Federal Communications Commission: Regulatory Fee Process Needs to Be Updated
Published: 2012-08-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: FCC must by law assess annual regulatory fees on telecommunications entities to recover its entire appropriationabout $336 million in fiscal year 2011. The entities from which FCC collects fees fall into one of five main industry sectors (broadcast, cable, wireline, wireless, and international) and are assigned to one of 86 fee categories, such as paging services. Recently, FCC stated that it was planning to consider reforms to its regulatory fee process. GAO was asked to examine (1) FCCs process for assessing regulatory fees among industry sectors, (2) FCCs regulatory fee collections over the past 10 years, and (3) alternative approaches to assessing regulatory fees. GAO reviewed FCC data and documents, interviewed officials from FCC and the telecommunications industry, and, to identify alternative approaches to assessing regulatory fees, met with five fee-funded U.S. and Canadian regulatory agencies.
section_title: What GAO Found
paragraphs: The Federal Communications Commission (FCC) assesses regulatory fees among industry sectors and fee categories based on obsolete data, with limited transparency. The Communications Act requires FCC to base its regulatory fees on the number of full-time equivalents (FTE) that perform regulatory tasks in certain bureaus, among other things. FCC based its fiscal year 2011 regulatory fee assessments on its fiscal year 1998 division of FTEs among fee categories. It has not updated the FTE analysis on which it bases its regulatory fees, in part to avoid fluctuations in fees from year to year. FCC officials stated that the agency has complied with its statutory authority by dividing fees among fee categories based on FTE dataalthough the data is from fiscal year 1998since the statute does not prescribe a specific time for FCC to update its FTE analysis. As a result, after 13 years in a rapidly changing industry, FCC has not validated the extent to which its fees correlate to its workload. Major changes in the telecommunications industry include the increasing use of wireless and broadband services and a convergence of telecommunications industries. Moreover, FCCs practice is inconsistent with federal guidance on user fees. As a result of FCCs use of obsolete data in assessing regulatory fees, companies in some fee categories may be subsidizing companies in others. FCC officials said it has become more challenging to align current FTEs to the 86 fee categories given the increasingly cross-cutting nature of FCCs work, raising the potential that FCCs fee categories may also be out of date. FCCs regulatory fee process also lacks transparency because of the limited nature of the information FCC has published on it. This has made it difficult for industry and other stakeholders to understand and provide input on fee assessments. On July 17, 2012, FCC released a regulatory fee reform Notice of Proposed Rulemaking (NPRM) proposing changes to FCCs regulatory fee program related to many issues raised in this report.
On average over the past 10 years, FCC collected 2 percent more in regulatory fees than it was required to collect. Prior to fiscal year 2008, FCCs annual appropriations stated that any excess regulatory fees remained available until expended; since 2008, FCCs annual appropriations have prohibited the use of any excess fees from the current year or previous years without an appropriation by Congress. As a result, $66 million in excess fees currently resides in an account at the Department of Treasury that cannot be used without congressional action. The account has increased by an average of $6.7 million per year for fiscal years 2006 through 2011. Congress has not provided for the disposition of these accumulating excess funds.
Approaches of other fee-funded regulatory agencies could be instructive as FCC considers reforms. For example, the Nuclear Regulatory Commission, Federal Energy Regulatory Commission, and Canadian Radio-television and Telecommunications Commission assess fees based on an annually or biennially updated analysis of costs by industry sector. Regarding excess fees, officials at five other fee-funded regulatory agencies stated that their agencies either apply excess fees as an adjustment to the subsequent years fees or refund them.
section_title: What GAO Recommends
paragraphs: Congress should consider whether FCCs excess fees should be appropriated for FCCs use or, if not, what their disposition should be. FCC should perform an updated FTE analysis and require at least biennial updates going forward; determine whether and how to revise the current fee schedule, including the number of fee categories; increase the transparency of its regulatory fee process; and consider the approaches of other fee-funded regulatory agencies. FCC agreed with GAOs recommendations.

section_title: Letter
paragraphs: The Federal Communications Commission (FCC), which regulates  interstate and international communications by radio, television, wire,  satellite, and cable in the United States, must by law assess and collect  annual regulatory fees from the entities it regulates. These fees are  designed to recover FCC’s operating costs, covering its enforcement,  policy and rulemaking, international, and user information activities. In  recent appropriation acts, Congress has directed FCC to recover its entire  appropriation—about $336 million for fiscal year 2011—through the  collection of these regulatory fees. The entities from which FCC collects  fees fall into one of five main industry sectors (broadcast, cable, wireline,  wireless, and international) and are assigned to 1 of 86 fee categories.  FCC has referred to the process as a “zero-sum proposition” because,  since FCC is directed to collect a specified amount by Congress, if FCC  reduces the fees of one industry sector or fee category, others must pay  more. Recently, concerns have been raised that FCC’s regulatory fee  process does not align with today’s communications industry and may  provide a competitive advantage to some industries while disadvantaging  others. In fiscal years 2008, 2011, and 2012, FCC stated that it was  planning to consider reforms to its regulatory fee process, in part because  the communications industry had changed dramatically since 1994 when  FCC’s regulatory fee process was first authorized, while FCC’s division of  regulatory fees among industry sectors and fee categories had changed  very little.
FCC refers to its process of dividing the amount to be collected among fee categories as  all allocation process.
subsections: section_title: Background
paragraphs: Section 9 of the Communications Act authorizes FCC to collect regulatory  fees annually. These regulatory fees do not include application fees or  revenue from spectrum auctions. The statute directs FCC to do the  following:
Assess and collect regulatory fees to recover the costs of FCC’s  regulatory activities, defined by section 9 as consisting of its  enforcement, policy and rulemaking, user information, and international  activities—in the amount required in FCC’s appropriation acts.
Derive these fees by determining the full-time equivalent (FTE)number of employees performing these regulatory activities in three  named bureaus and other FCC offices—adjusted to take into account  various factors that are reasonably related to the benefits to the fee  payors, including factors determined by FCC to be in the public  interest. (According to FCC officials, the three bureaus named in  section 9—the Private Radio, Mass Media, and Common Carrier  Bureaus—have since been reorganized and renamed as the Wireless  Telecommunications Bureau, the Media Bureau, the Wireline  Competition Bureau, and the International Bureau.)
Make mandatory adjustments. FCC maintains and is required  annually to revise a schedule of regulatory fees to reflect  proportionate increases or decreases in the amount of the  appropriation to be recovered as well as changes in the number of  licensees or other units required to pay the fees assessed.
Make permitted amendments as necessary. FCC is required to  amend the schedule if FCC determines that the schedule must be  amended to comply with the statute’s requirement that the fees be  derived by determining FTEs (as outlined above), adjusted to take into  account factors reasonably related to the benefits the fee payor  receives from FCC regulation, among other things.
In recent years, Congress has included language in FCC’s annual  appropriation act setting specific percentages of the appropriation FCC is  to offset with collected regulatory fees. This percentage has risen from 38  percent in 1994, when section 9 first went into effect, to over 99 percent  starting in 2004, to 100 percent starting in 2009. In fiscal year 2011,  FCC’s appropriation, and hence the total in regulatory fees it was to use  as offsets, was about $336 million. According to FCC officials, this  appropriation funded about 1,556 FTEs in FCC’s 11 offices and 7  bureaus. The 7 bureaus include the (1) Consumer and Governmental  Affairs, (2) Enforcement, (3) International, (4) Media, (5) Public Safety  and Homeland Security, (6) Wireless Telecommunications, and (7)  Wireline Competition Bureaus.
The five industry sectors in which FCC has typically grouped regulatory  fee payors include: (1) wireline services, (2) wireless services, (3) cable  services, (4) broadcast services, and (5) international services. At times,  FCC has combined cable and broadcast into an industry sector it calls  media—aligning the four industry sectors with four FCC bureaus— wireline with the Wireline Competition Bureau, wireless with the Wireless  Telecommunications Bureau, media with the Media Bureau, and  international with the International Bureau. As shown in Table 1, within  most of these industry sectors are a number of fee categories.
