compliance with the 
Commission's rules, such certification would cover compliance with the 
eligible expense rules, as amended.
    35. The Commission also does not believe it is necessary to alter 
NECA's role to enforce the rules adopted herein. NECA is an association 
of LECs established in 1984, at the direction of the Commission, to 
administer interstate access tariffs for LECs that do not file separate 
tariffs and to collect and distribute access charge revenues for those 
companies. NECA administers the process by which average schedule 
companies submit sampled data and cost companies submit cost studies 
that are ultimately used to calculate revenue requirements, rate base, 
and universal service disbursements. Carriers are required to submit 
certain cost data necessary to calculate high-cost support payments to 
NECA, certifying that they are accurate to the best of their knowledge, 
and NECA in turn analyzes that cost data, performs certain calculations 
and submits that information to USAC for use in determining support 
payments for eligible carriers. NECA has a responsibility to take 
reasonable precautions to ensure that the data it uses in preparing 
interstate access tariff filings and distributing interstate revenue 
comply with the Commission's rules. The Commission believes that NECA 
has sufficient authority and operational capability to provide 
oversight of its members with respect to high-cost support. Rather than 
expel carriers from the NECA pools as some commenters propose, the 
Commission encourages NECA to continue its oversight role, which it 
must do in compliance with the Commission's rules, and subject to 
Commission review. The Commission directs NECA to work with its members 
to develop processes to ensure compliance with the eligible expenses 
rules adopted herein to ensure that universal service support is being 
used only for its intended purposes. The Commission reminds NECA 
members that it is their responsibility to ensure that the expenses 
submitted to and used by NECA to calculate high-cost support are 
accurate and consistent with the Commission's rules. The Commission has 
authority to revoke section 214 authorizations based on misconduct, a 
finding that disqualifies that carrier from participation in the NECA 
pools.
    36. Finally, the Commission declines to adopt a ``safe harbor'' 
standard proposed by commenters that would insulate carriers from audit 
and enforcement liability if a carrier includes prohibited expenses but 
the ``overall impact'' is ``immaterial.'' The only way to determine if 
excluded expense are immaterial would be to conduct an audit. Moreover, 
the Commission believes that such an approach would not be in the 
public

[[Page 18956]]

interest because it would not encourage strict compliance with the 
existing and revised permitted expense rules.
    37. The Commission reminds carriers that failure to keep 
Commission-prescribed accounts, records, and memoranda on the books is 
a violation of section 220(d) of the Act and may subject carriers to 
forfeiture liability in the amount of $6,000 for each day of the 
continuance of each such offense. Carriers' employees, executives, and 
board members may also be subject to personal liability for violations. 
Carriers' employees, executives, and board members that willfully make 
any false entry in Commission-prescribed accounts may be subject them 
to monetary penalties for violations of section 220(e) of the Act will 
be deemed guilty of a misdemeanor, and shall be subject, upon 
conviction, to a fine of not less than $1,000 nor more than $5,000 or 
imprisonment for a term of not less than one year nor more than three 
years, or both such fine and imprisonment. Furthermore, persons making 
willful false statements in data submissions to NECA, USAC, or the 
Commission can be punished by fine or imprisonment under the provisions 
Title 18, Section 1001, of the U.S. Code.
    38. Section 201(b) of the Communications Act requires that only 
reasonable investments and expenses be recovered through regulated 
interstate rates--a requirement the Commission has historically 
enforced through the ``used and useful'' standard. The Commission 
amends its rules to provide guidance to legacy rate-of-return LECs 
regarding investments and expenses that are presumed not used and 
useful (and thus unreasonable under section 201) and thus, as a general 
matter, may not be recovered through interstate rates. The Commission 
divides such investments and expenses into two broad categories: Those 
that the Commission does not expect would be used and useful in the 
ordinary course and those the Commission would not expect to be used 
and useful unless customary for similarly situated companies. The 
Commission notes that the second category is intended to capture types 
of expenses that may be customary among small companies (and based on 
their widespread usage the Commission may consider more likely to be 
used and useful) but are subject to abuse. For example, a small company 
may reasonably host a company picnic (to boost the morale of employees 
operating the interstate telecommunications network), which would be 
customary for small companies, but might not reasonably host an 
expensive banquet for employees at an out-of-state venue.
    39. The Commission makes clear that its actions are not intended to 
alter the scope of the used and useful standard--instead only to 
provide prospective guidance and a default presumption in certain 
cases. Legacy rate-of-return LECs are free to attempt to rebut the 
presumption by showing particular factual circumstances justifying 
recovery of these investments and expenses through interstate rates but 
cannot recover for such costs absent a particularized showing. To the 
extent that these investments and expenses are recovered through 
interstate rates, in the event of an audit or other investigation, the 
carrier bears the burden of demonstrating that such investments and 
expenses are used and useful despite the presumption that they are not.
    40. Discussion.--Commenters agree that several of the expenses and 
investments discussed in the Rate-of-Return Reform FNPRM are already 
excluded from ratemaking, while others argue they should be excluded 
prospectively. Based on the record, below the Commission discusses the 
specific categories of investments and expenses that it presumes are 
not used and useful in the ordinary course and those not used and 
useful unless customary for similarly situated companies.
    41. Personal Expenses.--Personal expenses including vehicles for 
personal use, and personal travel (such as transportation, lodging and 
meals) are presumed excluded from recovery through interstate rates. 
There is broad consensus in the record that personal expenses are not 
used and useful for the provision of interstate telecommunications 
services and therefore cannot, and should not, be recovered through 
interstate rates. Personal expenses are for the benefit of an 
individual affiliated with the rate-of-return LEC without an 
articulable business-related purpose and are not necessary or incurred 
to provide regulated service. Personal expenses are presumed not used 
and useful in the ordinary course.
    42. To the extent a rate-of-return LEC provides its employees, 
executives or board members, or any other individuals affiliated with 
the LEC with additional benefits, such as gifts, housing allowances, 
and childcare that are not part of taxable compensation, the Commission 
finds that these expenses are presumed not used and useful unless 
customary for similarly situated companies. As noted by commenters, 
cash or in-kind bonuses, housing allowances, or childcare may qualify 
as part of a taxable compensation package--and are subject to a 
presumption-free review under the used and useful standard. The 
Commission agrees with commenters that temporary housing offered as 
part of businesses-related travel lodging or a temporary work 
assignment may qualify as legitimate business expenses, not a personal 
expense, and do not warrant the presumption.
    43. Personal food and beverage expenses are presumed not used and 
useful whereas food and beverage expenses for work and work-related 
travel as well as costs of operating cafeterias and dining facilities 
are presumed not used and useful unless customary for similarly 
situated companies. The Commission clarifies that food and beverages 
purchased during business-related travel are not personal expenses. As 
noted by commenters, reasonable per diem travel expenses, including 
food and beverages, are commonly-accepted business expenses. Similarly, 
food and beverage expenses incurred as part of work-related 
entertainment such as company parties or picnics are likewise presumed 
not used and useful unless customary. The Commission's existing rules 
allow rate-of-return LECs to include expenses incurred operating 
cafeterias and dining facilities in general and administrative accounts 
used to calculate interstate rates. At the same time, ratepayers should 
not be forced to pay for excessive or imprudent expenses unrelated to 
business purposes or unnecessary to the provision of regulated 
services.
    44. Although commenters disagree on whether entertainment expenses 
should be recoverable, the Commission finds that entertainment expenses 
are presumed not used and useful unless customary for similarly 
situated companies. Entertainment expenses, such as musical 
entertainment or food and beverage expenses incurred at company parties 
or picnics, are a common business practice to improve employee morale 
but are subject to potential abuse.
    45. Expenses Unrelated to Operations.--The Commission clarifies 
that certain expenses unrelated to operations--including political 
contributions, membership fees and dues in social, service and 
recreational or athletic clubs and organizations, penalties or fines 
for statutory or regulatory violations, and penalties or fees for late 
payments on debt, loans, or other payments--are presumed not used and 
useful. As several commenters note, most of these nonoperating expenses 
are

