Telecommunications: FCC Needs to Improve Performance Management and Strengthen Oversight of the High-Cost Program
Published: 2008-06-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In the Telecommunications Act of 1996 (1996 Act), the Congress said that consumers in "rural, insular, and high-cost areas" should have access to services and rates that are "reasonably comparable" to those in urban areas. To implement the 1996 Act, the Federal Communications Commission (FCC) modified and expanded the high-cost program. The program provides funding to some telecommunications carriers, facilitating lower telephone rates in rural areas. GAO was asked to review (1) the effect that the program structure has on the level of support and types of services in rural areas, (2) the extent to which FCC has developed performance goals and measures for the program, and (3) the extent to which FCC has implemented internal control mechanisms. GAO reviewed relevant documents; interviewed federal and state officials, industry participants, and experts; conducted 11 state site visits; and conducted a survey of state regulators, available online at GAO-08-662SP .
section_title: What GAO Found
paragraphs: The high-cost program's structure has resulted in the inconsistent distribution of support and availability of services across rural America. The program provides support to carriers in all states. However, small carriers receive more support than large carriers. As a result, carriers serving similar rural areas can receive different levels of support. Currently, the high-cost program provides support for the provision of basic telephone service, which is widely available and subscribed to in the nation. But, the program also indirectly supports broadband service, including high-speed Internet, in some rural areas, particularly those areas served by small carriers. The program provides support to both incumbents and competitors; as a result, it creates an incentive for competition to exist where it might not otherwise occur. There is a clearly established purpose for the high-cost program, but FCC has not established performance goals or measures. GAO was unable to identify performance goals or measures for the program. While FCC has begun preliminary efforts to address these shortcomings, the efforts do not align with practices that GAO has identified as useful for developing successful performance goals and measures. For example, FCC has not created performance goals and measures for intermediate and multiyear periods. In the absence of performance goals and measures, the Congress and FCC are limited in their ability to make informed decisions about the future of the high-cost program. While some internal control mechanisms exist for the high-cost program, these mechanisms are limited and exhibit weaknesses that hinder FCC's ability to assess the risk of noncompliance with program rules and ensure cost-effective use of program funds. Internal control mechanisms for the program consist of (1) carrier certification that funds will be used consistent with program rules, (2) carrier audits, and (3) carrier data validation. Yet, each mechanism has weaknesses. The carrier certification process exhibits inconsistency across the states that certify carriers, carrier audits have been limited in number and reported findings, and carrier data validation focuses primarily on completeness and not accuracy. These weaknesses could contribute to excessive program expenditures.

section_title: Letter
paragraphs: For many decades, federal policy has called for making affordable  residential telephone service available to the greatest possible number of  Americans—a policy known as “universal service.” Provision of this  service is often a concern in rural areas, where the cost of providing  telephone service can be particularly high. For example, in 2002, we  reported that the cost of providing telephone service in rural areas was  nearly three times the cost of providing service in central cities of  metropolitan areas. As a result, universal service policy traditionally  targeted financial support to rural areas where the costs of providing  telephone service are high. In the Telecommunications Act of 1996 (1996  Act), the Congress codified universal service which, among other things,  specified that consumers in “rural, insular, and high-cost areas” should  have access to services and rates that are “reasonably comparable” to  consumers in urban areas, and required that all companies providing  interstate telecommunications service contribute to a mechanism that  would fund universal service.
To implement the 1996 Act, the Federal Communications Commission  (FCC) modified and expanded the high-cost program. This program  provides support to companies designated as eligible telecommunications  carriers (ETC). There are two types of ETCs that receive support from the  program: incumbents and competitors. The incumbents were already  providing service when the Congress passed the 1996 Act. These  incumbents are further classified as either “rural”—generally small  carriers serving primarily rural areas—or “nonrural”—generally large  carriers serving both rural and urban areas. To a large extent, these  carriers receive support based on their size (as recognized by their  classification as rural or nonrural) and their cost characteristics. The  competitors—known as competitive eligible telecommunications carriers  (CETC)—receive support based on the level of support the incumbent  receives where the service is provided. By providing support to carriers,  the high-cost program allows the carriers to charge lower telephone rates  than otherwise would be available to customers in high-cost, rural, and  remote areas.
To implement the high-cost program, FCC relies on the Universal Service  Administrative Company (USAC) and state regulatory commissions. FCC  has overall responsibility for the high-cost program, including making and  interpreting policy, overseeing the operations of the program, and  ensuring compliance with its rules. However, FCC delegated to USAC  responsibility to administer the day-to-day operations of the program. At  the state level, state regulatory commissions (that is, the state agencies  responsible for regulating telephone service within the states) hold the  primary responsibility to determine carrier eligibility for participation in  the program and to annually certify that carriers will appropriately use  high-cost program support.
While considering legislation codifying universal service, the Senate  Committee on Commerce, Science, and Transportation anticipated that  competition and new technologies would reduce or eliminate the need for  universal service support mechanisms. However, rather than decreasing,  the cost of the high-cost program has grown substantially to $4.3 billion in  2007, increasing nearly 153 percent between calendar years 1998 and 2007.  This significant growth has raised concerns about what the program is  accomplishing, whether it has clear objectives, and whether it has  effective controls over expenditures. In response to your request that we  examine the federal high-cost program’s operation, this report addresses  three main questions:  1.  What effect has the structure of the program had on levels of support  received and types of services available in rural areas?  2.  To what extent does the program have performance goals and  measures?  3.  To what extent does the program have mechanisms in place to prevent  and detect fraud, waste, and abuse?
To respond to the objectives of this report, we reviewed documents and  interviewed officials from FCC and USAC. We also interviewed officials  from industry associations, national wireline and wireless carriers, the  National Exchange Carrier Association (NECA), and other individuals  with knowledge of the high-cost program. To develop an understanding of  how the program works in specific locations, we conducted site visits in  six states: Alabama, Iowa, Montana, Oklahoma, Oregon, and Wisconsin.  We chose these six states on the basis of such criteria as the extent of  rural population, geographic diversity, and the number of wireline and  wireless carriers present in the state. Within each state, we interviewed  the state regulatory commission, rural and nonrural incumbent carriers,  and competitive carriers. To test our structured interview and site  selection methodology, we also conducted site visits in the following  states: Arizona, Maine, Massachusetts, New Hampshire, and New Mexico.  For additional information about the types of mechanisms in place for  preventing waste, fraud, and abuse, we conducted a survey of state  regulatory commissions. The survey sought information pertaining to the  state’s regulation of telephone service and the state’s internal control  procedures for incumbent and competitive carriers receiving high-cost  program support in the state. The survey was available online to officials  in the 50 states and the District of Columbia on a secure Web site. We  received complete responses from 50 of the 51 commissions surveyed, for  an overall response rate of 98 percent. This report does not contain all the  results from the survey. The survey and a more complete tabulation of the  results can be viewed at GAO-08-662SP. See appendix I for a more detailed  discussion of our overall scope and methodology.
We conducted this performance audit from July 2007 through June 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
subsections: section_title: The Nation’s Universal Service Policy Has Changed Over Time
paragraphs: The Communications Act of 1934 sets forth the nation’s  telecommunications policy, including making communication services  available “so far as possible, to all the people of the United States.” Early  efforts by FCC, state regulators, and industry to promote universal service  generally began in the 1950s. At that time, increasing amounts of the costs  associated with providing local telephone service were recovered from  rates for long-distance services. This had the effect of lowering local  telephone rates and raising long-distance rates, which was intended to  make local telephone service more affordable. Because American  Telephone and Telegraph Company (AT&T) provided both nationwide  long-distance service and local telephone service to approximately 80  percent of the nation’s telephone subscribers, universal service was largely  promoted by shifting costs between different customers and services.