Each year, FCC sets a rate for each fee category that is used to calculate  how much each company within that category owes in regulatory fees.  FCC assesses this rate on various bases. For example, the rate for  wireline telephone companies is set per revenue dollar (for those  revenues subject to fees); the rate for wireless telephone companies  and cable television operators is based on the number of subscribers; the  rate for geostationary orbit space stations, including operators of direct- broadcast satellite television, is based on the number of satellites; and  broadcast television and radio licensees pay a flat fee that is set based on  market reach characteristics, such as the size of the market area or  population served. Entities that provide services in more than one fee  category—such as a company that offers wireline and wireless services— must pay regulatory fees for each fee category commensurate with the  service provided.
Each year, FCC issues a Notice of Proposed Rulemaking (NPRM) in  which it proposes how it will assess fees by industry sector and fee  category for that fiscal year. FCC receives comments on the NPRM and  may make adjustments before issuing a Report and Order establishing  assessment rates for each year’s regulatory fees. FCC also establishes a  due date for payment. Entities that are late in paying their assessed fees  are assessed an additional one-time 25 percent statutory penalty, and  FCC will take no action on any applications or other requests for benefits  from such an entity until its past due assessment is paid. According to  FCC officials, while the timing of this process varies somewhat from year  to year, the assessment is collected in time for FCC to process payment  and forward it to the Department of Treasury by the end of the fiscal year  on September 30. For example, in fiscal year 2011, the NPRM was  issued on May 3, 2011, and comments were accepted until June 9, 2011.  The Report and Order was released on July 22, 2011, and the assessed  fees were due on September 16, 2011.
section_title: FCC’s Assessment of Regulatory Fees Is Based on Obsolete Data and Lacks Transparency
subsections: section_title: FCC’s Regulatory Fee Assessments
paragraphs: From fiscal year 1998 through its most recent assessment for fiscal year  2011, FCC has based its division of regulatory fees among industry  sectors and fee categories on its fiscal year 1998 division of FTEs among  fee categories. FCC determined this fiscal year 1998 division of FTEs  among fee categories through a cost-accounting system that FCC  abandoned in fiscal year 1999 because of problems described in greater  detail below. In subsequent years, FCC continued to use the same  basic division of fees among fee categories established in fiscal year  1998, with some adjustments to the rates of certain fee categories, based  on (for example) concerns about overburdening particular industries.
These adjustments were not based on any FTE analysis and have had  relatively minor effects on the division of regulatory fees by industry  sector that FCC established in fiscal year 1998, as shown in figure 2.
In fiscal year 1994, when FCC first implemented the Communications Act  regulatory fee statute, FCC used the fee schedule Congress had included  as a starting point in the statute. That schedule, which was developed  based on information provided to Congress by FCC, set annual regulatory  fees for 46 fee categories that FCC was to follow until FCC amended the  schedule. The fee schedule established numerous fee categories—46— assessed on different bases, including a flat fee basis, a per subscriber  basis, a per antenna basis, and others. While FCC has made changes to  this fee schedule over the years, including adding and altering fee  categories, the basic elements of its structure—established based on the  telecommunications industry as it existed in 1994, and in the context of  directing FCC to collect fees to cover 38 percent of its appropriation  instead of the 100 percent that FCC has been directed to collect since  fiscal year 2009—have continued to guide FCC’s regulatory fee  assessment.
The Communications Act requires FCC to develop accounting systems  necessary for the agency to determine whether and how the fee schedule  should be adjusted to comply with the statute’s requirement that FCC  base its regulatory fees on the number of FTEs performing regulatory  tasks, among other things. The act does not specify that the system  should be a cost accounting system—FCC was free to interpret this  requirement according to its perceived needs. Nevertheless, in its  Reports and Orders for the 2 years following 1994, FCC discussed its  plans to develop a cost-accounting system to guide its division of fees  among fee categories. FCC implemented this cost-accounting system,  which relied on employees’ coding of time and attendance report entries,  for fiscal years 1997 and 1998, using it as the basis for dividing fees  among fee categories. At the time, FCC stated that its purpose in using a  cost-accounting system based on employees’ time card entries was to  ensure that fee collections from each category of service approximated,  to the extent possible, FCC’s actual costs to regulate each fee category.
In the Matter of Assessment and Collection of Regulatory Fees for Fiscal Year 2004, 19  FCC Rcd. 11665. much fluctuation in fees from year to year—because of a combination of  annual changes in workload, employee errors in completing time sheets,  and various other factors. FCC found that over the 1997 to 1998 period,  the rate assessed to all entities in a fee category could increase by more  than 25 percent from the prior year—beyond any increase because of  increases in the total amount in regulatory fees FCC was required to  collect. FCC officials stated that these fluctuations were especially  problematic for small service providers that could least absorb  unpredictable increases in fees.
According to FCC officials, FCC has continued to rely on the 1998  division of regulatory fees as the basis of its fee division through fiscal  year 2011. It has done so in spite of the problems FCC identified with the  system and even though this approach put FCC at risk of dividing the  regulatory fee burden among entities in different industries based on  obsolete data. FCC officials stated that while the statute requires FCC to  amend its regulatory fees if FCC determines such amendment is  necessary to comply with the FTE-based requirement, among other  things, the statute does not prescribe a specific time at which FCC must  make such a determination.  Furthermore, according to FCC officials,  while FCC has maintained information on how its FTEs are distributed  among the four core bureaus—which generally track with the four industry  sectors—FCC does not have information on how its current FTEs are  divided among the fee categories in the current fee schedule.
47 U.S.C. §159(b)(3) states in pertinent part that “The Commission shall, by regulation,  amend the Schedule of Regulatory Fees if the Commission determines that the Schedule  requires amendment to comply with the requirements of paragraph (1)(A).” things, emphasizes the importance of regularly updating analyses to  ensure that fees are set based on relevant information.
section_title: Changes in the Telecommunications Industry since 1998
paragraphs: The major changes that have occurred in the telecommunications  industry over the past 14 years dramatically increase the likelihood that  FCC’s current division of fees among fee categories has become  obsolete. In 2008, FCC stated in a Further Notice of Proposed  Rulemaking that major industry changes since 1994 included the  significant increase of wireless, broadband, and voice over Internet  protocol (“VoIP”), and discussed the fact that FCC itself had reorganized  several times to reflect industry changes. FCC acknowledged that there  could be several areas in which the regulatory fee process could be  revised and improved to better reflect the current industry. Two former  FCC commissioners told us that the significant increase in broadband and  wireless services, the increasing convergence of telecommunications  industries, and the transition to digital television are major changes that  have occurred since fiscal year 1998 that have affected FCC’s workload  and priorities.
Changes in FCC’s estimates of subscribers, revenues, or other bases  used to set the annual regulatory fee rates for different fee categories  also indicate major changes in the balance of telecommunications  industries from fiscal years 1998 to 2011. According to FCC’s estimates  (see table 2), measures of some industries grew by over 50 percent— including the wireless telephone industry, for which the number of  subscribers grew by over 400 percent—while measures of other  industries declined by over 40 percent, including VHF television stations,  for which the number of stations declined by 48 percent. In comparison to  these dramatic shifts, relatively small changes in the percent of the total  regulatory fees expected to be paid by these industries have occurred.  For example, while the wireline telephone industry’s estimated revenues  on which fees are assessed declined by 44 percent from fiscal year 1998  to fiscal year 2011, the percentage of total regulatory fees this industry is  expected to pay declined by 4 percentage points, from 48 percent to 44  percent of total fees. And while the wireless telephone industry’s  estimated number of subscribers grew 437 percent during this time  period, the percentage of the total regulatory fees the cell phone industry  is expected to pay grew only 5 percentage points—from 10 to 15 percent  of the total regulatory fees. According to FCC officials, there is not always  a straightforward relationship between growth in the number of  subscribers, revenues, or other basis used to determine the fee rate of a  fee category and the amount of work FCC performs related to that fee  category, and thus these shifting numbers do not offer a clear guide as to  how or even the extent to which the division of FCC’s regulatory fees  among industry sectors should be realigned. Nevertheless, they reinforce  the magnitude of the changes that have occurred, and underscore the  likelihood that FCC’s division of fees among fee categories may no longer  correlate to its current division of FTEs. (See table 2.)
