    Telecommunications: FCC Needs to Improve Performance Management
    and Strengthen Oversight of the High-Cost Program (13-JUN-08,
    GAO-08-633).

    In the Telecommunications Act of 1996 (1996 Act), the Congress
    said that consumers in "rural, insular, and high-cost areas"
    should have access to services and rates that are "reasonably
    comparable" to those in urban areas. To implement the 1996 Act,
    the Federal Communications Commission (FCC) modified and expanded
    the high-cost program. The program provides funding to some
    telecommunications carriers, facilitating lower telephone rates
    in rural areas. GAO was asked to review (1) the effect that the
    program structure has on the level of support and types of
    services in rural areas, (2) the extent to which FCC has
    developed performance goals and measures for the program, and (3)
    the extent to which FCC has implemented internal control
    mechanisms. GAO reviewed relevant documents; interviewed federal
    and state officials, industry participants, and experts;
    conducted 11 state site visits; and conducted a survey of state
    regulators, available online at GAO-08-662SP.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-633
        ACCNO:   A82354
      TITLE:     Telecommunications: FCC Needs to Improve Performance
    Management and Strengthen Oversight of the High-Cost Program
         DATE:   06/13/2008
      SUBJECT:   Broadband
    	     Competition
    	     Cost analysis
    	     Cost control
    	     Federal aid to localities
    	     Federal regulations
    	     Federal/state relations
    	     Internal controls
    	     Noncompliance
    	     Performance measures
    	     Policy evaluation
    	     Program management
    	     Risk assessment
    	     Telecommunication policy
    	     Telecommunications
    	     Telecommunications industry
    	     Telephones
    	     Universal service
    	     Program costs
    	     Program goals or objectives

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    GAO-08-633

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    Report to Congressional Committees:

    United States Government Accountability Office:

    GAO:

    June 2008:

    Telecommunications:

    FCC Needs to Improve Performance Management and Strengthen Oversight of
    the High-Cost Program:

    FCC's High-Cost Program:

    GAO-08-633:

    GAO Highlights:

    Highlights of GAO-08-633, a report to congressional committees.

    Why GAO Did This Study:

    In the Telecommunications Act of 1996 (1996 Act), the Congress said
    that consumers in �rural, insular, and high-cost areas� should have
    access to services and rates that are �reasonably comparable� to those
    in urban areas. To implement the 1996 Act, the Federal Communications
    Commission (FCC) modified and expanded the high-cost program. The
    program provides funding to some telecommunications carriers,
    facilitating lower telephone rates in rural areas. GAO was asked to
    review (1) the effect that the program structure has on the level of
    support and types of services in rural areas, (2) the extent to which
    FCC has developed performance goals and measures for the program, and
    (3) the extent to which FCC has implemented internal control
    mechanisms. GAO reviewed relevant documents; interviewed federal and
    state officials, industry participants, and experts; conducted 11 state
    site visits; and conducted a survey of state regulators, available
    online at GAO-08-662SP.

    What GAO Found:

    The high-cost program�s structure has resulted in the inconsistent
    distribution of support and availability of services across rural
    America. The program provides support to carriers in all states.
    However, small carriers receive more support than large carriers. As a
    result, carriers serving similar rural areas can receive different
    levels of support. Currently, the high-cost program provides support
    for the provision of basic telephone service, which is widely available
    and subscribed to in the nation. But, the program also indirectly
    supports broadband service, including high-speed Internet, in some
    rural areas, particularly those areas served by small carriers. The
    program provides support to both incumbents and competitors; as a
    result, it creates an incentive for competition to exist where it might
    not otherwise occur.

    There is a clearly established purpose for the high-cost program, but
    FCC has not established performance goals or measures. GAO was unable
    to identify performance goals or measures for the program. While FCC
    has begun preliminary efforts to address these shortcomings, the
    efforts do not align with practices that GAO has identified as useful
    for developing successful performance goals and measures. For example,
    FCC has not created performance goals and measures for intermediate and
    multiyear periods. In the absence of performance goals and measures,
    the Congress and FCC are limited in their ability to make informed
    decisions about the future of the high-cost program.

    While some internal control mechanisms exist for the high-cost program,
    these mechanisms are limited and exhibit weaknesses that hinder FCC�s
    ability to assess the risk of noncompliance with program rules and
    ensure cost-effective use of program funds. Internal control mechanisms
    for the program consist of (1) carrier certification that funds will be
    used consistent with program rules, (2) carrier audits, and (3) carrier
    data validation. Yet, each mechanism has weaknesses. The carrier
    certification process exhibits inconsistency across the states that
    certify carriers, carrier audits have been limited in number and
    reported findings, and carrier data validation focuses primarily on
    completeness and not accuracy. These weaknesses could contribute to
    excessive program expenditures.

    Figure: High-Cost Program Expenditures:

    This figure is a vertical bar graph showing high-cost program
    expenditures. The X axis represents the calendar years, and the Y axis
    represents the dollars in billions.

    Calendar year: 1998;
    Dollars in billions: $1.7.

    Calendar year: 1999;
    Dollars in billions: $1.72.

    Calendar year: 2000;
    Dollars in billions: $2.52.

    Calendar year: 2001;
    Dollars in billions: $2.6.

    Calendar year: 2002;
    Dollars in billions: $2.98.

    Calendar year: 2003;
    Dollars in billions: $3.27.

    Calendar year: 2004;
    Dollars in billions: $3.49.

    Calendar year: 2005;
    Dollars in billions: $3.82.

    Calendar year: 2006;
    Dollars in billions: $4.1.

    Calendar year: 2007;
    Dollars in billions: $4.

    [See PDF for image]

    Source: Universal Service Administrative Company data.

    [End of figure]

    What GAO Recommends:

    To strengthen management and oversight of the program, FCC should (1)
    establish short- and long-term performance goals and measures for the
    program and (2) identify areas of risk and implement mechanisms to help
    produce cost-effective expenditures. FCC intends to issue a Notice of
    Inquiry to address GAO�s recommendations.

    To view the full product, including the scope and methodology, click on
    [http://www.gao.gov/cgi-bin/getrpt?GAO-08-633]. For more information,
    contact Mark Goldstein, (202) 512-2834, goldsteinm@gao.gov.

    [End of section]

    Contents:

    Letter:

    Results in Brief:

    Background:

    The High-Cost Program's Structure Has Contributed to Inconsistent
    Distribution of Support and Availability of Services across Rural
    America:

    While There Is a Clearly Established Purpose for the High-Cost Program,
    FCC Has Not Established Performance Goals and Measures:

    Internal Control Mechanisms for the High-Cost Program Are Limited and
    Hinder FCC's Ability to Assess the Risk of Noncompliance with Program
    Rules and Ensure Cost-Effective Use of Program Funds:

    Conclusion:

    Recommendations for Executive Action:

    Agency Comments and Our Evaluation:

    Appendix I: Objectives, Scope, and Methodology:

    Appendix II: Telephone Penetration Rate by State (Percentage of
    Households with Telephone Service):

    Appendix III: Comments from the Federal Communications Commission:

    Appendix IV: Comments from the Universal Service Administrative
    Company:

    Appendix V: GAO Contact and Staff Acknowledgments:

    Tables:

    Table 1: Summary of Universal Service Fund Programs:

    Table 2: General Roles of Agencies and Organizations Involved in High-
    Cost Program Administration:

    Table 3: High-Cost Program Components, Eligibility, and Funding Levels:

    Table 4: Alignment of FCC Efforts with Useful Practices for Developing
    Successful Performance Goals:

    Table 5: Number of States Collecting Selected Quality-of-Service Data:

    Table 6: Information Collected by States as Part of the Annual
    Certification Process:

    Table 7: Individuals and Organizations Interviewed:

    Figures:

    Figure 1: Growth in High-Cost Program Support Payments to Incumbent and
    Competitive Carriers:

    Figure 2: Areas in Wisconsin Served by Rural and Nonrural Carriers:

    Abbreviations:

    AT&T: American Telephone and Telegraph Company:

    CETC: competitive eligible telecommunications carrier:

    ETC: eligible telecommunications carrier:

    FCC: Federal Communications Commission:

    IPIA: Improper Payments and Information Act of 2002:

    Joint Board: Federal-State Joint Board on Universal Service:

    MOU: Memorandum of Understanding:

    NECA: National Exchange Carrier Association:

    NPRM: Notice of Proposed Rulemaking:

    OIG: Office of Inspector General:

    OMB: Office of Management and Budget:

    USAC: Universal Service Administrative Company:

    USF: Universal Service Fund:

    1996 Act: Telecommunications Act of 1996:

    United States Government Accountability Office:

    Washington, DC 20548:

    June 13, 2008:

    The Honorable John D. Dingell:
    Chairman:
    The Honorable Joe Barton:
    Ranking Member:
    Committee on Energy and Commerce:
    House of Representatives:

    The Honorable Bart Stupak:
    Chairman:
    The Honorable John Shimkus:
    Ranking Member:
    Subcommittee on Oversight and Investigations:
    Committee on Energy and Commerce:
    House of Representatives:

    For many decades, federal policy has called for making affordable
    residential telephone service available to the greatest possible number
    of Americans--a policy known as "universal service." Provision of this
    service is often a concern in rural areas, where the cost of providing
    telephone service can be particularly high. For example, in 2002, we
    reported that the cost of providing telephone service in rural areas
    was nearly three times the cost of providing service in central cities
    of metropolitan areas.[Footnote 1] As a result, universal service
    policy traditionally targeted financial support to rural areas where
    the costs of providing telephone service are high. In the
    Telecommunications Act of 1996 (1996 Act), the Congress codified
    universal service which, among other things, specified that consumers
    in "rural, insular, and high-cost areas" should have access to services
    and rates that are "reasonably comparable" to consumers in urban areas,
    and required that all companies providing interstate telecommunications
    service contribute to a mechanism that would fund universal
    service.[Footnote 2]

    To implement the 1996 Act, the Federal Communications Commission (FCC)
    modified and expanded the high-cost program.[Footnote 3] This program
    provides support to companies designated as eligible telecommunications
    carriers (ETC). There are two types of ETCs that receive support from
    the program: incumbents and competitors. The incumbents were already
    providing service when the Congress passed the 1996 Act. These
    incumbents are further classified as either "rural"--generally small
    carriers serving primarily rural areas--or "nonrural"--generally large
    carriers serving both rural and urban areas. To a large extent, these
    carriers receive support based on their size (as recognized by their
    classification as rural or nonrural) and their cost characteristics.
    The competitors--known as competitive eligible telecommunications
    carriers (CETC)--receive support based on the level of support the
    incumbent receives where the service is provided. By providing support
    to carriers, the high-cost program allows the carriers to charge lower
    telephone rates than otherwise would be available to customers in high-
    cost, rural, and remote areas.

    To implement the high-cost program, FCC relies on the Universal Service
    Administrative Company (USAC) and state regulatory commissions. FCC has
    overall responsibility for the high-cost program, including making and
    interpreting policy, overseeing the operations of the program, and
    ensuring compliance with its rules. However, FCC delegated to USAC
    responsibility to administer the day-to-day operations of the program.
    At the state level, state regulatory commissions (that is, the state
    agencies responsible for regulating telephone service within the
    states) hold the primary responsibility to determine carrier
    eligibility for participation in the program and to annually certify
    that carriers will appropriately use high-cost program support.

    While considering legislation codifying universal service, the Senate
    Committee on Commerce, Science, and Transportation anticipated that
    competition and new technologies would reduce or eliminate the need for
    universal service support mechanisms.[Footnote 4] However, rather than
    decreasing, the cost of the high-cost program has grown substantially
    to $4.3 billion in 2007, increasing nearly 153 percent between calendar
    years 1998 and 2007. This significant growth has raised concerns about
    what the program is accomplishing, whether it has clear objectives, and
    whether it has effective controls over expenditures. In response to
    your request that we examine the federal high-cost program's operation,
    this report addresses three main questions:

    1. What effect has the structure of the program had on levels of
    support received and types of services available in rural areas?

    2. To what extent does the program have performance goals and measures?

    3. To what extent does the program have mechanisms in place to prevent
    and detect fraud, waste, and abuse?[Footnote 5]

    To respond to the objectives of this report, we reviewed documents and
    interviewed officials from FCC and USAC. We also interviewed officials
    from industry associations, national wireline and wireless carriers,
    the National Exchange Carrier Association (NECA),[Footnote 6] and other
    individuals with knowledge of the high-cost program. To develop an
    understanding of how the program works in specific locations, we
    conducted site visits in six states: Alabama, Iowa, Montana, Oklahoma,
    Oregon, and Wisconsin. We chose these six states on the basis of such
    criteria as the extent of rural population, geographic diversity, and
    the number of wireline and wireless carriers present in the state.
    Within each state, we interviewed the state regulatory commission,
    rural and nonrural incumbent carriers, and competitive carriers. To
    test our structured interview and site selection methodology, we also
    conducted site visits in the following states: Arizona, Maine,
    Massachusetts, New Hampshire, and New Mexico. For additional
    information about the types of mechanisms in place for preventing
    waste, fraud, and abuse, we conducted a survey of state regulatory
    commissions. The survey sought information pertaining to the state's
    regulation of telephone service and the state's internal control
    procedures for incumbent and competitive carriers receiving high-cost
    program support in the state. The survey was available online to
    officials in the 50 states and the District of Columbia on a secure Web
    site. We received complete responses from 50 of the 51 commissions
    surveyed, for an overall response rate of 98 percent. This report does
    not contain all the results from the survey. The survey and a more
    complete tabulation of the results can be viewed at GAO-08-662SP. See
    appendix I for a more detailed discussion of our overall scope and
    methodology.

    We conducted this performance audit from July 2007 through June 2008 in
    accordance with generally accepted government auditing standards. Those
    standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives. We believe that
    the evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives.

    Results in Brief:

    The high-cost program's structure has contributed to inconsistent
    distribution of support and availability of services across rural
    America. In 2007, eligible carriers in every state received support,
    with state-by-state distributions ranging from $31,000 for carriers in
    Rhode Island to $283 million for carriers in Mississippi. In general,
    the program provides greater levels of financial support in more rural
    states, such as Mississippi and Alaska. However, the program does not
    distribute support consistently to carriers operating in rural areas.
    Because of the program's structure--which consists of five components,
    each with different eligibility criteria and thresholds for
    distributing support--rural carriers generally receive more support
    than nonrural carriers, even though both types of carriers serve rural
    areas. Thus, two carriers serving similar customers in similar environs
    can receive different levels of support, which can lead to different
    levels of telecommunications service across rural areas. The program
    supports basic telephone service, which to a great extent is available
    and widely subscribed to throughout much of the country. But, the
    program also indirectly supports broadband service in some rural areas,
    particularly those areas served by rural carriers. Since rural carriers
    receive high levels of support, these carriers can upgrade their
    networks with new technologies, which often facilitate broadband
    service, in addition to basic telephone service. Conversely, since
    nonrural carriers do not receive as much funding, it is not always cost-
    effective for them to make similar upgrades in rural areas, which can
    limit their ability to provide broadband service in the rural areas
    where they provide service. Additionally, the program provides support
    to both incumbent and competitive carriers; as a result, it creates an
    incentive for competition to exist in areas where it might not occur
    otherwise. For the most part, wireless carriers have used this
    incentive, which has contributed to recent growth in the program.

    While there is a clearly established purpose for the high-cost program,
    FCC has not established performance goals or measures. In the 1996 Act,
    the Congress clearly established the principles underlying universal
    service policy, including that consumers in "rural, insular, and high-
    cost areas" should have access to telecommunications and information
    services that are "reasonably comparable to those services provided in
    urban areas and that are available at rates that are reasonably
    comparable to rates charged for similar services in urban areas." These
    guiding principles provide a clear purpose for the high-cost program.
    However, 12 years after the passage of the 1996 Act and after
    distributing over $30 billion in high-cost program support, FCC has yet
    to develop specific performance goals and measures for the program. In
    response to our 2005 report on the federal E-Rate program,[Footnote 7]
    which found similar problems in that program, in August 2007, FCC
    initiated preliminary efforts to collect data on the high-cost program
    in order to develop program goals. However, these efforts do not align
    with practices GAO and the Office of Management and Budget (OMB) have
    identified as useful for developing successful performance goals and
    measures. In particular, prior GAO reports indicate that best practices
    include developing goals and measures that address important dimensions
    of program performance, developing intermediate goals and measures, and
    developing goals to address mission-critical management problems. Yet,
    FCC has not established long-term or intermediate performance goals and
    measures. Additionally, OMB noted that performance measures should
    reflect desired outcomes, which describe the intended results of the
    program. Yet, FCC data collection efforts focus on program outputs,
    such as the number of requests for support payments, which describe the
    level of activity. In the absence of program goals, measures, and data
    about the program's performance, the Congress and FCC may be limited in
    their ability to make informed decisions about the program's future.

    While some internal control mechanisms for the high-cost program exist,
    these mechanisms are limited and exhibit weaknesses that, collectively,
    hinder FCC's ability to assess the risk of noncompliance with program
    rules and ensure cost-effective use of program funds. Essentially,
    internal control mechanisms for the high-cost program focus on three
    areas: (1) carrier self-certification, (2) carrier audits, and (3)
    carrier data validation processes. Each of these processes has
    limitations. Carrier self-certification is the primary tool used to
    ensure that carriers use high-cost program support consistent with
    program rules. Yet, the process does not have standardized requirements
    for achieving this objective since FCC and the states each impose
    different requirements. Additionally, carrier audits are the primary
    tool used in monitoring and overseeing carrier activities, yet these
    audits have been limited in number and the type of reported findings.
    FCC's Office of Inspector General, USAC, and state regulatory
    commissions conduct carrier audits. But, since 2002, USAC has conducted
    audits of 17 carriers, from a population of over 1,400 carriers. The
    carrier audits have yielded limited findings; according to USAC, it has
    been difficult to determine whether carriers are in compliance with FCC
    rules largely due to a lack of documentation available to substantiate
    the carriers' information. Lastly, the carrier data validation
    processes, which USAC and NECA conduct, are used to ensure the
    reliability of financial data underlying the program. However, these
    validation processes focus on the completeness of data reported by
    carriers and do not include processes for ensuring the accuracy of
    these data. These weaknesses limit FCC's ability to assess the risk of
    noncompliance with program rules. Further, these weaknesses could
    contribute to excessive program expenditures. For example, these
    mechanisms are limited in assessing the cost-effectiveness of carriers,
    the accuracy of carriers' cost and line count data, and the appropriate
    use of high-cost program support, each of which could contribute to
    excessive program expenditures.

