**Before the**

Federal Communications Commission

Washington, D.C. 20554

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| In the Matter of                 | * | WC Docket No. 05-337         |
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notice of proposed rulemaking

**Adopted: January 9, 2008 Released: January 29, 2008**

**Comment Date: (30 days after date of publication in the Federal
Register)**

**Reply Comment Date: (60 days after date of publication in the Federal
Register)**

By the Commission: Chairman Martin and Commissioners Tate and McDowell
issuing separate statements; Commissioner Copps approving in part,
dissenting in part and issuing a statement; Commissioner Adelstein
concurring in part, dissenting in part and issuing a statement.

Table of Contents

Paragraph \#

I. introduction 1

II\. background 2

III\. discussion 10

A. Eligibility Requirements 12

B. Single Winner Versus Multiple Winners 13

C. Method of Distributing the Subsidy 18

D. Geographic Areas 19

E. Universal Service Obligations 23

F. Reserve Prices 36

G. Auction Design 41

H. Frequency of Auctions 47

I. Broadband Reverse Auction Pilot Program 50

IV\. Procedural Matters 52

A. Initial Regulatory Flexibility Analysis 52

B. Paperwork Reduction Act Analysis 53

C. *Ex Parte* Presentations 54

D. Comment Filing Procedures 55

V. Ordering Clauses 57

APPENDIX: Initial Regulatory Flexibility Analysis

# introduction

1.  In this Notice of Proposed Rulemaking (Notice), we seek comment on
    the merits of using reverse auctions (a form of competitive bidding)
    to determine the amount of high-cost universal service support
    provided to eligible telecommunications carriers (ETCs) serving
    rural, insular, and high-cost areas. As discussed below, in a
    reverse auction, support generally would be determined by the lowest
    bid to serve the auctioned area. We tentatively conclude that
    reverse auctions offer several potential advantages over current
    high-cost support distribution mechanisms, and that the Commission
    should develop an auction mechanism to determine high-cost universal
    service support. We seek comment in this Notice on a number of
    specific issues regarding auctions and auction design that must be
    resolved in order for the Commission to implement an auction
    mechanism.

# background

2.  In the Telecommunications Act of 1996 (1996 Act), Congress sought to
    preserve and advance universal service while, at the same time,
    opening all telecommunications markets to competition.[^1] Section
    254(b) of the Act, which was added by the 1996 Act, directs the
    Federal-State Joint Board on Universal Service (Joint Board) and the
    Commission to base policies for the preservation and advancement of
    universal service on several general principles, plus other
    principles that the Commission may establish.[^2] Among other
    things, there should be specific, predictable, and sufficient
    federal and state universal service support mechanisms; quality
    services should be available at just, reasonable, and affordable
    rates; and consumers in all regions of the nation should have access
    to telecommunications services that are reasonably comparable to
    those services provided in urban areas at reasonably comparable
    rates.[^3] Section 254(e) of the Act provides that only ETCs
    designated under section 214(e) shall be eligible to receive federal
    universal service support, and that any such support should be
    explicit and sufficient to achieve the purposes of that section.[^4]

3.  In the *Universal Service First Report and Order*, the Commission
    recognized certain advantages of using competitive bidding to
    determine high-cost universal service support.[^5] First, "a
    compelling reason to use competitive bidding is its potential as a
    market-based approach to determining universal service support, if
    any, for any given area."[^6] Second, "by encouraging more efficient
    carriers to submit bids reflecting their lower costs, another
    advantage of a properly structured competitive bidding system would
    be its ability to reduce the amount of support needed for universal
    service."[^7] The record at the time, however, was insufficient to
    support adoption of a competitive bidding mechanism.[^8] Moreover,
    the Commission found it unlikely that competitive bidding mechanisms
    would be useful at that time because of the expectation that there
    would be no competition in a significant number of rural, insular,
    or high-cost areas in the near future.[^9] Nonetheless, the
    Commission found that competitive bidding warranted further
    consideration.[^10]

4.  More recently, there has been renewed interest in using competitive
    bidding to determine high-cost universal service support. The Joint
    Board currently is reviewing the Commission's rules relating to
    high-cost universal service support in service areas in which
    competitive ETCs receive support and high-cost universal service
    support for rural carriers.[^11] In August 2006, the Joint Board
    sought comment on the merits of using auctions to determine
    high-cost universal service support.[^12] In February 2007, the
    Joint Board held an *en banc* hearing to discuss high-cost universal
    service support in rural areas, including the use of reverse
    auctions to determine support.[^13] In his opening remarks, Chairman
    Kevin Martin explained that "reverse auctions could provide a
    technologically and competitively neutral means of controlling fund
    growth and ensuring a move to most efficient technology over
    time."[^14] In a Public Notice, released May 1, 2007, the Joint
    Board sought comment on various proposals for long term,
    comprehensive reform of the high-cost universal service support
    mechanisms, including the use of reverse auctions.[^15] The specific
    auction proposals filed during the course of this proceeding are
    briefly described below.

5.  *[CTIA Proposal]{.underline}*. In response to the *2006 Joint Board
    Public Notice*, CTIA -- The Wireless Association® (CTIA) proposed a
    "winner-gets-more" reverse auction structure in which wireline and
    wireless ETCs would compete in the same auction.[^16] Under this
    proposal, the winning bidder would receive the level of support it
    bid, and other auction participants would receive some lesser level
    of support. CTIA suggests two possible methods of calculating
    support for a non-winning bidder: (1) a percentage reduction in
    payment based on the difference between its bid and the winning bid;
    and (2) a percentage reduction in payment based on the difference
    between its bid and the winning bid, but also weighted by the share
    of customers of the winning bidder.[^17] CTIA supports the use of
    small areas, such as counties, as the geographic areas on which
    providers would bid.[^18]

6.  *[Verizon Proposal]{.underline}*. On February 9, 2007, Verizon
    proposed implementing competitive bidding on a limited basis, with
    the possibility of extending the use of auctions more widely after
    the Commission assesses the results.[^19] Under Verizon's proposal,
    the Commission would introduce auctions in areas in which multiple
    wireless competitive ETCs currently receive support to select a
    single winning wireless provider to receive federal high-cost
    support in that area.[^20] Once these auctions were completed, a
    separate set of auctions would be held in areas where there is at
    least one wireline competitive ETC. Both the incumbent local
    exchange carrier (LEC) and any wireline competitive ETCs would
    participate, and the auction would select a single wireline provider
    to receive high-cost support in that area.[^21] After reviewing its
    experience with the separate wireless and wireline auctions, the
    Commission could then consider holding a general auction in any area
    where there is a competitive ETC. Both wireline and wireless ETCs
    would participate, and the general auction would select a single ETC
    to receive the support determined by its bid.[^22] The Commission
    also could consider using the results of the auctions to adjust
    support of ETCs receiving support not yet determined by an auction.

7.  Verizon also proposes an auction design that uses wire centers, at
    least initially, as the geographic areas for which "combinatorial"
    auctions would be held.[^23] This type of auction allows bidders
    flexibility to submit bids for individual wire centers, or bids for
    packages of wire centers.[^24] Bids would be for a flat amount of
    subsidy for a given area, or package of areas.[^25] The reserve
    amount would be based on current high-cost support amounts and would
    ensure that the support determined by the auction is no greater than
    the amount of support provided prior to the auction.[^26]

8.  *[Alltel Proposal]{.underline}*. On February 16, 2007, Alltel
    proposed a reverse auction pilot program that would target
    additional funds to promote broadband deployment in unserved or
    underserved rural areas.[^27] In unserved or underserved zip code
    areas, any ETC could submit a bid for the minimum amount of
    universal service per line that it would need to make available
    broadband service, as well as the basic services currently supported
    by the high-cost program, to a minimum percentage of households in
    the zip code area within a specified period of time.[^28] In areas
    where an ETC can satisfy this standard without additional support
    beyond that already available under the existing high-cost program,
    Alltel claims that the winning bid might be zero.[^29] Each
    participating ETC would receive per-line funding only to the extent
    it provides broadband, as well as currently supported services to a
    customer line.[^30] The participant offering the lowest bid would
    receive the full bid amount for each broadband line it provides
    during the duration of the service term (e.g., five years). All
    other ETCs that commit to meeting the same broadband build-out
    requirements would also receive support, but at a slightly lower
    per-line rate than the winning bidder.[^31]

9.  Alltel recommends that the bidding process be conducted in a manner
    similar to that used for spectrum auctions: a multiple round,
    combinatorial auction, in which participants can bid for any number
    of zip code areas. The reserve price in each zip code area would be
    set based on the current level of high-cost support disbursed to
    ETCs in the area, increased by a certain percentage for the
    presumably higher cost of broadband deployment. Alltel suggests, for
    example, establishing a maximum bid amount so that the total
    per-line support would not increase by more than 50 percent or 100
    percent in any area where high-cost funds are already being
    disbursed to one or more ETCs.[^32]

# discussion

10. We seek comment generally on the advantages of using a reverse
    auction mechanism to determine the amount of high-cost universal
    service support distributed to ETCs. Technology and the marketplace
    have changed considerably since the Commission in 1997 found that
    competitive bidding mechanisms were unlikely to be useful in rural,
    insular, and high-cost areas because of the absence of competition
    in these markets. Since that time, many carriers, particularly
    wireless carriers, have become ETCs and receive support for serving
    high-cost areas. As a result of the policies and framework the
    Commission adopted at that time, the Commission's rules now result
    in subsidizing multiple competitors to serve areas in which costs
    may be prohibitively expensive for even one carrier to serve without
    a subsidy. The increase in the number of ETCs receiving high-cost
    support over the past several years is placing significant and
    increasing pressure on the stability of the universal service
    fund.[^33]

11. In a reverse auction, support generally would be determined by the
    lowest bid to serve the auctioned area. Auctions have potential
    merit in that they allow direct market signals to be used as a
    supplement to, and possible replacement of, cost estimates made from
    either historical cost accounting data or forward-looking cost
    models, as is done under the current high-cost support programs. In
    an auction, bids would reflect each bidding ETC's cost estimates for
    serving the relevant geographic area. If a sufficient number of
    bidders compete in the auction, the winning bid might be close to
    the minimum level of subsidy required to achieve the desired
    universal service goals. In contrast, a support mechanism based on
    either a carrier's embedded costs or on a forward-looking cost model
    provides no incentives for ETCs to provide supported services at the
    minimum possible cost. In addition, an auction could provide a fair
    and efficient means of eliminating the subsidization of multiple
    ETCs in a given region.[^34] We tentatively conclude that reverse
    auctions offer several potential advantages over current high-cost
    support distribution mechanisms, and that the Commission should
    develop an auction mechanism to determine high-cost universal
    service support. There are a number of detailed issues regarding
    auctions and auction design that must be resolved in order for the
    Commission to implement an auction mechanism, however. We seek
    comment below on these specific issues.

## Eligibility Requirements

12. We seek comment on eligibility requirements for bidders
    participating in reverse auctions. Section 254(e) states, in
    relevant part: "only an eligible telecommunications carrier
    designated under section 214(e) shall be eligible to receive
    specific Federal universal service support."[^35] Therefore, we
    tentatively conclude that a bidder must hold an ETC designation
    covering the relevant geographic area prior to participating in an
    auction to determine high-cost support for that geographic area.

## Single Winner Versus Multiple Winners

13. We seek comment on whether universal service support auctions should
    award high-cost support to a single winner or to multiple winners.
    Should only the carrier submitting the lowest bid be allowed to
    receive the subsidy? Should all ETCs participating in the auction
    receive support, and if so, should it be the same level of support,
    or different amounts of support as suggested in the CTIA and Alltel
    proposals?[^36] We ask commenters that favor multiple-winner
    auctions in which different amounts of support go to different
    bidders to explain how the different levels of support would be
    determined. Alternatively, should there be a fixed number of winners
    greater than one? If there are a fixed number of winners receiving
    support, should the winning bidders receive the same amount of
    support (i.e., the same amount as the lowest bidder), or should the
    lowest bidder receive more?

14. We seek comment on the advantages and disadvantages of a
    single-winner auction versus a multiple-winner auction format. As
    mentioned above, if only one bidder receives support, an auction
    could provide a fair and efficient means of eliminating the
    subsidization of multiple ETCs in a given region, thereby ceasing
    the uneconomic practice of subsidizing multiple competitors to serve
    areas in which costs are prohibitively expensive for even one
    carrier. We expect that using single-winner auctions would result in
    less overall support than multiple-winner auctions. For example, if
    support were to be distributed as a fixed subsidy per geographic
    area, then an auction with two winners would result in twice the
    support of a single-winner auction. As the number of winners
    increases, the size of the total subsidy would increase
    proportionately. We tentatively conclude that this would violate the
    universal service principle of sufficiency and would be an
    unacceptable auction format.[^37] We therefore tentatively conclude
    that universal service support auctions should award high-cost
    support to a single winner.

15. If support is determined on the basis of the number of subscribers
    served, we similarly would expect total support under a
    multiple-winner auction to be higher than support under a
    single-winner auction for several reasons. First, many subscribers
    may choose to purchase service from multiple ETCs, with the result
    that such subscribers could indirectly be subsidized multiple times
    in a multiple-winner auction.[^38] Second, a multiple-winner auction
    would also increase the expected size of the subsidy under most
    common auction formats. For example, if the size of the subsidy is
    determined by the lowest bid of a non-winning bidder, the
    per-carrier subsidy would be expected to rise as the number of
    winners increased.[^39] Third, when the number of winners is large
    relative to the number of expected bidders, tacit collusion may be
    facilitated, which would result in less competitive bidding for the
    required subsidy.[^40] Finally, as the number of carriers receiving
    a subsidy increases, the market share of each subsidized carrier
    would correspondingly decline. Since it is well established that
    costs to individual carriers increase as their customer density
    decreases,[^41] we would expect that the underlying costs on which
    carriers base their bids to increase as the number of winning
    bidders increased and the individual bidder's expected number of
    subscribers decreased.