FCC’s Office of the Managing Director has published some information  that further suggests that FCC is basing its division of regulatory fees  among fee categories on data that do not correlate with industry trends  and FCC’s current workload. In fiscal year 2008, FCC issued a Further  Notice of Proposed Rulemaking (FNPRM) specifically to consider reforms  to its regulatory fee process. In a separate public notice issued after FCC  adopted the 2008 FNPRM, the Office of the Managing Director provided  some updated information on FCC’s costs by core bureau. According to  FCC officials, the core bureaus correlate to the four industry sectors of  wireless telecommunications, wireline telecommunications, media, and  international. This information demonstrated substantial misalignment  between the division of regulatory fees by industry sector as presented in  FCC’s fiscal year 2008 FNPRM and FCC’s costs by bureau in the  Wireless, Wireline, and International Bureaus as presented in the public  notice, as shown in figure 3—although FCC officials did not include any  information at the more granular level of fee category. For example, in  fiscal year 2008, the wireless industry paid about 17 percent of the  regulatory fees while the Wireless Telecommunications Bureau incurred  about 27 percent of FCC’s total costs. In contrast, the wireline industry  paid about 47 percent of the total fees while the Wireline Competition  Bureau incurred about 23 percent of FCC’s total costs. FCC did not  comprehensively reform its process as a result of this FNPRM.
FCC’s inaction in updating its FTE analysis is inconsistent with federal  guidance on user fees. We recognize that federal guidance on user fees  for the most part assumes that the fees are to be set based on a cost- recovery scheme, which differs from the Communications Act’s  requirement that FCC base its regulatory fees on FTEs, among other  things. FTEs—the basic measure of levels of employment used in the  federal budget—are not the same as costs. FTE information is often  readily available and can be a useful proxy for cost, but FTE information  does not necessarily reflect total cost because, for example, it would  neither distinguish between higher and lower cost FTEs, nor would it  include other costs, such as contractors, training, equipment, or facilities’  costs.
Nevertheless, many of the general principles of federal user fee guidance  remain relevant in considering FCC’s FTE analysis. First, federal  guidance emphasizes the importance of reviewing fees regularly to check  the extent to which they are properly aligned. For example, OMB Circular  No. A-25, which, among other things, provides guidance to agencies  regarding their assessment of user charges under other statutes, directs  agencies that have user fees to review the user fees biennially in order to  assure, among other things, that existing charges are adjusted to reflect  unanticipated changes in costs or market values. The fact that the  Communications Act directs FCC to base its fees on FTEs does not  negate the applicability of the guidance regarding the regularity with  which the basis of the fees (i.e., FTEs) should be reviewed. The reason  that regular review is part of the guidance is to assure that fees are  adjusted to reflect changes that may have occurred over time in the  agency’s distribution of work among fee categories—which could be  measured by costs or FTEs.
Second, according to federal financial-accounting standards, cost  information should be reported in a timely manner and on a regular basis  and should be reliable and useful in making decisions. This standard  does not require the use of a particular type of costing system or  methodology, stating that agency and program management is in the best  position to select a type of costing system to meet its needs. However,  the standard requires that a methodology, once adopted, be used  consistently in order to provide results that can be compared from year to  year—with improvements and refinements made as necessary. In FCC’s  case, given the statutory framework of its regulatory fee program, this  principle pertains to FTEs rather than costs. Given the problems FCC  encountered with using its cost-accounting system to analyze FTEs by  fee categories in fiscal year 1998, these standards would suggest that  FCC could have considered alternate methodologies—or improvements  to its cost-accounting system—to address the problems described.  However, FCC’s decision to freeze its division of regulatory fees by fee  category on fiscal year 1998 data that came from the cost-accounting  system FCC abandoned, rather than addressing the problems or  choosing a different methodology, is inconsistent with the goal of such  standards. This decision, over time, has resulted in FCC not having FTE  information that is timely, reliable, or comparable from year to year to  guide its decisions on how to divide regulatory fees.
section_title: Probable Cross- Subsidization between Industry Sectors
paragraphs: In prior work, we have stated that agencies that do not review and adjust  fees regularly run the risk of undercharging or overcharging users, raising  equity concerns. Moreover, because FCC is directed in its annual  appropriation acts to collect a certain amount of money in regulatory fees  each year, if its division of fees among fee categories is misaligned with  its FTEs by fee category, then some entities are most likely overpaying,  essentially cross-subsidizing entities in other fee categories, which are  underpaying.
FCC’s regulatory fees are unlikely to ever equal the exact cost of  regulating the corresponding fee category for several reasons. First, since  FCC is required to collect 100 percent of its appropriation through  regulatory fees, including funding for items that are not specifically  regulatory activities—such as general overhead—the regulated industries  are being assessed to pay for more than the number of FTEs required for  their regulation. Second, FCC is directed by statute to base its fee  assessment on FTEs, which may not represent actual regulatory costs.  According to FCC officials, because it is not possible to precisely assign  the costs of regulation on a service-by-service basis, and because the act  requires FTE-based assessment and does not require amending the fee  schedule to mirror all changes in regulatory costs, some regulated entities  pay more than the direct cost of their regulation.
Third, exemptions create cross subsidization, as could some other policy  decisions. FCC, as required by statute, has exempted some groups of  entities, such as nonprofits, from paying fees, and has at times exercised  its statutory discretion by reducing the fee rates of certain fee categories  when it determined that doing so would benefit the public interest. In prior  work, we have pointed out that while exemptions can promote one kind of  equity by factoring the users’ ability to pay into the fee-rate formula, such  provisions may also increase cross-subsidies among users. We have  stated that in applying exemptions, agencies may purposefully choose to  set fees in such a way that cross subsidization occurs in order to promote  other policy goals. However, we have also stated that generally, fees  should be aligned with the costs of the activities for which the fee is  collected, unless there is a policy decision not to align them. Without a  current FTE analysis by fee category, it is not possible to determine the  extent that cross subsidization is occurring between fee categories, or  which fee categories are cross subsidizing other fee categories. However,  any cross subsidization that is occurring not because of a decision to  promote a policy goal but because the FTE analysis on which FCC bases  its fees is obsolete, is not consistent with general user fee principles.
According to officials in many industry associations and companies we  spoke with in the wireline, wireless, cable, and international industry  sectors, FCC’s regulatory fees are typically passed along to the  consumer, either in a line item on the bill or bundled into the general cost  of service. One potential effect of cross subsidization, therefore, is that, if  entities in different fee categories are directly competing for the same  customers, cross subsidization could result in competitively  disadvantaging entities in one fee category over another. As discussed in  the next section, some stakeholders told us that the regulatory fees are  small enough that they do not have a significant financial impact on the  companies that pay the fees. However, several industry stakeholders in  the wireline and cable television industry sectors told us that FCC’s  current regulatory fee process is competitively disadvantaging certain  industries and that FCC’s use of multiple bases for setting fee rates  makes it more difficult for industry stakeholders to compare the rates  assessed to different fee categories—and thus more difficult to determine  the extent to which the fees are fair and equitable.
