Telecommunications: FCC Has Reformed the High-Cost Program, but Oversight and Management Could be Improved
Released: 2012-07-25T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: The high-cost program within the Universal Service Fund (USF) provides subsidies to telecommunications carriers that serve rural and other remote areas with high costs of providing telephone service. The annual program cost has grown from $2.6 billion in 2001 to over $4 billion in 2011, primarily funded through fees added to consumers’ phone bills. The program is managed by the Federal Communications Commission (FCC), which noted that providing universal access to broadband is “the universal service challenge of our time.” Accordingly, FCC made changes to the program to make funds available to support both telephone and broadband. GAO previously reported that using USF monies for broadband could cause the size of the fund to greatly expand unless FCC improved its management and oversight to ensure the program’s cost-effectiveness. This requested report examines FCC’s (1) plans for repurposing the high-cost program for broadband, and (2) plans to address previously identified management challenges as it broadens the program’s scope. GAO reviewed and analyzed pertinent FCC orders, associated stakeholder comments, and reports related to USF and interviewed federal and industry stakeholders, as well as economists and experts.

section_title: What GAO Found
paragraphs: Under the USF Transformation Order, FCC adopted new rules to fundamentally change the high-cost program by extending the program to support broadband capable networks. For example, FCC established a $4.5-billion annual program budget for the next 6 years, created new funds—called the Connect America Fund and the Mobility Fund—that will support broadband deployment, and established public interest obligations for the carriers as a condition of receiving funds. Specifically, FCC will require carriers to offer broadband services in their supported service areas, meet certain broadband performance requirements, and report regularly on associated broadband performance measures. FCC also changed its method for distributing funds to carriers to address some of the recognized inefficiencies with the program. According to FCC, these changes will allow it to reduce high-cost support for carriers providing only voice services and make funds available to carriers to offer both voice and broadband services.

FCC has taken several steps to address previously identified oversight and management challenges that GAO and the Office of Management and Budget (OMB) have raised in the last 7 years, but issues remain. Management challenges identified by GAO included a lack of performance goals and measures for the program and weak internal controls, while OMB criticized FCC’s inability to base funding decisions on measurable benefits. In response, FCC established performance goals and measures for the high-cost program and improved internal control mechanisms over the fund. While these are noteworthy actions, GAO identified gaps in FCC’s plans to better oversee the program and make it more effective and efficient. In particular, FCC has not addressed its inability to determine the effect of the fund and lacks a specific data-analysis plan for carrier data it will collect. Such analysis would enable FCC to adjust the size of the Connect America Fund based on data-driven evaluation and would allow Congress and FCC to make better informed decisions about the program’s future and how program efficiency could be improved.

GAO also found that FCC lacks a mechanism to link carrier rates and revenues with support payments. A requirement in statute is for rates for telecommunications services to be reasonably comparable in rural and urban areas, but FCC has noted that some rural carriers are offering basic local rates for telephone services that are lower than the average basic rate paid by urban consumers. FCC has stated that it is not equitable for all consumers to subsidize the cost of service for some consumers who pay local service rates that are significantly lower than the national average and has therefore instituted an incentive mechanism for carriers to increase artificially low consumer rates. Although FCC would like to prevent consumers from subsidizing carriers that offer service at artificially low rates, its incentive mechanism to raise rural rates will not reduce the financial burden placed on all consumers as there is currently no connection between the support payments a carrier receives and the carrier’s rates and revenues. The Federal-State Joint Board on Universal Service recommended that FCC consider a carrier’s revenues when calculating its need for support payments, but in the past, FCC declined to implement this recommendation. FCC is developing a new model to calculate carrier support, but has not stated what factors will be included.

section_title: What GAO Recommends
paragraphs: FCC should (1) establish a specific data-analysis plan for carrier data to determine program effectiveness, and (2) consult with the Joint Board as it examines the factors for calculating carrier support payments. FCC concurred with the recommendations and provided technical comments.

section_title: Letter
paragraphs: Federal policy has long called for making affordable residential telephone  service available to the greatest possible number of Americans—a policy  known as “universal service.” The nation’s Universal Service Fund (USF),  managed by the Federal Communications Commission (FCC), includes  four programs that subsidize telecommunications carriers that provide  telephone and other communications services. Since 1998, USF has  distributed about $81.7 billion to carriers in all 50 states, the District of  Columbia, and all U.S. territories. The USF programs are funded through  mandatory payments from companies providing telecommunications  services—payments usually passed along to consumers as a line item  fee on their telephone bill. The USF program with the largest amount of  annual expenditures, the high-cost program, provides subsidies to  telecommunications carriers that serve rural, remote, and other areas   By providing  where the costs of providing telephone service are high.support to carriers, the high-cost program allows the carriers to charge  lower telephone rates than otherwise would be available to customers in  those areas. In the past few years, significant growth of the fund has  raised concerns about what the program is accomplishing, whether the  fund can be sustained over the long term, and the cost burden it imposes  on consumers. Much of the increase in USF has been the result of growth  in the high-cost program. In particular, the annual amount of money  disbursed by the high-cost program has increased 54 percent in the last  decade, growing from $2.6 billion in 2001 to over $4 billion in 2011.

While the high-cost program has traditionally supported telephone  service, FCC adopted new program rules to enable program funds to  support both telephone and broadband deployment. Broadband service is  increasingly viewed as a critical component of the nation’s physical  infrastructure and a key driver of economic growth. Both the current and  former Presidents and Congress have recognized that important policy  goals are to ensure the universal availability of infrastructure necessary to  provide broadband service and the ability of all citizens to subscribe to it.  In early 2009, Congress directed FCC to develop a broadband plan to  ensure that every American has access to broadband capability.  Congress required that this plan include a detailed strategy for achieving  affordability and maximizing use of broadband. In March 2010, an FCC  task force issued the National Broadband Plan, which recommended  reforming USF so that it could support both telephone and broadband  service. The National Broadband Plan noted that 14 million Americans  either have inadequate or no access to residential fixed broadband, and  FCC characterized providing universal access to broadband as “the  universal service challenge of our time.” As such, FCC has made  changes in the distribution and use of the high-cost program funds to  make them available to support both telephone service and broadband  deployment. These changes are outlined in an order released in  November 2011, in which FCC said it “comprehensively reforms and  modernizes” the universal service system to ensure that affordable voice  and broadband service are available throughout the nation. However,  there are several legal challenges to FCC’s authority to use USF monies  for deploying broadband-capable networks.

