oversight

Federal Communications Commission: Regulatory Fee Process Needs to Be Updated

Published by the Government Accountability Office on 2012-08-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

              United States Government Accountability Office

GAO           Report to Congressional Requesters




August 2012
              FEDERAL
              COMMUNICATIONS
              COMMISSION

              Regulatory Fee
              Process Needs to Be
              Updated




GAO-12-686
                                              August 2012

                                              FEDERAL COMMUNICATIONS COMMISSION
                                              Regulatory Fee Process Needs to Be Updated

Highlights of GAO-12-686, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
FCC must by law assess annual                 The Federal Communications Commission (FCC) assesses regulatory fees
regulatory fees on telecommunications         among industry sectors and fee categories based on obsolete data, with limited
entities to recover its entire                transparency. The Communications Act requires FCC to base its regulatory fees
appropriation—about $336 million in           on the number of full-time equivalents (FTE) that perform regulatory tasks in
fiscal year 2011. The entities from           certain bureaus, among other things. FCC based its fiscal year 2011 regulatory
which FCC collects fees fall into one of      fee assessments on its fiscal year 1998 division of FTEs among fee categories.
five main industry sectors (broadcast,        It has not updated the FTE analysis on which it bases its regulatory fees, in part
cable, wireline, wireless, and                to avoid fluctuations in fees from year to year. FCC officials stated that the
international) and are assigned to one
                                              agency has complied with its statutory authority by dividing fees among fee
of 86 fee categories, such as paging
                                              categories based on FTE data—although the data is from fiscal year 1998—
services. Recently, FCC stated that it
was planning to consider reforms to its
                                              since the statute does not prescribe a specific time for FCC to update its FTE
regulatory fee process. GAO was               analysis. As a result, after 13 years in a rapidly changing industry, FCC has not
asked to examine (1) FCC’s process            validated the extent to which its fees correlate to its workload. Major changes in
for assessing regulatory fees among           the telecommunications industry include the increasing use of wireless and
industry sectors, (2) FCC’s regulatory        broadband services and a convergence of telecommunications industries.
fee collections over the past 10 years,       Moreover, FCC’s practice is inconsistent with federal guidance on user fees. As a
and (3) alternative approaches to             result of FCC’s use of obsolete data in assessing regulatory fees, companies in
assessing regulatory fees. GAO                some fee categories may be subsidizing companies in others. FCC officials said
reviewed FCC data and documents,              it has become more challenging to align current FTEs to the 86 fee categories
interviewed officials from FCC and the        given the increasingly cross-cutting nature of FCC’s work, raising the potential
telecommunications industry, and, to          that FCC’s fee categories may also be out of date. FCC’s regulatory fee process
identify alternative approaches to            also lacks transparency because of the limited nature of the information FCC has
assessing regulatory fees, met with           published on it. This has made it difficult for industry and other stakeholders to
five fee-funded U.S. and Canadian             understand and provide input on fee assessments. On July 17, 2012, FCC
regulatory agencies.                          released a regulatory fee reform Notice of Proposed Rulemaking (NPRM)
                                              proposing changes to FCC’s regulatory fee program related to many issues
What GAO Recommends                           raised in this report.
Congress should consider whether              On average over the past 10 years, FCC collected 2 percent more in regulatory
FCC’s excess fees should be                   fees than it was required to collect. Prior to fiscal year 2008, FCC’s annual
appropriated for FCC’s use or, if not,        appropriations stated that any excess regulatory fees remained available until
what their disposition should be. FCC         expended; since 2008, FCC’s annual appropriations have prohibited the use of
should perform an updated FTE                 any excess fees from the current year or previous years without an appropriation
analysis and require at least biennial        by Congress. As a result, $66 million in excess fees currently resides in an
updates going forward; determine              account at the Department of Treasury that cannot be used without
whether and how to revise the current
                                              congressional action. The account has increased by an average of $6.7 million
fee schedule, including the number of
                                              per year for fiscal years 2006 through 2011. Congress has not provided for the
fee categories; increase the
transparency of its regulatory fee            disposition of these accumulating excess funds.
process; and consider the approaches          Approaches of other fee-funded regulatory agencies could be instructive as FCC
of other fee-funded regulatory                considers reforms. For example, the Nuclear Regulatory Commission, Federal
agencies. FCC agreed with GAO’s               Energy Regulatory Commission, and Canadian Radio-television and
recommendations.                              Telecommunications Commission assess fees based on an annually or biennially
                                              updated analysis of costs by industry sector. Regarding excess fees, officials at
                                              five other fee-funded regulatory agencies stated that their agencies either apply
                                              excess fees as an adjustment to the subsequent year’s fees or refund them.
View GAO-12-686. For more information,
contact Mark L. Goldstein at (202) 512-2834
or goldsteinm@gao.gov

                                                                                      United States Government Accountability Office
Contents


Letter                                                                                       1
               Background                                                                    4
               FCC’s Assessment of Regulatory Fees Is Based on Obsolete Data
                  and Lacks Transparency                                                     7
               FCC Has Collected $66 Million in Excess Fees That Is Unavailable
                  without Further Congressional Action                                     25
               Alternative Approaches Could Be Instructive as FCC Considers
                  Reforms to Its Regulatory Fee Process                                    30
               Conclusions                                                                 34
               Matter for Congressional Consideration                                      36
               Recommendations for Executive Action                                        36
               Agency Comments                                                             37

Appendix I     Objectives, Scope and Methodology                                           39



Appendix II    Comments from the Federal Communications Commission                         43



Appendix III   GAO Contact and Staff Acknowledgments                                       46



Tables
               Table 1: Examples of FCC Fee Categories within Each Industry
                        Sector                                                               6
               Table 2: Telecommunications Industry Changes, Fiscal Years 1998
                        to 2011, as Measured by Basis Used to Set FCC Regulatory
                        Fees                                                               13
               Table 3: FCC’s Regulatory Fee Collections, Fiscal Years 2002 to
                        2011                                                               26


Figures
               Figure 1: FCC’s Regulatory Fee Assessment Process                             3
               Figure 2: FCC’s Division of Regulatory Fees among Industry
                        Sectors, Fiscal Years 1998 and 2011                                  9
               Figure 3: FCC’s Division of Regulatory Fees versus Costs by Core
                        Bureau, Fiscal Year 2008                                           15



               Page i             GAO-12-686 Federal Communications Commission: Regulatory Fees
Abbreviations
CNCS         Canadian Nuclear Safety Commission
CRTC         Canadian Radio-television and Telecommunications
             Commission
FCA          Farm Credit Administration
FCC          Federal Communications Commission
FERC         Federal Energy Regulatory Commission
FNPRM        Further Notice of Proposed Rulemaking
FTE          full-time equivalent
ITTA         Independent Telephone and Telecommunications Alliance
NCTA         National Cable and Telecommunications Association
NPRM         Notice of Proposed Rulemaking
NRC          Nuclear Regulatory Commission
VoIP         voice over Internet protocol
Y2K          year 2000

This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.




Page ii                 GAO-12-686 Federal Communications Commission: Regulatory Fees
United States Government Accountability Office
Washington, DC 20548




                                   August 10, 2012

                                   The Honorable Henry A. Waxman
                                   Ranking Member
                                   Committee on Energy and Commerce
                                   House of Representatives

                                   The Honorable Anna G. Eshoo
                                   Ranking Member
                                   Subcommittee on Communications and Technology
                                   Committee on Energy and Commerce
                                   House of Representatives

                                   The Federal Communications Commission (FCC), which regulates
                                   interstate and international communications by radio, television, wire,
                                   satellite, and cable in the United States, must by law assess and collect
                                   annual regulatory fees from the entities it regulates. These fees are
                                   designed to recover FCC’s operating costs, covering its enforcement,
                                   policy and rulemaking, international, and user information activities. 1 In
                                   recent appropriation acts, Congress has directed FCC to recover its entire
                                   appropriation—about $336 million for fiscal year 2011—through the
                                   collection of these regulatory fees. 2 The entities from which FCC collects
                                   fees fall into one of five main industry sectors (broadcast, cable, wireline,
                                   wireless, and international) and are assigned to 1 of 86 fee categories.
                                   FCC has referred to the process as a “zero-sum proposition” because,
                                   since FCC is directed to collect a specified amount by Congress, if FCC
                                   reduces the fees of one industry sector or fee category, others must pay




                                   1
                                    Act of June 19, 1934, ch. 652, § 9, 48 Stat. 1064, as amended (codified at 47 U.S.C.
                                   § 159). Throughout this report, the 1934 Act as amended is referred to as the
                                   Communications Act; specific provisions are cited to the United States Code.
                                   2
                                    See the Full-Year Continuing Appropriations Act, 2011, Pub. L. No. 112-10, Div. B,
                                   § 1101(a)(6), 125 Stat. 38, 103 (2011), for the appropriations act language specifying that
                                   the applicable level, authority and conditions of funding for fiscal year 2011 continued to
                                   be as provided by the Consolidated Appropriations Act, 2010, Pub. L. No. 111-117, 123
                                   Stat. 3034, 3184-3185 (2009) for agencies previously funded by that act. The level set by
                                   Congress in the Consolidated Appropriations Act, 2010 for FCC was $335,794,000 of
                                   offsetting collections to be assessed and collected by FCC pursuant to the
                                   Communications Act.




                                   Page 1                  GAO-12-686 Federal Communications Commission: Regulatory Fees
more. 3 Recently, concerns have been raised that FCC’s regulatory fee
process does not align with today’s communications industry and may
provide a competitive advantage to some industries while disadvantaging
others. In fiscal years 2008, 2011, and 2012, FCC stated that it was
planning to consider reforms to its regulatory fee process, in part because
the communications industry had changed dramatically since 1994 when
FCC’s regulatory fee process was first authorized, while FCC’s division of
regulatory fees among industry sectors and fee categories had changed
very little.

To offset FCC’s annual appropriation through regulatory fees, FCC
determines how to divide the amount to be collected among the five
industry sectors and fee categories within each industry sector. 4 FCC also
determines a rate to charge entities within each fee category. 5 FCC sets
the rates of different fee categories on various bases. For example, FCC
sets the rate for wireline telephone companies on a per-revenue-dollar
basis—$.00375 per revenue dollar in fiscal year 2011, for total expected
collections from the industry of about $148 million. 6 On the other hand,
FCC sets the rate for wireless telephone companies on a per subscriber
basis 7—$0.17 per subscriber in fiscal year 2011, for total expected
collections from the industry of about $51 million. Figure 1 illustrates the
process FCC uses to assess and collect regulatory fees each year.




3
 In the Matter of Assessment and Collection of Regulatory Fees for fiscal year 2004, 19
FCC Rcd. 11662, 11666 (2004).
4
 FCC refers to its process of dividing the amount to be collected among fee categories as
all allocation process.
5
 Each year, FCC designates either a rate, based on revenues, subscribers, or another
basis, or a flat fee for each of the 86 fee categories.
6
 What we refer to in this report as the fee category for wireline telephone companies, FCC
refers to as the fee category for interstate telecommunications service providers.
According to FCC, providers subject to this fee category typically identify themselves
using one or more of the following descriptions: competitive access provider, competitive
local exchange carrier (CLEC); incumbent local exchange provider (ILEC); interconnected
voice over internet protocol (VoIP) provider; or interexchange carrier, among others. Only
certain revenues of these companies are used in computing the regulatory fees they pay.
7
 FCC’s fee category for wireless telephone (cell phone) providers is called the
Commercial Mobile Radio Service (CMRS) fee category. In this report, we refer to this fee
category as the wireless telephone fee category.




Page 2                  GAO-12-686 Federal Communications Commission: Regulatory Fees
Figure 1: FCC’s Regulatory Fee Assessment Process




                                      Note: In some cases, FCC charges each company within a fee category a flat fee. For example,
                                      within the media industry sector, FCC has divided broadcast television stations into 10 fee categories
                                      (5 for VHF stations and 5 for UHF stations) based on market share. Each television station within
                                      each fee category pays the same flat fee.