Following the divestiture of AT&T’s local telephone companies in 1984,  FCC made several changes to universal service policy. First, the costs  associated with local telephone service could no longer be shifted  internally within AT&T. FCC therefore implemented access charges—fees  that long-distance companies pay to originate and terminate long-distance  telephone calls over the local telephone network. Access charges were  intended to not only recover the cost of originating and terminating long- distance telephone calls over the local telephone networks, but also to  subsidize local telephone service. Second, FCC initiated several federal  efforts that targeted support to low-income customers to bring the rates  for basic telephone service within their reach. At this time, federal  universal service was for the most part funded through charges imposed  on long-distance companies.
The Congress made significant changes to universal service policy through  the 1996 Act. First, the 1996 Act provided explicit statutory support for  federal universal service policy. Second, the 1996 Act extended the scope  of federal universal service—beyond the traditional focus on low-income  consumers and consumers in rural and high-cost areas—to include eligible  schools, libraries, and rural health care providers. Third, the 1996 Act  altered the federal mechanism for funding universal service. Every  telecommunications carrier, and other entities, providing interstate  telecommunications services were required to contribute to federal  universal service, unless exempted by FCC; and their contributions were  to be equitable, nondiscriminatory, and explicit. Contributions are  deposited into the federal Universal Service Fund (USF), from which  disbursements are made for the various federal universal service  programs. Fourth, the 1996 Act established a Federal-State Joint Board on  Universal Service (Joint Board). This Joint Board, which is composed of  three FCC commissioners, four state regulatory commissioners, and a  consumer advocate, makes recommendations to FCC on implementing the  universal service-related provisions of the 1996 Act.
section_title: The High-Cost Program Is One of Four Universal Service Programs
paragraphs: The USF provides support through four different programs, each targeting  a particular group of telecommunications users (see table 1). In 2007,  support for the four USF programs totaled $7 billion. Among the four  programs, the high-cost program accounted for the largest amount of  support—$4.3 billion or 62 percent of USF support. The high-cost program  provides financial support to carriers operating in high-cost—generally  rural—areas in order to offset their costs, thereby allowing these carriers  to provide rates and services that are comparable to the rates and services  that customers in low-cost—generally urban—areas receive.
section_title: High-Cost Program Administration
paragraphs: Both federal and state governments play a role in implementing the federal  high-cost program. FCC has overall responsibility for the federal high-cost  program, including making and interpreting policy, overseeing the  operations of the program, and ensuring compliance with its rules.  However, FCC delegated to USAC responsibility to administer the day-to- day operations of the high-cost program. USAC is a not-for-profit  corporation and a subsidiary of NECA, although NECA does not  participate in the management of USAC. NECA, a not-for-profit  association of local telephone carriers and the primary administrator of  FCC’s access charge plan, collects cost and line count data from its  members and validates this information. At the state level, state regulatory  commissions hold the primary responsibility to determine carrier  eligibility for participation in the program and to annually certify that  carriers will appropriately use high-cost program support. Table 2  summarizes the general roles and responsibilities of the agencies and  organizations involved in high-cost program administration.
section_title: High-Cost Program Beneficiaries
paragraphs: To be eligible to receive high-cost program support, a carrier must be  designated as an eligible telecommunications carrier (ETC). Section  214(e)(1) of the 1996 Act requires that to be designated an ETC, the carrier  must (1) offer the services that FCC identified as eligible for universal  service support throughout the service area for which the designation is  received, (2) advertise the availability of those services, and (3) use at  least some of its own facilities to deliver those services. There are two  types of carriers.
Incumbents. When the Congress passed the 1996 Act, existing telephone  carriers that were members of NECA were designated as incumbent  carriers for their service areas. These incumbents subsequently received  ETC status. These incumbents are further classified as either “rural”— generally small carriers serving primarily rural areas—or “nonrural”— generally large carriers serving both rural and urban areas.
Competitors. Carriers competing against incumbents—both wireline and  wireless—also are eligible to receive high-cost program support. Just like  incumbents, these companies must apply for eligibility and receive ETC  status before they can receive support; these carriers are referred to as  competitive eligible telecommunications carriers (CETC). Competitors  can provide service without receiving CETC status or high-cost program  support.
Carriers that receive high-cost program support may use this support only  for the “provision, maintenance, and upgrading of facilities and services  for which the support is intended.”
section_title: High-Cost Program Support Components
paragraphs: The high-cost program consists of five components, each with different  eligibility criteria and different methods to determine the level of support.  Four of the components provide support to carriers to offset the costs of  the network, including local loops (primarily, the equipment that runs  from the carrier’s facilities to the customer’s premises). The four  components are high-cost loop, high-cost model, interstate access, and  interstate common line. The fifth component, local switching support,  provides support for very small carriers to offset the cost of their  switching equipment. For incumbent carriers, eligibility for the  components depends on the carrier’s size (as recognized by their  classification as rural or nonrural) and the type of regulation the carrier is  subject to—either rate-of-return or price-cap regulation. In 2007, USAC  reported that there were 1,250 rural carriers subject to rate-of-return  regulation, 105 rural carriers subject to price-cap regulation, 5 nonrural  carriers subject to rate-of-return regulation, and 81 nonrural carriers  subject to price-cap regulation. Based on the components for which they  qualify, rural carriers receive support based on the costs they incurred,  whereas based on the components for which they qualify, nonrural  carriers receive part of their support based on projected costs using an  FCC model. Table 3 summarizes each of the five high-cost program  components, which carriers are eligible for each, the qualification criteria  for each component, and the amount of support provided in 2007. For  example, a rural carrier with less than 50,000 customers and subject to  rate-of-return regulation could receive support through the high-cost loop,  local switching, and interstate common line components.
Unlike incumbents, competitors do not directly receive funds based on  their costs or FCC’s model. Rather, once a competitor receives CETC  status, it qualifies for the identical per-line level of support that the  incumbent receives for the area it serves; this is known as the identical  support rule.
section_title: Current Status of the High- Cost Program
paragraphs: Since its inception in 1998, the high-cost program has increased nearly 153  percent, from $1.7 billion in 1998 to about $4.3 billion in 2007. This  significant growth has raised concerns about the program’s long-term  sustainability, efficiency, and effectiveness, as well as the adequacy of the  oversight of carriers’ need for and use of support. Figure 1 illustrates the  growth in the high-cost program, including both incumbents and  competitors. Several factors have contributed to the growth in the high- cost program. In the early years of the program, support grew as FCC  reduced access charges (a form of implicit support for carriers) to  incumbents and offset those reductions with greater high-cost program  support (a form of explicit subsidy). However, in recent years, the high- cost program has grown because of support provided to competitors,  especially wireless companies.
