Putting the Squeeze on Rural America
Cost support for ILECs goes down while network obligations go up
On March 30, 2016, the FCC released a Report and Order, Order and Order on Reconsideration, and Further Notice of Proposed Rulemaking, imposing numerous additional obligations upon rate-of-return regulated incumbent local exchange carriers (ILECs), while leaving many rural ILECs with the same or even less compensation to satisfy the significant broadband build-out expenditures mandated by the new regulations.
National long distance carriers, such as AT&T and Verizon, receive a windfall under this regulatory regime, benefitting from completing their long distance calls over the rural ILECs' broadband infrastructure, but not compensating the rural ILECs anything more for the improvements made possible by the ILECs' broadband build-outs. Long distance carriers and end user consumers used to share in compensating rural ILECs for the costs ILECs incurred to build loops to complete long distance calls, also known as common line access service. Since such compensation for the use of the ILECs' networks was shifted to the universal service fund (USF) and billed by long distance carriers to end user consumers, long distance carriers pay zero for common line access service today. Consequently, it will be the rate-of-return ILECs and their rural consumers who will bear the financial burden of building the broadband networks required by these new FCC regulations.
This FCC decision requires rate-of-return ILECs to make some difficult, irrevocable choices. Calling the new regulations complex is an understatement. As acknowledged by FCC Commissioner Jessica Rosenworcel: "I worry that this complexity can deny carriers dependent on the universal service system the certainty they need to confidently invest in their network infrastructure." The deadline for filing petitions for reconsideration has not yet been announced. Check back here for updates. [NOTE: This is a correction. The post originally indicated, incorrectly, that a date for petitions for reconsideration had been established as of April 13.]
Lower Rate-of-Return
This FCC decision requires rate-of-return ILECs to spend substantial sums on constructing new broadband networks, and by lowering the authorized regulated rate-of-return, reduces the funds available for those expenditures. The FCC phased-down over a period of six years the authorized rate of return from 11.25% to 9.75%. Beginning July 1, 2016, the authorized interstate rate of return will decline to 11% followed by subsequent annual 25 basis point reductions. The FCC rejected a higher rate of return to compensate for the greater risk associated with the operation of a small, privately-owned rural ILEC.
Choice of Current USF or New Model-Based USF
This FCC decision adopts a new model-based approach for distributing USF, which is voluntary. Under the new federal rules, a rate-of-return ILEC will have the choice to either: (1) continue to receive funds from the high cost loop support and the Connect America Fund Broadband Loop Support (CAF BLS), which is the new name for interstate common line support (ICLS), or (2) receive the new "model-based" USF, which imposes more onerous broadband build-out obligations. After the FCC issues a Public Notice identifying the amount of model-based support for each ILEC, an irrevocable election on a statewide basis will have to be made by each ILEC within 90 days.
Regardless of which option an ILEC chooses, it will have new broadband construction obligations entailing additional costs. However, the FCC did not allocate additional funds to recover the increase in construction expenditures for those ILECs that elect to receive CAF BLS and high cost loop support. The FCC only provided $150 million more to pay for all the new broadband construction it is mandating for those ILECs that select model-based support. The funds within the current budget will first be distributed to those that elect model-based USF, and what is left within the current budget will be available for those that receive CAF BLS and high cost loop support.
To help it police whether ILECs are meeting their broadband build-out milestones, the FCC revised its reporting requirements. It replaced the current five-year service quality improvement plan with a requirement to file on a rolling basis geolocation data and speed information for each location receiving broadband service. Rate-of-return ILECs that fail to file their annual location data by March 1 of the following year will have their USF payments reduced.
New Rules for Current USF
As noted above, the FCC has newly dubbed what we used to call the ICLS support mechanism "CAF BLS." But this support mechanism by a new name smells not as sweet. The FCC retained the current budget and did not provide additional CAF BLS funds for new investment in broadband capable loops or to recover the costs of existing investment in loops used to provide broadband service.