We previously reported that using USF monies for broadband deployment  could cause the size of the fund to greatly expand unless policymakers  reexamined its purpose, design, and management, and unless FCC  improved its management and oversight processes to ensure the  program’s cost-effectiveness. In prior reports on FCC’s management of  USF, we noted long-standing weaknesses, including that FCC had  neither undertaken a data-driven approach to overseeing USF nor  established performance goals and measures for its programs.  Specifically related to the high-cost program, we reported in 2008 that the  significant program growth had raised concerns about what the program  was accomplishing, whether it had clear objectives, and whether it had  effective controls over expenditures.

In response to your request to assess FCC’s efforts to repurpose USF for  broadband deployment, we examined (1) FCC’s plans for repurposing the  USF high-cost program for broadband services and (2) how FCC is  planning to address previously identified oversight and management  challenges as it broadens the program’s scope.

To address these objectives, we reviewed and analyzed FCC’s 2011 USF  Transformation Order and associated stakeholder comments and  reviewed our past reports and academic literature related to USF. We  also interviewed officials from FCC, the Universal Service Administrative  Company (USAC), the National Exchange Carrier Association (NECA),  and the National Association of State Utility Consumer Advocates  (NASUCA). We met with associations representing the  telecommunications industry and state regulatory commissions, and  economists from academia and the telecommunications industry  recognized for their thorough knowledge of universal service. We  identified experts and industry stakeholders based on prior published  literature and other stakeholders’ recommendations. We limited the scope  of our review to the USF high-cost program because in the USF  Transformation Order, FCC focused on repurposing the high-cost  program to support broadband. We did not review FCC’s reform efforts  related to intercarrier compensation. Further details of our scope and  methodology are provided in appendix I.

We conducted this performance audit from September 2011 to July 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.
subsections: section_title: Background
paragraphs: The Communications Act of 1934 first established the nation’s  telecommunications policy, including making communications services  available “so far as possible, to all the people of the United States.” Since  the cost of providing telephone service in rural areas is generally higher  than the cost of providing service in central cities of metropolitan areas,  universal service policy has traditionally targeted financial support to rural  and other high-cost areas. In the Telecommunications Act of 1996 (the  1996 Act), Congress specified that consumers in “rural, insular, and high- cost areas” should have access to telecommunication rates and services  that are “reasonably comparable” to consumers in urban areas. The  1996 Act established a Federal-State Joint Board on Universal Service  (Joint Board), which is composed of three FCC commissioners, four state  regulatory commissioners, and a consumer advocate. The Joint Board  makes recommendations to FCC on implementing the universal service  related provisions of the 1996 Act. The 1996 Act also altered the federal  mechanism for funding universal service by requiring telecommunications  carriers and other entities providing interstate telecommunications service  to contribute to USF, unless exempted by FCC. The carriers generally  pass these costs on to customers, sometimes in the form of a line item on  customer’s telephone bills. According to FCC, the average cost to each  household in America is about $2.73 per month. The contributions are  deposited into the USF and distributed to the telecommunications carriers  that provide service.

USF provides financial support (i.e., subsidies) through four different  programs, each targeting a particular group of telecommunications users  (see table 1). In 2011, support for the four programs totaled $8 billion, and  the high-cost program accounted for the largest amount of support—$4  billion, or 50 percent of USF support. The high-cost program directly and  indirectly supports basic telephone (i.e., fixed wireline), broadband, and  wireless telephone (i.e., mobile) services. To make these services  universally available, the high-cost program offers support to both wireline  and wireless carriers operating in high-cost areas—generally rural—to  offset costs, thereby allowing these carriers to provide rates and services  that are comparable to the rates and services that consumers in low cost  areas—generally urban—receive. Consequently, while urban consumers pay the full cost of their service, many rural consumers  receive services that are subsidized by the high-cost fund.

The USF support a carrier can receive depends on various factors,  including its status as either the incumbent or a competitor, and the  number of lines it claims in its service territory. Incumbent carriers are  telephone carriers for a given service area that were in existence when  Congress passed the 1996 Act and were members of NECA. These  incumbent carriers are further classified as either “rural”—generally small  carriers serving primarily rural areas—or “nonrural”—generally large  carriers serving both rural and urban areas. Many small rural carriers are  subject to rate-of-return regulation, while nonrural carriers are usually  larger and subject to price-cap regulations and provide service to  approximately 95 percent of U.S. households, according to FCC  officials.

Federal and state governments play a role in implementing the federal  high-cost program, as do not-for-profit corporations and associations.  FCC has overall responsibility for the federal high-cost program, including  making and interpreting policy, overseeing program operations, and  ensuring compliance with its rules. However, FCC delegated to USAC  responsibility to administer the day-to-day operations of the high-cost  program. State regulatory commissions hold the primary responsibility to  determine carrier eligibility for program participation (i.e., states designate  eligibility status of carriers) 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.

The 2010 National Broadband Plan provided a road map for FCC to  reform the high-cost program, among other USF programs, to ensure that  all Americans have access to broadband-capable networks. The National  Broadband Plan concluded that millions of Americans do not have access  to broadband infrastructure at the target of 4 megabits per second (Mbps)  download and 1 Mbps upload. The plan recommended, among other  things, creating a Connect America Fund to address broadband  availability gaps in unserved areas. The plan also recommended creating  a Mobility Fund to provide support for deployment of a wireless network.  As we previously reported, implementing the plan’s recommendations  and ensuring universal broadband availability will be challenging, and it  remains to be seen whether and how effectively FCC will be able to  address these challenges and implement the plan’s recommendations.

