oversight

Telecommunications: FCC Has Reformed the High-Cost Program, but Oversight and Management Could be Improved

Published by the Government Accountability Office on 2012-07-25.

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

             United States Government Accountability Office

GAO          Report to Congressional Requesters




July 2012
             TELECOMMUNICATIONS

             FCC Has Reformed the
             High-Cost Program, but
             Oversight and
             Management Could be
             Improved




GAO-12-738
                                              July 2012

                                              TELECOMMUNICATIONS
                                              FCC Has Reformed the High-Cost Program, but
                                              Oversight and Management Could be Improved
Highlights of GAO-12-738, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
The high-cost program within the              Under the USF Transformation Order, FCC adopted new rules to fundamentally
Universal Service Fund (USF) provides         change the high-cost program by extending the program to support broadband
subsidies to telecommunications               capable networks. For example, FCC established a $4.5-billion annual program
carriers that serve rural and other           budget for the next 6 years, created new funds—called the Connect America
remote areas with high costs of               Fund and the Mobility Fund—that will support broadband deployment, and
providing telephone service. The              established public interest obligations for the carriers as a condition of receiving
annual program cost has grown from            funds. Specifically, FCC will require carriers to offer broadband services in their
$2.6 billion in 2001 to over $4 billion in    supported service areas, meet certain broadband performance requirements,
2011, primarily funded through fees
                                              and report regularly on associated broadband performance measures. FCC also
added to consumers’ phone bills. The
                                              changed its method for distributing funds to carriers to address some of the
program is managed by the Federal
Communications Commission (FCC),
                                              recognized inefficiencies with the program. According to FCC, these changes will
which noted that providing universal          allow it to reduce high-cost support for carriers providing only voice services and
access to broadband is “the universal         make funds available to carriers to offer both voice and broadband services.
service challenge of our time.”               FCC has taken several steps to address previously identified oversight and
Accordingly, FCC made changes to the          management challenges that GAO and the Office of Management and Budget
program to make funds available to            (OMB) have raised in the last 7 years, but issues remain. Management
support both telephone and                    challenges identified by GAO included a lack of performance goals and
broadband. GAO previously reported
                                              measures for the program and weak internal controls, while OMB criticized
that using USF monies for broadband
                                              FCC’s inability to base funding decisions on measurable benefits. In response,
could cause the size of the fund to
greatly expand unless FCC improved            FCC established performance goals and measures for the high-cost program and
its management and oversight to               improved internal control mechanisms over the fund. While these are noteworthy
ensure the program’s cost-                    actions, GAO identified gaps in FCC’s plans to better oversee the program and
effectiveness. This requested report          make it more effective and efficient. In particular, FCC has not addressed its
examines FCC’s (1) plans for                  inability to determine the effect of the fund and lacks a specific data-analysis plan
repurposing the high-cost program for         for carrier data it will collect. Such analysis would enable FCC to adjust the size
broadband, and (2) plans to address           of the Connect America Fund based on data-driven evaluation and would allow
previously identified management              Congress and FCC to make better informed decisions about the program’s future
challenges as it broadens the                 and how program efficiency could be improved.
program’s scope. GAO reviewed and
analyzed pertinent FCC orders,                GAO also found that FCC lacks a mechanism to link carrier rates and revenues
associated stakeholder comments, and          with support payments. A requirement in statute is for rates for
reports related to USF and interviewed        telecommunications services to be reasonably comparable in rural and urban
federal and industry stakeholders, as         areas, but FCC has noted that some rural carriers are offering basic local rates
well as economists and experts.               for telephone services that are lower than the average basic rate paid by urban
                                              consumers. FCC has stated that it is not equitable for all consumers to subsidize
What GAO Recommends                           the cost of service for some consumers who pay local service rates that are
FCC should (1) establish a specific           significantly lower than the national average and has therefore instituted an
data-analysis plan for carrier data to        incentive mechanism for carriers to increase artificially low consumer rates.
determine program effectiveness, and          Although FCC would like to prevent consumers from subsidizing carriers that
(2) consult with the Joint Board as it        offer service at artificially low rates, its incentive mechanism to raise rural rates
examines the factors for calculating          will not reduce the financial burden placed on all consumers as there is currently
carrier support payments. FCC                 no connection between the support payments a carrier receives and the carrier’s
concurred with the recommendations            rates and revenues. The Federal-State Joint Board on Universal Service
and provided technical comments.              recommended that FCC consider a carrier’s revenues when calculating its need
                                              for support payments, but in the past, FCC declined to implement this
View GAO-12-738. For more information,
contact Mark Goldstein at (202) 512-2834 or   recommendation. FCC is developing a new model to calculate carrier support,
goldsteinm@gao.gov.                           but has not stated what factors will be included.

                                                                                        United States Government Accountability Office
Contents


Letter                                                                                             1
                       Background                                                                  4
                       FCC Aims to Improve Efficiency and Provide Support for
                         Broadband through Changes to the High-Cost Program                        8
                       FCC Has Taken Steps to Address Previously Identified Oversight
                         and Management Challenges, but Issues Remain                            15
                       Conclusions                                                               23
                       Recommendations for Executive Action                                      25
                       Agency Comments                                                           25

Appendix I             Objectives, Scope, and Methodology                                        27



Appendix II            Comments from the Federal Communications Commission                       30



Appendix III           Federal Communications Commission’s Action to Implement National
                       Broadband Plan Recommendations Related to the Universal Service
                       Fund and Implement the USF Transformation Order                  34



Appendix IV            GAO Contact and Staff Acknowledgments                                     39



Related GAO Products                                                                             40



Tables
                       Table 1: Summary of Current Universal Service Fund Programs                 6
                       Table 2: General Roles of Agencies and Organizations Involved in
                                High-Cost Program Administration                                   7
                       Table 3: FCC’s Performance Goals and Measures for the High-Cost
                                Program                                                          17
                       Table 4: List of Telecommunications Industry Stakeholders and
                                Economists Contacted                                             28
                       Table 5: Status of FCC Actions to Implement Recommendations
                                from the National Broadband Plan                                 34



                       Page i                     GAO-12-738 Repurposing USF for Broadband Deployment
Table 6: Key Actions and Timeline for Implementing the USF
         Transformation Order                                                             36




Abbreviations

FCC               Federal Communications Commission
Joint Board       Federal-State Joint Board on Universal Service
OMB               Office of Management and Budget
NASUCA            National Association of State Utility Consumer Advocates
NECA              National Exchange Carrier Association
USAC              Universal Service Administrative Company
USF               Universal Service Fund




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Page ii                           GAO-12-738 Repurposing USF for Broadband Deployment
United States Government Accountability Office
Washington, DC 20548




                                   July 25, 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 Honorable Edward J. Markey
                                   House of Representatives

                                   Federal policy has long called for making affordable residential telephone
                                   service available to the greatest possible number of Americans—a policy
                                   known as “universal service.” The nation’s Universal Service Fund (USF),
                                   managed by the Federal Communications Commission (FCC), includes
                                   four programs that subsidize telecommunications carriers that provide
                                   telephone and other communications services. Since 1998, USF has
                                   distributed about $81.7 billion to carriers in all 50 states, the District of
                                   Columbia, and all U.S. territories. The USF programs are funded through
                                   mandatory payments from companies providing telecommunications
                                   services—payments usually passed along to consumers as a line item
                                   fee on their telephone bill. The USF program with the largest amount of
                                   annual expenditures, the high-cost program, provides subsidies to
                                   telecommunications carriers that serve rural, remote, and other areas
                                   where the costs of providing telephone service are high. 1 By providing
                                   support to carriers, the high-cost program allows the carriers to charge
                                   lower telephone rates than otherwise would be available to customers in
                                   those areas. In the past few years, significant growth of the fund has
                                   raised concerns about what the program is accomplishing, whether the
                                   fund can be sustained over the long term, and the cost burden it imposes


                                   1
                                     The high-cost program is the subject of this report. The other three USF programs
                                   subsidize telecommunication carriers that serve low-income consumers, schools and
                                   libraries, and rural health care providers. For more information on the USF programs, see
                                   the “related products” page at the end of this report.




                                   Page 1                            GAO-12-738 Repurposing USF for Broadband Deployment
on consumers. Much of the increase in USF has been the result of growth
in the high-cost program. In particular, the annual amount of money
disbursed by the high-cost program has increased 54 percent in the last
decade, growing from $2.6 billion in 2001 to over $4 billion in 2011.

While the high-cost program has traditionally supported telephone
service, FCC adopted new program rules to enable program funds to
support both telephone and broadband deployment. Broadband service is
increasingly viewed as a critical component of the nation’s physical
infrastructure and a key driver of economic growth. Both the current and
former Presidents and Congress have recognized that important policy
goals are to ensure the universal availability of infrastructure necessary to
provide broadband service and the ability of all citizens to subscribe to it.
In early 2009, Congress directed FCC to develop a broadband plan to
ensure that every American has access to broadband capability. 2
Congress required that this plan include a detailed strategy for achieving
affordability and maximizing use of broadband. In March 2010, an FCC
task force issued the National Broadband Plan, which recommended
reforming USF so that it could support both telephone and broadband
service. 3 The National Broadband Plan noted that 14 million Americans
either have inadequate or no access to residential fixed broadband, and
FCC characterized providing universal access to broadband as “the
universal service challenge of our time.” As such, FCC has made
changes in the distribution and use of the high-cost program funds to
make them available to support both telephone service and broadband
deployment. These changes are outlined in an order released in
November 2011, in which FCC said it “comprehensively reforms and
modernizes” the universal service system to ensure that affordable voice
and broadband service are available throughout the nation. 4 However,
there are several legal challenges to FCC’s authority to use USF monies
for deploying broadband-capable networks.



2
 Congress required FCC to develop a broadband plan and to report annually on the state
of broadband availability. American Recovery and Reinvestment Act, Pub. L. No. 111-5,
§6001(k)(1), 123 Stat. 115, 515 (2009).
3
 Federal Communications Commission, Connecting America: The National Broadband
Plan (Mar. 16, 2010).
4
 We refer to this order as the USF Transformation Order. Connect America Fund et al.,
WC Docket No. 10-90 et al., Report and Order and Further Notice of Proposed
Rulemaking, 26 FCC Rcd 17663 (2011).




