Federal Communications Commission FCC 10-58 
 
Before the 
Federal Communications Commission 
Washington, D.C. 20554 
 
 
In the Matter of 
 
Connect America Fund 
 
A National Broadband Plan for Our Future 
 
High-Cost Universal Service Support 
 
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WC Docket No. 10-90 
 
GN Docket No. 09-51 
 
WC Docket No. 05-337 
 
 
 
 
NOTICE OF INQUIRY AND NOTICE OF PROPOSED RULEMAKING 
 
Adopted:   April 21, 2010             Released:  April 21, 2010 
 
Comment Date: (60 days from publication in the Federal Register) 
Reply Comment Date:  (90 days from publication in the Federal Register) 
 
By the Commission: Chairman Genachowski and Commissioners Copps, McDowell, Clyburn and Baker 
issuing separate statements. 
TABLE OF CONTENTS 
Heading Paragraph # 
I. INTRODUCTION.................................................................................................................................. 1 
II. NOTICE OF INQUIRY ......................................................................................................................... 3 
A. Background...................................................................................................................................... 3 
1. Current High-Cost Support Programs ....................................................................................... 3 
2. The Commission’s Hybrid Cost Proxy Model .......................................................................... 5 
3. National Broadband Plan........................................................................................................... 9 
4. The National Broadband Plan Model...................................................................................... 11 
B. Discussion...................................................................................................................................... 13 
1. Model ...................................................................................................................................... 14 
a. Use of a Model..................................................................................................................17 
b. Cost Basis for Support ...................................................................................................... 23 
c. Types of Models ............................................................................................................... 31 
(i) HCPM vs. New Model ............................................................................................... 31 
(ii) Total Costs vs. Incremental Costs .............................................................................. 33 
(iii) Cost vs. Cost and Revenue......................................................................................... 35 
d. Geographic Areas ............................................................................................................. 41 
2. Expedited Process for Providing Funding to Extend Networks in Unserved Areas ............... 43 
III. NOTICE OF PROPOSED RULEMAKING ........................................................................................ 49 
A. Background.................................................................................................................................... 49 
B. Discussion...................................................................................................................................... 51 
1. Controlling the Size of the High-Cost Program ...................................................................... 51 
2. Specific Steps to Cut Legacy High-Cost Support ................................................................... 53 
IV. PROCEDURAL MATTERS................................................................................................................ 63 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
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A. Initial Regulatory Flexibility Analysis........................................................................................... 63 
B. Paperwork Reduction Act Analysis ............................................................................................... 64 
C. Ex Parte Presentations .................................................................................................................. 65 
D. Comment Filing Procedures .......................................................................................................... 66 
V. ORDERING CLAUSES....................................................................................................................... 74 
 
APPENDIX A:  Initial Regulatory Flexibility Analysis 
APPENDIX B:  Comments of 61 Economists 
APPENDIX C:  Omnibus Broadband Initiative, The Broadband Availability Gap 
 
By the Commission: 
 
I. INTRODUCTION 
1. On March 16, 2010, the Commission released a Joint Statement on Broadband stating 
that “[t]he nearly $9 billion Universal Service Fund (USF) and the intercarrier compensation (ICC) 
system should be comprehensively reformed to increase accountability and efficiency, encourage targeted 
investment in broadband infrastructure, and emphasize the importance of broadband to the future of these 
programs.”
1
  On the same day, the Commission delivered to Congress a National Broadband Plan 
recommending that the Commission adopt cost-cutting measures for existing voice support and create a 
Connect America Fund (CAF), without increasing the overall size of the Fund, to support the provision of 
broadband communications in areas that would be unserved without such support or that depend on 
universal service support for the maintenance of existing broadband service.
2
   
2. Today’s notice of inquiry (NOI) and notice of proposed rulemaking (NPRM) is the first 
in a series of proceedings to implement that vision.  This proceeding will develop the detailed analytic 
foundation necessary for the Commission to distribute funds in an efficient, targeted manner that avoids 
waste and minimizes burdens on American consumers.  The NOI seeks comment on whether the 
Commission should use a model to help determine universal service support levels in areas where there is 
no private sector business case to provide broadband and voice services.  The NOI also seeks comment on 
the best way to create an accelerated process to target funding toward new deployment of broadband 
networks in unserved areas, while we are considering final rules to implement fully a new CAF funding 
mechanism that efficiently ensures universal access to broadband and voice services.  Finally, the 
accompanying NPRM seeks comment on specific common-sense reforms to cap growth and cut 
inefficient funding in the legacy high-cost support mechanisms and to shift the savings toward broadband 
communications. 
II. NOTICE OF INQUIRY 
A. Background 
1. Current High-Cost Support Programs 
3. The purpose of high-cost universal service support always has been to help ensure that 
consumers have access to telecommunications services in areas where the cost of providing such services 
would otherwise be prohibitively high.  The current system of high-cost support has achieved 
 
1
 Joint Statement on Broadband, GN Docket No. 10-66, Joint Statement on Broadband, FCC 10-42 (rel. Mar.16, 
2010) at 2. 
2
 Federal Communications Commission, Connecting America: The National Broadband Plan, (rel. Mar. 16, 2010) 
(National Broadband Plan) at 144. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
3
                                                     
considerable success, helping ensure access to affordable voice services in all regions of the nation.
3
  
However, it was not designed to universalize broadband.
4
  Today, federal high-cost support is provided 
through a complicated patchwork of programs, developed over decades, in which the types of support a 
carrier receives depends on the size and regulatory classification of the carrier, not the characteristics of 
the area to which support is directed.
5
  Because only voice is a supported service, there is no requirement 
to provide broadband service to consumers, nor is there any mechanism to ensure that support is targeted 
toward extending broadband service to unserved areas.
6
  Moreover, some of the current high-cost 
programs do not provide support in an economically efficient manner.  For example, eligibility for certain 
types or levels of support is based on company size or regulatory classification, rather than the cost of 
serving the area.
7
  In addition, several programs provide support based on an incumbent carrier’s 
embedded costs, whether or not a competitor provides, or could provide, service at a lower cost. 
4. In the Universal Service First Report and Order, the Commission found that “the proper 
measure of cost for determining the level of universal service support is the forward-looking economic 
cost of constructing and operating the network facilities and functions used to provide the supported 
services.”
8
  Prior to the Telecommunications Act of 1996,
9
 explicit federal universal service support was 
based on embedded costs.  In setting forth the framework for implementing the 1996 Act, the 
Commission found that “the use of embedded cost to calculate universal service support would lead to 
subsidization of inefficient carriers at the expense of efficient carriers and could create disincentives for 
 