The FCC imposed broadband build-out obligations on all rate-of-return ILECs that elect to continue to receive legacy USF, rather than model-based USF, without providing additional funds to recover the additional broadband build-out costs. The FCC will individually tailor the broadband build-out obligations for each rate-of-return ILEC by taking into consideration the extent that broadband service has already been deployed, the CAF-BLS funds received, the amount of depreciated plant, and the density of the ILEC's service area. In order to receive CAF BLS, an ILEC will be required to build-out broadband service to a specific number of locations with a minimum speed of 10 Mbps downloads/1 Mbps uploads. Even ILECs that already exceed the 10 Mbps speed for more than 80% of their service area will have a new obligation to spend on constructing broadband to the rest of their service area. All ILECs will have to file Form 481 reporting on their progress in extending broadband to those parts of their service area that do not have 10 Mbps speed today, and the FCC intends to monitor that progress. Failure to build-out broadband service to the number of locations specified by the FCC will result in a reduction in the funds received by the rate-of-return ILEC. For those ILECs that do not currently offer 10 Mbps broadband to at least 80% of their locations, the FCC order also requires a minimum percentage of the CAF BLS funds to be spent on offering broadband service. ILECs can receive CAF BLS funds even though they are not currently eligible to receive high-cost loop support.
Unlike the current ICLS support mechanism, CAF BLS funds may be used to provide broadband service when consumers drop voice service, also known as stand-alone broadband service. Rate-of-return ILECs will receive CAF BLS funds regardless of whether the consumer chooses traditional voice service, a bundle of voice and broadband, or only broadband. However, CAF BLS funds for stand-alone broadband service will usually only be available to recover broadband-only loop costs in excess of $42 per loop per month. Furthermore, USF provided for consumer broadband-only lines will be reduced by imputing an amount equal to the Access Recovery Charge billed to end users. Each ILEC's special access revenue requirement will also be reduced by its consumer broadband-only revenue requirement. To the extent CAF BLS does not provide sufficient funds to recover an ILEC's broadband-only loop revenue requirement (as reduced by the new rules) the FCC created a new consumer broadband-only loop charge that can be billed to end users or Internet service providers (ISPs).
Many ILECs that choose to continue to receive USF as they do today will receive less funds. This FCC decision adopts a regression analysis to limit the operating expenses and corporate expenses that can be recovered from USF. The FCC also imposed capital budget constraints that limit how much loop plant investment can be recovered from high cost loop support and CAF BLS.
CAF BLS funds will not be provided in census blocks where an unsubsidized competitor offers broadband service to at least 85% of residential locations in a census block with a minimum speed of 10 Mbps downloads/1 Mbps uploads. The FCC adopted a challenge process to determine which areas are served by qualified unsubsidized broadband competitors. Because the challenge process will not be completed before the end of this year, reductions in the amount of CAF BLS funds that a carrier receives will not occur prior to early 2017. The new rules provide three options for disaggregating CAF BLS support for those areas found to be competitive and phasing in the reductions in funds to be received.
If, after satisfying the new build-out obligations, a rate-of-return ILEC does not find it reasonably feasible to extend broadband service to certain locations, the ILEC will be required to identify those locations in response to a future FCC Public Notice, so that those locations can be included in an auction.
Model-Based USF
Rate-of-return ILECs may elect to participate in the model-based option, but are not required to do so. The maximum amount of funds from model-based support will be capped at $200 per location. However, this funding cap may be reduced by the FCC if the participation in model-based USF exceeds the FCC's budget. In addition to funds from model-based USF, a rate-of-return ILEC electing model-based USF will receive transition payments, phased-out over a ten year period, if the ILEC's model-based USF is less than the funds it received in 2015 from ICLS and high cost loop support. Model-based USF will not be provided to ILECs that have deployed 10 Mbps broadband to 90% or more of their eligible locations in a state.
Funded Locations
Those rate-of-return ILECs that choose the model-based option will be required to satisfy specific broadband build-out obligations until December 31, 2026. The FCC rejected proposals that would have limited new broadband build-out costs to the supplemental support received from model-based USF in excess of the funds an ILEC currently receives from ICLS and high cost loop support. Furthermore, model-based USF will not be provided to census blocks where the rate-of-return ILEC or its affiliate is already providing broadband service that meets the FCC's minimum standards using fiber-to-the-premises or cable technology. The new end user consumer broadband-only loop charge billed by ILECs electing model-based USF cannot exceed $42 per line per month.
Model-based USF will not be provided in census blocks where an unsubsidized competitor provides broadband service. The FCC adopted a challenge process to determine which areas are served by qualified unsubsidized broadband competitors. In a Public Notice released on April 7, 2016, the FCC established April 28, 2016 as the deadline to file comments with the FCC contesting the competitive coverage contained in the A-CAM model.