These views were echoed in formal comments to FCC’s regulatory fee  FNPRM in 2008, when FCC last requested comments on substantial  reform to its regulatory fee process. For example, in response to the 2008  FNPRM, the National Cable and Telecommunications Association  (NCTA), a trade association for the U.S. cable industry, argued that FCC  assesses higher regulatory fees on cable operators than it does on direct  broadcast satellite television operators. According to the cable  association, the direct broadcast satellite television industry is a direct  competitor to cable, and thus its lower regulatory fee burden could give it  a competitive advantage. The cable association argued that every type of  multichannel video-programming distributor, including cable, telephone,  and direct broadcast satellite providers of multichannel video service,  should pay the same regulatory fee rate in order to ensure that no entity  received the competitive benefit of lower fees based solely on the  technology it used. Moreover, the cable association’s staff told us that  because the cable television industry’s fee rate is set on a per-subscriber  basis and the direct broadcast satellite television operator industry’s fee  rate is set on a per-satellite basis, it was not possible to compare the fees  as stated in FCC’s published information in order to assess their fairness.  For the cable association to determine how its members’ fees compared  to the fees of direct broadcast satellite television operators on a per- subscriber basis, the association had to do its own analysis using  company data. In its 2008 comments to the FNPRM, the cable  association also suggested that all providers of voice service and  multichannel video programming distributors—including cable, telephone,  and direct broadcast satellite providers—should pay on a per-subscriber  basis instead of the three different bases—per revenue dollar, per  subscriber, and per satellite—used today.
In another example, the Independent Telephone and  Telecommunications Alliance (ITTA), which represents a number of mid- size wireline telephone companies, argued that under FCC’s regulatory  fee process, wireline companies had higher per-subscriber fees than  wireless companies. ITTA argued that this higher per-subscriber rate was  not justified because, due to the convergence among technologies since  1994, many of FCC’s expenditures related to telecommunications issues  now related equally to wireline and wireless providers. According to ITTA,  the effect of the different fee rates assessed to wireline and wireless  telephone providers was that providers of similar voice services—and  their customers—assumed dissimilar responsibility in bearing FCC’s  regulatory costs.
ITTA called for both wireline and wireless providers’ regulatory fees to be  assessed on the basis of revenue, instead of the current situation, in  which wireline companies pay fees based on revenue while wireless  companies pay fees based on subscribership. Interestingly, in fiscal year  1994, FCC assessed the fees of both wireline and wireless telephone  entities on the basis of subscribers, as put forth in the fee schedule in the  Communications Act. For fiscal year 1995, FCC amended the schedule  by, among other things, changing its basis for assessing regulatory fees  on the wireline telephone industry from a subscriber to a revenue basis.  In making this change, FCC stated in the Report and Order that a  revenue-based methodology would equitably distribute the fee  requirement in a competitively neutral manner, and that it was FCC’s  intention to consider changing wireless carriers’ fees to a revenue basis in  future years. However, FCC has not done so, although wireless providers  report the same revenue information to FCC that wireline providers do. In  addition, one commenter to a recent NPRM suggested that FCC use  revenue as the basis for assessing regulatory fees on media fee  categories. According to FCC officials, because FCC does not currently  require industries in the media fee categories to report any revenue  information to FCC, in order for FCC to assess media companies on the  basis of revenue, FCC would have to rely on the honor system in  determining entities’ fee obligations, or establish new reporting  requirements, which would be burdensome to FCC and industry.
FCC did not summarize or comment on the proposals submitted by the  cable association and ITTA to the fiscal year 2008 FNPRM, even though  ITTA re-submitted its proposal in response to the fiscal year 2009 NPRM.  Instead, FCC exercised its administrative discretion to resolve all the  outstanding matters stemming from the FNPRM at a later time in a  separate Report and Order. More than 3 years later, no separate Report  and Order has been issued addressing these industry associations’  comments. According to NCTA and ITTA officials, the associations stopped  submitting formal comments to FCC because FCC’s lack of  responsiveness discouraged them from doing so—but both associations  continue to see the current regulatory fee assessment as not based on any  valid FTE analysis and as causing competitive disadvantage to their  industry.
section_title: Effect of Fees on Industry and Consumers
paragraphs: Most companies we spoke with stated that FCC’s regulatory fees have  little to no direct financial impact on the company, given the relatively  small size of the fees—for example, wireline telephone companies were  to pay $.00375 per assessable revenue dollar in fiscal year 2011, while  wireless telephone companies were to pay $0.17 per subscriber.  However, officials at the National Association of Broadcasting stated that  the payment of regulatory fees is a bigger issue for small stations. These  officials stated that because consumers do not pay directly for broadcast  radio or television, broadcasting entities cannot pass regulatory fees on to  consumers but must incorporate the fee payment into operating costs to  be paid with general operating revenue. The National Association of  Broadcasters and one broadcast company we spoke with stated that at a  time when some broadcasting companies are laying off employees  because of financial difficulties, FCC’s regulatory fees may equal the cost  of one or more employees that the company could not afford to keep  because of the regulatory fees. This potential impact on companies  underscores the importance that FCC assess regulatory fees on a fair  and equitable basis—and that it have updated information on FTEs with  which to do so.
The effect of regulatory fees on consumers is difficult to assess, in part  because of the relatively low cost of the fees. For example, if a wireless  telephone company passed its fiscal year 2011 regulatory fee directly on  to consumers, the fee would have increased the bill of each consumer by  $0.17 for the year. On the other hand, representatives of a wireline  telephone company we spoke with stated that many of their customers  are rural, low income, elderly people who are affected by any increase in  their phone bill caused by regulatory fees.
section_title: Challenges Related to Regulatory Fee Reform
paragraphs: According to FCC officials, the agency has not revised its assessment of  fees among fee categories since fiscal year 1998 in part because it is  difficult to propose and implement reforms given its need to collect  regulatory fees by the end of each fiscal year. In addition, FCC officials  stated that because the agency had received only a limited number of  comments to its 2008 FNPRM, FCC had decided not to undertake major  reform at that time. However, as described above, federal guidance on  user fees recommends that agencies review their fees biennially— including the costs that the fees are reimbursing. Moreover, by not  periodically analyzing FTEs by fee category and adjusting its division of  regulatory fees based on this analysis, FCC may have put itself into a  situation where, in order to adjust regulatory fees based on an updated  FTE analysis, FCC may have to figure out how to handle large swings in  fees for some fee categories. For example, we found that when another  agency waited 9 years before performing a review of its cost-based fees,  the result was that the average fee increased by 86 percent, causing the  new fee schedule to be widely questioned.
GAO, FCC Management: Improvements Needed in Communication, Decision-Making  Processes, and Workforce Planning, GAO-10-79 (Washington, D.C., Dec. 17, 2009). among the fee categories or what the outcome of such an analysis   would be.
In the fiscal year 2012 regulatory fee NPRM, released on May 4, 2012,  FCC stated that it planned to undertake two separate NPRMs to consider  reforms to the regulatory fee process. FCC stated that it would issue a  Report and Order finalizing its decision on all issues raised in the reform  proceedings, including new cost allocations and revised regulatory fees,  in sufficient time to allow for their implementation in fiscal year 2013. On  July 17, 2012, FCC released an NPRM on regulatory fee reform.   As  discussed in our agency comments section, this NPRM proposes some  fundamental changes to FCC’s regulatory fee program that relate to many  of the concerns raised in this report.
section_title: FCC’s Current Regulatory Fee Process Lacks Transparency
paragraphs: FCC has not been transparent in describing its regulatory fee process in  its recent annual NPRMs and Reports and Orders. This lack of  transparency has resulted in uncertainty among some industry  associations about FCC’s regulatory fee process; some told us that the  lack of transparency has made it more difficult for them to comment or  provide input on FCC’s regulatory fee process. In prior work, we have  reported that the regulatory process is used to provide information on  fees to Congress and stakeholders and to solicit stakeholder input.  Therefore, we have reported that, when an agency has authority to adjust  a fee through the regulatory process, as a first step towards improved  transparency, it should make available to the public substantive  information about recent and projected program costs and fee collections  through its notices in the Federal Register. Relevant information includes  the agency’s new fee rates, descriptions of the costs of the program,  projected program costs and fee collections, and the assumptions the  agency used to make those projections.