3
 The Commission’s most recent report on telephone subscribership, released in February 2010, found that the 
telephone subscribership penetration rate in the United States in 2009 had increased to 95.7 percent – the highest 
reported penetration rate since the Census Bureau began collecting such data in November 1983.  Industry Analysis 
and Technology Division, Wireline Competition Bureau, Telephone Subscribership in the United States, 3 (February 
2010) (Telephone Subscribership Report). 
4
 See National Broadband Plan at 135. 
5
 The federal high-cost support mechanism includes five major components.  High-cost loop support provides 
support for intrastate network costs to rural incumbent local exchange carriers (LECs) in service areas where the 
cost to provide service exceeds 115 percent of the national average.  See 47 C.F.R. § 36.631.  Rural incumbent LECs 
may also receive support under two additional sub-mechanisms in limited circumstances.  Carriers may qualify for 
additional support, i.e., safety net additive support, if they demonstrate significant investment in infrastructure.   See 
47 C.F.R. § 36.605.  Carriers may be eligible for additional support, i.e., safety value support, in instances where 
they acquire exchanges and invest in that infrastructure.  See 47 C.F.R. § 54.305(d).  Local switching support 
provides intrastate support for switching costs for companies that serve 50,000 or fewer access lines.  See 47 C.F.R. 
§ 54.301.  High-cost model support provides support for intrastate network costs to non-rural incumbent LECs in 
states where the cost to provide service in non-rural areas exceeds two standard deviations above the national 
average cost per line.  See 47 C.F.R. § 54.309.  Interstate access support (IAS) provides support for price cap 
carriers to offset certain reductions in interstate access charges.  See 47 C.F.R. § 54.800-809.  Interstate common 
line support (ICLS) provides support to rate-of-return carriers, to the extent that subscriber line charge (SLC) caps 
do not permit such carriers to recover their interstate common line revenue requirements.  See 47 C.F.R. § 54.901-
904. 
6
 See National Broadband Plan at 141. 
7
 Small carriers typically receive considerably more per-line support than larger carriers serving high-cost 
geographic areas. 
8
 See Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 
8899, para. 224 (1997) (Universal Service First Report and Order) (subsequent history omitted).   
9
 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996 Act).  The 1996 Act amended the 
Communications Act of 1934.  47 U.S.C. § 151, et seq. (Communications Act or Act). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
4
odel.  
                                                     
carriers to operate efficiently.”
10
  In 1997, the Commission determined that, initially, the larger, i.e., “non-
rural,” carriers, such as the Regional Bell Operating Companies, would transition to receiving support 
based on forward-looking economic cost, and that the smaller, i.e., “rural,” carriers, would gradually shift 
to a support system based on forward-looking economic cost after further review.
11
  Subsequently, in 
2001, the Commission adopted modified embedded cost support rules for rural carriers pending more 
comprehensive reform.
12
  As a consequence, only non-rural high-cost support is based on forward-
looking economic cost, as determined by the Commission’s voice telephony cost m
13
2. The Commission’s Hybrid Cost Proxy Model  
5. In 1997, the Commission adopted ten criteria to be used in estimating the forward-
looking economic cost of providing universal service in high-cost areas and thereby ensure economically 
efficient levels of support.
14
  For example, the “technology assumed in the . . . model must be the least-
cost, most-efficient, and reasonable technology for providing the supported services that is currently 
being deployed.”
15
  Because existing incumbent local exchange carrier plant in a particular area may not 
reflect forward-looking technology or design choices, the costs estimated by the model “must not be the 
embedded cost of the facilities, functions, or elements.”
16
  Instead, the model “must be based upon an 
examination of the current cost of purchasing facilities and equipment.”
 17
  To reflect the economies of 
scale associated with the provision of multi-line business, special access, and private lines, the model 
“must estimate the cost of providing service for all businesses and households within a geographic 
 
10
 Universal Service First Report and Order, at 8901, para. 228. 
11
 Id. at 8889, paras. 203-204.  
12
 See Federal-State Joint Board on Universal Service, Multi-Association Group (MAG) Plan for Regulation of 
Interstate Services of Non-Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers , CC Docket 
Nos. 96-45, 00-256 Fourteenth Report and Order and Twenty-Second Order on Reconsideration, Report and Order, 
16 FCC Rcd 11244, 11248, para. 8 (2001) (Rural Task Force Order).  Based on the Rural Task Force proposals, the 
Commission adopted modified embedded cost rules to provide support to rural carriers for a five-year period.  Over 
the next few years, the Commission had planned to develop a “long-term universal service plan for rural carriers that 
is better coordinated with the non-rural mechanism,” and “that better targets support to carriers serving high-cost 
areas.”  Id.  The Commission stated that “in developing a long-term universal service plan that better targets support 
to the highest cost rural areas, we intend to consider all options, including the use of forward-looking costs, to 
determine appropriate support levels for both rural and non-rural carriers.”  Id. at 11310, para. 170.  The 
Commission further indicated that, although it believed that distinct rural and non-rural mechanisms were 
appropriate at that time, two distinct mechanisms might not be viable in the long term.  Id.  In 2004, the Commission 
asked the Joint Board to review the Commission’s rules regarding high-cost support for rural carriers and to 
determine the appropriate rural mechanism to succeed the five-year plan adopted in the Rural Task Force Order.  
See Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Order, 19 FCC Rcd 11538 (2004) 
(Rural Referral Order).  Although the Commission originally intended that the rules adopted in the Rural Task 
Force Order would remain in place for five years, the Joint Board had not completed its review and 
recommendations by 2006.  The Commission extended those rules until such time that it “adopts new high-cost 
support rules for rural carriers.”  Federal-State Joint Board on Universal Service; High-Cost Universal Service 
Support, CC Docket No. 96-45, WC Docket No. 05-337, Order, 21 FCC Rcd 5514, 5515, para. 2 (2006). 
13
 See infra para. 6. 
14
 See Universal Service First Report and Order, 12 FCC Rcd at 8912-16, para. 250.   
15
 Id. at 8913, para. 250 (criterion one). 
16
 Id. (criterion three). 
17
 Id. 
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region.”
18
  To enable all interested parties to review and comment on the model and its inputs, “all 
underlying data, formulae, computations, and software must be available,” and all underlying data should 
be verifiable.
19
  To provide transparency and flexibility, the cost model “must include the capability to 
examine and modify the critical assumptions and engineering principles.”
20
 