Page 2                           GAO-12-738 Repurposing USF for Broadband Deployment
We previously reported that using USF monies for broadband deployment
could cause the size of the fund to greatly expand unless policymakers
reexamined its purpose, design, and management, and unless FCC
improved its management and oversight processes to ensure the
program’s cost-effectiveness. In prior reports on FCC’s management of
USF, we noted long-standing weaknesses, including that FCC had
neither undertaken a data-driven approach to overseeing USF nor
established performance goals and measures for its programs.
Specifically related to the high-cost program, we reported in 2008 that the
significant program growth had raised concerns about what the program
was accomplishing, whether it had clear objectives, and whether it had
effective controls over expenditures. 5

In response to your request to assess FCC’s efforts to repurpose USF for
broadband deployment, we examined (1) FCC’s plans for repurposing the
USF high-cost program for broadband services and (2) how FCC is
planning to address previously identified oversight and management
challenges as it broadens the program’s scope.

To address these objectives, we reviewed and analyzed FCC’s 2011 USF
Transformation Order and associated stakeholder comments and
reviewed our past reports and academic literature related to USF. We
also interviewed officials from FCC, the Universal Service Administrative
Company (USAC), 6 the National Exchange Carrier Association (NECA), 7
and the National Association of State Utility Consumer Advocates
(NASUCA). 8 We met with associations representing the
telecommunications industry and state regulatory commissions, and
economists from academia and the telecommunications industry


5
 GAO, Telecommunications: FCC Needs to Improve Performance Management and
Strengthen Oversight of the High-Cost Program, GAO-08-633 (Washington, D.C.: June
13, 2008).
6
 USAC is the not-for-profit corporation that administers USF programs under FCC’s
direction.
7
 NECA is a not-for-profit association of local telephone carriers established by FCC in
1983 to perform telephone industry tariff filings and revenue distributions. NECA collects
cost and line count data from its members and validates this information.
8
 NASUCA is an association of 44 consumer advocates in 40 states and the District of
Columbia. NASUCA's members are designated by the laws of their respective jurisdictions
to represent the interests of utility consumers before state and federal regulators and in
the courts.




Page 3                             GAO-12-738 Repurposing USF for Broadband Deployment
             recognized for their thorough knowledge of universal service. We
             identified experts and industry stakeholders based on prior published
             literature and other stakeholders’ recommendations. We limited the scope
             of our review to the USF high-cost program because in the USF
             Transformation Order, FCC focused on repurposing the high-cost
             program to support broadband. 9 We did not review FCC’s reform efforts
             related to intercarrier compensation. 10 Further details of our scope and
             methodology are provided in appendix I.

             We conducted this performance audit from September 2011 to July 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.


             The Communications Act of 1934 first established the nation’s
Background   telecommunications policy, including making communications services
             available “so far as possible, to all the people of the United States.” Since
             the cost of providing telephone service in rural areas is generally higher
             than the cost of providing service in central cities of metropolitan areas,
             universal service policy has traditionally targeted financial support to rural
             and other high-cost areas. In the Telecommunications Act of 1996 (the
             1996 Act), Congress specified that consumers in “rural, insular, and high-
             cost areas” should have access to telecommunication rates and services
             that are “reasonably comparable” to consumers in urban areas. 11 The
             1996 Act established a Federal-State Joint Board on Universal Service
             (Joint Board), which is composed of three FCC commissioners, four state
             regulatory commissioners, and a consumer advocate. The Joint Board


             9
              In February 2012, FCC adopted new rules for another USF program that includes
             developing a pilot to determine how USF monies could be used to increase broadband
             adoption among low-income consumers. Lifeline and Link Up Reform and Modernization
             et al., Report and Order and Further Notice of Proposed Rulemaking, WC Dkt. Nos. 11-42
             et al., CC Dkt No. 96-45, FCC 12-11, para. 515 (rel. Feb. 6, 2012).
             10
               In the USF Transformation Order, FCC also reformed the intercarrier compensation
             system. Intercarrier compensation refers to a system of payments between carriers for the
             origination, transportation, and termination of telecommunications traffic.
             11
              47 U.S.C. § 254(b)(3).




             Page 4                            GAO-12-738 Repurposing USF for Broadband Deployment
makes recommendations to FCC on implementing the universal service
related provisions of the 1996 Act. 12 The 1996 Act also altered the federal
mechanism for funding universal service by requiring telecommunications
carriers and other entities providing interstate telecommunications service
to contribute to USF, unless exempted by FCC. 13 The carriers generally
pass these costs on to customers, sometimes in the form of a line item on
customer’s telephone bills. According to FCC, the average cost to each
household in America is about $2.73 per month. 14 The contributions are
deposited into the USF and distributed to the telecommunications carriers
that provide service.

USF provides financial support (i.e., subsidies) through four different
programs, each targeting a particular group of telecommunications users
(see table 1). In 2011, support for the four programs totaled $8 billion, and
the high-cost program accounted for the largest amount of support—$4
billion, or 50 percent of USF support. The high-cost program directly and
indirectly supports basic telephone (i.e., fixed wireline), broadband, and
wireless telephone (i.e., mobile) services. To make these services
universally available, the high-cost program offers support to both wireline
and wireless carriers operating in high-cost areas—generally rural—to
offset costs, thereby allowing these carriers to provide rates and services
that are comparable to the rates and services that consumers in low cost
areas—generally urban—receive. 15 Consequently, while urban
consumers pay the full cost of their service, many rural consumers
receive services that are subsidized by the high-cost fund.




12
  FCC does not have to implement the recommendations made to it by the Joint Board
but it is required to consider them.
13
 47 U.S.C. § 254(d).
14
  This calculation is based on the total size of the USF divided by the number of
households, but since USF contributions are also assessed to businesses, FCC believes
the average cost to each household is likely to be less than $2.73 per month.
15
  Wireline carriers are providers of traditional landline telecommunications services
involving connections to the public switched telephone network by wire (or fiber) local
loops that terminate in fixed locations at customer premises, such as residences. Wireless
carriers are providers of wireless telecommunications services, operating with
electromagnetic waves, such as providing cellular phone service.




Page 5                            GAO-12-738 Repurposing USF for Broadband Deployment
Table 1: Summary of Current Universal Service Fund Programs

                                                                                                                        Calendar year 2011
                                                                                                                            disbursements
Program                    Description                                                                                         (in millions)
High-cost                  Assists customers living in high-cost, rural, or insular areas through financial
                           support to telephone carriers, thereby lowering rates for local and long-distance
                           service.                                                                                                  $4,031
Schools and libraries      Assists eligible schools and libraries through discounted telecommunications and
(federal E-Rate program)   information services. Discounts available for local and long-distance telephone
                           service, Internet access, and internal connection projects.                                                2,232
Low income                 Assists qualifying low-income customers through discounted installation and
                           monthly telephone services and free toll limitation service.                                               1,750
Rural health care          Assists health care providers located in rural areas through discounts for
                           telecommunications and Internet access services. Discounts are provided to
                           make rates for facilities in rural areas reasonably comparable to those in nearby
                           urban areas.                                                                                                  82
                                           Source: GAO presentation of FCC, NECA, and USAC data.



                                           The USF support a carrier can receive depends on various factors,
                                           including its status as either the incumbent or a competitor, and the
                                           number of lines it claims in its service territory. Incumbent carriers are
                                           telephone carriers for a given service area that were in existence when
                                           Congress passed the 1996 Act and were members of NECA. These
                                           incumbent carriers are further classified as either “rural”—generally small
                                           carriers serving primarily rural areas—or “nonrural”—generally large
                                           carriers serving both rural and urban areas. Many small rural carriers are
                                           subject to rate-of-return regulation, while nonrural carriers are usually
                                           larger and subject to price-cap regulations and provide service to
                                           approximately 95 percent of U.S. households, according to FCC
                                           officials. 16

                                           Federal and state governments play a role in implementing the federal
                                           high-cost program, as do not-for-profit corporations and associations.
                                           FCC has overall responsibility for the federal high-cost program, including
                                           making and interpreting policy, overseeing program operations, and
                                           ensuring compliance with its rules. However, FCC delegated to USAC


                                           16
                                             Rate-of-return regulation is a form of rate regulation wherein the carrier is allowed to
                                           recover its costs and earn a predetermined rate (or profit). Price-cap regulation is a form
                                           of rate regulation wherein the carrier may charge rates for regulated services up to an
                                           allowable cap, which is adjusted based on factors beyond the carrier’s control, such as
                                           inflation.




                                           Page 6                                       GAO-12-738 Repurposing USF for Broadband Deployment
                                        responsibility to administer the day-to-day operations of the high-cost
                                        program. State regulatory commissions hold the primary responsibility to
                                        determine carrier eligibility for program participation (i.e., states designate
                                        eligibility status of carriers) and to annually certify that carriers will
                                        appropriately use high-cost program support. 17 Table 2 summarizes the
                                        general roles and responsibilities of the agencies and organizations
                                        involved in high-cost program administration.

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

Agency/Organization             Description
FCC                             •   Makes all policy decisions pertaining to USF
                                •   Oversees program administration and finances
                                •   Designates eligibility status of some carriers to receive universal service support, including
                                    some carriers serving Tribal lands
                                •   Conducts oversight of some carriers’ use of funds
USAC                            •   Primary administrator of the high-cost program
                                •    Collects and validates line count data from carriers
                                •    Bills contributors, collects contributions, and disburses universal service support
                                •    Recovers improperly disbursed funds
                                •    Maintains accounting records
                                •    Processes appeals of funding decisions
                                •    Submits periodic reports to FCC
                                •    Conducts carrier oversight
NECA                            •    Collects and validates cost and revenue data from carriers
                                •    Collects and validates line count data from carriers
                                •    Calculates the national average cost per loop
                                •    Administers the interstate access charge revenue pools
State regulatory commissions    •    Designate eligibility status of most carriers to receive universal service support
                                •   Annually certify that beneficiaries in their jurisdictions will use high-cost program support
                                    appropriately
                                •    Some states may designate and certify wireless carriers
                                •    Some states audit carriers
                                        Source: GAO presentation of FCC, NECA, and USAC data.