                                      In response to your request that we review FCC’s regulatory fee process,
                                      we reviewed (1) FCC’s process for assessing regulatory fees among
                                      industry sectors and the results of this process, (2) FCC’s regulatory fee
                                      collections over the past 10 years compared to the amount FCC was
                                      directed to collect by Congress, and (3) alternative approaches to
                                      assessing regulatory fees that could be instructive as FCC considers
                                      reforming its process. To examine FCC’s regulatory fee process and
                                      annual regulatory fee collections, we reviewed, among other things,
                                      relevant statutes and budgetary documents, FCC documents, and FCC
                                      fee-collection data. We spoke with internal and external stakeholders,
                                      including FCC officials, media and telecommunications trade
                                      associations, and companies from each of the five main industry sectors
                                      that paid FCC regulatory fees in fiscal year 2010. To identify alternatives
                                      to FCC’s current regulatory fee process, we selected, met with, and
                                      reviewed documents from five U.S. or Canadian agencies based on the
                                      criteria that they, like FCC, be independent regulatory commissions that
                                      recover the majority or all of their costs through annual fees assessed on
                                      regulated entities. The agencies included (1) Canadian Nuclear Safety
                                      Commission (CNSC), (2) Canadian Radio-television and
                                      Telecommunications Commission (CRTC), (3) Farm Credit Administration
                                      (FCA), (4) Federal Energy Regulatory Commission (FERC), and (5)
                                      Nuclear Regulatory Commission (NRC).



                                      Page 3                     GAO-12-686 Federal Communications Commission: Regulatory Fees
             We conducted this performance audit from May 2011 to August 2012 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. More detailed information on
             our methodology can be found in appendix I.


             Section 9 of the Communications Act authorizes FCC to collect regulatory
Background   fees annually. 8 These regulatory fees do not include application fees or
             revenue from spectrum auctions. The statute directs FCC to do the
             following:

             •   Assess and collect regulatory fees to recover the costs of FCC’s
                 regulatory activities, defined by section 9 as consisting of its
                 enforcement, policy and rulemaking, user information, and international
                 activities—in the amount required in FCC’s appropriation acts.

             •   Derive these fees by determining the full-time equivalent (FTE) 9
                 number of employees performing these regulatory activities in three
                 named bureaus and other FCC offices—adjusted to take into account
                 various factors that are reasonably related to the benefits to the fee
                 payors, including factors determined by FCC to be in the public
                 interest. (According to FCC officials, the three bureaus named in
                 section 9—the Private Radio, Mass Media, and Common Carrier
                 Bureaus—have since been reorganized and renamed as the Wireless
                 Telecommunications Bureau, the Media Bureau, the Wireline
                 Competition Bureau, and the International Bureau.)

             •   Make mandatory adjustments. FCC maintains and is required
                 annually to revise a schedule of regulatory fees to reflect


             8
              47 U.S.C. § 159. FCC also collects application fees from companies for activities such
             as license applications, renewals or requests for modification. These fees are deposited
             in the General Fund of the Treasury and cannot be used by FCC. 47 U.S.C. § 158(e).
             9
              An FTE reflects the total number of regular straight-time hours (i.e., not including
             overtime or holiday hours) worked by employees divided by the number of compensable
             hours applicable to each fiscal year. Annual leave, sick leave, and compensatory time off
             and other approved leave categories are considered to be “hours worked” for purposes of
             defining FTE employment.




             Page 4                  GAO-12-686 Federal Communications Commission: Regulatory Fees
    proportionate increases or decreases in the amount of the
    appropriation to be recovered as well as changes in the number of
    licensees or other units required to pay the fees assessed.

•   Make permitted amendments as necessary. FCC is required to
    amend the schedule if FCC determines that the schedule must be
    amended to comply with the statute’s requirement that the fees be
    derived by determining FTEs (as outlined above), adjusted to take into
    account factors reasonably related to the benefits the fee payor
    receives from FCC regulation, among other things.

In recent years, Congress has included language in FCC’s annual
appropriation act setting specific percentages of the appropriation FCC is
to offset with collected regulatory fees. This percentage has risen from 38
percent in 1994, when section 9 first went into effect, to over 99 percent
starting in 2004, to 100 percent starting in 2009. 10 In fiscal year 2011,
FCC’s appropriation, and hence the total in regulatory fees it was to use
as offsets, was about $336 million. According to FCC officials, this
appropriation funded about 1,556 FTEs in FCC’s 11 offices and 7
bureaus. The 7 bureaus include the (1) Consumer and Governmental
Affairs, (2) Enforcement, (3) International, (4) Media, (5) Public Safety
and Homeland Security, (6) Wireless Telecommunications, and (7)
Wireline Competition Bureaus.

The five industry sectors in which FCC has typically grouped regulatory
fee payors include: (1) wireline services, (2) wireless services, (3) cable
services, (4) broadcast services, and (5) international services. At times,
FCC has combined cable and broadcast into an industry sector it calls
media—aligning the four industry sectors with four FCC bureaus—
wireline with the Wireline Competition Bureau, wireless with the Wireless
Telecommunications Bureau, media with the Media Bureau, and


10
  Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies
Appropriations Act, 1994, Pub. L. No. 103–121, 107 Stat 1153, 1166-1167 (1993);
Omnibus Appropriations Act, 2009, Pub. L. No. 111-8, 123 Stat. 524, 657 (2009). As the
appropriation acts make clear, the collected fees are treated as offsetting receipts. Unlike
offsetting collections, which are available for obligation by the agency without further
legislative action, offsetting receipts cannot be used without being appropriated. GAO, A
Glossary of Terms Used in the Federal Budget Process. GAO-05-734SP (Washington,
D.C.: Sept. 2005). Congress has indicated in recent FCC appropriation acts that offsetting
receipts collected in a given fiscal year are not available to FCC beyond the amount
initially appropriated. Fees collected in excess of the amount appropriated may not be
obligated without additional congressional action.




Page 5                  GAO-12-686 Federal Communications Commission: Regulatory Fees
                                          international with the International Bureau. As shown in Table 1, within
                                          most of these industry sectors are a number of fee categories.

Table 1: Examples of FCC Fee Categories within Each Industry Sector

                                   Number of fee
                                      categories,
Industry sector                  fiscal year 2011       Examples of fee categories within industry sector
Wireline                                         1      Wireline telephone
Wireless                                        14      Wireless telephone, paging, broadband radio service; and a number of fee
                                                        categories considered small wireless, such as aviation aircraft, aviation
                                                        ground, marine coast, and amateur vanity call signals
Cable/Media                                      2      Cable television systems, Cable access relay service
Broadcast/Media                                 60      UHF and VHF Television stations (divided into different markets), am and fm
                                                        radio stations (divided into different classes and by population served)
International                                    9      Submarine cable (divided into 5 fee categories based on capacity); earth
                                                        station satellites; international bearer circuits (terrestrial and satellite services);
                                                        geostationary space stations, including direct broadcast satellite television
                                                        operators; nongeostationary space stations
Total for all industry sectors                  86
                                          Source: GAO analysis of FCC information.



                                          Each year, FCC sets a rate for each fee category that is used to calculate
                                          how much each company within that category owes in regulatory fees.
                                          FCC assesses this rate on various bases. For example, the rate for
                                          wireline telephone companies is set per revenue dollar (for those
                                          revenues subject to fees); 11 the rate for wireless telephone companies
                                          and cable television operators is based on the number of subscribers; the
                                          rate for geostationary orbit space stations, including operators of direct-
                                          broadcast satellite television, is based on the number of satellites; and
                                          broadcast television and radio licensees pay a flat fee that is set based on
                                          market reach characteristics, such as the size of the market area or
                                          population served. 12 Entities that provide services in more than one fee
                                          category—such as a company that offers wireline and wireless services—


                                          11
                                            The wireline telephone company regulatory fee rate is based on billed interstate and
                                          international end-use revenues for local and most toll services. Other types of revenue
                                          are excluded from the regulatory fee calculation.
                                          12
                                            Specifically, the fee categories for commercial television stations are based on whether
                                          the station is broadcasting on VHF or UHF frequencies and the size of the Nielsen
                                          Designated Market Area. The fee categories for commercial radio stations are based on
                                          the class of station and population served.




                                          Page 6                            GAO-12-686 Federal Communications Commission: Regulatory Fees
                       must pay regulatory fees for each fee category commensurate with the
                       service provided.

                       Each year, FCC issues a Notice of Proposed Rulemaking (NPRM) in
                       which it proposes how it will assess fees by industry sector and fee
                       category for that fiscal year. FCC receives comments on the NPRM and
                       may make adjustments before issuing a Report and Order establishing
                       assessment rates for each year’s regulatory fees. FCC also establishes a
                       due date for payment. Entities that are late in paying their assessed fees
                       are assessed an additional one-time 25 percent statutory penalty, 13 and
                       FCC will take no action on any applications or other requests for benefits
                       from such an entity until its past due assessment is paid. According to
                       FCC officials, while the timing of this process varies somewhat from year
                       to year, the assessment is collected in time for FCC to process payment
                       and forward it to the Department of Treasury by the end of the fiscal year
                       on September 30. For example, in fiscal year 2011, the NPRM was
                       issued on May 3, 2011, and comments were accepted until June 9, 2011.
                       The Report and Order was released on July 22, 2011, and the assessed
                       fees were due on September 16, 2011.



FCC’s Assessment of
Regulatory Fees Is
Based on Obsolete
Data and Lacks
Transparency

FCC’s Regulatory Fee   From fiscal year 1998 through its most recent assessment for fiscal year
Assessments            2011, FCC has based its division of regulatory fees among industry
                       sectors and fee categories on its fiscal year 1998 division of FTEs among
                       fee categories. FCC determined this fiscal year 1998 division of FTEs
                       among fee categories through a cost-accounting system that FCC
                       abandoned in fiscal year 1999 because of problems described in greater




                       13
                        47 U.S.C. § 159(c)(1).




                       Page 7                    GAO-12-686 Federal Communications Commission: Regulatory Fees
detail below. 14 In subsequent years, FCC continued to use the same
basic division of fees among fee categories established in fiscal year
1998, with some adjustments to the rates of certain fee categories, based
on (for example) concerns about overburdening particular industries. 15
These adjustments were not based on any FTE analysis and have had
relatively minor effects on the division of regulatory fees by industry
sector that FCC established in fiscal year 1998, as shown in figure 2.




14
  In a fiscal year 2008 Further Notice of Proposed Rulemaking, FCC stated that FCC’s
division of fees among fee categories was based on FCC’s 1994 calculation of FTEs
devoted to each regulatory fee category. See In the Matter of Assessment and Collection
of Regulatory Fees for Fiscal Year 2008, 24 FCC Rcd. 6389, 6401 (2008). According to
FCC officials, the 2008 FNPRM should have referred to FCC’s fiscal year 1998 calculation
of FTEs. FCC staff confirmed that the FTE analysis was last conducted in 1998. Since
1994, FCC has used its authority under section 9 to modify the service categories and
amounts set out in the Schedule of Regulatory Fees in order to reflect changes in the
number of payment units, additions and changes in the services subject to the fee
requirement, and the benefits derived from FCC’s activities, and to simplify the structure of
the schedule. See Appendix F, “Detailed Guidance on Who Must Pay Regulatory Fees,”
Assessment and Collection of Regulatory Fees for Fiscal Year 2000, 15 FCC Rcd. 14478,
14539 (2000). FCC has continued to use FTE data compiled in fiscal year 1998 to
determine the proportion of the total regulatory fees assigned to each fee category.
15
  Based on FCC-provided information, we determined that the cumulative effect of all of
the adjustments made by FCC was that for fiscal year 2011, FCC expected the wireline
telephone industry to pay about $8.6 million less than it would have paid had FCC based
fees only on the division established by its fiscal year 1998 FTE analysis. In turn, FCC
expected the other industry sectors to pay more ($2.1 million more for the wireless
industry; $3.4 million more for the cable industry, $2.6 million more for the media industry,
and $1.2 million more for the international industry).