    To strengthen management and oversight of the high-cost program, we
    recommend that the Chairman, FCC, take the following two actions. To
    better ensure that its efforts are on target and that the high-cost
    program supports the mission of universal service, FCC should first
    clearly define the goals of the high-cost program and subsequently
    develop quantifiable performance measures. To ensure a robust internal
    control environment that supports performance-based management, FCC
    should identify areas of risk in its internal control environment and
    implement mechanisms that will help ensure compliance with program
    rules and produce cost-effective use of program funds.

    We provided a draft of this report to FCC and USAC for their review and
    comment. FCC noted that it was aware of, and had addressed or planned
    to address, the shortcomings we identified in the report. However, FCC
    noted that it would issue a Notice of Inquiry to seek information on
    ways to further strengthen its management and oversight of the high-
    cost program. FCC and USAC both provided information to further clarify
    the actions that are currently underway and provided technical comments
    that we incorporated where appropriate.

    Background:

    The Nation's Universal Service Policy Has Changed Over Time:

    The Communications Act of 1934 sets forth the nation's
    telecommunications policy, including making communication services
    available "so far as possible, to all the people of the United States."
    Early efforts by FCC, state regulators, and industry to promote
    universal service generally began in the 1950s. At that time,
    increasing amounts of the costs associated with providing local
    telephone service were recovered from rates for long-distance services.
    This had the effect of lowering local telephone rates and raising long-
    distance rates, which was intended to make local telephone service more
    affordable. Because American Telephone and Telegraph Company (AT&T)
    provided both nationwide long-distance service and local telephone
    service to approximately 80 percent of the nation's telephone
    subscribers, universal service was largely promoted by shifting costs
    between different customers and services.

    Following the divestiture of AT&T's local telephone companies in
    1984,[Footnote 8] FCC made several changes to universal service policy.
    First, the costs associated with local telephone service could no
    longer be shifted internally within AT&T. FCC therefore implemented
    access charges--fees that long-distance companies pay to originate and
    terminate long-distance telephone calls over the local telephone
    network. Access charges were intended to not only recover the cost of
    originating and terminating long-distance telephone calls over the
    local telephone networks, but also to subsidize local telephone
    service. Second, FCC initiated several federal efforts that targeted
    support to low-income customers to bring the rates for basic telephone
    service within their reach. At this time, federal universal service was
    for the most part funded through charges imposed on long-distance
    companies.

    The Congress made significant changes to universal service policy
    through the 1996 Act. First, the 1996 Act provided explicit statutory
    support for federal universal service policy. Second, the 1996 Act
    extended the scope of federal universal service--beyond the traditional
    focus on low-income consumers and consumers in rural and high-cost
    areas--to include eligible schools, libraries, and rural health care
    providers. Third, the 1996 Act altered the federal mechanism for
    funding universal service. Every telecommunications carrier, and other
    entities, providing interstate telecommunications services were
    required to contribute to federal universal service, unless exempted by
    FCC; and their contributions were to be equitable, nondiscriminatory,
    and explicit.[Footnote 9] Contributions are deposited into the federal
    Universal Service Fund (USF), from which disbursements are made for the
    various federal universal service programs. Fourth, the 1996 Act
    established a Federal-State Joint Board on Universal Service (Joint
    Board). This Joint Board, which is composed of three FCC commissioners,
    four state regulatory commissioners, and a consumer advocate, makes
    recommendations to FCC on implementing the universal service-related
    provisions of the 1996 Act.

    The High-Cost Program Is One of Four Universal Service Programs:

    The USF provides support through four different programs, each
    targeting a particular group of telecommunications users (see table 1).
    In 2007, support for the four USF programs totaled $7 billion. Among
    the four programs, the high-cost program accounted for the largest
    amount of support--$4.3 billion or 62 percent of USF support. The high-
    cost program provides financial support to carriers operating in high-
    cost--generally rural--areas in order to offset their costs, thereby
    allowing these carriers to provide rates and services that are
    comparable to the rates and services that customers in low-cost--
    generally urban--areas receive.

    Table 1: Summary of Universal Service Fund Programs:

    Program: High-cost;
    Description: Assists customers living in high-cost, rural, or insular
    areas through financial support to telephone carriers, thereby lowering
    rates for local and long-distance service;
    Calendar year 2007 disbursements (in millions): $4,287.

    Program: Schools and libraries (federal E-Rate program);
    Description: Assists eligible schools and libraries through discounted
    telecommunications and information services. Discounts available for
    local and long-distance telephone service, Internet access, and
    internal connection projects;
    Calendar year 2007 disbursements (in millions): 1,808.

    Program: Low-income;
    Description: Assists qualifying low-income customers through discounted
    installation and monthly telephone services and free toll limitation
    service;
    Calendar year 2007 disbursements (in millions): 823.

    Program: Rural health care;
    Description: Assists health care providers located in rural areas
    through discounts for telecommunications and Internet access services.
    Discounts are provided to make rates for facilities in rural areas
    reasonably comparable to those in nearby urban areas;
    Calendar year 2007 disbursements (in millions): 37.

    Source: GAO presentation of FCC, NECA, and USAC data.

    [End of table]

    High-Cost Program Administration:

    Both federal and state governments play a role in implementing the
    federal high-cost program. FCC has overall responsibility for the
    federal high-cost program, including making and interpreting policy,
    overseeing the operations of the program, and ensuring compliance with
    its rules. However, FCC delegated to USAC responsibility to administer
    the day-to-day operations of the high-cost program. USAC is a not-for-
    profit corporation and a subsidiary of NECA, although NECA does not
    participate in the management of USAC.[Footnote 10] NECA, a not-for-
    profit association of local telephone carriers and the primary
    administrator of FCC's access charge plan,[Footnote 11] collects cost
    and line count data from its members and validates this information. At
    the state level, state regulatory commissions hold the primary
    responsibility to determine carrier eligibility for participation in
    the program and to annually certify that carriers will appropriately
    use high-cost program support.[Footnote 12] Table 2 summarizes the
    general roles and responsibilities of the agencies and organizations
    involved in high-cost program administration.

    Table 2: General Roles of Agencies and Organizations Involved in High-
    Cost Program Administration:

    Agency/Organization: FCC;
    Description: * Makes all policy decisions pertaining to the Universal
    Service Fund;
    * Oversees program administration and finances;
    * Designates eligibility status of some carriers to receive universal
    service support;
    * Conducts oversight of some carriers' use of funds.

    Agency/Organization: USAC;
    Description: * Primary administrator of the high-cost program;
    * Bills contributors, collects contributions, and disburses universal
    service support;
    * Recovers improperly disbursed funds;
    * Maintains accounting records;
    * Processes appeals of funding decisions;
    * Submits periodic reports to FCC;
    * Conducts carrier oversight.

    Agency/Organization: NECA;
    Description: * Collects and validates cost and revenue data from
    carriers;
    * Collects and validates line count data from carriers;
    * Calculates the national average cost per loop;
    * Administers the interstate access charge revenue pools.

    Agency/Organization: State regulatory commissions;
    Description: * Designates eligibility status to receive universal
    service support;
    * Annually certifies that beneficiaries will use high-cost program
    support appropriately;
    * Some states may designate and certify wireless carriers;
    * Some states may audit carriers.

    Source: GAO presentation of FCC, NECA, and USAC data.

    [End of table]

    High-Cost Program Beneficiaries:

    To be eligible to receive high-cost program support, a carrier must be
    designated as an eligible telecommunications carrier (ETC). Section
    214(e)(1) of the 1996 Act requires that to be designated an ETC, the
    carrier must (1) offer the services that FCC identified as eligible for
    universal service support throughout the service area for which the
    designation is received, (2) advertise the availability of those
    services, and (3) use at least some of its own facilities to deliver
    those services.[Footnote 13] There are two types of carriers.

    * Incumbents. When the Congress passed the 1996 Act, existing telephone
    carriers that were members of NECA were designated as incumbent
    carriers for their service areas. These incumbents subsequently
    received ETC status. These incumbents are further classified as either
    "rural"--generally small carriers serving primarily rural areas--or
    "nonrural"--generally large carriers serving both rural and urban
    areas.[Footnote 14]

    * Competitors. Carriers competing against incumbents--both wireline and
    wireless--also are eligible to receive high-cost program support. Just
    like incumbents, these companies must apply for eligibility and receive
    ETC status before they can receive support; these carriers are referred
    to as competitive eligible telecommunications carriers (CETC).
    Competitors can provide service without receiving CETC status or high-
    cost program support.

    Carriers that receive high-cost program support may use this support
    only for the "provision, maintenance, and upgrading of facilities and
    services for which the support is intended."[Footnote 15]

    High-Cost Program Support Components:

    The high-cost program consists of five components, each with different
    eligibility criteria and different methods to determine the level of
    support. Four of the components provide support to carriers to offset
    the costs of the network, including local loops (primarily, the
    equipment that runs from the carrier's facilities to the customer's
    premises). The four components are high-cost loop, high-cost model,
    interstate access, and interstate common line.[Footnote 16] The fifth
    component, local switching support, provides support for very small
    carriers to offset the cost of their switching equipment.[Footnote 17]
    For incumbent carriers, eligibility for the components depends on the
    carrier's size (as recognized by their classification as rural or
    nonrural) and the type of regulation the carrier is subject to--either
    rate-of-return[Footnote 18] or price-cap[Footnote 19] regulation. In
    2007, USAC reported that there were 1,250 rural carriers subject to
    rate-of-return regulation, 105 rural carriers subject to price-cap
    regulation, 5 nonrural carriers subject to rate-of-return regulation,
    and 81 nonrural carriers subject to price-cap regulation. Based on the
    components for which they qualify, rural carriers receive support based
    on the costs they incurred, whereas based on the components for which
    they qualify, nonrural carriers receive part of their support based on
    projected costs using an FCC model. Table 3 summarizes each of the five
    high-cost program components, which carriers are eligible for each, the
    qualification criteria for each component, and the amount of support
    provided in 2007. For example, a rural carrier with less than 50,000
    customers and subject to rate-of-return regulation could receive
    support through the high-cost loop, local switching, and interstate
    common line components.

    Table 3: High-Cost Program Components, Eligibility, and Funding Levels:

    High-cost component: High-cost loop support;
    Description: Assists local telephone carriers with high loop costs.[A];
    Participant eligibility: Rural carriers with local costs exceeding 115
    percent of the national average;
    Calendar year 2007 support (in millions): $1,444.

    High-cost component: High-cost model support;
    Description: Assists local telephone carriers with high costs, based on
    FCC's Hybrid Cost Proxy Model of forward-looking costs.[B];
    Participant eligibility: Nonrural carriers in states with a statewide
    average cost per line for nonrural carriers that exceeds 2 standard
    deviations of the national average (approximately 131 percent of the
    national average);
    Calendar year 2007 support (in millions): 346.

    High-cost component: Local switching support;
    Description: Assists local telephone carriers serving 50,000 or fewer
    access lines;
    Participant eligibility: Rural carriers serving 50,000 or fewer access
    lines;
    Calendar year 2007 support (in millions): 460.

    High-cost component: Interstate access support;
    Description: Assists local telephone carriers subject to price-cap
    regulation[C] with high costs;
    Participant eligibility: Price-cap regulated carriers with high costs;
    Calendar year 2007 support (in millions): 645.

    High-cost component: Interstate common line support;
    Description: Assists local telephone carriers subject to rate-of-return
    regulation[D] with high costs;
    Participant eligibility: Rate-of- return regulated carriers with high
    costs;
    Calendar year 2007 support (in millions): 1,392.

    Total;
    Description: [Empty];
    Participant eligibility: [Empty];
    Calendar year 2007 support (in millions): $4,287.

    Source: GAO presentation of FCC, NECA, and USAC data.

    [A] Loop costs are the costs to run a wired connection from a telephone
    company's facility to the customer's premises.

    [B] The FCC's Hybrid Cost Proxy Model assumes an efficient carrier
    constructs the most efficient network to serve existing customers.

    [C] Price-cap regulation is a form of rate regulation wherein the
    carrier may charge rates up to an allowable cap, which is based on
    factors beyond the carrier's control, such as inflation.

    [D] Rate-of-return regulation is a form of rate regulation wherein the
    carrier is allowed to recover its costs and earn a predetermined return
    (or profit).

    [End of table]

    Unlike incumbents, competitors do not directly receive funds based on
    their costs or FCC's model. Rather, once a competitor receives CETC
    status, it qualifies for the identical per-line level of support that
    the incumbent receives for the area it serves; this is known as the
    identical support rule.[Footnote 20]

    Current Status of the High-Cost Program:

    Since its inception in 1998, the high-cost program has increased nearly
    153 percent, from $1.7 billion in 1998 to about $4.3 billion in 2007.
    This significant growth has raised concerns about the program's long-
    term sustainability, efficiency, and effectiveness, as well as the
    adequacy of the oversight of carriers' need for and use of support.
    Figure 1 illustrates the growth in the high-cost program, including
    both incumbents and competitors. Several factors have contributed to
    the growth in the high-cost program. In the early years of the program,
    support grew as FCC reduced access charges (a form of implicit support
    for carriers) to incumbents and offset those reductions with greater
    high-cost program support (a form of explicit subsidy). However, in
    recent years, the high-cost program has grown because of support
    provided to competitors, especially wireless companies.

    Figure 1: Growth in High-Cost Program Support Payments to Incumbent and
    Competitive Carriers:

    This figure is a vertical combination bar graph showing growth in high-
    cost program support payments to incumbent and competitive carriers.
    The X axis represents calendar years, and the Y axis represents dollars
    in billions. One bar represents competitors, and the other represents
    incumbents.

    Calendar year: 1998;
    Incumbents: $1.7;
    Competitors: $0.

    Calendar year: 1999;
    Incumbents: $1.72;
    Competitors: $0.

    Calendar year: 2000;
    Incumbents: $2.52;
    Competitors: $0.

    Calendar year: 2001;
    Incumbents: $2.58;
    Competitors: $0.02.

    Calendar year: 2002;
    Incumbents: $2.93;
    Competitors: $0.05.

    Calendar year: 2003;
    Incumbents: $3.14;
    Competitors: $0.13.

    Calendar year: 2004;
    Incumbents: $3.15;
    Competitors: $0.33.

    Calendar year: 2005;
    Incumbents: $3.19;
    Competitors: $0.64.

    Calendar year: 2006;
    Incumbents: $3.12;
    Competitors: $0.98.

    Calendar year: 2007;
    Incumbents: $3.11;
    Competitors: $1.18.

    [See PDF for image]

    Source: Universal Service Administrative Company data.

    [End of figure]

    In response to concerns about the long-term sustainability of the high-
    cost program, FCC issued several Notices of Proposed Rulemaking (NPRM)
    in January 2008, seeking comment on proposals for comprehensive reform
    of the program. These NPRMs represent the culmination of efforts by FCC
    and the Joint Board to reform the program. FCC released an NPRM seeking
    comment on a Joint Board recommendation that the high-cost program be
    divided into three separate funds: broadband service, mobility (or
    wireless) service, and traditional provider of last resort
    service.[Footnote 21],[Footnote 22] FCC also released an NPRM seeking
    comment on changing the current funding mechanism for CETCs, namely
    eliminating the identical support rule and requiring CETCs to submit
    cost data.[Footnote 23] Finally, FCC released an NPRM that sought
    comment on implementing reverse auctions to determine the amount of
    high-cost program support to be given to an ETC;[Footnote 24] with
    reverse auctions, support generally would be determined by the lowest
    bid to serve the auctioned area. In this report, however, we will not
    assess or discuss the merits of the reform proposals; instead, we will
    review the high-cost program in its current state and discuss best
    practices that are critical for the future of the fund, regardless of
    which reform efforts are adopted, if any.

    In addition to these three proposals, on May 1, 2008, FCC released an
    order adopting an interim cap on high-cost program support for CETCs.
    FCC adopted the interim cap to stem the growth of the program while it
    considers these comprehensive reform proposals. Under this order, total
    annual support for CETCs will be capped at the level of support that
    they were eligible to receive in each state during March 2008.[Footnote
    25]

    The High-Cost Program's Structure Has Contributed to Inconsistent
    Distribution of Support and Availability of Services across Rural
    America:

    The high-cost program provides support to eligible carriers in all
    states, with higher levels of support going to more rural states.
    However, the high-cost program does not provide support consistently to
    carriers operating in similar locations, which can lead to different
    levels of telecommunications service across rural areas. In general,
    rural carriers receive more support than nonrural carriers. The high-
    cost program provides support for the provision of basic telephone
    service and, to a great extent, access to this service is available and
    widely subscribed to throughout much of the country. But the high-cost
    program also indirectly supports broadband service in some rural areas,
    particularly those areas served by rural carriers. Finally, the high-
    cost program supports competitive carriers, and support for these
    carriers has increased greatly in recent years.