                                        The 2010 National Broadband Plan provided a road map for FCC to
                                        reform the high-cost program, among other USF programs, to ensure that
                                        all Americans have access to broadband-capable networks. The National


                                        17
                                          FCC also designates eligibility status of some carriers to receive high-cost program
                                        funds.




                                        Page 7                                       GAO-12-738 Repurposing USF for Broadband Deployment
                        Broadband Plan concluded that millions of Americans do not have access
                        to broadband infrastructure at the target of 4 megabits per second (Mbps)
                        download and 1 Mbps upload. 18 The plan recommended, among other
                        things, creating a Connect America Fund to address broadband
                        availability gaps in unserved areas. The plan also recommended creating
                        a Mobility Fund to provide support for deployment of a wireless network.
                        As we previously reported, implementing the plan’s recommendations
                        and ensuring universal broadband availability will be challenging, and it
                        remains to be seen whether and how effectively FCC will be able to
                        address these challenges and implement the plan’s recommendations. 19



FCC Aims to Improve
Efficiency and
Provide Support for
Broadband through
Changes to the High-
Cost Program

FCC Adopted New Rules   FCC adopted new rules to fundamentally change the high-cost program
to Support Broadband    by extending the program to support broadband capable networks.
                        According to FCC, the new rules will not adversely affect traditional voice
                        services; rather the changes will ensure that affordable voice and
                        broadband services are available to all Americans by 2017. The new
                        rules also addressed multiple recommendations from the National
                        Broadband Plan. See appendix III for the status of FCC’s efforts related to
                        those recommendations and a timeline for implementing the new rules. In
                        adopting the USF Transformation Order, FCC said it would control the
                        size of the fund as it transitions to support broadband and require


                        18
                          Broadband connections in the U.S. can provide speeds exceeding 1 Mbps both
                        upstream (data transferred from the consumer to the Internet service provider, also known
                        as upload) and downstream (data transferred from the Internet service provider to the
                        consumer, also known as download).
                        19
                          GAO, Telecommunications: National Broadband Plan Reflects the Experiences of
                        Leading Countries, but Implementation Will Be Challenging, GAO-10-825 (Washington,
                        D.C.: Sept. 14, 2010).




                        Page 8                            GAO-12-738 Repurposing USF for Broadband Deployment
accountability from carriers receiving support to ensure that public
investments are used wisely to deliver intended results. The order
outlines the following rules intended to improve the high-cost program
and enable it to support broadband capable networks:

Establishing a program budget for the first time. FCC set a budget of
$4.5 billion annually over the next 6 years by taking a number of actions,
including placing a cap on total per-line support, freezing certain support
for service providers at current levels, eliminating or phasing down certain
types of support, and setting caps for rate-of-return carriers’ capital and
operating expenses. FCC also established an automatic review trigger if
the program budget is threatened to be exceeded. Specifically, the USF
Transformation Order states that if program demand exceeds the
annualized $4.5 billion budget over any consecutive 4 quarters once fund
reserves are exhausted, FCC will initiate a process to bring demand back
under budget. 20 According to FCC, the $4.5 billion, which was set at the
2011 estimated level of support, will provide a predictable funding level
for carriers and protect consumers and businesses that ultimately pay for
the fund as FCC expands the program to support broadband. 21 In the
past, the high-cost program was not constrained by a specified level of
funding and we and other stakeholders have previously raised concerns
about the growing size of the program. The National Broadband Plan
recommended that FCC try to keep the overall size of the fund close to its
current size (in 2010 dollars) and FCC stated that the budget will help to
ensure that consumers will not pay more in contributions given the new
program rules.

Creating the Connect America Fund. FCC created the Connect
America Fund, which will ultimately replace the high-cost fund, to make
both wireline and wireless broadband available in unserved areas. Within
the Connect America Fund, FCC established support for mobile voice and
broadband services, recognizing that promoting universal availability of
mobile services is a vital component of universal service. Specifically,
FCC established the Mobility Fund, which is the first universal service



20
  For the years 2012-2017, USAC will forecast total high-cost universal service demand
as no less than $1.125 billion. When the demand for high-cost funds is less than $1.125
billion, the excess funds will become the fund’s reserves and will be used to make up the
difference when demand exceeds $1.125 billion in a quarter.
21
  It should be noted that FCC’s budget for the high-cost program is not the same as a firm
cap, since unlike a firm cap, the $4.5 billion budget can be exceeded.




Page 9                            GAO-12-738 Repurposing USF for Broadband Deployment
                          mechanism dedicated to ensuring availability of mobile voice and
                          broadband services in areas where service is currently not available. In
                          2012, FCC dedicated $300 million (one-time) for extending wireless
                          coverage in unserved areas and $500 million annually for ongoing
                          support for mobile voice and broadband service.

                          Establishing public interest obligations for all eligible carriers.
                          Previously, carriers were required to meet state public interest obligations
                          and limited federal duties as eligible telecommunications carriers to
                          receive USF support payments; however, carriers were not required to
                          meet any specific performance standards in exchange for receiving the
                          funds. 22 Under the USF Transformation Order, FCC requires all carriers
                          to offer broadband services in their supported service areas, meet certain
                          broadband performance requirements, and report regularly on associated
                          broadband performance measures. For instance, one of the broadband
                          performance requirements is for carriers providing service to fixed
                          locations to offer actual download speeds of at least 4 Mbps and upload
                          speeds of at least 1 Mbps to broadband subscribers.

FCC Is Implementing       In the USF Transformation Order, FCC changed its method for
Changes to Its Funding    distributing funds to carriers to address some of the recognized program
Distribution to Improve   inefficiencies. According to FCC, these changes will allow it to reduce
                          high-cost support for carriers providing only voice services and make
Program Efficiency        funds available to carriers for the deployment of both voice and
                          broadband-capable networks. Since many of these changes have yet to
                          be implemented, it is too early to assess their effectiveness. In the order,
                          FCC took the following actions:

                          Eliminated the identical support rule. To encourage competition
                          among carriers in rural areas, in 1997 FCC enacted the identical support
                          rule. At that time, FCC concluded that it would be inconsistent with the
                          statute and the competitive goals of the 1996 Act to exclude any
                          providers (regardless of the technology used for providing voice service)
                          from receiving universal service support and therefore determined that
                          universal service support should be available to all carriers that met the



                          22
                            Some carriers were required to meet state-defined obligations for carriers of last resort,
                          which include among other things, providing reliable service on nondiscriminatory terms at
                          rates set by the state commission. Although there were no federal carriers of last resort
                          obligations, carriers receiving USF support payments were conditioned to meet limited
                          requirements, such as providing single phone line service and touch-tone dialing.




                          Page 10                            GAO-12-738 Repurposing USF for Broadband Deployment
eligibility requirements, including competitive carriers that offered service
via satellite or other wireless technology. Under this model, incumbent
carriers received support based on their costs of providing service in an
area or from FCC’s cost model and competitive carriers received the
same amount of support per line served as the incumbent, regardless of
whether the competitor needed that same amount of support to provide
service. FCC assumed that high-cost support would be given to the most
efficient and competitive carriers providing fixed, wireline telephone
service (not mobile wireless providers), as they attracted customers from
the incumbent carriers in a competitive marketplace. FCC anticipated that
as the number of subscribers taking service from a more efficient
competitor increased, the number of subscribers taking service from the
incumbent would decrease, thereby decreasing the amount of support
FCC paid to the incumbent providers. However, the vast majority of
support payments for competitors went to wireless carriers and rather
than providing a complete substitute for traditional wireline service,
wireless competitors largely provided mobile voice service to customers
who also had wireline service. Thus, FCC ended up paying support for
both incumbents and competitors serving the same area, which caused
disbursements from the fund to increase dramatically.

In the USF Transformation Order, FCC acknowledged that the existing
system of providing high-cost support to competitive carriers that were
serving the same customers as the incumbent providers was inefficient
and the identical support rule failed to efficiently target support payments
to where they were most needed. By eliminating the identical support
rule, FCC can stop paying competitive carriers providing voice services
and make those funds available for fixed and mobile voice and broadband
services in targeted areas, including areas unserved by broadband.
Several of the stakeholders and economists we contacted supported
FCC’s decision to eliminate the identical support rule, noting that it was
inefficient and ineffective. Starting January 1, 2012, FCC froze support for
each competitive carrier at the 2011 monthly baseline amount. Beginning
July 1, 2012, FCC stated it would reduce support for each competitive
carrier by 20 percent annually for the next 5 years, with the aim of fully
eliminating support by July 1, 2016.

Eliminated support in areas with 100 percent overlap. FCC also
eliminated high-cost support for incumbent carriers in areas where an
unsubsidized competitor—or a combination of unsubsidized
competitors—also provides voice and broadband in the same service
area, known as 100 percent overlap. During the course of its
proceedings, FCC found that in many areas of the country, the high-cost



Page 11                      GAO-12-738 Repurposing USF for Broadband Deployment
program provided more support than necessary to achieve its goals by
“subsidizing a competitor to a voice and broadband provider that was
offering service without government assistance.” Significant
improvements in technology have made it possible for some cable
operators to offer many services, including both voice and broadband. As
such, cable operators have become unsubsidized competitors, offering
both voice and broadband services in the same service areas as
incumbent carriers. A report commissioned by the National Cable and
Telecommunications Association found that $504 million of high-cost
support went to 277 rural incumbent carriers’ service area in which
unsubsidized cable voice service was available to more than half of all
households. The report also found that in many areas, cable operators
offer voice service to more than 75 percent of the households, and in
some cases they offer service to 90-100 percent of households in an
incumbent carriers’ study area. 23 Documents FCC made available to a
congressional committee also showed evidence that other carriers, both
wireless and wireline, provide service in high-cost areas but do not
receive high-cost support. 24 For example, in an area in which the
incumbent carrier received $1.7 million (almost $13,000 per line) annually
in 2009, four wireless carriers provided voice service to more than 90
percent of that carrier’s service area without receiving USF support.