[[Page 18957]]

currently presumed to be excluded from the cost of service in setting 
rates. The record supports the continued presumption that these 
expenses are excluded from recovery through interstate rates.
    46. Although penalties or fees for late payments on debt, loans, or 
other payments have typically not been recovered through ratemaking, as 
noted by commenters, the Commission's rules do not contain an explicit 
prohibition. The Commission fails to see how these expenses can be 
distinguished from penalties or fines for statutory or regulatory 
violations which are currently presumed excluded from ratemaking. All 
of these expenses are imprudent--incurred when a carrier fails to 
adequately manage its business and operations. Ratepayers should not 
pay for expenses incurred due to irresponsible business practices. 
Accordingly, the Commission finds that penalties or fees for any late 
payments on debt, loans, or other payments are presumed not used and 
useful (and thus unreasonable).
    47. Under the Commission's current rules, membership fees and dues 
in social, service and recreational, or athletic clubs and 
organizations are presumed not used and useful and must be excluded 
from recovery via interstate rates. The Commission declines at this 
time to expand the scope of excluded fees and dues to cover additional 
types of fees, such as memberships in professional organizations and 
associations. As some commenters have argued, there is utility to 
customary memberships in professional organizations such as trade 
associations, chambers of commerce, and bar associations. As a result, 
membership fees and dues associated with professional organizations, 
unless customary for similarly situated companies, are presumed not 
used and useful.
    48. The Commission clarifies that other expenses unrelated to 
operations--including charitable donations, scholarships, sponsorships 
of conferences or community events--raise the potential for abuse and 
thus are presumed not used and useful unless customary for similarly 
situated companies. As commenters note, there appears to be a conflict 
in the Commission's rules regarding the treatment of charitable 
donations for ratemaking purposes. The Commission clarifies here, 
consistent with the justification provided in the 1987 Rate Base Order, 
53 FR 1027, January 15, 1988, that the Commission's rules allow 
recovery of reasonable charitable donations through the interstate 
revenue requirement. The Commission agrees with commenters that 
reasonable charitable donations may to be appropriate to support the 
community in which it operates as a cost of doing business and part of 
``good corporate citizenship.'' For similar reasons as charitable 
donations, the Commission finds that scholarships and sponsorships of 
conferences or community events likewise serve an important role in the 
community.
    49. Corporate Luxury Goods.--Although some corporate luxury goods 
are in fact customary, as a category it is subject to potential abuse. 
As such, expenses associated with corporate luxury goods--specifically 
corporate aircraft, watercraft, and other off-road vehicles used for 
work and work-related purposes, as well as artwork and other objects 
which possess aesthetic value that are displayed in the workplace--are 
presumed not used and useful (and thus unreasonable) unless customary 
for similarly situated companies. In the Rate-of-Return Reform FNPRM, 
the Commission proposed to allow recovery for corporate aircraft, 
watercraft, and other vehicles ``insofar as necessary to access 
inhabited portions of the study area not reachable by motor vehicles 
traveling on roads.'' Commenters support this proposal, asserting that 
a blanket ban is contrary to the Commission's objective of reducing 
waste and promoting efficiency. The Commission agrees that the use of 
aircraft and off-road vehicles can be the ``fastest, safest, most 
reliable and most efficient and least expensive way for technicians to 
reach remote areas to install, inspect or repair facilities.'' However, 
to avoid the risk of abuse, the Commission presumes that even vehicles 
used for work and work-related purposes are not used and useful unless 
customary for similarly situated companies. Based on the record, the 
Commission fully expects that carriers using such vehicles to access 
areas not seasonably reachable by road travel will be able to overcome 
the presumption, so long as they limit the use of aircraft, watercraft 
and off-road vehicles to work and work-related purposes. The Commission 
acknowledges that office artwork is a common business expense and 
should not place excessive burdens on ratepayers. Accordingly, expenses 
associated with artwork and other objects which possess aesthetic value 
that are displayed in the workplace are presumed not used and useful 
unless customary for similarly situated companies.
    50. The Rate-of-Return Reform FNPRM also proposed to prohibit 
recovery from interstate support ``expenses for tangible property not 
logically related or necessary to offering voice or broadband 
service.'' Such expenses include, for example, recreational equipment 
and consumer electronics not used for work purposes. These expenses are 
not used in the ordinary course for providing interstate 
telecommunications services, and so the Commission will presume them 
not used and useful (and thus unreasonable). Further, the Commission's 
rules provide that rate-of-return LECs may not recover investments and 
expenses unless ``recognized by the Commission as necessary to the 
provision'' of interstate telecommunications services. The Commission 
notes that, by definition, tangible property not logically related or 
necessary to offering voice or broadband service is not necessary or 
incurred to provide regulated interstate telecommunications service.
    51. Also in the Report and Order, the Commission directs the Bureau 
to offer additional Alternative Connect America Cost Model (A-CAM) 
support up to $146.10 per-location to all carriers that accepted the 
revised offers of model-based support. Under the revised offer, all 
locations with costs above $52.50 per location will be funded up to a 
per-location funding cap of $146.10, and the Bureau should adjust 
deployment obligations accordingly. If all eligible carriers accept 
this offer, the Commission anticipates that it would result in 
approximately $36.5 million more support per year for the 10-year A-CAM 
term. Increasing support immediately will result in additional 
broadband deployment, while balancing budgetary constraints pending the 
outcome of this proceeding. This increase in support does not impact 
legacy support.
    52. There is ample support in the record from carriers and state 
government officials, as well as from members of Congress, for 
increasing the budget for A-CAM. With additional funding, these parties 
have made clear the economic, educational, and healthcare benefits that 
will directly follow. The Commission's action today addresses these 
requests by extending a revised offer at $146.10, the same maximum per-
location support amount as the Commission offered to price cap carriers 
for the Phase II offer of model-based support and as the Commission has 
proposed for the maximum reserve price in the Phase II auction. By 
raising the per-location cap to a uniform $146.10 for all current A-CAM 
recipients, the Commission could increase by more than 17,700 the 
number of locations that will receive 25/

[[Page 18958]]