6. Using the ten criteria to provide guidance for selecting a cost model and its input values, 
the Commission, between 1997 and 1999, developed its current forward-looking economic cost model, 
called the Hybrid Cost Proxy Model (HCPM), in an open, deliberative process in which industry experts, 
state commissions, staff of the Federal-State Joint Board on Universal Service, and other interested parties 
provided valuable assistance.
21
  First, the Commission looked at the network design, engineering, and 
technology issues relevant to constructing a network to provide the supported services and adopted the 
model “platform,” i.e., assumptions about the design of the network and network engineering, and fixed 
characteristics such as soil and terrain.
22
  Second, the Commission looked at the costs of the components 
of the network, such as cable and switch costs, plant maintenance expenses, and various capital cost 
parameters, and adopted the model input values.
23
  The Commission developed an extensive record 
 
18
 Id. at 8915, para. 250 (criterion six). 
19
 Id. (criterion eight). 
20
 Id. (criterion nine). 
21
 See, e.g., Common Carrier Bureau to Post on the Internet Modifications to the Forward-Looking Economic Cost 
Model for Universal Service Support, Public Notice, CC Docket Nos. 96-45, 97-160, 14 FCC Rcd 1893 (1998); 
Common Carrier Bureau Releases Preliminary Common Input Values to Facilitate Selection of Final Input Values 
for the Forward-Looking Cost Model for Universal Service, Public Notice, CC Docket Nos. 96-45, 97-160,14 FCC 
Rcd 2372 (1999); Common Carrier Bureau Releases Preliminary Results Using Proposed Input Values in the 
Forward-Looking Cost Model for Universal Service, Public Notice, CC Docket Nos. 96-45, 97-160, 14 FCC Rcd 
9648 (1999); Common Carrier Bureau Releases Revised Spreadsheet for Estimating Universal Service Support 
Using Proposed Input Values in the Forward-Looking Cost Model, Public Notice, CC Docket Nos. 96-45, 97-160, 
14 FCC Rcd 11313(1999).  The Wireline Competition Bureau was previously named the Common Carrier Bureau.  
HCPM is available for downloading on the Commission’s Web site at 
http://www.fcc.gov/wcb/tapd/hcpm/welcome.html. 
22
 Federal-State Joint Board on Universal Service, Forward-Looking Mechanism for High-Cost Support for Non-
Rural LECs, Fifth Report and Order, CC Docket Nos. 96-45, 97-160, 13 FCC Rcd 21323, 21330 (1998) (Fifth 
Report and Order).  The model platform adopted by the Commission combined elements from each of the three 
models considered in that proceeding:  (1) the BCPM, Version 3.0 (BCPM); (2) the HAI Model, Version 5.0a 
(HAI); and (3) the Hybrid Cost Proxy Model, Version 2.5 (HCPM).  BCPM was submitted by BellSouth, US 
WEST, Inc., and Sprint.  HAI was submitted by AT&T and MCI.  HCPM was developed by Commission staff. 
23
 Federal-State Joint Board on Universal Service, Forward-Looking Mechanism for High Cost Support for Non-
Rural LECs, Tenth Report and Order, CC Docket Nos. 96-45, 97-160, 14 FCC Rcd 20156 (1999) (Tenth Report and 
Order), affirmed, Qwest Corp. v. FCC, 258 F.3d 1191 (10
th
 Cir. 2001) (Qwest I).  In the companion Ninth Report 
and Order, the Commission also adopted the methodology for determining high-cost support for non-rural carriers.  
Federal-State Joint Board on Universal Service, Ninth Report and Order and Eighteenth Order on Reconsideration, 
CC Docket 96-45, 14 FCC Rcd 20432 (1999) (Ninth Report and Order), remanded, Qwest I, 258 F.3d 1191; 
Federal-State Joint Board on Universal Service, Order on Remand, Further Notice of Proposed Rulemaking, and 
Memorandum Opinion and Order, CC Docket 96-45, 18 FCC Rcd 22559 (2003), remanded, Qwest Communications 
Int’l, Inc. v. FCC, 398 F.3d 1222 (10
th
 Cir. 2005) (Qwest II); High-Cost Universal Service Support; Federal-State 
Joint Board on Universal Service, FCC 10-56, Order on Remand and Memorandum Opinion and Order (2010) (rel. 
April 16, 2010) (Qwest II Remand Order).  The forward-looking cost mechanism takes the costs generated by the 
cost model, compares statewide average costs to a national benchmark, and provides support to non-rural carriers in 
those states where the costs exceed that benchmark.  This mechanism became effective January 1, 2000.  On July 
31, 2001, the United States Court of Appeals for the Tenth Circuit affirmed the Commission’s use of the cost model 
(continued….) 
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posed 
(Continued from previous page)                                                            
before adopting its high-cost universal service model, including issuing two further notices of pro
rulemaking,
24
 providing additional guidance to parties submitting cost models,
25
 and conducting several 
series of workshops on model platform and inputs issues and numerous ex parte meetings.
26
 
7. The Commission recognized that “the task of establishing a model to estimate forward-
looking costs is a dynamic process that will need to be reviewed and adjusted periodically,”
27
 and that 
“the model must evolve as technology and other conditions change.”
28
  Although the Commission’s 
forward-looking economic cost model used to determine non-rural support was adopted more than a 
decade ago, it has not been comprehensively updated.  It estimates the costs of a narrowband, circuit-
switched network that provides “plain old telephone service,” whereas today’s most efficient providers 
are constructing fixed or mobile networks that are capable of providing broadband as well as voice 
services.  Not only are the model inputs out-of-date, but the technology assumed by the model no longer 
reflects “the least-cost, most-efficient, and reasonable technology for providing the supported services 
that is currently being deployed.”
29
 
