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United States Government Accountability Office: 
GAO: 

Report to Congressional Requesters: 

July 2012: 

Telecommunications: 

FCC Has Reformed the High-Cost Program, but Oversight and Management 
Could be Improved: 

GAO-12-738: 

GAO Highlights: 

Highlights of GAO-12-738, a report to congressional requesters. 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

What GAO Recommends: 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-12-738]. For more 
information, contact Mark Goldstein at (202) 512-2834 or 
goldsteinm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

FCC Aims to Improve Efficiency and Provide Support for Broadband 
through Changes to the High-Cost Program: 

FCC Has Taken Steps to Address Previously Identified Oversight and 
Management Challenges, but Issues Remain: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the Federal Communications Commission: 

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: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Summary of Current Universal Service Fund Programs: 

Table 2: General Roles of Agencies and Organizations Involved in High-
Cost Program Administration: 

Table 3: FCC's Performance Goals and Measures for the High-Cost 
Program: 

Table 4: List of Telecommunications Industry Stakeholders and 
Economists Contacted: 

Table 5: Status of FCC Actions to Implement Recommendations from the 
National Broadband Plan: 

Table 6: Key Actions and Timeline for Implementing the USF 
Transformation Order: 

Abbreviations: 

FCC: Federal Communications Commission: 

Joint Board: Federal-State Joint Board on Universal Service: 

OMB: Office of Management and Budget: 

NASUCA: National Association of State Utility Consumer Advocates: 

NECA: National Exchange Carrier Association: 

USAC: Universal Service Administrative Company: 

USF: Universal Service Fund: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

July 25, 2012: 

The Honorable Henry A. Waxman: 
Ranking Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Anna G. Eshoo: 
Ranking Member: 
Subcommittee on Communications and Technology: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Edward J. Markey: 
House of Representatives: 

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 
where the costs of providing telephone service are high.[Footnote 1] 
By providing support to carriers, the high-cost program allows the 
carriers to charge lower telephone rates than otherwise would be 
available to customers in 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.[Footnote 2] 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.[Footnote 3] 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.
[Footnote 4] 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.[Footnote 5] 

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),[Footnote 6] the National Exchange Carrier Association 
(NECA),[Footnote 7] and the National Association of State Utility 
Consumer Advocates (NASUCA).[Footnote 8] 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.[Footnote 9] We did not review FCC’s 
reform efforts related to intercarrier compensation.[Footnote 10] 
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. 

Background: 

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.[Footnote 11] 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.[Footnote 12] 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.[Footnote 13] 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.[Footnote 14] 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.[Footnote 15] Consequently, while 
urban consumers pay the full cost of their service, many rural 
consumers receive services that are subsidized by the high-cost fund. 

Table 1: Summary of Current Universal Service Fund Programs: 

Program: High-cost; 
Description: Assists customers living in high-cost, rural, or insular 
areas through financial support to telephone carriers, thereby 
lowering rates for local and long-distance service; 
Calendar year 2011 disbursements (in millions): $4,031. 

Program: Schools and libraries; 
(federal E-Rate program); 
Description: Assists eligible schools and libraries through discounted 
telecommunications and information services. Discounts available for 
local and long-distance telephone service, Internet access, and 
internal connection projects; 
Calendar year 2011 disbursements (in millions): $2,232. 

Program: Low income; 
Description: Assists qualifying low-income customers through 
discounted installation and monthly telephone services and free toll 
limitation service; 
Calendar year 2011 disbursements (in millions): $1,750. 

Program: Rural health care; 
Description: Assists health care providers located in rural areas 
through discounts for telecommunications and Internet access services. 
Discounts are provided to make rates for facilities in rural areas 
reasonably comparable to those in nearby urban areas; 
Calendar year 2011 disbursements (in millions): $82. 

Source: GAO presentation of FCC, NECA, and USAC data. 

[End of table] 

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.[Footnote 16] 

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.[Footnote 17] Table 2 summarizes the general 
roles and responsibilities of the agencies and organizations involved 
in high-cost program administration. 

Table 2: General Roles of Agencies and Organizations Involved in High-
Cost Program Administration: 

Agency/Organization: FCC; 
Description: 
* Makes all policy decisions pertaining to USF; 
* Oversees program administration and finances; 
* Designates eligibility status of some carriers to receive universal 
service support, including some carriers serving Tribal lands; 
* Conducts oversight of some carriers' use of funds. 

Agency/Organization: USAC; 
Description: 
* Primary administrator of the high-cost program; 
* Collects and validates line count data from carriers; 
* Bills contributors, collects contributions, and disburses universal 
service support; 
* Recovers improperly disbursed funds; 
* Maintains accounting records; 
* Processes appeals of funding decisions; 
* Submits periodic reports to FCC; 
* Conducts carrier oversight. 

Agency/Organization: NECA; 
Description: 
* Collects and validates cost and revenue data from carriers; 
* Collects and validates line count data from carriers; 
* Calculates the national average cost per loop; 
* Administers the interstate access charge revenue pools. 

Agency/Organization: State regulatory commissions; 
Description: 
* Designate eligibility status of most carriers to receive universal 
service support; 
* Annually certify that beneficiaries in their jurisdictions will use 
high-cost program support appropriately; 
* Some states may designate and certify wireless carriers; 
* Some states audit carriers. 

Source: GAO presentation of FCC, NECA, and USAC data. 

[End of table] 

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.[Footnote 18] 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.[Footnote 19] 

FCC Aims to Improve Efficiency and Provide Support for Broadband 
through Changes to the High-Cost Program: 

FCC Adopted New Rules to Support Broadband: 

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.[Footnote 20] 
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.[Footnote 
21] 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.[Footnote 22] 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. 