In response to concerns about the long-term sustainability of the high-cost  program, FCC issued several Notices of Proposed Rulemaking (NPRM) in  January 2008, seeking comment on proposals for comprehensive reform of  the program. These NPRMs represent the culmination of efforts by FCC  and the Joint Board to reform the program. FCC released an NPRM  seeking comment on a Joint Board recommendation that the high-cost  program be divided into three separate funds: broadband service, mobility  (or wireless) service, and traditional provider of last resort service. FCC  also released an NPRM seeking comment on changing the current funding  mechanism for CETCs, namely eliminating the identical support rule and  requiring CETCs to submit cost data. Finally, FCC released an NPRM that  sought comment on implementing reverse auctions to determine the  amount of high-cost program support to be given to an ETC; with reverse  auctions, support generally would be determined by the lowest bid to  serve the auctioned area. In this report, however, we will not assess or  discuss the merits of the reform proposals; instead, we will review the  high-cost program in its current state and discuss best practices that are  critical for the future of the fund, regardless of which reform efforts are  adopted, if any.
In addition to these three proposals, on May 1, 2008, FCC released an  order adopting an interim cap on high-cost program support for CETCs.  FCC adopted the interim cap to stem the growth of the program while it  considers these comprehensive reform proposals. Under this order, total  annual support for CETCs will be capped at the level of support that they  were eligible to receive in each state during March 2008.
section_title: The High-Cost Program’s Structure Has Contributed to Inconsistent Distribution of Support and Availability of Services across Rural America
paragraphs: The high-cost program provides support to eligible carriers in all states,  with higher levels of support going to more rural states. However, the  high-cost program does not provide support consistently to carriers  operating in similar locations, which can lead to different levels of  telecommunications service across rural areas. In general, rural carriers  receive more support than nonrural carriers. The high-cost program  provides support for the provision of basic telephone service and, to a  great extent, access to this service is available and widely subscribed to  throughout much of the country. But the high-cost program also indirectly  supports broadband service in some rural areas, particularly those areas  served by rural carriers. Finally, the high-cost program supports  competitive carriers, and support for these carriers has increased greatly  in recent years.
subsections: section_title: The High-Cost Program Provides Support to Carriers in All States, but Support Is Dispersed Inconsistently across Rural Areas
paragraphs: In 2007, carriers in all states received some form of high-cost program  support, with higher levels of support going to more rural states.  Generally, carriers operating in states with below-average population  densities received more support than those in more densely populated  states. For example, the five states in which carriers received the greatest  amount of support in 2007 include Mississippi ($283 million), Texas ($246  million), Kansas ($222 million), Louisiana ($163 million), and Alaska ($161  million). While the average national population density is 190.1 people per  square mile, these states have lower-than-average population densities,  ranging from 1.2 people per square mile in Alaska to 98.4 people per  square mile in Louisiana. Alternatively, the five states that receive the least  support tend to have higher-than-average population densities, including  Rhode Island ($31,000), Delaware ($245,000), Connecticut ($1.3 million),  New Jersey ($1.7 million), and Massachusetts ($2.3 million); these states  have population densities ranging from 436.9 people per square mile in  Delaware to 1,176.2 people per square mile in New Jersey. Thus, at a  broad, national level, high-cost program support flows to more rural  states.
However, the high-cost program does not provide support consistently to  carriers operating in similar rural locations. To a large extent, this  situation arises because of the program’s structure: the five different high- cost program components, each with different eligibility and methods to  determine support. As mentioned earlier, rural carriers typically receive  high-cost program support through components that base support on the  carrier’s incurred costs. Thus, in the case of a rural carrier, the higher its  actual costs, the more funding it receives. Because of this, the funding that  a rural carrier receives depends on how much money it chooses to spend  on its network. Additionally, the disparity between rural and nonrural  carrier is even greater, as support to one carrier can be significantly more  generous than support provided to another carrier for serving comparable  areas. As mentioned earlier, nonrural carriers typically receive part of  their high-cost program support (high-cost model) through a component  that utilizes an FCC cost model; this model assumes the most efficient  carrier providing service to existing customers. Since this model is not  based on an individual carrier’s actual costs, investment in new network  infrastructure will not lead to greater high-cost program support. Further,  the threshold to receive support is greater for nonrural carriers; a rural  carrier’s costs must exceed 115 percent of the national average whereas  the statewide average cost must exceed approximately 131 percent of the  national average for nonrural carriers. As such, nonrural carriers in 10  states currently are eligible for this funding, yet nonrural carriers in other  states serve high-cost locations as well. Overall, rural carriers receive  more funding than nonrural carriers and in 2007, rural carriers received  $1.7 billion more in high-cost program support than nonrural carriers. In  November 2007, the Joint Board recognized this situation itself, noting that  “support for customers served by one kind of carrier can be significantly  more generous than for comparably situated customers served by the  other kind of carrier.”
We found similar results in our site-visit states. In the 11 states we visited,  9 states had rural carriers receiving more funding than nonrural carriers.  While rural carriers generally serve only rural areas, nonrural carriers also  can serve large swaths of rural areas. In fact, carriers providing service in  similar, even adjacent, areas can receive vastly different levels of high-cost  program support. For example, as shown in figure 2, in Wisconsin, there  are two nonrural carriers (areas in dark shading) that provide service to  rural areas, yet these carriers do not qualify to receive the same types of  support as rural carriers serving comparable adjacent areas. Similarly, in  Oregon, 25 percent of the lines served by a large, national carrier are  located in rural areas of the state; this carrier does not qualify to receive  the same type of support for these lines that rural carriers in the same area  do.
section_title: The High-Cost Program Supports Basic Telephone and Wireless Service, and Indirectly Supports Broadband Service
paragraphs: The high-cost program directly and indirectly supports several types of  service including (1) basic telephone service, (2) broadband service, and  (3) wireless telephone service.
subsections: section_title: Basic Telephone Service
paragraphs: Currently, the high-cost program provides support for the provision of  basic telephone service. In the 1996 Act, the Congress stated as one of the  principles underlying universal service that people in rural, insular, and  high-cost areas should have access to telecommunications and  information services that are reasonably comparable to those provided in  urban areas and at comparable rates. However, the Congress did not  define universal service or specify a list of services to be supported by the  program. Instead, the 1996 Act recognized universal service as an evolving  level of telecommunications services and directed FCC, after  recommendations from the Joint Board, to establish a definition of the  services to be supported by the program. In 1997, FCC adopted a set of  communications services and “functionalities” for rural, insular, and high- cost areas that were to be supported by the high-cost program.
To a great extent, access to basic telephone service is available and widely  subscribed to throughout much of the country. One widely used measure  of telephone subscribership is the penetration rate, which is based on  survey data collected by the U.S. Census Bureau to estimate the  percentage of U.S. households with telephone service. In 2007, the overall  penetration rate in the United States was 95 percent, representing an  increase of 0.9 percent since the inception of the high-cost program in  1998. While the penetration rate has increased marginally, there are  several factors that could contribute to this result in addition to the high- cost program, including changes in income levels, greater diffusion of  communications technology, or state-level programs. Appendix II shows  penetration rates by state and changes in the percentage of households  with telephone service from November 1983 through July 2007.