FCC acknowledged that providing high-cost support in areas of the
country where another voice and broadband provider offers high-quality
service without government assistance is an inefficient use of high-cost
support, and therefore plans to eliminate support in areas with 100
percent overlap service. An economist we contacted raised concerns on
how FCC will identify and eliminate support for incumbent carriers in
areas where unsubsidized competitors provide coverage. Details on the
methodology and data to be used for determining overlap areas are
currently unknown, but FCC plans to phase out, over a 3 year period, all
support for incumbent carriers in those areas where unsubsidized




23
  Jeffrey A. Eisenach, Universal Service Subsidies to Areas Served by Cable Telephony,
(November 2009).
24
  In June 2010, the Committee on Energy and Commerce, U.S. House of
Representatives, requested that FCC provide a list of the top 10 recipients of high-cost
support and the amount of support received, in total and by subscriber line, and the list of
competitors providing service in that area that did not receive high-cost support for years
2007-2009.




Page 12                            GAO-12-738 Repurposing USF for Broadband Deployment
competitors offer voice and broadband services for 100 percent of the
residential and business locations in the incumbent’s service area. 25

Established a new method to distribute funds to price-cap carriers.
Prior to the USF Transformation Order, FCC distributed high-cost support
to price-cap carriers through multiple mechanisms: for example, in some
areas FCC used a cost model to determine the costs of providing service
in a specific area, while in other areas, support was based on actual cost
of service. FCC recognized that this method of distributing high-cost
funds needed to be changed to accelerate broadband deployment in
unserved areas. Therefore, FCC changed the rules to (1) freeze the
amount of high-cost support distributed to the price-cap carriers at the
2011 support level, and (2) starting when there are model-set support
amounts and auction rules in place (which FCC anticipated would be in
January 2013) and for the next 5 years, employ a new model and
competitive bidding to support networks that can provide both voice and
broadband services. 26 Specifically, FCC plans to develop a model that
can be used for each census block in high-cost areas to determine the
amount of support required to extend and sustain a broadband-capable
network. Each incumbent price-cap carrier will have the opportunity to
accept the annual support derived from the model in each state in which it
operates. In exchange for accepting the support, a carrier must continue
providing voice service, commit to deploying broadband service, and
meet public interest obligations associated with all the eligible census
blocks in its territory. If an incumbent price-cap carrier declines, then FCC
will put the service area up for competitive bid. The winning bidder will be
required to provide voice and broadband services, and will receive the
amount of support the carrier bid to provide service. 27

Stakeholders we contacted had mixed views on FCC’s plans for using
both a model and competitive bidding. Several economists we



25
  This phase down period will start once FCC establishes a methodology for determining
areas of overlap and publishes a list of companies for which there is 100 percent overlap.
These issues are part of a pending Further Notice.
26
  FCC also made an additional $300 million in incremental support available to incumbent
price-cap carriers to encourage immediate broadband build-out.
27
  The carrier who proposes the lowest bid will be able to deploy the broadband-capable
network in that area and receive high-cost support payments. FCC sometimes refers to
this competitive bidding process as a “reverse auction” since the lowest bid wins.




Page 13                           GAO-12-738 Repurposing USF for Broadband Deployment
interviewed commented that while FCC’s planned model may be an
improvement over the previous distribution mechanism, it may not be the
most effective way for distributing support because using a model is data
intensive and requires accurate and reliable data from carriers. On the
other hand, telecommunications stakeholders commented that if the
variables used in the model are relatively accurate, the model may ensure
that support is properly targeted to the areas most in need.

Changed the method for determining support levels for rate-of-
return carriers. Prior to the USF Transformation Order, rate-of-return
carriers received funding from the high-cost fund based on their actual
costs. Under the old rules, some carriers were reimbursed for up to 100
percent of their eligible expenditures, faced no FCC imposed limits, and
had no incentive to be more efficient. 28 Under the new rules, FCC is
taking multiple actions to target support for investments in broadband,
increase accountability, and increase incentives for efficient use of public
resources. The reform measures include limiting reimbursements for
capital and operating expenses, and establishing an overall cap on the
amount of support, totaling $250 per line per month, or $3,000 annually.
The cap will be phased in over a 3-year period. Some economists we
spoke with commented that it does not go far enough to make the
mechanism more efficient. Two economists told us that if the reform were
to have any impact, the cap needed to be further reduced to $100 per line
per month. 29

FCC has also adopted a rule to limit support to carriers whose end-user
rates (i.e., basic telephone rates that carriers charge their customers) do
not meet a local rate floor. During the course of its proceedings, FCC
found that some carriers receiving high-cost support were offering basic
voice plans as low as $5 per month, in comparison to the 2008 national
average local rate of $15.62. The law requires that urban and rural rates
be reasonably comparable, which FCC has implemented by requiring that
rural consumers pay no more than two standard deviations 30 above the


28
  Connect America Fund; High-Cost Universal Service Support, WC Docket Nos. 10-90,
05-337, Order, DA 12-646 (Wireline Comp. Bur. rel. Apr. 25, 2012), para. 1 and 2
29
  According to FCC, some 13,500 lines will be affected with the $250 per line per month
cap. If the cap had been set at $100 per line per month, then about 185,000 lines in 108
service areas would have been affected in 2010.
30
  The term standard deviation refers to how spread out or widely dispersed the values in
the sample are from the mean of the sample.




Page 14                           GAO-12-738 Repurposing USF for Broadband Deployment
                         average of what urban consumers pay for the same level of voice
                         service. 31 To address this inefficiency, FCC has adopted a rule to reduce
                         high-cost support for carriers whose end-user rates for voice service do
                         not meet the local rate floor.

                         Furthermore, to help ensure that the reform efforts do not adversely affect
                         traditional voice service, FCC developed a waiver process for carriers that
                         contend the reforms will affect their ability to provide reasonably
                         comparable service at reasonably comparable rates if FCC reduces their
                         current support levels. In petitioning FCC for a waiver, a carrier must
                         clearly demonstrate that good cause exists for exempting it from some or
                         all of the reforms, and that the waiver is necessary and in the public
                         interest to ensure that consumers in the area continue to receive voice
                         service. FCC cautioned that those seeking a waiver would be subject to a
                         rigorous review, including an accounting of all revenues that the carrier
                         receives. However, for those carriers receiving a waiver, FCC has not yet
                         determined if it would impose a ceiling on the amount of support a carrier
                         could receive per line.



FCC Has Taken Steps
to Address Previously
Identified Oversight
and Management
Challenges, but Issues
Remain

FCC Steps to Address     We and OMB have each issued a report in the last 7 years critical of
Management Challenges    FCC’s management of the high-cost fund and in the USF Transformation
                         Order, FCC has taken several steps to address these challenges. The
                         management challenges we identified included a lack of performance
                         goals and measures for the program and weak internal controls, resulting
                         in FCC’s limited ability to oversee the actions of carriers or the data they
                         provide. In 2005, OMB criticized FCC’s inability to measure the effect of



                         31
                          47 U.S.C.§ 254 (b)(3).




                         Page 15                      GAO-12-738 Repurposing USF for Broadband Deployment
                                the fund on subscribership in rural areas or to base funding decisions on
                                any indication of measurable benefits. 32 To address these challenges,
                                FCC has (1) established performance goals and measures for the high-
                                cost program, (2) improved its internal control mechanisms over the fund,
                                and (3) directed USAC to undertake additional oversight and
                                management actions.

Established Performance Goals   In 2008, we reported that FCC lacked specific performance goals or
and Measures                    measures for the high-cost program. OMB reported that the high-cost
                                program neither measures the impact of funds on telephone
                                subscribership in rural areas nor bases funding decisions on measureable
                                benefits. As a result, after spending more than $41.1 billion in high-cost
                                funds since 2001, we reported that it was still unclear what FCC had
                                achieved through the program. In our report in 2008, we recommended
                                that FCC establish short- and long-term performance goals and measures
                                to make clear the program’s intentions and accomplishments. 33

                                As shown in table 3, FCC developed five performance goals and three
                                performance measures for the high-cost program in the USF
                                Transformation Order. As of July 2012, FCC was still formulating
                                measures for the remaining two goals.




                                32
                                  OMB. Program Assessment – Universal Service Fund High-Cost
                                http://georgewbush-whitehouse.archives.gov/omb/expectmore/detail/10004451.2005.html,
                                (accessed July 3, 2012).
                                33
                                 GAO-08-633.




                                Page 16                         GAO-12-738 Repurposing USF for Broadband Deployment
Table 3: FCC’s Performance Goals and Measures for the High-Cost Program

Goals                                                                   Measures
Preserve and advance universal availability of voice service.           FCC will use the telephone penetration rate, which measures
                                                                        subscription to telephone service.
Ensure universal availability of voice and broadband to homes, FCC will collect the number of residential, business, and community
businesses, and community anchor institutions.                 anchor institution locations that newly gain access to broadband
                                                               services. As an efficiency measure, FCC will use the change in the
                                                               number of homes, businesses, and community anchor institutions
                                                               passed or covered per million USF dollars spent.
Minimize the universal service contribution burden on                   FCC will divide the amount of the total inflation-adjusted expenditures
consumers and businesses.                                               of the high-cost program and Connect America Fund each year by
                                                                        the number of American households and measure it as a monthly
                                                                        dollar figure.
Ensure universal availability of mobile voice and broadband             FCC has not yet developed measures for this goal.
where Americans live, work, and travel.
Ensure reasonably comparable rates for voice and broadband              FCC has not yet developed measures for this goal.
services in all regions of the nation.
                                             Source: GAO based on FCC information.