FCC Is Implementing Changes to Its Funding Distribution to Improve 
Program Efficiency: 

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.[Footnote 23] 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.[Footnote 24] 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. 
[Footnote 25] 

[Side bar: Price-Cap and Rate-of-Return Regulation: 
Carriers have traditionally been regulated by state commissions to 
ensure that prices charged to consumers were fair and reasonable. 
Today, carriers are regulated either on the price they charge 
customers for regulated services, referred to as "price-cap carriers," 
or on the rate of return they are allowed to earn from their 
investments, referred to as "rate-of-return carriers." Price-cap 
carriers serve about 95 percent of telephone subscribers, serving 
primarily urban and some rural areas. Rate-of-return carriers serve 
smaller, rural areas. End of side bar] 

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 broadband services.[Footnote 26] 
Specifically, FCC plans to develop a model that 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.[Footnote 27] 

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.[Footnote 28] 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.[Footnote 29] 

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[Footnote 30] above the average of what urban 
consumers pay for the same level of voice service.[Footnote 31] 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. 

FCC Has Taken Steps to Address Previously Identified Oversight and 
Management Challenges, but Issues Remain: 

FCC Steps to Address Management Challenges: 

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.[Footnote 32] 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. 

Established Performance Goals and Measures: 

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.[Footnote 33] 

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. 

Table 3: FCC's Performance Goals and Measures for the High-Cost 
Program: 

Goals: Preserve and advance universal availability of voice service; 
Measures: FCC will use the telephone penetration rate, which measures 
subscription to telephone service. 

Goals: Ensure universal availability of voice and broadband to homes, 
businesses, and community anchor institutions; 
Measures: FCC will collect the number of residential, business, and 
community anchor institution locations that newly gain access to 
broadband services. As an efficiency measure, FCC will use the change 
in the number of homes, businesses, and community anchor institutions 
passed or covered per million USF dollars spent. 

Goals: Minimize the universal service contribution burden on consumers 
and businesses; 
Measures: FCC will divide the amount of the total inflation-adjusted 
expenditures of the high-cost program and Connect America Fund each 
year by the number of American households and measure it as a monthly 
dollar figure. 

Goals: Ensure universal availability of mobile voice and broadband 
where Americans live, work, and travel; 
Measures: FCC has not yet developed measures for this goal. 

Goals: Ensure reasonably comparable rates for voice and broadband 
services in all regions of the nation; 
Measures: FCC has not yet developed measures for this goal. 

Source: GAO based on FCC information. 

[End of table] 

Improved Internal Control Mechanisms: 

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. 
[Footnote 34] 

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. 

Directed USAC to Undertake Additional Oversight: 

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.[Footnote 35] 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. 
[Footnote 36] 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.[Footnote 37] While these activities may improve FCC's 
oversight of program funds, it is too soon to assess their 
effectiveness. 

Gaps in FCC's Oversight and Management of the High-Cost Program: 

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. 

Lack of a Data-Analysis Plan for Carrier Data: 

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 levels.[Footnote 38] As a result, FCC did not know if 
high-cost funds were achieving 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.[Footnote 39] 
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.[Footnote 40] 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.[Footnote 41] 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. 

Lack of a Mechanism to Link Carrier Rates and Revenues with Support 
Payments: 

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.[Footnote 42] 

To address this discrepancy, the USF Transformation Order required 
carriers to provide price data for both local telephone rates and 
broadband service. FCC will begin collecting data in July 2012 
regarding rates paid by consumers in rural areas that do not meet the 
local rate floor. FCC officials told us they are developing a survey 
of urban rates to obtain more current information than the last urban 
rate survey, which was published in 2008. Once it obtains these data, 
it can analyze the extent to which rural consumers pay rates lower 
than urban consumers. FCC also instituted an incentive for carriers to 
increase artificially low consumer rates by reducing high-cost support 
for voice services to those carriers whose customers do not pay an 
amount equal to a specified local rate floor.[Footnote 43] In other 
words, FCC plans to limit high-cost support for carriers to the extent 
they provide service to consumers at rates below the national urban 
average.[Footnote 44] In the USF Transformation Order, FCC justified 
this reduction by stating that "we do not believe it is equitable for 
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."[Footnote 45] 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.[Footnote 46] 

Conclusions: 

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. 

Recommendations for Executive Action: 

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. 

Agency Comments: 

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 [hyperlink, 
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. 

Signed by: 

Mark L. Goldstein: 
Director, Physical Infrastructure Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

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),[Footnote 47] and the National Exchange Carrier Association 
(NECA)[Footnote 48] 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. 

Table 4: List of Telecommunications Industry Stakeholders and 
Economists Contacted: 

Stakeholder Group: Associations representing telecommunications 
carriers; 
Stakeholders: 
CTIA - The Wireless Association; 
National Telecommunications Cooperative Association (NTCA); 
Organization for the Promotion and Advancement of Small 
Telecommunications Companies (OPASTCO); 
RCA - The Competitive Carriers Association; 
USTelecom Association. 

Stakeholder Group: Associations representing state regulatory 
commissions; 
Stakeholders: 
National Association of Regulatory Utility Commissioners (NARUC). 

Stakeholder Group: Consumer advocates; 
Stakeholders: 
National Association of State Utility Consumer Advocates (NASUCA); 
Public Knowledge. 

Stakeholder Group: Economists; 
Stakeholders: 
Michelle Connolly, Duke University; 
Bob Loube, Rolka Loube Saltzer Associates; 
John Mayo, Georgetown University; 
Douglas Meredith, John Staurulakis, Inc.; 
Greg Rosston, Stanford University; 
Scott Wallsten, Technology Policy Institute. 

Source: GAO. 

[End of table] 

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. 

