JSI’s Analysis of Five Major Items in the USF Reform Order

Since the FCC released its USF Reform Order for rate-of-return carriers (RLECs) last week, JSI has been assessing how its numerous components will impact clients. We’ve identified five areas of major importance and have outlined those below. We will provide additional analysis on our upcoming webinar on Friday, April 8 at 10:30 am Eastern and at our Management Seminars this May. We’ll also be discussing the potential impact of the Order with individual companies; please contact us if you would like to schedule a call.

#1: The A-CAM Challenge Process
The light has not turned green on the A-CAM election process quite yet. According to the FCC, it plans to release the next version of the A-CAM this week, which will contain the June 30, 2015, Form 477 data (updated as of February 19, 2016) and a Public Notice initiating a streamlined “challenge” process. This process will give RLECs 21 days to challenge competitors’ Form 477 data. Competitors then will have an opportunity to make any corrections to their data, but only corrections made by a deadline specified in the Public Notice will be included in the final version of the A-CAM.

A-CAM support will not be available in census blocks where a competitor has certified on its 477 that it provides voice and broadband at 10/1 Mbps. Because the burden rests on RLECs to ensure that competitors’ data is correct, we recommend that challenges include specific evidence that the data is erroneous. JSI developed guidelines on how to obtain the necessary evidence when we assisted clients to successfully challenge competitive overlap data in other contexts. We will provide more detailed information regarding this process after the Public Notice has been released. In the meantime, please let us know if you would like us to send you our guidelines or assist with drafting and filing comments.

Clients should be aware that if they discover corrections that should be made to their own Form 477 data, they are obligated to revise the data. However, only revisions made prior to the release of the Order will be included in the final version of the A-CAM.

#2: A-CAM Election Process
Once the challenge process is complete, the FCC will release the final version of the A-CAM, along with a Public Notice identifying the amount of support for each carrier, the deployment obligations, and the number of fully funded and capped locations. RLECs with multiple study areas will have to make a state-level election, similar to how the price cap carriers made their elections to accept model-based CAF Phase II support last year. Additionally, model-based support will not be made available to any RLEC with 10/1 Mbps broadband deployed to 90% or more of the eligible locations in a state (based on June 2015 Form 477 data).

RLECs will have 90 days from the release of the Public Notice to send their A-CAM “acceptance letters” to the FCC. Carriers that do not submit letters will remain on the modified legacy program. After the FCC calculates how much support carriers are seeking, the FCC will determine if the demand for support is within the existing annual $2 billion budget, plus an additional $150 million that the FCC will make available annually, or if it exceeds the budgeted amount. If the budget is sufficient given the demand, carriers that elected to move to the A-CAM have made an irrevocable decision and will receive model support, most likely beginning January 1, 2017. If the demand for support exceeds the A-CAM budget, the FCC will revise the A-CAM support amounts and deployment obligations so that the overall amount of model support is within the annual budget. The FCC will then give the RLECs that filed the initial acceptance letter 30 days to re-evaluate their initial acceptance of the A-CAM. The FCC intends to remove companies electing A-CAM from the annual high-cost loop support calculation.

If a carrier chooses to elect A-CAM support and its model-based support is less than its legacy support, there will be a three-tiered transition, which “recognizes the magnitude of the difference in support for particular carriers.” The three-tiered system is as follows:

• Tier 1: If the difference between A-CAM and legacy support is 10% or less, the carrier will receive 50% of that difference plus model support in year one. It will receive model support thereafter.
• Tier 2: If the difference is between 10% and 25%, the carrier will receive a transition payment plus model support for up to four years, and model support thereafter.
• Tier 3: If the difference is greater than 25%, the carrier will receive a transition payment plus model support for up to nine years, and model support thereafter.

#3: Buildout Timetables and Obligations
For Carriers Electing A-CAM
Buildout obligations for carriers that elect the A-CAM differ from those that remain on legacy support. Carriers electing to receive model-based support will have four years to offer at least 10/1 Mbps broadband service to 40% of the requisite number of locations in their service areas. They’ll be required to provide at least 10/1 Mbps service to an additional 10% of locations in each subsequent year of model support, with full 100% coverage at the end of the model’s 10-year term. Requisite locations are determined on a statewide basis and are those locations that meet the fully funded criteria. Some locations, based on density, will be required to receive 25/3 Mbps of broadband service. The 25/3 requirement for those applicable locations must be achieved by the end of the 10-year term.

For locations that are deemed not fully funded, those that exceed the support cap of $200 per month, carriers must offer at least 4/1 Mbps broadband service to 50% of their service areas if they have a density of 10 or more locations per square mile or 25% of their service areas if they have a density of less than 10 locations per square mile.