section_title: FCC Aims to Improve Efficiency and Provide Support for Broadband through Changes to the High- Cost Program
subsections: section_title: FCC Adopted New Rules to Support Broadband
paragraphs: FCC adopted new rules to fundamentally change the high-cost program  by extending the program to support broadband capable networks.  According to FCC, the new rules will not adversely affect traditional voice  services; rather the changes will ensure that affordable voice and  broadband services are available to all Americans by 2017. The new  rules also addressed multiple recommendations from the National  Broadband Plan. See appendix III for the status of FCC’s efforts related to  those recommendations and a timeline for implementing the new rules. In  adopting the USF Transformation Order, FCC said it would control the  size of the fund as it transitions to support broadband and require  accountability from carriers receiving support to ensure that public  investments are used wisely to deliver intended results. The order  outlines the following rules intended to improve the high-cost program  and enable it to support broadband capable networks:  Establishing a program budget for the first time. FCC set a budget of  $4.5 billion annually over the next 6 years by taking a number of actions,  including placing a cap on total per-line support, freezing certain support  for service providers at current levels, eliminating or phasing down certain  types of support, and setting caps for rate-of-return carriers’ capital and  operating expenses. FCC also established an automatic review trigger if  the program budget is threatened to be exceeded. Specifically, the USF  Transformation Order states that if program demand exceeds the  annualized $4.5 billion budget over any consecutive 4 quarters once fund  reserves are exhausted, FCC will initiate a process to bring demand back  under budget. According to FCC, the $4.5 billion, which was set at the  2011 estimated level of support, will provide a predictable funding level  for carriers and protect consumers and businesses that ultimately pay for  the fund as FCC expands the program to support broadband. In the  past, the high-cost program was not constrained by a specified level of  funding and we and other stakeholders have previously raised concerns  about the growing size of the program. The National Broadband Plan  recommended that FCC try to keep the overall size of the fund close to its  current size (in 2010 dollars) and FCC stated that the budget will help to  ensure that consumers will not pay more in contributions given the new  program rules.

Creating the Connect America Fund. FCC created the Connect  America Fund, which will ultimately replace the high-cost fund, to make  both wireline and wireless broadband available in unserved areas. Within  the Connect America Fund, FCC established support for mobile voice and  broadband services, recognizing that promoting universal availability of  mobile services is a vital component of universal service. Specifically,  FCC established the Mobility Fund, which is the first universal service  mechanism dedicated to ensuring availability of mobile voice and  broadband services in areas where service is currently not available. In  2012, FCC dedicated $300 million (one-time) for extending wireless  coverage in unserved areas and $500 million annually for ongoing  support for mobile voice and broadband service.

Establishing public interest obligations for all eligible carriers.  Previously, carriers were required to meet state public interest obligations  and limited federal duties as eligible telecommunications carriers to  receive USF support payments; however, carriers were not required to  meet any specific performance standards in exchange for receiving the  funds. Under the USF Transformation Order, FCC requires all carriers  to offer broadband services in their supported service areas, meet certain  broadband performance requirements, and report regularly on associated  broadband performance measures. For instance, one of the broadband  performance requirements is for carriers providing service to fixed  locations to offer actual download speeds of at least 4 Mbps and upload  speeds of at least 1 Mbps to broadband subscribers.

section_title: FCC Is Implementing Changes to Its Funding Distribution to Improve Program Efficiency
paragraphs: In the USF Transformation Order, FCC changed its method for  distributing funds to carriers to address some of the recognized program  inefficiencies. According to FCC, these changes will allow it to reduce  high-cost support for carriers providing only voice services and make  funds available to carriers for the deployment of both voice and  broadband-capable networks. Since many of these changes have yet to  be implemented, it is too early to assess their effectiveness. In the order,  FCC took the following actions:  Eliminated the identical support rule. To encourage competition  among carriers in rural areas, in 1997 FCC enacted the identical support  rule. At that time, FCC concluded that it would be inconsistent with the  statute and the competitive goals of the 1996 Act to exclude any  providers (regardless of the technology used for providing voice service)  from receiving universal service support and therefore determined that  universal service support should be available to all carriers that met the  eligibility requirements, including competitive carriers that offered service  via satellite or other wireless technology. Under this model, incumbent  carriers received support based on their costs of providing service in an  area or from FCC’s cost model and competitive carriers received the  same amount of support per line served as the incumbent, regardless of  whether the competitor needed that same amount of support to provide  service. FCC assumed that high-cost support would be given to the most  efficient and competitive carriers providing fixed, wireline telephone  service (not mobile wireless providers), as they attracted customers from  the incumbent carriers in a competitive marketplace. FCC anticipated that  as the number of subscribers taking service from a more efficient  competitor increased, the number of subscribers taking service from the  incumbent would decrease, thereby decreasing the amount of support  FCC paid to the incumbent providers. However, the vast majority of  support payments for competitors went to wireless carriers and rather  than providing a complete substitute for traditional wireline service,  wireless competitors largely provided mobile voice service to customers  who also had wireline service. Thus, FCC ended up paying support for  both incumbents and competitors serving the same area, which caused  disbursements from the fund to increase dramatically.

In the USF Transformation Order, FCC acknowledged that the existing  system of providing high-cost support to competitive carriers that were  serving the same customers as the incumbent providers was inefficient  and the identical support rule failed to efficiently target support payments  to where they were most needed. By eliminating the identical support  rule, FCC can stop paying competitive carriers providing voice services  and make those funds available for fixed and mobile voice and broadband  services in targeted areas, including areas unserved by broadband.  Several of the stakeholders and economists we contacted supported  FCC’s decision to eliminate the identical support rule, noting that it was  inefficient and ineffective. Starting January 1, 2012, FCC froze support for  each competitive carrier at the 2011 monthly baseline amount. Beginning  July 1, 2012, FCC stated it would reduce support for each competitive  carrier by 20 percent annually for the next 5 years, with the aim of fully  eliminating support by July 1, 2016.

