FCC Floats 15 RLECs for USF Phaseout, Expects Cost Model Revisions Soon

Commissioners Mignon Clyburn and Michael O’Rielly said they backed the bureau announcement. “Providing support to a carrier that is in essence using it to compete against an unsubsidized provider is not the best use of our scarce federal universal service dollars, as it distorts the market, fuels inefficiency, creates an un-level playing field and is not the intent of universal service,” they said in a rare joint statement. “While today's action is a significant step, we have more to do to address wasteful or excessive spending that is an undue burden on all consumers that contribute to the program. Further reforms are necessary to ensure we target finite universal service funds to areas that will not have broadband without such support.”

The FCC wants to adopt rate-of-return USF changes by year-end that could give small rural telcos (RLECs) an option to shift to model-based broadband subsidies. In another public notice Wednesday, the bureau said it expects to revise its RLEC-oriented cost model "in the near future." Rural carriers support voluntary use of the model, but have concerns about its accuracy. “Anything that can be done to improve the accuracy is a good thing,” Mike Romano, NTCA senior vice president-policy, told us Thursday. “You have to have a model you can trust.”

Under an FCC rule, USF support is to be phased out for carriers in “study areas” (carrier coverage areas) where an unsubsidized competitor or combination of competitors offers voice and 10/1 Mbps broadband to 100 percent of the area, as defined by the bureau. Support in those areas will be frozen and then cut by one-third of that amount each year for three years.

The bureau invited the 15 RLECs to confirm or refute the preliminary findings. Based on an earlier “challenge process” for price-cap carriers facing apparent unsubsidized competition, the bureau found “it is extremely difficult for an incumbent provider to prove a negative -- that a competitor is not serving an area. Rather, the purported competitor is in a much better position to confirm that it is offering service in a given area.” NTCA’s Romano welcomed the shift in emphasis because the previous “onus on price-cap carriers … led to a number of false positives” of supposed competitive overlap. “The public notice represents a productive evolution in their thinking,” he said.

The bureau also listed “for informational purposes” eight other rate-of-return RLECs in 11 study areas receiving more than $6 million in annual support that were preliminarily found to face unsubsidized competition in at least 99 percent of a study area. The bureau invited “any relevant information about whether these study areas are in fact 100 percent overlapped.” Telephone and Data Systems, a mid-sized carrier, had four of the areas.

On the broader USF overhaul, the bureau is adjusting a cost model developed for larger, price-cap carriers so that it can be used for rate-of-return rural carriers if they elect to receive model-derived support. The bureau is working to incorporate recent broadband provider Form 477 data about competitive coverage, adjust middle-mile cost calculations and institute a code change to allow specific input values for carrier study areas. “Hopefully the new 477 data will yield more accurate results,” Romano said, but he said other tweaks are needed. “When you do a model for 13 large companies, you can smooth out the rough edges. If you’re a small company, you don’t have that benefit. It’s got to be right.”

The NTCA, National Exchange Carrier Association and WTA-Advocates for Rural Broadband said in June that reviewers found the model "creates extreme and unexplained increases and decreases in support" that "need to be better understood," including some counterintuitive results. Many carriers that already deployed 10/1 Mbps (or higher) broadband “would receive large support increases under the model, while some companies reporting virtually no deployment of 10/1 broadband would receive reductions in support,” the groups said. “One company that reportedly has 10/1 capability throughout its entire network would experience a 793 percent increase in support, while 55 companies that lack any 10/1 capability whatsoever would experience decreases."

The Eastern Rural Telecom Association recently said its members generally would lose support under the model whether they have built out fiber to customers or not. Fiber is needed to offer 10/1 Mbps and higher in rural areas, the ERTA said. “Companies need certainty to operate and obtain loans needed for network upgrades," it said. "Large losses of support do not provide the certainty banks look for when loaning money."

Invited by FCC officials to develop an industry consensus for overhauling USF, rural telco groups proposed to change the current voice-focused mechanisms to enable broadband support -- even when consumers drop the incumbent’s voice service -- and give carriers the option of receiving model-based broadband support (see 1506040028). They had some differences over transition steps, but Romano said there's consensus. “The question is do commissioners see it as sufficient,” he said. “We have a plan that we think works, but to the extent that isn’t acceptable, we continue to talk to the commission on how to improve it, and we’ll stay at the table and try to work it out. It’s consuming all our time. No one is leaving any stone unturned to find a solution.”