network infrastructure

USF Reform Relief for Rural Rate-of-Return Carriers

By TMCnet Special Guest
Gary Bolton
  |  April 29, 2013

In late 2011, the Federal Communications Commission issued the Universal Services Reform Order and created the Connect America Fund to transition approximately $4.5 billion a year of federal subsidies to enable the build out of broadband services to rural communities. Last year, the CAF got off to a rocky start as it unintentionally delayed carriers’ investment in broadband infrastructure as a result of the FCC (News - Alert) over-rotating on rules and safeguards against spending abuse. The FCC allocated $300 million in the 2012 CAF Phase 1 funding for Tier 1 and Tier 2 price-cap carriers, but the FCC rules and obligations resulted in only $115 million of these funds being claimed -- leaving nearly $2 out of every $3 of this funding on the table. 

The rural rate-of-return carriers were also negatively impacted by confusion and lack of visibility into year-over-year support due to annual adjustments based on quantile regression analysis benchmarks. As a result, U.S. Department of Agriculture Secretary Tom Vilsack reported to the FCC that 63 percent of Rural Utilities Service funds available for broadband projects were left on the sidelines in 2012.

Good News for Rural Rate-of-Return Carriers

The FCC’s recent Sixth Order on reconsideration of Universal Service Fund reforms wasn’t just another announcement, but will enable these carriers to provide connectivity to rural customers. Nearly one-fourth of rural America lacks access to high-speed broadband, according to the FCC's eighth Broadband Progress Report. Without these federal subsidies, rural rate-of-return carriers would not have the means or business case to extend broadband service to these areas. Over the years, ADTRAN (News - Alert) has witnessed firsthand the benefits that local communities see through reliable high-speed Internet service, including increased business commerce and educational opportunities.


Previous Limitations on Carriers’ Ability to Provide Broadband

Because of the high costs for connecting outlaying areas, the FCC previously issued the USF/Intercarrier Compensation Transformation Order, limiting the reimbursement that rate-of-return carriers could receive through the USF and Connect America Fund. This order reduced support if capex or opex spending exceeded an annually-adjusted 90 percentile QRA benchmark based on the spending of approximately 737 other rate-of-return carriers.

Earlier this year, 159 rate-of-return carriers were notified of support reduction because either their opex or capex spending was outside the QRA benchmark. In many cases, the carrier’s total expenditures were within the aggregate benchmark, but either capex or opex was not, resulting in reduced support.

While carriers can control their capex and opex spending, they cannot anticipate what their peers may or may not spend. Furthermore, the FCC is not willing to disclose the details of their QRA model, so carriers have no visibility into year-over-year changes that may impact their support.


New Benefits for Rural Customers

The Sixth Order on reconsideration of USF reforms addresses several of these major issues and was effective immediately upon release in March 2013. To help simplify the regression analysis, capex and opex benchmarks will now be rolled into a total benchmark instead of two separate metrics. This modification alone decreased the number of companies subject to reduced support for 2013 from 159 to 70.

Additionally, the FCC directed the Wireline Competition Bureau to increase the time period for evaluation instead of adjusting the thresholds on a yearly basis. While this time period has not yet been determined, the greater time between adjustment will provide carriers greater visibility for budgeting expenditures. For the remainder of 2013, the order is also implementing a 15 percent backstop so a carrier’s funding can be reduced by no more than 15 percent.

Future Impact to Rate-of-Return Carriers

Although the new order is a step in the right direction, roadblocks still exist. Even with the changes, over 70 percent of the carriers will find that the 90 percentile QRA benchmark for 2013 is lower than their 2012 benchmark. Additionally, costs per loop continue to increase as mobile adoption grows, resulting in continued line loss throughout rural communities.

ADTRAN routinely hears frustrations from service providers that even though they’ve reduced their expenses, their opex and capex will be above the benchmark and impact their funding. An example that FCC Commissioner Ajit V. Pai provided in his statement showed a Minnesota-based service provider that cut more than $125,000 in opex and $135,000 in capex from its 2013 budget, but its funding will be capped for 2013 even though it was not capped in 2012.

While the new modifications will significantly help rural carriers, it is important for the FCC to continue to evaluate the process and refine guidelines, especially in mapping, definitions of dependent variables, evaluation of independent variables and the timing of updates. These parameters all have significant impact on the predictability of ongoing funding to enable build out and maintain broadband services to communities that otherwise would not have service. The FCC continues to address issues with the CAF Phase 1 rules so Tier 1 and Tier 2 price-cap carriers will be able to accept their 2013 allocations and address the unserved and underserved communities. This will enable rural-area residents to experience the educational and economic benefits that high-speed Internet service provides, and will help these small towns grow and thrive.

Gary Bolton (News - Alert) is vice president of global marketing at ADTRAN Inc. (

Edited by Stefania Viscusi