    The High-Cost Program Provides Support to Carriers in All States, but
    Support Is Dispersed Inconsistently across Rural Areas:

    In 2007, carriers in all states received some form of high-cost program
    support, with higher levels of support going to more rural
    states.[Footnote 26] Generally, carriers operating in states with below-
    average population densities received more support than those in more
    densely populated states. For example, the five states in which
    carriers received the greatest amount of support in 2007 include
    Mississippi ($283 million), Texas ($246 million), Kansas ($222
    million), Louisiana ($163 million), and Alaska ($161 million). While
    the average national population density is 190.1 people per square
    mile,[Footnote 27] these states have lower-than-average population
    densities, ranging from 1.2 people per square mile in Alaska to 98.4
    people per square mile in Louisiana. Alternatively, the five states
    that receive the least support tend to have higher-than-average
    population densities, including Rhode Island ($31,000), Delaware
    ($245,000), Connecticut ($1.3 million), New Jersey ($1.7 million), and
    Massachusetts ($2.3 million); these states have population densities
    ranging from 436.9 people per square mile in Delaware to 1,176.2 people
    per square mile in New Jersey. Thus, at a broad, national level, high-
    cost program support flows to more rural states.

    However, the high-cost program does not provide support consistently to
    carriers operating in similar rural locations. To a large extent, this
    situation arises because of the program's structure: the five different
    high-cost program components, each with different eligibility and
    methods to determine support. As mentioned earlier, rural carriers
    typically receive high-cost program support through components that
    base support on the carrier's incurred costs. Thus, in the case of a
    rural carrier, the higher its actual costs, the more funding it
    receives. Because of this, the funding that a rural carrier receives
    depends on how much money it chooses to spend on its network.
    Additionally, the disparity between rural and nonrural carrier is even
    greater, as support to one carrier can be significantly more generous
    than support provided to another carrier for serving comparable areas.
    As mentioned earlier, nonrural carriers typically receive part of their
    high-cost program support (high-cost model) through a component that
    utilizes an FCC cost model; this model assumes the most efficient
    carrier providing service to existing customers. Since this model is
    not based on an individual carrier's actual costs, investment in new
    network infrastructure will not lead to greater high-cost program
    support. Further, the threshold to receive support is greater for
    nonrural carriers; a rural carrier's costs must exceed 115 percent of
    the national average whereas the statewide average cost must exceed
    approximately 131 percent of the national average for nonrural
    carriers. As such, nonrural carriers in 10 states currently are
    eligible for this funding, yet nonrural carriers in other states serve
    high-cost locations as well.[Footnote 28] Overall, rural carriers
    receive more funding than nonrural carriers and in 2007, rural carriers
    received $1.7 billion more in high-cost program support than nonrural
    carriers.[Footnote 29] In November 2007, the Joint Board recognized
    this situation itself, noting that "support for customers served by one
    kind of carrier can be significantly more generous than for comparably
    situated customers served by the other kind of carrier."[Footnote 30]

    We found similar results in our site-visit states. In the 11 states we
    visited, 9 states had rural carriers receiving more funding than
    nonrural carriers.[Footnote 31] While rural carriers generally serve
    only rural areas, nonrural carriers also can serve large swaths of
    rural areas. In fact, carriers providing service in similar, even
    adjacent, areas can receive vastly different levels of high-cost
    program support. For example, as shown in figure 2, in Wisconsin, there
    are two nonrural carriers (areas in dark shading) that provide service
    to rural areas, yet these carriers do not qualify to receive the same
    types of support as rural carriers serving comparable adjacent areas.
    Similarly, in Oregon, 25 percent of the lines served by a large,
    national carrier are located in rural areas of the state; this carrier
    does not qualify to receive the same type of support for these lines
    that rural carriers in the same area do.

    Figure 2: Areas in Wisconsin Served by Rural and Nonrural Carriers:

    This figure is a map showing areas in Wisconsin served by rural and
    nonrural carriers.

    [See PDF for image]

    Source: Wisconsin Public Service Commission (exchange boundaries); U.S.
    Department of Commerce (MSA boundaries); and GAO (composite map).

    [End of figure]

    The High-Cost Program Supports Basic Telephone and Wireless Service,
    and Indirectly Supports Broadband Service:

    The high-cost program directly and indirectly supports several types of
    service including (1) basic telephone service, (2) broadband service,
    and (3) wireless telephone service.

    Basic Telephone Service:

    Currently, the high-cost program provides support for the provision of
    basic telephone service. In the 1996 Act, the Congress stated as one of
    the principles underlying universal service that people in rural,
    insular, and high-cost areas should have access to telecommunications
    and information services that are reasonably comparable to those
    provided in urban areas and at comparable rates. However, the Congress
    did not define universal service or specify a list of services to be
    supported by the program. Instead, the 1996 Act recognized universal
    service as an evolving level of telecommunications services and
    directed FCC, after recommendations from the Joint Board, to establish
    a definition of the services to be supported by the program.[Footnote
    32] In 1997, FCC adopted a set of communications services and
    "functionalities" for rural, insular, and high-cost areas that were to
    be supported by the high-cost program.[Footnote 33]

    To a great extent, access to basic telephone service is available and
    widely subscribed to throughout much of the country. One widely used
    measure of telephone subscribership is the penetration rate, which is
    based on survey data collected by the U.S. Census Bureau to estimate
    the percentage of U.S. households with telephone service. In 2007, the
    overall penetration rate in the United States was 95 percent,
    representing an increase of 0.9 percent since the inception of the high-
    cost program in 1998. While the penetration rate has increased
    marginally, there are several factors that could contribute to this
    result in addition to the high-cost program, including changes in
    income levels, greater diffusion of communications technology, or state-
    level programs. Appendix II shows penetration rates by state and
    changes in the percentage of households with telephone service from
    November 1983 through July 2007.

    Most of the rural carriers with whom we spoke agreed that support from
    the high-cost program has been an important source of their operating
    revenue. One recent study estimated that 30 percent of rural carriers'
    annual operating revenues are derived from federal and state universal
    service programs, including the high-cost program.[Footnote 34] Our
    site visit interviews similarly suggest that rural carriers depend on
    high-cost program support to provide customers with access to
    affordable telephone rates. For example, one carrier with whom we spoke
    received nearly 80 percent of its annual operating revenues from the
    high-cost program. Moreover, many of the rural carriers we met with
    told us that they would be unable to provide the same range or quality
    of service to their customers without support from the high-cost
    program. Most of these carriers, who serve very remote and sparsely
    populated rural areas where it is very costly to provide
    telecommunications services, stated that without the support, they
    would likely need to increase the rates they charge their customers for
    basic services.

    Broadband Service:

    Although there have been a number of proposals to revise the list of
    services supported by the high-cost program over the past decade, FCC
    has not taken action to change the original definition.[Footnote 35] To
    be eligible to receive high-cost program support, a carrier must offer
    each of the services and functionalities supported by the program.
    Additionally, carriers that receive high-cost program support may only
    use this support for the "provision, maintenance, and upgrading of
    facilities and services for which the support is intended."[Footnote
    36] While one of the universal service principles adopted in the 1996
    Act is that all regions of the country should have access to advanced
    telecommunication and information services, the high-cost program does
    not explicitly support access to broadband services.

    While access to advanced services, such as broadband, is not included
    among the designated list of services supported by the high-cost
    program, the program has indirectly facilitated broadband deployment in
    many rural areas. In recent years, some carriers have been using high-
    cost program support to upgrade their telephone networks, including
    upgrading to fiber optic cable and extending it closer to their
    customers.[Footnote 37] Because of advances in telecommunications
    technology, these upgrades increase the capacity of the network,
    thereby facilitating the provision of advanced services, such as
    broadband. For example, many rural carriers with whom we spoke have or
    are replacing their copper wire with fiber optic cable. One carrier was
    in the early phases of a 7-year, $1.8 million expansion to install
    fiber-to-the-home for each customer in one of its exchanges that served
    about 700 lines. In addition to transitioning from copper to fiber,
    carriers are investing in modern switching equipment and remote
    terminals to improve the connection speeds available to their
    customers.[Footnote 38] For example, one carrier told us that it is
    currently installing more remote terminals to provide higher-speed
    broadband service, and that it currently has 96 remote terminals to
    serve customers spread out across a 1,300 square mile area.

    The availability of high-cost program support can, in part, determine
    whether deployment of broadband service is feasible in a rural area. In
    rural areas served by rural carriers, the high-cost program allows the
    carrier to recoup a large portion of the investment that facilitates
    broadband service since, as we mentioned earlier, these carriers
    receive high-cost program support based on their costs. Alternatively,
    in rural areas served by nonrural carriers, which generally do not
    receive as much funding as rural carriers and do not receive funding
    based on their costs, the network upgrades necessary for broadband
    service are less likely. As a result, the availability of broadband
    services to rural customers is largely determined by the type of
    carrier they are served by, and not where they are located.

    * Rural carriers. Most rural carriers with whom we spoke had or were
    deploying advanced network features, such as fiber optic cable. For
    example, of the rural carriers we spoke with during our site visits,
    many stated they were able to provide broadband Internet service to 100
    percent of their customers or service areas. In addition, FCC estimates
    that in 2007, 82 percent of households served by rural incumbent
    carriers had access to high-speed broadband connections.

    * Nonrural carriers. Nonrural carriers with whom we spoke reported that
    they have broadband-enabled equipment in most or all facilities, but
    these carriers are generally unable to provide all rural customers with
    broadband service. Rather, only those customers residing relatively
    close to the carrier's facility can receive broadband service.[Footnote
    39] These carriers indicated that deploying broadband service to a
    wider service territory was not economical given the diffuse population
    in rural areas.

    Competition and Wireless Service:

    Another impact of the high-cost program has been the increase in
    competitive carriers, especially wireless carriers, in rural areas.
    Beginning in 1997, FCC adopted a series of measures intended to
    encourage competition between carriers in rural areas to promote the
    principles of universal service.[Footnote 40] Among the actions taken
    by FCC was adopting the principle of "competitive neutrality" as part
    of the high-cost program. Under this principle, one carrier should not
    be favored over another carrier, and support should be available to any
    carrier that meets the requirements for operating as an ETC, regardless
    of the type of technology the carrier employs (such as wireline,
    wireless, or satellite). This principle was supported by granting high-
    cost program support to CETCs. While incumbents--both rural and
    nonrural--receive support based on their costs of providing service in
    an area or FCC's cost model, CETCs receive support based on the number
    of lines they serve through a mechanism known as the identical support
    rule. Under this rule, CETCs in an area receive the same level of high-
    cost program support, on a per-line basis, as the incumbent carrier in
    that area.[Footnote 41] For example, if the incumbent carrier receives
    support that, based on the number of lines it serves, results in $20 of
    support per line, every competitor designated as an ETC in that area
    also will receive $20 in support for each line it serves in the same
    area regardless of its costs.[Footnote 42]

    ETC status is not required for a competitive carrier to operate in an
    area, but it is required if the carrier wants to receive high-cost
    program funding. As a result, the number of carriers seeking CETC
    status has increased dramatically, and the majority of newly designated
    carriers are wireless. Since 1998, the number of CETCs receiving
    support through the high-cost program has risen from a total of 2
    carriers in 1998, to 362 competitive carriers in 2007. Of these 362
    CETCs, 260 carriers--over 70 percent--are wireless carriers. Along with
    an increase in the number of carriers, the amount of funding provided
    to CETCs has increased over this time period, growing from $535,104 in
    1999, with 100 percent going to wireless carriers, to $1.2 billion by
    2007, with 98 percent of all CETC funding going to wireless
    carriers.[Footnote 43]

    A recent report by FCC estimated that at the end of 2006, wireless
    carriers had achieved an 80 percent penetration rate across the
    country,[Footnote 44] and according to the wireless carriers with whom
    we spoke, high-cost program support has allowed them to invest in
    improving and expanding their networks in rural areas where they would
    otherwise be unable to economically justify the investment. For
    example, one carrier told us that it can cost from $350,000 to $500,000
    to install a cell tower in rugged or mountainous terrain, in addition
    to other installation expenses such as land rent and maintenance costs,
    but that in most cases, low population density in the area would not
    yield enough customers to recover the investment. Additionally,
    wireless companies and regulators with whom we spoke stated that the
    availability of wireless communication is a public safety concern;
    travelers along rural highways expect to be able to use cell phones in
    the event of an emergency. However, wireless carriers often lack the
    economic incentive to install cell phone towers in rural areas where
    they are unlikely to recover the installation and maintenance costs,
    but high-cost program support allows them to make these investments.

    While There Is a Clearly Established Purpose for the High-Cost Program,
    FCC Has Not Established Performance Goals and Measures:

    In the 1996 Act, the Congress established the principles underlying
    universal service, which provide a clear purpose for the high-cost
    program. However, since 1998, FCC has distributed over $30 billion in
    high-cost funding without developing specific performance goals for the
    program. Additionally, FCC has not developed outcome-based performance
    measures for the program. While FCC has begun preliminary efforts to
    address these shortcomings, its efforts do not align with practices GAO
    and OMB have identified as useful in developing successful performance
    goals and measures. In the absence of program goals and data pertaining
    to the program's performance, the Congress and FCC may be limited in
    their ability to make informed decisions about the future of the
    program.

    The High-Cost Program Has a Clear Purpose, but Lacks Explicit
    Performance Goals and Measures:

    In the 1996 Act, the Congress clearly established the principles
    underlying universal service. In particular, the Congress said that
    "quality services should be available at just, reasonable, and
    affordable rates." Additionally, the Congress said that consumers in
    all regions of the country, including "those in rural, insular, and
    high-cost areas" should have access to telecommunications and
    information services that are "reasonably comparable to those services
    provided in urban areas and that are available at rates that are
    reasonably comparable to rates charged for similar services in urban
    areas." These guiding principles provide a clear purpose for the high-
    cost program.

    However, 12 years after the passage of the 1996 Act and after
    distributing over $30 billion in high-cost program support, FCC has yet
    to develop specific performance goals and measures for the program. We
    were unable to identify any performance goals or measures for the high-
    cost program. In its 2005 program assessment of the high-cost program,
    OMB also concluded that the program did not have performance goals or
    measures.[Footnote 45] OMB reported that the program neither measures
    the impact of funds on telephone subscribership in rural areas or other
    potential measures of program success, nor bases funding decisions on
    measurable benefits. OMB also reported that the high-cost program does
    not have specific, long-term performance measures that focus on
    outcomes and meaningfully reflect the purpose of the program.
    Additionally, in February 2005, we reported that FCC had not
    established performance goals and measures for the E-Rate program, the
    second-largest universal service program.[Footnote 46] At that time, we
    observed that under the Government Performance and Results Act, FCC was
    responsible for establishing goals for the universal service programs,
    despite the fact that the 1996 Act did not specifically require them.
    Further, FCC has not adequately defined the key terms of the high-cost
    program's purpose. For example, the Congress directed FCC to ensure
    consumers in rural areas received access to "reasonably comparable"
    services at "reasonably comparable" rates to those in urban America. To
    address this, in a report and order issued in 1999, FCC defined
    "reasonably comparable" as "a fair range of urban/rural rates both
    within a state's borders, and among states nationwide."[Footnote 47]
    This definition only focused on rates and did not address what FCC
    considered "reasonably comparable" services; 2 years after FCC issued
    this definition, its adequacy was challenged in federal court. In July
    2001, the Tenth Circuit Court rejected FCC's use of this definition,
    and required that FCC more precisely define "reasonably comparable" in
    reference to rates charged in rural and urban areas."[Footnote 48]
    Subsequently, in October 2003, FCC attempted to again define
    "reasonably comparable," this time stating that rates are considered
    reasonably comparable if they fall within two standard deviations of
    the national urban average.[Footnote 49] Again, this definition did not
    address what services should be supported by the high-cost program, and
    again in February 2005, the Tenth Circuit Court rejected the adequacy
    of this definition, stating that it was not clear how this new
    definition preserved and advanced universal service.[Footnote 50] To
    date, FCC has not adopted any other definitions for "reasonably
    comparable" rates or services.[Footnote 51]

    FCC's Efforts Do Not Align with Successful Practices for Developing
    Performance Goals and Will Provide Limited Insight to the High-Cost
    Program's Performance:

    In June 2005, FCC issued a Notice of Proposed Rulemaking, in which it
    sought comment on establishing useful outcome, output, and efficiency
    measures for each of the universal service programs, including the high-
    cost program.[Footnote 52] In this notice, FCC recognized that clearly
    articulated goals and reliable performance data would allow for
    assessment of the effectiveness of the high-cost program and would
    allow FCC to determine whether changes to the program are needed. As of
    August 2007, FCC had not established performance goals and measures for
    the high-cost program, and FCC stated it did not have sufficient data
    available to establish high-cost program performance goals.[Footnote
    53] To begin addressing this shortcoming, FCC started collecting
    performance data from USAC on a quarterly basis, including:[Footnote
    54]

    * number of program beneficiaries (i.e. ETCs) per study area and per
    wire center;

    * number of lines, per study area and per wire center, for each ETC;

    * number of requests for support payments;

    * average (mean) dollar amount of support and median dollar amount of
    support for each line for high-cost ETCs;

    * total amount disbursed--aggregate and for each ETC;

    * time to process 50 percent, 75 percent, and 100 percent of the high-
    cost support requests and authorize disbursements; and:

    * rate of telephone subscribership in urban vs. rural areas.

    However, these efforts generally do not align with known practices for
    developing performance goals. We have reported that in developing
    performance goals, an agency's efforts should focus on the results it
    expects its programs to achieve, that is, the differences the program
    will make in people's lives. In doing this, an agency's efforts should
    work to strike difficult balances among program priorities that reflect
    competing demands and provide congressional and other decision makers
    with an indication of the incremental progress the agency expects to
    make in achieving results. Additionally, we have identified many useful
    practices for developing program goals and measures; these practices
    include developing goals and measures that address important dimensions
    of program performance, developing intermediate goals and measures, and
    developing goals to address mission-critical management
    problems.[Footnote 55] As seen in table 4, we found that FCC's efforts
    do not align with useful practices we have identified for developing
    successful goals.