Improved Internal Control                    In 2008, we also reported weaknesses in FCC’s internal control
Mechanisms                                   mechanisms, including the carrier certification process, carrier audits, and
                                             carrier data validation. State officials’ annual certification of carriers is the
                                             primary tool used to determine if carriers are operating according to the
                                             high-cost fund’s guidelines. However, because the certification
                                             requirements were not standardized across states, carriers have been
                                             subject to varying levels of oversight. Audits of carriers are the primary
                                             tool used to oversee carrier activities, and audits may be conducted by
                                             USAC, state regulatory commissions, or FCC’s Office of Inspector
                                             General. In 2008, we reported that from 2002 to 2008, USAC had
                                             conducted about 17 audits, from more than 1,400 carriers participating
                                             annually in the high-cost program. We also found in a survey that 7 out of
                                             50 state regulatory commissions reported auditing incumbent carriers.
                                             Based on these findings, among others, we determined that FCC’s
                                             internal controls were weak and that its ability to adequately oversee the
                                             high-cost program was hindered. In addition, neither FCC nor USAC had
                                             audited the carrier-reported data for accuracy, and they did not follow up
                                             to assess whether the actions carriers claimed they were taking with
                                             regard to using high-cost support were consistent with the actions they
                                             actually were taking. We recommended that FCC identify areas of risk in




                                             Page 17                                  GAO-12-738 Repurposing USF for Broadband Deployment
                             its internal control environment and implement mechanisms to help
                             ensure carriers’ compliance with program rules. 34

                             In the USF Transformation Order, FCC addressed all three of the areas
                             we discussed in our 2008 report. To standardize the certification
                             requirements and bring more scrutiny to the data reported by carriers,
                             FCC established a national oversight framework that will be implemented
                             as a partnership between FCC and the states, U.S. territories, and tribal
                             governments. This framework will include annual reporting and
                             certification requirements for all carriers receiving universal service funds
                             and is designed to provide federal and state regulators with the
                             information needed to determine whether recipients are using support for
                             the intended purposes. Under the new standards, all carriers must include
                             in their annual reports to FCC and their respective state commissions a
                             progress report on their 5-year build-out plans, data, and explanatory text
                             concerning outages, unfulfilled requests for service, and complaints
                             received. They must also certify compliance with applicable service
                             quality and consumer protection standards and further certify their ability
                             to function in emergency situations.

Directed USAC to Undertake   To address the lack of audits on the part of FCC and USAC, FCC
Additional Oversight         directed USAC to review and enhance two programs that are intended to
                             oversee and safeguard USF. 35 FCC developed these programs in
                             coordination with OMB in 2010 to ensure that recipients of USF support
                             comply with FCC rules, and to prevent and detect waste, fraud, and
                             abuse. FCC expects that these audits will verify the accuracy of the
                             underlying data and address our previously reported concern that FCC
                             does not validate the accuracy of data reported by carriers. 36 Additionally,
                             FCC directed USAC to annually assess compliance with the new
                             requirements established for Connect America Fund recipients and test




                             34
                              GAO-08-633.
                             35
                                These two programs are called the Beneficiary/Contributor Compliance Audit Program
                             and the Payment Quality Assurance Program.
                             36
                              GAO-08-633.




                             Page 18                         GAO-12-738 Repurposing USF for Broadband Deployment
                               the accuracy of carriers’ certifications. 37 While these activities may
                               improve FCC’s oversight of program funds, it is too soon to assess their
                               effectiveness.


Gaps in FCC’s Oversight        While FCC has taken steps to address several shortcomings of the high-
and Management of the          cost program, our review of the order has identified gaps in FCC’s plans
High-Cost Program              to better oversee the program and make it more effective and efficient.
                               Specifically, we determined that FCC lacks (1) a data-analysis plan for
                               carrier data it will collect, and (2) a mechanism to link carrier rates and
                               revenues with USF support payments.

Lack of a Data-Analysis Plan   In the past, FCC had no way to measure the effectiveness of the high-
for Carrier Data               cost program because it did not collect adequate data at the service area
                               level, i.e., a geographic area served by a specific carrier that would allow
                               FCC to measure the effect of the funds by carrier on subscribership
                               levels. 38 As a result, FCC did not know if high-cost funds were achieving
                               their intended purpose. Economists have pointed out that to determine if
                               high-cost funds were achieving their intended purpose, FCC would need
                               to determine whether the provision of funds had caused an increase in
                               the level of subscribership that would not have occurred in the absence of
                               the funds. To assess program effectiveness, FCC would need to collect
                               data showing the outcomes (i.e., the change in the level of telephone
                               subscriptions) in study areas that used these funds as well as the
                               outcomes in study areas where these funds were not used.

                               Under the USF Transformation Order, FCC will start collecting data from
                               carriers that receive Connect America Fund monies on (1) the amount of
                               funding the carriers received, (2) their build-out of infrastructure for
                               broadband capable networks, and (3) service quality and speed in the



                               37
                                 For the first phase of the Connect America Fund, FCC established a requirement that
                               carriers must have completed build-out to two-thirds of the requisite number of locations
                               within 2 years. FCC also directed USAC to assess compliance with this requirement for
                               each holding company that receives funds during the first phase. According to FCC, any
                               oversight program to assess compliance will be designed to ensure that carriers are
                               reporting accurately and will be designed to test some of the underlying data that forms
                               the basis for a carrier’s certification of compliance with various requirements.
                               38
                                Service area is usually the service territory where a telecommunications carrier operates
                               and provides services in one state. Holding companies may own multiple operating
                               companies and thus have multiple service areas in a state.




                               Page 19                           GAO-12-738 Repurposing USF for Broadband Deployment
                              level of broadband service provided. 39 According to the order, FCC is
                              collecting the information to monitor progress in achieving its broadband
                              goals and to assist FCC in determining whether the funds are being used
                              appropriately. However, FCC’s order does not articulate a specific data-
                              analysis plan for the carrier data it will collect and it is unclear if or how
                              FCC plans to use the data. We have previously noted that sound program
                              evaluation should include a detailed data-analysis plan to track the
                              program’s performance and evaluate its final results. 40 Lacking such an
                              evaluation, the achievements and overall effectiveness of the Connect
                              America Fund are less likely to be clear and FCC might not have the
                              analysis to determine what changes should be made to improve the
                              program. Analyzing the carrier data could enable FCC to determine the
                              program’s effectiveness because the analysis would provide some
                              definitive examples of the connection between the level of subsidy and
                              the specific demographic factors of the service areas that have shown an
                              increase in broadband access. 41 Furthermore, such analysis would
                              enable FCC to adjust the size of the Connect America Fund based on
                              sound evaluation and would allow Congress and FCC to make better
                              informed decisions about the future of the program and how program
                              efficiency could be improved. Although FCC plans to determine the
                              number of residential, business, and community anchor institution
                              locations that have newly gained access to broadband service per $1
                              million spent in USF subsidy, such an evaluation does not provide any
                              direct link between an increase in broadband access and funding
                              subsidies provided by the Connect America Fund. In other words, FCC
                              will know the extent to which broadband access has changed over time,
                              but it will not know what factors have influenced the change.

Lack of a Mechanism to Link   One of FCC’s performance goals (and a requirement in statute) is to
Carrier Rates and Revenues    ensure that rates for broadband and voice services are reasonably
with Support Payments         comparable in all regions of the country. FCC has defined voice rates as
                              being reasonably comparable if the rural rate is equal to or greater than



                              39
                                USF Transformation Order, Appendix A, ¶54.313.
                              40
                                GAO, Telecommunications: FCC's Performance Management Weaknesses Could
                              Jeopardize Proposed Reforms of the Rural Health Care, GAO-11-27 (Washington, D.C.:
                              Nov. 17, 2010).
                              41
                                FCC noted that this data will not allow direct attribution of improvement in the availability
                              of broadband to the amount of money provided as this would assume that there would not
                              be any investment on the part of the carrier.




                              Page 20                             GAO-12-738 Repurposing USF for Broadband Deployment
the average urban rate but not by more than two standard deviations.
However, in the USF Transformation Order, FCC reported that many rural
carriers are offering basic local rates for telephone service that are lower
than the average basic local rate paid by urban consumers. In fact, FCC
cited data submitted by NECA which summarized 2008 residential rates
for over 600 companies — a broad cross-section of carriers that typically
receive universal service support — showing that approximately 60
percent of those carriers offered pricing plans that were below the 2008
national average local rate of $15.62. (According to FCC information
published in 2008, if the average urban rate plus federal and state
charges were $25.62, rural rates plus federal and state charges could be
as high as $36.52.) Two of the economists we contacted have written on
the inequity of this urban-rural rate difference, stressing that an effect of
this inequity could be the transfer of wealth from poor urban consumers
who pay into the fund but receive no subsidy, to wealthy rural consumers
who benefit from subsidized rates. 42

To address this discrepancy, the USF Transformation Order required
carriers to provide price data for both local telephone rates and
broadband service. FCC will begin collecting data in July 2012 regarding
rates paid by consumers in rural areas that do not meet the local rate
floor. FCC officials told us they are developing a survey of urban rates to
obtain more current information than the last urban rate survey, which
was published in 2008. Once it obtains these data, it can analyze the
extent to which rural consumers pay rates lower than urban consumers.
FCC also instituted an incentive for carriers to increase artificially low
consumer rates by reducing high-cost support for voice services to those
carriers whose customers do not pay an amount equal to a specified local
rate floor. 43 In other words, FCC plans to limit high-cost support for
carriers to the extent they provide service to consumers at rates below
the national urban average. 44 In the USF Transformation Order, FCC
justified this reduction by stating that “we do not believe it is equitable for



42
  Gregory Rosston and Bradley Wimmer, “The ‘State’ of Universal Service,” Information
Economics and Policy 12, no.3 (2000): 261-283.; Scott Wallsten, The Universal Service
Fund: What do High-Cost Subsidies Subsidize?” (Washington, D.C.: Technology Policy
Institute, February 2011).
43
 USF Transformation Order, para 235 & 240.
44
  FCC requires carriers to report the number of customer lines that are less than the
average urban rate.