8. Today, a significant portion of current high-cost support is provided to both incumbent 
telephone companies and competitive telephone companies based on an incumbent carrier’s embedded 
costs, regardless of whether a competitor could provide service at a lower cost.  In 2009, the Commission 
 
and deferred to the Commission’s expertise in establishing the cost model’s technical specifications.  See Qwest I, 
258 F.3d at 1205-06. 
24
 See Federal-State Joint Board on Universal Service, Forward-Looking Mechanism for High-Cost Support for 
Non-Rural LECs, Further Notice of Proposed Rulemaking, CC Docket Nos. 96-45, 97-160, 12 FCC Rcd 18514 
(1997) (1997 Further Notice); Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Forward-
Looking Mechanism for High-Cost Support for Non-Rural LECs, Further Notice of Proposed Rulemaking, CC 
Docket No. 97-160, FCC 99-120 (rel. May 28, 1999), 64 Fed. Reg. 31,780 (June 14, 1999) (1999 Further Notice).  
25
 See, e.g., Guidance to Proponents of Cost  Models in Universal Service Proceeding:  Customer Location and 
Outside Plant, Public Notice, CC Docket Nos. 96-45, 97-160, 12 FCC Rcd 18340 (1997); Guidance to Proponents 
of Cost Models in Universal Service Proceeding:  Switching, Interoffice Trunking, Signaling, and Local Tandem 
Investment, Public Notice, CC Docket Nos. 66-45, 97-160, 13 FCC Rcd 5884 (1998); Common Carrier Bureau 
Requests Further Comment on Selected Issues Regarding the Forward-Looking Economic Cost Mechanism for 
Universal Service, Public Notice, CC Docket Nos. 96-45, 97-160, 13 FCC Rcd 9346 (1998); Common Carrier 
Bureau Seeks Comment on Model Platform Development, Public Notice, CC Docket Nos. 97-160, 13 FCC Rcd 
21680 (1998).   
26
 See, e.g., Weekly Meetings on Forward-Looking Cost Mechanism for Universal Service Support, Public Notice, 
CC Docket Nos. 96-45 and 97-160, 12 FCC Rcd 22481 (1997); Workshops on Forward-Looking Cost Mechanisms 
for Universal Service Support for Non-Rural Carriers, September 3 and September 11, 1997, Public Notice, CC 
Docket Nos. 96-45 and 97-160, 13 FCC Rcd 4276 (1998); Common Carrier Bureau to Hold Three Workshops on 
Input Values to be Used to Estimate Forward-Looking Economic Costs for Purposes of Universal Service Support, 
Public Notice, CC Docket Nos. 96-45, 97-160, 13 FCC Rcd 23728 (1998). 
27
 Fifth Report and Order, 13 FCC Rcd at 21330, para. 13. 
28
 Tenth Report and Order, 14 FCC Rcd at 20170, para. 28.  When the Commission adopted the model platform, it 
delegated to then Common Carrier Bureau (now the Wireline Competition Bureau) (Bureau) the authority to make 
technical changes “as necessary and appropriate” on an ongoing basis to ensure that the model operates as the 
Commission intended.  See Fifth Report and Order, 13 FCC Rcd at 21330, para. 13.  Pursuant to this delegated 
authority, the Bureau has made technical changes to the model platform and limited changes to the input values, 
such as updating annual line counts.  The Bureau last updated the lines used in the model to estimate costs in 2003 
(using year-end 2002 lines), and non-rural high-cost support has been based on these cost estimates since 2004.  
29
 Universal Service First Report and Order, 12 FCC Rcd at 8913, para. 250 (criterion one). 
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disbursed almost $4.3 billion in high-cost support, of which $331 million was calculated on the basis of 
forward-looking costs.
30
 
3. National Broadband Plan 
9. On March 16, 2010, the Commission delivered to Congress the National Broadband Plan, 
which recommends the creation of a Connect America Fund to address the broadband availability gap in 
unserved areas and to provide any ongoing support necessary to sustain service in areas that require 
public funding, including those areas that already may have broadband.
31
  The National Broadband Plan 
recommends that the Commission direct public investment toward meeting an initial national broadband 
availability target of 4 Mbps of actual download speed and 1 Mbps of actual upload speed.
32
  The 
National Broadband Plan used an initial target of 4 Mbps actual download speed and 1 Mbps of actual 
upload speed to develop an analysis of the number of people that lack access to broadband capability 
today.  The National Broadband Plan estimated that 14 million people living in seven million housing 
units in the United States currently do not have access to terrestrial broadband infrastructure capable of 
meeting this target, described as “the broadband availability gap.”
33
   
10. The National Broadband Plan states that the Commission’s “long range goal should be to 
replace all the legacy High-Cost programs with a new program that preserves the connectivity that 
Americans have today and advances universal broadband in the 21
st
 century.”
34
  Specifically, the National 
Broadband Plan recommends that the Commission create a new  Connect America Fund, and that the 
CAF should adhere to the following principles:  (1) “CAF should only provide funding in geographic 
areas where there is no private sector business case to provide broadband and high-quality voice-grade 
service;”   (2) “There should be at most one subsidized provider of broadband per geographic area;” (3) 
“The eligibility criteria for obtaining broadband support from CAF should be company- and technology-
agnostic so long as the service provided meets the specifications set by the FCC;” (4) “The FCC should 
identify ways to drive funding to efficient levels, including market-based mechanisms where appropriate, 
to determine the firms that will receive CAF support and the amount of support they will receive;” and (5) 
“Recipients of CAF support must be accountable for its use and subject to enforceable timelines for 
achieving universal access.”
35
  In addition, the National Broadband Plan recommends that the 
Commission “create a fast-track program in CAF for providers to receive targeted funding for new 
broadband construction in unserved areas,”
36
 and 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.”
37
 
4. The National Broadband Plan Model 
11. The National Broadband Plan concludes that private investment alone is unlikely to 
extend broadband in some areas of the country with low population density.  In particular, “[b]ecause 
service providers in these areas cannot earn enough revenue to cover the costs of deploying and operating 
 
30
 Universal Service Administrative Company 2009 preliminary disbursement data. 
31
 See National Broadband Plan, at 135.  
32
 Id. 
33
 Id. at 136. 
34
 Id. at 145. 
35
 Id. (footnotes omitted). 
36
 Id. at 144. 
37
 Id. at 146. 
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broadband networks, including expected returns on capital, there is no business case to offer broadband 
services in these areas.”
38
 