3 Mbps over the course of the support term, with another 14,000 
locations receiving 10/1 Mbps. Although the Commission declines to 
extend the per-location funding cap to $200 at this time, the 
Commission seeks comment on doing so in the concurrently adopted NPRM, 
along with potential increases to the overall budget.
    53. The Commission directs the Bureau to release a public notice 
announcing the revised model-based support amounts and corresponding 
deployment obligations, and providing carriers with 45 days to confirm 
that they are will accept the revised offer. Any such election shall be 
irrevocable. In order to true up support that would have been disbursed 
in 2017 at the $146.10 per-location cap support amounts, the Commission 
directs USAC to make a one-time lump sum payment from excess cash in 
its high-cost account. USAC shall disburse that support the month 
following a Bureau public notice authorizing those carriers that accept 
this revised offer. The Commission further directs USAC to collect 
additional funds going forward to cover the increase in A-CAM support 
for the remainder of the support term.
    54. Finally, in the Report and Order, pursuant to Sec.  
54.709(a)(3) of the Commission's rules, the Commission directs USAC to 
continue forecasting a quarterly amount of high-cost demand at no less 
than one quarter of $4.5 billion until further Commission action, such 
as addressing the issues raised in the concurrently adopted NPRM. The 
concerns raised by the Commission in 2011 regarding support 
fluctuations resulting from implementation of the CAF remain true 
today. The Commission expects that there will continue to be shifts in 
support levels as the Commission transitions to paying winners of both 
upcoming universal service auctions (CAF Phase II and Mobility Fund II) 
while phasing down payments to current ETCs receiving frozen support 
amounts. At this time, the Commission cannot predict how those 
transitions will impact the overall CAF budget but will have a better 
sense of the impacts after the outcome of the auctions. It is in the 
public interest to collect a uniform amount to minimize unpredictable 
fluctuations in consumers' bills by allowing USAC to build up some 
excess cash to cover transitions without causing a dramatic shift in 
the quarterly contribution factor. Moreover, the Commission seeks 
comment in the concurrently adopted NPRM on whether to make certain 
adjustments to the rate-of-return support mechanisms, and building up 
excess cash leading up to an order on those decisions could lessen 
later increases to the contribution factor.
    55. USAC forecasted contributions based on an estimated demand of 
$1.06 billion for the first quarter of 2018, given that USAC's 
directive to collect $1.125 billion ended in 2017. To collect at least 
$4.5 billion for 2018, the Commission directs USAC to project for each 
of the final quarters of 2018 a total high-cost demand of at least 
$1.125 billion plus the difference between what it has already 
projected in 2018 based only on demand and the amount it would have 
collected had the Commission's prior direction continued into 2018, 
equally spread out over the final quarters. USAC shall place those 
excess funds in its high-cost account, pending further Commission 
decisions. USAC shall not take those excess funds into account when 
forecasting demand for 2018. If high-cost quarterly demand actually 
exceeds $1.125 billion plus the additional amount, no additional funds 
will accumulate in the high-cost cash account for that quarter and 
excess cash will be used to constrain the high-cost demand in the 
contribution factor. In other words, by the end of 2018, absent further 
direction by the Commission, USAC will have collected at least $4.5 
billion for the deployment of broadband networks in high-cost areas. 
The Commission anticipates that it will take action on the concurrently 
adopted NPRM prior to the end of 2018 and will issue additional 
guidance to USAC at that time.

III. Third Order on Reconsideration

    56. On May 25, 2016, five petitions were filed requesting that the 
Commission reconsider or clarify various aspects of the Rate-of-Return 
Reform Order. In April 2017, the Commission adopted an Order on 
Reconsideration, 82 FR 22901, May 19, 2017, in which it amended the 
capital investment allowance (CIA) rule limiting support for new 
construction projects with high average capital expenses. In a Second 
Order on Reconsideration and Clarification, 83 FR 14185, April 3, 2018, 
the Commission addressed the surrogate method for estimating consumer 
broadband-only loops (CBOLs) and the Access Recovery Charge imputation 
rule. In this Third Order on Reconsideration, the Commission addresses 
certain additional issues petitioners raised, including the mitigation 
of the budget control mechanism from July 2017 to June 2018; the 
addition of an inflation factor to calculate the operating expenses 
limitation; inclusion of broadband-only loops in calculating each 
carrier's corporate operations expense limitation; treatment of 
transferred exchanges; streamlined waivers; and the effect of the first 
A-CAM election on current budget for legacy rate-of-return carriers.
    57. Discussion.--To address the concerns raised by NTCA-The Rural 
Broadband Association (NTCA), the Commission grants its petition in 
part and eliminate the effect of the budget control mechanism for the 
period current budget year (from July 2017 to June 2018).
    58. During this budget year, the support claims of legacy rate-of-
return carriers have been reduced by approximately $180 million due to 
application of the budget control mechanism--a 13 percent reduction in 
support. Moreover, the reductions in support are not evenly distributed 
among states or carriers. For example, carriers in Virginia are subject 
to an average 17 percent reduction in support while carriers in New 
Mexico have their support reduced overall by only 9 percent. Similarly, 
carriers within each state may be subject to drastically different 
reductions. In Iowa, one carrier has its support reduced by 17 percent 
while another carrier's support is only reduced by 8 percent. In Texas, 
carrier reductions range from 8 percent to 16 percent.
    59. NTCA claims these legacy support reductions, which are even 
greater than it predicted, endanger legacy carriers' ability to offer 
service at reasonably comparable rates, and could result in rural 
consumers paying ``tens of dollars (or even hundreds of dollars) more 
per month than urban consumers for standalone broadband.'' That claim 
has been borne out in fact: Based on FCC Form 481 data, 27 eligible 
telecommunications carriers could not certify to meeting the broadband 
reasonable comparability benchmark.
    60. Several parties support NTCA's assertions regarding the 
insufficient budget for legacy carriers as enforced through the budget 
control mechanism. GVNW states that the Commission should revisit the 
budget ``to ensure sufficient support so that rural consumers may pay 
affordable rates.'' The National Tribal Telecommunications Association 
also argues that ``inadequate funding is leading to unreasonably 
comparable rates between rural Tribal areas and the urban areas of the 
United States,'' and that the Commission ``must act soon to provide the 
support necessary to ensure broadband capable facilities are deployed 
in these areas that allow for services being provided at affordable 
rates.'' ITTA ``shares the concerns expressed by NTCA . . . regarding 
the

[[Page 18959]]