16. Parties have argued that there are benefits to multiple-winner
    auctions. For example, CTIA argues that single-winner auctions run
    the risk of eliminating the consumer benefits of a competitive
    market by discouraging competitive entry during the period the
    auction winner has the exclusive right to receive support.[^42] How
    would a winner-gets-more auction, as proposed by CTIA, affect the
    overall level of support? How would the fact that all bidders
    receive support in a winner-gets-more auction affect the bidder
    strategies? To what extent should the Commission's universal service
    policies be directed at promoting competition in rural, high-cost
    markets? Does the Act require that rural consumers have affordable
    access to both wireline and wireless services? Would a single-winner
    auction deny rural consumers affordable access to both wireline and
    wireless services?

17. Some parties have suggested that the Commission consider having
    separate auctions for wireless and wireline ETCs, at least
    initially. For example, Verizon proposes that the Commission
    initiate the use of auctions in areas in which multiple wireless
    competitive ETCs receive support.[^43] Once these auctions have been
    completed, the Commission would hold a separate set of auctions in
    areas where there is an incumbent LEC and at least one wireline
    competitive ETC.[^44] We seek comment on separate wireless and
    wireline auctions and any other issues relating to single- versus
    multiple-winner auctions.

## Method of Distributing the Subsidy

18. We seek comment on the manner in which a subsidy should be computed
    and distributed. Specifically, subsidies could potentially be
    offered as a fixed payment for each geographic area, on the basis of
    the number of subscribers or households served, or on some
    combination of these methods. As noted above, a per-area subsidy
    with multiple winners would result in very large subsidies, and we
    have tentatively concluded above that this format would not be
    acceptable.[^45] In the case of a single-winner auction, there are
    advantages to each of the above possible distribution methods. A
    per-subscriber subsidy provides a financial incentive to serve new
    customers who might be otherwise unprofitable. A per-area subsidy
    provides certainty about the total subsidy level. This knowledge may
    be important to a carrier's decision about whether to make fixed
    investment to serve an area, and to therefore participate in the
    auction. The form of the subsidy may also affect the allocation of
    customers among multiple providers in a multiple-winner auction. If
    carriers do not all receive the same per-line subsidy, then a given
    customer may not be served by the lowest cost provider, but instead
    by a carrier with a higher subsidy. In addressing these issues,
    commenters should also address the relationship of the subsidy
    distribution methodology to the statute's universal service
    principles, including, in particular, the principles that the fund
    be specific, predictable, and sufficient and that consumers in
    rural, insular, and high-cost areas have access to services at rates
    that are comparable to the rates for comparable services in urban
    areas.

## Geographic Areas

19. We seek comment on the appropriate geographic areas for reverse
    auctions. In most areas of the country, telecommunications services
    are provided by a wireline incumbent LEC and possibly by one or more
    competitive ETCs, most of which are wireless carriers. Basing the
    geographic area on any particular carrier's service area would
    likely give that carrier an advantage in bidding because competing
    carriers are unlikely to have the same service footprint.

20. Currently, support is generally based on the wireline incumbent
    LEC's study area. We seek comment on whether we should use the
    wireline incumbent LEC's study area as the geographic area on which
    to base reverse auctions. We note that, in some cases, the wireline
    incumbent LEC's study area consists of multiple disjointed
    geographic areas within a state. We seek comment on whether an
    incumbent LEC's study area that consists of multiple non-contiguous
    geographic areas should be broken up at least into its contiguous
    parts for purposes of the auction, or be required to be auctioned as
    a single study area. An alternative to the wireline incumbent's
    study area would be to use the wire centers of the wireline
    incumbent LEC. What are the advantages and disadvantages of this
    approach? A third alternative is to use a geographic area that is
    independent of any carrier's service area, such as zip code, census
    tract, census block group, county, or metropolitan or rural
    statistical area (MSA, RSA). One potential advantage of such an
    approach is that it might better ensure that the auction is
    competitively and technologically neutral. What are the advantages
    and disadvantages of using independent geographic units that do not
    necessarily correspond to any wireline or wireless service area?
    CTIA contends that larger geographic units, such as MSAs/RSAs, would
    lead to problems of lack of coverage for many potential
    bidders.[^46] In addition, under CTIA's analysis, geographic areas
    which correspond to an incumbent LEC's study area (or contiguous
    portions thereof) might discourage participation in the auction by
    competitive carriers. Verizon argues that the areas should be small
    enough to allow the auctions to target support where it is most
    needed, but not so small as to create unnecessary complexity.[^47]
    Both CTIA and Verizon support using relatively small geographic
    areas, such as counties or wire centers, respectively.[^48] Although
    defining the relevant region as the incumbent LEC's entire study
    area might make it difficult for any individual competitive ETC to
    bid successfully, would the same hold true for incumbent LEC wire
    centers? Verizon claims that incumbent LEC switches generally have
    been located in population clusters, and that competitive ETCs
    similarly have tended to locate their facilities in population
    clusters even though they may have different network topologies than
    incumbent LECs.[^49] If geographic areas smaller than an incumbent
    LEC's entire study area are chosen, should the geographic areas
    nevertheless be defined so that each area is contained within the
    incumbent's study area, and that the total area of units up for
    auction completely covers the incumbent LEC's study area? We seek
    comment on how the size of the geographic area affects the ability
    of small entities to participate in auctions.

21. The size of the geographic area chosen for auction will also have an
    effect on the amount of high-cost support. Specifically, a larger
    geographic area may include subsets of customers that are profitable
    (either because they live in low-cost areas or because they are
    likely to purchase related but unsubsidized services such as video
    or high speed data service). When these areas are included as part
    of a larger geographic area, the need for an overall subsidy is
    reduced on a per-customer basis. When smaller units are individually
    auctioned, there may be fewer profitable customers to offset losses
    for higher-cost customers, so a higher total subsidy may be
    required. We seek comment on the trade-offs that may exist between
    the advantages of small geographic areas in terms of economic
    efficiency and competitive entry and the potential costs in terms of
    higher support levels. We tentatively conclude that the wireline
    incumbent LEC's study area is the appropriate geographic area on
    which to base reverse auctions, and that further disaggregation is
    appropriate only if the total support is not increased for the
    resulting areas, but is capped at the award amount for the original
    study area. We seek comment on this tentative conclusion, as well as
    on how one might disaggregate a study area yet ensure the overall
    support amount does not increase as a result of such disaggregation.

22. We also seek comment on how we would implement different geographic
    areas for reverse auctions conducted in areas served by rural
    telephone companies. Section 214(e)(5) of the Act states: "In the
    case of an area served by a rural telephone company, 'service area'
    means such company's 'study area' unless and until the Commission
    and the States, after taking into account recommendations of a
    Federal-State Joint Board instituted under section 410(c), establish
    a different definition of service area for such company."[^50] If we
    decide to conduct an auction in a geographic area that is different
    than a rural telephone company's study area, does the Act require us
    to coordinate with the relevant state commission prior to conducting
    the auction? If so, we seek comment on issues relating to
    coordination with state commissions concerning the appropriate
    geographic areas for reverse auctions in areas served by rural
    telephone companies.

## Universal Service Obligations

23. We seek comment on the extent to which we should define the
    universal service obligations of the winners of the auctions.
    Historically, only incumbent LECs received universal service support
    and had the obligation to serve customers subject to rates and terms
    specified by state regulatory authorities: so-called "carrier of
    last resort" obligations. Under the framework adopted by Congress in
    the 1996 Act, although only ETCs are eligible to receive federal
    universal service support, there may be multiple ETCs in a given
    area.[^51] In addition, although competitive ETCs do not necessarily
    have carrier of last resort obligations under state law, they are
    required to provide the supported services throughout the service
    area for which the designation is received and to advertise the
    availability of such services and their rates using media of general
    distribution.[^52] Moreover, section 214(e)(3) explicitly authorizes
    the states, with respect to intrastate services, and the Commission,
    with respect to interstate services, to order an ETC to provide
    service to an unserved area.[^53]

24. We seek comment on how to ensure the universal availability of
    services under a reverse auction mechanism. Specifically, how should
    the carrier of last resort obligations be defined, and on whom
    should they be imposed? One possibility would be for an incumbent
    LEC to retain both the carrier of last resort obligation and the
    full right to subsidy over its entire study or service area unless
    lower bids were submitted by rival bidders in each of the geographic
    units up for auction within its overall service area. If lower bids
    were submitted by rival bidders in all of the geographic units up
    for auction, then the winning bidder would inherit the carrier of
    last resort obligations. Related to this, the incumbent LEC could be
    the only provider to receive a subsidy if rival bidders do not
    submit bids below the reserve price in each of the geographic units
    up for auction within its overall service area. Alternatively, both
    the carrier of last resort obligation and associated subsides could
    be awarded to the winning bidder in each geographic unit. The
    definition of the universal service obligation may be inextricably
    linked to the manner in which reserve prices for a geographic area
    are determined and to the specific auction format as discussed
    below.[^54] We ask parties to comment specifically on the ways in
    which these issues are related.

25. We seek comment on several additional issues related to the
    continued availability of supported services. Should the winner of
    an auction be allowed to transfer to another ETC at any time the
    universal service obligations and the related support for any
    portion of a geographic area acquired through an auction? Currently
    the Commission has rules adopted pursuant to section 214 of the Act
    that address transfer of control and discontinuances.[^55] Are these
    rules adequate or do they need to be modified where a carrier has
    both universal service obligations and subsidies? Should an existing
    incumbent LEC be allowed to unilaterally renounce its carrier of
    last resort obligations by refusing to bid in a subsequent auction?
    Should states or the Commission establish penalties to be imposed on
    an ETC that fails to fulfill its universal service obligations in a
    geographic area that it acquired at auction? If a carrier that has
    won an auction subsequently declares bankruptcy, what effect will
    the declaration of bankruptcy have on its universal service
    obligations and the subsidy that it receives? Do we need to adopt
    new rules to address this issue?

26. In the *ETC Designation Order*, the Commission adopted additional
    requirements for ETC designation proceedings in which the Commission
    acts pursuant to section 214(e)(6) of the Act.[^56] Specifically,
    the Commission requires that an ETC applicant demonstrate: (1) a
    commitment and ability to provide services, including providing
    service to all customers within its proposed service area; (2) how
    it will remain functional in emergency situations; (3) that it will
    satisfy consumer protection and service quality standards; (4) that
    it offers local usage comparable to that offered by the incumbent
    LEC; and (5) an understanding that it may be required to provide
    equal access if all other ETCs in the designated service area
    relinquish their designations pursuant to section 214(e)(4) of the
    Act.[^57] We seek comment on whether these same requirements and/or
    any additional requirements should apply to all ETCs winning
    universal service auctions. Should these requirements apply only to
    auction winners, or should some or all of the requirements apply to
    all ETCs participating in universal service auctions? As noted,
    these requirements currently apply to ETCs designated by the
    Commission. Should they apply to state-designated ETCs as well?

27. In the *ETC Designation Order*, the Commission also encouraged
    states to adopt the Commission's requirements for ETC designation,
    but declined to mandate that state commissions do so.[^58] We seek
    comment on the extent to which states have done so. Section
    214(e)(2) of the Act gives states the primary responsibility to
    designate ETCs and prescribes that all state designation decisions
    must be consistent with the public interest, convenience, and
    necessity.[^59] Because the *ETC Designation Order* guidelines are
    not binding upon the states, the Commission rejected arguments
    suggesting that such guidelines would restrict the lawful rights of
    states to make ETC designations.[^60] The Commission also found that
    federal guidelines are consistent with the holding of the United
    States Court of Appeals for the Fifth Circuit that section 214(e) of
    the Act does not prohibit the states from imposing their own
    eligibility requirements in addition to those described in section
    214(e)(1).[^61] We seek comment on whether the Commission should
    condition an auction winner's receipt of federal high-cost support
    on compliance with additional requirements to ensure that the
    auction winner has obligations analogous to carrier of last resort
    obligations.[^62] We discuss the Commission's specific ETC
    requirements and related issues in more detail below.

28. *[Commitment and Ability to Provide the Supported
    Services]{.underline}*. The Commission requires that ETCs must
    provide service to all customers who make a reasonable request for
    service.[^63] Specifically, when a request comes from a potential
    customer located within the applicant's licensed service area but
    outside its existing network coverage, the ETC applicant should
    provide service within a reasonable period of time if service can be
    provided at reasonable cost by: (1) modifying or replacing the
    requesting customer's equipment; (2) deploying a roof-mounted
    antenna or other equipment; (3) adjusting the nearest cell
    tower; (4) adjusting network or customer facilities; (5) reselling
    services from another carrier's facilities to provide service;
    or (6) employing, leasing, or constructing an additional cell site,
    cell extender, repeater, or other similar equipment.[^64] The
    Commission encouraged states to follow the Joint Board's proposal
    that any build-out commitments adopted by states be harmonized with
    any existing policies regarding line extensions and carrier of last
    resort obligations.[^65] We seek comment on what build-out
    commitments should apply to ETCs participating in and/or winning
    universal service auctions.