12. To estimate the amount of additional funding required to close the broadband availability 
gap, Commission staff developed an economic model to estimate the level of additional funding that 
would be required to extend broadband service to the estimated 7 million housing units that presently are 
unserved by broadband that provides 4 Mbps actual download speed, 1 Mbps upload speed, and 
acceptable quality of service for the most common interactive applications.
39
  First, Commission staff 
developed a baseline of the current state of broadband availability and infrastructure deployment 
throughout the nation, which included all the major types of terrestrial broadband infrastructure as they 
are deployed today, and as they likely will evolve over the next three to five years without public 
support.
40
  Because the Commission does not presently have access to a comprehensive data set, at the 
required level of geographic granularity, regarding availability (i.e., which people have access to what 
services) and infrastructure (i.e., which people are passed by what types of network hardware), 
Commission staff combined several data sets and supplemented nationwide data with the output of a large 
multivariate regression model.  Staff then used this regression model to predict availability by speed tier 
and to fill gaps, especially last mile gaps, in the infrastructure data.
41
  Second, building on the 
infrastructure data, known and inferred, Commission staff’s economic analysis calculated the incremental 
forward-looking cost of upgrading or extending existing infrastructure to provide broadband service 
consistent with the national broadband availability target, and the incremental revenues that might be 
expected to be generated by the network upgrades.  From this, they calculated the net present value 
(NPV) of the gap between incremental costs and expected incremental revenues of broadband 
deployments in unserved areas.  This NPV represents the amount of additional funding necessary to 
upgrade or extend existing infrastructure to the level necessary to support the target (4 Mbps download/1 
Mbps upload).
42
  Underlying the economic model is the principle that only profitable business cases will 
induce incremental network investments and the best measure of profitability is the net present value of a 
build.
43
  
B. Discussion 
13. The National Broadband Plan recommends establishing the CAF to support universal 
access to broadband and voice services, including providing any ongoing support necessary to sustain 
service in areas that already have broadband because of the existing high-cost universal service 
program.
44
  As a first step in comprehensive universal service reform, we seek comment on three discrete 
groups of issues.  First, we seek comment on use of a model as a competitively neutral and efficient tool 
for helping us to quantify the minimum amount of universal service support necessary to support 
networks that provide broadband and voice service, such that the contribution burden that ultimately falls 
on American consumers is limited.  Second, we seek comment on potential approaches to providing such 
targeted funding on an accelerated basis in order to extend broadband networks in unserved areas, such as 
a competitive procurement auction.  Third, in the accompanying NPRM, we seek comment on specific 
 
38
 Id. at 136. 
39
 Omnibus Broadband Initiative, The Broadband Availability Gap (OBI Technical Paper No. 1)  at 1-3 (OBI, The 
Broadband Availability Gap); see Appendix C. 
40
 Id. at 1. 
41
 Id. at 1-2. 
42
 Id. at 2-3. 
43
 Id. at 1. 
44
 National Broadband Plan at 144. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
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proposals to cap and cut the legacy high-cost programs and realize savings that can be shifted to targeted 
investment in broadband infrastructure.
45
  We encourage input from Tribal governments on all of these 
issues, and specifically ask whether there are any unique circumstances in Tribal lands that would 
necessitate a different approach.
46
  Similarly, we request comment on whether there are any unique 
circumstances in insular areas that would necessitate a different approach. 
1. Model 
14. We specifically seek comment on whether the Commission should use the National 
Broadband Plan model as the starting point for developing a cost model, or alternatively a cost/revenue 
model, to use in determining future support for broadband-capable networks that provide voice service.  
We seek comment on whether the analysis and economic model that Commission staff used to estimate 
the broadband availability gap in unserved areas provides a useful foundation for calculating the support 
levels needed for the CAF in a way that minimizes waste, fraud and abuse.  We also seek comment on 
what modifications to the National Broadband Plan model would be required if the CAF is eventually to 
replace all of the legacy high-cost programs. 
15. A detailed description of the National Broadband Plan model, The Broadband 
Availability Gap, is found in Appendix C and is available on the Commission’s Broadband.gov Web 
site.
47
  Additional model documentation includes technical documentation of how the model is 
constructed and more detail about the statistical model used to estimate availability and network 
infrastructure in areas where no data are available, which also will be available on Broadband.gov.  A 
public notice will be released shortly regarding a workshop to discuss the technical paper. 
16. Commenters are invited to comment on any aspect of the National Broadband Plan model 
that may be relevant to our consideration of how to reform the existing universal service support 
mechanisms.  We highlight below only selected details relating to the National Broadband Plan model 
methodology, and specifically seek comment on several threshold design principles the Commission may 
consider before issuing a further notice of proposed rulemaking in this proceeding.  
a. Use of a Model 
17. We seek comment on whether the Commission should develop a nationwide broadband 
model to estimate support levels for the provision of broadband and voice service in areas that are 
currently served by broadband with the aid of legacy high-cost support, as well as areas that are unserved.  
A federal model could provide a more uniform and equitable basis for determining support than 
 
45
 See infra section III. 
46
 For the purposes of this NPRM, we define “Tribal lands” as any federally recognized Indian tribe’s reservation, 
pueblo or colony, including former reservations in Oklahoma, Alaska Native regions established pursuant to the 
Alaska Native Claims Settlement Act (85 Stat. 688), and Indian allotments.  The term “Tribe" means any American 
Indian or Alaska Native Tribe, Band, Nation, Pueblo, Village or Community which is acknowledged by the Federal 
government to have a government-to-government relationship with the United States and is eligible for the programs 
and services established by the United States.  See Statement of Policy on Establishing a Government-to-
Government Relationship with Indian Tribes, 16 FCC Rcd 4078, 4080 (2000).  Thus, “Tribal lands” includes 
American Indian Reservations and Trust Lands, Tribal Jurisdiction Statistical Areas, Tribal Designated Statistical 
Areas, and Alaska Native Village Statistical Areas, as well as the communities situated on such lands.  This would 
also include the lands of Native entities receiving Federal acknowledgement or recognition in the future.  Although 
Native Hawaiians are not currently members of federally-recognized Tribes, we also seek comment on whether 
there are any unique circumstances that would warrant an alternative approach in Native Hawaiian homelands.  
47
 See http://www.broadband.gov/plan/broadband-working-reports-technical-papers.html. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
10
                                                     
individual carrier cost studies or models submitted by interested parties.
48
  A uniform federal model could 
provide a mechanism for determining support levels based on the geographic characteristics of the areas 
served, rather than the regulatory classification of the incumbent telephone company that serves the area.   
18. One assumption underlying the National Broadband Plan’s estimate of the level of public 
support needed to fill the broadband availability gap is that “whenever possible, a market-based 
mechanism will be used to select which providers receive support,” . . . “and that there is competitive 
interest in receiving a subsidy to extend broadband to an unserved area.”
49
  One of the principles 
underlying the creation of the CAF is that the Commission “should identify ways to drive funding to 
efficient levels, including market-based mechanisms where appropriate, to determine firms that will 
receive CAF support and the amount of support they will receive.”
50
   