Most of the rural carriers with whom we spoke agreed that support from  the high-cost program has been an important source of their operating  revenue. One recent study estimated that 30 percent of rural carriers’  annual operating revenues are derived from federal and state universal  service programs, including the high-cost program. Our site visit  interviews similarly suggest that rural carriers depend on high-cost  program support to provide customers with access to affordable telephone  rates. For example, one carrier with whom we spoke received nearly 80  percent of its annual operating revenues from the high-cost program.  Moreover, many of the rural carriers we met with told us that they would  be unable to provide the same range or quality of service to their  customers without support from the high-cost program. Most of these  carriers, who serve very remote and sparsely populated rural areas where  it is very costly to provide telecommunications services, stated that  without the support, they would likely need to increase the rates they  charge their customers for basic services.
section_title: Broadband Service
paragraphs: Although there have been a number of proposals to revise the list of  services supported by the high-cost program over the past decade, FCC  has not taken action to change the original definition. To be eligible to  receive high-cost program support, a carrier must offer each of the  services and functionalities supported by the program. Additionally,  carriers that receive high-cost program support may only use this support  for the “provision, maintenance, and upgrading of facilities and services  for which the support is intended.” While one of the universal service  principles adopted in the 1996 Act is that all regions of the country should  have access to advanced telecommunication and information services, the  high-cost program does not explicitly support access to broadband  services.
While access to advanced services, such as broadband, is not included  among the designated list of services supported by the high-cost program,  the program has indirectly facilitated broadband deployment in many rural  areas. In recent years, some carriers have been using high-cost program  support to upgrade their telephone networks, including upgrading to fiber  optic cable and extending it closer to their customers. Because of  advances in telecommunications technology, these upgrades increase the  capacity of the network, thereby facilitating the provision of advanced  services, such as broadband. For example, many rural carriers with whom  we spoke have or are replacing their copper wire with fiber optic cable.  One carrier was in the early phases of a 7-year, $1.8 million expansion to  install fiber-to-the-home for each customer in one of its exchanges that  served about 700 lines. In addition to transitioning from copper to fiber,  carriers are investing in modern switching equipment and remote  terminals to improve the connection speeds available to their customers.  For example, one carrier told us that it is currently installing more remote  terminals to provide higher-speed broadband service, and that it currently  has 96 remote terminals to serve customers spread out across a 1,300  square mile area.
The availability of high-cost program support can, in part, determine  whether deployment of broadband service is feasible in a rural area. In  rural areas served by rural carriers, the high-cost program allows the  carrier to recoup a large portion of the investment that facilitates  broadband service since, as we mentioned earlier, these carriers receive  high-cost program support based on their costs. Alternatively, in rural  areas served by nonrural carriers, which generally do not receive as much  funding as rural carriers and do not receive funding based on their costs,  the network upgrades necessary for broadband service are less likely. As a  result, the availability of broadband services to rural customers is largely  determined by the type of carrier they are served by, and not where they  are located.
Rural carriers. Most rural carriers with whom we spoke had or were  deploying advanced network features, such as fiber optic cable. For  example, of the rural carriers we spoke with during our site visits, many  stated they were able to provide broadband Internet service to 100 percent  of their customers or service areas. In addition, FCC estimates that in  2007, 82 percent of households served by rural incumbent carriers had  access to high-speed broadband connections.
Nonrural carriers. Nonrural carriers with whom we spoke reported that  they have broadband-enabled equipment in most or all facilities, but these  carriers are generally unable to provide all rural customers with  broadband service. Rather, only those customers residing relatively close  to the carrier’s facility can receive broadband service. These carriers  indicated that deploying broadband service to a wider service territory  was not economical given the diffuse population in rural areas.
section_title: Competition and Wireless Service
paragraphs: Another impact of the high-cost program has been the increase in  competitive carriers, especially wireless carriers, in rural areas. Beginning  in 1997, FCC adopted a series of measures intended to encourage  competition between carriers in rural areas to promote the principles of  universal service. Among the actions taken by FCC was adopting the  principle of “competitive neutrality” as part of the high-cost program.  Under this principle, one carrier should not be favored over another  carrier, and support should be available to any carrier that meets the  requirements for operating as an ETC, regardless of the type of technology  the carrier employs (such as wireline, wireless, or satellite). This principle  was supported by granting high-cost program support to CETCs. While  incumbents—both rural and nonrural—receive support based on their  costs of providing service in an area or FCC’s cost model, CETCs receive  support based on the number of lines they serve through a mechanism  known as the identical support rule. Under this rule, CETCs in an area  receive the same level of high-cost program support, on a per-line basis, as  the incumbent carrier in that area. For example, if the incumbent carrier  receives support that, based on the number of lines it serves, results in $20  of support per line, every competitor designated as an ETC in that area  also will receive $20 in support for each line it serves in the same area  regardless of its costs.
ETC status is not required for a competitive carrier to operate in an area,  but it is required if the carrier wants to receive high-cost program funding.  As a result, the number of carriers seeking CETC status has increased  dramatically, and the majority of newly designated carriers are wireless.  Since 1998, the number of CETCs receiving support through the high-cost  program has risen from a total of 2 carriers in 1998, to 362 competitive  carriers in 2007. Of these 362 CETCs, 260 carriers—over 70 percent—are  wireless carriers. Along with an increase in the number of carriers, the  amount of funding provided to CETCs has increased over this time period,  growing from $535,104 in 1999, with 100 percent going to wireless carriers,  to $1.2 billion by 2007, with 98 percent of all CETC funding going to  wireless carriers.
A recent report by FCC estimated that at the end of 2006, wireless carriers  had achieved an 80 percent penetration rate across the country, and  according to the wireless carriers with whom we spoke, high-cost program  support has allowed them to invest in improving and expanding their  networks in rural areas where they would otherwise be unable to  economically justify the investment. For example, one carrier told us that  it can cost from $350,000 to $500,000 to install a cell tower in rugged or  mountainous terrain, in addition to other installation expenses such as  land rent and maintenance costs, but that in most cases, low population  density in the area would not yield enough customers to recover the  investment. Additionally, wireless companies and regulators with whom  we spoke stated that the availability of wireless communication is a public  safety concern; travelers along rural highways expect to be able to use cell  phones in the event of an emergency. However, wireless carriers often  lack the economic incentive to install cell phone towers in rural areas  where they are unlikely to recover the installation and maintenance costs,  but high-cost program support allows them to make these investments.
section_title: While There Is a Clearly Established Purpose for the High- Cost Program, FCC Has Not Established Performance Goals and Measures
paragraphs: In the 1996 Act, the Congress established the principles underlying  universal service, which provide a clear purpose for the high-cost  program. However, since 1998, FCC has distributed over $30 billion in  high-cost funding without developing specific performance goals for the  program. Additionally, FCC has not developed outcome-based  performance measures for the program. While FCC has begun preliminary  efforts to address these shortcomings, its efforts do not align with  practices GAO and OMB have identified as useful in developing successful  performance goals and measures. In the absence of program goals and  data pertaining to the program’s performance, the Congress and FCC may  be limited in their ability to make informed decisions about the future of  the program.
subsections: section_title: The High-Cost Program Has a Clear Purpose, but Lacks Explicit Performance Goals and Measures
paragraphs: In the 1996 Act, the Congress clearly established the principles underlying  universal service. In particular, the Congress said that “quality services  should be available at just, reasonable, and affordable rates.” Additionally,  the Congress said that consumers in all regions of the country, including  “those in rural, insular, and high-cost areas” 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.” These guiding principles provide a clear  purpose for the high-cost program.