Eliminated support in areas with 100 percent overlap. FCC also  eliminated high-cost support for incumbent carriers in areas where an  unsubsidized competitor—or a combination of unsubsidized  competitors—also provides voice and broadband in the same service  area, known as 100 percent overlap. During the course of its  proceedings, FCC found that in many areas of the country, the high-cost  program provided more support than necessary to achieve its goals by  “subsidizing a competitor to a voice and broadband provider that was  offering service without government assistance.” Significant  improvements in technology have made it possible for some cable  operators to offer many services, including both voice and broadband. As  such, cable operators have become unsubsidized competitors, offering  both voice and broadband services in the same service areas as  incumbent carriers. A report commissioned by the National Cable and  Telecommunications Association found that $504 million of high-cost  support went to 277 rural incumbent carriers’ service area in which  unsubsidized cable voice service was available to more than half of all  households. The report also found that in many areas, cable operators  offer voice service to more than 75 percent of the households, and in  some cases they offer service to 90-100 percent of households in an  incumbent carriers’ study area. Documents FCC made available to a  congressional committee also showed evidence that other carriers, both  wireless and wireline, provide service in high-cost areas but do not  receive high-cost support. For example, in an area in which the  incumbent carrier received $1.7 million (almost $13,000 per line) annually  in 2009, four wireless carriers provided voice service to more than 90  percent of that carrier’s service area without receiving USF support.

FCC acknowledged that providing high-cost support in areas of the  country where another voice and broadband provider offers high-quality  service without government assistance is an inefficient use of high-cost  support, and therefore plans to eliminate support in areas with 100  percent overlap service. An economist we contacted raised concerns on  how FCC will identify and eliminate support for incumbent carriers in  areas where unsubsidized competitors provide coverage. Details on the  methodology and data to be used for determining overlap areas are  currently unknown, but FCC plans to phase out, over a 3 year period, all  support for incumbent carriers in those areas where unsubsidized  competitors offer voice and broadband services for 100 percent of the  residential and business locations in the incumbent’s service area.

Established a new method to distribute funds to price-cap carriers.  Prior to the USF Transformation Order, FCC distributed high-cost support  to price-cap carriers through multiple mechanisms: for example, in some  areas FCC used a cost model to determine the costs of providing service  in a specific area, while in other areas, support was based on actual cost  of service. FCC recognized that this method of distributing high-cost  funds needed to be changed to accelerate broadband deployment in  unserved areas. Therefore, FCC changed the rules to (1) freeze the  amount of high-cost support distributed to the price-cap carriers at the  2011 support level, and (2) starting when there are model-set support  amounts and auction rules in place (which FCC anticipated would be in  January 2013) and for the next 5 years, employ a new model and  competitive bidding to support networks that can provide both voice and   Specifically, FCC plans to develop a model that  broadband services. can be used for each census block in high-cost areas to determine the  amount of support required to extend and sustain a broadband-capable  network. Each incumbent price-cap carrier will have the opportunity to  accept the annual support derived from the model in each state in which it  operates. In exchange for accepting the support, a carrier must continue  providing voice service, commit to deploying broadband service, and  meet public interest obligations associated with all the eligible census  blocks in its territory. If an incumbent price-cap carrier declines, then FCC  will put the service area up for competitive bid. The winning bidder will be  required to provide voice and broadband services, and will receive the  amount of support the carrier bid to provide service.

Stakeholders we contacted had mixed views on FCC’s plans for using  both a model and competitive bidding. Several economists we  interviewed commented that while FCC’s planned model may be an  improvement over the previous distribution mechanism, it may not be the  most effective way for distributing support because using a model is data  intensive and requires accurate and reliable data from carriers. On the  other hand, telecommunications stakeholders commented that if the  variables used in the model are relatively accurate, the model may ensure  that support is properly targeted to the areas most in need.

Changed the method for determining support levels for rate-of- return carriers. Prior to the USF Transformation Order, rate-of-return  carriers received funding from the high-cost fund based on their actual  costs. Under the old rules, some carriers were reimbursed for up to 100  percent of their eligible expenditures, faced no FCC imposed limits, and  had no incentive to be more efficient. Under the new rules, FCC is  taking multiple actions to target support for investments in broadband,  increase accountability, and increase incentives for efficient use of public  resources. The reform measures include limiting reimbursements for  capital and operating expenses, and establishing an overall cap on the  amount of support, totaling $250 per line per month, or $3,000 annually.  The cap will be phased in over a 3-year period. Some economists we  spoke with commented that it does not go far enough to make the  mechanism more efficient. Two economists told us that if the reform were  to have any impact, the cap needed to be further reduced to $100 per line  per month.

FCC has also adopted a rule to limit support to carriers whose end-user  rates (i.e., basic telephone rates that carriers charge their customers) do  not meet a local rate floor. During the course of its proceedings, FCC  found that some carriers receiving high-cost support were offering basic  voice plans as low as $5 per month, in comparison to the 2008 national  average local rate of $15.62. The law requires that urban and rural rates  be reasonably comparable, which FCC has implemented by requiring that  rural consumers pay no more than two standard deviations above the average of what urban consumers pay for the same level of voice  service. To address this inefficiency, FCC has adopted a rule to reduce  high-cost support for carriers whose end-user rates for voice service do  not meet the local rate floor.

Furthermore, to help ensure that the reform efforts do not adversely affect  traditional voice service, FCC developed a waiver process for carriers that  contend the reforms will affect their ability to provide reasonably  comparable service at reasonably comparable rates if FCC reduces their  current support levels. In petitioning FCC for a waiver, a carrier must  clearly demonstrate that good cause exists for exempting it from some or  all of the reforms, and that the waiver is necessary and in the public  interest to ensure that consumers in the area continue to receive voice  service. FCC cautioned that those seeking a waiver would be subject to a  rigorous review, including an accounting of all revenues that the carrier  receives. However, for those carriers receiving a waiver, FCC has not yet  determined if it would impose a ceiling on the amount of support a carrier  could receive per line.

section_title: FCC Has Taken Steps to Address Previously Identified Oversight and Management Challenges, but Issues Remain
subsections: section_title: FCC Steps to Address Management Challenges
paragraphs: We and OMB have each issued a report in the last 7 years critical of  FCC’s management of the high-cost fund and in the USF Transformation  Order, FCC has taken several steps to address these challenges. The  management challenges we identified included a lack of performance  goals and measures for the program and weak internal controls, resulting  in FCC’s limited ability to oversee the actions of carriers or the data they  provide. In 2005, OMB criticized FCC’s inability to measure the effect of  the fund on subscribership in rural areas or to base funding decisions on  any indication of measurable benefits. To address these challenges,  FCC has (1) established performance goals and measures for the high- cost program, (2) improved its internal control mechanisms over the fund,  and (3) directed USAC to undertake additional oversight and  management actions.