FCC’s recent annual Reports and Orders on regulatory fees include  FCC’s fee rates, along with the total FCC is required to collect as directed  in its appropriations act and how much it expects to collect from each fee  category. However, since FCC has not performed any current FTE  analysis, there is no discussion of FCC’s current FTEs or costs related to  each fee category. Moreover, FCC does not clearly explain in any of the  Reports and Orders after fiscal year 2002 that the division of regulatory  fees among fee categories is based on a fiscal year 1998 FTE analysis  that was never updated. This lack of information in FCC’s regulatory-fee- related NPRMs and Reports and Orders has limited the ability of industry  stakeholders to understand exactly how FCC has been determining its  assessment of regulatory fees in recent years, and may have limited  stakeholders’ ability to effectively provide input to this process.
Another area where FCC has not been transparent is in describing the  effects of its adjustments on other fee payors. Each year, FCC’s  regulatory-fee-related NPRMs and Reports and Orders include any  proposed or actual adjustments and tables detailing the resulting  regulatory fees for all payors. However, those tables have not explicitly  shown how adjustments to the rates of certain fee categories have  affected the rates of the other fee categories, or the total FCC must  attempt to collect from other fee categories. Consequently, it is difficult to  use FCC’s information to determine how FCC got from the previous  year’s regulatory fee rates to the current year’s regulatory fee rates.
For example, in the fiscal year 2010 Report and Order, FCC stated that  because the revenue base upon which the wireline telephone industry’s  fee rate is calculated had been decreasing for several years, FCC had  determined it would best serve the public interest to set the wireline  telephone industry’s fiscal year 2010 fee rate at $0.00349 per revenue  dollar. In a footnote, FCC elaborated that because the wireline telephone  industry’s revenue data was lower than expected, if FCC had not decided  to set the wireline telephone rate at $0.00349 per revenue dollar, the rate  would have increased to $0.00364 per revenue dollar. However, FCC did  not explain what this change in rates translated to in terms of the amount  of revenue it expected to collect in fees from the wireline telephone  industry. Moreover, while FCC stated in the Report and Order that  reducing the fees paid by the wireline telephone industry would increase  the fees paid by licensees in other service categories, and the resulting  regulatory fees are detailed in FCC’s Report and Order, FCC did not  specifically show the fee increase for each regulatory fee category  caused solely by this policy decision. In November 2011, FCC officials  told us that this policy decision had resulted in reducing the total expected  fees to be collected from the wireline telephone industry by approximately  $12 million, and that FCC instead attempted to collect this $12 million by  raising the rates of all the other fee categories based on the existing  division of fees among fee categories. This $12 million is reflected in the  regulatory fee tables set forth in FCC’s Order. However, the limited  information on how various adjustments affect each fee category reduces  the ease with which industry stakeholders or other interested parties can  understand the effects of FCC’s current process—including the policy  decisions FCC has made without any updated FTE analysis.
section_title: FCC Has Collected $66 Million in Excess Fees That Is Unavailable without Further Congressional Action
subsections: section_title: FCC’s Regulatory Fee Collections
paragraphs: On average, FCC collected 2 percent more each year in regulatory fees  than it was required to collect in its annual appropriations acts over the  past 10 fiscal years. FCC under collected regulatory fees in 1 year— 2003—and over collected regulatory fees in 9 years.  For example, it  overcollected regulatory fees by 5 percent—$13 million—in fiscal year  2005. (See table 3.)
According to FCC officials, FCC attempts to meet its regulatory fee target  each year but is unable to ensure it will collect exactly the amount  required by Congress because there are multiple variables that can affect  the final amount collected. Key variables that can cause FCC to collect  more or less than it expected are late payments, FCC’s use of preliminary  data in setting fee rates, refunds, and bankruptcies. Regarding late  payments, FCC counts all regulatory fee payments that arrive in a fiscal  year as part of that year’s regulatory fee collections, even if the imposed  assessment was incurred in a prior year. FCC officials stated that each  year some entities do not pay the fees owed that year, while some  entities pay fees owed from prior years. According to FCC officials,  because in any given year, FCC does not know exactly how much of the  year’s owed fees are not going to be paid in the year they are due, or how  much in late payments will come in from prior years, late payments can  affect the total amount of regulatory fees collected for the year. We found  that the percentage of FCC’s total annual regulatory fee collections that  was made up of late payments varied from 1 to 3 percent for fiscal years  2005 to 2011.
FCC’s use of preliminary data to set fees also can cause FCC to collect  more or less than it expected and can at times lead to FCC’s having to  refund companies some of their prior year’s fees, which can also affect  the total collected. In order to charge fees based on current year data and  to publish the final fee rates in the Report and Order in time for entities to  pay by the end of the fiscal year, FCC must set the fee rate for some  large fee categories—including wireline telephones, wireless telephones,  and cable, among others—based on preliminary industry information. For  example, until fiscal year 2011, FCC relied on preliminary estimates  provided to FCC by wireline telephone entities to estimate the total  amount of revenue dollars in the wireline telephone industry. In  combination with FCC projections based on past years’ collections and  economic conditions, FCC set the wireline telephone fee rate based on  this preliminary industry data. Wireline telephone entities determine the  amount of fees they owe by multiplying the fee rate as published in FCC’s  annual Report and Order by their final revenue dollars, as reported by the  entities typically after FCC had already set the rate for the fiscal year. If,  in aggregate, the total final amount of revenue dollars in the industry was  significantly higher or lower than the estimate FCC used to set the fee  rate, FCC would collect more or less than it expected.
In fiscal year 2011, FCC automated the input of annual revenue data  provided by wireline providers to FCC so FCC would have actual instead  of estimated revenue information to use in setting regulatory fees for  wireline telephone companies. According to FCC officials, this change  should improve FCC’s ability to predict how much total revenue wireline  telephone entities will pay fees on, and therefore improve the accuracy of  the rate it sets for the wireline telephone fee category in terms of meeting  its target collection amount from that fee category. However, even so,  wireline telephone entities can revise their final revenue numbers for an  entire year after the revenue information has been submitted. According  to FCC officials, if some wireline telephone entities pay their regulatory  fees based on the revenue information submitted in one fiscal year, but  then revise their revenue numbers downward after the end of the fiscal  year, the filer may be entitled to a refund in the following year, which also  can affect FCC’s ability to collect exactly the targeted amount in the next  fiscal year. According to FCC officials, refunds can be sought on other  grounds, too, and such filings cannot be predicted by FCC. In addition,  according to FCC officials, FCC is an unsecured creditor when it comes  to a licensee filing for bankruptcy and FCC often does not receive unpaid  assessments from the bankruptcy court. Therefore, bankruptcies can also  affect FCC’s ability to collect its target amount.
section_title: Excess Regulatory Fees
paragraphs: Any regulatory fees collected above what FCC was directed to collect in  its annual appropriations are considered excess fees. As explained  earlier, since 2008, FCC’s annual appropriations have prohibited the use  of any excess fees from the current year or previous years without an  appropriation by Congress. Prior to fiscal year 2008, FCC’s annual  appropriations stated that any excess regulatory fees remained available  until expended. According to FCC officials, FCC obligated excess  regulatory fees in fiscal years 1996 to 1998 to fund programs to help FCC  with changes related to the year 2000 technology transition (sometimes  referred to as Y2K), and it obligated excess regulatory fees from 2001 to  2003 in order to meet critical physical security needs in fiscal year  2004. According to FCC officials, FCC has deposited all excess fee  collections into a separate account with the Department of Treasury. As  of fiscal year 2011, the account held approximately $66 million, which  represents about 2 percent of the $2.9 billion FCC was required to collect  in regulatory fees from fiscal year 2002 to 2010. FCC has collected on  average $6.7 million in excess fees annually from fiscal year 2006 to  2011, and so the account has steadily increased. FCC’s tendency to over  collect rather than under collect regulatory fees over the past 10 years  also suggests that as long as Congress does not provide for their  disposition, total excess funds will continue to increase. Congress has not  provided for the disposition of the funds.