    Table 4: Alignment of FCC Efforts with Useful Practices for Developing
    Successful Performance Goals:

    Practice to enhance performance goals: Create a set of performance
    goals and measures that address important dimensions of a program's
    performance and balance competing priorities;
    Reason for practice: Programs often are forced to strike difficult
    balances among priorities that reflect competing demands. Sets of
    performance goals and measures could provide a balanced perspective of
    the intended performance of a program's multiple priorities;
    How FCC's efforts align with practice: FCC's efforts do not align with
    this practice. A general purpose for the high-cost program exists--to
    promote nationwide rate and service comparability for people in high-
    cost areas--but explicit performance goals and measures for how this is
    to be achieved and measured have not been established.

    Practice to enhance performance goals: Use intermediate goals and
    measures to show progress or contribution to intended results;
    Reason for practice: Intermediate goals and measures, such as outputs
    or intermediate outcomes, can be used to show progress or contribution
    to intended results;
    How FCC's efforts align with practice: FCC's efforts do not align with
    this practice. While FCC has begun to collect output data in order to
    develop performance measures for the high-cost program, it has not yet
    determined the goals of the program. Therefore, it is unclear how these
    output data will illustrate progress in meeting performance goals.

    Practice to enhance performance goals: Include explanatory information
    on the goals and measures;
    Reason for practice: Explanatory information in a performance plan can
    help to show the relationship between results-oriented goals, measures,
    and program outputs and services;
    How FCC's efforts align with practice: FCC's efforts do not align with
    this practice.

    Practice to enhance performance goals: Develop performance goals to
    address mission-critical management problems;
    Reason for practice: Weaknesses in internal management processes and
    systems undermine the achievement of program results; therefore,
    performance goals to address mission-critical management problems are
    valuable in program management;
    How FCC's efforts align with practice: FCC's efforts somewhat align
    with this practice. FCC issued a Report and Order in August 2007 which
    adopted measures to improve the management, administration, and
    oversight of the USF. This includes actions specific to the high-cost
    program.

    Practice to enhance performance goals: Show baseline and trend data for
    past performance;
    Reason for practice: Baseline and trend data provide a context for
    drawing conclusions about whether performance goals are reasonable and
    appropriate;
    How FCC's efforts align with practice: FCC's efforts somewhat align
    with this practice. While FCC began collecting quarterly data in April
    2007, to establish a baseline for performance measures, because the
    high-cost program is in its 10th year, it is unclear if this data
    collection effort will adequately demonstrate past performance trends.

    Practice to enhance performance goals: Identify projected target levels
    of performance for multiyear goals;
    Reason for practice: Multiyear performance goals can provide
    congressional and other decision makers with an indication of the
    incremental progress the agency expects to make in achieving results;
    How FCC's efforts align with practice: FCC's efforts do not align with
    this practice.

    Practice to enhance performance goals: Link the goals of component
    organizations to departmental strategic goals;
    Reason for practice: Linking component performance to departmental
    goals can provide a clear, direct understanding of how the achievement
    of the components' annual goals will lead to the achievement of the
    agency's strategic goals;
    How FCC's efforts align with practice: FCC's efforts somewhat align
    with this practice. FCC's performance and accountability report
    includes accomplishments related to enhancing universal service, but
    does not specifically address the high-cost program, or how it has
    impacted the provision of universal service.

    Source: GAO, Agency Performance Plans: Examples of Practices That Can
    Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington,
    D.C.: Feb. 26, 1999).

    [End of table]

    Additionally, FCC's efforts do not align with guidance set forth by
    OMB. According to OMB, output measures describe the level of a
    program's activity, whereas outcome measures describe the intended
    result from carrying out a program or activity and efficiency measures
    capture a program's ability to perform its function and achieve its
    intended results. In its Program Assessment Rating Tool Guidance, OMB
    noted that measures should reflect desired outcomes.[Footnote 56] Yet,
    FCC's data collection efforts focus on program outputs, and not program
    outcome or efficiency. Therefore, FCC's efforts will be of limited use
    in illustrating the impacts of the high-cost program or how efficiently
    the program is operating.

    Clearly articulated performance goals and measures are important to
    help ensure the high-cost program meets the guiding principles set
    forth by the Congress. These guiding principles include comparable
    rates and services for consumers in all regions of the country. Yet, as
    mentioned earlier, the program's structure has contributed to
    inconsistent distribution of support and availability of
    telecommunications services across rural America, which is not
    consistent with these guiding principles. Outcome-based performance
    goals and measures will help illustrate to what extent, if any, the
    program's structure is fulfilling the guiding principles set forth by
    the Congress. Finally, FCC is reviewing several recommendations and
    proposals to restructure the high-cost program. Yet, because there is
    limited information available on what the program in its current form
    is intended to accomplish, what it is accomplishing, and how well it is
    doing so, it remains unclear how FCC will be able to make informed
    decisions about which option is best for the future.

    Internal Control Mechanisms for the High-Cost Program Are Limited and
    Hinder FCC's Ability to Assess the Risk of Noncompliance with Program
    Rules and Ensure Cost-Effective Use of Program Funds:

    Internal controls mechanisms for the high-cost program focus on three
    areas. Yet, each area has weaknesses. The carrier certification process
    exhibits inconsistency across states and carriers, the carrier audits
    have been limited in number and types of reported findings, and carrier
    data validation focuses primarily on completeness and not accuracy.
    Collectively, these weaknesses hinder FCC's ability to understand the
    risks associated with noncompliance with program rules. Further, these
    weaknesses could contribute to excessive program expenditures. In
    particular, the high-cost program could incur excessive expenditures
    because of carrier inefficiencies, excessive payments to carriers, and
    provision of funding for nonsupported services.

    Internal Control Mechanisms for the High-Cost Program Exhibit
    Weaknesses:

    Internal control mechanisms for the high-cost program focus on three
    areas: (1) carrier certification, (2) carrier audits, and (3) carrier
    data validation processes. In each of these three areas, we found
    weaknesses in the internal control mechanisms.

    Carrier Certification:

    Annual certification is the primary tool used to enforce carrier
    accountability for use of high-cost program support, yet the
    certification process does not have standardized requirements. FCC
    requires that all states annually certify that all federal high-cost
    program support provided to eligible carriers in their state will be
    used only for the provision, maintenance, and upgrading of facilities
    and services for which the support is intended.[Footnote 57] It is up
    to the states to determine if carriers are operating in accordance with
    these guidelines. Generally, states do so by collecting information
    from carriers regarding their use of high-cost program funds. However,
    states have different requirements for what information carriers must
    submit. Additionally, if a state does not have jurisdiction over a
    carrier, then the carrier provides annual certification data directly
    to FCC.[Footnote 58] As a result, carriers are subject to different
    levels of oversight and documentation requirements to demonstrate that
    high-cost program support was used appropriately.

    FCC established requirements for information that must be submitted by
    the carriers it designates as ETCs. Incumbent carriers designated as
    ETCs by FCC must provide a sworn affidavit stating they are using high-
    cost program funding only for the provision, maintenance, and upgrading
    of facilities and services for which the support is intended.
    Additionally, all carriers--incumbent and competitive--designated as
    ETCs by FCC must provide:[Footnote 59]

    * progress reports on the ETC's 5-year service quality improvement
    plan;

    * detailed outage information;

    * the number of unfulfilled service requests from potential customers;

    * the number of complaints per 1,000 handsets or lines;

    * certification that the ETC is complying with applicable service
    quality standards and consumer protection rules;

    * certification that the ETC is able to function in emergency
    situations;

    * certification that the ETC is offering a local usage plan comparable
    to that offered by the incumbent in the relevant service areas; and:

    * certification that the carrier acknowledges that FCC may require it
    to provide equal access to long-distance carriers in the event that no
    other eligible telecommunications carrier is providing equal access
    within the service area.

    While FCC encourages state regulatory commissions to adopt these
    requirements, it is not mandatory.[Footnote 60] Nevertheless, in our
    survey of state regulatory commissions, we found that many states
    require carriers to provide information similar to some of the
    information collected by FCC, particularly with respect to quality-of-
    service data. For example, FCC requires carriers to submit annual
    information on the number of unfulfilled service requests from
    potential customers, the number of complaints per 1,000 handsets or
    lines, as well as detailed information on outages the carrier
    experienced. According to our survey, we found that many states require
    similar information from carriers. Additionally, in our survey, we
    asked the state regulatory commissions to specify the types of quality-
    of-service measures they require for incumbent, competitive wireline,
    and wireless carriers. We found that state requirements are somewhat
    varied across the three different types of carriers. For example, of
    the 45 states that indicated they measure consumer complaints, 22
    states indicated they require this information for at least one type of
    carrier but not all types of carriers. (See table 5.)

    Table 5: Number of States Collecting Selected Quality-of-Service Data:

    Quality-of-service measure: Number of consumer complaints;
    Number of states that have measurement for any type of carrier: 45;
    Number of states that apply same requirements across all types of
    carriers: 23;
    Number of states that apply different requirements based on the type of
    carrier: 22.

    Quality-of-service measure: Unfulfilled service requests;
    Number of states that have measurement for any type of carrier: 43;
    Number of states that apply same requirements across all types of
    carriers: 18;
    Number of states that apply different requirements based on the type of
    carrier: 25.

    Quality-of-service measure: Number of outages;
    Number of states that have measurement for any type of carrier: 43;
    Number of states that apply same requirements across all types of
    carriers: 19;
    Number of states that apply different requirements based on the type of
    carrier: 24.

    Source: GAO survey of state regulatory commissions.

    [End of table]

    In addition to the quality-of-service information, we found that state
    regulatory commissions collect a variety of information pertaining
    directly to the annual certification process. States most frequently
    require carriers to submit affidavits that future support will be used
    for its intended purpose; plans for quality, coverage, or capacity
    improvements; and evidence that past support was used for its intended
    purposes. However, according to our survey, 10 state regulatory
    commissions require incumbent carriers to submit only an affidavit,
    with no additional information. Additionally, in some instances, these
    requirements vary based on the type of carrier. (See table 6.)

    Table 6: Information Collected by States as Part of the Annual
    Certification Process:

    Requirements for annual certification: Affidavit indicating that high-
    cost program funding will be used for its intended purposes;
    Number of states that have requirement for any type of carrier: 44;
    Number of states that apply same requirements across all types of
    carriers: 32;
    Number of states that apply different requirements based on the type of
    carrier: 12.

    Requirements for annual certification: Carriers' plans for quality,
    coverage, or capacity improvements;
    Number of states that have requirement for any type of carrier: 33;
    Number of states that apply same requirements across all types of
    carriers: 19;
    Number of states that apply different requirements based on the type of
    carrier: 14.

    Requirements for annual certification: Evidence that previously
    received high-cost program funding was used for its intended purposes;
    Number of states that have requirement for any type of carrier: 31;
    Number of states that apply same requirements across all types of
    carriers: 22;
    Number of states that apply different requirements based on the type of
    carrier: 9.

    Requirements for annual certification: Consultation between state
    commission and carrier;
    Number of states that have requirement for any type of carrier: 27;
    Number of states that apply same requirements across all types of
    carriers: 16;
    Number of states that apply different requirements based on the type of
    carrier: 11.

    Requirements for annual certification: Evidence that the carrier has
    complied with state requirements for use of funds;
    Number of states that have requirement for any type of carrier: 26;
    Number of states that apply same requirements across all types of
    carriers: 17;
    Number of states that apply different requirements based on the type of
    carrier: 9.

    Requirements for annual certification: Review of carriers' annual or
    other periodic reports;
    Number of states that have requirement for any type of carrier: 24;
    Number of states that apply same requirements across all types of
    carriers: 18;
    Number of states that apply different requirements based on the type of
    carrier: 6.

    Requirements for annual certification: Other requirements;
    Number of states that have requirement for any type of carrier: 14;
    Number of states that apply same requirements across all types of
    carriers: 9;
    Number of states that apply different requirements based on the type of
    carrier: 5.

    Requirements for annual certification: New application;
    Number of states that have requirement for any type of carrier: 7;
    Number of states that apply same requirements across all types of
    carriers: 4;
    Number of states that apply different requirements based on the type of
    carrier: 3.

    Source: GAO survey of state regulatory commissions.

    [End of table]

    Carrier Audits:

    Carrier audits are the primary tool used in monitoring and overseeing
    carrier activities, but these audits have been limited in number and
    types of reported findings. While the 1996 Act does not require audits,
    FCC has authorized USAC to conduct audits.[Footnote 61] FCC, USAC, and
    some state regulatory commissions conduct carrier audits for the high-
    cost program.

    USAC audits. USAC operates an audit program to determine if carriers
    are complying with the program's rules. This audit program has been
    limited; according to USAC officials, since 2002, USAC has conducted
    about 17 audits, from more than 1,400 carriers participating in the
    high-cost program (approximately 1.2 percent coverage). USAC officials
    told us these audits are time-consuming, and have yielded limited
    findings because participants did not maintain adequate documentation
    to validate their information. This occurred for two reasons: (1) the
    high-cost program had no requirement that carriers retain documents and
    (2) rural carriers receive funding as a reimbursement for costs
    incurred 2 years prior to the receipt of support and therefore carriers
    did not keep records going back a sufficient period of time for the
    audit. To address these problems, in August 2007, FCC imposed and USAC
    implemented document retention rules for high-cost program
    participants; participants are now required to maintain records that
    can be used to demonstrate to auditors that support received was used
    consistent with the 1996 Act and FCC's rules for 5 years.[Footnote 62]

    FCC audits. In 2006 and 2007, FCC's Office of Inspector General (OIG)
    instructed USAC to begin conducting audits and assessments to determine
    the extent to which high-cost program beneficiaries were in compliance
    with program rules. These audits and assessments have two objectives:
    (1) validate the accuracy of carrier self-certifications--audits--and
    (2) provide a basis for identifying and estimating improper payments
    under the Improper Payments and Information Act of 2002 (IPIA)--
    assessments.[Footnote 63] To conduct these audits and assessments, a
    random sample of 65 out of about 1,400 carriers was selected by OIG. In
    meeting its first objective, findings were similar to USAC's audit
    findings, in that it could not be determined if the information that
    carriers attested to in their annual certifications was accurate
    because carriers did not have proper documentation to validate their
    information. For the second objective, OIG reported that the high-cost
    program had an estimated 16.6 percent rate of improper
    payments.[Footnote 64] In response to these findings, USAC maintained
    that this error rate was primarily indicative of carrier noncompliance
    with program rules, and not a result of payments made to carriers for
    inaccurate amounts. For example, USAC stated that these payments were
    categorized as erroneous because the carrier failed to comply with high-
    cost program rules such as meeting filing deadlines or completing
    required documentation.[Footnote 65],[Footnote 66] In November 2007, a
    second round of beneficiary audits and assessments was begun to further
    review program compliance and should be completed by the end of
    calendar year 2008.

    State audits. In addition to the USAC and FCC OIG audits, 7 of the 50
    state regulatory commissions that responded to our survey reported that
    they audit incumbent carriers.[Footnote 67] These audits focus on the
    appropriate use of high-cost program funding, the accuracy of carrier-
    reported costs, and the compliance with quality-of-service standards.
    Two of the 7 states reported that they audit all incumbent carriers,
    while the remaining 5 states reported that audits are based on a risk
    assessment of the carrier, or triggered by unusual behavior on the part
    of the carrier. While these 7 states conduct audits, states generally
    do not revoke carrier's ETC status. According to our survey, since
    2002, one state reported it had revoked a carrier's ETC status (for a
    competitive carrier). Additionally, during our site visits, several
    state officials told us they did not conduct audits because they did
    not feel it was the state's jurisdiction or they lack the resources to
    perform in-depth reviews of carriers' use of high-cost program funds.

    Carrier Data Validation:

    Data validation processes to ensure the reliability of financial data
    primarily focus on the completeness of the data provided by carriers,
    but not the accuracy of the data. Incumbents submit cost and line count
    data directly to NECA and USAC; these cost and line count data are used
    to qualify carriers for and to calculate the amount of carriers' high-
    cost program support. NECA is responsible only for collecting carrier
    cost and line count data for the high-cost loop support component of
    the high-cost program. All cost data NECA collects for this component
    are subject to several electronic validations which primarily focus on
    ensuring that all required data are reported and that the data ranges
    are consistent with information reported in previous years. In
    addition, NECA compares reported cost data with information provided in
    carriers' audited financial statements to identify any discrepancies.
    According to NECA officials, these statements are available for about
    90 percent of its member carriers. If inaccuracies are found, member
    carriers are required to provide NECA with an explanation to resolve
    the situation, but no action is taken against the carrier. NECA
    officials do not conduct any additional oversight of the line count
    data they receive. USAC collects cost and line count data for the
    remaining components of the high-cost program, and similarly to NECA,
    these data are subject to several electronic data validations for
    completeness. While these validations and reviews provide NECA and USAC
    with opportunities to identify input errors, they do not addresses
    whether or not the data provided by participants are accurate or if the
    money spent addresses the intended purposes of the high-cost program.

    Internal Control Weaknesses Could Lead to Excessive Program
    Expenditures:

    While some internal control mechanisms are in place, the weaknesses we
    identified hinder FCC's ability to assess the risk of noncompliance
    with program rules. In particular, the internal control mechanisms may
    not fully address the following concerns, which could contribute to
    excessive program expenditures.

    * Cost-effectiveness. In some instances, carriers receive high-cost
    program support based on their costs. Historically, carriers often were
    subject to rate-of-return regulation, wherein a state regulatory
    commission would assess the carrier's costs and investments to ensure
    these were appropriate and necessary. Of the 50 respondents to our
    survey of state regulatory commissions, 33 apply rate-of-return
    regulation to rural incumbent carriers, 13 apply it to nonrural
    incumbent carriers, and 4 apply it to competitive wireline
    carriers.[Footnote 68] Further, during our site visits, several state
    commissions told us that rate cases in which a state regulatory
    commission evaluates a carrier's costs and investments are very
    infrequent, if they take place at all. As such, there is limited
    assessment of the cost-effectiveness of carriers and their investments.
    Further, as OMB noted, there is no evidence that the program explicitly
    encourages carriers to achieve efficient and cost-effective delivery of
    service; rather, the program simply makes rural incumbent carriers
    whole, regardless of their investment decisions or business model, or
    the presence of competition in the market by guaranteeing "reasonable"
    rates of return.[Footnote 69] The combination of a funding mechanism
    that does not encourage cost-effectiveness, combined with a lack of
    detailed oversight, may not yield the most cost-effective program
    expenditures.