insufficiency'' of the budget. The WTA-Advocates for Rural Broadband 
(WTA) Petition for Reconsideration of the Rate-of-Return Reform Order 
similarly asserts that the budget control mechanism is contributing to 
rates that are not reasonably comparable to urban areas.
    61. The Commission agrees with these concerns and find here that it 
is in the public interest to grant in part NTCA's petition for 
reconsideration. Specifically, the Commission reconsiders 
implementation of the budget control mechanism affecting claims from 
July 2017 to June 2018 by fully funding carrier claims during that 
period--such large and variable reductions in support have made support 
not sufficiently ``predictable'' for affected rate-of-return carriers 
to engage in the long-term planning for the high-speed broadband 
deployment needed in rural America. The Commission directs USAC, 
working with the Bureau, to determine an efficient methodology to 
calculate the amounts withheld as a result of the budget control 
mechanism and make payments to fully fund support claims to the 
affected carriers in a lump sum payment in the second full quarter 
after the effective date of this Third Order on Reconsideration, 
drawing first upon funds available in USAC's reserve account.
    62. Nonetheless, the Commission disagrees with NTCA's suggestion 
that it should go farther immediately and instead initiate a budget 
review to determine whether the current level of support is sufficient 
and predictable enough for carriers serving rural areas to provide 
service at rates comparable to those in urban areas. The Commission 
also seeks comment on how it can encourage more efficient use of 
carrier support and modify the budget control mechanism to provide more 
predictable support.
    63. Discussion.--The Commission grants NTCA's request regarding the 
opex limitation. The Commission recognizes that the opex limitation, 
which does not account for inflation, may constrain support for rising 
costs, potentially diminishing carriers' ability to maintain and 
support their networks, thereby potentially reducing service quality, 
and in turn harming consumers. The Commission therefore reconsiders how 
the opex limitation is calculated to include the inflationary 
adjustment factor GDP-CPI. The GDP-CPI is the same adjustment factor 
proposed by industry and that the Commission uses for the Rural Growth 
Factor (RGF). Using this adjustment factor will alleviate any harm 
caused by inflation in application of the opex limitation. Moreover, 
using the same series for both the opex adjustment and the RGF will 
reduce confusion and facilitate administrative efficiency. This 
inflation adjustment will be applicable for five years. Thereafter, the 
Commission anticipates that it may revisit the inflation adjustment to 
assess whether it accurately reflects carriers' experienced changes in 
costs and if it remains necessary to protect carriers from inflation-
driven cost increases.
    64. The Commission directs NECA to calculate each carrier's opex 
limitation for the following calendar year by multiplying the inflation 
adjustment factor used in the RGF, as described in its annual September 
30 filing, by the carrier's opex limitation for the current year. For 
example, if the inflation adjustment in NECA's September 30, 2018 
annual filing is 2 percent, then each carrier's opex limit for 2019 
will be calculated by multiplying its 2018 opex limit by 1.02. 
Adjusting the opex limitation on this schedule will provide sufficient 
notice for carriers in preparing their budgets for the upcoming 
calendar year.
    65. The inflation adjustments will be implemented beginning with 
expenses incurred in 2017. It would be administratively burdensome to 
apply the inflation adjustment to 2016 expenses because NECA has 
already made its annual filing setting 2018 HCLS amounts based on 2016 
expenses. Therefore, the Commission will include in the 2017 opex 
limitation a compounded inflation adjustment so as to account for the 
effects of inflation for 2016 expenses. Specifically, the inflation 
adjustment will be implemented as follows.

------------------------------------------------------------------------
                         Inflation adjustment
                         (multiplied by prior
  Expense  incurred in         year opex          Expenses reported in
                              limitation)
------------------------------------------------------------------------
2017...................  1.0273..............  NECA October 1, 2018
                                                annual filing (HCLS),
                                                December 31, 2018 Form
                                                509 (CAF BLS).
2018...................  1.0128..............  NECA October 1, 2019
                                                annual filing (HCLS),
                                                December 31, 2019 Form
                                                509 (CAF BLS).
2019...................  As published in       NECA October 1, 2020
                          NECA's Oct. 1, 2018   annual filing (HCLS),
                          annual filing.        December 31, 2020 Form
                                                509 (CAF BLS).
Subsequent years.......  As published in the   NECA annual filing and
                          prior year's NECA     Form 509 filed in the
                          annual filing.        following year.
------------------------------------------------------------------------

    66. On reconsideration, as requested by NTCA, the Commission amends 
Sec.  54.1308(a)(4) of the Commission's rules to include CBOLs in the 
calculation of each carrier's corporate operations expense limitation. 
The rule operates by creating a limit on total corporate operations 
expenses based on the number of lines, and then apportioning those 
costs among common line and other cost categories. The Commission did 
not amend this rule in the Rate-of-Return Reform Order, and the rule 
currently includes only common line (voice and voice-broadband) loops 
in the calculation. As a result, NTCA argues that the rule now sets an 
inappropriately low limit on the corporate operations expenses for 
carriers with broadband-only lines. In an extreme case, a carrier with 
customers that exclusively have chosen to subscribe through broadband-
only lines would not be eligible to recover any of its corporate 
operations expenses. The Commission concurs and amends the rule 
accordingly to allow broadband-only loops, as well as voice and voice-
broadband loops, in the corporate operations expense limitation 
calculations. The Commission expects that this action will provide 
parity for carriers with broadband-only lines and create incentives for 
broadband deployment.
    67. At the request of WTA, the Commission clarifies the treatment 
of transferred exchanges under the rules adopted in the Rate-of-Return 
Reform Order.
    68. Specifically, the Commission first clarifies that when any 
entity that is not a rate-of-return carrier (including a price cap 
carrier, competitive local exchange carrier, interexchange carrier, or 
non-carrier entity) acquires exchanges from a rate-of-return carrier, 
Sec.  54.902(c) applies. This means that, ``absent further action by 
the Commission, the carrier will receive model-based

[[Page 18960]]