[End of section] 

Appendix II: Comments from the Federal Communications Commission: 

Federal Communications Commission: 
Washington, D.C. 20554: 

July 12, 2012: 

Mark Goldstein: 
Director, Physical Infrastructure Issues: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Goldstein: 

Thank you for the opportunity to review the draft Government 
Accountability Office (GAO) Report regarding the reforms to and 
management of the universal service high-cost program. The high-cost 
program is designed to promote the goal of section 254 of the 
Communications Act of 1934, as amended by the Telecommunications Act 
of 1996 (the Act), that consumers in rural and other high-cost areas 
of the country have access to services that are reasonably comparable 
to those in urban areas, at reasonably comparable rates. The 
Commission is dedicated to achieving the universal service goals of 
section 254 of the Act, and therefore welcomes suggestions on snaking 
additional improvements to the high-cost program. 

GAO's draft report includes two primary recommendations for the 
Commission to consider as we continue forward with our implementation 
of universal service reform and our modernization of the program to 
ensure that voice and broadband service are available throughout the 
nation. GAO first recommends that we establish a specific plan to 
analyze the data carriers will be reporting in order to determine the 
effectiveness of the new programs as well as improve oversight. GAO 
also recommends that we consult with the Federal-State Joint Board on 
Universal Service ("Joint Board") to determine what factors, such as 
carrier revenues, should be considered in support calculations in 
order to minimize contribution burdens as we proceed with the reform. 
As discussed in more detail below, we find both GAO recommendations 
valuable. The Commission's Connect America Fund reforms will directly 
link universal service funding to broadband expansion for the first 
time, allowing the Commission to directly determine the effect of the 
funding. In addition, the Commission's existing regular programs to 
assess broadband deployment and adoption will provide opportunities to 
review the impact of the reforms. Nevertheless, we agree with GAO that 
as carrier data are submitted, it will be valuable for the Commission 
to review how it will use these reports, and any other necessary 
reviews, to regularly assess progress. We also agree that carrier 
revenues are a relevant consideration in determining appropriate
support levels that are sufficient but not excessive. Our reforms 
include a number of measures to take these revenues into account, 
particularly for price-cap carriers, and we will continue to examine 
additional reforms to better account for revenues for rate-of-return 
carriers. 

As the draft report recognizes, in the USF/ICC Transformation Order, 
the Commission comprehensively reformed and modernized the high-cost 
program to ensure that voice and broadband service, both fixed and 
mobile, are available to Americans throughout the nation. The 
Commission adopted fiscally responsible, accountable, incentive-based 
policies to transition the outdated high-cost program to the
Connect America Fund, ensuring fairness for consumers and addressing 
the communications infrastructure challenges of today and tomorrow. 
The Connect America Fund, which will ultimately replace all existing 
high-cost support mechanisms, will help make broadband available to 
homes, businesses, and community anchor institutions in areas that do 
not, or would not otherwise, have broadband, while preserving voice 
service. In addition, the Mobility Fund, an essential part of the
Connect America Fund, will promote access to mobile voice and 
broadband service. The Commission also established a budget of $4.5 
billion for the Connect America Fund, with an automatic review trigger 
if it appears the budget will be exceeded. 

The draft report also acknowledges that the Commission has taken steps 
to address oversight and management challenges previously identified 
by GAO and the Office of Management and Budget (OMB). In the USF/ICC 
Transformation Order, the Commission adopted specific performance 
goals to enable the Commission to determine not just whether the 
federal funding is used for the intended purposes, but also whether 
that funding is accomplishing the intended results — including the
Commission's objectives of preserving and advancing voice, broadband, 
and advanced mobility for all Americans. In addition, the Commission 
set forth robust and meaningful requirements to provide voice and 
broadband service to ensure that recipients that benefit from public 
investment in their networks have clearly defined public interest 
obligations associated with the use of such funding. The Commission 
also established a national framework for certifications and reporting 
requirements for all high-cost recipients to ensure that they are 
satisfying their public interest obligations, that state and federal 
regulators have the tools needed to conduct meaningful oversight, and 
that public funds are expended in an efficient and effective manner. 

We appreciate GAO's recognition of the Commission's efforts to date to 
reform the high-cost program, and we agree that the Commission should 
strive to continue to improve the effectiveness of the high-cost 
program and improve program oversight. The Commission and its staff 
are in the midst of implementing the framework established in the 
USF/ICC Transformation Order, and this draft report is timely and 
helpful in assisting our efforts. 

In the draft report, GAO first recommends the Commission establish a 
specific plan to analyze the data reported by the carriers as a way to 
improve oversight of the program. We agree with this assessment and 
are planning to build on measures adopted by the Commission in the 
USF/ICC Transformation Order to improve the effectiveness of the new 
program. 

In the USF/ICC Transformation Order, the Commission established a 
foundation for collecting meaningful data to judge the effectiveness 
of the support provided and the program as a whole. For example, the 
Commission adopted threshold reporting and certification requirements 
that apply to all high-cost recipients, which we intend to use to 
evaluate the impact of these reforms. The Commission adopted 
additional, specific reporting requirements for the first phase of the 
Connect America Fund, for example, requiring both fixed and mobile 
participants to commit to provide specific levels of service
before accepting support, and to satisfy specific build-out 
requirements. In addition, those recipients will be required to submit 
reports demonstrating that they are meeting interim benchmarks or 
"milestones." Targeting specific levels of support to these services 
in this way and requiring proof of build-out will allow us to gauge 
the impact of the program funds throughout the course of these 
programs. While the contours of the second phase of the Mobility Fund 
and the Remote Areas Fund are not yet finalized, the Commission 
contemplated similar commitments from participants in these programs. 
Finally, outside the universal service context, the Commission also 
collects data on broadband deployment and adoption which is regularly 
disseminated through other reports, such as the annual section 706 
report that requires the Commission to determine and report annually 
on whether advanced telecommunications capability is being deployed to 
all Americans in a reasonable and timely fashion. These other sources 
of data on deployment will also allow us to evaluate the impact and 
effectiveness of our universal service reforms. We are committed to 
analyzing the impact of our reforms on the achievement of our goals 
for the program as set forth by Congress. Even though we are in the 
early stages of the reforms, we are cognizant of the importance of 
reliable and consistent data as a way to measure the success of the 
reforms and the high-cost program itself. As the Commission and staff 
develop and refine our data analysis plan in the months ahead, we will 
continue to place a premium on collecting and reviewing data submitted 
by all recipients to improve upon the effectiveness of the program. 