Page 8                   GAO-12-686 Federal Communications Commission: Regulatory Fees
Figure 2: FCC’s Division of Regulatory Fees among Industry Sectors, Fiscal Years 1998 and 2011




Statutory Framework                     In fiscal year 1994, when FCC first implemented the Communications Act
                                        regulatory fee statute, FCC used the fee schedule Congress had included
                                        as a starting point in the statute. That schedule, which was developed
                                        based on information provided to Congress by FCC, set annual regulatory
                                        fees for 46 fee categories that FCC was to follow until FCC amended the
                                        schedule. 16 The fee schedule established numerous fee categories—46—
                                        assessed on different bases, including a flat fee basis, a per subscriber
                                        basis, a per antenna basis, and others. While FCC has made changes to
                                        this fee schedule over the years, including adding and altering fee
                                        categories, the basic elements of its structure—established based on the
                                        telecommunications industry as it existed in 1994, and in the context of
                                        directing FCC to collect fees to cover 38 percent of its appropriation


                                        16
                                          In 1991, the House of Representatives, in a bill that would have established FCC’s
                                        authority to charge regulatory fees, adopted a proposed annual fee schedule that was
                                        informed by information provided by FCC on how FCC allocated its costs among bureaus
                                        and service categories. The legislation did not become law in 1991. However, the fee
                                        provisions that became law in 1993 were virtually identical to those in the 1991 bill, with
                                        the exception of the level of the fees themselves. See H.R. Rep. 102-207, 102nd Cong.
                                        (1991).




                                        Page 9                  GAO-12-686 Federal Communications Commission: Regulatory Fees
instead of the 100 percent that FCC has been directed to collect since
fiscal year 2009—have continued to guide FCC’s regulatory fee
assessment.

The Communications Act requires FCC to develop accounting systems
necessary for the agency to determine whether and how the fee schedule
should be adjusted to comply with the statute’s requirement that FCC
base its regulatory fees on the number of FTEs performing regulatory
tasks, among other things. 17 The act does not specify that the system
should be a cost accounting system—FCC was free to interpret this
requirement according to its perceived needs. Nevertheless, in its
Reports and Orders for the 2 years following 1994, FCC discussed its
plans to develop a cost-accounting system to guide its division of fees
among fee categories. FCC implemented this cost-accounting system,
which relied on employees’ coding of time and attendance report entries,
for fiscal years 1997 and 1998, using it as the basis for dividing fees
among fee categories. At the time, FCC stated that its purpose in using a
cost-accounting system based on employees’ time card entries was to
ensure that fee collections from each category of service approximated,
to the extent possible, FCC’s actual costs to regulate each fee category. 18

FCC abandoned the use of this system to track costs according to fee
category after fiscal year 1998 because the agency found use of the
system to be problematic. 19 Specifically, according to FCC officials,
basing its division of fees on employees’ time card entries caused too



17
   As previously stated, FCC is required to base its regulatory fees on the number of FTEs
performing regulatory tasks in three named bureaus plus other FCC offices, as adjusted to
take into account factors that are reasonably related to the benefits provided by FCC’s
activities to those entities paying the fee, including factors determined by FCC to be in the
public interest.
18
  This system, as described in the 1997 Report and Order, was in line with federal cost
accounting guidance in that it identified direct costs, such as payroll and other direct costs,
and assigned these costs to fee categories via program codes recorded by employees on
their time sheets in what appeared to be a rational and systematic manner. In addition, it
allocated other indirect costs pro-rata to direct costs and distributed overhead costs based
on predetermined allocation formulas. However, as the system is no longer in use, we
were unable to validate the extent to which it met federal cost accounting standards. See
In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 1997, 12
FCC Rcd. (1997).
19
 In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 2004, 19
FCC Rcd. 11665.




Page 10                  GAO-12-686 Federal Communications Commission: Regulatory Fees
much fluctuation in fees from year to year—because of a combination of
annual changes in workload, employee errors in completing time sheets,
and various other factors. FCC found that over the 1997 to 1998 period,
the rate assessed to all entities in a fee category could increase by more
than 25 percent from the prior year—beyond any increase because of
increases in the total amount in regulatory fees FCC was required to
collect. 20 FCC officials stated that these fluctuations were especially
problematic for small service providers that could least absorb
unpredictable increases in fees.

According to FCC officials, FCC has continued to rely on the 1998
division of regulatory fees as the basis of its fee division through fiscal
year 2011. It has done so in spite of the problems FCC identified with the
system and even though this approach put FCC at risk of dividing the
regulatory fee burden among entities in different industries based on
obsolete data. FCC officials stated that while the statute requires FCC to
amend its regulatory fees if FCC determines such amendment is
necessary to comply with the FTE-based requirement, among other
things, the statute does not prescribe a specific time at which FCC must
make such a determination. 21 Furthermore, according to FCC officials,
while FCC has maintained information on how its FTEs are distributed
among the four core bureaus—which generally track with the four industry
sectors—FCC does not have information on how its current FTEs are
divided among the fee categories in the current fee schedule.

As a result, for 13 years, FCC has not validated the extent to which its
division of fees among industry sectors and fee categories correlates with
its current division of FTEs among industry sectors and fee categories.
Major changes have occurred in the telecommunications industry since
1998, as described below, making it likely that FCC’s fiscal year 1998
FTE analysis no longer reflects FCC’s current regulatory priorities. As
explained later in the report, FCC’s failure to update its FTE analysis is
inconsistent with federal guidance on user fees, which, among other




20
 In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 1997, 12
FCC Rcd. 17161, 17165 (1997).
21
  47 U.S.C. §159(b)(3) states in pertinent part that “The Commission shall, by regulation,
amend the Schedule of Regulatory Fees if the Commission determines that the Schedule
requires amendment to comply with the requirements of paragraph (1)(A).”




Page 11                 GAO-12-686 Federal Communications Commission: Regulatory Fees
                      things, emphasizes the importance of regularly updating analyses to
                      ensure that fees are set based on relevant information.


Changes in the        The major changes that have occurred in the telecommunications
Telecommunications    industry over the past 14 years dramatically increase the likelihood that
Industry since 1998   FCC’s current division of fees among fee categories has become
                      obsolete. In 2008, FCC stated in a Further Notice of Proposed
                      Rulemaking that major industry changes since 1994 included the
                      significant increase of wireless, broadband, and voice over Internet
                      protocol (“VoIP”), and discussed the fact that FCC itself had reorganized
                      several times to reflect industry changes. FCC acknowledged that there
                      could be several areas in which the regulatory fee process could be
                      revised and improved to better reflect the current industry. 22 Two former
                      FCC commissioners told us that the significant increase in broadband and
                      wireless services, the increasing convergence of telecommunications
                      industries, and the transition to digital television are major changes that
                      have occurred since fiscal year 1998 that have affected FCC’s workload
                      and priorities.

                      Changes in FCC’s estimates of subscribers, revenues, or other bases
                      used to set the annual regulatory fee rates for different fee categories
                      also indicate major changes in the balance of telecommunications
                      industries from fiscal years 1998 to 2011. According to FCC’s estimates
                      (see table 2), measures of some industries grew by over 50 percent—
                      including the wireless telephone industry, for which the number of
                      subscribers grew by over 400 percent—while measures of other
                      industries declined by over 40 percent, including VHF television stations,
                      for which the number of stations declined by 48 percent. In comparison to
                      these dramatic shifts, relatively small changes in the percent of the total
                      regulatory fees expected to be paid by these industries have occurred.
                      For example, while the wireline telephone industry’s estimated revenues
                      on which fees are assessed declined by 44 percent from fiscal year 1998
                      to fiscal year 2011, the percentage of total regulatory fees this industry is
                      expected to pay declined by 4 percentage points, from 48 percent to 44



                      22
                        In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 2008, 24
                      FCC Rcd 6388, 6401 (2008). FCC has also stated that the statute does not require
                      amendment to the fee schedule to mirror all changes in regulatory costs. See In the
                      Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 2004, 19 FCC
                      Rcd., 11665.




                      Page 12                GAO-12-686 Federal Communications Commission: Regulatory Fees
                                            percent of total fees. And while the wireless telephone industry’s
                                            estimated number of subscribers grew 437 percent during this time
                                            period, the percentage of the total regulatory fees the cell phone industry
                                            is expected to pay grew only 5 percentage points—from 10 to 15 percent
                                            of the total regulatory fees. According to FCC officials, there is not always
                                            a straightforward relationship between growth in the number of
                                            subscribers, revenues, or other basis used to determine the fee rate of a
                                            fee category and the amount of work FCC performs related to that fee
                                            category, and thus these shifting numbers do not offer a clear guide as to
                                            how or even the extent to which the division of FCC’s regulatory fees
                                            among industry sectors should be realigned. Nevertheless, they reinforce
                                            the magnitude of the changes that have occurred, and underscore the
                                            likelihood that FCC’s division of fees among fee categories may no longer
                                            correlate to its current division of FTEs. (See table 2.)

Table 2: Telecommunications Industry Changes, Fiscal Years 1998 to 2011, as Measured by Basis Used to Set FCC
Regulatory Fees

                                           Fiscal year 1998 estimated                  Fiscal year 2011 estimated
Industry and basis used by FCC           number of the basis used by                 number of the basis used by        Percent change, fiscal
to set regulatory fees                     FCC to set regulatory fees                  FCC to set regulatory fees           year 1998 to 2011
VHF television stations (number of                                         499                                261                           -48 %
stations)
Wireline telephone (revenues)a                           $70,103,000,000                          $39,500,000,000                            -44%


Cable (number of subscribers)                                   66,000,000                             63,400,000                             -4%


AM/FM radio stations (number of                                         8,646                              10,285                             19%
stations)
UHF television stations (number of                                         668                                866                             30%
stations)
Geostationary space stations,                                                   46                             87                             89%
including operators of direct
broadcast satellite television service
(number of satellites)
Wireless telephoneb (number of                                  55,540,000                            298,000,000                           437 %
subscribers)

                                            Source: GAO analysis of FCC data.
                                            a
                                             Revenue dollars have not been adjusted for inflation.
                                            b
                                             The fee category that includes wireless telephones is called commercial wireless radio services. It
                                            includes specialized mobile radio services, public coast stations, public mobile radio, cellular, 800
                                            MHz air-ground radiotelephone, offshore radio services and broadband personal communications
                                            services.




                                            Page 13                             GAO-12-686 Federal Communications Commission: Regulatory Fees
FCC’s Office of the Managing Director has published some information
that further suggests that FCC is basing its division of regulatory fees
among fee categories on data that do not correlate with industry trends
and FCC’s current workload. In fiscal year 2008, FCC issued a Further
Notice of Proposed Rulemaking (FNPRM) specifically to consider reforms
to its regulatory fee process. In a separate public notice issued after FCC
adopted the 2008 FNPRM, the Office of the Managing Director provided
some updated information on FCC’s costs by core bureau. 23 According to
FCC officials, the core bureaus correlate to the four industry sectors of
wireless telecommunications, wireline telecommunications, media, and
international. 24 This information demonstrated substantial misalignment
between the division of regulatory fees by industry sector as presented in
FCC’s fiscal year 2008 FNPRM and FCC’s costs by bureau in the
Wireless, Wireline, and International Bureaus as presented in the public
notice, as shown in figure 3—although FCC officials did not include any
information at the more granular level of fee category. For example, in
fiscal year 2008, the wireless industry paid about 17 percent of the
regulatory fees while the Wireless Telecommunications Bureau incurred
about 27 percent of FCC’s total costs. In contrast, the wireline industry
paid about 47 percent of the total fees while the Wireline Competition
Bureau incurred about 23 percent of FCC’s total costs. FCC did not
comprehensively reform its process as a result of this FNPRM. 25



23
  Public Notice, 23 FCC Rcd. 14581 (2008).
24
  According to the information provided by the managing director’s office, in creating a
chart to show fiscal year 2008 total costs by core bureau (see second pie chart of figure
3), FCC staff identified the total estimated costs (both direct and indirect costs) associated
with the regulatory activities performed by the four bureaus named in the chart. Estimated
indirect costs were comprised of the expenses incurred by the remaining FCC offices and
bureaus. Estimated indirect costs were allocated among the four bureaus named in the
chart based on their number of FTEs. Estimated costs associated with operating FCC,
such as financial operations and human resources, were allocated to each bureau and
office based on the number of FTEs in each operating unit, and then allocated to the four
bureaus named in the chart based on their number of FTEs.
25
  In the order following this FNPRM, released in May 2009, FCC adopted proposals to
eliminate two regulatory fee categories—international fixed public radio and international
high frequency broadcast stations—and stated that the outstanding matters stemming
from the FNPRM might be decided at a later time in a separate Report and Order. See In
the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 2009, 24 FCC
Rcd. 5966, footnote 4 (2009).