support.'' The Commission notes that the language about which WTA 
raises its specific question--``entity other than a rate-of-return 
carrier''--is retained from the prior ICLS rule. Given that CAF BLS is 
predicated on rate-of-return regulation, there does not appear to be 
any basis for automatically providing CAF BLS to an entity that is not 
a rate-of-return carrier. The rule expressly contemplates that the 
Commission may consider alternatives on a case-by-case basis, but 
provides a default mechanism whereby the acquiring entity becomes 
subject to the Connect America Model support and obligations. WTA 
suggests that this result does not appear to be the intent of the Rate-
of-Return Reform Order but provides no support for this assertion.
    69. Second, the Commission clarifies, as requested by WTA, that the 
term ``exchanges'' in Sec.  54.902 does not apply to entire study 
areas, but instead to areas smaller than a complete study area. This 
approach is consistent with how the Commission has previously treated 
transfers of control, as well as Sec.  54.305 (the ``parent trap 
rule'') and study area waivers. The Commission notes that the sale of a 
complete study area does not necessarily present the same potential for 
manipulating universal service support as the sale of exchanges because 
support is calculated on a study area basis. The transfer of exchanges 
or other parts of a study area, on the other hand, likely would affect 
the amount of universal service support for which a study area would 
qualify under its rules. The Commission is concerned that transfers of 
exchanges could be structured in order to maximize and increase high-
cost support and could put additional pressure on scarce high-cost 
resources.
    70. Next, the Commission declines to eliminate Sec.  54.305 as 
proposed by Madison Telephone Company (Madison Telephone). Madison 
Telephone argues that the parent trap rule is no longer necessary 
because Sec.  54.902 is sufficient to address the consequences to high-
cost universal service support resulting from transfers of exchanges. 
The Commission disagrees. Section 54.902, entitled ``Calculation of CAF 
BLS Support for transferred exchanges,'' does not apply to HCLS. 
Without Sec.  54.305, therefore, there is no constraint on increases to 
HCLS resulting from the strategic transfer of portions of study areas. 
Further, the Commission is not persuaded by Madison Telephone's 
arguments that the parent trap rule should be eliminated because only a 
relatively small number of carriers are currently subject to the rule. 
Currently, 28 carriers are subject to the parent trap rule. Madison 
Telephone's argument fails to address the fact that the absolute number 
of carriers subject to the rule is not an adequate measure of the 
potential financial effects to universal service posed by the 
elimination of the parent trap rule. Madison Telephone does not, for 
example, estimate the amount of additional support that affected 
carriers would receive if the parent trap rule were eliminated. The 
Commission further notes that the Commission relied on the 
applicability of Sec.  54.305 as a constraint on universal service 
support in granting study area waivers to many of the carriers 
currently subject to the parent trap rule. Eliminating the parent trap 
rule without further analysis of the consequences would undermine the 
rationale for granting those waivers.
    71. The Commission is also not persuaded by Madison Telephone's 
argument that the build-out requirements of the Rate-of-Return Reform 
Order necessitate the provision of additional support to carriers 
currently subject to the parent trap rule. Each carrier's build-out 
obligations have been determined based on the amount of support a 
carrier was forecasted to receive, which takes into account the effect 
of the parent trap rule. Therefore, the Commission expects that 
eliminating the parent trap rule would increase the build-out 
obligations for those carriers, rather than provide additional support 
to achieve the same obligations. Finally, the Commission rejects 
Madison Telephone's argument that the complications of the parent trap 
rule perpetuate a disincentive to further consolidation among rate-of-
return carriers. Although the Commission agrees that rate-of-return 
carriers should have appropriate incentives for further consolidation, 
the Commission must have adequate safeguards to protect the Fund from 
transfers of exchanges that result in excessive increases in high-cost 
support. As described above, the Commission disagrees that there would 
be adequate safeguards if the Commission eliminates the parent trap 
rule and find that it continues to serve an important purpose.
    72. In general, the rules governing the transfer of exchanges are 
intended to prevent an increase in high-cost universal service, driven 
by a change in the area over which costs are averaged, without a 
Commission finding that such an increase would be in the public 
interest. Although budget constraints now prevent the Fund's total size 
from increasing as the result of transactions, increases in universal 
service awarded to one carrier result in decreases in support to other 
carriers. Therefore, the Commission must carefully review new or 
additional demands on resources to ensure that the overall effect is in 
the public interest. Although the Commission may consider a systematic 
review of the rules governing transfers of exchanges in light of the 
recent reforms, it does not believe that the current petitions are the 
appropriate means by which to do so.
    73. The Commission also addresses two requests, one from NTCA and 
the other from WTA, related to streamlining waivers. NTCA's petition 
for reconsideration, in part, asks the Commission to clarify (or to the 
extent necessary, reconsider) the circumstances in which a 
``streamlined waiver'' process may be used, whereby an ``engineer-
certified estimate of construction costs could be substituted for the 
CIA-estimated investment allowance. Specifically, NTCA argues that a 
streamlined process should be permitted for circumstances beyond the 
narrow instance of compliance with defined buildout obligations.'' For 
example, NTCA states that, ``a RLEC may be unable to obtain financing 
to perform any buildout--whether tied to a specific obligation or 
otherwise intended to advance broadband--unless it can obtain such a 
waiver.'' NTCA also notes that ``timing considerations with respect to 
buildout and hiring of contractors, especially in certain locales where 
build seasons are shorter, may drive the need for a waiver.''
    74. First, the Commission clarifies that it did not adopt a 
``streamlined waiver'' process in the Rate-of-Return Reform Order. 
Although the Commission noted that several commenters argued a 
streamlined waiver process was needed ``to ensure that carriers can 
seek a waiver if it needs to make investments greater than those 
allowed by the capital budget limitation to provide broadband to the 
carrier's customers,'' the Commission determined that any carrier could 
file a waiver under the Commission's existing rules. The Commission 
then explained what would enable ``expeditious'' treatment of a waiver 
and further stated that ``carriers who cannot meet their deployment 
obligation even by expending the full amount of their TALPI [Total 
Allowed Loop Plant Investment] allowance should submit information 
regarding the costs expected to be incurred to meet the deployment 
obligation certified by an engineer licensed in the state(s) in which 
the construction will take place.'' The Commission noted that this 
information would assist the Commission in reviewing a waiver request 
expeditiously.

[[Page 18961]]

    75. Second, the Commission clarifies that in assessing whether 
``good cause'' exists to grant a request for waiver of the CIA, the 
Commission is likely to view as highly relevant cost estimate 
information certified by an engineer licensed in the state where the 
construction will take place. The Commission anticipates that 
certification will help ensure that any cost estimates are reasonably 
accurate and objective. The Commission further clarifies that it will 
review any waiver petitions of the CIA on a case-by-case basis, and 
carriers should submit all relevant information, certified 
appropriately, to justify the relief requested to help expedite the 
review process.
    76. WTA asks the Commission to address the ``extremely likely'' 
situation of material/labor shortages and corresponding price increases 
by adopting a rule that allows rate-of-return carriers receiving CAF 
BLS to ``request and obtain via a streamlined process a reduction of 
their applicable build-out requirements if they can show that their 
cost per location has increased by thirty percent (30.0%) or more above 
the cost per location used to compute their initial buildout 
requirement.'' WTA further requests a streamlined waiver process for 
all CAF BLS and A-CAM carriers to ``extend their deadlines for meeting 
interim and/or ultimate build-out requirements if they can show that 
they had made bona fide attempts to obtain the requisite pre-
construction approvals, fiber optic cable and/or contractor 
arrangements, and had been unsuccessful in doing so for reasons 
significantly outside their control.''
    77. The Commission denies WTA's request. The Commission finds that 
the situations for which WTA requests streamlined waivers must each be 
considered individually and that there is an existing process by which 
to seek relief. As stated above and in the Rate-of-Return Reform Order, 
any carrier may file a waiver under existing rules to address the 
specific hardships that it faces. Carriers should submit all relevant 
information, certified appropriately, to justify the relief requested 
to help expedite the review process, and the Commission will evaluate 
the circumstances on a case-by-case basis. The Commission further notes 
that WTA does not provide a concrete proposal for how a streamlined 
waiver process would work. For instance, it is not clear whether after 
a specific period of time the waiver would be deemed granted; or 
whether a request to reduce the number of locations by a third or 
extend a deadline by two years would qualify for streamlined treatment. 
Given the availability of an existing mechanism to address WTA's 
concerns, and its lack of a specific proposal, the Commission concludes 
that WTA's request lacks merit and is thereby denied. The Commission 
reminds carriers that detailed petitions for waiver, substantiated by 
data (and certified appropriately) will help to facilitate expeditious 
review.
    78. The Commission dismisses as moot NTCA's request regarding the 
budgetary impact in cases where a carrier that initially elected to 
receive model support in 2016 subsequently declined the revised offer. 
In the Rate-of-Return Reform Order, the Commission decided how the 
budget for the first offer of A-CAM support would be determined if 
carriers that initially elected to receive model support subsequently 
declined to accept a revised second offer. Specifically, the Rate-of-
Return Reform Order provided that ``[i]f 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 though 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.''
    79. NTCA seeks clarification of whether this statement means that 
the difference reduces that carrier's own support, or whether it 
reduces the overall budget for carriers remaining on legacy support. To 
the extent the Commission intended to reduce the overall budget, NTCA 
seeks reconsideration of this decision. NTCA is concerned that such an 
approach could dramatically reduce the budget for carriers remaining on 
legacy support and undermine their ability to offer voice and broadband 
service at reasonably comparable rates. Similarly, Custer Telephone 
Cooperative et al. seeks clarification, or reconsideration, regarding 
the reduction of support available to carriers remaining on legacy 
support mechanisms.
    80. In the A-CAM Revised Offer Order, 82 FR 4275, January 13, 2017, 
the Commission concluded that its approach to revising the first A-CAM 
offers largely addressed the concerns raised by NTCA because the 
Commission did not change the support amounts for those carriers for 
which the offer of model-based support was less than the legacy 
support. The 35 such carriers that accepted the initial offer 
contributed to the overall A-CAM budget and were authorized by the 
Bureau to receive support because their support was unchanged and their 
initial elections were irrevocable. When the Bureau extended revised 
offers to the remaining carriers that accepted the initial offer, it 
resulted in only 18 instances in which the carrier was offered a 
revised amount that was less than the legacy support received in 2015. 
Because the net decrease in legacy support for this group of carriers 
was only approximately $4.2 million, the Commission determined that the 
difference was only a de minimis amount in the context of the overall 
rate-of-return budget. Therefore, the potential harm identified by the 
parties in their petitions for clarifications or reconsideration of 
this issue--``to ensure that non-model carriers and their consumers 
will not be harmed by the decisions of RLECs that choose to `jump in 
and out' of the model election process''--did not come to pass. 
Accordingly, the Commission dismisses as moot those portions of these 
requests.