However, 12 years after the passage of the 1996 Act and after distributing  over $30 billion in high-cost program support, FCC has yet to develop  specific performance goals and measures for the program. We were unable  to identify any performance goals or measures for the high-cost program.  In its 2005 program assessment of the high-cost program, OMB also  concluded that the program did not have performance goals or measures.  OMB reported that the program neither measures the impact of funds on  telephone subscribership in rural areas or other potential measures of  program success, nor bases funding decisions on measurable benefits.  OMB also reported that the high-cost program does not have specific,  long-term performance measures that focus on outcomes and  meaningfully reflect the purpose of the program. Additionally, in February  2005, we reported that FCC had not established performance goals and  measures for the E-Rate program, the second-largest universal service  program. At that time, we observed that under the Government  Performance and Results Act, FCC was responsible for establishing goals  for the universal service programs, despite the fact that the 1996 Act did  not specifically require them.
Further, FCC has not adequately defined the key terms of the high-cost  program’s purpose. For example, the Congress directed FCC to ensure  consumers in rural areas received access to “reasonably comparable”  services at “reasonably comparable” rates to those in urban America. To  address this, in a report and order issued in 1999, FCC defined “reasonably  comparable” as “a fair range of urban/rural rates both within a state’s  borders, and among states nationwide.” This definition only focused on  rates and did not address what FCC considered “reasonably comparable”  services; 2 years after FCC issued this definition, its adequacy was  challenged in federal court. In July 2001, the Tenth Circuit Court rejected  FCC’s use of this definition, and required that FCC more precisely define  “reasonably comparable” in reference to rates charged in rural and urban  areas.” Subsequently, in October 2003, FCC attempted to again define  “reasonably comparable,” this time stating that rates are considered  reasonably comparable if they fall within two standard deviations of the  national urban average. Again, this definition did not address what  services should be supported by the high-cost program, and again in  February 2005, the Tenth Circuit Court rejected the adequacy of this  definition, stating that it was not clear how this new definition preserved  and advanced universal service. To date, FCC has not adopted any other  definitions for “reasonably comparable” rates or services.
section_title: FCC’s Efforts Do Not Align with Successful Practices for Developing Performance Goals and Will Provide Limited Insight to the High-Cost Program’s Performance
paragraphs: In June 2005, FCC issued a Notice of Proposed Rulemaking, in which it  sought comment on establishing useful outcome, output, and efficiency  measures for each of the universal service programs, including the high- cost program. In this notice, FCC recognized that clearly articulated goals  and reliable performance data would allow for assessment of the  effectiveness of the high-cost program and would allow FCC to determine  whether changes to the program are needed. As of August 2007, FCC had  not established performance goals and measures for the high-cost  program, and FCC stated it did not have sufficient data available to  establish high-cost program performance goals. To begin addressing this  shortcoming, FCC started collecting performance data from USAC on a  quarterly basis, including:  number of program beneficiaries (i.e. ETCs) per study area and per wire    number of lines, per study area and per wire center, for each ETC;    number of requests for support payments;    average (mean) dollar amount of support and median dollar amount of  support for each line for high-cost ETCs;  total amount disbursed—aggregate and for each ETC; time to process 50 percent, 75 percent, and 100 percent of the high-cost  support requests and authorize disbursements; and rate of telephone subscribership in urban vs. rural areas.
However, these efforts generally do not align with known practices for  developing performance goals. We have reported that in developing  performance goals, an agency’s efforts should focus on the results it  expects its programs to achieve, that is, the differences the program will  make in people’s lives. In doing this, an agency’s efforts should work to  strike difficult balances among program priorities that reflect competing  demands and provide congressional and other decision makers with an  indication of the incremental progress the agency expects to make in  achieving results. Additionally, we have identified many useful practices  for developing program goals and measures; these practices include  developing goals and measures that address important dimensions of  program performance, developing intermediate goals and measures, and  developing goals to address mission-critical management problems. As  seen in table 4, we found that FCC’s efforts do not align with useful  practices we have identified for developing successful goals.
Additionally, FCC’s efforts do not align with guidance set forth by OMB.  According to OMB, output measures describe the level of a program’s  activity, whereas outcome measures describe the intended result from  carrying out a program or activity and efficiency measures capture a  program’s ability to perform its function and achieve its intended results.  In its Program Assessment Rating Tool Guidance, OMB noted that  measures should reflect desired outcomes. Yet, FCC’s data collection  efforts focus on program outputs, and not program outcome or efficiency.  Therefore, FCC’s efforts will be of limited use in illustrating the impacts of  the high-cost program or how efficiently the program is operating.
Clearly articulated performance goals and measures are important to help  ensure the high-cost program meets the guiding principles set forth by the  Congress. These guiding principles include comparable rates and services  for consumers in all regions of the country. Yet, as mentioned earlier, the  program’s structure has contributed to inconsistent distribution of support  and availability of telecommunications services across rural America,  which is not consistent with these guiding principles. Outcome-based  performance goals and measures will help illustrate to what extent, if any,  the program’s structure is fulfilling the guiding principles set forth by the  Congress. Finally, FCC is reviewing several recommendations and  proposals to restructure the high-cost program. Yet, because there is  limited information available on what the program in its current form is  intended to accomplish, what it is accomplishing, and how well it is doing  so, it remains unclear how FCC will be able to make informed decisions  about which option is best for the future.
section_title: Internal Control Mechanisms for the High-Cost Program Are Limited and Hinder FCC’s Ability to Assess the Risk of Noncompliance with Program Rules and Ensure Cost-Effective Use of Program Funds
paragraphs: Internal controls mechanisms for the high-cost program focus on three  areas. Yet, each area has weaknesses. The carrier certification process  exhibits inconsistency across states and carriers, the carrier audits have  been limited in number and types of reported findings, and carrier data  validation focuses primarily on completeness and not accuracy.  Collectively, these weaknesses hinder FCC’s ability to understand the risks  associated with noncompliance with program rules. Further, these  weaknesses could contribute to excessive program expenditures. In  particular, the high-cost program could incur excessive expenditures  because of carrier inefficiencies, excessive payments to carriers, and  provision of funding for nonsupported services.
subsections: section_title: Internal Control Mechanisms for the High- Cost Program Exhibit Weaknesses
paragraphs: Internal control mechanisms for the high-cost program focus on three  areas: (1) carrier certification, (2) carrier audits, and (3) carrier data  validation processes. In each of these three areas, we found weaknesses in  the internal control mechanisms.
subsections: section_title: Carrier Certification
paragraphs: Annual certification is the primary tool used to enforce carrier  accountability for use of high-cost program support, yet the certification  process does not have standardized requirements. FCC requires that all  states annually certify that all federal high-cost program support provided  to eligible carriers in their state will be used only for the provision,  maintenance, and upgrading of facilities and services for which the  support is intended. It is up to the states to determine if carriers are  operating in accordance with these guidelines. Generally, states do so by  collecting information from carriers regarding their use of high-cost  program funds. However, states have different requirements for what  information carriers must submit. Additionally, if a state does not have  jurisdiction over a carrier, then the carrier provides annual certification  data directly to FCC. As a result, carriers are subject to different levels of  oversight and documentation requirements to demonstrate that high-cost  program support was used appropriately.
FCC established requirements for information that must be submitted by  the carriers it designates as ETCs. Incumbent carriers designated as ETCs  by FCC must provide a sworn affidavit stating they are using high-cost  program funding only for the provision, maintenance, and upgrading of  facilities and services for which the support is intended. Additionally, all  carriers—incumbent and competitive—designated as ETCs by FCC must  provide:   progress reports on the ETC’s 5-year service quality improvement plan;  the number of unfulfilled service requests from potential customers; the number of complaints per 1,000 handsets or lines;   certification that the ETC is complying with applicable service quality  standards and consumer protection rules;   certification that the ETC is able to function in emergency situations;    certification that the ETC is offering a local usage plan comparable to that  offered by the incumbent in the relevant service areas; and   certification that the carrier acknowledges that FCC 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.