Page 14                  GAO-12-686 Federal Communications Commission: Regulatory Fees
Figure 3: FCC’s Division of Regulatory Fees versus Costs by Core Bureau, Fiscal Year 2008




Federal User Fee Guidance               FCC’s inaction in updating its FTE analysis is inconsistent with federal
                                        guidance on user fees. We recognize that federal guidance on user fees
                                        for the most part assumes that the fees are to be set based on a cost-
                                        recovery scheme, which differs from the Communications Act’s
                                        requirement that FCC base its regulatory fees on FTEs, among other
                                        things. 26 FTEs—the basic measure of levels of employment used in the



                                        26
                                           User fees are assessed to users for goods or services provided by the federal
                                        government that provide special benefits to identifiable recipients above and beyond what
                                        is normally available to the public. User fees are normally related to the cost of the goods
                                        or services provided. See Office of Management and Budget, Circular No. A-25 Revised,
                                        (July 8, 1993) and GAO, A Glossary of Terms Used in the Federal Budget Process,
                                        GAO-05-734SP (Washington, D.C.: September 2005). Regulatory transactions are one
                                        type of cost-based user fee. See GAO, Federal User Fees: A Design Guide,
                                        GAO-08-386SP (Washington, D.C.: May 29, 2008). In addition, the Chief Financial
                                        Officers Act of 1990, codified as positive law at 31 U.S.C. ch. 9 requires an agency’s CFO
                                        to review user fees, among other things, on a biennial basis, and make recommendations
                                        on revising those charges to reflect costs incurred. 31 U.S.C. § 902(a)(8). The CFO Act
                                        does not apply to FCC, but demonstrates good government practice.




                                        Page 15                 GAO-12-686 Federal Communications Commission: Regulatory Fees
federal budget 27—are not the same as costs. FTE information is often
readily available and can be a useful proxy for cost, but FTE information
does not necessarily reflect total cost because, for example, it would
neither distinguish between higher and lower cost FTEs, nor would it
include other costs, such as contractors, training, equipment, or facilities’
costs. 28

Nevertheless, many of the general principles of federal user fee guidance
remain relevant in considering FCC’s FTE analysis. First, federal
guidance emphasizes the importance of reviewing fees regularly to check
the extent to which they are properly aligned. For example, OMB Circular
No. A-25, which, among other things, provides guidance to agencies
regarding their assessment of user charges under other statutes, directs
agencies that have user fees to review the user fees biennially in order to
assure, among other things, that existing charges are adjusted to reflect
unanticipated changes in costs or market values. The fact that the
Communications Act directs FCC to base its fees on FTEs does not
negate the applicability of the guidance regarding the regularity with
which the basis of the fees (i.e., FTEs) should be reviewed. The reason
that regular review is part of the guidance is to assure that fees are
adjusted to reflect changes that may have occurred over time in the
agency’s distribution of work among fee categories—which could be
measured by costs or FTEs.

Second, according to federal financial-accounting standards, cost
information should be reported in a timely manner and on a regular basis
and should be reliable and useful in making decisions. This standard
does not require the use of a particular type of costing system or
methodology, stating that agency and program management is in the best
position to select a type of costing system to meet its needs. However,
the standard requires that a methodology, once adopted, be used
consistently in order to provide results that can be compared from year to
year—with improvements and refinements made as necessary. In FCC’s
case, given the statutory framework of its regulatory fee program, this
principle pertains to FTEs rather than costs. Given the problems FCC
encountered with using its cost-accounting system to analyze FTEs by


27
 Office of Management and Budget, Circular No. A-11, (Aug. 18, 2011).
28
  GAO, Streamlining Government: Opportunities Exist to Strengthen OMB’s Approach to
Improving Efficiency, GAO-10-394 (Washington, D.C.: May 7, 2010).




Page 16               GAO-12-686 Federal Communications Commission: Regulatory Fees
                        fee categories in fiscal year 1998, these standards would suggest that
                        FCC could have considered alternate methodologies—or improvements
                        to its cost-accounting system—to address the problems described.
                        However, FCC’s decision to freeze its division of regulatory fees by fee
                        category on fiscal year 1998 data that came from the cost-accounting
                        system FCC abandoned, rather than addressing the problems or
                        choosing a different methodology, is inconsistent with the goal of such
                        standards. This decision, over time, has resulted in FCC not having FTE
                        information that is timely, reliable, or comparable from year to year to
                        guide its decisions on how to divide regulatory fees.


Probable Cross-         In prior work, we have stated that agencies that do not review and adjust
Subsidization between   fees regularly run the risk of undercharging or overcharging users, raising
Industry Sectors        equity concerns. 29 Moreover, because FCC is directed in its annual
                        appropriation acts to collect a certain amount of money in regulatory fees
                        each year, if its division of fees among fee categories is misaligned with
                        its FTEs by fee category, then some entities are most likely overpaying,
                        essentially cross-subsidizing entities in other fee categories, which are
                        underpaying.

                        FCC’s regulatory fees are unlikely to ever equal the exact cost of
                        regulating the corresponding fee category for several reasons. First, since
                        FCC is required to collect 100 percent of its appropriation through
                        regulatory fees, including funding for items that are not specifically
                        regulatory activities—such as general overhead—the regulated industries
                        are being assessed to pay for more than the number of FTEs required for
                        their regulation. Second, FCC is directed by statute to base its fee
                        assessment on FTEs, which may not represent actual regulatory costs.
                        According to FCC officials, because it is not possible to precisely assign
                        the costs of regulation on a service-by-service basis, and because the act
                        requires FTE-based assessment and does not require amending the fee
                        schedule to mirror all changes in regulatory costs, some regulated entities
                        pay more than the direct cost of their regulation.

                        Third, exemptions create cross subsidization, as could some other policy
                        decisions. FCC, as required by statute, has exempted some groups of


                        29
                          In past work we defined equity to mean that everyone pays their fair share,
                        acknowledging that the definition of fair share can have multiple facets. See
                        GAO-08-386SP.




                        Page 17                 GAO-12-686 Federal Communications Commission: Regulatory Fees
entities, such as nonprofits, from paying fees, and has at times exercised
its statutory discretion by reducing the fee rates of certain fee categories
when it determined that doing so would benefit the public interest. In prior
work, we have pointed out that while exemptions can promote one kind of
equity by factoring the users’ ability to pay into the fee-rate formula, such
provisions may also increase cross-subsidies among users. 30 We have
stated that in applying exemptions, agencies may purposefully choose to
set fees in such a way that cross subsidization occurs in order to promote
other policy goals. However, we have also stated that generally, fees
should be aligned with the costs of the activities for which the fee is
collected, unless there is a policy decision not to align them. Without a
current FTE analysis by fee category, it is not possible to determine the
extent that cross subsidization is occurring between fee categories, or
which fee categories are cross subsidizing other fee categories. However,
any cross subsidization that is occurring not because of a decision to
promote a policy goal but because the FTE analysis on which FCC bases
its fees is obsolete, is not consistent with general user fee principles.

According to officials in many industry associations and companies we
spoke with in the wireline, wireless, cable, and international industry
sectors, FCC’s regulatory fees are typically passed along to the
consumer, either in a line item on the bill or bundled into the general cost
of service. One potential effect of cross subsidization, therefore, is that, if
entities in different fee categories are directly competing for the same
customers, cross subsidization could result in competitively
disadvantaging entities in one fee category over another. As discussed in
the next section, some stakeholders told us that the regulatory fees are
small enough that they do not have a significant financial impact on the
companies that pay the fees. However, several industry stakeholders in
the wireline and cable television industry sectors told us that FCC’s
current regulatory fee process is competitively disadvantaging certain
industries and that FCC’s use of multiple bases for setting fee rates
makes it more difficult for industry stakeholders to compare the rates
assessed to different fee categories—and thus more difficult to determine
the extent to which the fees are fair and equitable.

These views were echoed in formal comments to FCC’s regulatory fee
FNPRM in 2008, when FCC last requested comments on substantial



30
 GAO-08-386SP.




Page 18              GAO-12-686 Federal Communications Commission: Regulatory Fees
reform to its regulatory fee process. For example, in response to the 2008
FNPRM, the National Cable and Telecommunications Association
(NCTA), a trade association for the U.S. cable industry, argued that FCC
assesses higher regulatory fees on cable operators than it does on direct
broadcast satellite television operators. According to the cable
association, the direct broadcast satellite television industry is a direct
competitor to cable, and thus its lower regulatory fee burden could give it
a competitive advantage. The cable association argued that every type of
multichannel video-programming distributor, including cable, telephone,
and direct broadcast satellite providers of multichannel video service,
should pay the same regulatory fee rate in order to ensure that no entity
received the competitive benefit of lower fees based solely on the
technology it used. Moreover, the cable association’s staff told us that
because the cable television industry’s fee rate is set on a per-subscriber
basis and the direct broadcast satellite television operator industry’s fee
rate is set on a per-satellite basis, it was not possible to compare the fees
as stated in FCC’s published information in order to assess their fairness.
For the cable association to determine how its members’ fees compared
to the fees of direct broadcast satellite television operators on a per-
subscriber basis, the association had to do its own analysis using
company data. In its 2008 comments to the FNPRM, the cable
association also suggested that all providers of voice service and
multichannel video programming distributors—including cable, telephone,
and direct broadcast satellite providers—should pay on a per-subscriber
basis instead of the three different bases—per revenue dollar, per
subscriber, and per satellite—used today.

In another example, the Independent Telephone and
Telecommunications Alliance (ITTA), which represents a number of mid-
size wireline telephone companies, argued that under FCC’s regulatory
fee process, wireline companies had higher per-subscriber fees than
wireless companies. ITTA argued that this higher per-subscriber rate was
not justified because, due to the convergence among technologies since
1994, many of FCC’s expenditures related to telecommunications issues
now related equally to wireline and wireless providers. According to ITTA,
the effect of the different fee rates assessed to wireline and wireless
telephone providers was that providers of similar voice services—and
their customers—assumed dissimilar responsibility in bearing FCC’s
regulatory costs.

ITTA called for both wireline and wireless providers’ regulatory fees to be
assessed on the basis of revenue, instead of the current situation, in
which wireline companies pay fees based on revenue while wireless


Page 19             GAO-12-686 Federal Communications Commission: Regulatory Fees
companies pay fees based on subscribership. Interestingly, in fiscal year
1994, FCC assessed the fees of both wireline and wireless telephone
entities on the basis of subscribers, as put forth in the fee schedule in the
Communications Act. 31 For fiscal year 1995, FCC amended the schedule
by, among other things, changing its basis for assessing regulatory fees
on the wireline telephone industry from a subscriber to a revenue basis. 32
In making this change, FCC stated in the Report and Order that a
revenue-based methodology would equitably distribute the fee
requirement in a competitively neutral manner, and that it was FCC’s
intention to consider changing wireless carriers’ fees to a revenue basis in
future years. However, FCC has not done so, although wireless providers
report the same revenue information to FCC that wireline providers do. In
addition, one commenter to a recent NPRM suggested that FCC use
revenue as the basis for assessing regulatory fees on media fee
categories. According to FCC officials, because FCC does not currently
require industries in the media fee categories to report any revenue
information to FCC, in order for FCC to assess media companies on the
basis of revenue, FCC would have to rely on the honor system in
determining entities’ fee obligations, or establish new reporting
requirements, which would be burdensome to FCC and industry.