In 2008, we reported that FCC lacked specific performance goals or  measures for the high-cost program. OMB reported that the high-cost  program neither measures the impact of funds on telephone  subscribership in rural areas nor bases funding decisions on measureable  benefits. As a result, after spending more than $41.1 billion in high-cost  funds since 2001, we reported that it was still unclear what FCC had  achieved through the program. In our report in 2008, we recommended  that FCC establish short- and long-term performance goals and measures  to make clear the program’s intentions and accomplishments.

As shown in table 3, FCC developed five performance goals and three  performance measures for the high-cost program in the USF  Transformation Order. As of July 2012, FCC was still formulating  measures for the remaining two goals.

In 2008, we also reported weaknesses in FCC’s internal control  mechanisms, including the carrier certification process, carrier audits, and  carrier data validation. State officials’ annual certification of carriers is the  primary tool used to determine if carriers are operating according to the  high-cost fund’s guidelines. However, because the certification  requirements were not standardized across states, carriers have been  subject to varying levels of oversight. Audits of carriers are the primary  tool used to oversee carrier activities, and audits may be conducted by  USAC, state regulatory commissions, or FCC’s Office of Inspector  General. In 2008, we reported that from 2002 to 2008, USAC had  conducted about 17 audits, from more than 1,400 carriers participating  annually in the high-cost program. We also found in a survey that 7 out of  50 state regulatory commissions reported auditing incumbent carriers.  Based on these findings, among others, we determined that FCC’s  internal controls were weak and that its ability to adequately oversee the  high-cost program was hindered. In addition, neither FCC nor USAC had  audited the carrier-reported data for accuracy, and they did not follow up  to assess whether the actions carriers claimed they were taking with  regard to using high-cost support were consistent with the actions they  actually were taking. We recommended that FCC identify areas of risk in  its internal control environment and implement mechanisms to help  ensure carriers’ compliance with program rules.

In the USF Transformation Order, FCC addressed all three of the areas  we discussed in our 2008 report. To standardize the certification  requirements and bring more scrutiny to the data reported by carriers,  FCC established a national oversight framework that will be implemented  as a partnership between FCC and the states, U.S. territories, and tribal  governments. This framework will include annual reporting and  certification requirements for all carriers receiving universal service funds  and is designed to provide federal and state regulators with the  information needed to determine whether recipients are using support for  the intended purposes. Under the new standards, all carriers must include  in their annual reports to FCC and their respective state commissions a  progress report on their 5-year build-out plans, data, and explanatory text  concerning outages, unfulfilled requests for service, and complaints  received. They must also certify compliance with applicable service  quality and consumer protection standards and further certify their ability  to function in emergency situations.

To address the lack of audits on the part of FCC and USAC, FCC  directed USAC to review and enhance two programs that are intended to  oversee and safeguard USF. FCC developed these programs in  coordination with OMB in 2010 to ensure that recipients of USF support  comply with FCC rules, and to prevent and detect waste, fraud, and  abuse. FCC expects that these audits will verify the accuracy of the  underlying data and address our previously reported concern that FCC  does not validate the accuracy of data reported by carriers. Additionally,  FCC directed USAC to annually assess compliance with the new  requirements established for Connect America Fund recipients and test  the accuracy of carriers’ certifications.improve FCC’s oversight of program funds, it is too soon to assess their  effectiveness.

section_title: Gaps in FCC’s Oversight and Management of the High-Cost Program
paragraphs: While FCC has taken steps to address several shortcomings of the high- cost program, our review of the order has identified gaps in FCC’s plans  to better oversee the program and make it more effective and efficient.  Specifically, we determined that FCC lacks (1) a data-analysis plan for  carrier data it will collect, and (2) a mechanism to link carrier rates and  revenues with USF support payments.

In the past, FCC had no way to measure the effectiveness of the high- cost program because it did not collect adequate data at the service area  level, i.e., a geographic area served by a specific carrier that would allow  FCC to measure the effect of the funds by carrier on subscribership   As a result, FCC did not know if high-cost funds were achieving  levels.their intended purpose. Economists have pointed out that to determine if  high-cost funds were achieving their intended purpose, FCC would need  to determine whether the provision of funds had caused an increase in  the level of subscribership that would not have occurred in the absence of  the funds. To assess program effectiveness, FCC would need to collect  data showing the outcomes (i.e., the change in the level of telephone  subscriptions) in study areas that used these funds as well as the  outcomes in study areas where these funds were not used.

Under the USF Transformation Order, FCC will start collecting data from  carriers that receive Connect America Fund monies on (1) the amount of  funding the carriers received, (2) their build-out of infrastructure for  broadband capable networks, and (3) service quality and speed in the  level of broadband service provided. According to the order, FCC is  collecting the information to monitor progress in achieving its broadband  goals and to assist FCC in determining whether the funds are being used  appropriately. However, FCC’s order does not articulate a specific data- analysis plan for the carrier data it will collect and it is unclear if or how  FCC plans to use the data. We have previously noted that sound program  evaluation should include a detailed data-analysis plan to track the  program’s performance and evaluate its final results. Lacking such an  evaluation, the achievements and overall effectiveness of the Connect  America Fund are less likely to be clear and FCC might not have the  analysis to determine what changes should be made to improve the  program. Analyzing the carrier data could enable FCC to determine the  program’s effectiveness because the analysis would provide some  definitive examples of the connection between the level of subsidy and  the specific demographic factors of the service areas that have shown an  increase in broadband access. Furthermore, such analysis would  enable FCC to adjust the size of the Connect America Fund based on  sound evaluation and would allow Congress and FCC to make better  informed decisions about the future of the program and how program  efficiency could be improved. Although FCC plans to determine the  number of residential, business, and community anchor institution  locations that have newly gained access to broadband service per $1  million spent in USF subsidy, such an evaluation does not provide any  direct link between an increase in broadband access and funding  subsidies provided by the Connect America Fund. In other words, FCC  will know the extent to which broadband access has changed over time,  but it will not know what factors have influenced the change.

