new rate-of-return order from FCCOn March 30, the Federal Communications Commission (FCC) released its long anticipated rate of return order that provides $20 billion in funding over the next 10 years.  According to Chairman Wheeler, “Today’s order sets forth a package of reforms to address rate-of-return issues that are fundamentally intertwined—the need to modernize the program to provide support for stand-alone broadband service; the need to improve incentives for broadband investment to connect unserved rural Americans; and the need to strengthen the rate-of-return system to provide certainty and stability for years to come.”

The order seeks to address the evolving digital divide, an issue the FCC sees as a product of both the consumer’s fiscal ability to pay and the barriers to deploying reliable, high-speed services.   Believing that competition is the ultimate tool that should be used to drive progress, the FCC’s rate-of-return reform is intended to better reflect the current market and provide incentives to compete in rural areas that aren’t market friendly.  Currently, more than 4 million Americans live in these high-cost locales served by rate-of-return providers, and 20% of all homes in these areas lack access to terrestrial fixed broadband that meets the FCC’s benchmarks.

To modernize the Universal Service Program for rate-of-return carriers, support will now be provided for standalone broadband service without bundled voice services.  In part, this will be accomplished by changing the existing Interstate Common Line Support (ICLS) mechanism to the Connect America Fund Broadband Loop Support (CAF BLS) mechanism, which will support broadband capable loops more equitably and hopefully incentivize deployment.  In addition, greater capital expenditures will now be permitted for providers with below average deployment, while providers with above average deployment will now have more limited allowances.

To improve the fiscal viability of the program, the subsidy provided to rate-of-return carriers will be reduced from 11.25% to 9.75% over six years.

The FCC is adopting a voluntary path for providers impacted by the reform.  The new model-based support can be elected for 10 years if providers agree to meet certain build-out and minimum speed obligations.  Carriers that adopt the new model will be required to deploy service at a minimum speed of 10 Mbps download/1 Mbps upload for all supported service areas, and 25 Mbps down/3 Mbps up for higher population areas.  The service area is also required to be 40% built out  at a rate of 10% each year for the first 4 years and 100% built out after 10 years.  Adoption is not required, however, all rate-of-return carriers will now be required to adopt deployment obligations.  Those who chose to stick with the old model will have individually sized obligations, based on existing deployment and projected use of loop support funding.

Areas lacking competition will be more intensely targeted for development with universal service funding.  For areas serviced by a qualified unsubsidized provider, rate-of-return carriers in the same area will not receive support through the CAF BLS mechanism.  These challenges are not expected to take place this year, so support adjustments will not take place earlier than 2017.

In addition to the anticipated rate of return orders, the FCC is also asking for comment on several issues.  Concerned about abuse of funds, the FCC is reviewing policies regarding permissible investments and expenses for providers receiving Universal Service Funds.  The Commission disclosed past audits have revealed a few instances where funds have been used to cover costs unrelated to the provision of services.

Reforms to tribal support programs are another issue on which the FCC is asking for comment.  Since tribal lands have traditionally lacked services due to challenging conditions, the commission is considering proposals that would offer additional funding to rate-of-return providers deploying services on tribal lands.  The FCC is asking for feedback regarding eligible providers and the appropriate level of subsidy needed to encourage broadband deployment.  Chairman Wheeler is hopeful a new proposal will take form by the end of the year.

Comments on the order can be submitted electronically within 30 days from publication of the notice (April 30, 2016).  Reply comments must be submitted within 60 days of the original publication notice (May 30, 2016). The full order and requests for comments can be found at:

https://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0330/FCC-16-33A1.pdf