FCC did not summarize or comment on the proposals submitted by the
cable association and ITTA to the fiscal year 2008 FNPRM, even though
ITTA re-submitted its proposal in response to the fiscal year 2009 NPRM.
Instead, FCC exercised its administrative discretion to resolve all the
outstanding matters stemming from the FNPRM at a later time in a
separate Report and Order. More than 3 years later, no separate Report
and Order has been issued addressing these industry associations’
comments. According to NCTA and ITTA officials, the associations stopped
submitting formal comments to FCC because FCC’s lack of
responsiveness discouraged them from doing so—but both associations
continue to see the current regulatory fee assessment as not based on any
valid FTE analysis and as causing competitive disadvantage to their
industry.


31
  See 47 U.S.C. § 159(g) (Schedule of Regulatory Fees); see also Implementation of
Section 9 of the Communications Act, Assessment and Collection of Regulatory Fees for
Fiscal Year 1994, 9 FCC Rcd. 5333,¶ 9 (1994) recon. denied, 10 FCC Rcd. 12759 ¶12
(1995).
32
  See In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year
1995, 10 FCC Rcd. 13512, 13519 (1995).




Page 20                GAO-12-686 Federal Communications Commission: Regulatory Fees
Effect of Fees on Industry   Most companies we spoke with stated that FCC’s regulatory fees have
and Consumers                little to no direct financial impact on the company, given the relatively
                             small size of the fees—for example, wireline telephone companies were
                             to pay $.00375 per assessable revenue dollar in fiscal year 2011, while
                             wireless telephone companies were to pay $0.17 per subscriber.
                             However, officials at the National Association of Broadcasting stated that
                             the payment of regulatory fees is a bigger issue for small stations. These
                             officials stated that because consumers do not pay directly for broadcast
                             radio or television, broadcasting entities cannot pass regulatory fees on to
                             consumers but must incorporate the fee payment into operating costs to
                             be paid with general operating revenue. The National Association of
                             Broadcasters and one broadcast company we spoke with stated that at a
                             time when some broadcasting companies are laying off employees
                             because of financial difficulties, FCC’s regulatory fees may equal the cost
                             of one or more employees that the company could not afford to keep
                             because of the regulatory fees. This potential impact on companies
                             underscores the importance that FCC assess regulatory fees on a fair
                             and equitable basis—and that it have updated information on FTEs with
                             which to do so.

                             The effect of regulatory fees on consumers is difficult to assess, in part
                             because of the relatively low cost of the fees. For example, if a wireless
                             telephone company passed its fiscal year 2011 regulatory fee directly on
                             to consumers, the fee would have increased the bill of each consumer by
                             $0.17 for the year. On the other hand, representatives of a wireline
                             telephone company we spoke with stated that many of their customers
                             are rural, low income, elderly people who are affected by any increase in
                             their phone bill caused by regulatory fees.


Challenges Related to        According to FCC officials, the agency has not revised its assessment of
Regulatory Fee Reform        fees among fee categories since fiscal year 1998 in part because it is
                             difficult to propose and implement reforms given its need to collect
                             regulatory fees by the end of each fiscal year. In addition, FCC officials
                             stated that because the agency had received only a limited number of
                             comments to its 2008 FNPRM, FCC had decided not to undertake major
                             reform at that time. However, as described above, federal guidance on
                             user fees recommends that agencies review their fees biennially—
                             including the costs that the fees are reimbursing. Moreover, by not
                             periodically analyzing FTEs by fee category and adjusting its division of
                             regulatory fees based on this analysis, FCC may have put itself into a
                             situation where, in order to adjust regulatory fees based on an updated
                             FTE analysis, FCC may have to figure out how to handle large swings in


                             Page 21             GAO-12-686 Federal Communications Commission: Regulatory Fees
fees for some fee categories. For example, we found that when another
agency waited 9 years before performing a review of its cost-based fees,
the result was that the average fee increased by 86 percent, causing the
new fee schedule to be widely questioned. 33

Another issue, according to FCC officials, is that assigning regulatory
costs among the 86 fee categories has become more challenging, given
the increasingly cross-cutting nature of FCC’s work. Staff we spoke with
in the Wireline, Wireless, and Media Bureaus stated that, generally, their
work focuses on the industry sector directly related to their bureau, and
that when FCC works on issues that cut across more than one bureau,
staff from each relevant bureau will work together. However, staff in the
Wireless and Media Bureaus stated that it would be very difficult to track
their activities at the level of fee category. Moreover, staff we spoke with
in the International and Enforcement Bureaus stated that their work was
so cross cutting that they did not think it would make sense to track it
according to industry sector—much less according to fee category. This
issue is not isolated to FCC’s assessment of regulatory fees. In recent
work, we found that the increasingly cross-cutting nature of FCC’s work
has caused FCC to reconsider how to handle some regulatory activities. 34
For example, as companies that once provided a distinct service (such as
cable and telephone companies) have shifted to providing bundles of
services (voice, video, and data services) over a broadband platform, new
debates have arisen at FCC regarding how rules previously intended for a
specific industry and service should be applied to companies now
providing multiple services. These concerns bring up some additional
questions—whether FCC’s use of 86 fee categories may also be obsolete
in the current regulatory environment, and whether FCC’s difficulties in
keeping its process current may be in part because its statutory
framework is based on a telecommunications environment that no longer
exists. However, since FCC has not attempted to track FTEs by fee
category since fiscal year 1998, we were not able to determine the extent
to which changes since fiscal year 1998—including the increasing amount
of cross-cutting work—would affect FCC’s ability to distribute its FTEs


33
  See GAO, Federal User Fees: Additional Analyses and Timely Reviews Could Improve
Immigration and Naturalization User Fee Design and USCIS Operations, GAO-09-180
(Washington, D.C.: Jan. 23, 2009).
34
  GAO, FCC Management: Improvements Needed in Communication, Decision-Making
Processes, and Workforce Planning, GAO-10-79 (Washington, D.C., Dec. 17, 2009).




Page 22               GAO-12-686 Federal Communications Commission: Regulatory Fees
                           among the fee categories or what the outcome of such an analysis
                           would be.

                           In the fiscal year 2012 regulatory fee NPRM, released on May 4, 2012,
                           FCC stated that it planned to undertake two separate NPRMs to consider
                           reforms to the regulatory fee process. FCC stated that it would issue a
                           Report and Order finalizing its decision on all issues raised in the reform
                           proceedings, including new cost allocations and revised regulatory fees,
                           in sufficient time to allow for their implementation in fiscal year 2013. 35 On
                           July 17, 2012, FCC released an NPRM on regulatory fee reform. 36 As
                           discussed in our agency comments section, this NPRM proposes some
                           fundamental changes to FCC’s regulatory fee program that relate to many
                           of the concerns raised in this report.


FCC’s Current Regulatory   FCC has not been transparent in describing its regulatory fee process in
Fee Process Lacks          its recent annual NPRMs and Reports and Orders. This lack of
Transparency               transparency has resulted in uncertainty among some industry
                           associations about FCC’s regulatory fee process; some told us that the
                           lack of transparency has made it more difficult for them to comment or
                           provide input on FCC’s regulatory fee process. In prior work, we have
                           reported that the regulatory process is used to provide information on
                           fees to Congress and stakeholders and to solicit stakeholder input.
                           Therefore, we have reported that, when an agency has authority to adjust
                           a fee through the regulatory process, as a first step towards improved
                           transparency, it should make available to the public substantive
                           information about recent and projected program costs and fee collections
                           through its notices in the Federal Register. Relevant information includes
                           the agency’s new fee rates, descriptions of the costs of the program,
                           projected program costs and fee collections, and the assumptions the
                           agency used to make those projections. 37

                           FCC’s recent annual Reports and Orders on regulatory fees include
                           FCC’s fee rates, along with the total FCC is required to collect as directed


                           35
                            In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 2012,
                           FCC 12-48 (May 4, 2012).
                           36
                              In the Matter of Procedures for Assessment and Collection of Regulatory Fees, FCC
                           12-77, July 17, 2012.
                           37
                            GAO-08-386SP, p. 35.




                           Page 23                GAO-12-686 Federal Communications Commission: Regulatory Fees
in its appropriations act and how much it expects to collect from each fee
category. However, since FCC has not performed any current FTE
analysis, there is no discussion of FCC’s current FTEs or costs related to
each fee category. Moreover, FCC does not clearly explain in any of the
Reports and Orders after fiscal year 2002 that the division of regulatory
fees among fee categories is based on a fiscal year 1998 FTE analysis
that was never updated. This lack of information in FCC’s regulatory-fee-
related NPRMs and Reports and Orders has limited the ability of industry
stakeholders to understand exactly how FCC has been determining its
assessment of regulatory fees in recent years, and may have limited
stakeholders’ ability to effectively provide input to this process.

Another area where FCC has not been transparent is in describing the
effects of its adjustments on other fee payors. Each year, FCC’s
regulatory-fee-related NPRMs and Reports and Orders include any
proposed or actual adjustments and tables detailing the resulting
regulatory fees for all payors. However, those tables have not explicitly
shown how adjustments to the rates of certain fee categories have
affected the rates of the other fee categories, or the total FCC must
attempt to collect from other fee categories. Consequently, it is difficult to
use FCC’s information to determine how FCC got from the previous
year’s regulatory fee rates to the current year’s regulatory fee rates.

For example, in the fiscal year 2010 Report and Order, FCC stated that
because the revenue base upon which the wireline telephone industry’s
fee rate is calculated had been decreasing for several years, FCC had
determined it would best serve the public interest to set the wireline
telephone industry’s fiscal year 2010 fee rate at $0.00349 per revenue
dollar. In a footnote, FCC elaborated that because the wireline telephone
industry’s revenue data was lower than expected, if FCC had not decided
to set the wireline telephone rate at $0.00349 per revenue dollar, the rate
would have increased to $0.00364 per revenue dollar. However, FCC did
not explain what this change in rates translated to in terms of the amount
of revenue it expected to collect in fees from the wireline telephone
industry. Moreover, while FCC stated in the Report and Order that
reducing the fees paid by the wireline telephone industry would increase
the fees paid by licensees in other service categories, and the resulting
regulatory fees are detailed in FCC’s Report and Order, FCC did not
specifically show the fee increase for each regulatory fee category
caused solely by this policy decision. In November 2011, FCC officials
told us that this policy decision had resulted in reducing the total expected
fees to be collected from the wireline telephone industry by approximately
$12 million, and that FCC instead attempted to collect this $12 million by


Page 24              GAO-12-686 Federal Communications Commission: Regulatory Fees
                        raising the rates of all the other fee categories based on the existing
                        division of fees among fee categories. This $12 million is reflected in the
                        regulatory fee tables set forth in FCC’s Order. However, the limited
                        information on how various adjustments affect each fee category reduces
                        the ease with which industry stakeholders or other interested parties can
                        understand the effects of FCC’s current process—including the policy
                        decisions FCC has made without any updated FTE analysis.



FCC Has Collected
$66 Million in Excess
Fees That Is
Unavailable without
Further Congressional
Action

FCC’s Regulatory Fee    On average, FCC collected 2 percent more each year in regulatory fees
Collections             than it was required to collect in its annual appropriations acts over the
                        past 10 fiscal years. 38 FCC under collected regulatory fees in 1 year—
                        2003—and over collected regulatory fees in 9 years. For example, it
                        overcollected regulatory fees by 5 percent—$13 million—in fiscal year
                        2005. (See table 3.)




                        38
                          In fiscal year 2002, FCC was directed to collect 89 percent of its appropriation in
                        regulatory fees. In fiscal year 2003, FCC was directed to collect 99 percent of its
                        appropriation. For fiscal years 2004 to 2008, FCC was directed to collect all but $1 million
                        of its appropriation in regulatory fees, and since fiscal year 2009, FCC has been directed
                        to collect 100 percent of its appropriation in regulatory fees.