According to FCC officials, FCC has reported to Congress and the  Department of Treasury on its excess regulatory fees. However, FCC has  not been fully transparent with regard to informing industry stakeholders  or others about these excess fees. FCC officials stated that FCC has kept  Congress informed of the excess fees during periodic briefings with  appropriators, and FCC provides an annual report to Treasury that  identifies the total amount of regulatory fees it has collected for the past  year, including the extent to which its collections vary from the amount  FCC is required to collect. FCC also published the amount of excess fees  collected in its fiscal year 2011 Annual Financial Report and its fiscal year  2013 budget estimate to Congress. However, FCC has not published the  amount of excess fees collected in its NPRMs or Reports and Orders. In  prior work, we have reported that the regulatory process is used to  provide information on fees to stakeholders and to solicit stakeholder  input. Therefore, when an agency has authority to adjust a fee through  the regulatory process, it should make substantive information about  recent and projected fee collections, among other things, available to the  public through notices in the Federal Register. FCC has included  projected fee collections for the current fiscal year in its NPRMs and  Reports and Orders, but it has not disclosed the actual amount collected  the prior year or disclosed any information on the total in excess fees  collected in previous years. As a result, some industry associations we  spoke with were aware that FCC had collected excess regulatory fees,  but most did not know that the amount of FCC’s excess collections had  grown to about $66 million.
section_title: Alternative Approaches Could Be Instructive as FCC Considers Reforms to Its Regulatory Fee Process
paragraphs: We identified alternative approaches that could be instructive as FCC  considers reforms to its regulatory fee process. These alternative  approaches include (1) ensuring that the division of fees among fee  categories is aligned with a reasonably current measure of the division of  regulatory activities among fee categories, and (2) taking specific steps to  promote transparency in the regulatory fee process. In addition, we  identified how these agencies are applying any excess fees.
We identified these alternative approaches through examining the  regulatory fee processes of five other regulatory fee-funded agencies in  the U.S. and Canada: the Nuclear Regulatory Commission (NRC),  Federal Energy Regulatory Commission (FERC), Farm Credit  Administration (FCA), Canadian Radio-television and  Telecommunications Commission (CRTC), and the Canadian Nuclear  Safety Commission (CNSC). Because these agencies perform regulatory  functions and recover many, if not all, of their costs through annual fees  paid by regulated entities, we believe their processes may be instructive  to FCC and Congress in considering reforms to FCC’s current regulatory  fee process. In addition, while four of the agencies regulate different  industries, CRTC regulates some of the same industries as FCC,  including, according to CRTC officials, the telecommunications industry— which encompasses wireline and wireless telephone providers—and the  broadcast industry—which encompasses radio, television, and cable  distribution operators. Each of the five agencies, like FCC, has different,  specific statutory authority authorizing its collection of annual regulatory  fees to help fund the agency or to reimburse the Department of Treasury  for its annual appropriation. FERC, for example, which has regulatory  authority over the hydropower, oil pipeline, natural gas, and electric  industries, derives its fee-collecting authorities from the Federal Power  Act for the hydropower industry and the Omnibus Budget Reconciliation  Act of 1986 for the oil, natural gas and electricity industries.  Nevertheless, we believe approaches used by these agencies may be  instructive for FCC as it considers reforms to its regulatory fee process.  For more information on the criteria used to select these agencies, see  appendix I.
subsections: section_title: Ensuring Data Used to Align Fees with Regulatory Activities Is Reasonably Current
paragraphs: As we described previously, FCC has acknowledged the need to revisit  its division of fees among fee categories to reflect regulatory and staffing  changes that have occurred since 1998. However, it has not yet done so.  We found that NRC, CRTC, and FERC divide fees among fee categories  based on current or recent data by industry sector. The other two  agencies we met with either have only one fee category (FCA) or do not  collect most fees through a rate assessed to a category of fee payors  (CNSC).
According to officials at NRC, CRTC, and FERC, each agency aligns its  assessment of annual fees by industry sector with an annually or  biennially updated analysis of costs by industry sector. Officials at NRC  specifically stated that keeping the agency’s fees aligned with annually or  biennially updated costs was essential to ensuring that the fees were fair  and equitable. If one industry sector gets more in services or regulatory  activities from NRC in one year compared to the previous year, then that  sector will pay a higher proportion of the total regulatory fees. NRC  officials stated that they consider it part of NRC’s mission as a regulatory  agency to ensure that the link between costs and fees is apparent, and  officials at both NRC and CRTC told us that it is important that the  regulated industries understand the rationale for the assessed fees. As  stated previously, the Communications Act identifies FTEs as FCC’s  basis for deriving regulatory fees. Nevertheless, the methods these three  agencies use to keep their alignment of costs and fees updated may be  instructive to FCC.
According to NRC officials, NRC updates its cost analysis for its larger fee  categories annually and its smaller fee categories biennially. The officials  added that NRC’s regulatory fees are based on the proportional cost of  direct and indirect services provided to an industry sector, as determined  by NRC’s program offices, compared to the total fee-funded budget—and  there is a direct link between the resources planned in the budget and the  distribution of regulatory fees. For example, NRC officials stated that  because the nuclear reactor category accounted for approximately 88  percent of the NRC fee-funded budget in fiscal year 2010, the nuclear  reactor category was responsible for approximately 88 percent of the fees  collected for fiscal year 2010. NRC officials told us that because they  analyze costs for NRC’s larger fee categories annually and revise their  division of fees accordingly by industry sector, at times an industry  sector’s proportion of fees has risen or fallen compared to the previous  year. However, NRC officials stated that the industries they regulate are  generally aware of what work NRC plans to do related to each industry  sector—in part because NRC informs industry of its plans during its  budget process.
CRTC also links the division of its fees by fee category to its costs for  regulating each fee category, and CRTC updates its cost analysis and its  fee assessment annually. One element of CRTC’s process that may be  instructive to FCC in considering reforms is that while according to CRTC  officials, CRTC regulates many of the same converging industries in  Canada that FCC regulates in the United States, CRTC has only two fee  categories for assessing regulatory fees: telecommunications and  broadcast. Like FCC, CRTC regulates wireline telephone, wireless  telephone, direct broadcast satellite and cable television operators,  broadcast television, and radio. However, CRTC has one broadcast fee  category that includes radio stations, television stations, and cable and  direct broadcast satellite television operators. All pay the same rate on  the same basis—the licensee’s fee revenues for the most recently  completed year. In contrast, FCC has 62 fee categories for the same  broadcasting services, and different bases for different fee categories,  including, among others, a flat fee for each fee category of broadcast  television and radio station, a per-subscriber fee rate for cable television,  and a per-satellite fee rate for direct broadcasting satellite television  operators.
In another example, CRTC’s telecommunications fee category  encompasses wireless telephone services and wireline telephone  services. The rate for the telecommunications fee category is set on the  same basis used to set the rate for the broadcast industry—the licensee’s  fee revenues for the most recently completed year. In contrast, FCC has  separate fee categories for wireless telephone services and wireline  telephone services—and the two fee categories pay different rates set on  different bases, with the wireless telephone rate set on a per-subscriber  basis and the wireline telephone rate set on a per-revenue-dollar basis.
CRTC officials told us that having two fee categories—both with fee rates  determined on the basis of revenue—makes it relatively easy for CRTC to  align costs to a fee category, even given the increasing convergence of  industry and the cross-cutting nature of CRTC’s work. CRTC officials told  us they track CRTC’s direct costs according to these fee categories in  CRTC’s activity-based cost system annually. Because most mission- related staff are assigned to work centers aligned with either the  broadcasting or the telecommunications industries, CRTC officials said it  is administratively easy to track costs according to these fee categories.  For staff working on cross-cutting issues related to both categories,  management estimates how much time each staff has spent on each of  the two fee categories. CRTC then divides the total amount in fees it  must collect between the two fee categories based on its costs  associated with each fee category. Indirect costs for internal services  provided to the entire agency—such as, among other things, human  resources, legal services, and accounting—are divided among the two  fee categories consistent with the distribution of direct costs.