One of FCC’s performance goals (and a requirement in statute) is to  ensure that rates for broadband and voice services are reasonably  comparable in all regions of the country. FCC has defined voice rates as  being reasonably comparable if the rural rate is equal to or greater than  the average urban rate but not by more than two standard deviations.  However, in the USF Transformation Order, FCC reported that many rural  carriers are offering basic local rates for telephone service that are lower  than the average basic local rate paid by urban consumers. In fact, FCC  cited data submitted by NECA which summarized 2008 residential rates  for over 600 companies — a broad cross-section of carriers that typically  receive universal service support — showing that approximately 60  percent of those carriers offered pricing plans that were below the 2008  national average local rate of $15.62. (According to FCC information  published in 2008, if the average urban rate plus federal and state  charges were $25.62, rural rates plus federal and state charges could be  as high as $36.52.) Two of the economists we contacted have written on  the inequity of this urban-rural rate difference, stressing that an effect of  this inequity could be the transfer of wealth from poor urban consumers  who pay into the fund but receive no subsidy, to wealthy rural consumers  who benefit from subsidized rates.

USF Transformation Order, para 235 & 240. consumers across the country to subsidize the cost of service for some  consumers that pay local service rates that are significantly lower than the  national urban average.” FCC officials told us they plan to determine  how much carrier revenue would increase if the rural rates increased to  the urban rate average. However, because FCC does not include carrier  revenues in determining USF support payments for the carriers, FCC will  allow carriers that subsequently raise their rates to the national urban  average to receive the support payments they were initially denied when  their rates were below the specified floor. As a result, FCC’s incentive  mechanism to raise rural rates will not result in any reduction in the  amount consumers are charged for universal service. Members of the  National Association of State Utility Consumer Advocates (NASUCA) we  contacted expressed concern that the level of USF support payments is  not tied to a carrier’s rates and revenues. They explained that carriers’  revenues come from services other than basic local service, but all of  those services are carried over the networks to which consumers have  contributed for years through the USF. These revenues are not included  in the determination of USF payments that the carriers will receive. In  addition, of the six economists we interviewed who are knowledgeable  about how universal service support payments are determined, four  explicitly mentioned revenues as one of the factors that should be taken  into account for modeling the level of support that carriers receive.

In 2007, the Joint Board adopted as a basic principle that USF should  exist within a limited budget and made several recommendations to help  FCC do so, including considering a carrier’s revenues when calculating its  need for USF support. Controlling the growth of the high-cost fund could  help FCC achieve its goal of minimizing the universal service contribution  burden on consumers and businesses. Similar to the points raised by  NASUCA and four of the economists we contacted, the Joint Board  believed in 2007 that if broadband was to become a funded universal  service, then the mechanisms used to calculate support payments should  be revised to take into account the carriers’ net profits from selling  broadband to wireline customers. The Joint Board noted that such profits  should be measured and used to offset some of the carriers’ claims for  explicit USF support. However, in 2008, FCC declined to implement the  Joint Board’s recommendation related to considering carrier revenues  when calculating support payments. According to the Joint Board, FCC  did not address why the Joint Board’s recommendation had not been  adopted.

Under the USF Transformation Order, FCC will consider a carrier’s  revenue when determining support payments under certain  circumstances. In particular, for those carriers that petition for a waiver to  exempt the carrier from some or all USF reforms, FCC intends to subject  such requests to a rigorous, thorough, and searching review comparable  to a total company earnings review. In those cases, FCC intends to take  into account not only all revenues derived from network facilities that are  supported by universal service, but also revenues derived from  unregulated and unsupported services as well. As we noted previously,  under the USF Transformation Order, FCC is developing a new model to  revise its method for calculating carrier support, since FCC recognized  that the prior method of distributing high-cost funds needed to be  changed to accelerate broadband deployment in unserved areas.  However, FCC has not stated what factors, such as carrier revenues, will  be included in the model.

section_title: Conclusions
paragraphs: FCC has undertaken the difficult task of reforming the high-cost program  to make it more efficient and thus able to support both voice and  broadband services. In the USF Transformation Order, FCC said it would  control the size of USF as it transitions to support broadband and adopted  new rules to make the fund more efficient as a way to minimize the  universal service contribution burden on consumers and businesses. As  FCC looks to broaden the scope of the high-cost program by providing  support for broadband capable networks, it is therefore important for FCC  to ensure that the limited program funds are used as effectively and  efficiently as possible to stem further growth in the fund. Historically, FCC  has not collected data at the level economists agree is necessary to  determine the overall effectiveness of the high-cost program or  demonstrate that the program increased telephone subscribership  beyond the level that would have been achieved if there were no subsidy.  Rather, FCC has assumed that the subsidies going to carriers were  positively affecting subscribership even though it collected no empirical  data to support that conclusion. In the USF Transformation Order, FCC  instituted performance goals and measures with the intention of ensuring  that the reforms achieve their intended purpose, and will require those  carriers receiving support from the Connect America Fund to submit  additional information. However, FCC has no specific data-analysis plan  for the carrier data it will collect. Such analysis could enable FCC to  correlate the amount of money spent with the increase in broadband  access in specific areas and thus help FCC to determine the  effectiveness of Connect America Fund expenditures. Lacking such  analysis, the program’s achievements and overall effectiveness are less  likely to be clear and Congress and FCC might not have the information  necessary to make informed decisions about the program’s future.