                        Page 25                 GAO-12-686 Federal Communications Commission: Regulatory Fees
Table 3: FCC’s Regulatory Fee Collections, Fiscal Years 2002 to 2011

(In millions)
                                                                           Percentage difference
                           Amount of regulatory             Amount of      between fees required
                                 fees FCC was           regulatory fees            to collect and
    Fiscal Year              required to collect         FCC collected            fees collected
    2002                                        $219              $220                               1%
    2003                                        $269              $266                               -1%
    2004                                        $273              $285                               5%
    2005                                        $280              $293                               5%
    2006                                        $299              $308                               3%
    2007                                        $290              $297                               2%
    2008                                        $312              $325                               4%
                                                                      a
    2009                                        $342             $342                                0%
    2010                                        $336              $342                               2%
    2011                                        $336              $342                               2%
Source: GAO analysis of FCC data.
a
FCC collected $81,000 more in regulatory fees than it was directed to collect in fiscal year 2009.


According to FCC officials, FCC attempts to meet its regulatory fee target
each year but is unable to ensure it will collect exactly the amount
required by Congress because there are multiple variables that can affect
the final amount collected. Key variables that can cause FCC to collect
more or less than it expected are late payments, FCC’s use of preliminary
data in setting fee rates, refunds, and bankruptcies. Regarding late
payments, FCC counts all regulatory fee payments that arrive in a fiscal
year as part of that year’s regulatory fee collections, even if the imposed
assessment was incurred in a prior year. FCC officials stated that each
year some entities do not pay the fees owed that year, while some
entities pay fees owed from prior years. According to FCC officials,
because in any given year, FCC does not know exactly how much of the
year’s owed fees are not going to be paid in the year they are due, or how
much in late payments will come in from prior years, late payments can
affect the total amount of regulatory fees collected for the year. We found
that the percentage of FCC’s total annual regulatory fee collections that
was made up of late payments varied from 1 to 3 percent for fiscal years
2005 to 2011.




Page 26                             GAO-12-686 Federal Communications Commission: Regulatory Fees
FCC’s use of preliminary data to set fees also can cause FCC to collect
more or less than it expected and can at times lead to FCC’s having to
refund companies some of their prior year’s fees, which can also affect
the total collected. In order to charge fees based on current year data and
to publish the final fee rates in the Report and Order in time for entities to
pay by the end of the fiscal year, FCC must set the fee rate for some
large fee categories—including wireline telephones, wireless telephones,
and cable, among others—based on preliminary industry information. For
example, until fiscal year 2011, FCC relied on preliminary estimates
provided to FCC by wireline telephone entities to estimate the total
amount of revenue dollars in the wireline telephone industry. 39 In
combination with FCC projections based on past years’ collections and
economic conditions, FCC set the wireline telephone fee rate based on
this preliminary industry data. Wireline telephone entities determine the
amount of fees they owe by multiplying the fee rate as published in FCC’s
annual Report and Order by their final revenue dollars, as reported by the
entities typically after FCC had already set the rate for the fiscal year. If,
in aggregate, the total final amount of revenue dollars in the industry was
significantly higher or lower than the estimate FCC used to set the fee
rate, FCC would collect more or less than it expected.

In fiscal year 2011, FCC automated the input of annual revenue data
provided by wireline providers to FCC so FCC would have actual instead
of estimated revenue information to use in setting regulatory fees for
wireline telephone companies. According to FCC officials, this change
should improve FCC’s ability to predict how much total revenue wireline
telephone entities will pay fees on, and therefore improve the accuracy of
the rate it sets for the wireline telephone fee category in terms of meeting
its target collection amount from that fee category. However, even so,
wireline telephone entities can revise their final revenue numbers for an
entire year after the revenue information has been submitted. According
to FCC officials, if some wireline telephone entities pay their regulatory
fees based on the revenue information submitted in one fiscal year, but
then revise their revenue numbers downward after the end of the fiscal
year, the filer may be entitled to a refund in the following year, which also
can affect FCC’s ability to collect exactly the targeted amount in the next
fiscal year. According to FCC officials, refunds can be sought on other



39
  Only certain wireline telephone companies’ revenues are used in setting their fee. In
this paragraph, we are referring to those revenues.




Page 27                 GAO-12-686 Federal Communications Commission: Regulatory Fees
                         grounds, too, and such filings cannot be predicted by FCC. In addition,
                         according to FCC officials, FCC is an unsecured creditor when it comes
                         to a licensee filing for bankruptcy and FCC often does not receive unpaid
                         assessments from the bankruptcy court. Therefore, bankruptcies can also
                         affect FCC’s ability to collect its target amount.


Excess Regulatory Fees   Any regulatory fees collected above what FCC was directed to collect in
                         its annual appropriations are considered excess fees. As explained
                         earlier, since 2008, FCC’s annual appropriations have prohibited the use
                         of any excess fees from the current year or previous years without an
                         appropriation by Congress. Prior to fiscal year 2008, FCC’s annual
                         appropriations stated that any excess regulatory fees remained available
                         until expended. According to FCC officials, FCC obligated excess
                         regulatory fees in fiscal years 1996 to 1998 to fund programs to help FCC
                         with changes related to the year 2000 technology transition (sometimes
                         referred to as Y2K), and it obligated excess regulatory fees from 2001 to
                         2003 40 in order to meet critical physical security needs in fiscal year
                         2004. 41 According to FCC officials, FCC has deposited all excess fee
                         collections into a separate account with the Department of Treasury. 42 As
                         of fiscal year 2011, the account held approximately $66 million, which
                         represents about 2 percent of the $2.9 billion FCC was required to collect
                         in regulatory fees from fiscal year 2002 to 2010. 43 FCC has collected on
                         average $6.7 million in excess fees annually from fiscal year 2006 to
                         2011, and so the account has steadily increased. FCC’s tendency to over
                         collect rather than under collect regulatory fees over the past 10 years



                         40
                           Disbursements from FCC’s excess regulatory fee account were made through fiscal
                         year 2006.
                         41
                           FCC was unable to identify the purposes for which it obligated excess regulatory fee
                         collection prior to fiscal year 1999 because FCC does not retain records prior to fiscal year
                         2000.
                         42
                           According to FCC officials, for fiscal year 2003, the 1 year out of the past 10 that FCC
                         under collected its regulatory fees (by $5 million, or about 2 percent), FCC reimbursed the
                         Department of Treasury the amount that it collected in regulatory fees and notified the
                         Department of Treasury and Congress. According to FCC officials, no further action was
                         taken. As a result, FCC did not fully offset its appropriation for fiscal year 2003.
                         43
                           At the end of fiscal year 2011, FCC’s excess collections account had a balance of $66
                         million dollars, of which $5.3 million dollars had been deposited prior to fiscal year 2002.
                         Because of limitations with FCC’s data, GAO was unable to determine a year-by-year
                         breakdown of excess collections for fiscal years prior to 2002.




                         Page 28                  GAO-12-686 Federal Communications Commission: Regulatory Fees
also suggests that as long as Congress does not provide for their
disposition, total excess funds will continue to increase. Congress has not
provided for the disposition of the funds.

According to FCC officials, FCC has reported to Congress and the
Department of Treasury on its excess regulatory fees. However, FCC has
not been fully transparent with regard to informing industry stakeholders
or others about these excess fees. FCC officials stated that FCC has kept
Congress informed of the excess fees during periodic briefings with
appropriators, and FCC provides an annual report to Treasury that
identifies the total amount of regulatory fees it has collected for the past
year, including the extent to which its collections vary from the amount
FCC is required to collect. FCC also published the amount of excess fees
collected in its fiscal year 2011 Annual Financial Report and its fiscal year
2013 budget estimate to Congress. However, FCC has not published the
amount of excess fees collected in its NPRMs or Reports and Orders. In
prior work, we have reported that the regulatory process is used to
provide information on fees to stakeholders and to solicit stakeholder
input. 44 Therefore, when an agency has authority to adjust a fee through
the regulatory process, it should make substantive information about
recent and projected fee collections, among other things, available to the
public through notices in the Federal Register. FCC has included
projected fee collections for the current fiscal year in its NPRMs and
Reports and Orders, but it has not disclosed the actual amount collected
the prior year or disclosed any information on the total in excess fees
collected in previous years. As a result, some industry associations we
spoke with were aware that FCC had collected excess regulatory fees,
but most did not know that the amount of FCC’s excess collections had
grown to about $66 million.




44
 GAO-08-386SP.




Page 29             GAO-12-686 Federal Communications Commission: Regulatory Fees
                       We identified alternative approaches that could be instructive as FCC
Alternative            considers reforms to its regulatory fee process. These alternative
Approaches Could Be    approaches include (1) ensuring that the division of fees among fee
                       categories is aligned with a reasonably current measure of the division of
Instructive as FCC     regulatory activities among fee categories, and (2) taking specific steps to
Considers Reforms to   promote transparency in the regulatory fee process. In addition, we
Its Regulatory Fee     identified how these agencies are applying any excess fees.

Process                We identified these alternative approaches through examining the
                       regulatory fee processes of five other regulatory fee-funded agencies in
                       the U.S. and Canada: the Nuclear Regulatory Commission (NRC),
                       Federal Energy Regulatory Commission (FERC), Farm Credit
                       Administration (FCA), Canadian Radio-television and
                       Telecommunications Commission (CRTC), and the Canadian Nuclear
                       Safety Commission (CNSC). Because these agencies perform regulatory
                       functions and recover many, if not all, of their costs through annual fees
                       paid by regulated entities, we believe their processes may be instructive
                       to FCC and Congress in considering reforms to FCC’s current regulatory
                       fee process. In addition, while four of the agencies regulate different
                       industries, CRTC regulates some of the same industries as FCC,
                       including, according to CRTC officials, the telecommunications industry—
                       which encompasses wireline and wireless telephone providers—and the
                       broadcast industry—which encompasses radio, television, and cable
                       distribution operators. Each of the five agencies, like FCC, has different,
                       specific statutory authority authorizing its collection of annual regulatory
                       fees to help fund the agency or to reimburse the Department of Treasury
                       for its annual appropriation. 45 FERC, for example, which has regulatory
                       authority over the hydropower, oil pipeline, natural gas, and electric
                       industries, derives its fee-collecting authorities from the Federal Power
                       Act for the hydropower industry and the Omnibus Budget Reconciliation
                       Act of 1986 for the oil, natural gas and electricity industries. 46
                       Nevertheless, we believe approaches used by these agencies may be
                       instructive for FCC as it considers reforms to its regulatory fee process.
                       For more information on the criteria used to select these agencies, see
                       appendix I.



                       45
                         Some of the agencies also collect hourly fees for specific regulatory work done in
                       addition to the annual regulatory fees which are the focus of this report.
                       46
                         See Act of June 10, 1920, ch. 285, 41 Stat. 1063 (codified at 16 U.S.C. § 803, § 823a)
                       and Pub. L. No. 99-509, § 3401, 100 Stat. 1874 (1986) (codified at 42 U.S.C. § 7178).




                       Page 30                 GAO-12-686 Federal Communications Commission: Regulatory Fees
Ensuring Data Used to        As we described previously, FCC has acknowledged the need to revisit
Align Fees with Regulatory   its division of fees among fee categories to reflect regulatory and staffing
Activities Is Reasonably     changes that have occurred since 1998. However, it has not yet done so.
                             We found that NRC, CRTC, and FERC divide fees among fee categories
Current                      based on current or recent data by industry sector. The other two
                             agencies we met with either have only one fee category (FCA) or do not
                             collect most fees through a rate assessed to a category of fee payors
                             (CNSC).

                             According to officials at NRC, CRTC, and FERC, each agency aligns its
                             assessment of annual fees by industry sector with an annually or
                             biennially updated analysis of costs by industry sector. Officials at NRC
                             specifically stated that keeping the agency’s fees aligned with annually or
                             biennially updated costs was essential to ensuring that the fees were fair
                             and equitable. If one industry sector gets more in services or regulatory
                             activities from NRC in one year compared to the previous year, then that
                             sector will pay a higher proportion of the total regulatory fees. NRC
                             officials stated that they consider it part of NRC’s mission as a regulatory
                             agency to ensure that the link between costs and fees is apparent, and
                             officials at both NRC and CRTC told us that it is important that the
                             regulated industries understand the rationale for the assessed fees. As
                             stated previously, the Communications Act identifies FTEs as FCC’s
                             basis for deriving regulatory fees. Nevertheless, the methods these three
                             agencies use to keep their alignment of costs and fees updated may be
                             instructive to FCC.