While FCC encourages state regulatory commissions to adopt these  requirements, it is not mandatory. Nevertheless, in our survey of state  regulatory commissions, we found that many states require carriers to  provide information similar to some of the information collected by FCC,  particularly with respect to quality-of-service data. For example, FCC  requires carriers to submit annual information on the number of  unfulfilled service requests from potential customers, the number of  complaints per 1,000 handsets or lines, as well as detailed information on  outages the carrier experienced. According to our survey, we found that  many states require similar information from carriers. Additionally, in our  survey, we asked the state regulatory commissions to specify the types of  quality-of-service measures they require for incumbent, competitive  wireline, and wireless carriers. We found that state requirements are  somewhat varied across the three different types of carriers. For example,  of the 45 states that indicated they measure consumer complaints, 22  states indicated they require this information for at least one type of  carrier but not all types of carriers. (See table 5.)
In addition to the quality-of-service information, we found that state  regulatory commissions collect a variety of information pertaining directly  to the annual certification process. States most frequently require carriers  to submit affidavits that future support will be used for its intended  purpose; plans for quality, coverage, or capacity improvements; and  evidence that past support was used for its intended purposes. However,  according to our survey, 10 state regulatory commissions require  incumbent carriers to submit only an affidavit, with no additional  information. Additionally, in some instances, these requirements vary  based on the type of carrier. (See table 6.)
Carrier audits are the primary tool used in monitoring and overseeing  carrier activities, but these audits have been limited in number and types  of reported findings. While the 1996 Act does not require audits, FCC has  authorized USAC to conduct audits. FCC, USAC, and some state  regulatory commissions conduct carrier audits for the high-cost program.
USAC audits. USAC operates an audit program to determine if carriers are  complying with the program’s rules. This audit program has been limited;  according to USAC officials, since 2002, USAC has conducted about 17  audits, from more than 1,400 carriers participating in the high-cost  program (approximately 1.2 percent coverage). USAC officials told us  these audits are time-consuming, and have yielded limited findings  because participants did not maintain adequate documentation to validate  their information. This occurred for two reasons: (1) the high-cost  program had no requirement that carriers retain documents and (2) rural  carriers receive funding as a reimbursement for costs incurred 2 years  prior to the receipt of support and therefore carriers did not keep records  going back a sufficient period of time for the audit. To address these  problems, in August 2007, FCC imposed and USAC implemented  document retention rules for high-cost program participants; participants  are now required to maintain records that can be used to demonstrate to  auditors that support received was used consistent with the 1996 Act and  FCC’s rules for 5 years.
FCC audits. In 2006 and 2007, FCC’s Office of Inspector General (OIG)  instructed USAC to begin conducting audits and assessments to determine  the extent to which high-cost program beneficiaries were in compliance  with program rules. These audits and assessments have two objectives: (1)  validate the accuracy of carrier self-certifications—audits—and (2)  provide a basis for identifying and estimating improper payments under  the Improper Payments and Information Act of 2002 (IPIA)— assessments. To conduct these audits and assessments, a random sample  of 65 out of about 1,400 carriers was selected by OIG. In meeting its first  objective, findings were similar to USAC’s audit findings, in that it could  not be determined if the information that carriers attested to in their  annual certifications was accurate because carriers did not have proper  documentation to validate their information. For the second objective,  OIG reported that the high-cost program had an estimated 16.6 percent  rate of improper payments. In response to these findings, USAC  maintained that this error rate was primarily indicative of carrier  noncompliance with program rules, and not a result of payments made to  carriers for inaccurate amounts. For example, USAC stated that these  payments were categorized as erroneous because the carrier failed to  comply with high-cost program rules such as meeting filing deadlines or  completing required documentation. In November 2007, a second round  of beneficiary audits and assessments was begun to further review  program compliance and should be completed by the end of calendar year  2008.
State audits. In addition to the USAC and FCC OIG audits, 7 of the 50 state  regulatory commissions that responded to our survey reported that they  audit incumbent carriers. These audits focus on the appropriate use of  high-cost program funding, the accuracy of carrier-reported costs, and the  compliance with quality-of-service standards. Two of the 7 states reported  that they audit all incumbent carriers, while the remaining 5 states  reported that audits are based on a risk assessment of the carrier, or  triggered by unusual behavior on the part of the carrier. While these 7  states conduct audits, states generally do not revoke carrier’s ETC status.  According to our survey, since 2002, one state reported it had revoked a  carrier’s ETC status (for a competitive carrier). Additionally, during our  site visits, several state officials told us they did not conduct audits  because they did not feel it was the state’s jurisdiction or they lack the  resources to perform in-depth reviews of carriers’ use of high-cost  program funds.
section_title: Carrier Data Validation
paragraphs: Data validation processes to ensure the reliability of financial data  primarily focus on the completeness of the data provided by carriers, but  not the accuracy of the data. Incumbents submit cost and line count data  directly to NECA and USAC; these cost and line count data are used to  qualify carriers for and to calculate the amount of carriers’ high-cost  program support. NECA is responsible only for collecting carrier cost and  line count data for the high-cost loop support component of the high-cost  program. All cost data NECA collects for this component are subject to  several electronic validations which primarily focus on ensuring that all  required data are reported and that the data ranges are consistent with  information reported in previous years. In addition, NECA compares  reported cost data with information provided in carriers’ audited financial  statements to identify any discrepancies. According to NECA officials,  these statements are available for about 90 percent of its member carriers.  If inaccuracies are found, member carriers are required to provide NECA  with an explanation to resolve the situation, but no action is taken against  the carrier. NECA officials do not conduct any additional oversight of the  line count data they receive. USAC collects cost and line count data for the  remaining components of the high-cost program, and similarly to NECA,  these data are subject to several electronic data validations for  completeness. While these validations and reviews provide NECA and  USAC with opportunities to identify input errors, they do not addresses  whether or not the data provided by participants are accurate or if the  money spent addresses the intended purposes of the high-cost program.
section_title: Internal Control Weaknesses Could Lead to Excessive Program Expenditures
paragraphs: While some internal control mechanisms are in place, the weaknesses we  identified hinder FCC’s ability to assess the risk of noncompliance with  program rules. In particular, the internal control mechanisms may not fully  address the following concerns, which could contribute to excessive  program expenditures.
Cost-effectiveness. In some instances, carriers receive high-cost program  support based on their costs. Historically, carriers often were subject to  rate-of-return regulation, wherein a state regulatory commission would  assess the carrier’s costs and investments to ensure these were  appropriate and necessary. Of the 50 respondents to our survey of state  regulatory commissions, 33 apply rate-of-return regulation to rural  incumbent carriers, 13 apply it to nonrural incumbent carriers, and 4 apply  it to competitive wireline carriers. Further, during our site visits, several  state commissions told us that rate cases in which a state regulatory  commission evaluates a carrier’s costs and investments are very  infrequent, if they take place at all. As such, there is limited assessment of  the cost-effectiveness of carriers and their investments. Further, as OMB  noted, there is no evidence that the program explicitly encourages carriers  to achieve efficient and cost-effective delivery of service; rather, the  program simply makes rural incumbent carriers whole, regardless of their  investment decisions or business model, or the presence of competition in  the market by guaranteeing “reasonable” rates of return. The  combination of a funding mechanism that does not encourage cost- effectiveness, combined with a lack of detailed oversight, may not yield  the most cost-effective program expenditures.