According to statute, urban and rural telecommunication rates should be  reasonably comparable, but many rural consumers, whose rates are  supported through the high-cost fund, pay rates that are lower than many  urban consumers. FCC has stated that it is not equitable for all  consumers to subsidize the cost of service for some consumers who pay  local service rates that are significantly lower than the national average.  In addition, given the way the high-cost program is funded, it is possible  that poor urban consumers are subsidizing wealthy rural consumers. To  provide an incentive for carriers to raise rates in rural areas, FCC plans to  penalize carriers with rates that are too low by reducing the amount of  high-cost support they can receive. While this action should help rural and  urban rates become more comparable, it will not prevent consumers from  subsidizing the cost of service for those areas where rates are too low  because FCC will continue to allow carriers to receive the same amount  of subsidy once their rates are raised to the urban mean. Therefore,  although FCC would like to prevent consumers from subsidizing carriers  whose rates for basic local service are artificially low, its incentive  mechanism to raise rural rates will not reduce the financial burden placed  on all consumers as there is currently no connection between the amount  of support payments a carrier receives and the revenue a carrier earns,  through rates or any other source. In addition to voicing concern for the  potential inequity of rural rates that are lower than urban rates, FCC has a  stated goal to minimize the universal service contribution burden on  consumers and businesses. The National Broadband Plan recommended  that FCC keep the overall size of the fund close to its 2010 funding level,  and the Joint Board has stated its strong commitment to limit the size of  the fund. As a way to control the size of the fund, the Joint Board  recommended that FCC consider a carrier’s revenues when calculating  its need for USF support but FCC declined to implement this  recommendation. Under the USF Transformation Order, FCC has the  opportunity to revisit this issue as it develops a new model to determine  the amount of support a carrier should receive, however it has not stated  what factors will be included in the model.

section_title: Recommendations for Executive Action
paragraphs: FCC should take the following two actions:

To determine the overall effectiveness of the Connect America Fund  as well as improve the oversight and transparency of the high-cost  program, establish a specific data-analysis plan for the carrier data  and make the information publicly available.

To help minimize the universal service contribution burden on  consumers and businesses, as FCC examines and revises the  manner in which carrier support payments are calculated, consult with  the Joint Board and/or make appropriate referrals to determine what  factors, such as carrier revenues, should be considered in the  calculation.

section_title: Agency Comments
paragraphs: We provided a draft of this report to FCC for its review and comment. In  response, FCC stated that our recommendations were valuable and  noted that it has taken steps to address the oversight and management  challenges we previously identified. Specifically, FCC noted that in the  USF Transformation Order, FCC has adopted performance goals, set  forth requirements to provide voice and broadband service to all  Americans, and established a national framework to ensure that  recipients who benefit from public investment in their networks have  clearly defined public interest obligations and reporting requirements.  FCC’s written response also included information to further clarify the  actions that are currently under way related to the USF Transformation  Order. With respect to our first recommendation, FCC agreed that it  should establish a specific plan to analyze the data reported by the  carriers as a way to improve oversight of the program, and noted it is  planning to build on measures adopted in the USF Transformation Order  to improve the effectiveness of the new program. Related to our second  recommendation, FCC agreed that revenues derived from infrastructure  supported by universal service are an important consideration when  determining support provided to carriers, and FCC appreciated our  suggestion that it work with the Joint Board to implement the reforms in  the USF Transformation Order. FCC’s written comments are reprinted in  appendix II.

FCC provided technical comments on the draft report that we  incorporated as appropriate.

We are sending copies of this report to the Chairman of FCC and  appropriate congressional committees. In addition, the report will be  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff 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 on appendix IV.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines the Federal Communications Commission’s (FCC)  plans to refocus and expand the high-cost program of the Universal  Service Fund (USF) to provide support for broadband-capable networks.  In particular, the report provides information on (1) FCC’s plans for  repurposing the USF high-cost program for broadband services and (2)  how FCC is planning to address previously identified oversight and  management challenges as it broadens the scope of the program.

To understand FCC’s plans for repurposing the high-cost program for  broadband service, we reviewed and analyzed FCC’s USF  Transformation Order and associated stakeholder comments. We  interviewed officials from FCC, the Universal Service Administrative  Company (USAC), and the National Exchange Carrier Association  (NECA) on the rule changes outlined in the order and other actions that  FCC has taken to repurpose USF to support broadband services in  addition to voice services. We analyzed and assessed the previous and  planned high-cost program structure and method of distributing funds. We  also reviewed and analyzed telecommunications stakeholders’ filings and  studies on the potential impact of FCC’s planned changes to the existing  high-cost program. We limited the scope of our review to the USF high- cost program because in the USF Transformation Order, FCC focused on  repurposing the high-cost program to support broadband. Although FCC  made changes to intercarrier compensation in the USF Transformation  Order, we did not review FCC’s reform efforts related to intercarrier  compensation. Intercarrier compensation refers to the charges that one  carrier pays to another carrier to originate, transport, and/or terminate  telecommunications traffic. The intercarrier compensation regimes are  governed by a complex and different system of federal and state rules  than those of universal services; therefore, we decided not to review  intercarrier compensation.

To determine how FCC is planning to address previously identified  oversight and management challenges as it broadens the scope of the  program, we reviewed our past reports, documents from the Office of  Management and Budget and FCC’s Office of Inspector General, and  academic literature related to the high-cost program of USF. We met with  telecommunications stakeholders, including associations representing  consumers, small and large telecommunications carriers, and state  regulatory commissions, to obtain their views on FCC’s management of  and the changes made to the high-cost program. We identified industry  stakeholders based on prior published literature, including filings with  FCC, and other stakeholders’ recommendations. We also conducted  semi-structured interviews with economists from academia and the  telecommunications industry, recognized for their thorough knowledge of  universal service. The economists we spoke with were selected based on  studies focused on the high-cost program of USF, published within the  last 5 years, and recommendations from telecommunications industry  stakeholders, including associations representing telecommunications  carriers, consumers, and state regulatory commissions. See table 4 for  the stakeholders and economists we contacted.

We conducted this performance audit from September 2011 to July 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: Federal Communications Commission’s Action to Implement National Broadband Plan Recommendations Related to the Universal Service Fund and Implement the USF Transformation Order
paragraphs: In early 2009, Congress directed the Federal Communications  Commission (FCC) to develop a broadband plan to ensure every  American has “access to broadband capability” and to report annually on  the state of broadband availability. In March 2010, an FCC task force  issued the National Broadband Plan, which provided a road map for FCC  to reform Universal Service Fund (USF) and the high-cost program, in  particular. The National Broadband Plan made 11 recommendations as it  relates to universal service. FCC has implemented or partially  implemented 3 and is planning to implement the remaining 8  recommendations. Table 5 provides information on actions FCC has  taken to enact the selected recommendations made in the National  Broadband Plan.