For Carriers on Legacy Support
Carriers that remain on legacy rate-of-return support will have a choice in how their deployment obligation is determined. It will be based on their forecasted CAF-BLS (old ICLS mechanism) and a cost per location metric, which can either be based on (1) the average cost of providing 10/1 Mbps service, based on the actual costs of carriers with similar density that have widely deployed 10/1 service, or (2) the A-CAM’s calculation of the cost of providing 10/1 Mbps service in the unserved census blocks in the carrier’s study area. Based on the carrier’s decision, USAC will make the calculations and provide the FCC with a schedule of broadband obligations for each carrier for a five-year period.

Buildout obligations will vary by carrier depending on their current build-out reflected in their June 2015 FCC Form 477 data. Carriers with less than 20% deployment of 10/1 Mbps broadband service in their entire study area will be required to utilize 35% of their five-year forecasted CAF-BLS support to deploy 10/1 service where it is currently lacking. If carriers have deployed more than 20%, but less than 40%, of 10/1 Mbps service, they will be required to utilize 25% of their five-year forecasted CAF-BLS support to deploy 10/1 Mbps service where it is currently lacking. Carriers with 40% or greater, but less than 80%, of 10/1 Mbps service will be required to utilize 20% of their five-year forecasted CAF-BLS support specifically for the deployment of 10/1 service where it is currently lacking. Carriers that have deployed 10/1 Mbps service in more than 80% of their study areas will not have specific buildout obligations, but they will need to report progress on connecting additional customers with broadband.

#4: Annual Reporting Obligations
Considerable changes are coming to the FCC’s annual reporting rules. Most notably, after the 2016 ETC annual report, RLECs will no longer be required to submit progress reports for their five-year service quality improvement plans. Instead, RLECs will submit geocoded locations to which they have newly deployed broadband through an online portal USAC will create. Since the 2016 progress report will be the last one, JSI will send a streamlined template to those clients that we assist in preparing the report. If you have not requested JSI’s assistance for this year’s filing, please let us know if you would like our revised template or would like for us to review your Form 481 before it is submitted.

The FCC also proposes considerable changes to the Form 481. The FCC is seeking comment on streamlining the filing process and content and eliminating unnecessary or redundant data, such as outage reporting. One proposal is for carriers to only file the form with USAC using an online portal where the FCC, state commissions, Tribal authorities and the public could view the data. Please contact us if you are interested in filing comments on these proposed changes.

#5: Competitive Overlap and Disaggregation for Modified Rate of Return
For carriers that are staying on the modified rate-of-return path, CAF-BLS will be eliminated in competitive areas at the census block level. In this context, a census block is deemed competitive if a qualifying competitor offers voice and broadband to at least 85% of the residential locations in the block and is able to provision service within 10 business days to those locations. To be considered a qualifying competitor, the company must certify that it offers both voice and at least 10/1 Mbps broadband with rates and usage capacity that is reasonably comparable to offerings in urban areas, and it must be able to port telephone numbers within that census block. To the extent the competitor is meeting its voice service obligations through interconnected VoIP, it will already be subject to E911 and CALEA requirements. Similar to the 100% overlap proceeding last year, the FCC will release a preliminary list of qualifying competitors serving specific census blocks based on the most recent Form 477 data. The burden of proof will be on the competitor to certify and provide evidence that it offers service to at least 85% of the locations in the block. RLECs and other interested parties will be able to contest the competitor’s claims.

When the challenge process is complete, the FCC will allow carriers to select a method to disaggregate CAF-BLS support between competitive and non-competitive areas. JSI will provide more analysis on the disaggregation options in the future, but, generally speaking, carriers may choose to disaggregate their CAF-BLS based on one of the following:

1. The relative density of competitive and non-competitive areas;
2. The ratio of competitive to non-competitive square miles in a study area; or
3. The ratio of A-CAM calculated for competitive areas compared to A-CAM support for the study area.

Other important changes coming for rate-of-return carriers include the phase-down of the unitary rate of return from 11.25% to 9.75%. The first step down to 11.0% will become effective on July 1, 2016. Each year thereafter, it will be reduced by 25 basis points, until 2021 when it will reach 9.75%. Additionally, eligible operating costs will be limited by a new formula that compares a range of operating costs for similarly situated carriers. This limitation will be phased in during the first year of implementation. Finally, a new capex allowance based on a carrier’s inflation-adjusted depreciated loop plant and the current level of broadband deployment will apply to all investment made after the Order’s effective date.

If you have questions about the Order or any company-specific issues that you would like to discuss, please contact Manny Staurulakis, Steve Meltzer, John Kuykendall, Brian Sullivan, Bhavini Sokhey or Christine Duncan in JSI’s Maryland office at 301-459-7590, Douglas Meredith in our Utah office at 801-294-4576, Gordon Dauchy or Ryan Denzel in our Minneapolis office at 651-452-2660, or your company’s JSI consultant.

Source: JSI e-Lert