Page 21                           GAO-12-738 Repurposing USF for Broadband Deployment
consumers across the country to subsidize the cost of service for some
consumers that pay local service rates that are significantly lower than the
national urban average.” 45 FCC officials told us they plan to determine
how much carrier revenue would increase if the rural rates increased to
the urban rate average. However, because FCC does not include carrier
revenues in determining USF support payments for the carriers, FCC will
allow carriers that subsequently raise their rates to the national urban
average to receive the support payments they were initially denied when
their rates were below the specified floor. As a result, FCC’s incentive
mechanism to raise rural rates will not result in any reduction in the
amount consumers are charged for universal service. Members of the
National Association of State Utility Consumer Advocates (NASUCA) we
contacted expressed concern that the level of USF support payments is
not tied to a carrier’s rates and revenues. They explained that carriers’
revenues come from services other than basic local service, but all of
those services are carried over the networks to which consumers have
contributed for years through the USF. These revenues are not included
in the determination of USF payments that the carriers will receive. In
addition, of the six economists we interviewed who are knowledgeable
about how universal service support payments are determined, four
explicitly mentioned revenues as one of the factors that should be taken
into account for modeling the level of support that carriers receive.

In 2007, the Joint Board adopted as a basic principle that USF should
exist within a limited budget and made several recommendations to help
FCC do so, including considering a carrier’s revenues when calculating its
need for USF support. Controlling the growth of the high-cost fund could
help FCC achieve its goal of minimizing the universal service contribution
burden on consumers and businesses. Similar to the points raised by
NASUCA and four of the economists we contacted, the Joint Board
believed in 2007 that if broadband was to become a funded universal
service, then the mechanisms used to calculate support payments should
be revised to take into account the carriers’ net profits from selling
broadband to wireline customers. The Joint Board noted that such profits
should be measured and used to offset some of the carriers’ claims for
explicit USF support. However, in 2008, FCC declined to implement the
Joint Board’s recommendation related to considering carrier revenues
when calculating support payments. According to the Joint Board, FCC



45
 USF Transformation Order, para 237.




Page 22                        GAO-12-738 Repurposing USF for Broadband Deployment
              did not address why the Joint Board’s recommendation had not been
              adopted.

              Under the USF Transformation Order, FCC will consider a carrier’s
              revenue when determining support payments under certain
              circumstances. In particular, for those carriers that petition for a waiver to
              exempt the carrier from some or all USF reforms, FCC intends to subject
              such requests to a rigorous, thorough, and searching review comparable
              to a total company earnings review. In those cases, FCC intends to take
              into account not only all revenues derived from network facilities that are
              supported by universal service, but also revenues derived from
              unregulated and unsupported services as well. As we noted previously,
              under the USF Transformation Order, FCC is developing a new model to
              revise its method for calculating carrier support, since FCC recognized
              that the prior method of distributing high-cost funds needed to be
              changed to accelerate broadband deployment in unserved areas.
              However, FCC has not stated what factors, such as carrier revenues, will
              be included in the model. 46


              FCC has undertaken the difficult task of reforming the high-cost program
Conclusions   to make it more efficient and thus able to support both voice and
              broadband services. In the USF Transformation Order, FCC said it would
              control the size of USF as it transitions to support broadband and adopted
              new rules to make the fund more efficient as a way to minimize the
              universal service contribution burden on consumers and businesses. As
              FCC looks to broaden the scope of the high-cost program by providing
              support for broadband capable networks, it is therefore important for FCC
              to ensure that the limited program funds are used as effectively and
              efficiently as possible to stem further growth in the fund. Historically, FCC
              has not collected data at the level economists agree is necessary to
              determine the overall effectiveness of the high-cost program or
              demonstrate that the program increased telephone subscribership
              beyond the level that would have been achieved if there were no subsidy.
              Rather, FCC has assumed that the subsidies going to carriers were



              46
                FCC plans to complete the model by the end of 2012 and has not yet made the
              proposed model public. FCC officials believe FCC is not prohibited per se from
              considering revenues. Rather, FCC would consider the statutory directives, relevant legal
              precedent, and the record in the relevant FCC proceedings in determining whether
              support is sufficient but not excessive to achieve the goals of universal service.




              Page 23                           GAO-12-738 Repurposing USF for Broadband Deployment
positively affecting subscribership even though it collected no empirical
data to support that conclusion. In the USF Transformation Order, FCC
instituted performance goals and measures with the intention of ensuring
that the reforms achieve their intended purpose, and will require those
carriers receiving support from the Connect America Fund to submit
additional information. However, FCC has no specific data-analysis plan
for the carrier data it will collect. Such analysis could enable FCC to
correlate the amount of money spent with the increase in broadband
access in specific areas and thus help FCC to determine the
effectiveness of Connect America Fund expenditures. Lacking such
analysis, the program’s achievements and overall effectiveness are less
likely to be clear and Congress and FCC might not have the information
necessary to make informed decisions about the program’s future.

According to statute, urban and rural telecommunication rates should be
reasonably comparable, but many rural consumers, whose rates are
supported through the high-cost fund, pay rates that are lower than many
urban consumers. FCC has stated that it is not equitable for all
consumers to subsidize the cost of service for some consumers who pay
local service rates that are significantly lower than the national average.
In addition, given the way the high-cost program is funded, it is possible
that poor urban consumers are subsidizing wealthy rural consumers. To
provide an incentive for carriers to raise rates in rural areas, FCC plans to
penalize carriers with rates that are too low by reducing the amount of
high-cost support they can receive. While this action should help rural and
urban rates become more comparable, it will not prevent consumers from
subsidizing the cost of service for those areas where rates are too low
because FCC will continue to allow carriers to receive the same amount
of subsidy once their rates are raised to the urban mean. Therefore,
although FCC would like to prevent consumers from subsidizing carriers
whose rates for basic local service are artificially low, its incentive
mechanism to raise rural rates will not reduce the financial burden placed
on all consumers as there is currently no connection between the amount
of support payments a carrier receives and the revenue a carrier earns,
through rates or any other source. In addition to voicing concern for the
potential inequity of rural rates that are lower than urban rates, FCC has a
stated goal to minimize the universal service contribution burden on
consumers and businesses. The National Broadband Plan recommended
that FCC keep the overall size of the fund close to its 2010 funding level,
and the Joint Board has stated its strong commitment to limit the size of
the fund. As a way to control the size of the fund, the Joint Board
recommended that FCC consider a carrier’s revenues when calculating
its need for USF support but FCC declined to implement this


Page 24                      GAO-12-738 Repurposing USF for Broadband Deployment
                      recommendation. Under the USF Transformation Order, FCC has the
                      opportunity to revisit this issue as it develops a new model to determine
                      the amount of support a carrier should receive, however it has not stated
                      what factors will be included in the model.


                      FCC should take the following two actions:
Recommendations for
Executive Action      •   To determine the overall effectiveness of the Connect America Fund
                          as well as improve the oversight and transparency of the high-cost
                          program, establish a specific data-analysis plan for the carrier data
                          and make the information publicly available.
                      •   To help minimize the universal service contribution burden on
                          consumers and businesses, as FCC examines and revises the
                          manner in which carrier support payments are calculated, consult with
                          the Joint Board and/or make appropriate referrals to determine what
                          factors, such as carrier revenues, should be considered in the
                          calculation.

                      We provided a draft of this report to FCC for its review and comment. In
Agency Comments       response, FCC stated that our recommendations were valuable and
                      noted that it has taken steps to address the oversight and management
                      challenges we previously identified. Specifically, FCC noted that in the
                      USF Transformation Order, FCC has adopted performance goals, set
                      forth requirements to provide voice and broadband service to all
                      Americans, and established a national framework to ensure that
                      recipients who benefit from public investment in their networks have
                      clearly defined public interest obligations and reporting requirements.
                      FCC’s written response also included information to further clarify the
                      actions that are currently under way related to the USF Transformation
                      Order. With respect to our first recommendation, FCC agreed that it
                      should establish a specific plan to analyze the data reported by the
                      carriers as a way to improve oversight of the program, and noted it is
                      planning to build on measures adopted in the USF Transformation Order
                      to improve the effectiveness of the new program. Related to our second
                      recommendation, FCC agreed that revenues derived from infrastructure
                      supported by universal service are an important consideration when
                      determining support provided to carriers, and FCC appreciated our
                      suggestion that it work with the Joint Board to implement the reforms in
                      the USF Transformation Order. FCC’s written comments are reprinted in
                      appendix II.




                      Page 25                     GAO-12-738 Repurposing USF for Broadband Deployment
FCC provided technical comments on the draft report that we
incorporated as appropriate.


We are sending copies of this report to the Chairman of FCC and
appropriate congressional committees. In addition, the report will be
available at no charge on the GAO website at http://www.gao.gov.

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




Mark L. Goldstein
Director, Physical Infrastructure Issues




Page 26                      GAO-12-738 Repurposing USF for Broadband Deployment
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              This report examines the Federal Communications Commission’s (FCC)
              plans to refocus and expand the high-cost program of the Universal
              Service Fund (USF) to provide support for broadband-capable networks.
              In particular, the report provides information on (1) FCC’s plans for
              repurposing the USF high-cost program for broadband services and (2)
              how FCC is planning to address previously identified oversight and
              management challenges as it broadens the scope of the program.

              To understand FCC’s plans for repurposing the high-cost program for
              broadband service, we reviewed and analyzed FCC’s USF
              Transformation Order and associated stakeholder comments. We
              interviewed officials from FCC, the Universal Service Administrative
              Company (USAC), 1 and the National Exchange Carrier Association
              (NECA) 2 on the rule changes outlined in the order and other actions that
              FCC has taken to repurpose USF to support broadband services in
              addition to voice services. We analyzed and assessed the previous and
              planned high-cost program structure and method of distributing funds. We
              also reviewed and analyzed telecommunications stakeholders’ filings and
              studies on the potential impact of FCC’s planned changes to the existing
              high-cost program. We limited the scope of our review to the USF high-
              cost program because in the USF Transformation Order, FCC focused on
              repurposing the high-cost program to support broadband. Although FCC
              made changes to intercarrier compensation in the USF Transformation
              Order, we did not review FCC’s reform efforts related to intercarrier
              compensation. Intercarrier compensation refers to the charges that one
              carrier pays to another carrier to originate, transport, and/or terminate
              telecommunications traffic. The intercarrier compensation regimes are
              governed by a complex and different system of federal and state rules
              than those of universal services; therefore, we decided not to review
              intercarrier compensation.