FERC also tracks its costs by industry sector and fee category annually  and then assesses fees in alignment with its costs. FERC officials told us  that FERC’s time and attendance system tracks the time staff spends  directly on each fee category through activity codes aligned with particular  fee categories. This assessment of time spent on each industry forms the  basis of the assessment of fees. Similar to CRTC, indirect costs are  assessed among the fee categories based on the assessment of direct  costs incurred by industry sector.
section_title: Making the Assessment Process Transparent
paragraphs: NRC takes specific steps that facilitate industry and public understanding  of how the agency distributes and assesses regulatory fees that go  beyond FCC’s provision of information on this topic. NRC officials stated  that NRC’s chief financial officer has consistently emphasized the  importance of transparency in setting fees. According to NRC officials,  transparency is important because the fees impact NRC’s stakeholders,  and therefore stakeholders should be able to understand how the fees  are derived. While both FCC and NRC publish NPRMs and Final Orders  regarding each year’s fees, NRC also publishes the workpapers it has  used to determine the fees and rates in its NPRMs and Final Orders to  further promote transparency. These workpapers contain detailed cost  data that form NRC’s basis for setting its fees for each industry sector.  NRC’s website has a link to an electronic docket that contains its  regulatory-fee-related NPRM, Final Order, and workpapers, such that one  can see how NRC went from its detailed cost data to its final fee-setting  rule. As described previously, in recent years, FCC has not included this  level of detail in its NPRMs and Reports and Orders related to its  regulatory fees. Moreover, in addition to providing these supporting  workpapers on its website, NRC staff told us they also meet with industry  stakeholders periodically to help ensure the stakeholders understand the  assessment process and how the fee rates are determined.
section_title: Handling of Excess Fees
paragraphs: As mentioned earlier, FCC may not obligate any excess fees it receives  without an appropriation from Congress. In contrast, officials at all five  agencies we met with told us their agency has a form of annual  adjustment or “true-up” mechanism such that any excess fees collected  are either applied as an adjustment to the next year’s fees or are  refunded. Four of the five agencies apply any excess fees collected  toward the next year’s fee assessment, while one agency issues a refund.  For example, according to NRC’s fiscal year 2011 Annual Financial  Report, NRC applies collections that exceed its budget authority to offset  subsequent years’ appropriations. According to FERC officials, at year- end, FERC calculates a required subsequent year adjustment based on  the difference between the amounts assessed and actual costs. CRTC  officials told us that they make an adjustment to the subsequent year’s  assessments based on the difference between the fees collected—based  on estimated costs—and annual expenditures. FCA officials stated that  FCA also makes adjustments for overpayments in the current year to fees  owed the following year. Lastly, CNSC officials told us they refund fees  collected in excess of actual costs. As a result of these procedures, the  fees paid to these five agencies are ultimately used to fund the regulatory  agency or are refunded.
section_title: Conclusions
paragraphs: The Communications Act states that FCC is to derive regulatory fees from  the number of FTEs in certain bureaus performing regulatory activities,  but the act does not specifically state how frequently FCC must  reexamine its FTEs to assure its regulatory fees are aligned with FCC’s  current work priorities. FCC has relied on this lack of clarity to justify  continuing to use 1998 data as the basis for its assessment of regulatory  fees—in spite of the vast changes to the telecommunications industry that  have occurred, including significant convergence of technologies and  changes in the nature of the industries that FCC regulates. Federal user  fee guidance, accounting standards, and the practices of other agencies  we met with all stress the importance of using timely, regularly updated  data to guide decisions, with federal user fee guidance directing agencies  to review user fees biennially to assure that charges are adjusted to  reflect changes that have occurred. In addition, although FCC has made  incremental changes to the fee schedule first established in the  Communications Act and implemented by FCC in fiscal year 1994, FCC  has not considered more holistic changes to the way regulatory fees are  assessed. In part, FCC’s difficulties in keeping its process current may be  because its statutory framework is based on a telecommunications  environment that no longer exists. The large number of fee categories— 86 in fiscal year 2011—may have contributed to FCC’s difficulties in  keeping the division of fees aligned with the current regulatory activities  on which it spends its time. Furthermore, FCC’s lack of transparency in  disclosing its methodology for dividing regulatory fees among fee  categories and the different methodologies FCC uses to calculate fee  rates for different industries have made it difficult for stakeholders to  understand and comment on FCC’s decisions related to its regulatory fee  process.
On July 17, 2012, FCC released an NPRM on regulatory fee reform,  which, as described in our agency comments section, contains proposals  that respond to many of the concerns raised in this report. The processes  of other regulatory fee-funded agencies, both in the United States and  internationally, may be instructive for FCC as it considers such issues as  re-aligning its division of regulatory fees and increasing the transparency  of the process. We acknowledge the inherent difficulties in reforming the  process. Because of the zero-sum nature of FCC’s regulatory fees, any  significant changes to FCC’s assessment of regulatory fees among  industry sectors and fee categories would most likely result in fee  increases for some sectors and fee decreases for other sectors. Not only  is this likely to be controversial to some industry stakeholders, but this  change—and any analysis required to better align regulatory fees to  FCC’s division of FTEs by fee category—is likely to be time consuming  and require some FCC resources, if done comprehensively. Some  potential changes, such as changes to the bases on which FCC assesses  regulatory fees—could add new administrative burdens on FCC or  industry stakeholders. The likely effects of changes to its current fee  assessment will need to be carefully analyzed by FCC.  In releasing the  regulatory fee reform NPRM, FCC has taken an important first step in this  challenging reform effort, but significant analysis and decisions remain to  be made by FCC.
Lastly, over time, FCC has collected approximately 2 percent more on  average than is required in its annual appropriations acts. Because recent  annual appropriations do not permit FCC to use any of these excess fees  without congressional action, they currently have grown to $66 million  and, absent any change in FCC’s statutory authority and method of  collecting fees, are likely to continue to increase. The decision of how to  dispose of these excess regulatory fees as well as how to handle any  future excess collections is a policy choice for Congress to make.
section_title: Matter for Congressional Consideration
paragraphs: Congress should consider whether FCC’s excess fees (approximately  $66 million through fiscal year 2011) should be appropriated for FCC’s  use, or, if not, what the disposition of these funds should be, and whether  to change FCC’s annual appropriations language to permit reconciliation  of excess collections or to govern FCC’s handling of any future excess  collections.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Chairman of the FCC, as part of FCC’s effort to  reform its regulatory fee process, take the following three actions:
Determine whether and how the current fee schedule should be  revised—including an overall analysis of the appropriate number of  categories and bases for calculating rates—to reflect the current  telecommunications industry and FCC’s regulatory activities, and in  consideration of the processes of other regulatory fee-funded  agencies that may be instructive, including, if appropriate, proposing  to Congress any needed changes to its current statutory authority.
Perform an updated FCC FTE analysis by fee category and establish  a process to assure that the FTE analysis be performed at least  biennially, consistent with federal guidance on user fees.