GAO also recommends that the Commission consult with the Joint Board 
as we examine and revise the manner in which high-cost support 
payments are calculated, including specifically the extent to which 
carrier revenues should be included in any such calculation. We agree 
that revenues derived from infrastructure supported by universal 
service are an important consideration when determining support 
provided to carriers. The Commission recognized the importance of 
revenues in the USF/ICC Transformation Order when it directed staff to 
identify areas where the cost of service provided by price cap 
carriers is greater than can be supported through reasonably 
comparable end-user rates. The Commission adopted a requirement that 
no support be provided to such carriers below a cost benchmark; such a 
benchmark necessarily will require carriers to cover a minimum level 
of costs with their own revenues from both regulated and unregulated 
services delivered over the supported network infrastructure. The 
Commission also anticipated that revenues from services delivered over 
supported plant for rate-of-return carriers would be a relevant 
consideration when evaluating carrier requests for waiver of support 
reductions. Moreover, consistent with the Commission's framework for 
reform, we will consider other ways to better take into account 
revenues of rate-of-return carriers as we continue with 
implementation. In addition, the Order phases in a limit of support to 
carriers whose end-user rates are below an urban mean. 

Likewise, the Commission designed the Mobility Fund in a way that 
ensures support levels are no greater than necessary. The first phase 
of the Mobility Fund, for example, will use a reverse auction to set 
support levels and will incorporate market-based forces to ensure that 
carriers reveal the lowest amount of support required to provide a 
service. In developing their bids, carriers will take into account 
their anticipated revenues and will have strong incentives to bid the 
lowest amount possible, in order to win such support. 

Regardless of the specific ways in which revenues are taken into 
account, directly or indirectly, in the implementation of the Connect 
America Fund, the Commission is committed to minimizing the
contribution burden on consumers and businesses. The Commission 
adopted that as an explicit performance goal and took action to ensure 
that the goal would be achieved by establishing, for the first time, a 
firm and comprehensive budget for the high-cost program of $4.5 
billion. This budget will provide for more predictable funding for 
carriers and will protect consumers and businesses that ultimately pay 
for the fund through fees on their communications bills. 

Finally, we appreciate GAO's suggestion that the Commission work with 
the Joint Board as we implement the reforms in the USF/ICC 
Transformation Order. As the GAO recognizes in the draft report, the 
Commission followed the Joint Board's recommendation in adopted the 
principle, pursuant to the Commission's section 254(b)(7) authority, 
that universal service support should be directed where possible to 
networks that provide advanced services as well as voice services. 
Moreover, many of the policy innovations adopted by the Commission in 
the USF/ICC Transformation Order arose from Joint Board discussions 
and past recommendations, including establishing a budget for the high-
cost program of $4.5 billion, establishing a separate fund dedicated 
to supporting mobility services, and the gradual elimination of 
support to competitive carriers under the "identical support rule." In 
the past, the Joint Board also suggested, and the Commission embraced 
in the USF/ICC Transformation Order, a new rates test as a condition 
of or an adjustment to cost-based support, providing more limits on 
support for operating expenses, and targeting support to only one 
service provider in an area and reducing or eliminating support to 
areas with multiple providers. The Commission's reforms are 
significant steps in implementing these past recommendations of the 
Joint Board, and we will continue our ongoing dialogue with the State 
Members of the Joint Board. 

Thank you again for providing the draft report to us for review and 
comment. We very much appreciate the recommendations and look forward 
to working with you in the future. 

Sincerely, 

Signed by: 

Julie A. Veach: 
Acting Chief, Wireline Competition Bureau: 

[End of section] 

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: 

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.[Footnote 49] 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. 

Table 5: Status of FCC Actions to Implement Recommendations from the 
National Broadband Plan: 

National Broadband Plan Recommendation: 
1. FCC should improve USF performance and accountability. As FCC 
reforms its USF support and disbursement mechanisms, it should also 
ensure that any future enhancements to the USF program have 
accountability and oversight provisions built in from the outset. As 
FCC moves forward on the reforms in the plan, it should enhance its 
data collection and reporting to ensure that the nation's funds are 
being used effectively to advance defined programmatic goals; 
FCC Actions: Planning under way. FCC established public interest 
obligations, including meeting certain broadband performance 
requirements, in exchange for receiving support. FCC also developed 
accountability mechanisms, such as requiring default payments, in case 
carriers receiving support default from their obligations. 

National Broadband Plan Recommendation: 
2. FCC should create the Connect America Fund. FCC's long range goal 
should be to replace all of the legacy high-cost programs with a new 
program that preserves the connectivity that Americans have today and 
advances universal broadband in the 21st century; 
FCC Actions: Implemented. In the USF Transformation Order, FCC created 
the Connect America Fund, which will ultimately replace the high-cost 
program. 