IV. Procedural Matters

A. Paperwork Reduction Act

    81. The Report and Order adopted herein contains new or modified 
information collection requirements subject to the Paperwork Reduction 
Act of 1995 (PRA), Public Law 104-13. 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 will be 
invited to comment on the new or modified information collection 
requirements contained in this proceeding. In addition, the Commission 
notes that pursuant to the Small Business Paperwork Relief Act of 2002, 
Public Law 107-198, see 44 U.S.C. 3506(c)(4), it previously sought 
specific comment on how the Commission might further reduce the 
information collection burden for small business concerns with fewer 
than 25 employees. In this present document, the Commission has 
assessed the effects of the new and modified rules that might impose 
information collection burdens on small business concerns, and find 
that they either will not have a significant economic impact on a 
substantial number of small entities or will have a minimal economic 
impact on a substantial number of small entities.

B. Congressional Review Act

    82. The Commission will send a copy of the Report and Order, Third 
Order on Reconsideration and Notice of Proposed Rulemaking to Congress 
and the Government Accountability Office

[[Page 18962]]

pursuant to the Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).
    83. As required by the Regulatory Flexibility Act of 1980 (RFA), as 
amended, Initial Regulatory Flexibility Analyses (IRFAs) were 
incorporated in the Report and Order, Order, and Order on 
Reconsideration, and Further Notice of Proposed Rulemaking (Rate-of-
Return Reform Order and Further NPRM). The Commission sought written 
public comment on the proposals in the Rate-of-Return Reform Order and 
Further NPRM, including comment on the IRFA. The Commission did not 
receive comments on the Rate-of-Return Reform Order and FNPRM IRFA. 
This present Final Regulatory Flexibility Analysis (FRFA) conforms to 
the RFA.
    84. In the Report and Order, the Commission adopts reforms to 
ensure that high-cost universal service support provided to eligible 
telecommunications carriers (ETCs) is used only for the provision, 
maintenance, and upgrading of facilities and services for which the 
high-cost support is intended. Specifically, this Report and Order 
addresses whether specific expenses are eligible for recovery from 
federal high-cost support pursuant to section 254(e) of the Act.
    85. The Commission also adopts measures to ensure carrier 
compliance with the permitted expense rules adopted above for high-cost 
support. The Commission requires rate-of-return ETCs to identify on 
their annual FCC Form 481 (Carrier Annual Reporting Data Collection 
Form) their cost consultants and cost consulting firm, or other third 
party, if any, used to prepare cost studies, or other calculations used 
to calculate high-cost support for their submission. Disclosure of such 
parties is a low-burden measure that will help the Commission identify 
waste, fraud, and abuse during audits. Identifying such parties will 
help the Commission and USAC identify and rectify patterns of 
noncompliance, and potentially fraud, during audits. This will 
ultimately help preserve the integrity of the Universal Service Fund by 
ensuring that carriers use high-cost support only for the provision, 
maintenance, and upgrading of facilities and services for which the 
high-cost support is intended.
    86. In the Report and Order, the Commission further amends the 
rules to provide guidance to legacy rate-of-return LECs regarding 
investments and expenses that are presumed not used and useful (and 
thus unreasonable under section 201 of the Communications Act) and 
thus, as a general matter, may not be recovered through interstate 
rates. The Commission divides such investments and expenses into two 
broad categories: Those that it does not expect would be used and 
useful in the ordinary course and those it would not expect to be used 
and useful unless customary for similarly situated companies.
    87. The Report and Order also addresses two matters for which Final 
Regulatory Flexibility Analysis is unnecessary.
    88. First, the Report and Order provides additional support to fund 
model-based deployment. In the April 2014 Connect America FNPRM, 79 FR 
39196, July 9, 2014, the Commission proposed a framework for a 
voluntary election by rate-of-return carriers to receive model-based 
support and tentatively concluded that such a framework could achieve 
important universal service benefits by creating incentives for 
deployment of voice and broadband-capable infrastructure. The 
Commission sought written comment on the proposal, including comment on 
the Initial Regulatory Flexibility Analysis (IRFA). The Commission did 
not receive any comments on the April 2014 Connect America FNPRM IRFA. 
In the Rate-of-Return Reform Order, the Commission adopted a voluntary 
path under which rate-of-return carriers may elect to receive model-
based support for a term of 10 years in exchange for meeting defined 
build-out obligations. The Commission issued a Final Regulatory 
Flexibility Analysis (FRFA) that conforms to the Regulatory Flexibility 
Act of 1980 (RFA), as amended. This present Report and Order further 
implements the framework previously adopted by the Commission. 
Therefore, the Commission certifies that it will not have a significant 
economic impact on a substantial number of small entities.
    89. Second, the Report and Order directs USAC to continue the 
practice of uniform quarterly collections. The Commission's directive 
to USAC to continue uniform quarterly collection is not a rule subject 
to notice-and-comment rulemaking and therefore no Regulatory 
Flexibility Analysis is required. Further, the Commission notes that is 
only applicable to USAC and will not have a significant economic impact 
on a substantial number of small entities.
    90. 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).
    91. The Commission's actions, over time, may affect small entities 
that are not easily categorized at present. The Commission therefore 
describes here, at the outset, three broad groups of small entities 
that could be directly affected herein. First, while there are industry 
specific size standards for small businesses that are used in the 
regulatory flexibility analysis, according to data from the SBA's 
Office of Advocacy, in general a small business is an independent 
business having fewer than 500 employees. These types of small 
businesses represent 99.9% of all businesses in the United States which 
translates to 28.8 million businesses.
    92. Next, the type of small entity described as 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 Aug. 2016, there were approximately 356,494 small 
organizations based on registration and tax data filed by nonprofits 
with the Internal Revenue Service (IRS).
    93. Finally, the small entity described as a ``small governmental 
jurisdiction'' is defined generally as ``governments of cities, 
counties, towns, townships, villages, school districts, or special 
districts, with a population of less than fifty thousand.'' U.S. Census 
Bureau data from the 2012 Census of Governments indicates that there 
were 90,056 local governmental jurisdictions consisting of general 
purpose governments and special purpose governments in the United 
States. Of this number there were 37,132 General purpose governments 
(county, municipal and town or township) with populations of less than 
50,000 and 12,184 Special purpose governments (independent school 
districts and special districts) with populations of less than 50,000. 
The 2012 U.S. Census Bureau data for most types of governments in the 
local government category shows that the majority of these governments 
have populations of less than 50,000. Based on this data the Commission 
estimates that at least 49,316 local government jurisdictions fall in 
the category of ``small governmental jurisdictions.''
    94. In the Report and Order, the Commission codifies a list of 
ineligible expenses and expense categories the

[[Page 18963]]