    * Accuracy of cost and line count data. ETCs and CETCs receive high-
    cost program support based on their costs and line counts. However, as
    mentioned above, FCC, USAC, and NECA data collection efforts generally
    focus on completeness and consistency of carriers' data submissions,
    but not the accuracy of the data. Further, USAC, FCC, and state
    regulatory commissions audit a small fraction of program participants,
    and in the case of FCC's IPIA audits, these audits do not assess the
    accuracy of cost and line count data which are used to form the basis
    for carrier support. Inaccuracies in cost and line count data, which
    are not uncovered through review, could facilitate excessive program
    expenditures.

    * Appropriate use of high-cost program support. The high-cost program
    rules delineate the appropriate uses of the program's support. As we
    discussed, carriers must annually certify that their use of high-cost
    program support complies with the program rules. However, the self-
    certification process varies based on who oversees the carrier;
    further, there is little follow-up to assess whether carriers' actions
    are consistent with the certifications. As such, program administrators
    cannot fully assess whether carriers are appropriately using high-cost
    program support. Thus, program expenditures could prove excessive if
    high-cost program funding is used to support services not covered by
    the program (such as broadband).

    Conclusion:

    In the 1996 Act, the Congress said that consumers in "rural, insular,
    and high-cost areas" should have access to services and rates that are
    "reasonably comparable" to consumers in urban areas. To respond to this
    task, FCC modified and expanded the high-cost program. In the
    intervening 10 years, FCC has distributed over $30 billion to carriers,
    with much of this support coming from fees charged to consumers. Yet,
    FCC has not established performance goals or measures for the program.
    Thus, it is neither clear what outcomes the program is intended to
    produce nor what outcomes the program has achieved. What we and the
    Joint Board found were differences in telecommunications services in
    rural areas across the country. For example, in some rural areas,
    carriers receive generous support and provide advanced services, such
    as fiber-to-the-home, while in other rural areas, carriers receive
    little or no support and provide basic services. In addition to the
    lack of performance goals and measures, the internal control mechanisms
    in place have weaknesses, which hinder FCC's ability to assess the risk
    of noncompliance with program rules and ensure cost-effective use of
    program funds. The internal control mechanisms are inconsistent,
    limited in number, and appear more concerned with data completeness
    than accuracy. Thus, for example, it is not clear that the program
    ensures the most cost-effective delivery of services to rural areas.
    Therefore, program expenditures may be higher than necessary. These
    problems raise concerns about past and current program expenditures.
    But, they also raise concerns about the future of the program. In
    January 2008, FCC issued several notices proposing fundamental, policy-
    oriented reform of the program. For example, FCC proposed reverse
    auctions for the program, but it is not clear how FCC can assess this
    proposal when it does not know what goals the program should achieve or
    how it will measure program outcomes. Additionally, the Joint Board
    proposed separate funds for broadband, mobility, and provider-of-last
    resort services, with a $4 billion funding level that was based on the
    current level of program expenditures. But, it is not clear that the $4
    billion is the correct funding level. Without performance goals,
    measures, and adequate internal controls, it will be difficult for FCC
    to assess these proposals. Finally, failure to address these problems
    may undermine support for the program over time, as program
    expenditures continue to increase.

    Recommendations for Executive Action:

    To strengthen management and oversight of the high-cost program, we
    recommend that the Chairman, FCC take the following two actions:

    1. To better ensure that the high-cost program supports the purpose it
    is intended to fill, FCC should first clearly define the specific long-
    term and short-term goals of the high-cost program and subsequently
    develop quantifiable measures that can be used by the Congress and FCC
    in determining the program's success in meeting its goals.

    2. To ensure a robust internal control environment that supports
    performance-based management, FCC should identify areas of risk in its
    internal control environment and implement mechanisms that will help
    ensure compliance with program rules and produce cost-effective use of
    program funds.

    Agency Comments and Our Evaluation:

    We provided a draft of this report to FCC and USAC for their review and
    comment. FCC noted that it was aware of, and had addressed or planned
    to address, the shortcomings we identified in the report. However, FCC
    noted that it would issue a Notice of Inquiry to seek information on
    ways to further strengthen its management and oversight of the high-
    cost program. FCC and USAC both provided information to further clarify
    the actions that are currently underway and provided technical comments
    that we incorporated where appropriate. The written comments of FCC and
    USAC appear in appendices III and IV, respectively.

    In its comments, FCC reiterated the status of its existing efforts to
    strengthen the management and oversight of the high-cost program, as
    well as to restrain the growth in program expenditures. In particular,
    FCC cited the OIG audits, the new document retention requirements, and
    the Memorandum of Understanding (MOU) between FCC and USAC. We agree
    that these are important efforts, but they do not resolve the
    shortcomings we identified in the report. FCC also noted that we did
    not mention the MOU in the report; while we did not cite the MOU, we
    did incorporate elements of the MOU in the report, including, for
    example, the requirement that USAC collect and report performance data
    on a quarterly basis. In addition, FCC noted that it issued several
    NPRMs seeking comments on proposals to restrain the growth in program
    expenditures, including removal of the identical support rule and
    adoption of reverse auctions, and noted that we did not consider these
    reform proposals in our report. We did provide background information
    on these proposals; however, we did not provide an assessment of these
    proposals since FCC was actively seeking comments on the proposals and
    the outcome of the proposals was speculative; further, our findings and
    recommendations regarding management and oversight are applicable to
    the program in general, regardless of the specific reform proposal
    adopted.

    As agreed with your offices, unless you publicly announce the contents
    of this report earlier, we plan no further distribution until 30 days
    from the date of this letter. At that time, we will send copies of this
    report to the appropriate congressional committees, the Chairman of the
    Federal Communications Commission, and the Chairman of the Universal
    Service Administrative Company. We will also make copies available to
    others upon request. In addition, the report will be available at no
    charge on the GAO Web site at [hyperlink, http://www.gao.gov].

    If you have any questions about this report, please contact me at (202)
    512-2834 or goldsteinm@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last
    page of this report. Contact information and major contributors to this
    report are listed in appendix V.

    Signed by:

    Mark L. Goldstein:

    Director, Physical Infrastructure Issues:

    [End of section]

    Appendix I: Objectives, Scope, and Methodology:

    This report examines the operation of the high-cost program of the
    Universal Service Fund. In particular, the report provides information
    on (1) the effect that the structure of the program has on the levels
    of support and types of services available in high-cost areas; (2) the
    extent that the program has performance goals and measures; and (3) the
    extent that the program has mechanisms in place to prevent and detect
    fraud, waste, and abuse.

    To respond to the overall objectives of this report, we interviewed
    officials from the Federal Communications Commission (FCC) and the
    Universal Service Administrative Company (USAC). In addition, we
    reviewed FCC and USAC documents, as well as relevant legislation and
    federal regulations. We also interviewed industry associations,
    national wireline and wireless companies, the National Exchange Carrier
    Association (NECA), and other individuals with knowledge of the high-
    cost program. We reviewed USAC data on the distribution of high-cost
    funds across states and companies. Finally, we compared FCC, USAC, and
    state policies to GAO and Office of Management and Budget (OMB)
    guidance. Table 7 lists the individuals and organizations with whom we
    spoke.

    For the first and third objectives, we conducted site visits in six
    states: Alabama, Iowa, Montana, Oklahoma, Oregon, and Wisconsin. We
    used a multistep process to select these six states. First, we divided
    states into Census Bureau regions, excluding states where (1) no
    competitive eligible telecommunications carriers (CETC) received
    support in 2006 and (2) the urban population was equal to or above
    average, since the high-cost program provides support for rural areas.
    Second, we selected states within each region based on the number of
    eligible telecommunications carriers (ETC) and CETCs present in the
    state. Within each state, we interviewed the state regulatory
    commission (that is, the state agency responsible for regulating
    telephone service within the state), "rural" and "nonrural" ETCs, and
    CETCs. In some states, we also interviewed cost consultants, state
    industry associations, and wireless carriers. To test our structured
    interview and site selection methodology, we also conducted site visits
    in the following states: Arizona, Maine, Massachusetts, New Hampshire,
    and New Mexico. We interviewed similar state and industry officials in
    these five states.

    For the third objective, we conducted a survey of state regulatory
    commissions. The survey field period was from December 12, 2007, to
    February 8, 2008, and sought information pertaining to the state's
    regulation of telephone service; the state's internal control
    procedures for incumbent, competitive wireline, and competitive
    wireless carriers receiving high-cost support in the state; and the
    state's high-cost program, if any. To help ensure that the survey
    questions were clear and understandable to respondents, and that we
    gathered the information we desired, we conducted pretests with
    relevant officials in Mississippi, North Carolina, Pennsylvania,
    Virginia, and Washington. The survey was available online to officials
    in the 50 states and the District of Columbia on a secure Web site. We
    received complete responses from 50 of the 51 commissions we surveyed,
    for an overall response rate of 98 percent. This report does not
    contain all the results from the survey. The survey and a more complete
    tabulation of the results can be viewed at GAO-08-662SP.

    We conducted this performance audit from July 2007 through June 2008 in
    accordance with generally accepted government auditing standards. Those
    standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives. We believe that
    the evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives.

    Table 7: Individuals and Organizations Interviewed:

    Alabama-Mississippi Telecommunications Association;
    Alabama Public Service Commission;
    Alltel;
    Arizona Corporation Commission;
    AT&T;
    Balhoff, Rowe & Williams, LLC (Robert C. Rowe, Esq.);
    Beaver Creek Cooperative Telephone Company;
    Blackfoot Telephone Cooperative, Inc;
    BTC Broadband;
    Carnegie Telephone Company;
    Cascade Utilities, Inc;
    CenturyTel;
    Chibardun Telephone Cooperative, Inc;
    Chickasaw Telecom, Inc;
    Clear Creek Telephone & TeleVision;
    CLTel;
    Comptel;
    Consumer Advocate Division, Public Service Commission of West Virginia;
    Corr Wireless;
    CTIA;
    Davis Brown Law Firm (Robert F. Holz, Jr.);
    Department of Telecommunications and Cable, The Commonwealth of
    Massachusetts;
    Dobson Telephone Company;
    Dumont Telephone Company;
    Farmers Mutual Cooperative Telephone Company;
    Federal Communications Commission;
    Granite State Telephone;
    Harris, Wiltshire & Grannis LLP (John T. Nakahata, Attorney at Law);
    Hayneville Telephone Company, Inc;
    Heart of Iowa Communications Cooperative;
    Hot Springs Telephone Company;
    Huxley Communications;
    Iowa Telecom;
    Iowa Telecommunications Association;
    Iowa Utilities Board;
    Jackson Thorton (Rob Ballard, CPA);
    Kiesling (Burnie Snoddy, Consultant);
    La Jicarita Rural Telephone Cooperative;
    Maine Public Utilities Commission;
    Martin Group (Darrell Bolen, CPA);
    Massachusetts Office of Consumer Affairs and Business Regulation;
    McLoud Telephone Company;
    Medicine Park Telephone Company;
    MHTC;
    MonCre Telephone Cooperative;
    Montana Public Service Commission;
    Montana Telecommunications Association;
    National Association of Regulatory Utility Commissioners;
    National Exchange Carrier Association;
    National Regulatory Research Institute;
    National Telecommunications Cooperative Association;
    New Hampshire Public Utilities Commission;
    New Mexico Consumer Advocate, Office of the Attorney General;
    Oklahoma Corporation Commission, Public Utility Division;
    Oklahoma Telephone Association;
    Oregon Public Utility Commission;
    Organization for the Promotion and Advancement of Small
    Telecommunications Companies;
    Partner Communications Cooperative;
    Panhandle Telecommunication Systems, Inc;
    Pioneer Telephone Cooperative;
    Public Advocate Office, State of Maine;
    Public Regulation Commission of New Mexico;
    Public Service Commission of Wisconsin;
    Qwest;
    Ron Comingdeer & Assoc;
    Sacred Wind Communications;
    Southern Montana Telephone Company;
    Totah Communications, Inc;
    Trans-Cascade Telephone Company;
    Union Springs Telephone Company;
    United States Telecom Association;
    Unitel Incorporated;
    Universal Service Administrative Company;
    U.S. Cellular;
    Verizon;
    West Wisconsin Telcom Cooperative, Inc;
    Wisconsin State Telecommunications Association;
    Zona Communications;
    3 Rivers Communications.

    Source: GAO.

    [End of table]

    [End of section]

    Appendix II: Telephone Penetration Rate by State (Percentage of
    Households with Telephone Service):

    Table 8:

    State: Alabama;
    November 1983 (%): 87.9;
    July 2007 (%): 92.6;
    Change (%): 4.7.

    State: Alaska;
    November 1983 (%): 83.8;
    July 2007 (%): 96.7;
    Change (%): 12.9.

    State: Arizona;
    November 1983 (%): 88.8;
    July 2007 (%): 93.1;
    Change (%): 4.3.

    State: Arkansas;
    November 1983 (%): 88.2;
    July 2007 (%): 93.0;
    Change (%): 4.9.

    State: California;
    November 1983 (%): 91.7;
    July 2007 (%): 96.7;
    Change (%): 5.0.

    State: Colorado;
    November 1983 (%): 94.4;
    July 2007 (%): 97.4;
    Change (%): 3.0.

    State: Connecticut;
    November 1983 (%): 95.5;
    July 2007 (%): 96.7;
    Change (%): 1.1.

    State: Delaware;
    November 1983 (%): 95.0;
    July 2007 (%): 95.0;
    Change (%): 0.0.

    State: District of Columbia;
    November 1983 (%): 94.7;
    July 2007 (%): 90.5;
    Change (%): -4.3.

    State: Florida;
    November 1983 (%): 85.5;
    July 2007 (%): 93.3;
    Change (%): 7.8.

    State: Georgia;
    November 1983 (%): 88.9;
    July 2007 (%): 92.2;
    Change (%): 3.3.

    State: Hawaii;
    November 1983 (%): 94.6;
    July 2007 (%): 96.9;
    Change (%): 2.3.

    State: Idaho;
    November 1983 (%): 89.5;
    July 2007 (%): 96.8;
    Change (%): 7.3.

    State: Illinois;
    November 1983 (%): 95.0;
    July 2007 (%): 94.1;
    Change (%): -0.9.

    State: Indiana;
    November 1983 (%): 90.3;
    July 2007 (%): 91.0;
    Change (%): 0.7.

    State: Iowa;
    November 1983 (%): 95.4;
    July 2007 (%): 97.7;
    Change (%): 2.3.

    State: Kansas;
    November 1983 (%): 94.9;
    July 2007 (%): 97.0;
    Change (%): 2.1.

    State: Kentucky;
    November 1983 (%): 86.9;
    July 2007 (%): 94.4;
    Change (%): 7.5.

    State: Louisiana;
    November 1983 (%): 88.9;
    July 2007 (%): 93.9;
    Change (%): 5.0.

    State: Maine;
    November 1983 (%): 90.7;
    July 2007 (%): 97.0;
    Change (%): 6.3.

    State: Maryland;
    November 1983 (%): 96.3;
    July 2007 (%): 96.3;
    Change (%): 0.0.

    State: Massachusetts;
    November 1983 (%): 94.3;
    July 2007 (%): 95.9;
    Change (%): 1.6.

    State: Michigan;
    November 1983 (%): 93.8;
    July 2007 (%): 95.6;
    Change (%): 1.9.

    State: Minnesota;
    November 1983 (%): 96.4;
    July 2007 (%): 97.8;
    Change (%): 1.5.

    State: Mississippi;
    November 1983 (%): 82.4;
    July 2007 (%): 89.8;
    Change (%): 7.5.

    State: Missouri;
    November 1983 (%): 92.1;
    July 2007 (%): 96.1;
    Change (%): 4.1.

    State: Montana;
    November 1983 (%): 92.8;
    July 2007 (%): 94.7;
    Change (%): 1.9.

    State: Nebraska;
    November 1983 (%): 94.0;
    July 2007 (%): 92.8;
    Change (%): -1.2.

    State: Nevada;
    November 1983 (%): 89.4;
    July 2007 (%): 95.5;
    Change (%): 6.1.

    State: New Hampshire;
    November 1983 (%): 95.0;
    July 2007 (%): 96.6;
    Change (%): 1.6.

    State: New Jersey;
    November 1983 (%): 94.1;
    July 2007 (%): 94.9;
    Change (%): 0.7.

    State: New Mexico;
    November 1983 (%): 85.3;
    July 2007 (%): 91.1;
    Change (%): 5.7.

    State: New York;
    November 1983 (%): 90.8;
    July 2007 (%): 93.0;
    Change (%): 2.1.

    State: North Carolina;
    November 1983 (%): 89.3;
    July 2007 (%): 94.8;
    Change (%): 5.5.

    State: North Dakota;
    November 1983 (%): 95.1;
    July 2007 (%): 97.6;
    Change (%): 2.5.

    State: Ohio;
    November 1983 (%): 92.2;
    July 2007 (%): 96.6;
    Change (%): 4.4.

    State: Oklahoma;
    November 1983 (%): 91.5;
    July 2007 (%): 95.3;
    Change (%): 3.8.

    State: Oregon;
    November 1983 (%): 91.2;
    July 2007 (%): 97.7;
    Change (%): 6.5.

    State: Pennsylvania;
    November 1983 (%): 95.1;
    July 2007 (%): 97.3;
    Change (%): 2.2.

    State: Rhode Island;
    November 1983 (%): 93.3;
    July 2007 (%): 95.4;
    Change (%): 2.1.