National Broadband Plan Recommendation: 
3. FCC should create a Mobility Fund. FCC should create a Mobility 
Fund to provide one-time support for deployment of 3G networks, to 
bring all states to a minimum level of 3G (or better) mobile service 
availability. FCC should select an efficient method, such as a market-
based mechanism, for supporting mobility in targeted areas; 
FCC Actions: Implemented. In the USF Transformation Order, FCC created 
the Mobility Fund. A one-time support of $300 million will be made 
available and disbursed through a competitive bidding process. Ongoing 
support of $500 million will also be made available for carriers to 
deploy a minimum level of 3G mobile service availability. 

National Broadband Plan Recommendation: 
4. FCC should design new USF funds in a tax-efficient manner to 
minimize the size of the gap. In certain circumstances, the Department 
of Treasury's Internal Revenue Service treats governmental payments to 
private parties for the purpose of making capital investments to 
advance public purposes as contributions to capital under section 118 
of the U.S. Internal Revenue Code. Such treatment allows recipients to 
exclude the payments from income, but reduces depreciation deductions 
in future years; 
FCC Actions: Planning under way. According to FCC officials, the first 
phase of Connect America Fund and Mobility Fund has been designed to 
enable carriers to seek an advisory ruling from the Internal Revenue 
Service that the funding represents a contribution to capital under 
section 118. 

National Broadband Plan Recommendation: 
5. Throughout the USF reform process, FCC should solicit input from 
Tribal governments on USF matters that affect Tribal lands. In 
recognition of Tribal sovereignty, FCC should solicit input from 
Tribal governments on any proposed changes to USF that would affect 
Tribal lands. Tribal governments should play an integral role in the 
process for designating carriers that may receive support to serve 
Tribal lands. The eligible carrier designation process should require 
consultation with the relevant Tribal government after a carrier files 
an application to serve a Tribal land. It should also require that an 
eligible carrier file a plan with both FCC (or state, in those cases 
where a carrier is seeking eligible carrier designation from a state) 
and the Tribe on proposed plans to serve the area; 
FCC Actions: Planning under way. FCC is requiring eligible carriers 
serving Tribal lands to demonstrate and report meaningful engagement 
with Tribal governments in their supported areas. Carriers must 
document that they had, at the minimum, discussions that included: (1) 
a needs assessment and deployment planning with a focus on Tribal 
community anchor institutions; (2) feasibility and sustainability 
planning; (3) marketing services in a culturally sensitive manner; 
(4) rights of way processes, land use permitting, facilities siting, 
environmental and cultural preservation review processes; and (5) 
compliance with Tribal business and licensing requirements. 

National Broadband Plan Recommendation: 
6. FCC should take action to shift up to $15.5 billion over the next 
decade from the current high-cost program to broadband through 
commonsense reforms. FCC should issue an order to implement the 
voluntary commitments of Sprint and Verizon Wireless to reduce the 
high-cost funding they receive as competitive carriers to zero over a 
5-year period as a condition of earlier merger decisions. FCC should 
require rate-of-return carriers to move to incentive regulation. FCC 
should phase out the remaining legacy high-cost support for 
competitive carriers and establish a schedule to reduce support to 
zero over 5 years. As support levels for competitive carriers are 
reduced, this funding should be redirected toward broadband. Depending 
on the details and timing of implementation, these actions 
collectively will free up to $15.5 billion (present value in 2010 
dollars) in funding from the legacy high-cost program between 2010 and 
2020; 
FCC Actions: Planning under way. Proposals to move rate-of-return 
carriers to an incentive regulation are out for comment. FCC also 
froze support for each competitive carrier at the 2011 monthly 
baseline amount, starting in January 1, 2012. Beginning July 1, 2012, 
FCC plans to 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, 2012. 

National Broadband Plan Recommendation: 
7. FCC should examine middle-mile costs and pricing. An examination of 
middle-mile costs and pricing should occur in concert with the 
comprehensive USF reform program; 
FCC Actions: Planning under way. FCC is gathering data, as part of its 
consideration of special access reform. The FCC Chairman circulated a 
proposed item to the other commissioners, setting forth a path to 
reform and modernize FCC's rules for special access services to 
protect competition and ensure access to robust, affordable broadband 
for small business, mobile providers, and others. 

National Broadband Plan Recommendation: 
8. FCC should begin making disbursements from the Connect America 
Fund. Once FCC completes rulemakings to establish the parameters of 
the new Connect America Fund, it should begin to distribute funds to 
discrete geographic areas that contain unserved households; 
FCC Actions: Planning under way. As part of the first phase of 
implementing the Connect America Fund, FCC froze support for price cap 
carriers and announced incremental support amounts under the Connect 
America Fund. 

National Broadband Plan Recommendation: 
9. FCC should broaden the universal service contribution base. As FCC 
establishes the Connect America Fund, it should also adopt revised 
contribution methodology rules to ensure that USF remains sustainable 
over time; 
FCC Actions: Planning under way. FCC developed proposals to reform and 
modernize how USF contributions are assessed and recovered. A Notice 
for Proposed Rulemaking is out for public comment. 

National Broadband Plan Recommendation: 
10. FCC should manage the total size of USF to remain close to its 
current size (in 2010 dollars) in order to minimize the burden of 
increasing universal service contributions on consumers. Unrestrained 
growth of the USF, regardless of reason, could jeopardize public 
support for the goals of universal service. FCC should aim to keep the 
overall size of the fund close to its current size (in 2010 dollars), 
while recognizing that the uncapped parts of USF may continue to grow 
due to factors outside the scope of the National Broadband Plan. As 
FCC implements the recommendations of the plan, it should evaluate 
innovative strategies to leverage the reach of existing governmental 
support programs and evaluate whether to adjust the relative 
proportion of supply-side versus demand-side subsidies over time; 
FCC Actions: Partially implemented. In the USF Transformation Order, 
FCC established a budget of $4.5 billion annually over the next 6 
years. 

