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 ï¿½rural, insular, and high-cost areasï¿½ should have 
access to services and rates that are ï¿½reasonably comparableï¿½ 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 programï¿½s 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 FCCï¿½s 
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 GAOï¿½s 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, [email protected]. 

[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 [email protected]. 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 ï¿½ 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 ï¿½ incumbents and competitive ï¿½ 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 ï¿½ 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 [email protected]: 

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. ï¿½ 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. ï¿½ 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. ï¿½ 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. ï¿½54.307(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. ï¿½ 254(a)(2). 

[95] 47 U.S.C. ï¿½ 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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Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs:  

Contact:  

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: [email protected]: 
Automated answering system: (800) 424-5454 or (202) 512-7470:  

Congressional Relations:  

Ralph Dawn, Managing Director, [email protected]: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, [email protected]: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: 

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