Commission previously identified as ineligible for high-cost support, 
and it provides guidance going-forward on the eligibility of expenses 
on which the Commission sought comment in the Rate-of-Return Reform 
Order and FNPRM. The revised rules adopted herein provide more 
specificity and certainty to ETCs and do not impose any additional 
recordkeeping requirements. Additionally, the Commission requires all 
rate-of-return ETCs to identify on their annual FCC Form 481 (Carrier 
Annual Reporting Data Collection Form) their cost consultants and cost 
consulting firm, or other third party, if any, used to prepare cost 
studies, or other calculations used to calculate high-cost support for 
their submission. The Commission expects this reporting obligation to 
have a minimal impact.
    95. The Report and Order amends the rules to provide guidance to 
legacy rate-of-return LECs regarding investments and expenses that are 
presumed not used and useful and thus, as a general matter, may not be 
recovered through interstate rates. Such investments and expenses are 
divided into two broad categories: Those that the Commission does not 
expect would be used and useful in the ordinary course and those it 
would not expect to be used and useful unless customary for similarly 
situated companies. These changes do not impact reporting obligations, 
and are necessary to ensure that recovery of these investments and 
expenses via interstate rates is consistent with section 201(b) of the 
Act.
    96. 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 Rate-of-
Return Reform Order and FNRPM and IRFA, in reaching its final 
conclusions and taking action in this proceeding.
    97. The rules that the Commission adopts in the Report and Order 
provide greater certainty to rate-of-return carriers, many of which are 
small entities. The Commission codifies a simple, clear, and carefully 
defined list of categories of expenses that are precluded from recovery 
via the universal service fund. The Commission incorporates expenses 
categories previously identified as ineligible for high-cost support, 
High-Cost Oct. 19, 2015 Public Notice and in the Rate-of-Return Reform 
FNPRM and the Commission provides guidance going-forward on the 
eligibility of expenses on which the Commission sought comment in the 
Rate-of-Return Reform FNPRM. Providing a clear list of expenses that 
are not reimbursable will ensure that more resources are available in 
the universal service fund. Although the Commission provides guidance 
going-forward on the eligibility of expenses on which the Commission 
sought comment, such guidance should have only a minimal impact on 
small entities.
    98. Similarly, the Commission provides greater certainty to legacy 
rate-of-return carriers by codifying a list of investments and expenses 
that are presumed not used and useful and thus, as a general matter, 
may not be recovered through interstate rates. This guidance provides 
more certainty and predictability, while also providing carriers the 
opportunity to recover these costs via regulated interstate rates if 
the presumption can be overcome.
    99. The Commission also acts to modify its existing reporting 
requirements. The Commission requires carriers to identify on their 
annual FCC Form 481 their cost consultants and cost consulting firm, or 
other third party, used to prepare cost studies or other calculations 
used to calculate high-cost support for their submission will have a 
minimal economic impact because small entities already prepare this 
filing. The Commission revises ETCs' annual reporting requirements to 
align better those requirements with the Commission's statutory and 
regulatory objectives. This addition will allow the Commission to 
identify themes and trends among both rate-of-return carriers and 
third-party cost consultants and to eliminate waste, fraud, and abuse.
    100. The Third Order on Reconsideration above amends rules adopted 
in the Rate-of-Return Reform Order by (1) implementing, for a five-year 
period, an inflation adjustment for the operating expense limitation, 
(2) incorporating broadband-only loops into the corporate operations 
expense limitation, and (3) reconsiders the application of the budget 
control mechanism for July 2017 to June 2018. These revisions do not 
create any burdens, benefits, or requirements that were not addressed 
by the Final Regulatory Flexibility Analysis attached to the Rate-of-
Return Reform Order. Therefore, the Commission certifies that the rule 
revisions adopted in this Third Order on Reconsideration and 
Clarification will not have a significant economic impact on a 
substantial number of small entities.

V. Ordering Clauses

    101. Accordingly, it is ordered that, pursuant to the authority 
contained in sections 1-4, 5, 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. 151-155, 201-206, 214, 218-220, 251, 256, 254, 256, 303(r), 403 
and 405, this Report and Order, Third Order on Reconsideration 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 
become effective immediately upon announcement in the Federal Register 
of OMB approval. It is the Commission's 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.
    102. It is further ordered that part 54 and 64 of the Commission's 
rules, 47 CFR part 54 and 64, are amended as set forth in the 
following, and such rule amendments shall be effective May 31, 2018, 
except that those rules and requirements which contain new or modified 
information collection requirements that require approval by the Office 
of Management and Budget under the Paperwork Reduction Act will become 
effective after the Commission publishes a document in the Federal 
Register announcing such approval and the relevant effective date.
    103. It is further ordered that, pursuant to the authority 
contained in section 405 of the Communications Act of 1934, as amended, 
47 U.S.C. 405, and Sec. Sec.  0.331 and 1.429 of the Commission's 
rules, 47 CFR 0.331 and 47 CFR 1.429, the Petition for Reconsideration 
filed by NTCA on May 25, 2016 is granted in part and dismissed as moot 
in part to the extent described herein.

[[Page 18964]]

    104. It is further ordered that, pursuant to the authority 
contained in section 405 of the Communications Act of 1934, as amended, 
47 U.S.C. 405, and Sec. Sec.  0.331 and 1.429 of the Commission's 
rules, 47 CFR 0.331 and 47 CFR 1.429, the Petition for Reconsideration 
filed by CUSTER TELEPHONE COOPERATIVE, ET AL., on May 25, 2016 is 
dismissed as moot in part to the extent described herein.
    105. It is further ordered that, pursuant to the authority 
contained in section 405 of the Communications Act of 1934, as amended, 
47 U.S.C. 405, and Sec. Sec.  0.331 and 1.429 of the Commission's 
rules, 47 CFR 0.331 and 47 CFR 1.429, the Petition for Reconsideration 
filed by WTA on May 25, 2016 is granted in part and denied in part to 
the extent described herein.
    106. It is further ordered that, pursuant to the authority 
contained in section 405 of the Communications Act of 1934, as amended, 
47 U.S.C. 405, and Sec. Sec.  0.331 and 1.429 of the Commission's 
rules, 47 CFR 0.331 and 47 CFR 1.429, the Petition for Reconsideration 
filed by MADISON TELEPHONE COMPANY on May 25, 2016 is denied.

List of Subjects

47 CFR Part 54

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

47 CFR Part 64

    Claims, Communications Common carriers, Computer technology, 
Credit, Foreign relations, Individuals with disabilities, Political 
candidates, Radio, Reporting and recordkeeping requirements, 
Telecommunications, Telegraph, Telephone.


Federal Communications Commission.
Katura Jackson,
Federal Register Liaison Officer, Office the Secretary.

Final Rules

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR parts 54 and 64 as follows:

PART 54--UNIVERSAL SERVICE

0
1. The authority citation for part 54 continues 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
2. Amend Sec.  54.7 by adding paragraph (c) to read as follows:


Sec.  54.7  Intended use of federal universal service support.