National Broadband Plan Recommendation: 
11. FCC should eliminate the legacy high-cost program, with all 
federal government funding to support broadband availability provided 
through the Connect America Fund. By 2020, the "old" high-cost program 
will cease operations, and service providers will only receive support 
for deployment and provision of supported services (i.e., broadband 
that offers high-quality voice) through the Connect America Fund. FCC 
should set a deadline for recipients of USF to offer supported 
services. FCC should consider alternative approaches, such as 
satellite broadband, for addressing the most costly areas of the 
country to minimize the contribution burden on consumers across 
America; 
FCC Actions: Planning under way. In the USF Transformation Order, FCC 
created the Connect America Fund to ultimately replace the high-cost 
program. FCC has established deadlines to offer supported services. 
For instance, carriers receiving incremental support from the Connect 
America Fund in 2012 are required to complete broadband deployment to 
all required locations within 3 years. FCC is considering alternative 
approaches, such as satellite broadband, for addressing the most 
costly areas. 

Source: GAO analysis of the National Broadband Plan and USF 
Transformation Order. 

Note: The National Broadband Plan made 15 recommendations under the 
universal service category, which included recommendations for 
reforming intercarrier compensation. Because we did not review 
intercarrier compensation, those recommendations were not included in 
our analysis and the table above. One recommendation that was not 
directed to FCC was also excluded from our analysis. 

[End of table] 

Table 6: Key Actions and Timeline for Implementing the USF 
Transformation Order: 

Time frame: Nov. 18, 2011; 
Key Actions and Requirements: USF Transformation Order released. 

Time frame: Jan. 1, 2012; 
Key Actions and Requirements: 
* FCC froze high-cost support to carriers, equal to the amount of 
support the carriers received in 2011 in a given study area; 
* FCC eliminated the identical support rule and began phasing down the 
support provided to carriers under that rule. 

Time frame: Feb. 15, 2012; 
Key Actions and Requirements: The Universal Service Administrative 
Company (USAC) published each carrier's frozen high-cost support 
amount. 

Time frame: April 25, 2012; 
Key Actions and Requirements: FCC announced the $300-million 
incremental support amounts for carriers (this occurred about a month 
later than the originally planned March 31, 2012, date in the USF 
Transformation Order). 

Time frame: June 1, 2012; 
Key Actions and Requirements: As directed in the USF Transformation 
Order, FCC issued a progress report on the status of developing a cost 
model for price-cap carriers, in preparation for implementing the 
revised disbursement mechanisms (i.e., the cost model and competitive 
bidding mechanisms) under the Connect America Fund. 

Time frame: July 25, 2012; 
Key Actions and Requirements: Each carrier must notify FCC within 90 
days of being informed of the incremental support amount (i.e., April 
25, 2012), identifying the amount of support it wishes to accept and 
the areas by wire centers and census blocks in which the carrier 
intends to deploy broadband to meet its obligation. Carriers can also 
decline the incremental support. 

Time frame: September 27, 2012; 
Key Actions and Requirements: Competitive bidding for the one-time, 
$300-million disbursement of the Mobility Fund is scheduled to begin. 

Time frame: December 31, 2012; 
Key Actions and Requirements: 
* FCC plans to have adopted a forward-looking cost model for the 
purpose of implementing the second phase of the Connect America Fund; 
* FCC will begin disbursing $300 million from the Mobility Fund no 
later than 2013. 

Time frame: January 1, 2013; 
Key Actions and Requirements: 
* FCC will begin implementing the second phase of Connect America 
Fund, which consists of generating a support amount from a cost-model 
and/or conducting competitive bidding; 
* Contingency plan will take effect if second phase of Connect America 
Fund (i.e., the cost model and competitive bidding mechanism) is not 
ready for implementation; 
* FCC will phase in a requirement that carriers use the incremental 
support amount for building and operating broadband-capable networks 
and offering broadband services in substantially unserved areas. 

Time frame: 2013; 
Key Actions and Requirements: 
* All carriers receiving frozen high-cost support will be required to 
use at least one-third of the support to build and operate broadband-
capable networks used to offer broadband services in substantially 
unserved areas; 
* Carriers accepting support that was generated from the cost-model 
will receive half of the full amount the carrier was designed to 
receive and half the amount the carrier received under the first phase 
of the Connect America Fund (which would be the frozen 2011 support 
amount or the frozen amount plus the incremental support amount the 
carrier may have accepted from the first phase of implementing the 
Connect America Fund). 

Time frame: July-September 2013; 
Key Actions and Requirements: FCC plans to hold a reverse auction 
(i.e., competitive bidding) in the third quarter of 2013, with an 
annual budget of $500 million from the Mobility Fund. 

Time frame: 2014; 
Key Actions and Requirements: 
* At least two-thirds of the frozen high-cost support from Connect 
America Fund must be used as required; 
* Carriers declining the support amount generated from the cost-model 
of the Connect America Fund will continue to receive support in an 
amount equal to its 2011 support amount until the first month that the 
winner of any competitive process receives support under the second 
phase of implementing the Connect America Fund; 
at that time, the carrier declining support in the second phase will 
stop receiving high-cost universal service support; 
* If carriers accepted incremental support in 2012, then they are 
required by this time to complete broadband deployment to no less than 
two-thirds of the required number of locations within 2 years; 
* FCC will begin disbursing $500 million from the Mobility Fund. 

Time frame: 2015; 
Key Actions and Requirements: 
* All frozen high-cost support disbursed under the Connect America 
Fund must be spent as required. Carriers will be required to certify 
that they have spent high-cost support consistent with FCC 
requirements in their annual filings; 
* Carriers receiving incremental support from the Connect America Fund 
in 2012 are required to complete broadband deployment to all required 
locations. 