              To determine how FCC is planning to address previously identified
              oversight and management challenges as it broadens the scope of the
              program, we reviewed our past reports, documents from the Office of
              Management and Budget and FCC’s Office of Inspector General, and
              academic literature related to the high-cost program of USF. We met with


              1
               USAC is the not-for-profit corporation that administers the USF programs.
              2
               NECA is a not-for-profit association of local telephone carriers established by FCC in
              1983 to perform telephone industry tariff filings and revenue distributions.




              Page 27                              GAO-12-738 Repurposing USF for Broadband Deployment
Appendix I: Objectives, Scope, and
Methodology




telecommunications stakeholders, including associations representing
consumers, small and large telecommunications carriers, and state
regulatory commissions, to obtain their views on FCC’s management of
and the changes made to the high-cost program. We identified industry
stakeholders based on prior published literature, including filings with
FCC, and other stakeholders’ recommendations. We also conducted
semi-structured interviews with economists from academia and the
telecommunications industry, recognized for their thorough knowledge of
universal service. The economists we spoke with were selected based on
studies focused on the high-cost program of USF, published within the
last 5 years, and recommendations from telecommunications industry
stakeholders, including associations representing telecommunications
carriers, consumers, and state regulatory commissions. See table 4 for
the stakeholders and economists we contacted.

Table 4: List of Telecommunications Industry Stakeholders and Economists
Contacted

 Stakeholder Groups           Stakeholders
 Associations representing    CTIA -The Wireless Association
 telecommunications           National Telecommunications Cooperative Association
 carriers                     (NTCA)
                              Organization for the Promotion and Advancement of Small
                              Telecommunications Companies (OPASTCO)
                               RCA – The Competitive Carriers Association
                              USTelecom Association
 Associations representing    National Association of Regulatory Utility Commissioners
 state regulatory             (NARUC)
 commissions
 Consumer advocates           National Association of State Utility Consumer Advocates
                              (NASUCA)
                              Public Knowledge
 Economists                   Michelle Connolly, Duke University
                              Bob Loube, Rolka Loube Saltzer Associates
                              John Mayo, Georgetown University
                              Douglas Meredith, John Staurulakis, Inc.
                              Greg Rosston, Stanford University
                              Scott Wallsten, Technology Policy Institute
Source: GAO.



We conducted this performance audit from September 2011 to July 2012
in accordance with generally accepted government auditing standards.



Page 28                              GAO-12-738 Repurposing USF for Broadband Deployment
Appendix I: Objectives, Scope, and
Methodology




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 29                              GAO-12-738 Repurposing USF for Broadband Deployment
Appendix II: Comments from the Federal
              Appendix II: Comments from the Federal
              Communications Commission



Communications Commission




              Page 30                          GAO-12-738 Repurposing USF for Broadband Deployment
Appendix II: Comments from the Federal
Communications Commission




Page 31                          GAO-12-738 Repurposing USF for Broadband Deployment
Appendix II: Comments from the Federal
Communications Commission




Page 32                          GAO-12-738 Repurposing USF for Broadband Deployment
Appendix II: Comments from the Federal
Communications Commission




Page 33                          GAO-12-738 Repurposing USF for Broadband Deployment
Appendix III: Federal Communications Commission’s
                                             Appendix III: Federal Communications
                                             Commission’s Action to Implement National

Action to Implement National Broadband Plan
                                             Broadband Plan Recommendations Related to
                                             the Universal Service Fund and Implement the
                                             USF Transformation Order

Recommendations Related to the Universal Service
Fund and Implement the USF Transformation Order
                                             In early 2009, Congress directed the Federal Communications
                                             Commission (FCC) to develop a broadband plan to ensure every
                                             American has “access to broadband capability” and to report annually on
                                             the state of broadband availability. In March 2010, an FCC task force
                                             issued the National Broadband Plan, which provided a road map for FCC
                                             to reform Universal Service Fund (USF) and the high-cost program, in
                                             particular. The National Broadband Plan made 11 recommendations as it
                                             relates to universal service. 1 FCC has implemented or partially
                                             implemented 3 and is planning to implement the remaining 8
                                             recommendations. Table 5 provides information on actions FCC has
                                             taken to enact the selected recommendations made in the National
                                             Broadband Plan.

                                             In the USF Transformation Order, released in November 2011, FCC took
                                             action to realize the overarching goal of the National Broadband Plan to
                                             make affordable broadband service available to all Americans. In
                                             particular, FCC adopted a number of actions designed to transition
                                             universal service funds from supporting only voice service to supporting
                                             networks that can provide both voice and broadband services. Table 6
                                             displays FCC’s timeline for making this transition.

Table 5: Status of FCC Actions to Implement Recommendations from the National Broadband Plan

National Broadband Plan Recommendations                                             FCC Actions
1.   FCC should improve USF performance and accountability. As FCC reforms          Planning under way. FCC established public
     its USF support and disbursement mechanisms, it should also ensure that        interest obligations, including meeting certain
     any future enhancements to the USF program have accountability and             broadband performance requirements, in
     oversight provisions built in from the outset. As FCC moves forward on the     exchange for receiving support. FCC also
     reforms in the plan, it should enhance its data collection and reporting to    developed accountability mechanisms, such as
     ensure that the nation’s funds are being used effectively to advance defined   requiring default payments, in case carriers
     programmatic goals.                                                            receiving support default from their obligations.
2.   FCC should create the Connect America Fund. FCC’s long range goal should Implemented. In the USF Transformation Order,
     be to replace all of the legacy high-cost programs with a new program that  FCC created the Connect America Fund, which
     preserves the connectivity that Americans have today and advances universal will ultimately replace the high-cost program.
     broadband in the 21st century.




                                             1
                                              We are reporting on recommendations specifically directed to FCC related to the high-
                                             cost fund.




                                             Page 34                           GAO-12-738 Repurposing USF for Broadband Deployment
                                                Appendix III: Federal Communications
                                                Commission’s Action to Implement National
                                                Broadband Plan Recommendations Related to
                                                the Universal Service Fund and Implement the
                                                USF Transformation Order




National Broadband Plan Recommendations                                                     FCC Actions
3.   FCC should create a Mobility Fund. FCC should create a Mobility Fund to                Implemented. In the USF Transformation Order,
     provide one-time support for deployment of 3G networks, to bring all states to         FCC created the Mobility Fund. A one-time
     a minimum level of 3G (or better) mobile service availability. FCC should              support of $300 million will be made available and
     select an efficient method, such as a market-based mechanism, for                      disbursed through a competitive bidding process.
     supporting mobility in targeted areas.                                                 Ongoing support of $500 million will also be made
                                                                                            available for carriers to deploy a minimum level of
                                                                                            3G mobile service availability.
4.   FCC should design new USF funds in a tax-efficient manner to minimize the              Planning under way. According to FCC officials,
     size of the gap. In certain circumstances, the Department of Treasury’s                the first phase of Connect America Fund and
     Internal Revenue Service treats governmental payments to private parties for           Mobility Fund has been designed to enable
     the purpose of making capital investments to advance public purposes as                carriers to seek an advisory ruling from the
     contributions to capital under section 118 of the U.S. Internal Revenue Code.          Internal Revenue Service that the funding
     Such treatment allows recipients to exclude the payments from income, but              represents a contribution to capital under section
     reduces depreciation deductions in future years.                                       118.
5.   Throughout the USF reform process, FCC should solicit input from Tribal                Planning under way. FCC is requiring eligible
     governments on USF matters that affect Tribal lands. In recognition of Tribal          carriers serving Tribal lands to demonstrate and
     sovereignty, FCC should solicit input from Tribal governments on any                   report meaningful engagement with Tribal
     proposed changes to USF that would affect Tribal lands. Tribal governments             governments in their supported areas. Carriers
     should play an integral role in the process for designating carriers that may          must document that they had, at the minimum,
     receive support to serve Tribal lands. The eligible carrier designation process        discussions that included: (1) a needs
     should require consultation with the relevant Tribal government after a carrier        assessment and deployment planning with a
     files an application to serve a Tribal land. It should also require that an eligible   focus on Tribal community anchor institutions; (2)
     carrier file a plan with both FCC (or state, in those cases where a carrier is         feasibility and sustainability planning; (3)
     seeking eligible carrier designation from a state) and the Tribe on proposed           marketing services in a culturally sensitive
     plans to serve the area.                                                               manner; (4) rights of way processes, land use
                                                                                            permitting, facilities siting, environmental and
                                                                                            cultural preservation review processes; and (5)
                                                                                            compliance with Tribal business and licensing
                                                                                            requirements.
6.   FCC should take action to shift up to $15.5 billion over the next decade from          Planning under way. Proposals to move rate-of-
     the current high-cost program to broadband through commonsense reforms.                return carriers to an incentive regulation are out
     FCC should issue an order to implement the voluntary commitments of Sprint             for comment. FCC also froze support for each
     and Verizon Wireless to reduce the high-cost funding they receive as                   competitive carrier at the 2011 monthly baseline
     competitive carriers to zero over a 5-year period as a condition of earlier            amount, starting in January 1, 2012. Beginning
     merger decisions. FCC should require rate-of-return carriers to move to                July 1, 2012, FCC plans to reduce support for
     incentive regulation. FCC should phase out the remaining legacy high-cost              each competitive carrier by 20 percent annually
     support for competitive carriers and establish a schedule to reduce support to         for the next 5 years, with the aim of fully
     zero over 5 years. As support levels for competitive carriers are reduced, this        eliminating support by July 1, 2012.
     funding should be redirected toward broadband. Depending on the details and
     timing of implementation, these actions collectively will free up to $15.5 billion
     (present value in 2010 dollars) in funding from the legacy high-cost program
     between 2010 and 2020.
7.   FCC should examine middle-mile costs and pricing. An examination of          Planning under way. FCC is gathering data, as
     middle-mile costs and pricing should occur in concert with the comprehensive part of its consideration of special access reform.
     USF reform program.                                                          The FCC Chairman circulated a proposed item to
                                                                                  the other commissioners, setting forth a path to
                                                                                  reform and modernize FCC’s rules for special
                                                                                  access services to protect competition and
                                                                                  ensure access to robust, affordable broadband for
                                                                                  small business, mobile providers, and others.