19. The Commission has previously sought comment on using competitive bidding – that is, 
using a reverse auction, in which sellers, rather than buyers, compete and the lowest bid wins – to 
determine high-cost support amounts for voice telephony.
51
  It tentatively concluded that “reverse 
auctions offer several potential advantages over current high-cost support distribution mechanisms.”
52
  
The Commission reasoned that “[i]f a sufficient number of bidders compete in an auction, the winning bid 
might be close to the minimum level of subsidy required to achieve the desired universal service goals.”
53
  
Similarly, the National Broadband Plan states that “[i]f enough carriers compete for support in a given 
area and the mechanism is properly designed, the market should help identify the provider that will serve 
the area at the lowest cost.”
54
 
20. We seek comment on whether a model would be an important tool, even if the 
Commission uses a market-based mechanism to identify supported entities and support levels under the 
CAF.  For example, if the Commission uses some form of a reverse auction to determine CAF support 
levels, it would be important to establish a “reserve price,” i.e., a maximum subsidy level that participants 
would be allowed to place as a bid, because there may be few bidders in certain geographic areas.  
Depending on the design of the market-based mechanism, reserve prices could play a critical role.  A 
reserve price that is set too low is likely to discourage bidders from participating, while one that is set too 
high raises the possibility that too much support will be allocated to a particular area. 
 
48
 The Commission encourages interested parties to submit such information on the record, however, to assist us in 
developing an accurate and verifiable federal cost model.  The Commission previously concluded that a national 
forward-looking model would provide a more consistent approach and found that relying on differing forward-
looking cost methodologies would prevent meaningful comparisons and provide a less accurate picture of relative 
forward-looking costs.  See Federal-State Joint Board on Universal Service, Access Charge Reform, Seventh Report 
& Order and Thirteenth Order on Reconsideration in CC Docket No. 96-45, Fourth Report & Order in CC Docket 
No. 96-262, and Further Notice of Proposed Rulemaking, 14 FCC Rcd 8078, 8104, para. 52 (1999). 
49
 National Broadband Plan at 137. 
50
 Id. at 145. 
51
 Specific examples of reverse auctions include procurement auctions to identify the party willing to provide a good 
or service at the lowest cost to the buyer, and auctions to identify the least amount of support needed to induce a 
party to undertake a certain action.  
52
 High-Cost Universal Service Support, Federal-State Joint Board on Universal Service, WC Docket No. 05-337, 
CC Docket No. 96-45, Notice of Proposed Rulemaking, 23 FCC Rcd 1495, 1500 para. 11 (2008) (Reverse Auctions 
Notice). 
53
 Id. 
54
 National Broadband Plan at 145. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
11
                                                     
21. If we ultimately use some form of market-based mechanism to determine CAF support, 
we seek comment on whether a model should be used to set reserve prices.  Specifically, we seek 
comment on whether a model would provide advantages over the alternative of using a particular firm’s 
current support levels to set reserve prices.  Currently, high-cost support levels for voice telephony are 
based on statewide or study area average costs.
55
  Moreover, high-cost support is based on the incumbent 
telephone companies’ forward-looking or embedded costs to provide voice service, which is not 
necessarily the same as the costs of an efficient provider of both broadband and voice services.  Some 
areas where broadband is not available today may be unserved because there is insufficient high-cost 
support available in the area to make a business case for deploying broadband-capable networks.  In these 
cases, setting the reserve price at the current support levels could result in a reserve price that is too low 
and would not further our goal of extending broadband-capable networks to unserved areas.  In other 
cases, setting the reserve price at current support levels could result in a reserve price that is too high, 
which would not help us “identify ways to drive funding to efficient levels.”
56
 
22. In addition to assisting the Commission in setting reserve prices, we seek comment on 
whether a model could be an important tool in determining appropriate support amounts (for example, in 
areas where the Commission determines that it is unable to use a competitive bidding mechanism).  We 
also seek comment on the role of a model in identifying the most costly areas to serve, where the 
Commission may want to consider alternative approaches to providing access to broadband and voice 
services.
57
  For example, the National Broadband Plan’s estimate of the $24 billion broadband availability 
gap is based on the economics of terrestrial technologies only and on the assumption that satellite capacity 
in the foreseeable future does not appear sufficient to serve every unserved household.
58
  The National 
Broadband Plan estimated that the most expensive 250,000 unserved housing units represent a 
disproportionate share of the total investment gap – $14 billion.
59
  This represents less than two-tenths of 
one percent of all housing units in the United States; the average amount of funding for terrestrial 
broadband per household to close the gap for these units is an estimated $56,000.
60
 
b. Cost Basis for Support  
23. We seek comment on whether the Commission should base any new CAF support on the 
forward-looking economic costs of an efficient provider, rather than on historic, embedded costs.  Basing 
support on forward-looking costs is consistent with the Commission’s policy adopted in the Universal 
Service First Report and Order that support in high-cost areas should be based on forward-looking 
economic costs and the Commission’s finding that using embedded costs to calculate support would lead 
 
55
 To the extent that certain types of support may be targeted to wire centers, UNE zones, or disaggregated in some 
rural study areas, overall support levels are still determined based upon statewide or study area averages. 
56
 National Broadband Plan at 145. 
57
 See id. at 150 (suggesting that the Commission “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”). 
58
 National Broadband Plan at 137.  (“While satellite is capable of delivering speeds that meet the National 
Availability Target, satellite capacity can meet only a small portion of broadband demand in unserved areas for the 
foreseeable future.  Satellite has the advantage of being both ubiquitous and having a geographically independent 
cost structure, making it particularly well suited to serve high-cost, low-density areas.  However, while satellite can 
serve any given household, satellite capacity does not appear sufficient to serve every unserved household.”) 
(footnotes omitted). 
59
 Id. at 138.  
60
 Id. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
12
                                                     
to inefficient subsidization of carriers and could create disincentives for carriers to operate efficiently.
61
  
Using forward looking costs also is consistent with the National Broadband Plan’s recommendation that 
“CAF support levels should be based on what is necessary to induce a private firm to serve an area,” and 
that “[s]upport should be based on the net gap (i.e., forward looking costs less revenues).”
62
   