29. The Commission also requires that a competitive ETC applicant submit
    a five-year plan describing with specificity its proposed
    improvements or upgrades to its network on a wire center-by-wire
    center basis throughout its designated service area.[^66] The
    five-year plan must demonstrate in detail how high-cost support will
    be used for service improvements that would not occur absent receipt
    of such support. This showing must include: (1) how signal quality,
    coverage, or capacity will improve due to the receipt of high-cost
    support throughout the area for which the ETC seeks designation; (2)
    the projected start date and completion date for each improvement
    and the estimated amount of investment for each project that is
    funded by high-cost support; (3) the specific geographic areas where
    the improvements will be made; and (4) the estimated population that
    will be served as a result of the improvements.[^67] We seek comment
    on whether we should require all ETCs participating in and/or
    winning universal service auctions to submit similarly detailed
    five-year plans.[^68] If commenters believe that the requirement to
    submit five-year build-out plans, or the specific contents of the
    build-out plans, should be modified, they should explain how.

30. *[Local Usage]{.underline}*. The Commission currently requires an
    ETC applicant to demonstrate that it offers a local usage plan
    comparable to the one offered by the incumbent LEC in the service
    areas for which the applicant seeks designation, but the Commission
    declined to adopt a specific local usage threshold in the *ETC
    Designation Order*.[^69] Should we adopt a specific local usage
    threshold for winners of auctions? Currently, we do not regulate the
    retail rates of ETCs as a condition of their receiving high-cost
    support. States generally regulate wireline residential rates for
    incumbent LECs, but are precluded from regulating wireless rates by
    section 332(c)(3) of the Act.[^70] Wireline rates typically are set
    on a flat rate basis, whereas rates for wireless service generally
    are set on the basis of "buckets of minutes." What kind of
    restrictions on retail pricing, if any, should the Commission place
    on auction participants in order to ensure rough comparability of
    pricing plans? For example, if a carrier whose rates are not
    regulated wins an auction, should it be required to freeze its
    retail rates, or agree to increase them subject to a price cap plan
    already in place within the state? Should the Commission establish a
    maximum rate for the local usage plan offered by auction bidders or
    winners?

31. *[Equal Access]{.underline}*. Although the Commission does not
    impose a general equal access requirement on ETC applicants, we
    require ETC applicants to acknowledge that we may require them to
    provide equal access to long distance carriers in their designated
    service area in the event that no other ETC is providing equal
    access within the service area.[^71] The Commission found that, if
    such circumstances arise, the Commission should consider whether to
    impose an equal access or similar requirement on a case-by-case
    basis. We seek comment on whether we should require all ETCs
    participating in universal service auctions to acknowledge that they
    may be required to provide equal access in the event that they win
    the auction.

32. *[Ability to Remain Functional in Emergency
    Situations]{.underline}*. The Commission also requires an ETC
    applicant to demonstrate its ability to remain functional in
    emergency situations by demonstrating that it has a reasonable
    amount of back-up power to ensure functionality without an external
    power source, is able to re-route traffic around damaged facilities,
    and is capable of managing traffic spikes resulting from emergency
    situations.[^72] In addition, ETCs designated by the Commission must
    certify on an annual basis that they are able to function in
    emergency situations. We seek comment on whether we should require
    all ETCs participating in and/or winning universal service auctions
    to demonstrate their ability to remain functional in emergencies.

33. *[Consumer Protection]{.underline}*. The Commission requires a
    carrier seeking ETC designation to demonstrate its commitment to
    meeting consumer protection and service quality standards in its
    application to the Commission.[^73] A commitment to comply with
    CTIA's Consumer Code for Wireless Service currently satisfies this
    requirement for a wireless ETC applicant seeking designation before
    the Commission.[^74] We seek comment on whether we should require
    all wireless ETCs participating in and/or winning universal service
    auctions to comply with CTIA's Consumer Code for Wireless Service.
    Are there other consumer protection and service quality standards
    that should apply to auction participants and/or winners? We seek
    comment on what type of consumer protection and service quality
    standards should apply to wireline auction participants and/or
    winners, including incumbent LECs.

34. *[Adequate Financial Resources]{.underline}*. In the *ETC
    Designation Order*, the Commission declined to adopt the Joint
    Board's recommendation that an ETC applicant demonstrate that it has
    the financial resources and ability to provide quality services
    throughout the designated service area.[^75] The Commission found
    that compliance with the requirements adopted in that order would
    require an ETC applicant to show that it has significant financial
    resources.[^76] After obtaining a license, whether by auction or
    other means, wireless carriers must further comply with the
    Commission's rules by meeting build-out or substantial service
    requirements for the particular service.[^77] We seek comment on
    whether we should adopt additional requirements for ETCs
    participating in universal service auctions to demonstrate that they
    have the financial resources and ability to provide quality services
    throughout the geographic area to be auctioned.

35. *[Additional Obligations/Provision of Broadband Internet Access
    Services]{.underline}*. In addition to the ETC requirements adopted
    in the *ETC Designation Order*, we seek comment on whether we should
    adopt additional obligations in the context of reverse auctions. We
    ask parties to comment on the specific additional universal service
    obligations they believe to be appropriate, and how they should be
    defined. We tentatively conclude that the Commission should require
    an auction winner to offer broadband Internet access services with
    information transfer rates greater than or equal to 768 kbps in at
    least one direction throughout the entire geographic area for which
    it wins the auction. In addition, we tentatively conclude that the
    Commission should require an auction winner to offer broadband
    Internet access services with information transfer rates greater
    than or equal to 1.5 mbps in at least one direction throughout the
    entire geographic area halfway through the term of the
    obligations.[^78] We reach these tentative conclusions because
    "\[t\]he Commission has consistently recognized the critical
    importance of broadband services to the nation\'s present and future
    prosperity and is committed to adopting policies to promote the
    development of broadband services, including broadband Internet
    access services."[^79] We seek comment on these tentative
    conclusions. Further, we tentatively conclude that an auction
    winner's broadband Internet access services should be offered at a
    reasonable price. We seek comment on how we should ensure that
    broadband Internet access services are being offered at reasonable
    prices.

## Reserve Prices

36. Because there may be few bidders in certain geographic areas, it is
    important to establish a reserve "price" -- i.e. a maximum subsidy
    level that participants in the auction would be allowed to place as
    a bid. We seek comment on how we should set the reserve prices for
    the areas to be auctioned. We expect that the reserve prices will
    play a critical role in the auctions. A reserve price that is set
    too low is likely to discourage bidders from participating in the
    auction, while one that is set too high raises the possibility that
    too much support will be allocated.

37. At least initially, reserve prices could be based on the current
    levels of high-cost support. We seek comment on how reserve prices
    based on current support should be determined if the geographic area
    to be auctioned differs from the area for which support is currently
    calculated. For example, if the geographic areas for the auctions
    are wire centers, for non-rural study areas it would be fairly
    straightforward to set wire center reserve prices based on the
    forward-looking costs estimated by the Commission's cost model.

38. Because the non-rural mechanism targets support to wire centers
    based on relative cost, the highest cost wire centers would have the
    highest per-line reserve price. For rural study areas with multiple
    wire centers, however, embedded costs for incumbent LECs are
    typically available only at the study area level. If a reserve price
    were based on the average cost per line in the study area, or if a
    fixed reserve subsidy for a study area were allocated on a per-line
    basis, the reserve price would not accurately reflect the costs of
    the individual wire centers or other geographic units within the
    study area. As noted above, this would discourage participation in
    the auction by competitive ETCs in the higher cost areas.[^80] In
    addition, encouraging competitive ETCs to bid for the lower cost
    areas could potentially provide insufficient support for an
    incumbent LEC with the obligation to serve the remaining higher cost
    areas. One alternative would be to determine a reserve price at the
    wire center level by allocating the study area embedded cost on the
    basis of relative forward-looking costs as determined at the wire
    center level by the Commission's cost model. Another alternative
    would be to set reserve prices for rural study areas on the basis of
    a formula in which either forward-looking, model-generated cost or
    embedded cost data are used to estimate costs on the basis of
    observable factors such as customer density. For example, if a
    forward-looking approach is used to set a reserve price for
    non-rural geographic areas, one could use the data generated by the
    forward-looking cost model to regress model costs by wire center on
    wire center customer density. The result would be a simple analytic
    formula that could be used in place of the model to set reserve
    prices for geographic units in rural study areas.[^81] We seek
    comment on these and other alternatives.

39. We tentatively conclude that, if the reserve price is based on the
    current levels of high-cost support and the area to be auctioned is
    smaller than the incumbent LEC's study area, the reserve price
    should be based on disaggregated support amounts. We also
    tentatively conclude that, if reserve prices are based on
    disaggregated support amounts, reserve prices in the aggregate
    should be capped at the current study area support amount. We seek
    comment on these tentative conclusions.

40. After the initial auction, the winning bids in the most recent prior
    auctions could be used to establish a reserve price in the next
    auction. If the geographic areas subject to auction are smaller than
    an incumbent LEC's service area, then the reserve price could be
    determined for each geographic unit for both rural and non-rural
    study areas as described above, but using the previous auction's
    winning bid rather than the incumbent LEC's forward-looking or
    embedded cost. Use of prior auction data would result in reserve
    prices that are responsive to changing technologies, and would
    lessen the need to rely on forward-looking cost models after the
    initial auction. On the other hand, use of prior auction results
    might introduce new strategic considerations into any given auction,
    since participants would be aware that their bid might affect future
    reserve prices. We seek comment on these issues.

## Auction Design

41. The Commission has conducted public auctions for electromagnetic
    spectrum rights since 1994. In a spectrum auction, a winning bidder
    obtains a license to use spectrum in a well defined geographic area.
    The value of winning a particular area, however, can be closely
    related to the value of winning in adjacent areas. Individual
    bidders may have unique business models, so that the value of
    winning a particular area will generally differ among the bidders.
    At the same time, there can be a common value component if competing
    bidders have similar business models, even though each bidder has
    unique information about demands, costs or other relevant aspects of
    the business model. In its spectrum auctions, the Commission has
    used an auction design known as the simultaneous multiple round
    (SMR) auction to address these issues. The SMR auction is a form of
    ascending price auction in which bidders are allowed to place bids
    for any number of single licenses in a series of discrete,
    successive rounds, with the length of each round announced in
    advance by the Commission. After each round closes, round results
    are processed and made public. At that time, bidders learn about the
    bids placed by other bidders, obtaining information about the value
    of the licenses to all bidders.[^82] This increases the likelihood
    that the licenses will be assigned to the bidders who value them the
    most. In an SMR auction, there is no preset number of rounds.
    Bidding continues until a round occurs in which no new bids are
    submitted.[^83]

42. Recently, variations on the SMR design have been proposed in which
    bidders are allowed to bid on packages of licenses. With package or
    "combinatorial" bidding, bidders may place bids on groups of
    licenses as well as on individual licenses. This approach allows
    bidders to better express the value of any synergies (benefits from
    combining complementary items) that may exist among licenses and to
    avoid the risk of winning only part of a desired set. Package
    bidding can be important to bidders who anticipate significant
    economies of scale and scope in deploying new infrastructure, or who
    expect customer demand to depend on total network coverage.

43. The auction design for a reverse auction to determine high-cost
    universal service support should make use of the Commission's
    experience with spectrum auctions as much as possible. As a general
    matter, we invite parties to comment on the similarities and
    differences between auctions for spectrum and reverse auctions for
    subsidies for high-cost support.

44. Whether or not the SMR design is considered as a basis for a reverse
    auction for high-cost support, there are a number of specific issues
    that must be resolved. To what extent should package bidding be
    allowed? Unrestricted combinatorial bidding would allow bidders to
    place a bid for any package of geographic areas in the auction.[^84]
    If small geographic areas are chosen as units for auction, package
    bidding may be essential for bidders to make appropriate bids based
    on their perceived cost and demand complementarities among
    geographic regions. On the other hand, an unrestricted combinatorial
    bidding procedure with a large number of distinct geographic areas
    could prove to be confusing to bidders and potentially
    computationally intractable. Should individual auctions with
    combinatorial bidding be held at a regional or state specific level
    instead of on a national basis? A broader scope for the auction
    would allow bidders to better capture interrelationships between
    geographic areas. However, a larger scope would also significantly
    increase the complexity of the auction, whether or not package
    bidding is allowed.

45. If a multiple round auction is considered, another important issue
    is the information that is revealed to bidders between rounds. A
    multiple round auction can lead to efficient outcomes in auctions
    with a common value component, since the highest bid at any round is
    necessarily revealed to all bidders.[^85] However, if additional
    information, such as the identity of the current winning bidder for
    each item is also revealed, strategic behavior may be facilitated.
    We seek comment on the potential dangers of anti-competitive
    strategic behavior in an auction for high-cost support, and the
    potential effects on economic efficiency.

46. If parties do not believe that an SMR auction design should be used
    for high-cost support, they should propose and discuss in detail the
    specific auction design that they believe to be superior. For
    example, would a single round "sealed bid" format be acceptable? If
    so, should the winning bidder receive a subsidy based on its own bid
    for the necessary subsidy or on the bid of the next higher bidder?
    Under the latter alternative, known as a "second price auction," it
    is well known that bidders have an incentive to place a bid based on
    the minimum subsidy they would be willing to accept (since the
    subsidy they receive does not depend on their actual bid). How are
    these auction designs affected if the number of bidders is
    small?[^86] Parties are also invited to comment on the specific
    auction designs used in other countries in which reverse auctions
    have been used for universal service support.

## Frequency of Auctions

47. We seek comment on the appropriate length of time between auctions.
    Currently, each applicant seeking ETC designation by the Commission
    must submit a five-year plan describing with specificity its
    proposed improvements or upgrades to its network on a wire
    center-by-wire center basis throughout its designated service
    area.[^87] Would five years be an appropriate length of time between
    auctions, or should auctions be more or less frequent?