                                                Page 35                              GAO-12-738 Repurposing USF for Broadband Deployment
                                             Appendix III: Federal Communications
                                             Commission’s Action to Implement National
                                             Broadband Plan Recommendations Related to
                                             the Universal Service Fund and Implement the
                                             USF Transformation Order




National Broadband Plan Recommendations                                                             FCC Actions
8.   FCC should begin making disbursements from the Connect America Fund.                           Planning under way. As part of the first phase of
     Once FCC completes rulemakings to establish the parameters of the new                          implementing the Connect America Fund, FCC
     Connect America Fund, it should begin to distribute funds to discrete                          froze support for price cap carriers and
     geographic areas that contain unserved households.                                             announced incremental support amounts under
                                                                                                    the Connect America Fund.
9.   FCC should broaden the universal service contribution base. As FCC                             Planning under way. FCC developed proposals to
     establishes the Connect America Fund, it should also adopt revised                             reform and modernize how USF contributions are
     contribution methodology rules to ensure that USF remains sustainable over                     assessed and recovered. A Notice for Proposed
     time.                                                                                          Rulemaking is out for public comment.
10. FCC should manage the total size of USF to remain close to its current size      Partially implemented. In the USF Transformation
    (in 2010 dollars) in order to minimize the burden of increasing universal        Order, FCC established a budget of $4.5 billion
    service contributions on consumers. Unrestrained growth of the USF,              annually over the next 6 years.
    regardless of reason, could jeopardize public support for the goals of
    universal service. FCC should aim to keep the overall size of the fund close to
    its current size (in 2010 dollars), while recognizing that the uncapped parts of
    USF may continue to grow due to factors outside the scope of the National
    Broadband Plan. As FCC implements the recommendations of the plan, it
    should evaluate innovative strategies to leverage the reach of existing
    governmental support programs and evaluate whether to adjust the relative
    proportion of supply-side versus demand-side subsidies over time.
11. FCC should eliminate the legacy high-cost program, with all federal                             Planning under way. In the USF Transformation
    government funding to support broadband availability provided through the                       Order, FCC created the Connect America Fund to
    Connect America Fund. By 2020, the “old” high-cost program will cease                           ultimately replace the high-cost program. FCC
    operations, and service providers will only receive support for deployment and                  has established deadlines to offer supported
    provision of supported services (i.e., broadband that offers high-quality voice)                services. For instance, carriers receiving
    through the Connect America Fund. FCC should set a deadline for recipients                      incremental support from the Connect America
    of USF to offer supported services. FCC should consider alternative                             Fund in 2012 are required to complete broadband
    approaches, such as satellite broadband, for addressing the most costly                         deployment to all required locations within 3
    areas of the country to minimize the contribution burden on consumers across                    years. FCC is considering alternative approaches,
    America.                                                                                        such as satellite broadband, for addressing the
                                                                                                    most costly areas.

                                             Source: GAO analysis of the National Broadband Plan and USF Transformation Order.

                                             Note: The National Broadband Plan made 15 recommendations under the universal service category,
                                             which included recommendations for reforming intercarrier compensation. Because we did not review
                                             intercarrier compensation, those recommendations were not included in our analysis and the table
                                             above. One recommendation that was not directed to FCC was also excluded from our analysis.



Table 6: Key Actions and Timeline for Implementing the USF Transformation Order

Time frame                   Key Actions and Requirements
Nov. 18, 2011                USF Transformation Order released.
Jan. 1, 2012                 •    FCC froze high-cost support to carriers, equal to the amount of support the carriers received in 2011
                                  in a given study area.
                             •    FCC eliminated the identical support rule and began phasing down the support provided to carriers
                                  under that rule.
Feb. 15, 2012                The Universal Service Administrative Company (USAC) published each carrier’s frozen high-cost
                             support amount.




                                             Page 36                                         GAO-12-738 Repurposing USF for Broadband Deployment
                                      Appendix III: Federal Communications
                                      Commission’s Action to Implement National
                                      Broadband Plan Recommendations Related to
                                      the Universal Service Fund and Implement the
                                      USF Transformation Order




Time frame             Key Actions and Requirements
April 25, 2012         FCC announced the $300-million incremental support amounts for carriers (this occurred about a month
                       later than the originally planned March 31, 2012, date in the USF Transformation Order).
June 1, 2012           As directed in the USF Transformation Order, FCC issued a progress report on the status of developing
                       a cost model for price-cap carriers, in preparation for implementing the revised disbursement
                       mechanisms (i.e., the cost model and competitive bidding mechanisms) under the Connect America
                       Fund.
July 25, 2012          Each carrier must notify FCC within 90 days of being informed of the incremental support amount (i.e.,
                       April 25, 2012), identifying the amount of support it wishes to accept and the areas by wire centers and
                       census blocks in which the carrier intends to deploy broadband to meet its obligation. Carriers can also
                       decline the incremental support.
September 27, 2012     Competitive bidding for the one-time, $300-million disbursement of the Mobility Fund is scheduled to
                       begin.
December 31, 2012      •   FCC plans to have adopted a forward-looking cost model for the purpose of implementing the
                           second phase of the Connect America Fund.
                       •   FCC will begin disbursing $300 million from the Mobility Fund no later than 2013.
January 1, 2013        •   FCC will begin implementing the second phase of Connect America Fund, which consists of
                           generating a support amount from a cost-model and/or conducting competitive bidding.
                       •   Contingency plan will take effect if second phase of Connect America Fund (i.e., the cost model and
                           competitive bidding mechanism) is not ready for implementation.
                                    o FCC will phase in a requirement that carriers use the incremental support amount for
                                        building and operating broadband-capable networks and offering broadband services
                                        in substantially unserved areas.
2013                   •   All carriers receiving frozen high-cost support will be required to use at least one-third of the support
                           to build and operate broadband-capable networks used to offer broadband services in substantially
                           unserved areas.
                       •   Carriers accepting support that was generated from the cost-model will receive half of the full
                           amount the carrier was designed to receive and half the amount the carrier received under the first
                           phase of the Connect America Fund (which would be the frozen 2011 support amount or the frozen
                           amount plus the incremental support amount the carrier may have accepted from the first phase of
                           implementing the Connect America Fund).
July –September 2013   FCC plans to hold a reverse auction (i.e., competitive bidding) in the third quarter of 2013, with an annual
                       budget of $500 million from the Mobility Fund.
2014                   •   At least two-thirds of the frozen high-cost support from Connect America Fund must be used as
                           required.
                       •   Carriers declining the support amount generated from the cost-model of the Connect America Fund
                           will continue to receive support in an amount equal to its 2011 support amount until the first month
                           that the winner of any competitive process receives support under the second phase of
                           implementing the Connect America Fund; at that time, the carrier declining support in the second
                           phase will stop receiving high-cost universal service support.
                       •   If carriers accepted incremental support in 2012, then they are required by this time to complete
                           broadband deployment to no less than two-thirds of the required number of locations within 2 years.
                       •   FCC will begin disbursing $500 million from the Mobility Fund.
2015                   •   All frozen high-cost support disbursed under the Connect America Fund must be spent as required.
                           Carriers will be required to certify that they have spent high-cost support consistent with FCC
                           requirements in their annual filings.
                       •   Carriers receiving incremental support from the Connect America Fund in 2012 are required to
                           complete broadband deployment to all required locations.




                                      Page 37                             GAO-12-738 Repurposing USF for Broadband Deployment
                            Appendix III: Federal Communications
                            Commission’s Action to Implement National
                            Broadband Plan Recommendations Related to
                            the Universal Service Fund and Implement the
                            USF Transformation Order




Time frame   Key Actions and Requirements
2016         Carriers receiving support under the cost-model must offer at least 4 Megabits per second (Mbps)
             download and 1 Mbps upload broadband service level to at least 85 percent of their high-cost locations,
             including those on Tribal lands.
2017         FCC plans to evaluate the need for ongoing support at the set budget levels and determine how best to
             drive support to efficient levels, given consumer demand and technological developments at that time.
2018         •   By the end of the fifth year, price-cap carriers must offer at least 4 Mbps download and 1 Mbps
                 upload broadband service level to all supported locations, and at least 6 Mbps download and 1.5
                 Mbps upload speed to a number of supported locations to be specified.
             •   After the end of the 5-year planned term, FCC plans to distribute all support for price-cap areas,
                 using a market-based mechanism (i.e., competitive bidding) from the Connect America Fund.
                            Source: GAO analysis of FCC information.




                            Page 38                                    GAO-12-738 Repurposing USF for Broadband Deployment
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Mark L. Goldstein, (202) 512-2834, or goldsteinm@gao.gov
GAO Contact
                  In addition to the contact named above, Sally Moino, Assistant Director;
Staff             Pedro Almoguera; Colin Fallon; David Hooper; Jennifer Kim; Andrew
Acknowledgments   Stavisky; and Nancy Zearfoss made key contributions to this report.




                  Page 39                          GAO-12-738 Repurposing USF for Broadband Deployment
Related GAO Products
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             GAO-11-27. Washington, D.C.: November 17, 2010.

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             Decision Making for the Universal Service Fund Low-Income Program.
             GAO-11-11. Washington, D.C.: October 28, 2010.

             Telecommunications: FCC Should Assess the Design of the E-rate
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             Telecommunications: Long-Term Strategic Vision Would Help Ensure
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             Washington, D.C.: June 13, 2008.




(543293)
             Page 40                   GAO-12-738 Repurposing USF for Broadband Deployment
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