Time frame: 2016; 
Key Actions and Requirements: Carriers receiving support under the 
cost-model must offer at least 4 Megabits per second (Mbps) download 
and 1 Mbps upload broadband service level to at least 85 percent of 
their high-cost locations, including those on Tribal lands. 

Time frame: 2017; 
Key Actions and Requirements: FCC plans to evaluate the need for 
ongoing support at the set budget levels and determine how best to 
drive support to efficient levels, given consumer demand and 
technological developments at that time. 

Time frame: 2018; 
Key Actions and Requirements: 
* By the end of the fifth year, price-cap carriers must offer at least 
4 Mbps download and 1 Mbps upload broadband service level to all 
supported locations, and at least 6 Mbps download and 1.5 Mbps upload 
speed to a number of supported locations to be specified; 
* After the end of the 5-year planned term, FCC plans to distribute 
all support for price-cap areas, using a market-based mechanism (i.e., 
competitive bidding) from the Connect America Fund. 

Source: GAO analysis of FCC information. 

[End of table] 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mark L. Goldstein, (202) 512-2834, or goldsteinm@gao.gov: 

Staff Acknowledgments: 

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. 

[End of section] 

Related GAO Products: 

Telecommunications: FCC's Performance Management Weaknesses Could 
Jeopardize Proposed Reforms of the Rural Health Care Program. 
[hyperlink, http://www.gao.gov/products/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. [hyperlink, 
http://www.gao.gov/products/GAO-11-11]. Washington, D.C.: October 28, 
2010. 

Telecommunications: FCC Should Assess the Design of the E-rate 
Program's Internal Control Structure. [hyperlink, 
http://www.gao.gov/products/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. [hyperlink, 
http://www.gao.gov/products/GAO-09-253]. Washington, D.C.: March 27, 
2009. 

Telecommunications: FCC Needs to Improve Performance Management and 
Strengthen Oversight of the High-Cost Program. [hyperlink, 
http://www.gao.gov/products/GAO-08-633]. Washington, D.C.: June 13, 
2008. 

[End of section] 

Footnotes: 

[1] The high-cost program is the subject of this report. The other 
three USF programs subsidize telecommunication carriers that serve low-
income consumers, schools and libraries, and rural health care 
providers. For more information on the USF programs, see the "related 
products" page at the end of this report. 

[2] Congress required FCC to develop a broadband plan and to report 
annually on the state of broadband availability. American Recovery and 
Reinvestment Act, Pub. L. No. 111-5, §6001(k)(1), 123 Stat. 115, 515 
(2009). 

[3] Federal Communications Commission, Connecting America: The 
National Broadband Plan (Mar. 16, 2010). 

[4] We refer to this order as the USF Transformation Order. Connect 
America Fund et al., WC Docket No. 10-90 et al., Report and Order and 
Further Notice of Proposed Rulemaking, 26 FCC Rcd 17663 (2011). 

[5] GAO, Telecommunications: FCC Needs to Improve Performance 
Management and Strengthen Oversight of the High-Cost Program, 
[hyperlink, http://www.gao.gov/products/GAO-08-633] (Washington, D.C.: 
June 13, 2008). 

[6] USAC is the not-for-profit corporation that administers USF 
programs under FCC's direction. 

[7] NECA is a not-for-profit association of local telephone carriers 
established by FCC in 1983 to perform telephone industry tariff 
filings and revenue distributions. NECA collects cost and line count 
data from its members and validates this information. 

[8] NASUCA is an association of 44 consumer advocates in 40 states and 
the District of Columbia. NASUCA's members are designated by the laws 
of their respective jurisdictions to represent the interests of 
utility consumers before state and federal regulators and in the 
courts. 

[9] In February 2012, FCC adopted new rules for another USF program 
that includes developing a pilot to determine how USF monies could be 
used to increase broadband adoption among low-income consumers. 
Lifeline and Link Up Reform and Modernization et al., Report and Order 
and Further Notice of Proposed Rulemaking, WC Dkt. Nos. 11-42 et al., 
CC Dkt No. 96-45, FCC 12-11, para. 515 (rel. Feb. 6, 2012). 

[10] In the USF Transformation Order, FCC also reformed the 
intercarrier compensation system. Intercarrier compensation refers to 
a system of payments between carriers for the origination, 
transportation, and termination of telecommunications traffic. 

[11] 47 U.S.C. § 254(b)(3). 

[12] FCC does not have to implement the recommendations made to it by 
the Joint Board but it is required to consider them. 

[13] 47 U.S.C. § 254(d). 

[14] This calculation is based on the total size of the USF divided by 
the number of households, but since USF contributions are also 
assessed to businesses, FCC believes the average cost to each 
household is likely to be less than $2.73 per month. 

[15] Wireline carriers are providers of traditional landline 
telecommunications services involving connections to the public 
switched telephone network by wire (or fiber) local loops that 
terminate in fixed locations at customer premises, such as residences. 
Wireless carriers are providers of wireless telecommunications 
services, operating with electromagnetic waves, such as providing 
cellular phone service. 

[16] Rate-of-return regulation is a form of rate regulation wherein 
the carrier is allowed to recover its costs and earn a predetermined 
rate (or profit). Price-cap regulation is a form of rate regulation 
wherein the carrier may charge rates for regulated services up to an 
allowable cap, which is adjusted based on factors beyond the carrier's 
control, such as inflation. 

[17] FCC also designates eligibility status of some carriers to 
receive high-cost program funds. 

[18] Broadband connections in the U.S. can provide speeds exceeding 1 
Mbps both upstream (data transferred from the consumer to the Internet 
service provider, also known as upload) and downstream (data 
transferred from the Internet service provider to the consumer, also 
known as download). 