24. In addition, we seek comment on what technology platforms should be included in the 
forward-looking cost model if the Commission decides to base broadband support on the forward-looking 
economic costs of an efficient provider.  The National Broadband Plan recommended that eligibility for 
obtaining Connect America Funding “should be company- and technology-agnostic,”
63
 which is 
consistent with the “competitively neutrality” principle adopted by the Commission in the Universal 
Service First Report and Order.
64
  The plan recommends that “[s]upport should be available to both 
incumbent and competitive telephone companies (whether classified today as ‘rural’ or ‘non-rural’), fixed 
and mobile wireless providers, satellite providers and other broadband providers, consistent with statutory 
requirements.”
65
  We seek comment on this proposal to ensure competitive neutrality. 
25. Consistent with the principle that eligibility for obtaining CAF support should be 
technology-agnostic, we seek comment on whether the Commission should develop a model that 
estimates the costs of all technologies currently being deployed (or soon to be deployed) that are capable 
of providing voice service and broadband service that meets the national broadband availability target.  
We also seek comment on how to ensure that any cost model used in conjunction with determining CAF 
support is capable of identifying the least-cost, most-efficient technology in unserved areas.  A forward-
looking economic cost model that estimates the costs of various technologies would enable the 
Commission to identify the least-cost, most-efficient technology currently being deployed, and thereby, 
provide only as much support as needed to achieve the Commission’s goals for universal access.   
26. We note, however, that while the costs of providing satellite service do not vary with 
geography and are fairly easy to identify, at present there is not sufficient satellite capacity to address all 
of the households that are unserved.
66
  Thus we do not believe that we need to include satellite in the 
model.  We seek comment on that view. 
27. In defining forward-looking economic cost, we seek comment on the extent to which the 
Commission should consider any existing plant.  We note in this regard that the Commission’s forward-
looking cost model adopted a “scorched node” approach, which assumed the incumbent LECs’ central 
office (switch) locations as a given, rather than a total green field approach.
67
  The National Broadband 
Plan model assumes existing infrastructure (for example, central office locations, cell towers), and 
estimates the incremental costs of brown field build outs and estimates green field build only where there 
is no nearby infrastructure.  We seek comment on what existing infrastructure the model should assume.  
 
61
 See supra para. 4. 
62
 National Broadband Plan at 145.  
63
 Id. 
64
 Universal Service First Report and Order, 12 FCC Rcd at 8801, para. 47 (explaining that “competitive neutrality 
means that universal service support mechanisms and rules neither unfairly advantage or disadvantage one provider 
over another, and neither unfairly favor or disfavor one technology over another”).  
65
 National Broadband Plan at 145. 
66
 Id. at 137. 
67
 See, e.g., Universal Service First Report and Order, Appendix J, 12 FCC Rcd at 9435, n. 628 (“A ‘scorched node’ 
model is one that models the network using the existing wire centers.  A ‘greenfield’ model, by contrast, does not 
use the existing wire centers, but models a completely new network, including new wire centers.”). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
13
                                                     
We also seek comment on which nodes are most analogous to a LEC central office in a scorched node 
approach for different technologies. 
28. The Commission has extensive experience modeling the costs of wireline deployment, 
but prior to the National Broadband Plan proceeding, had not modeled the costs of deploying alternative 
technologies.  Although the National Broadband Plan model includes wireless technologies, Commission 
staff noted that “[i]t is important to recognize that a wireless network has several layers of complexity that 
are not found in wireline networks, each of which affect the user experience and, therefore, network 
buildout costs and the investment gap.”
68
  For example, the user experience may be affected by the 
distance of the user from a cell site, the number of users sharing spectrum within a cell, the characteristics 
of the terrain, and the capability of end-user devices.  We therefore seek comment on what modifications 
to the National Broadband Plan model, if any, would be appropriate to estimate wireless costs for 
purposes of universal service support.   
29. Commission staff noted that determining the actual cost of a wireless deployment would 
require a finely calibrated propagation model.
69
  However, Commission staff noted that conducting the 
radiofrequency (RF) propagation analysis in the field that would be required to calibrate such a model 
would be extremely time-consuming and expensive.  According to Commission staff, such analysis is 
usually undertaken only at the time of an actual build-out, and may still not account for some effects, such 
as seasonal foliage.  We seek comment on whether a propagation model would be required to accurately 
model the costs of wireless deployment.  We also seek comment on the feasibility of developing such a 
model. 
30. In the absence of a finely calibrated propagation model, Commission staff used a 
combination of approaches to ensure both adequate coverage and sufficient capacity to ensure access to 
service consistent with the target speed.  The maximum cell radius is calculated from target uplink signal 
strength, with the radius in any given area adjusted for likely terrain-driven signal degradation.  Capacity 
requirements for downlink capacity for the number of modeled end-users in a given cell drive cell 
splitting as required.  Nonetheless, Commission staff concedes that “it is possible that the parameters in 
an actual network deployment are different from those that we estimated.”
70
  We seek comment on the 
assumptions underlying the parameters that the National Broadband Plan model uses to estimate the costs 
of a wireless network capable of providing service that provides 4 Mbps actual download and 1 Mbps 
actual upload capabilities.  Is the National Broadband Plan approach an appropriate way to model 
wireless deployment costs for purposes of determining CAF support? 
c. Types of Models 
(i) HCPM vs. New Model 
31. We seek comment on whether the Commission should develop a new model for 
determining appropriate universal service support levels for modern networks, rather than updating and 
modifying the Commission’s existing HCPM used to determine high-cost support for the provision of 
voice telephony by non-rural carriers.  Although the Commission previously stated that its forward-
looking economic cost model should evolve as technology changes,
71
 we do not believe that we should 
use the Commission’s existing model as a starting point in developing a model to estimate CAF support 
 