Accuracy of cost and line count data. ETCs and CETCs receive high-cost  program support based on their costs and line counts. However, as  mentioned above, FCC, USAC, and NECA data collection efforts generally  focus on completeness and consistency of carriers’ data submissions, but  not the accuracy of the data. Further, USAC, FCC, and state regulatory  commissions audit a small fraction of program participants, and in the  case of FCC’s IPIA audits, these audits do not assess the accuracy of cost  and line count data which are used to form the basis for carrier support.  Inaccuracies in cost and line count data, which are not uncovered through  review, could facilitate excessive program expenditures.
Appropriate use of high-cost program support. The high-cost program  rules delineate the appropriate uses of the program’s support. As we  discussed, carriers must annually certify that their use of high-cost  program support complies with the program rules. However, the self- certification process varies based on who oversees the carrier; further,  there is little follow-up to assess whether carriers’ actions are consistent  with the certifications. As such, program administrators cannot fully  assess whether carriers are appropriately using high-cost program  support. Thus, program expenditures could prove excessive if high-cost  program funding is used to support services not covered by the program  (such as broadband).
section_title: Conclusion
paragraphs: In the 1996 Act, the Congress said that consumers in “rural, insular, and  high-cost areas” should have access to services and rates that are  “reasonably comparable” to consumers in urban areas. To respond to this  task, FCC modified and expanded the high-cost program. In the  intervening 10 years, FCC has distributed over $30 billion to carriers, with  much of this support coming from fees charged to consumers. Yet, FCC  has not established performance goals or measures for the program. Thus,  it is neither clear what outcomes the program is intended to produce nor  what outcomes the program has achieved. What we and the Joint Board  found were differences in telecommunications services in rural areas  across the country. For example, in some rural areas, carriers receive  generous support and provide advanced services, such as fiber-to-the- home, while in other rural areas, carriers receive little or no support and  provide basic services. In addition to the lack of performance goals and  measures, the internal control mechanisms in place have weaknesses,  which hinder FCC’s ability to assess the risk of noncompliance with  program rules and ensure cost-effective use of program funds. The internal  control mechanisms are inconsistent, limited in number, and appear more  concerned with data completeness than accuracy. Thus, for example, it is  not clear that the program ensures the most cost-effective delivery of  services to rural areas. Therefore, program expenditures may be higher  than necessary. These problems raise concerns about past and current  program expenditures. But, they also raise concerns about the future of  the program. In January 2008, FCC issued several notices proposing  fundamental, policy-oriented reform of the program. For example, FCC  proposed reverse auctions for the program, but it is not clear how FCC  can assess this proposal when it does not know what goals the program  should achieve or how it will measure program outcomes. Additionally,  the Joint Board proposed separate funds for broadband, mobility, and  provider-of-last resort services, with a $4 billion funding level that was  based on the current level of program expenditures. But, it is not clear that  the $4 billion is the correct funding level. Without performance goals,  measures, and adequate internal controls, it will be difficult for FCC to  assess these proposals. Finally, failure to address these problems may  undermine support for the program over time, as program expenditures  continue to increase.
section_title: Recommendations for Executive Action
paragraphs: To strengthen management and oversight of the high-cost program, we  recommend that the Chairman, FCC take the following two actions:  1.  To better ensure that the high-cost program supports the purpose it is  intended to fill, FCC should first clearly define the specific long-term  and short-term goals of the high-cost program and subsequently  develop quantifiable measures that can be used by the Congress and  FCC in determining the program’s success in meeting its goals.  2.  To ensure a robust internal control environment that supports  performance-based management, FCC should identify areas of risk in  its internal control environment and implement mechanisms that will  help ensure compliance with program rules and produce cost-effective  use of program funds.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FCC and USAC for their review and  comment. FCC noted that it was aware of, and had addressed or planned  to address, the shortcomings we identified in the report. However, FCC  noted that it would issue a Notice of Inquiry to seek information on ways  to further strengthen its management and oversight of the high-cost  program. FCC and USAC both provided information to further clarify the  actions that are currently underway and provided technical comments that  we incorporated where appropriate. The written comments of FCC and  USAC appear in appendices III and IV, respectively.
In its comments, FCC reiterated the status of its existing efforts to  strengthen the management and oversight of the high-cost program, as  well as to restrain the growth in program expenditures. In particular, FCC  cited the OIG audits, the new document retention requirements, and the  Memorandum of Understanding (MOU) between FCC and USAC. We agree  that these are important efforts, but they do not resolve the shortcomings  we identified in the report. FCC also noted that we did not mention the  MOU in the report; while we did not cite the MOU, we did incorporate  elements of the MOU in the report, including, for example, the requirement  that USAC collect and report performance data on a quarterly basis. In  addition, FCC noted that it issued several NPRMs seeking comments on  proposals to restrain the growth in program expenditures, including  removal of the identical support rule and adoption of reverse auctions, and  noted that we did not consider these reform proposals in our report. We  did provide background information on these proposals; however, we did  not provide an assessment of these proposals since FCC was actively  seeking comments on the proposals and the outcome of the proposals was  speculative; further, our findings and recommendations regarding  management and oversight are applicable to the program in general,  regardless of the specific reform proposal adopted.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  date of this letter. At that time, we will send copies of this report to the  appropriate congressional committees, the Chairman of the Federal  Communications Commission, and the Chairman of the Universal Service  Administrative Company. We will also make copies available to others  upon request. In addition, the report will be available at no charge on the  GAO Web site at http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Contact information and major contributors to this report  are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines the operation of the high-cost program of the  Universal Service Fund. In particular, the report provides information on  (1) the effect that the structure of the program has on the levels of support  and types of services available in high-cost areas; (2) the extent that the  program has performance goals and measures; and (3) the extent that the  program has mechanisms in place to prevent and detect fraud, waste, and  abuse.
To respond to the overall objectives of this report, we interviewed officials  from the Federal Communications Commission (FCC) and the Universal  Service Administrative Company (USAC). In addition, we reviewed FCC  and USAC documents, as well as relevant legislation and federal  regulations. We also interviewed industry associations, national wireline  and wireless companies, the National Exchange Carrier Association  (NECA), and other individuals with knowledge of the high-cost program.  We reviewed USAC data on the distribution of high-cost funds across  states and companies. Finally, we compared FCC, USAC, and state policies  to GAO and Office of Management and Budget (OMB) guidance. Table 7  lists the individuals and organizations with whom we spoke.
For the first and third objectives, we conducted site visits in six states:  Alabama, Iowa, Montana, Oklahoma, Oregon, and Wisconsin. We used a  multistep process to select these six states. First, we divided states into  Census Bureau regions, excluding states where (1) no competitive eligible  telecommunications carriers (CETC) received support in 2006 and (2) the  urban population was equal to or above average, since the high-cost  program provides support for rural areas. Second, we selected states  within each region based on the number of eligible telecommunications  carriers (ETC) and CETCs present in the state. Within each state, we  interviewed the state regulatory commission (that is, the state agency  responsible for regulating telephone service within the state), “rural” and  “nonrural” ETCs, and CETCs. In some states, we also interviewed cost  consultants, state industry associations, and wireless carriers. To test our  structured interview and site selection methodology, we also conducted  site visits in the following states: Arizona, Maine, Massachusetts, New  Hampshire, and New Mexico. We interviewed similar state and industry  officials in these five states.