                             According to NRC officials, NRC updates its cost analysis for its larger fee
                             categories annually and its smaller fee categories biennially. The officials
                             added that NRC’s regulatory fees are based on the proportional cost of
                             direct and indirect services provided to an industry sector, as determined
                             by NRC’s program offices, compared to the total fee-funded budget—and
                             there is a direct link between the resources planned in the budget and the
                             distribution of regulatory fees. For example, NRC officials stated that
                             because the nuclear reactor category accounted for approximately 88
                             percent of the NRC fee-funded budget in fiscal year 2010, the nuclear
                             reactor category was responsible for approximately 88 percent of the fees
                             collected for fiscal year 2010. NRC officials told us that because they
                             analyze costs for NRC’s larger fee categories annually and revise their
                             division of fees accordingly by industry sector, at times an industry
                             sector’s proportion of fees has risen or fallen compared to the previous
                             year. However, NRC officials stated that the industries they regulate are
                             generally aware of what work NRC plans to do related to each industry



                             Page 31             GAO-12-686 Federal Communications Commission: Regulatory Fees
sector—in part because NRC informs industry of its plans during its
budget process.

CRTC also links the division of its fees by fee category to its costs for
regulating each fee category, and CRTC updates its cost analysis and its
fee assessment annually. One element of CRTC’s process that may be
instructive to FCC in considering reforms is that while according to CRTC
officials, CRTC regulates many of the same converging industries in
Canada that FCC regulates in the United States, CRTC has only two fee
categories for assessing regulatory fees: telecommunications and
broadcast. Like FCC, CRTC regulates wireline telephone, wireless
telephone, direct broadcast satellite and cable television operators,
broadcast television, and radio. 47 However, CRTC has one broadcast fee
category that includes radio stations, television stations, and cable and
direct broadcast satellite television operators. All pay the same rate on
the same basis—the licensee’s fee revenues for the most recently
completed year. In contrast, FCC has 62 fee categories for the same
broadcasting services, and different bases for different fee categories,
including, among others, a flat fee for each fee category of broadcast
television and radio station, a per-subscriber fee rate for cable television,
and a per-satellite fee rate for direct broadcasting satellite television
operators.

In another example, CRTC’s telecommunications fee category
encompasses wireless telephone services and wireline telephone
services. The rate for the telecommunications fee category is set on the
same basis used to set the rate for the broadcast industry—the licensee’s
fee revenues for the most recently completed year. In contrast, FCC has
separate fee categories for wireless telephone services and wireline
telephone services—and the two fee categories pay different rates set on
different bases, with the wireless telephone rate set on a per-subscriber
basis and the wireline telephone rate set on a per-revenue-dollar basis.

CRTC officials told us that having two fee categories—both with fee rates
determined on the basis of revenue—makes it relatively easy for CRTC to
align costs to a fee category, even given the increasing convergence of
industry and the cross-cutting nature of CRTC’s work. CRTC officials told


47
  Some of the industry sectors FCC regulates are regulated in Canada by another
Canadian agency, Industry Canada, including the submarine cable industry. In addition,
unlike FCC, CRTC does not manage spectrum, which is managed by Industry Canada.




Page 32                GAO-12-686 Federal Communications Commission: Regulatory Fees
                        us they track CRTC’s direct costs according to these fee categories in
                        CRTC’s activity-based cost system annually. Because most mission-
                        related staff are assigned to work centers aligned with either the
                        broadcasting or the telecommunications industries, CRTC officials said it
                        is administratively easy to track costs according to these fee categories.
                        For staff working on cross-cutting issues related to both categories,
                        management estimates how much time each staff has spent on each of
                        the two fee categories. 48 CRTC then divides the total amount in fees it
                        must collect between the two fee categories based on its costs
                        associated with each fee category. Indirect costs for internal services
                        provided to the entire agency—such as, among other things, human
                        resources, legal services, and accounting—are divided among the two
                        fee categories consistent with the distribution of direct costs.

                        FERC also tracks its costs by industry sector and fee category annually
                        and then assesses fees in alignment with its costs. FERC officials told us
                        that FERC’s time and attendance system tracks the time staff spends
                        directly on each fee category through activity codes aligned with particular
                        fee categories. This assessment of time spent on each industry forms the
                        basis of the assessment of fees. Similar to CRTC, indirect costs are
                        assessed among the fee categories based on the assessment of direct
                        costs incurred by industry sector.


Making the Assessment   NRC takes specific steps that facilitate industry and public understanding
Process Transparent     of how the agency distributes and assesses regulatory fees that go
                        beyond FCC’s provision of information on this topic. NRC officials stated
                        that NRC’s chief financial officer has consistently emphasized the
                        importance of transparency in setting fees. According to NRC officials,
                        transparency is important because the fees impact NRC’s stakeholders,
                        and therefore stakeholders should be able to understand how the fees
                        are derived. While both FCC and NRC publish NPRMs and Final Orders
                        regarding each year’s fees, NRC also publishes the workpapers it has
                        used to determine the fees and rates in its NPRMs and Final Orders to



                        48
                          Before CRTC began estimating the time staff spent on cross-cutting issues, officials told
                        us they had used an activity-based costing system to account for all staff time spent on
                        each category. CRTC leadership later asked the managers in each category to estimate
                        the distribution of staff time. According to officials we met with, the estimates were close
                        enough to the results of the activity-based costing system that CRTC determined it wasn’t
                        cost-effective to continue using its activity-based costing system for this purpose.




                        Page 33                 GAO-12-686 Federal Communications Commission: Regulatory Fees
                          further promote transparency. These workpapers contain detailed cost
                          data that form NRC’s basis for setting its fees for each industry sector.
                          NRC’s website has a link to an electronic docket that contains its
                          regulatory-fee-related NPRM, Final Order, and workpapers, such that one
                          can see how NRC went from its detailed cost data to its final fee-setting
                          rule. As described previously, in recent years, FCC has not included this
                          level of detail in its NPRMs and Reports and Orders related to its
                          regulatory fees. Moreover, in addition to providing these supporting
                          workpapers on its website, NRC staff told us they also meet with industry
                          stakeholders periodically to help ensure the stakeholders understand the
                          assessment process and how the fee rates are determined.


Handling of Excess Fees   As mentioned earlier, FCC may not obligate any excess fees it receives
                          without an appropriation from Congress. In contrast, officials at all five
                          agencies we met with told us their agency has a form of annual
                          adjustment or “true-up” mechanism such that any excess fees collected
                          are either applied as an adjustment to the next year’s fees or are
                          refunded. Four of the five agencies apply any excess fees collected
                          toward the next year’s fee assessment, while one agency issues a refund.
                          For example, according to NRC’s fiscal year 2011 Annual Financial
                          Report, NRC applies collections that exceed its budget authority to offset
                          subsequent years’ appropriations. According to FERC officials, at year-
                          end, FERC calculates a required subsequent year adjustment based on
                          the difference between the amounts assessed and actual costs. CRTC
                          officials told us that they make an adjustment to the subsequent year’s
                          assessments based on the difference between the fees collected—based
                          on estimated costs—and annual expenditures. FCA officials stated that
                          FCA also makes adjustments for overpayments in the current year to fees
                          owed the following year. Lastly, CNSC officials told us they refund fees
                          collected in excess of actual costs. As a result of these procedures, the
                          fees paid to these five agencies are ultimately used to fund the regulatory
                          agency or are refunded.


                          The Communications Act states that FCC is to derive regulatory fees from
Conclusions               the number of FTEs in certain bureaus performing regulatory activities,
                          but the act does not specifically state how frequently FCC must
                          reexamine its FTEs to assure its regulatory fees are aligned with FCC’s
                          current work priorities. FCC has relied on this lack of clarity to justify
                          continuing to use 1998 data as the basis for its assessment of regulatory
                          fees—in spite of the vast changes to the telecommunications industry that
                          have occurred, including significant convergence of technologies and


                          Page 34             GAO-12-686 Federal Communications Commission: Regulatory Fees
changes in the nature of the industries that FCC regulates. Federal user
fee guidance, accounting standards, and the practices of other agencies
we met with all stress the importance of using timely, regularly updated
data to guide decisions, with federal user fee guidance directing agencies
to review user fees biennially to assure that charges are adjusted to
reflect changes that have occurred. In addition, although FCC has made
incremental changes to the fee schedule first established in the
Communications Act and implemented by FCC in fiscal year 1994, FCC
has not considered more holistic changes to the way regulatory fees are
assessed. In part, FCC’s difficulties in keeping its process current may be
because its statutory framework is based on a telecommunications
environment that no longer exists. The large number of fee categories—
86 in fiscal year 2011—may have contributed to FCC’s difficulties in
keeping the division of fees aligned with the current regulatory activities
on which it spends its time. Furthermore, FCC’s lack of transparency in
disclosing its methodology for dividing regulatory fees among fee
categories and the different methodologies FCC uses to calculate fee
rates for different industries have made it difficult for stakeholders to
understand and comment on FCC’s decisions related to its regulatory fee
process.

On July 17, 2012, FCC released an NPRM on regulatory fee reform,
which, as described in our agency comments section, contains proposals
that respond to many of the concerns raised in this report. The processes
of other regulatory fee-funded agencies, both in the United States and
internationally, may be instructive for FCC as it considers such issues as
re-aligning its division of regulatory fees and increasing the transparency
of the process. We acknowledge the inherent difficulties in reforming the
process. Because of the zero-sum nature of FCC’s regulatory fees, any
significant changes to FCC’s assessment of regulatory fees among
industry sectors and fee categories would most likely result in fee
increases for some sectors and fee decreases for other sectors. Not only
is this likely to be controversial to some industry stakeholders, but this
change—and any analysis required to better align regulatory fees to
FCC’s division of FTEs by fee category—is likely to be time consuming
and require some FCC resources, if done comprehensively. Some
potential changes, such as changes to the bases on which FCC assesses
regulatory fees—could add new administrative burdens on FCC or
industry stakeholders. The likely effects of changes to its current fee
assessment will need to be carefully analyzed by FCC. In releasing the
regulatory fee reform NPRM, FCC has taken an important first step in this
challenging reform effort, but significant analysis and decisions remain to
be made by FCC.


Page 35             GAO-12-686 Federal Communications Commission: Regulatory Fees
                      Lastly, over time, FCC has collected approximately 2 percent more on
                      average than is required in its annual appropriations acts. Because recent
                      annual appropriations do not permit FCC to use any of these excess fees
                      without congressional action, they currently have grown to $66 million
                      and, absent any change in FCC’s statutory authority and method of
                      collecting fees, are likely to continue to increase. The decision of how to
                      dispose of these excess regulatory fees as well as how to handle any
                      future excess collections is a policy choice for Congress to make.


                      Congress should consider whether FCC’s excess fees (approximately
Matter for            $66 million through fiscal year 2011) should be appropriated for FCC’s
Congressional         use, or, if not, what the disposition of these funds should be, and whether
                      to change FCC’s annual appropriations language to permit reconciliation
Consideration         of excess collections or to govern FCC’s handling of any future excess
                      collections.


                      We recommend that the Chairman of the FCC, as part of FCC’s effort to
Recommendations for   reform its regulatory fee process, take the following three actions:
Executive Action
                      •   Determine whether and how the current fee schedule should be
                          revised—including an overall analysis of the appropriate number of
                          categories and bases for calculating rates—to reflect the current
                          telecommunications industry and FCC’s regulatory activities, and in
                          consideration of the processes of other regulatory fee-funded
                          agencies that may be instructive, including, if appropriate, proposing
                          to Congress any needed changes to its current statutory authority.

                      •   Perform an updated FCC FTE analysis by fee category and establish
                          a process to assure that the FTE analysis be performed at least
                          biennially, consistent with federal guidance on user fees.