48. Auctions for universal service support are closely related to
    franchise bidding schemes for natural monopoly, which have been
    extensively studied in economics literature. [^88] Bidders in any
    particular auction require some degree of certainty about future
    revenues, including subsidies, in order to make informed investment
    decisions. Williamson[^89] discusses some of the less obvious
    advantages of long term contracting, which, in the reverse auction
    context, would call for relatively infrequent auctions. On the other
    hand, new technologies may periodically evolve that would allow
    lower cost provision of telecommunications services in high-cost
    areas. In addition, more frequent auctions can allow for more
    informed bidding decisions, since each bidder would be more able to
    predict levels of demand and potential competition in the immediate
    future than in the longer term.

49. To the extent that support levels provided to a winning bidder
    become an essential source of revenue for the winning bidder, the
    question of asset transfers must be considered in cases in which a
    new winning bidder replaces a previously supported carrier. For
    example, it might be efficient for a cellular carrier that wins an
    auction to acquire towers and fiber links from a previously
    supported carrier serving the same region. If asset transfers are
    determined only through bilateral bargaining between the relevant
    parties, incumbent LECs might have a significant advantage due to
    their sunk costs. As a result, there may be fewer bidders in
    subsequent auctions than would otherwise be desirable. Should there
    be any oversight or other restrictions on the transfer of assets
    when a new winning bidder replaces the previous auction winner? We
    ask parties to comment on this analysis and its importance in
    assessing the long term viability of reverse auctions for universal
    service support.

## Broadband Reverse Auction Pilot Program

50. Finally, in light of the complexities in establishing a reverse
    auction, we seek comment on whether we should employ a pilot program
    to test the use of reverse auctions as a method for distributing
    high-cost support. Specifically, we seek comment on whether we
    should adopt a pilot program to replace the current high-cost
    support received in a particular area. We tentatively conclude that,
    in any pilot program, the reserve price should be based on the
    current level of support in the particular area. We also tentatively
    conclude that the states are best situated to implement any pilot
    program. We seek comment on how such a pilot program should be
    implemented.

51. We also seek comment on whether a pilot program should be used to
    disburse high-cost support targeted to broadband Internet access
    services. We note that Alltel has filed a broadband auction
    proposal, and we seek comment on that proposal.[^90] Similarly, AT&T
    has proposed its own broadband pilot program.[^91] We seek comment
    on AT&T's broadband pilot program, and whether it would be possible
    to use a reverse auction approach under that proposal.

# Procedural Matters

## Initial Regulatory Flexibility Analysis

52. As required by the Regulatory Flexibility Act of 1980, as
    amended,[^92] the Commission has prepared an Initial Regulatory
    Flexibility Analysis (IRFA) of the possible significant economic
    impact on a substantial number of small entities by the policies and
    rules proposed in this Notice. The IRFA is in the Appendix. Written
    public comments are requested on this IRFA. Comments must be
    identified as responses to the IRFA and must be filed by the
    deadlines for comments on the Notice. The Commission will send a
    copy of the Notice, including this IRFA, to the Chief Counsel for
    Advocacy of the Small Business Administration.[^93] In addition, the
    Notice and IRFA (or summaries thereof) will be published in the
    Federal Register.[^94]

## Paperwork Reduction Act Analysis

53. This document contains proposed new information collection
    requirements. The Commission, as part of its continuing effort to
    reduce paperwork burdens, invites the general public and the Office
    of Management and Budget (OMB) to comment on the information
    collection requirements contained in this document, as required by
    the Paperwork Reduction Act of 1995.[^95] Public and agency comments
    are due 60 days after this notice of proposed rulemaking is
    published in the Federal Register. Comments should address: (a)
    whether the proposed collection of information is necessary for the
    proper performance of the functions of the Commission, including
    whether the information shall have practical utility; (b) the
    accuracy of the Commission\'s burden estimates; (c) ways to enhance
    the quality, utility, and clarity of the information collected;
    and (d) ways to minimize the burden of the collection of information
    on the respondents, including the use of automated collection
    techniques or other forms of information technology. In addition,
    pursuant to the Small Business Paperwork Relief Act of 2002, we seek
    specific comment on how we might "further reduce the information
    collection burden for small business concerns with fewer than 25
    employees."[^96]

## *Ex Parte* Presentations

54. These matters shall be treated as a "permit-but-disclose" proceeding
    in accordance with the Commission's *ex parte* rules.[^97] Persons
    making oral *ex parte* presentations are reminded that memoranda
    summarizing the presentations must contain summaries of the
    substance of the presentations and not merely a listing of the
    subjects discussed. More than a one or two sentence description of
    the views and arguments presented is generally required.[^98] Other
    requirements pertaining to oral and written presentations are set
    forth in section 1.1206(b) of the Commission's rules.[^99]

## Comment Filing Procedures

55. Pursuant to sections 1.415 and 1.419 of the Commission's
    rules,[^100] interested parties may file comments 30 days after
    publication of this Notice in the Federal Register, and reply
    comments 60 days after publication of this Notice in the Federal
    Register. Comments may be filed using: (1) the Commission's
    Electronic Comment Filing System (ECFS), (2) the Federal
    Government's eRulemaking Portal, or (3) by filing paper copies. *See
    Electronic Filing of Documents in Rulemaking Proceedings*, 63 FR
    24121 (1998).

-   Electronic Filers: Comments may be filed electronically using the
    Internet by accessing the ECFS: <http://www.fcc.gov/cgb/ecfs/> or
    the Federal eRulemaking Portal:
    [http://www.regulations.gov](http://www.regulations.gov/). Filers
    should follow the instructions provided on the website for
    submitting comments.

    -   For ECFS filers, if multiple docket or rulemaking numbers appear
        in the caption of this proceeding, filers must transmit one
        electronic copy of the comments for each docket or rulemaking
        number referenced in the caption. In completing the transmittal
        screen, filers should include their full name, U.S. Postal
        Service mailing address, and the applicable docket or rulemaking
        number. Parties may also submit an electronic comment by
        Internet e-mail. To get filing instructions, filers should send
        an e-mail to <ecfs@fcc.gov>, and include the following words in
        the body of the message, "get form." A sample form and
        directions will be sent in response.

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-   Paper Filers: Parties who choose to file by paper must file an
    original and four copies of each filing. If more than one docket or
    rulemaking number appears in the caption of this proceeding, filers
    must submit two additional copies for each additional docket or
    rulemaking number.

> Filings can be sent by hand or messenger delivery, by commercial
> overnight courier, or by first-class or overnight U.S. Postal Service
> mail (although we continue to experience delays in receiving U.S.
> Postal Service mail). All filings must be addressed to the
> Commission's Secretary, Office of the Secretary, Federal
> Communications Commission.

-   The Commission's contractor will receive hand-delivered or
    messenger-delivered paper filings for the Commission's Secretary at
    236 Massachusetts Avenue, N.E., Suite 110, Washington, DC 20002. The
    filing hours at this location are 8:00 a.m. to 7:00 p.m. All hand
    deliveries must be held together with rubber bands or fasteners. Any
    envelopes must be disposed of [before]{.underline} entering the
    building.

-   Commercial overnight mail (other than U.S. Postal Service Express
    Mail and Priority Mail) must be sent to 9300 East Hampton Drive,
    Capitol Heights, MD 20743.

-   U.S. Postal Service first-class, Express, and Priority mail must be
    addressed to 445 12^th^ Street, S.W., Washington DC 20554.

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-   People with Disabilities: To request materials in accessible formats
    for people with disabilities (Braille, large print, electronic
    files, audio format), send an e-mail to <fcc504@fcc.gov> or call the
    Consumer & Governmental Affairs Bureau at 202-418-0530 (voice),
    202-418-0432 (tty).

In addition, one copy of each pleading must be sent to each of the
following:

(1) The Commission's duplicating contractor, Best Copy and Printing,
    Inc, 445 12^th^ Street, S.W., Room CY-B402, Washington, D.C. 20554;
    website: [www.bcpiweb.com](http://www.bcpiweb.com/); phone:
    1-800-378-3160;

(2) Antoinette Stevens, Telecommunications Access Policy Division,
    Wireline Competition Bureau, 445 12^th^ Street, S.W., Room 5-B540,
    Washington, D.C. 20554; e-mail: <Antoinette.Stevens@fcc.gov>.

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56. For further information regarding this proceeding, contact Katie
    King, Special Counsel, Telecommunications Access Policy Division,
    Wireline Competition Bureau, (202) 418-7491, or
    <katie.king@fcc.gov>.

# Ordering Clauses

57. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1, 2, 4(i), 4(j), 201-205, 214, 254, and 403 of the
    Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 152,
    154(i)-(j), 201-205, 214, 254, 403 and sections 1.1, 1.411-1.419,
    and 1.1200-1.1216 of the Commission's rules, 47 C.F.R. §§ 1.1,
    1.411-1.419, 1.1200-1.1216, this Notice of Proposed Rulemaking IS
    ADOPTED.

58. IT IS FURTHER ORDERED that the Commission's Consumer and
    Governmental Affairs Bureau, Reference Information Center, SHALL
    SEND a copy of this Notice of Proposed Rulemaking, including the
    Initial Regulatory Flexibility Analysis, to the Chief Counsel for
    Advocacy of the Small Business Administration.

    FEDERAL COMMUNICATIONS COMMISSION

    Marlene H. Dortch

    Secretary

    **APPENDIX**

    **Initial Regulatory Flexibility Analysis**

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1.  As required by the Regulatory Flexibility Act (RFA),[^101] the
    Commission has prepared this Initial Regulatory Flexibility Analysis
    (IRFA) of the possible significant economic impact on small entities
    by the policies and rules proposed in the Notice of Proposed
    Rulemaking (Notice). Written public comments are requested on this
    IRFA. Comments must be identified as responses to the IRFA and must
    be filed by the deadlines for comments on the Notice provided in
    paragraph 55 of the item. The Commission will send a copy of the
    Notice, including this IRFA, to the Chief Counsel for Advocacy of
    the Small Business Administration (SBA).[^102] In addition, the
    Notice and IRFA (or summaries thereof) will be published in the
    Federal Register.[^103]

## Need for, and Objectives of, the Proposed Rules

59. In the Telecommunications Act of 1996 (1996 Act), Congress sought to
    preserve and advance universal service while, at the same time,
    opening all telecommunications markets to competition.[^104] Section
    254(b) of the Act directs the Federal-State Joint Board on Universal
    Service (Joint Board) and the Commission to base policies for the
    preservation and advancement of universal service on several general
    principles, plus other principles that the Commission may
    establish.[^105] Section 254(e) provides that only eligible
    telecommunications carriers (ETCs) designated under section 214(e)
    shall be eligible to receive federal universal service support, and
    any such support should be explicit and sufficient to achieve the
    purposes of that section.[^106]

60. In the *Universal Service First Report and Order*, the Commission
    recognized certain advantages of using competitive bidding to
    determine high-cost universal service support, specifically, "its
    potential as a market-based approach to determining universal
    service support, if any, for any given area," and "its ability to
    reduce the amount of support needed for universal service."[^107]
    The record at the time, however, was insufficient to support
    adoption of a competitive bidding mechanism.[^108] Moreover, the
    Commission found it unlikely that competitive bidding mechanisms
    would be useful at that time because of the expectation that there
    would be no competition in a significant number of rural, insular,
    or high-cost areas in the near future.[^109] Nonetheless, the
    Commission found that competitive bidding warranted further
    consideration.[^110]

61. More recently, there has been renewed interest in using competitive
    bidding to determine high-cost universal service support. In August
    2006, the Joint Board sought comment on the merits of using auctions
    to determine high-cost universal service support.[^111] In February
    2007, the Joint Board held an *en banc* hearing to discuss high-cost
    universal service support in rural areas, including the use of
    reverse auctions to determine support.[^112] The Joint Board
    received three specific auction proposals in response to the *2006
    Joint Board Public Notice* and the *en banc* hearing.[^113] In a
    Public Notice, released May 1, 2007, the Joint Board sought comment
    on these proposals and invited commenters to file additional auction
    proposals.[^114]

62. In this Notice, the Commission seeks comment on the merits of using
    reverse auctions (a form of competitive bidding) to determine the
    amount of high-cost universal service support provided to ETCs
    serving rural, insular, and high-cost areas. In a reverse auction,
    support generally would be determined by the lowest bid to serve the
    auctioned area. The Commission tentatively concludes that reverse
    auctions offer several potential advantages over current high-cost
    support distribution mechanisms, and that the Commission should
    develop an auction mechanism to determine high-cost universal
    service support. The objective of the Notice is to seek comment on
    this tentative conclusion and on a number of specific issues
    regarding auctions and auction design that must be resolved in order
    for the Commission to implement an auction mechanism.

## Legal Basis

63. The legal basis for any action that may be taken pursuant to the
    Notice is contained in sections 1, 2, 4(i), 4(j), 201-205, 214, 254,
    and 403 of the Communications Act of 1934, as amended, 47 U.S.C. §§
    151, 152, 154(i)-(j), 201-205, 214, 254, 403 and sections 1.1,
    1.411-1.419, and 1.1200-1.1216, of the Commission's rules, 47 C.F.R.
    §§ 1.1, 1.411-1.419, 1.1200-1.1216.