Rate-of-return ILECs electing model USF will be required to provide broadband service to all fully-funded (below the funding cap) locations with a minimum usage allowance of 150 GB per month and a minimum speed of 10 Mbps downloads/1 Mbps uploads. The build-out must be completed to 40% of fully funded locations by the end of 2020, to 50% of fully funded locations by the end of 2021, to 60% of fully funded locations by the end of 2022, to 70% of fully funded locations by the end of 2023, to 80% of fully funded locations by the end of 2024, to 90% of fully funded locations by the end of 2025, and to 100% of fully funded locations by the end of 2026.
In addition, by the end of this ten-year term, ILECs with five or fewer housing units per square mile will be required to offer broadband service to 25% of the fully funded locations in the state with a minimum speed of 25 Mbps downloads/3 Mbps uploads. Those ILECs with more than five housing units per square mile, but ten or fewer housing units per square mile, will be required to offer broadband service to 50% of the fully funded locations in the state with a minimum speed of 25 Mbps downloads/3 Mbps uploads by the end of the ten-year term. ILECs with more than ten housing units per square mile will be required to offer broadband service to 75% of the fully funded locations in the state with a minimum speed of 25 Mbps downloads/3 Mbps uploads.
Rate-of-return ILECs accepting model-based USF must also certify that 95% or more of all peak period measurements of network round-trip latency are at or below 100 milliseconds.
Capped Locations
Furthermore, rate-of-return ILECs electing model USF with 10 or fewer housing units per square mile will be required to provide broadband service to 25% of the capped and not fully-funded (above the funding cap) locations in the state with a minimum speed of 4 Mbps downloads/1 Mbps uploads by the end of the ten-year term. Those ILECs with more than ten housing units per square mile will be required to offer broadband service to 50% of the capped locations in the state with a minimum speed of 4 Mbps downloads/1 Mbps uploads by the end of the ten-year term.
If, after satisfying these build-out obligations, a rate-of-return ILEC is not offering broadband service to a capped location, that ILEC must still offer broadband service with a minimum speed of 4 Mbps downloads/1 Mbps uploads to that capped location after receiving a reasonable request from a customer. ILECs will not be required to comply with such reasonable requests if, by a deadline to be established by a future FCC Public Notice, the ILEC provides notice to the FCC of the census blocks that will not receive broadband service by the end of the ten-year term. Those capped locations can then be included in an auction to determine who will provide support there and for how much.
New Rulemaking Proceeding
The FCC at the same time commenced a proceeding proposing new rules that would eliminate certain expenses from a rate-of-return ILEC's revenue requirement and USF support. Expenses for employee childcare, employee cafeterias, excessive square footage in offices and warehouses, entertainment, food, scholarships, and membership dues are some of the expenses that the FCC proposes to exclude from the regulated revenue requirement and USF support. This new proceeding will also consider new rules to reduce the amount of joint costs incurred in providing non-regulated services that are allocated to regulated services or regulated affiliates. The FCC proposes a new rule that would remove the "deemed lawful" status of an ILEC's tariff and subject the ILEC to retroactive refunds if the ILEC includes costs in its regulated revenue requirement that are not permitted by these new rules. Furthermore, the FCC will consider a new rule that would expel an ILEC from the NECA pool should the ILEC include expenses in its regulated revenue requirement that are prohibited by the FCC's rules.
The FCC also seeks comments in this new proceeding concerning other options for disaggregating USF in areas served by unsubsidized broadband competitors. The FCC inquires whether an ILEC should be permitted to bill end users a subscriber line charge that exceeds the current cap in order to recover loop costs excluded from USF due to the existence of an unsubsidized competitor. The FCC seeks comments on whether it should adopt rule changes to better evaluate whether NECA is functioning in an efficient and neutral manner. Additional USF for tribal lands that lack broadband service will also be considered in this new proceeding. This new rulemaking proceeding will also consider proposals on how to streamline the certification and reporting requirements for eligible telecommunications carriers, such as removing the requirement in Form 481 to report outages, unfilled service requests, and pricing for voice and broadband services.
The deadline for filing comments in this new rulemaking proceeding will be May 12, 2016, with replies due June 13.
If you would like our assistance in filing a petition for reconsideration of the new FCC rules that have been adopted, or help with filing comments concerning the rules being proposed, please contact James Troup at (703) 812-0511.