On May 10, 2022, the FCC released an Order in Docket 10-90 in which it temporarily waives, on its own volition, the application of the budget control mechanism for rate-of-return (ROR) carriers that receive high-cost universal service support from legacy mechanisms. Instead, it adopts a budget constraint of 0 percent for the July 2022 to June 2023 tariff year. Here is what this means.

Under the Commission’s rules, ROR ILECs that count on historical universal service support are eligible for High-Cost Loop Support (HCLS) and Connect America Fund Broadband Loop Support (CAF BLS).

HCLS provides support to carriers with high loop costs based on the extent that an individual company’s cost per loop exceeds the national average cost per loop. CAF BLS supports voice and broadband-only lines to the extent that the carrier’s costs (i.e., revenue requirements) exceed its revenues. (Docket 10-90, May 10, 2022, Order at para. 2.).

Complicating the situation, in its previous Order in this proceeding that reduced most terminating switched access rates to bill-and-keep, the FCC adopted an overall budget for the high-cost universal service program, including a $2 billion annual budget for rate-of-return carriers including controls.

To ensure that the support distributed to rate-of-return carriers did not exceed $2 billion annually, the Commission subsequently adopted a “self-effectuating mechanism”—known as the budget control mechanism—to enforce the rate-of-return budget by reducing HCLS and CAF BLS claims as necessary to meet the budget constraint. The Commission subsequently adopted a guaranteed minimum so that no carrier’s total legacy support in any year would fall below its CAF BLS forecast for that year. (Id.).

The budget control mechanism helps ROR ILECs manage their budgets and provides stability to the Universal Service Fund. The budget control mechanism ensures that overall ROR ILEC support increases each year by no more than the rate of inflation.

However, according to the Commission, in the upcoming tariff period from July 1, 2022 to June 30, 2023, ROR carriers will face a unique situation.

Based on carrier filings, the projected budget control adjustment factor for July 2022 to June 2023 would be 0.8571997. This means that the projected total support (including true-ups) for legacy rate-of-return carriers for July 1, 2022, to June 30, 2023, will exceed the budget by approximately 14%. To determine each carrier’s support, USAC calculates a pro rata reduction for carrier support projections to ensure that total support remains within the budget constraint but then ensures that no carrier’s support goes below the minimum threshold for that carrier. (Id., at para 5.).

Thus, on average if the Commission takes no action, each ROR ILEC would have to reduce its budget by 14 percent beginning in July. The Commission sees this as unworkable with the state of the industry and Covid. Therefore, it will not enforce this budget reduction.

Absent a waiver, the projected budget control reduction factor would exceed 14%, resulting in a substantial reduction in support for most legacy rate-of-return carriers, at a time when they are facing cash flow issues and increased expenses arising out of the pandemic. In part, the growth in projected support is due to an increased conversion of voice lines to broadband-only lines, which receive a higher support amount, and an increase in the number of new customers subscribing to broadband-only lines, particularly given population migration during the pandemic to areas served by legacy rate-of-return carriers. NTCA – the Rural Broadband Association (NTCA) explains that “a mix of increased investment and greater customer adoption of standalone broadband services has led to demand for support in excess of what was projected four years ago.” Moreover, while the budget control mechanism annually provides an upwards adjustment to account for inflation, it does not fully account for increased costs in this instance because the inflation factor is backward looking. For instance, the inflation adjustment for the budget control mechanism for the relevant time- period was 1.3%. Projected CAF BLS, though, is forward looking (i.e., based on projected costs), and today’s projected costs account for the current inflation rate of 8.1%. (Id., at para. 8).

Regardless of the worthiness of the Commission’s actions, and we have tremendous sympathy for rural ROR ILECs, the failure to stay within the High-Cost Fund budget will put the responsibility on USAC to determine how to pay for this. Thus, do not be surprised if the monthly universal factor continues to increase. That increase will likely continue until the contribution methodology is changed.