## Description and Estimate of the Number of Small Entities to Which Rules Will Apply

64. The RFA directs agencies to provide a description of, and, where
    feasible, an estimate of the number of small entities that may be
    affected by the rules, if adopted.[^115] The RFA generally defines
    the term "small entity"[^116] as having the same meaning as the
    terms "small business,"[^117] "small organization," [^118] and
    "small governmental jurisdiction."[^119] In addition, the term
    "small business" has the same meaning as the term "small business
    concern" under the Small Business Act, unless the Commission has
    developed one or more definitions that are appropriate to its
    activities.[^120] Under the Small Business Act, a "small business
    concern" is one that: (1) is independently owned and operated; (2)
    is not dominant in its field of operation; and (3) meets any
    additional criteria established by the Small Business Administration
    (SBA).[^121] Nationwide, there are a total of approximately 22.4
    million small businesses, according to SBA data.[^122] A small
    organization is generally "any not-for-profit enterprise which is
    independently owned and operated and is not dominant in its
    field."[^123] Nationwide, as of 2002, there were approximately 1.6
    million small organizations.[^124]

65. The most reliable source of information regarding the total numbers
    of certain common carrier and related providers nationwide, as well
    as the number of commercial wireless entities, is the data that the
    Commission publishes in its *Trends in Telephone Service*
    report.[^125] The SBA has developed small business size standards
    for wireline and wireless small businesses within the three
    commercial census categories of Wired Telecommunications
    Carriers,[^126] Paging,[^127] and Cellular and Other Wireless
    Telecommunications.[^128] Under these categories, a business is
    small if it has 1,500 or fewer employees. Below, using the above
    size standards and others, we discuss the total estimated numbers of
    small businesses that might be affected by our actions.

### Wireline Carriers and Service Providers

66. We have included small incumbent local exchange carriers (LECs) in
    this present RFA analysis. As noted above, a "small business" under
    the RFA is one that, *inter* *alia*, meets the pertinent small
    business size standard (e.g., a telephone communications business
    having 1,500 or fewer employees), and "is not dominant in its field
    of operation."[^129] The SBA's Office of Advocacy contends that, for
    RFA purposes, small incumbent LECs are not dominant in their field
    of operation because any such dominance is not "national" in
    scope.[^130] We have therefore included small incumbent LECs in this
    RFA analysis, although we emphasize that this RFA action has no
    effect on Commission analyses and determinations in other, non-RFA
    contexts.

67. *Incumbent LECs*. Neither the Commission nor the SBA has developed a
    size standard for small businesses specifically applicable to
    incumbent LECs. The closest applicable size standard under SBA rules
    is for Wired Telecommunications Carriers. Under that size standard,
    such a business is small if it has 1,500 or fewer employees.[^131]
    According to Commission data,[^132] 1,307 carriers reported that
    they were engaged in the provision of local exchange services. Of
    these 1,307 carriers, an estimated 1,019 have 1,500 or fewer
    employees, and 288 have more than 1,500 employees. Consequently, the
    Commission estimates that most providers of incumbent local exchange
    service are small businesses that may be affected by our action.

68. *Competitive LECs, Competitive Access Providers (CAPs),
    "Shared-Tenant Service Providers," and "Other Local Service
    Providers."* Neither the Commission nor the SBA has developed a
    small business size standard specifically for these service
    providers. The appropriate size standard under SBA rules is for the
    category Wired Telecommunications Carriers. Under that size
    standard, such a business is small if it has 1,500 or fewer
    employees.[^133] According to Commission data,[^134] 859 carriers
    reported that they were engaged in the provision of either
    competitive LEC or CAP services. Of these 859 carriers, an estimated
    741 have 1,500 or fewer employees, and 118 have more than 1,500
    employees.[^135] In addition, 16 carriers have reported that they
    are "Shared-Tenant Service Providers," and all 16 are estimated to
    have 1,500 or fewer employees. In addition, 44 carriers have
    reported that they are "Other Local Service Providers." Of the 44,
    an estimated 43 have 1,500 or fewer employees, and one has more than
    1,500 employees. Consequently, the Commission estimates that most
    competitive LECs, CAPs, "Shared-Tenant Service Providers," and
    "Other Local Service Providers" are small entities that may be
    affected by our action.

### Wireless Carriers and Service Providers

69. *Wireless Service Providers*. The SBA has developed a small business
    size standard for wireless firms within the two broad economic
    census categories of "Paging"[^136] and "Cellular and Other Wireless
    Telecommunications."[^137] Under both categories, the SBA deems a
    wireless business to be small if it has 1,500 or fewer employees.
    For the census category of Paging, Census Bureau data for 2002 show
    that there were 807 firms in this category that operated for the
    entire year.[^138] Of this total, 804 firms had employment of 999 or
    fewer employees, and three firms had employment of 1,000 employees
    or more.[^139] Thus, under this category and associated small
    business size standard, the majority of firms can be considered
    small. For the census category of Cellular and Other Wireless
    Telecommunications, Census Bureau data for 2002 show that there were
    1,397 firms in this category that operated for the entire
    year.[^140] Of this total, 1,378 firms had employment of 999 or
    fewer employees, and 19 firms had employment of 1,000 employees or
    more.[^141] Thus, under this second category and size standard, the
    majority of firms can, again, be considered small.

70. *Wireless Telephony*. Wireless telephony includes cellular, personal
    communications services (PCS), and specialized mobile radio (SMR)
    telephony carriers. As noted earlier, the SBA has developed a small
    business size standard for "Cellular and Other Wireless
    Telecommunications" services.[^142] Under that SBA small business
    size standard, a business is small if it has 1,500 or fewer
    employees.[^143] According to Commission data, 432 carriers reported
    that they were engaged in the provision of wireless telephony.[^144]
    We have estimated that 221 of these are small under the SBA small
    business size standard.

### Satellite Service Providers

71. The first category of Satellite Telecommunications "comprises
    establishments primarily engaged in providing point-to-point
    telecommunications services to other establishments in the
    telecommunications and broadcasting industries by forwarding and
    receiving communications signals via a system of satellites or
    reselling satellite telecommunications."[^145] For this category,
    Census Bureau data for 2002 show that there were a total of 371
    firms that operated for the entire year.[^146] Of this total, 307
    firms had annual receipts of under \$10 million, and 26 firms had
    receipts of \$10 million to

    \$24,999,999.[^147] Consequently, we estimate that the majority of
    Satellite Telecommunications firms are small entities that might be
    affected by our action.

72. The second category of Other Telecommunications "comprises
    establishments primarily engaged in (1) providing specialized
    telecommunications applications, such as satellite tracking,
    communications telemetry, and radar station operations; or (2)
    providing satellite terminal stations and associated facilities
    operationally connected with one or more terrestrial communications
    systems and capable of transmitting telecommunications to or
    receiving telecommunications from satellite systems."[^148] For this
    category, Census Bureau data for 2002 show that there were a total
    of 332 firms that operated for the entire year.[^149] Of this total,
    259 firms had annual receipts of under \$10 million and 15 firms had
    annual receipts of \$10 million to \$24,999,999.[^150] Consequently,
    we estimate that the majority of Other Telecommunications firms are
    small entities that might be affected by our action.

## Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

73. In the Notice, the Commission tentatively concludes that, under a
    reverse auction mechanism, bidders must hold an ETC designation
    covering the relevant geographic area prior to participating in an
    auction to determine high-cost support for that geographic
    area.[^151] In the *ETC Designation Order*, the Commission required
    ETCs designated by the Commission to submit annually certain
    information regarding their networks and their use of universal
    service funds.[^152] Specifically, every ETC designated by the
    Commission must submit the following information on an annual basis:

```{=html}
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```
(1) progress reports on the ETC's five-year service quality improvement
    plan, including maps detailing progress towards meeting its plan
    targets; an explanation of how much universal service support was
    received and how the support was used to improve signal quality,
    coverage, or capacity; and an explanation regarding any network
    improvement targets that have not been fulfilled. The information
    should be submitted at the wire center level;

(2) detailed information on any outage lasting at least 30 minutes, for
    any service area in which an ETC is designated for any facilities it
    owns, operates, leases, or otherwise utilizes that potentially
    affect at least ten percent of the end users served in a designated
    service area, or that potentially affect a 911 special facility (as
    defined in subsection (e) of section 4.5 of the *Outage Reporting
    Order*).[^153] An outage is defined as a significant degradation in
    the ability of an end user to establish and maintain a channel of
    communications as a result of failure or degradation in the
    performance of a communications provider's network.[^154]
    Specifically, the ETC's annual report must include: (1) the date and
    time of onset of the outage; (2) a brief description of the outage
    and its resolution; (3) the particular services affected; (4) the
    geographic areas affected by the outage; (5) steps taken to prevent
    a similar situation in the future; and (6) the number of customers
    affected;

(3) the number of requests for service from potential customers within
    its service areas that were unfulfilled for the past year. The ETC
    must also detail how it attempted to provide service to those
    potential customers;

(4) the number of complaints per 1,000 handsets or lines;

(5) certification that the ETC is complying with applicable service
    quality standards and consumer protection rules, *e.g.*, the CTIA
    Consumer Code for Wireless Service;[^155]

(6) certification that the ETC is able to function in emergency
    situations;[^156]

(7) certification that the ETC is offering a local usage plan comparable
    to that offered by the incumbent LEC in the relevant service areas;
    and

(8) certification that the carrier acknowledges that the Commission may
    require it to provide equal access to long distance carriers in the
    event that no other eligible telecommunications carrier is providing
    equal access within the service area.[^157]

    In the Notice, the Commission sought comment on whether the
    Commission's ETC designation requirements should apply to all ETCs
    participating in and/or winning universal service auctions.[^158]

## Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered

74. The RFA requires an agency to describe any significant alternatives
    that it has considered in reaching its proposed approach, which may
    include the following four alternatives (among others): (1) the
    establishment of differing compliance and reporting requirements or
    timetables that take into account the resources available to small
    entities; (2) the clarification, consolidation, or simplification of
    compliance or reporting requirements under the rule for small
    entities; (3) the use of performance, rather than design, standards;
    and (4) an exemption from coverage of the rule, or part thereof, for
    small entities.[^159]

75. This IRFA seeks comment on how reverse auctions could be implemented
    in a manner that reduces the potential burden and cost of
    participation by small entities in the auctions. We also seek
    comment on the potential impact the use of reverse auctions to
    distribute high-cost universal service support would have on small
    entities**.** In the Notice, the Commission offers several
    alternatives that might minimize significant economic impact on
    ETCs, some of which might be small entities. For example, the
    Commission discusses proposals to use relatively small geographic
    areas as the areas to be auctioned, and specifically seeks comment
    on how the size of the geographic area affects the ability of small
    entities to participate in auctions.[^160] The Commission also seeks
    comment on various methods of setting reserve prices based on
    current levels of high-cost support, and tentatively concludes that
    the reserve price should be set at disaggregated support amounts if
    the area to be auctioned is smaller than the incumbent LEC's study
    area.[^161]

## Federal Rules that may Duplicate, Overlap, or Conflict with the Proposed Rules

76. None.

**STATEMENT OF**

**CHAIRMAN KEVIN J. MARTIN**

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-22 (*Joint Board Comprehensive High Cost
Recommended Decision Notice*).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-4 (*Identical Support Rule Notice*).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-5 (*Reverse Auctions Notice*).

Today, the Commission adopts several proposals to reform the high-cost
universal service program. It is essential that we take actions that
preserve and advance the benefits of the universal service program.

 

The United States and the Commission have a long history and tradition
of ensuring that rural areas of the country are connected and have
similar opportunities for communications as other areas.  Our universal
service program must continue to promote investment in rural America's
infrastructure and ensure access to telecommunications services that are
comparable to those available in urban areas today, as well as provide a
platform for delivery of advanced services.

 

Changes in technology and increases in the number of carriers that
receive universal service support, however, have placed significant
pressure on the stability of the Fund.  A large and rapidly growing
portion of the high-cost support program is now devoted to supporting
multiple competitors to serve areas in which costs are prohibitively
expensive for even one carrier.  These additional networks don't receive
support based on their own costs, but rather on the costs of the
incumbent provider, even if their costs of providing service are lower.
In addition to recommending an interim cap, the Joint Board has
recognized the problems of maintaining this identical support rule.

 

I am supportive of several means of comprehensive reform for the
universal service program. I have circulated among my colleagues at the
Commission an Order that adopts the recommendation of the Joint Board to
place an interim cap on the amount of high-cost support available to
competitive ETCs.  And today we adopt a Notice of Proposed Rulemaking
that would require that high-cost support be based on a carrier's own
costs in the same way that rural phone companies' support is based.  I'm
supportive of both measures as a means to contain the growth of
universal service in order to preserve and advance the benefits of the
fund and protect the ability of people in rural areas to continue to be
connected. 

 

I continue to believe the long-term answer for reform of high-cost
universal service support is to move to a reverse auction
methodology.  I believe that reverse auctions could provide a
technologically and competitively neutral means of controlling the
current growth in the fund and ensuring a move to most efficient
technologies over time.  Accordingly, I am pleased that we adopt today's
Notice of Proposed Rulemaking to use reverse auctions to distribute
universal service support.

**STATEMENT OF**

**COMMISSIONER MICHAEL J. COPPS, **

**Approving in FCC 08-22**

**Approving in FCC 08-4**

**Approving in Part, Dissenting in Part in FCC 08-5**

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-22 (*Joint Board Comprehensive High Cost
Recommended Decision Notice*) (Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-4 (*Identical Support Rule Notice*)
(Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-5 (*Reverse Auctions Notice*) (Approving in
Part, Dissenting in Part).

** **

The Commission adopts and seeks comment on three Notices of Proposed
Rulemaking concerning:  the Federal-State Joint Board on Universal
Service's (Joint Board) recommendation on comprehensive reform of the
high-cost Universal Service support mechanism; the elimination of the
"Identical Support" rule; and the merits of using reverse auctions in
distributing high-cost support to eligible telecommunications carriers
(ETCs).  I am pleased that the Commission today initiates all three
NPRMs simultaneously as I have long believed that Universal Service
reform must be done in a comprehensive, systematic manner.  I write here
to express my views on all three proceedings.

 

I continue to believe that there are a variety of ways to promote
Universal Service and at the same time ensure the sustainability and
integrity of the fund.  I believe much would be accomplished if the
Commission were to include broadband on both the distribution and
contribution side of the ledger; eliminate the Identical Support rule;
and increase its oversight and auditing of the high-cost fund. 
Additionally, Congressional authorization to permit the assessment of
Universal Service contributions on intrastate as well as interstate
revenue would be a valuable tool for supporting broadband.  

 

That being said, the Joint Board made an assortment of recommendations
of its own.  I agreed with some of them and not with others. In my view,
the most important part of the recommendation is its inclusion of
broadband as part of USF for the 21^st^ Century.  My views on the
recommendation are explained in further detail in my statement that
accompanied the Joint Board's recommendation and which is attached as an
appendix to the NPRM adopted today.  I believe the recommendation merits
further action by the Commission, and therefore, I am pleased to support
the NPRM initiated today.

 

Let me briefly take this opportunity to thank the members of the Joint
Board who worked tirelessly on the difficult task of developing a
comprehensive proposal for the FCC's consideration.  I congratulate
Chairwoman Tate for her leadership in bringing these recommendations to
the Commission.  We are all deeply indebted to her co-chair,
Commissioner Ray Baum of Oregon, for his tireless and energetic work in
shepherding the Joint Board toward consensus on many items.  And I want
to pay tribute to the always visionary yet practical efforts of the
indefatigable Billy Jack Gregg whose endless good counsel is sewn
throughout the Joint Board's recommendations.

 

With regard to the NPRM on the Identical Support rule, it is clear to me
that the costs of investing and maintaining wireless and wireline
infrastructure are inherently different.  I believe that wireless can
and should be a part of Universal Service, but the time has come to put
an end to the irrational and costly system of supporting wireless
carriers based on the cost of wireline incumbents. I therefore am
supportive of the tentative conclusion that we eliminate this rule. The
NPRM is particularly important because it seeks comment on how best to
replace this rule and in particular the methodologies by which CETCs
should be able to recover costs for Universal Service support purposes.

 

 The NPRM on reverse auctions is much more of a mixed bag.  On the one
hand, I support the Commission's decision to seek comment on the merits
of reverse auctions as a method for distributing high-cost Universal
Service support. The Joint Board spent a great deal of time examining
the use of reverse auctions, but I must say that our review raised in my
mind many more questions than it answered.  For instance, how do we
ensure that the winning bidder provides adequate quality of service? 
What happens if the winner later decides it is no longer profitable to
continue its operation?  And who will be responsible for establishing
the rules and enforcing them?  Ironically, this purportedly market-based
approach strikes me as hyper-regulatory.  For these reasons, I must
dissent from the NPRM's tentative conclusion that the Commission should
develop an auction mechanism to determine high-cost support.  I believe
that the options I outlined above---including broadband as part of
Universal Service; elimination of the Identical Support rule; stepped-up
accounting oversight; and Congressional action to enable Universal
Service collections on an intrastate as well as an interstate basis
provide a more effective and less disruptive approach to Universal
Service reform.

 

The good news is that these three items, particularly the Joint Board
recommendation, put the urgent need for comprehensive Universal Service
reform squarely in front of the Commission.  I hope the FCC will deal
with these recommendations expeditiously and comprehensively. This is no
place for piecemeal actions.  We need to think expansively and
creatively about implementing the path-breaking broadband decision that
has now been presented to us. This country desperately needs a
comprehensive broadband strategy.  The Joint Board recommendation
provides the opportunity for the FCC to move toward such a strategy,
working with our own rules and making suggestions to Congress in those
areas where legislative action may be required to ensure such a
strategy.  I am looking forward to working with my colleagues in order
to turn these proposals into workable solutions.

  

**STATEMENT OF**

**COMMISSIONER JONATHAN S. ADELSTEIN,**

**Approving in FCC 08-22**

**Approving in FCC 08-4**

**Concurring in Part, Dissenting in Part in FCC 08-5**

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-22 (*Joint Board Comprehensive High Cost
Recommended Decision Notice*) (Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-4 (*Identical Support Rule Notice*)
(Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-5 (*Reverse Auctions Notice*) (Concurring in
Part, Dissenting in Part).

Through these Notices, the Commission seeks comment on potentially
profound changes to the Universal Service High Cost program. While I am
not without reservations about some of the proposals in these items, I
am pleased that the Commission is engaging in serious consideration of
how to preserve and advance universal service, one of the bedrock
principles of U.S. telecommunications policy. I am particularly
encouraged that the Commission is seeking comment on the recommendations
of the Federal-State Joint Board on Universal Service (Joint Board), and
I thank the members of the Joint Board for their considerable efforts to
bring us this Recommended Decision.

Congress and the Commission recognized early on that the economic,
social, and public health benefits of the telecommunications network are
increased for all subscribers by the addition of each new subscriber. In
Section 254 of the Communications Act, Congress affirmed the broad
principle that "consumers in all regions of the nation . . . should have
access to telecommunications and information services . . . that are
reasonably comparable to those services provided in urban areas and that
are available at rates that are reasonably comparable to rates charged
for similar services in urban areas." Implementing universal service as
intended by Congress in Section 254 of the Act is among the highest
priorities for the Commission.

The task before us -- ensuring the continued vitality of universal
service -- is particularly important as technology and the marketplace
continue to evolve. Our choices in this proceeding will have a dramatic
effect on the ability of communities and consumers in Rural America to
thrive and grow with the rest of the country. History has shown that
many rural consumers would be left behind if it weren't for the support
made available through our universal service policies.

The Joint Board's Recommended Decision for comprehensive reform of the
high cost support mechanism -- and, in particular, the decision to
include broadband as a supported service -- is a landmark development. I
have long argued that the universal service fund is an integral
component of our efforts to meet the broadband challenge. So, the
decision to embrace broadband, through the list of supported services
and through targeted funding for unserved areas, and the recognition of
the effectiveness of the current High Cost Loop Fund in supporting the
capital costs of providing broadband-capable loop facilities for rural
carriers are encouraging developments.

I must express a degree of reservation over the amount of support
allocated to the Broadband Fund, among other limitations on support.
Maintaining our commitment to connectivity, particularly in the
broadband age, is more important than ever, and the Commission must
start to provide realistic assessments of what will be required. To that
end, I am also concerned about the impact of reverse auctions and
whether such mechanisms can provide adequate incentives for build out in
Rural America. For these reasons, I dissent from the tentative
conclusions in the separate Reverse Auctions Notice. While I appreciate
the majority's willingness to flesh out details of their reverse auction