    State: South Carolina;
    November 1983 (%): 81.8;
    July 2007 (%): 91.6;
    Change (%): 9.8.

    State: South Dakota;
    November 1983 (%): 92.7;
    July 2007 (%): 96.4;
    Change (%): 3.7.

    State: Tennessee;
    November 1983 (%): 87.6;
    July 2007 (%): 93.2;
    Change (%): 5.6.

    State: Texas;
    November 1983 (%): 89.0;
    July 2007 (%): 94.1;
    Change (%): 5.1.

    State: Utah;
    November 1983 (%): 90.3;
    July 2007 (%): 96.6;
    Change (%): 6.3.

    State: Vermont;
    November 1983 (%): 92.7;
    July 2007 (%): 98.0;
    Change (%): 5.3.

    State: Virginia;
    November 1983 (%): 93.1;
    July 2007 (%): 95.6;
    Change (%): 2.5.

    State: Washington;
    November 1983 (%): 92.5;
    July 2007 (%): 95.8;
    Change (%): 3.4.

    State: West Virginia;
    November 1983 (%): 88.1;
    July 2007 (%): 94.3;
    Change (%): 6.2.

    State: Wisconsin;
    November 1983 (%): 94.8;
    July 2007 (%): 97.7;
    Change (%): 2.9.

    State: Wyoming;
    November 1983 (%): 89.7;
    July 2007 (%): 95.3;
    Change (%): 5.6.

    State: Total United States;
    November 1983 (%): 91.4;
    July 2007 (%): 95.0;
    Change (%): 3.6.

    Source: FCC, Telephone Subscribership in the United States (Washington,
    D.C., February 2008).

    Note: The Census Bureau collects these data. Through November 2004, the
    Census Bureau asked "Is there a telephone in this house/apartment?"
    Subsequently, the Census Bureau has asked "Does this house, apartment,
    or mobile home have telephone service from which you can both make and
    receive calls? Please include cell phones, regular phones, and any
    other type of telephone."

    [End of table]

    [End of section]

    Appendix III: Comments from the Federal Communications Commission:

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    Federal Communications Commission:
    Washington, D.C. 20554:

    May 16, 2008:

    Mr. Mark Goldstein:
    Director, Physical Infrastructure:
    U.S. Government Accountability Office:
    441 G Street, NW:
    Washington, D.C. 20548:

    Dear Mr. Goldstein:

    Thank you for the opportunity to respond to the draft Government
    Accountability Office (GAO) report concerning program management and
    oversight of the universal service fund (USF or the fund) high-cost
    program.

    During Chairman Martin's tenure, the Commission has been a proponent of
    strong action to strengthen the management, oversight, and policies of
    the USF high-cost fund, enabling it to fulfill its statutory goals
    under section 254 of the Communications Act of 1934, as amended (the
    Act) so that consumers throughout rural and insular areas of the nation
    have access to affordable, quality telecommunications
    services.[Footnote 70] Among other things, these actions have resulted
    in the initiation or completion of over 450 audits of high-cost program
    beneficiaries since August 2006. The Commission also has taken actions
    to rein in the explosive growth in high-cost universal service support
    disbursements caused primarily by disbursements to competitive eligible
    telecommunications carriers (ETCs), which have grown from approximately
    $1.5 million in 2000 to well over $1 billion in 2007. The Commission
    also has acted to establish performance measures for the universal
    service programs and the fund administrator, the Universal Service
    Administrative Company (USAC). In addition, the Commission has devoted
    significant resources to establish a Memorandum of Understanding (MOU)
    with USAC to ensure its performance measures are met and ensure greater
    clarity in USAC's administrative and management functions.

    Because the Commission is dedicated to ensuring the statutory
    principles of section 254 of the Act are met, the Commission welcomes
    recommendations on making additional improvements. In its draft report,
    the GAO first recommends that the Commission clearly define the
    specific long-term and short- term goals of the high-cost program and
    subsequently develop quantifiable measures that can be used by Congress
    and the Commission in determining the program's success in meeting its
    goals.[Footnote 71] The report concludes that "because there is limited
    information available on what the program in its current form is
    intended to accomplish, what it is accomplishing, and how well it is
    doing, so it remains unclear how Commission will be able to make
    informed decisions about which option is best for the future."[Footnote
    72] Second, the GAO recommends that the Commission identify areas of
    risk in its internal control environment and implement mechanisms that
    will help ensure compliance with program rules and produce cost-
    effective use of program funds.[Footnote 73] GAO states that the high-
    cost program's internal control measures contain weaknesses which could
    contribute to excessive program expenditures.[Footnote 74]

    We are pleased to report that the Commission has already implemented
    measures that address both GAO recommendations. As the Commission staff
    indicated to GAO during the course of its examination (beginning in
    June 2007), we were already aware of the issues GAO raised throughout
    the investigation and had either addressed, or had plans in place to
    improve, both the Commission's performance measures and internal
    controls for the USF high-cost program.

    First, the Inspector General (IG) has initiated and completed 459
    audits of USF program beneficiaries and contributors since August of
    2006, and the IG has an additional 650 audits of the USF program
    beneficiaries and contributors currently underway. For the high-cost
    program alone, the IG has initiated and completed 65 audits of program
    beneficiaries since August of 2006, and the IG has an additional 390
    high-cost audits currently underway. As part of these audits, for the
    first time, the high-cost program is subject to statistical sampling
    and attest audits to determine compliance with the Act and the
    Commission rules.[Footnote 75]

    Second, in June 2007, the Commission established an MOU with USAC to
    ensure greater clarity in administrative and management functions. In
    particular, the MOU established reporting requirements of key
    performance measurement data to the Commission, instructed USAC to take
    corrective action on all audit findings including recovery of any funds
    identified as improperly disbursed, and directed USAC to maintain
    effective internal controls over its operations.

    Third, in August of 2007, the Commission adopted rules that address
    many of the problems previously identified with the USF
    program.[Footnote 76] The Commission's new rules establish rigorous
    document retention requirements for program participants and establish
    performance measurements to better manage USAC and the high-cost
    program. These measurements, among other things, require USAC to
    provide specific performance measurements for the high-cost program,
    such as, the number of program beneficiaries, rates of telephone
    subscribership in urban versus rural areas, and the average median
    dollar amount of support.[Footnote 77] The Commission's new rules also
    create additional penalties for bad actors � specifically, the
    Commission can now debar from continued participation in the program,
    any party that defrauds any of the programs, including the high-cost
    program. The Commission is revising the MOU to reflect these new rules,
    and to further bolster its oversight of USAC, the Commission will
    require additional data from USAC so the Commission can better
    determine whether the adopted performance measure requirements are
    being met.

    The GAO's assessments of the high-cost mechanism, unfortunately, do not
    mention key Commission actions, such as the MOU, and contain
    inaccuracies, which detract from the report's utility. Specifically:

    * As discussed above, the GAO draft report does not mention the MOU in
    the sections of the report on internal controls. The Commission
    included provisions concerning internal controls in the MOU to
    strengthen the controls over the USF program in general. As part of the
    MOU, the Commission directs USAC to implement an internal control
    structure consistent with the requirements of Office of Management and
    Budget Circular A-123. In compliance with this instruction, USAC is in
    the process of re-assessing its internal controls framework. The
    results of this effort will enable USAC to develop and implement
    corrective action plans for any identified internal control weaknesses,
    which will help to prevent and reduce improper payments across all of
    the USF programs, including the high-cost program.

    (See comment 1.):

    * At pages 2 and 39, the GAO draft report incorrectly states the USF
    high-cost program was established in response to the 1996 Act. The high-
    cost program predates the 1996 Act, and included the high-cost loop
    support, dial equipment minutes (DEM) weighting, and long term support
    programs. To implement the 1996 Act, these programs were modified and
    additional mechanisms were adopted to make support explicit and funded
    by all providers of interstate telecommunications.[Footnote 78]

    (See comment 2.):

    * At pages 27-28, the GAO's draft report acknowledges that the
    Commission has made preliminary efforts to collect high-cost data to
    develop program goals and adopted performance measures in August of
    2007 as a result of the June 2005 notice of proposed
    rulemaking.[Footnote 79] It should also be noted that the Commission's
    efforts in this regard under Chairman Martin represent the most
    comprehensive efforts to date to seek input from the public, USAC, the
    National Exchange Carrier Association (NECA), and program participants
    to determine appropriate performance measures for the USF programs. In
    addition, this section of the report does not mention the MOU between
    the Commission and USAC, which formalized the reporting of the
    performance measurement data to the Commission on a quarterly basis and
    stated that the Commission anticipated adopting goals for the programs
    as the Commission and USAC gain experience with the data.

    (See comment 3.):

    * At page 32, the GAO draft report contains inaccuracies concerning the
    ETC USF high-cost certification process. In particular, the GAO draft
    report states that "all carriers � incumbents and competitive � under
    the FCC's jurisdiction" are required to submit certifications and the
    associated reporting data."[Footnote 80] However, only carriers who
    seek ETC status under section 241(e)(6) of the Act � not all carriers
    under the FCC's jurisdiction -- are subject to the certification and
    data reporting requirements set forth in the Commission's 2005 ETC
    Designation Order.[Footnote 81]

    (See comment 4.):

    * At pages 31-32, the GAO draft report states the USF high-cost
    certification process lacks standardized requirements because carriers
    throughout the nation may be subject to different levels of oversight
    and documentation requirements concerning certification and data
    reporting. The draft report, however, lacks any recognition of
    Congress' intent in providing state commissions with the primary
    responsibility to perform ETC designations under section 214(e)(2) of
    the Act.[Footnote 82] More importantly, the draft report fails to
    acknowledge that the Commission's action adopting federal permissive
    guidelines for ETC designations, as opposed to mandatorily-imposed
    nationwide requirements, was consistent not only with statutory
    directive, but also with the holding of the United States Court of
    Appeals for the Fifth Circuit that the Act does not preclude states
    from imposing their own eligibility requirements on ETCs.[Footnote 83]

    (See comment 5.):

    * At page 35, note 58, the GAO draft report states that, concerning
    audits of incumbent local exchange carriers (LECs), the "FCC imposes no
    audit requirements on state regulatory commissions." Section 152(b) of
    the Act, however, expressly precludes the Commission from jurisdiction
    over intrastate services, limiting the Commission's ability to direct
    state regulatory commissions to conduct audits concerning costs and
    rates for intrastate services.[Footnote 84]

    (See comment 6.):

    * At page 38, in the paragraph on the Accuracy of Cost and Line-Count
    Data, the GAO draft report states that: "...FCC, USAC, and NECA data
    collection efforts generally focus on completeness and consistency of
    carriers' data submissions, but not the accuracy of the data." In fact,
    NECA does have controls in place to look for deviations of information
    reported by carriers from year to year in support of their claims for
    USF support. For example, as the report states, NECA compares reported
    cost data with information provided in carriers' audited financial
    statements to identify any discrepancies. If significant deviations in
    cost or line count data are discovered through NECA's checks, NECA will
    seek to validate that information and can ask the carrier to revise the
    data if it is found to be inaccurate. Further, NECA cost and line-count
    data study results are provided to USAC and made available on the
    Commission's website for any interested party to review and
    analyze.[Footnote 85] The underlying data used to compile the NECA
    study has also been made available to USAC for its review and analysis.

    (See comment 7.):

    * Further, in the same paragraph on the Accuracy of Cost and Line-Count
    Data, GAO states that: "...in the case of the FCC's IPIA audits, these
    audits do not assess the accuracy of cost and line- count data which
    are used to form the basis for carrier support." Contrary to GAO's
    observations, the IG's audits were in fact designed to render an
    independent auditor's opinion on the accuracy of carriers' cost and
    line counts. Some audits specifically found instances where the carrier
    could provide no supporting data and other instances in which the data
    did not support carriers' reported costs or line counts.

    (See comment 8.):

    The GAO draft report also determines, that, without performance goals,
    measures, and adequate internal controls, it will be difficult for the
    Commission to assess proceedings contemplating reform of the high- cost
    program and GAO expressly refused to consider these Commission efforts
    as part of its analysis.[Footnote 86]

    First, as discussed above, the GAO report neglected to reference or
    adequately describe certain Commission actions strengthening
    performance measures and internal controls. The Commission, however, is
    open to GAO's recommendations on making additional improvements. To
    that end, the Commission intends to issue a Notice of Inquiry (NOI)
    seeking information on ways to further strengthen management and
    oversight of the high-cost program, how to more clearly define the
    goals of the high- cost program, and what additional quantifiable
    performance measures are needed. In addition, the NOI will seek
    information on whether and to what extent the Commission's internal
    controls and compliance oversight can be improved. We commit to issuing
    this NOI promptly, and to act within one year.

    Second, as the draft report acknowledges, GAO refused to "assess or
    discuss the merits of the [Commission's] reform proposals."[Footnote
    87] Given the significant and increasing pressure on the stability of
    the high-cost fund, which grew from approximately $2.6 billion in 2001
    to approximately $4.3 billion in 2007, it is imperative that the
    Commission consider proposals to address its current policies and rules
    concerning support distribution; the utility of the draft report is
    undermined by its failure to consider the need for fundamental reform
    of the program.

    (See comment 9.):

    For example, the draft report fails to properly recognize that the most
    rapidly growing portion of the high- cost support program is now
    devoted to supporting multiple competitors who are not required to file
    cost information at all, and, therefore, are not subject to the types
    of cost oversight discussed in the GAO investigation. These competitive
    ETCs, primarily wireless carriers, do not receive support based on
    their own costs, but rather on the costs of the incumbent provider,
    even if their costs of providing service are lower.[Footnote 88]

    (See comment 10.):

    Indeed, growth in required contributions to the fund is largely
    attributable to these competitive ETCs. High-cost support to
    competitive ETCs has grown from approximately $1.5 million in 2000 to
    well over $1 billion in 2007. The Commission recently took action to
    rein in the explosive growth in high-cost universal service support
    disbursements by adopting an interim, emergency cap on the amount of
    high- cost support that competitive ETCs may receive.[Footnote 89]

    The Commission plans to move forward on adopting comprehensive reform
    measures in an expeditious manner. Specifically, the Commission is
    considering all the principles in section 254(b) of the Act, including
    reasonable comparability, in the Tenth Circuit Remand
    proceeding.[Footnote 90]

    In addition, on November 19, 2007, the Joint Board submitted to the
    Commission recommendations for comprehensive reform of high-cost
    universal service support,[Footnote 91] and on January 29, 2008, the
    Commission released three notices of proposed rulemaking addressing
    proposals for comprehensive reform of the high-cost universal service
    support program.[Footnote 92] In the Identical Support Rule NPRM, the
    Commission tentatively concludes that it should eliminate the
    Commission's current "identical support" rule, which provides
    competitive ETCs with the same per-line high-cost support amounts that
    incumbent LECs receive. In the Reverse Auctions NPRM, the Commission
    tentatively concludes that reverse auctions offer several potential
    advantages over the current high-cost support distribution mechanisms.
    Auctions would allow direct market signals to be used as a supplement
    to, and possible replacement of, cost estimates made from either
    historical cost accounting data or forward-looking cost models, and
    thereby minimize the level of subsidy required to achieve universal
    service goals. An auction could also provide a fair and efficient means
    of eliminating the subsidization of multiple ETCs in a given area. In
    the Joint Board Comprehensive Reform NPRM, the Commission is
    considering the recommendations of the Joint Board to establish three
    separate funds with distinct budgets and purposes: a broadband fund; a
    mobility fund; and a provider of last resort fund, and to adopt an
    overall cap on high-cost funding. Comments on the Reform Notices were
    due by April 17, 2008, and reply comments are due by June 2,
    2008.[Footnote 93]

    Finally, GAO's refusal to consider these reform proposals and its
    recommendation that the Commission focus its reform efforts elsewhere
    ignores the Commission's clear statutory obligation to act.
    Specifically, section 254(a)(2) of the Act requires the Commission to
    act on the Joint Board's recommended decision within one year.

    Although we are concerned about the flaws in the GAO's examination
    noted above, we appreciate GAO's recommendations on making additional
    improvements. We agree that the Commission should continue to
    strengthen the USF high-cost program's performance measures and
    internal controls. At the same time, however, we remain committed to
    meeting the Commission's statutory obligations and to preserve and
    advance universal service, and to ensure the sufficiency of the fund so
    that people throughout rural areas of the nation have access to
    telecommunications services.[Footnote 95] We look forward to working
    with the GAO on this and other matters in the future.

    Signed by:

    Dana R. Shaffer:
    Chief, Wireline Competition Bureau:

    Signed by:

    Anthony J. Dale:
    Managing Director:

    The following are GAO's comments on the Federal Communications
    Commission's letter dated May 16, 2008.

    GAO's Comments:

    1. While we did not specifically cite the Memorandum of Understanding
    (MOU), we did discuss elements of this document. With respect to
    internal controls, the MOU states that USAC "shall implement a
    comprehensive audit program to ensure that USF monies are used for
    their intended purpose, to verify that all USF contributors make the
    appropriate contributions in accordance with the [FCC's] rules, and to
    detect and deter potential waste, fraud, and abuse. [USAC] shall work
    under the oversight of the OIG in hiring contractors and auditing
    contractors ..." While we acknowledge these recent efforts to conduct
    audits of USF (Universal Service Fund) program contributors and
    beneficiaries, as discussed in this report, we found that with respect
    to the high-cost program, these efforts have been limited and yielded
    limited results. For example, USAC has conducted about 17 audits, from
    more than 1,400 participating carriers, and participants did not
    maintain adequate information for the auditors to validate their
    information. The MOU also states that USAC "shall implement effective
    internal control over its operations, including the administration of
    the USF and compliance with applicable laws and regulations. [USAC]
    will implement an internal control structure consistent with the
    standards and guidance contained in OMB Circular A-123, including the
    methodology for assessing, documenting, and reporting on internal
    controls..." During our review, USAC officials made us aware of the
    actions they are taking to develop a comprehensive, internal control
    framework for USAC's internal operations, such as procedures to ensure
    that cash disbursements are consistent with funds due to participating
    carriers. While we encourage these efforts, USAC's internal operations
    were not in the scope of our objectives, and these efforts do not
    address the issues we raised in the report--weak and limited internal
    control mechanisms specifically aimed at the high-cost program
    beneficiaries.

