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FCC USF Reform Order outlines two paths for rate-of-return carriers

Authorized rate of return to be reduced to 9.75 percent over six years

By Teresa Evert and Bob Deegan  

The FCC has finally released its much-anticipated Order and Further Notice of Proposed Rulemaking on USF Reform for rate-of-return carriers. While FCC Chairman Tom Wheeler was not able to meet his initial end-of-football season commitment, he did manage to beat the clock on the college basketball season and Major League Baseball’s opening day. The document was expected to be quite lengthy and detailed, and certainly lived up to expectations. 

As anticipated, the Order creates two paths for RLEC USF support: a model-based option for companies wishing to receive all their high cost support based on the Commission’s Alternative Connect America Model, and a broadband loop support mechanism for companies that do not choose the model, which will expand existing Interstate Common Line Support to provide support for standalone broadband. Additionally, the Order defines broadband deployment milestones for both support paths, service performance requirements, operating expense and capital expense limitations, budget controls to maintain a $2 billion per year budget, as well as eliminates support where an unsubsidized competitor provides qualifying service. The Order also reduces the authorized rate of return to 9.75 percent over the next several years. Finally, the FCC included a Further Notice of Proposed Rulemaking in its release, seeking comments on a variety of issues, including permissible expenses and proper cost allocations.  

While NECA continues to review the Order in extensive detail, much is still being sorted out to determine its full effect. So, for purposes of this article, we will just cover some of the basics. 

Model-based support 

A voluntary path will exist for RLECs to elect A-CAM model-based support for a term of 10 years in exchange for deploying broadband-capable networks to a set number of locations. By choosing the model, an RLEC is opting for incentive regulation for its common line and consumer broadband-only loop offerings and, as a result, these services will no longer be subject to rate-of-return regulation. Also, these carriers will receive all their high cost support from the model – they no longer will qualify for High Cost Loop Support and ICLS. Some details include:

  • The model will have a $200 per-location funding cap to provide support for locations above a funding benchmark of $52.50. The per-location funding cap can be reduced for budget control purposes.

  • Up to $150 million of additional funding from high cost fund reserves support will be available to model adopters. Up to $50 million more could be added at the discretion of the FCC.
     
  • Initial model election is irrevocable if funding can be supplied with the additional reserves to meet the $200 per-location funding cap. Only if the per-location funding cap is reduced can companies reverse this election.

  • Carriers will have to make a statewide election for all their companies within a state.

  • Census blocks where the carrier is providing 10/1 Mbps or better broadband using either fiber to the premises or cable technologies, based on June 2015 FCC Form 477 data, will be excluded entirely and will not receive support. The same is true for census blocks where an unsubsidized competitor is offering qualifying service. In addition, carriers offering 10/1 Mbps or better to 90 percent or more of their eligible locations in their study area/state are precluded from selecting the model.

  • Carriers accepting the model will be required to maintain existing voice and broadband service and offer at least 10/1 Mbps to all locations fully funded by the model. Additional obligations apply to partially funded locations.

Broadband loop support

The Order makes rule changes to support the provision of service in areas with high loop-related costs, which will be known as CAF broadband loop support. CAF BLS will provide support (replacing traditional ICLS) for voice and voice/data service as well as add support for standalone broadband service, which has not been supported in the past. Also different from existing support processes, the Order implements some operating expense limits, capital expenditure allowances, and applies a budgetary control to be applied to the High Cost Loop Support and CAF BLS mechanisms to ensure the overall $2 billion cap is not exceeded. CAF BLS support recipients will also have buildout obligations based on a percentage of their projected BLS to be received over five years.

Finally, the Order prohibits CAF BLS support in census blocks served by a qualifying unsubsidized competitor. There will, however, be a challenge process to determine which areas are in fact served by a qualifying unsubsidized competitor, in which the competitor will bear the burden of proof to show they are a qualified competitor serving 85 percent of the locations in a census block. There are also several options for disaggregating BLS support where bonafide competition exists.  High Cost Loop Support is not subject to reduction in competitive locations. 

Authorized rate of return

As expected, the FCC took action to re-prescribe the authorized rate of return from the current 11.25 percent to 9.75 percent. The rate will be reduced by .25 percent annually, starting this July, until 9.75 percent is reached in 2021. For the A-CAM, an input value of 9.75 percent for the cost of money will be used immediately.

Further Notice of Proposed Rulemaking seeks input on additional changes

Lastly, the FCC issued an FNPRM with proposals and questions on a number of issues important to NECA and its members, such as permissible expenses, proper cost allocations and affiliate transactions.

On the expense issue, the FCC seeks comments on rule changes to eliminate any inefficiencies and provide guidance to RLECs regarding expectations for appropriate expenditures. These changes would eliminate a number of expenses from inclusion in an RLEC’s revenue requirement and high-cost support calculations. On the affiliate transaction issue, the FCC seeks input on ways in which the cost allocation procedures between regulated and non-regulated activities and the affiliate transaction rules can be improved to reduce the potential for a carrier to shift costs from non-regulated to regulated services or to the regulated affiliate.

Comments on the FNPRM are due May 12, and reply comments June 13. 

What happens next

Most of the new rules become effective on May 25. However, a number of provisions involve information collections and need to be reviewed by the Office of Management and Budget. We do know that the first step-down of the rate of return is to take place July 1, 2016, declining to 11.0 percent for non-model based support and interstate rate calculations.

Additionally, RLECs considering the model path will have 90 days to elect to do so following the release of a Public Notice with the final version of the A-CAM. If CAF reserve funds of $150 million are not sufficient for those choosing the model, the FCC will then revise support offers and buildout obligations for those companies initially electing model support and will give those RLECs 30 days to withdraw their election. Companies rescinding their elections in this second round will revert to non-model based support. 


Teresa Evert is senior regulatory manager in NECA’s Whippany office. She can be reached at tevert@neca.org. Bob Deegan is senior government relations counsel and can be reached at rdeegan@neca.org.


 

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