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. 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. 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.