                      •   Increase the transparency of FCC’s regulatory fee process by
                          describing in each future year’s NPRM and subsequent report, in
                          sufficient detail for stakeholders to understand, the methodology and
                          analysis used to divide fees among fee categories, including the year
                          any FTE data used was collected, any additional information needed
                          to explain the effect of other adjustments, and the amount of excess
                          fees collected.




                      Page 36             GAO-12-686 Federal Communications Commission: Regulatory Fees
                  FCC provided written comments on a draft of this report by letter dated
Agency Comments   July 17, 2012. These comments are summarized below and are reprinted
                  in appendix II. FCC agreed with our recommendations and stated that an
                  NPRM on regulatory fee reform, released on July 17, 2012, addressed
                  them. FCC stated that the NPRM sets forth three goals to guide FCC in
                  its reform initiative: fairness, administrability, and sustainability. FCC
                  stated that to achieve these goals, the Commission has proposed a
                  series of fundamental changes to its regulatory fee program that include,
                  but are not limited to, proposals contained in our recommendations. For
                  example, FCC stated that, consistent with our recommendations, the
                  NPRM seeks comment on (1) using updated fiscal year 2012 FTE data to
                  calculate regulatory fees, (2) whether reducing the number of regulatory
                  fee categories would be advisable, and (3) whether the different bases on
                  which regulatory fees are currently calculated should be reduced or made
                  uniform among all services. FCC stated that, consistent with our
                  recommendation to consider the processes of other regulatory fee-funded
                  agencies, it would place a copy of our final report in the record of the
                  rulemaking so that interested parties could comment on our
                  recommendations and analyses. Regarding our recommendation that
                  FCC review its division of FTEs at least biennially, FCC stated that its
                  NPRM seeks comment on the frequency with which FCC should revisit its
                  division of FTEs, such as annually. Furthermore, FCC stated that it would
                  implement our recommendation to increase the transparency of its
                  rulemaking process in its next annual regulatory fee proceeding, for fiscal
                  year 2013. Finally, regarding our matter for congressional consideration
                  related to excess fees, FCC stated that should Congress decide to
                  examine these or any other issues regarding regulatory fees, FCC would
                  provide any information Congress may request. We recognize that the
                  proposals contained in FCC’s NPRM are responsive to our
                  recommendations. In light of FCC’s lack of action after its 2008 FNPRM
                  on regulatory fee reform, it remains critical that FCC continue to move
                  forward on analyzing its proposals and determining how best to update its
                  regulatory fee process.




                  Page 37             GAO-12-686 Federal Communications Commission: Regulatory Fees
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 report. At that time, we will send copies to the Chairman of
FCC and other interested parties. In addition, the report will be available
at no charge on the GAO website at http://www.gao.gov.

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




Mark L. Goldstein
Director
Physical Infrastructure Issues




Page 38             GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix I: Objectives, Scope and
              Appendix I: Objectives, Scope and
              Methodology



Methodology

              In response to your request to review FCC’s regulatory fee process, we
              examined (1) FCC’s process for assessing regulatory fees among
              industry sectors and the results of this process, (2) FCC’s regulatory fee
              collections over the past 10 years compared to the amount it was directed
              to collect by Congress, and (3) alternative approaches to assessing and
              collecting regulatory fees that could be instructive for FCC as it considers
              reforms to its process.

              In examining FCC’s regulatory fee process, we reviewed relevant federal
              statutes, federal appropriations acts, congressional reports and hearing
              transcripts, FCC documents, and GAO reports. We spoke to
              stakeholders, including officials at FCC, industry trade associations, and
              fee-paying companies. Specifically, among others, we reviewed the
              following documents:

              •   Statute establishing FCC’s regulatory fee-collecting authority (Section
                  9 of the Communications Act of 1934)

              •   FCC’s appropriations acts, fiscal years 1994 to 2011

              •   Conference Report to Accompany the Federal Communications
                  Commission Authorization Act of 1991, Sept. 17, 1991

              •   Hearing transcript, House Energy and Commerce Subcommittee on
                  Communications and Technology Hearing on President Obama’s
                  Fiscal 2013 Budget Proposal for the Federal Communications
                  Commission, February 16, 2012

              •   FCC Notices of Proposed Rulemakings, Further Notice of Proposed
                  Rulemaking, and Reports and Orders related to FCC’s collection of
                  regulatory fees, fiscal years 1994 through 2012

              •   FCC budget justifications, fiscal years 2005 to 2013

              •   FCC internal documentation of its regulatory fee methodology

              •   FCC internal documentation related to its core financial system,
                  Genesis

              •   FCC strategic plans, 2009 to 2014 and 2012 to 2016

              •   FCC annual financial reports, fiscal years 2010 and 2011




              Page 39                 GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix I: Objectives, Scope and
Methodology




•   Prior GAO work on FCC, regulatory agencies, and user fees

•   Federal guidance on user fees and cost accounting, including the
    Office of Management and Budget’s Circular No. A-25 and the
    Statement of Federal Financial Accounting Standards 4.

We also spoke with stakeholders from the following entities:

•   FCC—Office of the Managing Director, Enforcement Bureau,
    International Bureau, Media Bureau, Wireless Telecommunications
    Bureau, Wireline Competition Bureau

•   Two former FCC commissioners

•   Industry associations—American Association of Paging Carriers,
    CTIA-The Wireless Association, Independent Telephone &
    Telecommunications Alliance, National Association of Broadcasters,
    National Cable and Telecommunications Association, US Telecom

•   Fee-paying Companies—Commonwealth Broadcasting, Critical Alert
    Systems, DIRECTV, Gannett Company Inc./Multimedia Holdings
    Corp., Intelsat, KRIS-TV, Level 3 Communications, Mainline
    Broadcasting, Midcontinent Media, People’s Telco, Quincy
    Newspapers (regarding its TV and radio interests), Southern Utah
    Telephone Company, Windstream Communications, and WUBU-FM

To select the fee-paying companies (listed above) to interview about their
perspectives on FCC’s regulatory fee process, we began with a list of
companies provided by FCC. Our criteria for selecting companies from
the FCC list were as follows:

•   companies from each industry sector (wireless, wireline, broadcasting,
    cable, international);

•   companies from a variety of fee codes within the industry sectors; and

•   an emphasis on small companies, as they may be less well
    represented in associations, less likely to submit public comments to
    regulatory fee rulemakings, and regulatory fees may impact them
    more.

Within each industry sector and fee category, we selected companies
using these criteria and a few additional constraints. For example, if an



Page 40                 GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix I: Objectives, Scope and
Methodology




FM radio station in a small market appeared to be owned by a company
that also owned a station in a large market, then we treated it as large.
Also, in most cases, companies were selected based on the fee
categories in which they conducted their primary business, not on
secondary business they might also have conducted.

To understand FCC’s regulatory fee collections over the past 10 years
compared to the amount it was directed to collect by Congress, we (1)
met with officials to discuss FCC fee collection process and timeline and
(2) analyzed FCC regulatory fee collection data from FCC’s internal
financial system, Genesis, by FCC’s “payment type code” from fiscal year
2002 to fiscal year 2011. We assessed the reliability of the data through
reviewing documentation on Genesis, and through interviews
supplemented with questionnaires to knowledgeable agency officials on
Genesis and related internal controls. We determined that the data were
sufficiently reliable for determining FCC’s total regulatory fee collections,
including by industry sector, for fiscal years 2002 through 2011, and for
determining the amount of late payments in each of those years. We
compared this fee collection data with the amount Congress appropriated
to FCC for each respective year. FCC’s payment type codes are codes
FCC assigns to identify the fee category for which a regulatory fee
payment is associated with. FCC officials also provided us with a cross-
reference that associated payment type codes with the main industry
sectors used in our review (i.e., Broadcast, Cable, Wireline, Wireless, and
International.) Subsequently, we analyzed the fee payment data by
industry sector to understand the extent, if any, to which excess fees
collected were associated with a particular industry sector and to analyze
the influence of late payments on the total amount collected. We also
spoke with a budgeting and forecasting expert, who provided background
information and context related to FCC’s use of estimates and forecasts
in setting regulatory fees.

To identify alternative approaches to FCC’s regulatory fee process that
could be instructive as FCC considers reforms to its current process, we
reviewed the regulatory fee processes of several foreign and domestic
federal agencies. In selecting comparative agencies, we narrowed our
scope to those agencies that were similar enough to FCC in mission and
fee process such that possibly instructive alternatives could be identified.
FCC is an independent agency that regulates interstate and international
communications by radio, television, wire, satellite and cable, and that
assesses annual regulatory fees to offset its entire annual appropriation
from Congress. We therefore selected independent regulatory
commissions that recover the majority or all of their costs through annual


Page 41                 GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix I: Objectives, Scope and
Methodology




fees assessed on regulated entities, including, in the U.S., the (1) Nuclear
Regulatory Commission, (2) Federal Energy Regulatory Commission, and
(3) The Farm Credit Administration. In order to include an agency that
regulates industries that are similar to those regulated by FCC, we also
included (4) the Canadian Radio-television and Telecommunications
Commission (CRTC). Lastly, after receiving a recommendation from an
official at CRTC, we included (5) the Canadian Nuclear Safety
Commission, the Nuclear Regulatory Commission’s Canadian
counterpart.

We conducted this performance audit from May 2011 to August 2012 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.




Page 42                 GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix II: Comments from the Federal
              Appendix II: Comments from the Federal
              Communications Commission



Communications Commission




              Page 43                GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix II: Comments from the Federal
Communications Commission




Page 44                GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix II: Comments from the Federal
Communications Commission




Page 45                GAO-12-686 Federal Communications Commission: Regulatory Fees
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Mark L. Goldstein, (202) 512-2834 or goldsteinm@gao.gov
GAO Contact
                  In addition to the contact above, Tammy Conquest (Assistant Director),
Staff             Juan P. Avila, Russell Burnett, Patrick Dudley, Fred Evans, Colin Fallon,
Acknowledgments   Bob Homan, Bert Japikse, Jacqueline M. Nowicki, Joshua Ormond, Steve
                  Rabinowitz, and Alwynne Wilbur made key contributions to this report.




(543287)
                  Page 46                 GAO-12-686 Federal Communications Commission: Regulatory Fees
GAO’s Mission         The Government Accountability Office, the audit, evaluation, and
                      investigative arm of Congress, exists to support Congress in meeting its
                      constitutional responsibilities and to help improve the performance and
                      accountability of the federal government for the American people. GAO
                      examines the use of public funds; evaluates federal programs and
                      policies; and provides analyses, recommendations, and other assistance
                      to help Congress make informed oversight, policy, and funding decisions.
                      GAO’s commitment to good government is reflected in its core values of
                      accountability, integrity, and reliability.

                      The fastest and easiest way to obtain copies of GAO documents at no
Obtaining Copies of   cost is through GAO’s website (www.gao.gov). Each weekday afternoon,
GAO Reports and       GAO posts on its website newly released reports, testimony, and
                      correspondence. To have GAO e-mail you a list of newly posted products,
Testimony             go to www.gao.gov and select “E-mail Updates.”

Order by Phone        The price of each GAO publication reflects GAO’s actual cost of
                      production and distribution and depends on the number of pages in the
                      publication and whether the publication is printed in color or black and
                      white. Pricing and ordering information is posted on GAO’s website,
                      http://www.gao.gov/ordering.htm.
                      Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
                      TDD (202) 512-2537.
                      Orders may be paid for using American Express, Discover Card,
                      MasterCard, Visa, check, or money order. Call for additional information.
                      Connect with GAO on Facebook, Flickr, Twitter, and YouTube.
Connect with GAO      Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.
                      Visit GAO on the web at www.gao.gov.
                      Contact:
To Report Fraud,
Waste, and Abuse in   Website: www.gao.gov/fraudnet/fraudnet.htm
                      E-mail: fraudnet@gao.gov
Federal Programs      Automated answering system: (800) 424-5454 or (202) 512-7470

                      Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-
Congressional         4400, U.S. Government Accountability Office, 441 G Street NW, Room
Relations             7125, Washington, DC 20548

                      Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800
Public Affairs        U.S. Government Accountability Office, 441 G Street NW, Room 7149
                      Washington, DC 20548




                        Please Print on Recycled Paper.