    2. We are aware that efforts to promote universal service in rural
    areas pre-date the 1996 Act, and include background information on
    these efforts on pages 7-8 of the report. However, to avoid any
    confusion, we modified the report text to note that FCC modified and
    expanded the high-cost program after the Telecommunications Act of
    1996.

    3. Again, while we did not specifically cite the MOU, on page 28 of the
    report, we did discuss the performance data that FCC requires USAC to
    collect and report on a quarterly basis. Interestingly, in a previous
    meeting with USAC and in USAC's written comments, USAC noted that it is
    not authorized to collect all the performance data required by FCC. In
    particular, of the seven categories of performance data, USAC said it
    was not authorized to collect some portions of three categories,
    including the number of program beneficiaries per wire center, the
    number of lines per wire center (except for the high-cost model
    component), and the rate of telephone subscribership in urban vs. rural
    areas. Thus, it is unclear how effective this data collection effort
    will be in developing performance goals and measures.

    4. We changed the text to be consistent with the 1996 Act.

    5. We did not assert that FCC had the authority to impose mandatory
    standards on state regulatory commissions, although, since the issue
    has not been adjudicated, it is unclear whether the statute prohibits
    FCC from imposing mandatory standards. Irrespective of FCC's authority
    to impose mandatory standards, the inconsistent requirements imposed by
    the states represent a weakness in the high-cost program's internal
    controls. As USAC noted in its written comments, "if states adopted
    similar requirements there would be more standardized requirements
    across all ETCs thereby enabling USAC to conduct more comprehensive
    audits to ensure ETCs are using High Cost funds for the purposes
    intended."

    6. We changed the text to be consistent with the 1996 Act.

    7. On page 37 of this report, we discuss the steps NECA takes to verify
    the accuracy of the data that carriers submit, including analyzing
    trends and comparing cost data with information in carriers' audited
    financial statements. Although, as we also discuss, NECA is responsible
    only for collecting carrier cost and line count data for the high-cost
    loop support component, representing only one of the five high-cost
    program components. Further, trend analysis does not necessarily ensure
    the accuracy of the underlying data. In its comments on this report,
    USAC, which also performs extensive trending validations, noted that
    "absent a full-scale audit, it is difficult to determine the level of
    accuracy of the information provided by the carriers."

    8. We acknowledge that FCC's Office of Inspector General (OIG) Improper
    Payments and Information Act of 2002 (IPIA) audits included a component
    to determine carrier compliance with high-cost program rules. While
    FCC's comments state these audits were designed to render an auditor's
    opinion on the accuracy of carrier data, it was unclear to us that
    these audits specifically addressed accuracy of carrier cost and line
    counts. In the OIG's Initial Statistical Analysis of Data from the
    2006/2007 Compliance Audits, the reasons for carrier noncompliance
    focused on procedural noncompliance. These reports attributed
    inadequate document retention; inadequate auditee processes or policies
    and procedures; inadequate systems for collecting, reporting, or
    monitoring data; auditee weak internal controls; and auditee data entry
    error. These reports do not discuss the accuracy of carrier's cost or
    line-count data.

    9. We acknowledged the Notice of Proposed Rulemakings that FCC issued
    to address the growth in the high-cost program's expenditures and
    provided background information on these proposals. However, we did not
    provide an assessment of these proposals since FCC was actively seeking
    comments on the proposals, and the outcome of the proposals was
    speculative. Further, our findings and recommendations regarding
    management and oversight of the high-cost program are applicable to the
    program in general, regardless of the specific reform proposal adopted.
    In making our recommendations, we are not implying that FCC should
    discontinue policy-oriented reform of the high-cost program; rather,
    these efforts are complementary.

    10. On page 14 of the report, we provide a discussion of the factors
    contributing to the growth of high-cost program expenditures, and
    figure 1 provides a visual illustration of the growth in both incumbent
    and competitive support. Further, on page 24, we provide detailed
    information on the growth in the number of CETCs and the overall
    financial support provided to CETCs.

    [End of section]

    Appendix IV: Comments from the Universal Service Administrative
    Company:

    USAC:
    Universal Service Administrative Company:
    2000 L Street. N W.:
    Suite 200:
    Washington, DC 20036:
    Voice: 202.776.0200:
    Fax 202,776.0080:

    [hyperlink, http://www.usac.org]:

    Via Electronic Mail:

    May 15, 2008:

    Michael Clements:
    Assistant Director:
    United States Government Accountability Office:
    441 G Street, Room 2T23:
    Washington, D.C. 20548:

    Re: Response to Draft Report to Congressional Committees on the High
    Cost Program:

    Dear Mr. Clements:

    This letter responds to the draft Government Accountability Office
    (GAO) Report to Congressional Committees on the High Cost Program
    administered by the Universal Service Administrative Company (USAC).
    USAC is pleased to submit its response and clarify certain report
    findings as they relate to USAC and its roles and responsibilities
    regarding the High Cost Program. This response is divided into two
    sections according to the two main GAO report findings concerning
    program administration.

    Lack of Performance Measures and Goals:

    GAO's first recommendation is to clearly define the goals of the High
    Cost Program and subsequently develop quantifiable performance based
    measures.[Footnote 96] While the draft report found that there is a
    clearly established overall goal for the High Cost Program, it also
    concluded that current performance measures established by the Federal
    Communications Commission (FCC or Commission) do not align with GAO and
    Office of Management and Budget (OMB) standards used in developing
    successful performance goals and measures.[Footnote 97] The draft
    report states that the current measurements established by the FCC
    focus on program output rather than program outcome and
    efficiency.[Footnote 98] USAC looks forward to working with the
    Commission in developing additional performance measures and goals.
    Reporting other performance measures identified by GAO may require
    collection and analysis of additional data that USAC is presently not
    authorized to collect.

    Internal Control Weaknesses:

    GAO's second recommendation is to implement mechanisms that will help
    ensure compliance with program rules and produce cost effective use of
    program funds.[Footnote 99] While GAO recognizes that internal controls
    currently exist for the High Cost Program, the draft report states that
    these mechanisms are limited and exhibit weaknesses that hinder the
    Commission's ability to assess rules compliance and ensure cost-
    effective use of program funds.[Footnote 100] The draft report
    identified three internal control mechanisms: carrier certifications,
    carrier audits, and carrier data validation. USAC addresses GAO's
    concerns regarding each internal control mechanism below.

    Carrier Certifications:

    Annual certifications are the primary tool used to ensure that carriers
    are using High Cost support consistent with program rules. The annual
    certifications are provided primarily from the state regulatory
    commissions to USAC and the FCC. GAO found that the certification
    process lacks standardization because states have different
    requirements for the type and breadth of information carriers must
    submit in order to be certified. As a result, GAO concluded that
    carriers are subject to different levels of oversight and documentation
    requirements to demonstrate that High Cost support is used
    appropriately.[Footnote 101] USAC's authority to review such
    certifications is limited. USAC must rely on states and territorial
    certifying authorities having done the due diligence necessary to
    ensure that carriers use High Cost support consistent with program
    rules. If a state certifies the carrier, USAC is required to pay
    support to the carrier consistent with program rules. USAC does not
    have authority to collect the data necessary to perform due diligence
    to ensure that carriers are using support consistent with program
    rules.

    In cases where states or territorial authorities do not have
    jurisdiction over carriers, the FCC is responsible for designating
    carriers as eligible telecommunications carriers (ETCs). When the FCC
    designates carriers as ETCs, it requires carriers to provide additional
    information, such as progress reports on the carrier's five-year
    service quality improvement plan, detailed outage information,
    etc.[Footnote 102] In addition, the carrier must provide an annual self-
    certification directly to the FCC and USAC that it is using High Cost
    funds consistent with program rules. More than half of the respondents
    to the GAO survey indicated that their certifying authorities do not
    require wireless carriers to fulfill requirements similar to the
    requirements imposed by the FCC on carriers it designates as
    ETCs.[Footnote 103] GAO correctly notes that if states adopted similar
    requirements there would be more standardized requirements across all
    ETCs thereby enabling USAC to conduct more comprehensive audits to
    ensure ETCs are using High Cost funds for the purposes intended.

    Audits:

    High Cost Program audits are a key tool used to monitor and oversee
    carrier activities. In its draft report, GAO noted that "USAC has
    conducted about 17 audits from over 1,400 carriers participating" in
    the High Cost Program.[Footnote 104] While USAC has always considered
    audits to be an important element of an effective control environment,
    there are several reasons why USAC conducted only 17 High Cost Program
    beneficiary audits prior to 2006. In early 2002, USAC began increasing
    its attention to audit activities by expanding its Internal Audit
    Division (IAD). In 2002 and 2003, most of USAC's limited audit
    resources were dedicated to performing audits of Schools and Libraries
    Program beneficiaries. At the time, the High Cost Program was
    considered a lower risk program because ETCs have more stringent
    eligibility requirements for receipt of High Cost support. As USAC's
    IAD began to expand in late 2002 and 2003, it initiated a limited
    number of High Cost beneficiary audits.

    In mid-2004, USAC was instructed by the FCC Office of Inspector General
    (OIG) to launch a large scale audit program that included conducting up
    to 700 audits over a three year period across all support programs.
    This audit plan included 250 High Cost beneficiary audits. To complete
    the planned 700 audits, USAC engaged in a procurement process to select
    outside audit firms to perform the work. Once the procurement process
    was completed, USAC requested Commission approval of the selected firms
    in April 2005. In October 2005, the FCC directed USAC to recompete the
    procurement. Under the direction of a new FCC Inspector General, the
    audit program was redesigned, which delayed the recompete process until
    July 2006. As such, far fewer High Cost beneficiary audits were
    performed in 2005 and early 2006 than expected. The audit work began in
    late 2006 with 65 High Cost Program beneficiary audits. All High Cost
    FCC OIG audits were completed by mid-2007. Currently, USAC is working
    with the OIG on a substantially larger sample of High Cost Program
    beneficiary audits, and USAC IAD is continuing to perform its own audit
    work with High Cost beneficiaries.

    With respect to the 65 OIG High Cost audits performed in 2006-2007, the
    draft GAO report states that "USAC found that the [H]igh [C]ost Program
    had an estimated 16.6 percent rate of improper payments."[Footnote 105]
    In addition, the draft report states, "USAC maintained this error rate
    was primarily indicative of carrier non-compliance with program rules
    and not a result of payments made to carriers for inaccurate
    amounts."[Footnote 106] The FCC OIG, not USAC, reported the estimated
    erroneous payment rate was 16.6 percent. In addition, the FCC OIG
    reported that there was "general compliance with FCC rules and
    regulations" in the program.[Footnote 107] None of the 65 audits
    indicated fraudulent activity.

    Of the 65 High Cost Program audits conducted, 12 were disclaimed by the
    auditing firm where the firm concluded the carrier lacked sufficient
    documentation for costs associated with continuing property
    records.[Footnote 108] For these disclaimed audits, the OIG considered
    the entire amounts disbursed as improper payments. USAC is working to
    determine the true amount of funds that may be subject to recovery or
    further action. Of the remaining 53 audits performed, 45 received
    unqualified opinions, five received qualified opinions, and three
    received adverse opinions. Among the 53 providers for which the
    auditors did provide opinions, the erroneous payment rate was
    6.0%.[Footnote 109] As stated above, USAC is reviewing the disclaimed
    audits to determine the actual erroneous payment amount for each audit,
    which is anticipated to be only a subset of the entire payment amount
    used by the FCC OIG in its report.

    The draft GAO report also states that only seven of the 50 state
    regulatory commissions that responded to GAO's survey conduct their own
    audits of incumbent carriers while even fewer state regulatory
    commissions conduct audits of competitive carriers.[Footnote 110] The
    results of the GAO survey show that only four of 48 state regulatory
    commissions perform audits of competitive wireline carriers and only
    two of 48 state regulatory commissions perform audits of competitive
    wireless carriers.[Footnote 111] Even in cases where states do perform
    High Cost audits, USAC is not necessarily aware of such activities.
    Because there is no requirement that USAC be notified of state audits,
    USAC is rarely informed of audit results.

    Carrier Data Validation:

    Data validation is the primary tool used to ensure the accuracy of the
    data submitted by carriers that receive High Cost support. The GAO
    draft report finds that current data validation processes performed by
    USAC, the National Exchange Carrier Association (NECA), and the FCC are
    primarily focused on the completeness, not the accuracy, of the data
    provided by carriers.[Footnote 112] USAC performs, to the extent
    possible, extensive trending validations to ensure data accuracy to the
    extent possible. Absent a full-scale audit, it is difficult to
    determine the level of accuracy of the information provided by the
    carriers. In 2005, USAC suggested the Commission authorize USAC to
    receive cost study data and other documentation supporting annual
    filings and quarterly revisions filed by carriers with NECA pursuant to
    47 C.F.R. Part 36.[Footnote 113] USAC does not seek to assume Part 36
    data collection and associated administrative responsibilities, but
    requested that it be authorized to receive copies of the underlying
    data submitted by carriers to NECA that is used in the support
    calculations. USAC's access to this data would enable data reviews and
    verifications that cannot be performed by USAC today.[Footnote 114]

    USAC appreciates the opportunity to submit its response to the draft
    report on the High Cost Program. Please contact me if you have
    questions.

    Sincerely,

    Signed by:

    /s/ Karen Majcher:

    Vice President:
    High Cost and Low Income Division:

    [End of section]

    Appendix V: GAO Contact and Staff Acknowledgments:

    GAO Contact:

    Mark L. Goldstein, (202) 512-2834, or goldsteinm@gao.gov:

    Staff Acknowledgments:

    In addition to the individual named above, Michael Clements, Assistant
    Director; Tida Barakat; Brandon Haller; Amanda Krause; Carla Lewis;
    Michael Meleady; Joshua Ormond; Donell Ries; Stan Stenerson; Mindi
    Weisenbloom; Crystal Wesco; and Elizabeth Wood made key contributions
    to this report.

    [End of section]

    Footnotes:

    [1] GAO, Telecommunications: Federal and State Universal Service
    Programs and Challenges to Funding, GAO-02-187 (Washington, D.C.: Feb.
    4, 2002).

    [2] Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
    (Feb. 8, 1996).

    [3] The 1996 Act also specified universal service support for other
    entities, including schools, libraries, and rural health care
    facilities. As such, FCC established the schools and libraries (E-Rate)
    and rural health care programs. The 1996 Act also codified an existing
    program for low-income consumers.

    [4] S. Rep. No. 104-23 (1995).

    [5] We also are reviewing the schools and libraries (E-Rate) program
    and will issue a separate report on it.

    [6] NECA is a not-for-profit association of local telephone carriers
    established by FCC in 1983 to perform telephone industry tariff filings
    and revenue distributions.

    [7] GAO, Telecommunications: Greater Involvement Needed by FCC in the
    Management and Oversight of the E-Rate Program, GAO-05-151 (Washington,
    D.C.: Feb. 9, 2005).

    [8] In 1974, the Department of Justice brought an antitrust suit
    against AT&T, alleging that the company was engaging in anticompetitive
    behavior. The Department of Justice and AT&T entered into a consent
    decree that required AT&T to divest its local telephone companies.

    [9] See, 47 U.S.C. Section 254(b)(4). Companies generally pass these
    contributions on to customers, sometimes in the form of a line item on
    customers' monthly telephone bills.

    [10] FCC rules require that USAC maintain its books separately from
    NECA and have a Board of Directors separate from the NECA Board, with
    the NECA Board prohibited from participating in USAC. In addition, the
    FCC Chairman selects the members of USAC's Board of Directors, with
    nominations from constituent groups represented by each Board seat, and
    must approve the appointment of USAC's Chief Executive Officer. See, 47
    C.F.R. Sections 54.702(e), 54.703(a), 54.703, and 54.704(b).

    [11] NECA files a tariff with FCC specifying the level of access
    charges (the fees paid by long-distance companies to use local
    telephone networks). Participating local telephone carriers bill long-
    distance companies at the tariff rate and submit the revenues to NECA.
    NECA subsequently distributes these revenues to the participating
    carriers based either on the carrier's cost (known as cost companies)
    or a formula (known as average schedule companies).

    [12] If the state does not have jurisdiction over carrier eligibility,
    the carrier may seek designation from FCC. See, 47 U.S.C. Section
    214(e)(6).

    [13] See, 47 U.S.C. Section 214 and 47 C.F.R. Section 54.201. In 2005,
    FCC adopted additional requirements that carriers must meet to be
    designated as an ETC by the FCC. See, 47 C.F.R. Section 54.202.

    [14] To be a "rural telephone company," the carrier must (1) provide
    service to any area that does not include either (a) any incorporated
    place of 10,000 inhabitants or more, or any part thereof, based on the
    most recently available population statistics of the Bureau of the
    Census, or (b) any territory incorporated or unincorporated, included
    in an urbanized area, as defined by the Bureau of the Census as of
    August 10, 1993; (2) provide telephone service, including exchange
    access, to fewer than 50,000 access lines; (3) provide telephone
    service to any study area with fewer than 100,000 access lines; or (4)
    have less than 15 percent of its access lines in communities of more
    than 50,000 on the date of enactment of the 1996 Act. Any carrier that
    does not meet this definition is considered a nonrural carrier. See, 47
    U.S.C. Section 153(37).

    [15] See, 47 U.S.C. Section 254(e).

    [16] High-cost loop support includes disbursement for two
    subcomponents: safety net additive support and safety valve support.

    [17] A switch is equipment that routes a customer's call to its
    destination. High-cost model support also provides funding for a
    carrier's switching and interoffice costs.