* * * * *
    (c) For those eligible telecommunications carriers as defined in 
Sec.  54.5 receiving universal service support pursuant to subparts K 
and M of this part, ineligible expenses include but are not limited to 
the following:
    (1) Personal expenses of employees, executives, board members, and 
contractors, and family members thereof, or any other individuals 
affiliated with the eligible telecommunications carrier, including but 
not limited to personal expenses for housing, such as rent or 
mortgages, vehicles for personal use and personal travel, including 
transportation, lodging and meals;
    (2) Gifts to employees; childcare; housing allowances or other 
forms of mortgage or rent assistance for employees except that a 
reasonable amount of assistance shall be allowed for work-related 
temporary or seasonal lodging; cafeterias and dining facilities; food 
and beverage except that a reasonable amount shall be allowed for work-
related travel; entertainment;
    (3) Expenses associated with: Tangible property not logically 
related or necessary to the offering of voice or broadband services; 
corporate aircraft, watercraft, and other motor vehicles designed for 
off-road use except insofar as necessary or reasonable to access 
portions of the study area not readily accessible by motor vehicles 
travelling on roads; tangible property used for entertainment purposes; 
consumer electronics used for personal use; kitchen appliances except 
as part of work-related temporary or seasonal lodging assistance; 
artwork and other objects which possess aesthetic value;
    (4) Political contributions; charitable donations; scholarships; 
membership fees and dues in clubs and organizations; sponsorships of 
conferences or community events; nonproduct-related corporate image 
advertising; and
    (5) Penalties or fines for statutory or regulatory violations; 
penalties or fees for any late payments on debt, loans, or other 
payments.

0
3. Amend Sec.  54.303 by adding paragraph (a)(6) to read as follows:


Sec.  54.303  Eligible Capital Investment and Operating Expenses.

    (a) * * *
    (6) For a period of five years following the implementation of 
paragraph (a) of this section, the total eligible annual operating 
expenses per location in paragraph (a) shall be adjusted annually to 
account for changes to the Department of Commerce's Gross Domestic 
Product Chain-type Price Index (GDP-CPI).
* * * * *

0
4. Amend Sec.  54.313 by adding paragraph (f)(4) to read as follows:


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

* * * * *
    (f) * * *
    (4) If applicable, the name of any cost consultant and cost 
consulting firm, or other third-party, retained to prepare financial 
and operations data disclosures submitted to the National Exchange 
Carrier Association (NECA), the Administrator or the Commission 
pursuant to subpart D, K, or M of this part.
* * * * *

0
5. Amend Sec.  54.901 by revising paragraph (b) and adding paragraph 
(f)(4) to read as follows:


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

* * * * *
    (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 
limitations set forth in Sec.  54.303.
* * * * *
    (f) * * *
    (4) This paragraph (f) shall not apply to support provided from 
July 1, 2017 to June 30, 2018.
* * * * *

0
6. Amend Sec.  54.1305 by adding paragraph (j) to read as follows:


Sec.  54.1305  Submission of information to the National Exchange 
Carrier Administration (NECA)

* * * * *
    (j) The number of consumer broadband-only loops for each study 
area, as defined in Sec.  54.901(g), calculated as of December 31st of 
the calendar year preceding each July 31st filing.

0
7. Amend Sec.  54.1308 by revising paragraphs (a)(4)(ii) introductory 
text and (a)(4)(ii)(A) through (C) to read as follows:


Sec.  54.1308  Study Area Total Unseparated Loop Cost.

    (a) * * *
    (4) * * *
    (ii) A monthly per-loop amount computed according to paragraphs 
(a)(4)(ii)(A) through (D) of this section. To the extent that some 
carriers' corporate operations expenses are

[[Page 18965]]

disallowed pursuant to these limitations, the national average 
unseparated cost per loop shall be adjusted accordingly. For the 
purposes of this paragraph (a)(4)(ii), ``total eligible lines'' refers 
to working loops as defined by this subpart and consumer broadband-only 
loops, as defined in Sec.  54.901(g).
    (A) For study areas with 6,000 or fewer total eligible lines, the 
monthly per-loop amount shall be $42.337 - (.00328 x the number of 
total eligible lines), or, $63,000/the number of total eligible lines, 
whichever is greater;
    (B) For study areas with more than 6,000 but fewer than 17,887 
total eligible lines, the monthly per-loop amount shall be $3.007 + 
(117,990/the number of total eligible lines); and
    (C) For study areas with 17,887 or more total eligible lines, the 
monthly per-loop amount shall be $9.562.
* * * * *

0
8. Amend Sec.  54.1310 by adding paragraph (d)(3) as follows:


Sec.  54.1310  Expense adjustment.

* * * * *
    (d) * * *
    (3) This paragraph (d) shall not apply to support provided from 
July 1, 2017 to June 30, 2018.

PART 64--MISCELLANEOUS RULES RELATING TO COMMON CARRIERS

0
9. The authority citation for part 64 continues to read as follows:

    Authority:  47 U.S.C. 154, 202, 225, 251(e), 254(k), 
403(b)(2)(B), (c), 616, 620, Pub. L. 104-104, 110 Stat. 56. 
Interpret or apply 47 U.S.C. 201, 202, 218, 222, 225, 226, 227, 228, 
251(e), 254(k), 616, 620, and the Middle Class Tax Relief and Job 
Creation Act of 2012, Pub. L. 112-96, unless otherwise noted.

    1. Add subpart J, consisting of Sec. Sec.  64.1000 through 64.1002, 
to read as follows:
Subpart J--Recovery of Investments and Expenses in Regulated Interstate 
Rates
Sec.
64.1000 Scope.
64.1001 Purpose.
64.1002 Investments and expenses.

Subpart J--Recovery of Investments and Expenses in Regulated 
Interstate Rates


Sec.  64.1000  Scope.

    This subpart is applicable only to rate-of-return carriers as 
defined in Sec.  54.5 of this chapter receiving Connect America Fund 
Broadband Loop Support as described in Sec.  54.901 of this chapter.


Sec.  64.1001  Purpose.

    This subpart is intended to ensure that only used and useful 
investments and expenses are recovered through regulated interstate 
rates pursuant to section 201(b) of the Communications Act as amended 
(the Act), 47 U.S.C. 201(b).


Sec.  64.1002  Investments and expenses.

    (a) Investment and expenses not used and useful in the ordinary 
course. The following investments and expenses are presumed not used 
and useful (and thus unreasonable):
    (1) Personal expenses, including but not limited to personal 
expenses for food and beverages, housing, such as rent or mortgages, 
vehicles for personal use, and personal travel;
    (2) Tangible property not logically related or necessary to 
offering voice or broadband services;
    (3) Political contributions;
    (4) Membership fees and dues in social, service and recreational, 
or athletic clubs or organizations;
    (5) Penalties or fines for statutory or regulatory violations; and
    (6) Penalties or fees for late payments on debt, loans, or other 
payments.
    (b) Non-customary investments and expenses. Unless customary for 
similarly situated companies, the following investments and expenses 
are presumed not used and useful (and thus unreasonable):
    (1) Personal benefits, such as gifts, housing allowances, and 
childcare, that are not part of taxable compensation;
    (2) Artwork and other objects that possess aesthetic value that are 
displayed in the workplace;
    (3) Aircraft, watercraft, and off-road vehicles used for work and 
work-related purposes;
    (4) Cafeterias and dining facilities;
    (5) Charitable donations;
    (6) Entertainment;
    (7) Food and beverage expenses for work and work-related travel;
    (8) Membership fees and dues associated with professional 
organizations;
    (9) Scholarships; and
    (10) Sponsorships of conferences or community events.

[FR Doc. 2018-08025 Filed 4-30-18; 8:45 am]
BILLING CODE 6712-01-P