In the USF Transformation Order, released in November 2011, FCC took  action to realize the overarching goal of the National Broadband Plan to  make affordable broadband service available to all Americans. In  particular, FCC adopted a number of actions designed to transition  universal service funds from supporting only voice service to supporting  networks that can provide both voice and broadband services. Table 6  displays FCC’s timeline for making this transition.

section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Sally Moino, Assistant Director;  Pedro Almoguera; Colin Fallon; David Hooper; Jennifer Kim; Andrew  Stavisky; and Nancy Zearfoss made key contributions to this report.

section_title: Related GAO Products
paragraphs: Telecommunications: FCC’s Performance Management Weaknesses  Could Jeopardize Proposed Reforms of the Rural Health Care Program.  GAO-11-27. Washington, D.C.: November 17, 2010.

Telecommunications: Improved Management Can Enhance FCC  Decision Making for the Universal Service Fund Low-Income Program.  GAO-11-11. Washington, D.C.: October 28, 2010.

Telecommunications: FCC Should Assess the Design of the E-rate  Program’s Internal Control Structure. GAO-10-908. Washington, D.C.:  September 29, 2010.

Telecommunications: Long-Term Strategic Vision Would Help Ensure  Targeting of E-rate Funds to Highest-Priority Uses. GAO-09-253.  Washington, D.C.: March 27, 2009.

Telecommunications: FCC Needs to Improve Performance Management  and Strengthen Oversight of the High-Cost Program. GAO-08-633.  Washington, D.C.: June 13, 2008.


Question-summary annotations: questions: question: How did the FCC change the high-cost program of telecommunications?
answer: Under the USF Transformation Order, FCC adopted new rules to fundamentally change the high-cost program by extending the program to support broadband capable networks. For example, FCC established a $4.5-billion annual program budget for the next 6 years, created new funds—called the Connect America Fund and the Mobility Fund—that will support broadband deployment, and established public interest obligations for the carriers as a condition of receiving funds.

question: How will the FCC enforce broadband services?
answer: Specifically, FCC will require carriers to offer broadband services in their supported service areas, meet certain broadband performance requirements, and report regularly on associated broadband performance measures. FCC also changed its method for distributing funds to carriers to address some of the recognized inefficiencies with the program.
child_questions: question: How does the FCC anticipate these changes will improve the high-cost of communications?
answer: According to FCC, these changes will allow it to reduce high-cost support for carriers providing only voice services and make funds available to carriers to offer both voice and broadband services.

questions: question: What did the GAO identify as existing issues with the FCCs program?
answer: FCC has taken several steps to address previously identified oversight and management challenges that GAO and the Office of Management and Budget (OMB) have raised in the last 7 years, but issues remain. Management challenges identified by GAO included a lack of performance goals and measures for the program and weak internal controls, while OMB criticized FCC’s inability to base funding decisions on measurable benefits.
child_questions: question: How did the FCC attempt to resolve these issues?
answer: In response, FCC established performance goals and measures for the high-cost program and improved internal control mechanisms over the fund.

question: What did the GAO still identify as flaws in the FCCs plans?
answer: While these are noteworthy actions, GAO identified gaps in FCC’s plans to better oversee the program and make it more effective and efficient. In particular, FCC has not addressed its inability to determine the effect of the fund and lacks a specific data-analysis plan for carrier data it will collect.
child_questions: question: What would the analysis of these specific plans enable for the FCC?
answer: Such analysis would enable FCC to adjust the size of the Connect America Fund based on data-driven evaluation and would allow Congress and FCC to make better informed decisions about the program’s future and how program efficiency could be improved.

questions: question: What was an issue GAO found with FCC?
answer: GAO also found that FCC lacks a mechanism to link carrier rates and revenues with support payments.
child_questions: question: What has FCC noted regarding telecommunications rates in rural versus urban areas?
answer: A requirement in statute is for rates for telecommunications services to be reasonably comparable in rural and urban areas, but FCC has noted that some rural carriers are offering basic local rates for telephone services that are lower than the average basic rate paid by urban consumers.

question: How has the FCC tried to equalize consumer rates in rural and urban areas?
answer: FCC has stated that it is not equitable for all consumers to subsidize the cost of service for some consumers who pay local service rates that are significantly lower than the national average and has therefore instituted an incentive mechanism for carriers to increase artificially low consumer rates. Although FCC would like to prevent consumers from subsidizing carriers that offer service at artificially low rates, its incentive mechanism to raise rural rates will not reduce the financial burden placed on all consumers as there is currently no connection between the support payments a carrier receives and the carrier’s rates and revenues.
child_questions: question: What other payment changes were recommended to the FCC?
answer: The Federal-State Joint Board on Universal Service recommended that FCC consider a carrier’s revenues when calculating its need for support payments, but in the past, FCC declined to implement this recommendation.
child_questions: question: What has the FCC opted to do instead?
answer: FCC is developing a new model to calculate carrier support, but has not stated what factors will be included.

questions: question: How has the FCCs high-cost program served and grown?
answer: The high-cost program within the Universal Service Fund (USF) provides subsidies to telecommunications carriers that serve rural and other remote areas with high costs of providing telephone service. The annual program cost has grown from $2.6 billion in 2001 to over $4 billion in 2011, primarily funded through fees added to consumers’ phone bills.
child_questions: question: How is the program managed?
answer: The program is managed by the Federal Communications Commission (FCC), which noted that providing universal access to broadband is “the universal service challenge of our time.” Accordingly, FCC made changes to the program to make funds available to support both telephone and broadband.

question: What did GAO report on the FCC and their program?
answer: GAO previously reported that using USF monies for broadband could cause the size of the fund to greatly expand unless FCC improved its management and oversight to ensure the program’s cost-effectiveness. This requested report examines FCC’s (1) plans for repurposing the high-cost program for broadband, and (2) plans to address previously identified management challenges as it broadens the program’s scope. GAO reviewed and analyzed pertinent FCC orders, associated stakeholder comments, and reports related to USF and interviewed federal and industry stakeholders, as well as economists and experts.