proposal, I cannot support these premature tentative conclusions, and
would have preferred a more balanced presentation of the potential
disadvantages of such an approach.

There remain many questions about the Recommended Decision and details
to be vetted. While I reserve judgment on many of the proposals, there
is much here that warrants careful consideration. The Joint Board has
wrestled with many difficult issues, including the unique role of
providers of last resort, compensation for multiple providers, and the
role of the States in fostering universal service, and I look forward to
seeking comment on their recommendations. I agree with the Joint Board's
recommendation on the identical support rule and support the separate
Notice seeking comment on alternative approaches.

As we move forward with these proceedings at the Commission, I would
like to express my sincere gratitude to all the members and staff of the
Joint Board. The Joint Board, and the many parties who participated in
those proceedings, engaged in a long and arduous effort to bring us
these recommendations. I know that we will benefit considerably from
their expertise and judgment, and I look forward to the coming dialogue
on these proposals with our state commission colleagues, consumers,
providers, and the many others with a stake in the future of universal
service.

**STATEMENT OF**

**COMMISSIONER DEBORAH TAYLOR TATE**

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-22 (*Joint Board Comprehensive High Cost
Recommended Decision Notice*) (Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-4 (*Identical Support Rule Notice*)
(Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-5 (*Reverse Auctions Notice*) (Approving).

As Federal Chair of the Federal-State Joint Board on Universal Service
(Joint Board) I am particularly pleased that we are taking this
significant step forward in the journey toward comprehensive reform of
the high-cost universal service program.  This is an important program
at the heart of rural America. Its purpose, to connect all Americans to
telecommunications at affordable rates, has over the years permitted
people to be connected even in rural and remote parts of our nation.
Going forward, the Universal Service Fund will continue to play a
critical and increasing role in one of our top priorities at the
Commission -- encouraging broadband deployment to all corners of
America.  

Specifically, we seek comment on the recommendation of the Joint Board
regarding comprehensive reform of high-cost universal service support.
 It is also significant that we also incorporate by reference the
*Identical Support NPRM* and *Reverse Auctions NPRM*, including the
records to be developed in response to those NPRMs. I look forward to
receiving public input and examining these issues.  

I would like to thank my Co-Chair, Commissioner Ray Baum of the Oregon
Public Utility Commission. I am especially pleased that all eight Joint
Board members, large and small/rural and urban/donor and recipient, were
able to come to this consensus and hope this will move us forward and
provide the basic building blocks for fundamental reform to ensure Fund
stability and viability in a fiscally responsible manner. All of the
Joint Board members deserve praise for their commitment to the in-depth
analysis of these complex issues, their desire to positively affect
public policy and to make decisions in the public interest in a
thoughtful and deliberative manner. They should all be commended for
their commitment to serve on the Joint Board in addition to their full
time positions as government officials.

**STATEMENT OF**

**COMMISSIONER ROBERT M. MCDOWELL**

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-22 (*Joint Board Comprehensive High Cost
Recommended Decision Notice*) (Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-4 (*Identical Support Rule Notice*)
(Approving).

Re: *High-Cost Universal Service Support; Federal-State Joint Board on
Universal Service*, Notice of Proposed Rulemaking, WC Docket No. 05-337;
CC Docket No. 96-45, FCC 08-5 (*Reverse Auctions Notice*) (Approving).

I have consistently stated that, while the Universal Service system has
been instrumental in keeping Americans connected and improving their
quality of life, this system is in dire need of comprehensive reform. I
have maintained that we must follow five principles when considering
reforms to the Universal Service Fund. We must: (1) slow the growth of
the Fund; (2) permanently broaden the base of contributors; (3) reduce
the contribution burden for all, if possible; (4) ensure competitive
neutrality; and (5) eliminate waste, fraud and abuse. A number of
proposals have been put forth, particularly the Joint Board's
recommendations for comprehensive reform sent to the Commission on
November 19, 2007.

By adopting these three notices of proposed rulemaking, we are moving
forward to advance specific reforms to the way the Universal Service
High Cost Fund is administered. I favor a comprehensive approach where
we can consider all ideas and options for reform of this important
program. This year the Commission has an historic opportunity to
implement meaningful and lasting fiscal reform that balances
stakeholders' concerns and promotes the interests of consumers. We
should seize this opportunity and take a bold step forward.

[^1]: Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56
    (1996 Act). The 1996 Act amended the Communications Act of 1934. 47
    U.S.C. § 151, *et seq*. (Communications Act or Act).

[^2]: *See* 47 U.S.C. § 254(b).

[^3]: 47 U.S.C. § 254(b)(1), (3), (5).

[^4]: 47 U.S.C. §§ 214(e), 254(e).

[^5]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776, 8948, para. 320 (1997)
    (*Universal Service First Report and Order*) (subsequent history
    omitted).

[^6]: *Id*. (agreeing with the Joint Board). The Commission also agreed
    with the Joint Board that "competitive bidding is consistent with
    section 254, and comports with the intent of the 1996 Act to rely on
    market forces to minimize regulation." *Id*. at 8951, para. 325.

[^7]: *Id*. at 8948, para. 320 ("In that regard, the bidding process
    should also capture the efficiency gains from new technologies or
    improved productivity, converting them into cost savings for
    universal service.").

[^8]: *See id*. at 8949, para. 320. Only GTE had proposed a detailed
    competitive bidding plan, which it characterized as an outline
    rather than a final proposal. GTE's Comments in Response to
    Questions, CC Docket No. 96-45, Attach. 1 (filed Aug. 2, 1996).

[^9]: *See Universal Service First Report and Order*, 12 FCC Rcd at
    8950, para. 324.

[^10]: *See id*. at 8948, para. 320. Although the Commission indicated
    it would issue a further notice of proposed rulemaking specifically
    examining the use of competitive bidding to determine high-cost
    support, until now, it has only sought comment in the more limited
    context of using competitive bidding to identify the carrier(s) best
    able to provide service to unserved tribal lands. *See id*. at 8951,
    para. 325; *Federal-State Joint Board on Universal Service;
    Promoting Deployment and Subscribership in Unserved and Underserved
    Areas, Including Tribal and Insular Areas*, CC Docket No. 96-45,
    Further Notice of Proposed Rulemaking, 14 FCC Rcd 21177, 21217-24,
    paras. 93-114 (1999).

[^11]: *See Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Order, 17 FCC Rcd 22642 (2002) (*ETC/Portability Referral
    Order*); *Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, Order, 19 FCC Rcd 11538, para. 1 (2004) (*Rural*
    *Referral Order*).

[^12]: *Federal-State Joint Board on Universal Service Seeks Comment on
    the Merits of Using Auctions to Determine High-Cost Universal
    Service Support*, WC Docket No. 05-337, CC Docket No. 96-45, Public
    Notice, 21 FCC Rcd 9292 (Fed.-State Jt. Bd. 2006) (*2006 Joint Board
    Public Notice*). The Joint Board also sought comment on auctions in
    the ETC/Portability proceeding. *See Federal-State Joint Board on
    Universal Service Seeks Comment on Certain of the Commission's Rules
    Relating to High-Cost Universal Service Support and the ETC
    Designation Process*, CC Docket No. 96-45, Public Notice, 18 FCC Rcd
    1941, 1950, para. 20 (Fed.-State Jt. Bd. 2003).

[^13]: *See Federal-State Joint Board on Universal Service to Hold En
    Banc Hearing on High-Cost Universal Service Support in Areas Served
    by Rural Carriers*, WC Docket No. 05-337, Public Notice, 22 FCC Rcd
    2545 (Wireline Comp. Bur. 2007).

[^14]: Statements, slides and audio transcripts from the *2007 en banc
    hearing* are available at
    <http://www.fcc.gov/wcb/tapd/universal_service/JointBoard/welcome.html>
    (last updated Oct. 1, 2007).

[^15]: *Federal-State Joint Board on Universal Service Seeks Comment on
    Long Term Comprehensive High-Cost Universal Service Reform*, WC
    Docket No. 05-337, CC Docket No. 96-45, Public Notice, 22 FCC Rcd
    9023, 9024-25, para.4 (Fed.-State Jt. Bd. 2007). Comments were due
    May 31, 2007, and reply comments were due July 2, 2007. The Joint
    Board also recommended that, as an interim measure, the Commission
    adopt a cap on competitive ETC support. *See High-Cost Universal
    Service Support; Federal-State Joint Board on Universal Service*, WC
    Docket No. 05-337, CC Docket No.96-45, Recommended Decision, 22 FCC
    Rcd 8998 (Fed.-State Jt. Bd. 2007) (*2007 Recommended Decision*).

[^16]: *See 2006 Joint Board Public Notice*, Reply Comments of
    CTIA---The Wireless Association®, WC Docket No. 05-337, CC Docket
    No. 96-45, Appendix (Controlling Universal Service Funding and
    Promoting Competition Through Reverse Auctions, by James Stegeman,
    Dr. Steve Parsons, Robert Frieden, and Mike Wilson) (filed Nov. 8,
    2006) (CTIA Reply Comments).

[^17]: *See id*. Appendix at 21. For example, under the first method, if
    the winning bid is \$8 per line and another bidder bids \$10, the
    winning bid is 20 percent below the other bid, so the non-winning
    bidder would receive 20 percent less support, or \$6.40. Under the
    second method, if the winning bidder at \$8 serves fifty percent of
    the market, the carrier bidding \$10 has its reduction factor
    multiplied by 50 percent, for a ten percent reduction and would
    receive \$7.20 per line. The purpose of the market share adjustment
    value is to reduce gamesmanship opportunities available to providers
    with only a small share of the market. *Id*.

[^18]: *See id*. at 9.

[^19]: *See* Letter from Kathleen Grillo, Vice President Federal
    Regulatory, Verizon, to Deborah Taylor Tate, Federal Chair and Ray
    Baum, State Chair, Federal-State Joint Board on Universal Service,
    WC Docket No. 05-337, CC Docket No. 96-45, Appendix (Modernizing
    Universal Service: A Design for Competitive Bidding), (dated Feb. 9,
    2007) (Verizon Letter).

[^20]: *See id*. at 7-8.

[^21]: *See id*.

[^22]: *See id*. at 9.

[^23]: *See id*. at 5-6.

[^24]: *See id*. at 6. The specific auction design Verizon describes is
    called a "clock-proxy" auction, which is a hybrid of two auction
    designs, a "clock" auction and a "proxy" auction. A clock auction is
    a dynamic, multiple round process in which the auctioneer announces
    prices and bidders respond with quantities desired at announced
    prices. It is called a clock auction because the rounds of bidding
    are conducted at regular intervals. In a proxy auction, the bidding
    activity is conducted by a proxy agent (a computer program)
    following strict rules in order to limit the possibility of
    strategic behavior by the bidder. *See id*. Appendix at 8-14.

[^25]: *See id*. at 6.

[^26]: *See id*. at 7. As a first step, Verizon proposes that the
    Commission stabilize the universal service fund by placing a
    reasonable cap on current high-cost support levels. Support would be
    capped for each study area, with two separate caps, one for wireline
    ETCs and one for wireless ETCs. *See id*. at 3-5. Verizon also
    states that its auction design suggests two reserve amounts that
    would each have to be satisfied: one that applies at the study area
    level, and a second that applies at the wire center level. The
    aggregate reserve at the study area level would be the capped amount
    established at the beginning of the process. The wire center reserve
    would be based on a pro-rata distribution of the study area support
    to each wire center, but with some additional amount added to allow
    for auction results to direct more support to higher cost wire
    centers, and less to lower cost ones. This means that the sum of the
    individual wire center reserves in a study area would be greater
    than the aggregate reserve for the study area as a whole. The
    separate imposition of the study area reserve would ensure that the
    auction cannot result in an increase in support for any study area.
    *Id*. at 7.

[^27]: *See* Letter from Gene DeJordy, Vice President Regulatory
    Affairs, Steve R. Mowery, Vice President Public Policy, and Mark
    Rubin, Vice President Federal Government Affairs, Alltel, to Deborah
    Taylor Tate, Federal Chair, and Ray Baum, State Chair, Federal-State
    Joint Board on Universal Service, WC Docket No. 05-337, CC Docket
    No. 96-45 (dated Feb. 16, 2007) (Alltel Letter) (attaching Alltel
    Universal Service Reform Proposals) (Alltel Proposal). Although
    Alltel believes that it may be possible to resolve certain problems
    and ultimately use reverse auctions to allocate all universal
    service support, its pilot program proposal would provide support in
    addition to support participating ETCs receive under the
    pre-existing high-cost program. *See* Alltel Proposal at 1.

[^28]: *See* Alltel Proposal at 1.

[^29]: *Id*. Alltel suggests that broadband could be defined as any
    service used for transmission of information of a user's choosing at
    a transmission speed of at least 400 kbps in at least one direction,
    regardless of the transmission medium or technology employed. *See
    id*. at 2.

[^30]: *See id*.

[^31]: Alltel suggests that the non-winning bidders could receive 90
    percent of any amounts disbursed over and above the amounts already
    available under the pre-existing high-cost program. *See id*. at 3.

[^32]: *See id*. Alltel recommends that the pilot program start at about
    \$25 million. *See* Alltel Proposal at Summary.

[^33]: *See 2007 Recommended Decision*, 22 FCC Rcd at 8999-9001, paras.
    4-5 (recommending an interim cap on competitive ETC high-cost
    support to restrain the growth of the fund); *see also Universal
    Service Contribution Methodology*, WC Docket No. 06-133, Report and
    Order and Notice of Proposed Rulemaking, 21 FCC Rcd 7518, 7527,
    para. 17 (2006) (adopting an interim contribution measures in
    response to strain on the universal service fund due to growth in
    disbursements).

[^34]: This benefit would result if the Commission adopts an auction
    design that awards support to a single winner per area. *See infra*
    para. 14.

[^35]: 47 U.S.C. § 254(e).

[^36]: *See supra* paras. 5, 8.

[^37]: *See* 47 U.S.C. § 254(b)(5); *Alenco Communications v. FCC*, 201
    F.3d 608, 619 (5^th^ Cir. 2000) ("excessive funding may itself
    violate the sufficiency requirement of the Act"). To avoid this
    result, support in a multiple-winner auction would need to be
    distributed on a per-line basis, rather than as a fixed amount per
    area.

[^38]: If subsidies were based on the number of lines, then some
    households could also receive multiple indirect subsidies by
    subscribing to a single wireless carrier that offers discounted
    prices for additional lines to family members.

[^39]: When the subsidy is determined by the *lowest non-winning bid*,
    auction theory suggests that, absent scale economies, bidders will
    not change their bids when the number of winners is increased. *See*
    Vijay Krishna, *Auction Theory* 181-83 (Academic Press 2002). It
    follows that increasing the number of winners implies that the
    lowest non-winning bid will be higher. To ilustrate, under such a
    mechnism, if there were a single winner, the subsidy would be based
    on the second lowest bid. If there were two winners, the subsidy
    would be based on the third lowest bid, which by defintion would be
    higher, since bids do not change as the number of winners increases.
    Similar results would be expected if subsidies were determined on
    the basis of the *lowest winning bid*, although calculations for
    this case must take into account changes in optimal bidding
    strategies as the number of winners increases.

[^40]: *See, e.g.*, Paul Klemperer, *Auctions: Theory and Practice*
    151-67 (Princeton University Press 2004) (dealing with favorable and
    unfavorable outcomes in European auctions for third generation
    mobile phone spectrum licenses); *see also* J. Anton and D.Yao,
    *Split Awards, Procurement and Innovation*, 20 Rand J. Econ. 538-52
    (1989) (a related theoretical argument in the context of procurement
    auctions).

[^41]: *See, e.g.*, Douglas W. Caves, Laurits R. Christensen, *The
    Importance of Economies of Scale, Capacity Utilization, and Density
    in Explaining Interindustry Differences in Productivity Growth*, 24
    Logistics & Transp. Rev. 3-32 (1988).

[^42]: CTIA Reply Comments at 7. ("\[A\] 'winner-gets-more' reverse
    auction structure rewards the lowest bidder with the bid level of
    support, while still providing some lesser level of support for
    auction participants who fail to submit the lowest bid. A
    'winner-gets-more' reverse auction therefore can balance the need to
    drive down the cost of universal service and minimizing competitive