Increase the transparency of FCC’s regulatory fee process by  describing in each future year’s NPRM and subsequent report, in  sufficient detail for stakeholders to understand, the methodology and  analysis used to divide fees among fee categories, including the year  any FTE data used was collected, any additional information needed  to explain the effect of other adjustments, and the amount of excess  fees collected.
section_title: Agency Comments
paragraphs: FCC provided written comments on a draft of this report by letter dated  July 17, 2012.  These comments are summarized below and are reprinted  in appendix II.  FCC agreed with our recommendations and stated that an  NPRM on regulatory fee reform, released on July 17, 2012, addressed  them.  FCC stated that the NPRM sets forth three goals to guide FCC in  its reform initiative: fairness, administrability, and sustainability.  FCC  stated that to achieve these goals, the Commission has proposed a  series of fundamental changes to its regulatory fee program that include,  but are not limited to, proposals contained in our recommendations.  For  example, FCC stated that, consistent with our recommendations, the  NPRM seeks comment on (1) using updated fiscal year 2012 FTE data to  calculate regulatory fees, (2) whether reducing the number of regulatory  fee categories would be advisable, and (3) whether the different bases on  which regulatory fees are currently calculated should be reduced or made  uniform among all services.  FCC stated that, consistent with our  recommendation to consider the processes of other regulatory fee-funded  agencies, it would place a copy of our final report in the record of the  rulemaking so that interested parties could comment on our  recommendations and analyses.  Regarding our recommendation that  FCC review its division of FTEs at least biennially, FCC stated that its  NPRM seeks comment on the frequency with which FCC should revisit its  division of FTEs, such as annually.  Furthermore, FCC stated that it would  implement our recommendation to increase the transparency of its  rulemaking process in its next annual regulatory fee proceeding, for fiscal  year 2013.  Finally, regarding our matter for congressional consideration  related to excess fees, FCC stated that should Congress decide to  examine these or any other issues regarding regulatory fees, FCC would  provide any information Congress may request.  We recognize that the  proposals contained in FCC’s NPRM are responsive to our  recommendations.  In light of FCC’s lack of action after its 2008 FNPRM  on regulatory fee reform, it remains critical that FCC continue to move  forward on analyzing its proposals and determining how best to update its  regulatory fee process.
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 report.  At that time, we will send copies to the Chairman of  FCC and other interested parties.  In addition, the report will be available  at no charge on the GAO website at http://www.gao.gov.
If you or your staffs 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. GAO staff who made major contributions to  this report are listed in appendix III.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: In response to your request to review FCC’s regulatory fee process, we  examined (1) FCC’s process for assessing regulatory fees among  industry sectors and the results of this process, (2) FCC’s regulatory fee  collections over the past 10 years compared to the amount it was directed  to collect by Congress, and (3) alternative approaches to assessing and  collecting regulatory fees that could be instructive for FCC as it considers  reforms to its process.
In examining FCC’s regulatory fee process, we reviewed relevant federal  statutes, federal appropriations acts, congressional reports and hearing  transcripts, FCC documents, and GAO reports. We spoke to  stakeholders, including officials at FCC, industry trade associations, and  fee-paying companies. Specifically, among others, we reviewed the  following documents:
Statute establishing FCC’s regulatory fee-collecting authority (Section  9 of the Communications Act of 1934)
FCC’s appropriations acts, fiscal years 1994 to 2011
Conference Report to Accompany the Federal Communications  Commission Authorization Act of 1991, Sept. 17, 1991
Hearing transcript, House Energy and Commerce Subcommittee on  Communications and Technology Hearing on President Obama’s  Fiscal 2013 Budget Proposal for the Federal Communications  Commission, February 16, 2012
FCC Notices of Proposed Rulemakings, Further Notice of Proposed  Rulemaking, and Reports and Orders related to FCC’s collection of  regulatory fees, fiscal years 1994 through 2012
FCC budget justifications, fiscal years 2005 to 2013
FCC internal documentation of its regulatory fee methodology
FCC internal documentation related to its core financial system,
FCC strategic plans, 2009 to 2014 and 2012 to 2016
FCC annual financial reports, fiscal years 2010 and 2011
Prior GAO work on FCC, regulatory agencies, and user fees
Federal guidance on user fees and cost accounting, including the  Office of Management and Budget’s Circular No. A-25 and the  Statement of Federal Financial Accounting Standards 4.
We also spoke with stakeholders from the following entities:
FCC—Office of the Managing Director, Enforcement Bureau,  International Bureau, Media Bureau, Wireless Telecommunications  Bureau, Wireline Competition Bureau
Two former FCC commissioners  Industry associations—American Association of Paging Carriers,  CTIA-The Wireless Association, Independent Telephone &  Telecommunications Alliance, National Association of Broadcasters,  National Cable and Telecommunications Association, US Telecom
Fee-paying Companies—Commonwealth Broadcasting, Critical Alert  Systems, DIRECTV, Gannett Company Inc./Multimedia Holdings  Corp., Intelsat, KRIS-TV, Level 3 Communications, Mainline  Broadcasting, Midcontinent Media, People’s Telco, Quincy  Newspapers (regarding its TV and radio interests), Southern Utah  Telephone Company, Windstream Communications, and WUBU-FM  To select the fee-paying companies (listed above) to interview about their  perspectives on FCC’s regulatory fee process, we began with a list of  companies provided by FCC. Our criteria for selecting companies from  the FCC list were as follows:  companies from each industry sector (wireless, wireline, broadcasting,  cable, international);  companies from a variety of fee codes within the industry sectors; and an emphasis on small companies, as they may be less well  represented in associations, less likely to submit public comments to  regulatory fee rulemakings, and regulatory fees may impact them  more.
Within each industry sector and fee category, we selected companies  using these criteria and a few additional constraints. For example, if an  FM radio station in a small market appeared to be owned by a company  that also owned a station in a large market, then we treated it as large.  Also, in most cases, companies were selected based on the fee  categories in which they conducted their primary business, not on  secondary business they might also have conducted.
To understand FCC’s regulatory fee collections over the past 10 years  compared to the amount it was directed to collect by Congress, we (1)  met with officials to discuss FCC fee collection process and timeline and  (2) analyzed FCC regulatory fee collection data from FCC’s internal  financial system, Genesis, by FCC’s “payment type code” from fiscal year  2002 to fiscal year 2011. We assessed the reliability of the data through  reviewing documentation on Genesis, and through interviews  supplemented with questionnaires to knowledgeable agency officials on  Genesis and related internal controls. We determined that the data were  sufficiently reliable for determining FCC’s total regulatory fee collections,  including by industry sector, for fiscal years 2002 through 2011, and for  determining the amount of late payments in each of those years. We  compared this fee collection data with the amount Congress appropriated  to FCC for each respective year. FCC’s payment type codes are codes  FCC assigns to identify the fee category for which a regulatory fee  payment is associated with. FCC officials also provided us with a cross- reference that associated payment type codes with the main industry  sectors used in our review (i.e., Broadcast, Cable, Wireline, Wireless, and  International.) Subsequently, we analyzed the fee payment data by  industry sector to understand the extent, if any, to which excess fees  collected were associated with a particular industry sector and to analyze  the influence of late payments on the total amount collected. We also  spoke with a budgeting and forecasting expert, who provided background  information and context related to FCC’s use of estimates and forecasts  in setting regulatory fees.
To identify alternative approaches to FCC’s regulatory fee process that  could be instructive as FCC considers reforms to its current process, we  reviewed the regulatory fee processes of several foreign and domestic  federal agencies. In selecting comparative agencies, we narrowed our  scope to those agencies that were similar enough to FCC in mission and  fee process such that possibly instructive alternatives could be identified.  FCC is an independent agency that regulates interstate and international  communications by radio, television, wire, satellite and cable, and that  assesses annual regulatory fees to offset its entire annual appropriation  from Congress. We therefore selected independent regulatory  commissions that recover the majority or all of their costs through annual  fees assessed on regulated entities, including, in the U.S., the (1) Nuclear  Regulatory Commission, (2) Federal Energy Regulatory Commission, and  (3) The Farm Credit Administration. In order to include an agency that  regulates industries that are similar to those regulated by FCC, we also  included (4) the Canadian Radio-television and Telecommunications  Commission (CRTC). Lastly, after receiving a recommendation from an  official at CRTC, we included (5) the Canadian Nuclear Safety  Commission, the Nuclear Regulatory Commission’s Canadian  counterpart.
We conducted this performance audit from May 2011 to August 2012 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: Comments from the Federal Communications Commission
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Tammy Conquest (Assistant Director),  Juan P. Avila, Russell Burnett, Patrick Dudley, Fred Evans, Colin Fallon,  Bob Homan, Bert Japikse, Jacqueline M. Nowicki, Joshua Ormond, Steve  Rabinowitz, and Alwynne Wilbur made key contributions to this report.