    [18] Rate-of-return regulation is a form of rate regulation wherein the
    carrier is allowed to recover its costs and earn a predetermined return
    (or profit).

    [19] Price-cap regulation is a form of rate regulation wherein a
    carrier may charge rates up to an allowable cap, which is adjusted
    based on factors beyond the carrier's control, such as inflation.

    [20] See, 47 C.F.R. Section 54.307.

    [21] In the Matter of Federal-State Joint Board on Universal Service,
    Recommended Decision, 22 FCC Rcd. 20477 (2007).

    [22] In the Matter of Federal-State Joint Board on Universal Service,
    WC Docket No. 05-337, CC Docket No. 96-45, Notice of Proposed
    Rulemaking, FCC 08-22 (rel. Jan. 29, 2008).

    [23] In the Matter of Federal-State Joint Board on Universal Service,
    WC Docket No. 05-337, CC Docket No. 96-45, Notice of Proposed
    Rulemaking, FCC 08-4 (rel. Jan. 29, 2008) (Identical Support Rule
    NPRM).

    [24] In the Matter of Federal-State Joint Board on Universal Service,
    WC Docket No. 05-337, CC Docket No. 96-45, Notice of Proposed
    Rulemaking, FCC 08-5 (rel. Jan. 29, 2008) (Reverse Auctions NPRM).

    [25] In the Matter of High-Cost Universal Service Support, WC Docket
    No. 05-337, CC Docket No. 96-45, Order, FCC 08-122 (rel. May 1, 2008).

    [26] Carriers in the U.S. territories also receive high-cost support,
    including America Samoa, Guam, Puerto Rico, Northern Mariana Islands,
    and the Virgin Islands. The District of Columbia is the only
    jurisdiction that does not receive high-cost support.

    [27] This national average does not include the District of Columbia,
    which has a population density of 9,471.2 people per square mile.

    [28] Nonrural carriers in these 10 states, as well as other states, can
    receive other high-cost program support, such as interstate access
    support.

    [29] As mentioned earlier, there are more incumbent rural carriers
    (1,355) than nonrural carriers (86). Yet, nonrural carriers serve many
    customers in rural areas. For example, one nonrural carrier--AT&T--
    serves over 7 million rural lines, or nearly one-third of the rural
    lines in the nation. Thus, on a per-rural-customer basis, rural
    carriers generally receive more support than nonrural carriers.

    [30] See, 22 FCC Rcd. 20477, para. 20 (2007).

    [31] Alabama and Massachusetts are the two states where nonrural
    carriers receive more funding than rural carriers.

    [32] In the 1996 Act, the Congress included a broad set of criteria for
    FCC to consider as it identifies the supported services. These criteria
    include the extent to which the services (1) are essential to
    education, public health, or public safety; (2) have, through the
    operation of market choices by customers, been subscribed to by a
    substantial majority of residential customers; (3) are being deployed
    in public communications networks by telecommunications carriers; and
    (4) are consistent with the public interest, convenience, and
    necessity. 47 U.S.C. Section 254(c)(1).

    [33] These services and functionalities include single-party service;
    voice grade access to the telephone network; Touch-Tone service or its
    equivalent; access to emergency services, operator services, long-
    distance service, and directory assistance; and toll limitation
    service. See, 47 C.F.R. Section 54.101. We refer to these services and
    functionalities as basic telephone service.

    [34] Congressional Budget Office, Factors That May Increase Future
    Spending from the Universal Service Fund (Washington, D.C., June 2006),
    page 19, table 4-2.

    [35] In the 1996 Act, the Congress defined universal service as an
    evolving level of telecommunication services and directed FCC to
    periodically review advancements in information technologies and
    services to determine whether additional services should be added to
    the definition of supported services. 47 U.S.C. Section 254(c). In
    2002, the Joint Board considered whether to modify the list of
    supported services and ultimately issued a recommendation to FCC that
    no changes were necessary at that time. See, In the Matter of Federal-
    State Joint Board on Universal Service, Recommended Decision, 17 FCC
    Rcd. 14095 (2002). FCC accepted the recommendation, in effect leaving
    the definition of supported service unchanged since originally
    established in 1997.

    [36] See, 47 U.S.C. Section 254(e).

    [37] When deploying fiber, the carrier can install fiber to a remote
    terminal (essentially a box or small shelter with communications
    equipment) and leave copper to the customer's premises or install fiber
    entirely to the customer's premises (known as fiber-to-the-home).

    [38] Generally, to receive DSL service (a form of high-speed Internet
    access), a customer must be within 18,000 feet of the carrier's
    facility, either a central office or remote terminal.

    [39] In some cases where broadband service is not generally available
    to customers, the carrier can make special arrangements with a customer
    to provide broadband service. However, in these instances, the customer
    could incur substantial charges for adding the service.

    [40] In the Matter Federal-State Joint Board on Universal Service,
    Report and Order, 12 FCC Rcd. 8776 (1997).

    [41] See, 47 C.F.R. Section 54.307(a).

    [42] FCC has tentatively concluded that the identical support rule
    should be eliminated and replaced with support based on CETCs' own
    costs of providing the supported services. See, FCC 08-4.

    [43] In 2004, the Joint Board recommended that high-cost support be
    limited to one connection per household, thereby capping the number of
    supported lines. See, In the Matter of Federal-State Joint Board on
    Universal Service, Recommended Decision, 19 FCC Rcd. 4257 (2004).
    However, the Congress inserted language into FCC's 2005 appropriations
    that restricted FCC from spending appropriated funds to carry out the
    Joint Board's recommendation. See, Consolidated Appropriations Act,
    2005, Pub. L. 108-447, 118 Stat. 2809 (Dec. 8, 2004). The Congress
    continued this restriction. See, Consolidated Appropriations Act, 2008,
    Pub. L. 110-161, 121 Stat. 1844 (Dec. 26, 2007).

    [44] Implementation of Section 6002(b) of the Omnibus Budget
    Reconciliation Act of 1993; Annual Report and Analysis of Competitive
    Market Conditions with Respect to Commercial Mobile Services, WC Docket
    No. 07-71 (Terminated), Twelfth Report, FCC 08-28 (rel. Feb. 4, 2008).

    [45] OMB, Program Assessment - Universal Service Fund High Cost
    [hyperlink,
    http://www.whitehouse.gov/omb/expectmore/summary/10004451.2005.html]
    (accessed Apr. 2, 2008).

    [46] GAO, Telecommunications: Greater Involvement Needed by FCC in the
    Management and Oversight of the E-Rate Program, GAO-05-151 (Washington,
    D.C.: Feb. 9, 2005).

    [47] In the Matter of Federal-State Joint Board on Universal Service,
    Seventh Report and Order and Thirteenth Order on Reconsideration in CC
    Docket No. 96-45, Fourth Report and Order in CC Docket No. 96-262, and
    Further Notice of Proposed Rulemaking, 14 FCC Rcd. 8078 (1999).

    [48] Qwest Corporation v. Federal Communications Commission, 258 F.3d
    1191 (10th Cir. 2001) (Qwest I).

    [49] In the Matter of Federal-State Joint Board on Universal Service,
    Order on Remand, Further Notice of Proposed Rulemaking, and Memorandum
    Opinion and Order, 18 FCC Rcd. 22559 (2003), remanded by Qwest
    Corporation v. Federal Communications Commission, 398 F.3d 1222 (10th
    Cir. 2005) (Qwest II).

    [50] Qwest II, 398 F.3d 1222 (2005).

    [51] FCC issued a Notice of Proposed Rulemaking seeking comment on how
    to define "sufficient" and "reasonably comparable" in light of the
    ruling of the Tenth Circuit. See, In the Matter of Federal-State Joint
    Board on Universal Service, Notice of Proposed Rulemaking, 20 FCC Rcd.
    19731 (2005).

    [52] See, Comprehensive Review of Universal Service Fund Management,
    Administration, and Oversight, Notice of Proposed Rulemaking and
    Further Notice of Proposed Rulemaking, 20 FCC Rcd. 11308 (2005).

    [53] See, In the Matter of Federal-State Joint Board on Universal
    Service, Comprehensive Review of the Universal Service Fund Management,
    Administration, and Oversight, Report and Order, 22 FCC Rcd. 16372
    (2007).

    [54] Certain data USAC is to provide to FCC are presently not collected
    by USAC because FCC rules do not require carriers to provide these
    data; these data include the number of program beneficiaries per wire
    center, the number of lines per wire center (except for the high-cost
    model component), and the rate of telephone subscribership in urban vs.
    rural areas.

    [55] GAO, Agency Performance Plans: Examples of Practices That Can
    Improve Usefulness to Decisionmakers, GAO/GGD/AIMD-99-69 (Washington,
    D.C.: Feb. 26, 1999).

    [56] See, Program Assessment Rating Tool Guidance No. 2008-01.
    According to OMB, it is acceptable to use output measures when outcome
    measures are not available, comprehensive, or of sufficient quality.
    However, OMB noted that in these cases, the agency must provide clear
    justification and rationales for why the measures chosen are
    appropriate.

    [57] In 2004, the Joint Board reported that the state certification
    process provides the most reliable means of determining whether
    carriers are using support in a manner consistent with the 1996 Act.
    See, 19 FCC Rcd. 4257, para. 46 (2004).

    [58] Under the 1996 Act, states have primary oversight of carriers, but
    some states lack jurisdiction to regulate certain types of carriers--
    generally wireless and tribal carriers. In these cases, FCC assumes
    jurisdiction over the carriers. Currently, FCC has oversight of 46
    carriers.

    [59] See, In the Matter of Federal-State Joint Board on Universal
    Service, Report and Order, 20 FCC Rcd. 6371 (2005).

    [60] According to FCC, the setting of voluntary standards is consistent
    with its statutory authority and the holding of the United States Court
    of Appeals for the Fifth Circuit, Texas Off. of Pub. Util. Counsel v.
    FCC, 183 F.3d 393, 418 (5th Cir. 1999).

    [61] Section 152(b) of the 1996 Act precludes FCC from imposing audit
    requirements on state regulatory commissions.

    [62] In the Matter of Federal-State Joint Board on Universal Service,
    Comprehensive Review of the Universal Service Fund Management,
    Administration, and Oversight, Report and Order, 22 FCC Rcd. 16372
    (2007).

    [63] Pub. L. No. 107-300. IPIA requires federal agencies to annually
    (1) review all programs and activities to identify those that may be
    susceptible to significant improper payments, (2) estimate the amount
    of improper payments in those programs and activities, (3) report these
    estimates, and (4) implement a plan to reduce improper payments for
    estimates exceeding $10 million.

    [64] According to FCC's OIG, the high-cost program was determined to be
    at risk. Under IPIA standards, a program is at risk if the erroneous
    payment rate equals or exceeds both 2.5 percent of program payments and
    $10 million annually.

    [65] IPIA defines improper payments as any payment that should not have
    been made or that was made in an incorrect amount (including
    overpayments and underpayments) under statutory, contractual,
    administrative, or other legally applicable requirements. We did not
    assess whether these payments were improper as defined by IPIA.

    [66] In response to these findings, FCC imposed and USAC implemented
    document retention rules for high-cost program participants.

    [67] Fewer state regulatory commissions audit competitive wireline and
    competitive wireless carriers, four and two states, respectively.

    [68] These state regulatory commissions do not necessarily apply rate-
    of-return regulation to all rural incumbent carriers, nonrural
    incumbent carriers, or competitive wireline carriers in their states.

    [69] OMB, Program Assessment - Universal Service Fund High Cost
    [hyperlink,
    http://www.whitehouse.gov/omb/expectmore/summary/10004451.2005.html]
    (accessed Apr. 2, 2008).

    [70] 47 U.S.C. � 254. The Telecommunications Act of 1996 (1996 Act)
    amended the Communications Act of 1934. Pub. L. No. 104-104, 110 Stat.
    56 (1996).

    [71] GAO Draft Report at 40.

    [72] Id. at 31.

    [73] Id. at 40.

    [74] Id. at 31.

    [75] See Office of the Inspector General, Semiannual Report to
    Congress, April 1, 2007 to September 30, 2007 (dated Oct. 31, 2007),
    available at [hyperlink,
    http://www.hraunfoss.fcc.gov/edocspublic/attachmatch/DOC-278589A1.pdf].

    [76] Comprehensive Review of the Universal Service Fund Management,
    Administration, and Oversight, WC Docket Nos. 05-195, 02-60, 03-109, CC
    Docket Nos. 96-45, 02-6, 97-21, Report and Order, 22 FCC Red 16372
    (2007) (Comprehensive Review Order).

    [77] Id. at 16397-98, para. 55.

    [78] 47 U.S.C. � 254.

    [79] Comprehensive Review of Universal Service Fund Management,
    Administration, and Oversight, WC Docket Nos. 05-195, 02-60, 03-109, CC
    Docket Nos. 96-45, 02-6, 97-21, Notice of Proposed Rulemaking and
    Further Notice of Proposed Rulemaking, 20 FCC Rcd 11308 (2005).

    [80] GAO Draft Report at p. 32 (emphasis added); see also n. 56
    (incorrectly stating that the Commission assumes jurisdiction over
    carriers that are not designated by state commissions).

    [81] See Federal-State Joint Board on Universal Service, CC Docket No.
    96-45, Report and Order, 20 FCC Rcd 6371 (2005) (2005 ETC Designation
    Order).

    [82] 2005 ETC Designation Order, 20 FCC Red at 6397-98, para. 61.

    [83] Id; Texas Off of Pub. Util. Counsel v. FCC, 183 F.3d 393, 418 (5`h
    Cir. 1999) (TOPUC v. FCC).

    [84] 47 U.S.C. � 152(b).

    [85] See NECA Overview of Universal Service Fund, available at
    [hyperlink, http://www.fcc.gov/wcb/iatd/neca.html] (last visited May
    14, 2008). (NECA Cost Study Results). The 2007 Submission of the NECA
    Cost Study Results is attached.

    [86] GAO Draft Report at pp. 16, 40.

    [87] GAO Draft Report at p. 16.

    [88] See 47 C.F.R. �54.307(a).

    [89] See High-Cost Universal Service Support; Federal-State Joint Board
    on Universal Service, WC Docket No. 05- 337, CC Docket No. 96-45,
    Order, FCC 08-122 (rel. May 1, 2008).

    [90] See Federal-State Joint Board on Universal Service, High-Cost
    Service Support, CC Docket No. 96-45, WC Docket No. 05-337, Notice of
    Proposed Rulemaking, 20 FCC Red 19731 (2005).

    [91] High-Cost Universal Service Support; Federal-State Joint Board on
    Universal Service, WC Docket No. 05-337, CC Docket No. 96-45,
    Recommended Decision, 22 FCC Red 20477 (Fed.-State Jt. Bd. 2007).

    [92] High-Cost Universal Service Support; Federal-State Joint Board on
    Universal Service, WC Docket No. 05-337, CC Docket No. 96-45, Notice of
    Proposed Rulemaking, 23 FCC Red 1467 (2008) (Identical Support Rule
    NPRM); High-Cost Universal Service Support; Federal-State Joint Board
    on Universal Service, WC Docket No. 05-337, CC Docket No. 96-45, Notice
    of Proposed Rulemaking, 23 FCC Rcd 1495 (2008) (Reverse Auctions NPRM);
    High-Cost Universal Service Support; Federal-State Joint Board on
    Universal Service, WC Docket No. 05-337, CC Docket No. 96-45, Notice of
    Proposed Rulemaking, 23 FCC Rcd 1531 (2008) (Joint Board Comprehensive
    Reform NPRM) (collectively Reform Notices).

    [93] High-Cost Universal Service Support; Federal-State Joint Board on
    Universal Service, CC Docket No. 96-45; WC Docket No. 05-337, Order, DA
    08-674 (rel. Mar. 24, 2008); High-Cost Universal Service Support;
    Federal- State Joint Board on Universal Service, WC Docket No. 05-337,
    CC Docket No. 96-45, Order, DA No. 08-1168 (rel. May 15, 2008)
    (extending comment and reply comment dates).

    [94] 47 U.S.C. � 254(a)(2).

    [95] 47 U.S.C. � 254(b).

    [96] United States Government Accountability Office Report to
    Congressional Committees, FCC Needs to Improve Performance Management
    and Strengthen Oversight of the High Cost Program, GAO-08-633, Draft
    Report June 2008, page 7 (GAO Draft Report)(draft provided to USAC on
    April 16, 2008).

    [97] GAO Draft Report, page 5.

    [98] GAO Draft Report, pages 27-30.

    [99] GAO Draft Report, page 7.

    [100] GAO Draft Report, Highlights.

    [101] GAO Draft Report, page 32.

    [102] GAO Draft Report, pages 32 and 33.

    [103] Government Accountability Office Survey of State Regulatory
    Commissions, GAO-08-622SP, (GAO Survey Results).

    [104] GAO Draft Report, page 35.

    [105] Id.

    [106] GAO Draft Report, page 36.

    [107] Federal Communications Commission Office of Inspector General,
    High Cost Program, Initial Statistical Analysis of Data from the
    2006/2007 Compliance Audits, page 27 (October 3, 2007) (OIG High Cost
    Report).

    [108] No High Cost Program record retention rule were promulgated and
    made effective by the Commission at the time of the FCC OIG audits of
    2006-2007.

    [109] Universal Service Report on the Federal Communications Commission
    Office of Inspector General 2006-07 Universal Support Fund Audit
    Report, December 2007, page 13.

    [110] GAO Draft Report, page 36.

    [111] GAO Survey Results.

    [112] GAO Draft Report, page 37.

    [113] See In the Matter of Comprehensive Review of Universal Service
    Fund Management, Administration, and Oversight, CC Docket 96-45,
    Comments of Universal Service Administrative Company, filed October 18,
    2005, pages 152-53.

    [114] USAC's Letter of Additional Steps to Reduce Improper Payments,
    dated February 28, 2008.

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