    distortions.").

[^43]: *See supra* para. 5.

[^44]: *See id*.

[^45]: *See supra* para. 14.

[^46]: *See* CTIA Reply Comments, Appendix at 18.

[^47]: *See* Verizon Letter at 5-6.

[^48]: *See* CTIA Reply Comments at 9, Verizon Letter at 6.

[^49]: *See* Verizon Letter at 6.

[^50]: 47 U.S.C. § 214(e)(5). The Federal-State Joint Board on Universal
    Service made such recommendations in its *1996 Recommended
    Decision*. *See Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Recommended Decision, 12 FCC Rcd 87, 179-80,
    paras. 172-74 (Fed.-State Jt. Bd. 1996) (*1996 Recommended
    Decision*). Specifically, when the Joint Board recommended that the
    Commission retain the current study areas of rural telephone
    companies as the service areas for the rural telephone companies,
    the Joint Board made the following observations: (1) the potential
    for creamskimming is minimized by retaining study areas because
    competitors, as a condition of eligibility, must provide services
    throughout the rural telephone company\'s study area; (2) the Act,
    in many respects, places rural telephone companies on a different
    competitive footing from other local telephone companies; and (3)
    there would be an administrative burden imposed on rural telephone
    companies by requiring them to calculate costs at something other
    than the study area level. *Id.*

[^51]: 47 U.S.C. §§ 214(e)(2), 254(e); *supra* para. 2.

[^52]: 47 U.S.C. § 214(e)(1).

[^53]: 47 U.S.C. § 214(e)(3).

[^54]: *See infra* sections F, G.

[^55]: 47 U.S.C. § 214; 47 C.F.R. §§ 63.03, 63.04, 63.71.

[^56]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-56, Report and Order, 20 FCC Rcd 6371 (2005) (*ETC Designation
    Order*); 47 U.S.C. § 214(e)(6). Section 214(e)(6) of the Act directs
    the Commission to designate carriers when those carriers are not
    subject to the jurisdiction of a state commission.

[^57]: *ETC Designation Order*, 20 FCC Rcd at 6380, para. 20.

[^58]: *Id*. at 6380, para. 20, 6397, para. 61.

[^59]: 47 U.S.C. § 214(e)(2).

[^60]: *ETC Designation Order*, 20 FCC Rcd at 6397, para. 61.

[^61]: *See Texas Office of Public Utility Counsel v. FCC*, 183 F. 3d
    393, 418 (5^th^ Cir. 1999) (*TOPUC I*), *cert. dismissed sub nom.
    GTE Serv. Corp. v. FCC*, 531 U.S. 975, 121 S.Ct. 423, 148 L.Ed.2d
    327 (2000).

[^62]: Consistent with *TOPUC I*, state commissions would continue to
    maintain the flexibility to impose further additional eligibility
    requirements in state ETC proceedings, if they so choose.

[^63]: *ETC Designation Order*, 20 FCC Rcd at 6380-81, para. 22.

[^64]: *Id*. at 6381, para. 22.

[^65]: *Id*. at 6380, para. 21.

[^66]: *Id*. at 6381-82, para. 23.

[^67]: *Id*.

[^68]: If the auction winner's obligation to serve the area is longer or
    shorter than five years, we tentatively conclude that it would be
    appropriate to adjust the time period for the plan to coincide with
    the time period of the obligation.

[^69]: *ETC Designation Order*, 20 FCC Rcd at 6385, para. 32.

[^70]: 47 U.S.C. § 332(c)(3).

[^71]: *ETC Designation Order*, 20 FCC Rcd at 6386, para. 35.

[^72]: *Id*. at 6382-83, para. 25.

[^73]: *Id*. at 6383-84, para. 28.

[^74]: *See id*. at 6383, para. 28 & n.71; CTIA, Consumer Code for
    Wireless Service, available at
    <http://www.ctia.org/consumer_info/index.cfm/AID/10352> (last
    retrieved October 3, 2007). Under the CTIA Consumer Code, wireless
    carriers agree to: (1) disclose rates and terms of service to
    consumers; (2) make available maps showing where service is
    generally available; (3) provide contract terms to customers and
    confirm changes in service; (4) allow a trial period for new
    service; (5) provide specific disclosures in advertising; (6)
    separately identify carrier charges from taxes on billing
    statements; (7) provide customers the right to terminate service for
    changes to contract terms; (8) provide ready access to customer
    service; (9) promptly respond to consumer inquiries and complaints
    received from government agencies; and (10) abide by policies for
    protection of customer privacy.

[^75]: *ETC Designation Order*, 20 FCC Rcd at 6387-88, para. 37.

[^76]: *See id*. at 6387, para. 37.

[^77]: *See id*. & n.100.

[^78]: We seek comment below on the appropriate length of time between
    auctions and, thus, on the term of the auction winners' obligations.
    *See infra* paras. 47-49.

[^79]: *Development of Nationwide Broadband Data To Evaluate Reasonable
    And Timely Deployment of Advanced Services To All Americans,
    Improvement of Wireless Broadband Subscribership Data, And
    Development of Data on Interconnected Voice Over Internet Protocol
    Subscribership*, WC Docket No. 07-38, Notice of Proposed Rulemaking,
    22 FCC Rcd 7760, para. 1 (2007) (citing *Appropriate Framework for
    Broadband, Access to the Internet over Wireline Facilities, et al.*,
    CC Docket No, 02-33 *et al*., Policy Statement, 20 FCC Rcd 14986
    (2005) (setting forth four principles intended to "encourage
    broadband deployment and preserve and promote the open and
    interconnected nature of the public Internet")).

[^80]: *See supra* para. 20.

[^81]: While forward-looking cost models are not currently used to
    determine high-cost loop support in rural study areas, a similar
    formula could be obtained from data generated within rural
    geographic areas, since most forward-looking models are also capable
    of estimating costs for rural areas.

[^82]: For the 700 MHz auction (auction 73), the Commission will use
    anonymous bidding. *See Auction of 700 MHz Band Licenses Scheduled
    for January 24, 2008*, AU Docket No. 07-157, Public Notice, DA
    07-4171, at paras. 145-56 (rel. Oct. 5, 2007).

[^83]: The SMR auction also contains detailed rules governing bid
    increments, bid withdrawals, and bidder activity rules which require
    active bidding in order to remain eligible to make future bids on
    particular licenses. *See* *Implementation of Section 309(j) of the
    Communications Act -- Competitive Bidding,* PP Docket No. 93-253,
    Second Report and Order, 9 FCC Rcd 2348 (1994)*.*

[^84]: For example, if there are 30 geographic areas in an auction, then
    there are 2^30^ -- 1 = 1,073,741,823 possible packages to bid for.

[^85]: Such information can serve to ameliorate the so-called "winner's
    curse" in which a naïve bidder's bidding strategy is based on his or
    her own private information, which, for the winning bidder, turns
    out to be more optimistic than the information available to other
    bidders. Knowing this, more sophisticated bidders consciously reduce
    their bids in a common value setting.

[^86]: With a single bidder, the subsidy would necessarily be determined
    by the reserve price.

[^87]: *See supra* para. 29; *ETC Designation Order*, 20 FCC Rcd at
    6381-82, para. 23.

[^88]: *See, e.g.*, O. Williamson, *Franchise bidding for natural
    monopolies -- in general and with respect to CATV*, 7 Bell J. Econ.
    73-104 (1976) (discussing some of the potential difficulties of
    franchise bidding in the context of cable television monopolies).

[^89]: *See id.* at 83-90.

[^90]: *See* Letter from Gene DeJordy, Vice President Regulatory
    Affairs, Steve R. Mowery, Vice President Public Policy, and Mark
    Rubin, Vice President Federal Government Affairs, Alltel, to Deborah
    Taylor Tate, Federal Chair, and Ray Baum, State Chair, Federal-State
    Joint Board on Universal Service (dated Feb. 16, 2007).

[^91]: High-Cost Universal Service Support, Federal-State Joint Board on
    Universal Service, Comments of AT&T Inc., WC Docket No. 05-337, CC
    Docket No. 96-45 (filed May 31, 2007).

[^92]: 5 U.S.C. § 603.

[^93]: *See* 5 U.S.C. § 603(a).

[^94]: *Id.*

[^95]: Paperwork Reduction Act of 1995, Pub. L. No. 104-13, 109 Stat.
    163 (1995).

[^96]: Small Business Paperwork Relief Act of 2002, Pub. L. No. 107-198,
    116 Stat. 729 (2002); 44 U.S.C. § 3506(c)(4).

[^97]: 47 C.F.R. §§ 1.1200-1.1216.

[^98]: 47 C.F.R. § 1.1206(b)(2).

[^99]: 47 C.F.R. § 1.1206(b).

[^100]: 47 CFR §§ 1.415, 1.419.

[^101]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. §§ 601 -- 612, has
    been amended by the Small Business Regulatory Enforcement Fairness
    Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857
    (1996).

[^102]: *See* 5 U.S.C. § 603(a).

[^103]: *Id.*

[^104]: Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat.
    56 (1996). The 1996 Act amended the Communications Act of 1934. 47
    U.S.C. § 151, *et seq*. (Communications Act or Act).

[^105]: *See* 47 U.S.C. § 254(b). Among other things, there should be
    specific, predictable, and sufficient federal and state universal
    service support mechanisms; quality services should be available at
    just, reasonable, and affordable rates; and consumers in all regions
    of the nation should have access to telecommunications services that
    are reasonably comparable to those services provided in urban areas
    at reasonably comparable rates. 47 U.S.C. § 254(b)(1), (3), (5).

[^106]: 47 U.S.C. §§ 214(e), 254(e).

[^107]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776, 8948, para. 320, 8951,
    para. 325. (1997) (*Universal Service First Report and Order*)
    (subsequent history omitted).

[^108]: *See id*. at 8949, para. 320.

[^109]: *See id*. at 8950, para. 324.

[^110]: *See id*. at 8948, para. 320. Although the Commission indicated
    it would issue a further notice of proposed rulemaking specifically
    examining the use of competitive bidding to determine high-cost
    support, until now, it has only sought comment in the more limited
    context of using competitive bidding to identify the carrier(s) best
    able to provide service to unserved tribal lands. *See id*. at 8951,
    para. 325; *Federal-State Joint Board on Universal Service;
    Promoting Deployment and Subscribership in Unserved and Underserved
    Areas, Including Tribal and Insular Areas*, CC Docket No. 96-45,
    Further Notice of Proposed Rulemaking, 14 FCC Rcd 21177, 21217-24,
    paras. 93-114 (1999) (*Unserved/Tribal Areas NPRM*).

[^111]: *Federal-State Joint Board on Universal Service Seeks Comment on
    the Merits of Using Auctions to Determine High-Cost Universal
    Service Support*, WC Docket No. 05-337, Public Notice, 21 FCC Rcd
    9292 (Fed.-State Jt. Bd. 2006) (*2006 Joint Board Public Notice*).
    The Joint Board also sought comment on auctions in the
    ETC/Portability proceeding. *See Federal-State Joint Board on
    Universal Service Seeks Comment on Certain of the Commission's Rules
    Relating to High-Cost Universal Service Support and the ETC
    Designation Process*, CC Docket No. 96-45, Public Notice, 18 FCC Rcd
    1941, 1950, para. 20 (Fed.-State Jt. Bd. 2003). The Joint Board
    currently is reviewing the Commission's rules relating to high-cost
    universal service support in study areas in which competitive ETCs
    receive support and the rules relating to high-cost universal
    service support for rural carriers. *See Federal-State Joint Board
    on Universal Service*, CC Docket No. 96-45, Order, 17 FCC Rcd 22642
    (2002) (*ETC/Portability Referral Order*); *See Federal-State Joint
    Board on Universal Service*, CC Docket No. 96-45, Order, 19 FCC Rcd
    11538, para. 1 (2004) (*Rural* *Referral Order*).

[^112]: *See Federal-State Joint Board on Universal Service to Hold En
    Banc Hearing on High-Cost Universal Service Support in Areas Served
    by Rural Carriers*, WC Docket No. 05-337, Public Notice, 22 FCC Rcd
    2545 (Wireline Comp. Bur. 2007). The Joint Board also sought comment
    on various other proposals for long term, comprehensive reform of
    the high-cost universal service support mechanisms.

[^113]: *See* Notice, paras. 5-9.

[^114]: *Federal-State Joint Board on Universal Service Seeks Comment on
    Long Term Comprehensive High-Cost Universal Service Reform*, WC
    Docket No. 05-337, CC Docket No. 96-45, Public Notice, 22 FCC Rcd
    9023, 9024-25, para.4 (Fed.-State Jt. Bd. 2007). Comments were due
    May 31, 2007, and reply comments were due July 2, 2007. The Joint
    Board also recommended that, as an interim measure, the Commission
    adopt a cap on competitive ETC support. *See High-Cost Universal
    Service Support; Federal-State Joint Board on Universal Service*, WC
    Docket No. 05-337, CC Docket No.96-45, Recommended Decision, 22 FCC
    Rcd 8998 (Fed.-State Jt. Bd. 2007) (*2007 Recommended Decision*).

[^115]: 5 U.S.C. § 604(a)(3).

[^116]: 5 U.S.C. § 601(6).

[^117]: 5 U.S.C. § 601(3).

[^118]: 5 U.S.C. § 601(4).

[^119]: 5 U.S.C. § 601(5).

[^120]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small business concern" in 5 U.S.C. § 632). Pursuant to 5 U.S.C. §
    601(3), the statutory definition of a small business applies "unless
    an agency after consultation with the Office of Advocacy of the
    Small Business Administration and after opportunity for public
    comment, establishes one or more definitions of such term which are
    appropriate to the activities of the agency and publishes such
    definition in the Federal Register." 5 U.S.C. § 601(3).

[^121]: 15 U.S.C. § 632.

[^122]: *See* SBA, Programs and Services, SBA Pamphlet No. CO-0028, at
    40 (July 2002).

[^123]: 5 U.S.C. § 601(4).

[^124]: Independent Sector, The New Nonprofit Almanac & Desk Reference
    (2002).

[^125]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3, page
    5-5 (February 2007) (*Trends in Telephone Service*). This source
    uses data collected as of October 20, 2005.

[^126]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 517110.

[^127]: *Id.* § 121.201, NAICS code 517211 (This category will be
    changed for purposes of the 2007 Census to "Wireless
    Telecommunications Carriers (except Satellite)," NAICS code
    517210.).

[^128]: *Id*. § 121.201, NAICS code 517212 (This category will be
    changed for purposes of the 2007 Census to "Wireless
    Telecommunications Carriers (except Satellite)," NAICS code
    517210.).

[^129]: 15 U.S.C. § 632.

[^130]: *See* Letter from Jere W. Glover, Chief Counsel for Advocacy,
    SBA, to Chairman William E. Kennard, Federal Communications
    Commission (May 27, 1999). The Small Business Act contains a
    definition of "small business concern," which the RFA incorporates
    into its own definition of "small business." *See* 15 U.S.C. §
    632(a) (Small Business Act); 5 U.S.C. § 601(3) (RFA). SBA
    regulations interpret "small business concern" to include the
    concept of dominance on a national basis. 13 C.F.R. § 121.102(b).

[^131]: 13 C.F.R. § 121.201, NAICS code 517110.

[^132]: *Trends in Telephone Service* at Table 5.3.

[^133]: 13 C.F.R. § 121.201, NAICS code 517110.

[^134]: *Trends in Telephone Service* at Table 5.3.

[^135]: *Id.*

[^136]: 13 C.F.R. § 121.201, NAICS code 517211 (This category will be
    changed for purposes of the 2007 Census to "Wireless
    Telecommunications Carriers (except Satellite)," NAICS code
    517210.).

[^137]: 13 C.F.R. § 121.201, NAICS code 517212 (This category will be
    changed for purposes of the 2007 Census to "Wireless
    Telecommunications Carriers (except Satellite)," NAICS code
    517210.).

[^138]: U.S. Census Bureau, 2002 Economic Census, Subject Series:
    "Information," Table 5, Employment Size of Firms for the United
    States: 2002, NAICS code 517211 (issued Nov. 2005).

[^139]: *Id.* The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is for firms with "1000
    employees or more."

[^140]: U.S. Census Bureau, 2002 Economic Census, Subject Series:
    "Information," Table 5, Employment Size of Firms for the United
    States: 2002, NAICS code 517212 (issued Nov. 2005).

[^141]: *Id.* The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is for firms with "1000
    employees or more."

[^142]: 13 C.F.R. § 121.201, NAICS code 517212.

[^143]: *Id*.

[^144]: *Trends in Telephone Service* at Table 5.3.

[^145]: U.S. Census Bureau, 2002 NAICS Definitions, "517410 Satellite
    Telecommunications";
    http://www.census.gov/epcd/naics02/def/NDEF517.HTM.

[^146]: U.S. Census Bureau, 2002 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 4, NAICS code 517410 (issued Nov. 2005).

[^147]: *Id*. An additional 38 firms had annual receipts of \$25 million
    or more.

[^148]: U.S. Census Bureau, 2002 NAICS Definitions, "517910 Other
    Telecommunications";
    http://www.census.gov/epcd/naics02/def/NDEF517.HTM.

[^149]: U.S. Census Bureau, 2002 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 4, NAICS code 517910 (issued Nov. 2005).

[^150]: *Id*. An additional 14 firms had annual receipts of \$25 million
    or more.

[^151]: Notice, para. 12. Section 254(e) states, in relevant part: "only
    an eligible telecommunications carrier designated under section
    214(e) shall be eligible to receive specific Federal universal
    service support." 47 U.S.C. § 254(e).

[^152]: *ETC Designation Order*, 20 FCC Rcd at 6432, Appendix C, para.
    22.

[^153]: *See New Part 4 of the Commission's Rules Concerning Disruptions
    to Communications*, Report and Order and Further Notice of Proposed
    Rulemaking, 19 FCC Rcd 16830, 16923-24, § 4.5 (2004) (*Outage
    Reporting Order*).

[^154]: *See* *Outage Reporting Order*, 19 FCC Rcd at 16925, § 4.9.

[^155]: *CTIA, Consumer Code for Wireless Service*, available at
    http://www.wow-com.com/pdf/The_Code.pdf.

[^156]: If an ETC had not previously submitted a plan demonstrating how
    it will remain functional in an emergency, it should do so with its
    first reporting compliance filing.

[^157]: *ETC Designation Order*, 20 FCC Rcd at 6432-34, Appendix C,
    para. 23.

[^158]: Notice, paras. 28-34.

[^159]: *See* 5 U.S.C. § 603(c).

[^160]: Notice, para. 20-21.

[^161]: *Id.*, para. 39.