For the third objective, we conducted a survey of state regulatory  commissions. The survey field period was from December 12, 2007, to  February 8, 2008, and sought information pertaining to the state’s  regulation of telephone service; the state’s internal control procedures for  incumbent, competitive wireline, and competitive wireless carriers  receiving high-cost support in the state; and the state’s high-cost program,  if any. To help ensure that the survey questions were clear and  understandable to respondents, and that we gathered the information we  desired, we conducted pretests with relevant officials in Mississippi, North  Carolina, Pennsylvania, Virginia, and Washington. The survey was  available online to officials in the 50 states and the District of Columbia on  a secure Web site. We received complete responses from 50 of the 51  commissions we surveyed, for an overall response rate of 98 percent. This  report does not contain all the results from the survey. The survey and a  more complete tabulation of the results can be viewed at GAO-08-662SP.
We conducted this performance audit from July 2007 through June 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Telephone Penetration Rate by State (Percentage of Households with Telephone Service)
paragraphs: Appendix II: Telephone Penetration Rate by  State (Percentage of Households with  Telephone Service)
November 1983 (%)
July 2007 (%)
November 1983 (%)
July 2007 (%)
section_title: Appendix III: Comments from the Federal Communications Commission
paragraphs: The following are GAO’s comments on the Federal Communications  Commission’s letter dated May 16, 2008.
subsections: section_title: GAO’s Comments
paragraphs: 1.  While we did not specifically cite the Memorandum of Understanding  (MOU), we did discuss elements of this document. With respect to  internal controls, the MOU states that USAC “shall implement a  comprehensive audit program to ensure that USF monies are used for  their intended purpose, to verify that all USF contributors make the  appropriate contributions in accordance with the  rules, and to  detect and deter potential waste, fraud, and abuse.  shall work  under the oversight of the OIG in hiring contractors and auditing  contractors . . .” While we acknowledge these recent efforts to conduct  audits of USF (Universal Service Fund) program contributors and  beneficiaries, as discussed in this report, we found that with respect to  the high-cost program, these efforts have been limited and yielded  limited results. For example, USAC has conducted about 17 audits,  from more than 1,400 participating carriers, and participants did not  maintain adequate information for the auditors to validate their  information. The MOU also states that USAC “shall implement  effective internal control over its operations, including the  administration of the USF and compliance with applicable laws and  regulations.  will implement an internal control structure  consistent with the standards and guidance contained in OMB Circular  A-123, including the methodology for assessing, documenting, and  reporting on internal controls. . .” During our review, USAC officials  made us aware of the actions they are taking to develop a  comprehensive, internal control framework for USAC’s internal  operations, such as procedures to ensure that cash disbursements are  consistent with funds due to participating carriers. While we  encourage these efforts, USAC’s internal operations were not in the  scope of our objectives, and these efforts do not address the issues we  raised in the report—weak and limited internal control mechanisms  specifically aimed at the high-cost program beneficiaries.  2.  We are aware that efforts to promote universal service in rural areas  pre-date the 1996 Act, and include background information on these  efforts on pages 7-8 of the report. However, to avoid any confusion, we  modified the report text to note that FCC modified and expanded the  high-cost program after the Telecommunications Act of 1996.  3.  Again, while we did not specifically cite the MOU, on page 28 of the  report, we did discuss the performance data that FCC requires USAC  to collect and report on a quarterly basis. Interestingly, in a previous  meeting with USAC and in USAC’s written comments, USAC noted that  it is not authorized to collect all the performance data required by  FCC. In particular, of the seven categories of performance data, USAC  said it was not authorized to collect some portions of three categories,  including the number of program beneficiaries per wire center, the  number of lines per wire center (except for the high-cost model  component), and the rate of telephone subscribership in urban vs.  rural areas. Thus, it is unclear how effective this data collection effort  will be in developing performance goals and measures.  4.  We changed the text to be consistent with the 1996 Act.  5.  We did not assert that FCC had the authority to impose mandatory  standards on state regulatory commissions, although, since the issue  has not been adjudicated, it is unclear whether the statute prohibits  FCC from imposing mandatory standards. Irrespective of FCC’s  authority to impose mandatory standards, the inconsistent  requirements imposed by the states represent a weakness in the high- cost program’s internal controls. As USAC noted in its written  comments, “if states adopted similar requirements there would be  more standardized requirements across all ETCs thereby enabling  USAC to conduct more comprehensive audits to ensure ETCs are  using High Cost funds for the purposes intended.”  6.  We changed the text to be consistent with the 1996 Act.  7.  On page 37 of this report, we discuss the steps NECA takes to verify  the accuracy of the data that carriers submit, including analyzing  trends and comparing cost data with information in carriers’ audited  financial statements. Although, as we also discuss, NECA is  responsible only for collecting carrier cost and line count data for the  high-cost loop support component, representing only one of the five  high-cost program components. Further, trend analysis does not  necessarily ensure the accuracy of the underlying data. In its  comments on this report, USAC, which also performs extensive  trending validations, noted that “absent a full-scale audit, it is difficult  to determine the level of accuracy of the information provided by the  carriers.”  8.  We acknowledge that FCC’s Office of Inspector General (OIG)
Improper Payments and Information Act of 2002 (IPIA) audits included  a component to determine carrier compliance with high-cost program  rules. While FCC’s comments state these audits were designed to  render an auditor’s opinion on the accuracy of carrier data, it was  unclear to us that these audits specifically addressed accuracy of  carrier cost and line counts. In the OIG’s Initial Statistical Analysis of  Data from the 2006/2007 Compliance Audits, the reasons for carrier  noncompliance focused on procedural noncompliance. These reports  attributed inadequate document retention; inadequate auditee  processes or policies and procedures; inadequate systems for  collecting, reporting, or monitoring data; auditee weak internal  controls; and auditee data entry error. These reports do not discuss the  accuracy of carrier’s cost or line-count data.  9.  We acknowledged the Notice of Proposed Rulemakings that FCC  issued to address the growth in the high-cost program’s expenditures  and provided background information on these proposals. However,  we did not provide an assessment of these proposals since FCC was  actively seeking comments on the proposals, and the outcome of the  proposals was speculative. Further, our findings and recommendations  regarding management and oversight of the high-cost program are  applicable to the program in general, regardless of the specific reform  proposal adopted. In making our recommendations, we are not  implying that FCC should discontinue policy-oriented reform of the  high-cost program; rather, these efforts are complementary.  10. On page 14 of the report, we provide a discussion of the factors  contributing to the growth of high-cost program expenditures, and  figure 1 provides a visual illustration of the growth in both incumbent  and competitive support. Further, on page 24, we provide detailed  information on the growth in the number of CETCs and the overall  financial support provided to CETCs.
section_title: Appendix IV: Comments from the Universal Service Administrative Company
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Michael Clements, Assistant  Director; Tida Barakat; Brandon Haller; Amanda Krause; Carla Lewis;  Michael Meleady; Joshua Ormond; Donell Ries; Stan Stenerson; Mindi  Weisenbloom; Crystal Wesco; and Elizabeth Wood made key contributions  to this report.