[19] GAO, Telecommunications: National Broadband Plan Reflects the 
Experiences of Leading Countries, but Implementation Will Be 
Challenging, [hyperlink, http://www.gao.gov/products/GAO-10-825] 
(Washington, D.C.: Sept. 14, 2010). 

[20] For the years 2012-2017, USAC will forecast total high-cost 
universal service demand as no less than $1.125 billion. When the 
demand for high-cost funds is less than $1.125 billion, the excess 
funds will become the fund's reserves and will be used to make up the 
difference when demand exceeds $1.125 billion in a quarter. 

[21] It should be noted that FCC's budget for the high-cost program is 
not the same as a firm cap, since unlike a firm cap, the $4.5 billion 
budget can be exceeded. 

[22] Some carriers were required to meet state-defined obligations for 
carriers of last resort, which include among other things, providing 
reliable service on nondiscriminatory terms at rates set by the state 
commission. Although there were no federal carriers of last resort 
obligations, carriers receiving USF support payments were conditioned 
to meet limited requirements, such as providing single phone line 
service and touch-tone dialing. 

[23] Jeffrey A. Eisenach, Universal Service Subsidies to Areas Served 
by Cable Telephony, (November 2009). 

[24] In June 2010, the Committee on Energy and Commerce, U.S. House of 
Representatives, requested that FCC provide a list of the top 10 
recipients of high-cost support and the amount of support received, in 
total and by subscriber line, and the list of competitors providing 
service in that area that did not receive high-cost support for years 
2007-2009. 

[25] This phase down period will start once FCC establishes a 
methodology for determining areas of overlap and publishes a list of 
companies for which there is 100 percent overlap. These issues are 
part of a pending Further Notice. 

[26] FCC also made an additional $300 million in incremental support 
available to incumbent price-cap carriers to encourage immediate 
broadband build-out. 

[27] The carrier who proposes the lowest bid will be able to deploy 
the broadband-capable network in that area and receive high-cost 
support payments. FCC sometimes refers to this competitive bidding 
process as a "reverse auction" since the lowest bid wins. 

[28] Connect America Fund; High-Cost Universal Service Support, WC 
Docket Nos. 10-90, 05-337, Order, DA 12-646 (Wireline Comp. Bur. rel. 
Apr. 25, 2012), para. 1 and 2 

[29] According to FCC, some 13,500 lines will be affected with the 
$250 per line per month cap. If the cap had been set at $100 per line 
per month, then about 185,000 lines in 108 service areas would have 
been affected in 2010. 

[30] The term standard deviation refers to how spread out or widely 
dispersed the values in the sample are from the mean of the sample. 

[31] 47 U.S.C.§ 254 (b)(3). 

[32] OMB. Program Assessment - Universal Service Fund High-Cost 
[hyperlink, http://georgewbush-
whitehouse.archives.gov/omb/expectmore/detail/10004451.2005.html], 
(accessed July 3, 2012). 

[33] [hyperlink, http://www.gao.gov/products/GAO-08-633]. 

[34] [hyperlink, http://www.gao.gov/products/GAO-08-633]. 

[35] These two programs are called the Beneficiary/Contributor 
Compliance Audit Program and the Payment Quality Assurance Program. 

[36] [hyperlink, http://www.gao.gov/products/GAO-08-633]. 

[37] For the first phase of the Connect America Fund, FCC established 
a requirement that carriers must have completed build-out to two-
thirds of the requisite number of locations within 2 years. FCC also 
directed USAC to assess compliance with this requirement for each 
holding company that receives funds during the first phase. According 
to FCC, any oversight program to assess compliance will be designed to 
ensure that carriers are reporting accurately and will be designed to 
test some of the underlying data that forms the basis for a carrier's 
certification of compliance with various requirements. 

[38] Service area is usually the service territory where a 
telecommunications carrier operates and provides services in one 
state. Holding companies may own multiple operating companies and thus 
have multiple service areas in a state. 

[39] USF Transformation Order, Appendix A, ¶54.313. 

[40] GAO, Telecommunications: FCC's Performance Management Weaknesses 
Could Jeopardize Proposed Reforms of the Rural Health Care, 
[hyperlink, http://www.gao.gov/products/GAO-11-27] (Washington, D.C.: 
Nov. 17, 2010). 

[41] FCC noted that this data will not allow direct attribution of 
improvement in the availability of broadband to the amount of money 
provided as this would assume that there would not be any investment 
on the part of the carrier. 

[42] Gregory Rosston and Bradley Wimmer, "The 'State' of Universal 
Service," Information Economics and Policy 12, no.3 (2000): 261-283; 
Scott Wallsten, The Universal Service Fund: What do High-Cost 
Subsidies Subsidize?" (Washington, D.C.: Technology Policy Institute, 
February 2011). 

[43] USF Transformation Order, para 235 & 240. 

[44] FCC requires carriers to report the number of customer lines that 
are less than the average urban rate. 

[45] USF Transformation Order, para 237. 

[46] FCC plans to complete the model by the end of 2012 and has not 
yet made the proposed model public. FCC officials believe FCC is not 
prohibited per se from considering revenues. Rather, FCC would 
consider the statutory directives, relevant legal precedent, and the 
record in the relevant FCC proceedings in determining whether support 
is sufficient but not excessive to achieve the goals of universal 
service. 

[47] USAC is the not-for-profit corporation that administers the USF 
programs. 

[48] NECA is a not-for-profit association of local telephone carriers 
established by FCC in 1983 to perform telephone industry tariff 
filings and revenue distributions. 

[49] We are reporting on recommendations specifically directed to FCC 
related to the high-cost fund. 

[End of section] 

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