68
 OBI, The Broadband Availability Gap at 66. 
69
 Id. 
70
 Id.  
71
 See Fifth Report and Order, 13 FCC Rcd at 21330, para. 13; Tenth Report and Order, 14 FCC Rcd at 20170, para. 
28. 
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14
                                                     
levels.  Since the Commission adopted its model, much progress has been made in developing computer 
cost models that estimate the cost of constructing modern networks.  For example, in a 2009 notice of 
inquiry, the Commission sought comment on one such model.
72
  More recently, Commission staff utilized 
CostQuest Associates as a contractor in developing the National Broadband Plan model that estimated the 
size of the broadband availability gap. 
32. The National Broadband Plan model has several advantages over the Commission’s 
existing HCPM that reflect improvements in cost modeling that have occurred within the industry and 
outside of Commission proceedings over the last several years.  For example, the National Broadband 
Plan model relies on road and other rights-of-way data to route outside plant, which is a more realistic 
method than the Commission’s existing model’s use of rectilinear distances.
73
  In addition, the National 
Broadband Plan model estimates the costs of multiple broadband technologies.  Although the 
Commission’s existing model could be modified relatively easily to estimate the costs of providing digital 
subscriber line (DSL) service over shorter copper loops by changing certain input values,
74
 HCPM does 
not estimate the costs of other technologies such as wireless, hybrid fiber-coaxial cable, or fiber-to-the-
premises, whereas the National Broadband Plan model does.  The National Broadband Plan model also 
includes the costs of so-called “middle mile” facilities, whereas the only transport costs that HCPM 
estimates are the incumbent LECs’ inter-office transport costs.  We seek comment on whether the 
National Broadband Plan model is a better starting point for developing a broadband cost model than the 
Commission’s existing HCPM.  We seek comment on what other models we should consider if the 
Commission determines that it should develop a new model. 
(ii) Total Costs vs. Incremental Costs 
33. We seek comment on using a forward-looking economic cost model to determine support 
for broadband that estimates the total costs of broadband-capable networks, rather than the incremental 
costs of upgrading or extending existing networks to provide broadband in unserved areas.  As noted 
above, the National Broadband Plan model identifies “unserved areas,” i.e. areas without infrastructure 
that is capable of delivering broadband service meeting the national target, and estimates the incremental 
cost of augmenting existing infrastructure to provide broadband using various technologies.  As discussed 
more fully below, the National Broadband Plan model estimates not only the incremental costs of 
deploying broadband to unserved areas, but also the expected incremental revenues associated with the 
new broadband deployment.
75
  The National Broadband Plan model, however, does not take into account 
universal service support received under the current high-cost programs for those unserved areas.  Rather, 
the National Broadband Plan model estimates only the incremental support amounts needed to deploy 
broadband in unserved areas and “assumes that existing networks will be available on an ongoing basis” 
 
72
 See Federal-State Joint Board on Universal Service, High-Cost Universal Service Support, CC Docket No. 96-45, 
WC Docket No. 05-337, Notice of Inquiry, 24 FCC Rcd 4281, 4286-87 (2009) (seeking comment on CostQuest 
proposal that the Commission adopt an advanced services model for use in a reformed universal service system).  
See also, Comments of CostQuest Associates, CC Docket Nos. 96-45, 96-98, 99-68, 99-200, 01-92, WC Docket 
Nos. 03-109, 04-36, 05-337, 06-122 (filed Nov. 26, 2008) (CostQuest Comments) (attaching, among other things, a 
white paper by James Stegeman, Dr. Steve Parsons, and Mike Wilson, The Advanced Services Model:  Proposal for 
a Competitive and Efficient Universal Service High-Cost Approach for a Broadband World (CostQuest Proposal)). 
73
 See CostQuest Proposal at 22-26.  
74
 Specifically, we could change the maximum copper loop length, which is currently set at 18,000 feet, to the 
maximums used in the broadband model (12,000, 5,000, and 3,000 feet), and update other inputs to include the costs 
of Digital Subscriber Line Access Multiplers (DSLAMs).  We note however, that other inputs also should be 
updated to reflect current costs. 
75
 See infra paras. 35-40. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
15
d build-out.  
                                                     
without taking into consideration the role of existing universal service support.
76
  For example, if a carrier 
in a high-cost area uses high-cost support to make voice and broadband available to eighty-five percent of 
its customers, the National Broadband Plan model estimates the cost of deploying broadband to the 
remaining fifteen percent, but does not estimate the costs associated with the eighty-five percent that 
already have access to broadband.  The National Broadband Plan model does not estimate forward-
looking economic costs in areas with existing broadband networks and, thus, provides no means of 
objectively evaluating whether current high-cost support levels are efficient, or how much support would 
be necessary to maintain broadband and voice services in areas currently receiving high-cost support.  
Nor does the National Broadband Plan model take into account any universal service support that carriers 
may currently receive for providing supported telephony services, whether or not they provide broadband. 
34. The Commission’s forward-looking cost model that is used to determine support for non-
rural carriers estimates the total local exchange network costs of providing telephone service to all 
households and businesses within a geographic area.  We seek comment on whether, if the Commission 
replaces its current high-cost funding mechanism with a new Connect America Fund to support both 
broadband and voice service, the Commission should adopt a total cost rather than an incremental cost 
model. 
(iii) Cost vs. Cost and Revenue  
35. We seek comment on whether the Commission should consider revenues, as well as 
costs, in determining CAF support.  The Commission’s current forward-looking cost model used to 
determine support levels for voice telephony for non-rural carriers estimates only costs, not revenues.
77
  
In contrast, the National Broadband Plan model, in addition to estimating the incremental costs of 
deploying broadband in unserved areas, estimates the expected incremental revenue from the new 
customers and services resulting from the new broadban
78
36. The National Broadband Plan recommends that support should be based on the net gap, 
i.e., forward-looking costs less revenues and that “[r]evenues should include all revenues earned from 
broadband-capable network infrastructure, including voice, data and video revenues, and take into 
account the impact of other regulatory reforms that may impact revenue flows, such as ICC [intercarrier 
compensation], and funding from other sources, such as Recovery Act grants.”
79
  Because “[s]imply 
calculating the incremental costs of deploying broadband is not enough to determine the Broadband 
Investment Gap necessary to encourage operators to deploy,” the National Broadband Plan model 
estimates “the amount of support necessary to cause the networks’ economics to not only be positive, but 
to be sufficiently positive to motivate investment given capital scarcity and returns offered by alternative 
investments.”
80
 
 
76
 OBI, The Broadband Availability Gap at 35 (“One issue with this approach is that it assumes that existing 
networks will be available on an ongoing basis.  To the extent that existing networks depend on public support, such 
as USF disbursements, the total gap for providing service in unserved areas could be significantly higher than the 
incremental calculation indicates.”). 
77
 None of the current high-cost support mechanisms consider expected revenues, except in the limited 
circumstances when subscriber line charge (SLC) revenues are imputed for purposes of calculating interstate 
common line support (ICLS).  For example, high-cost loop support and local switching support are based on 
embedded costs without regard to revenues.   
78
 OBI, The Broadband Availability Gap at 34-35, 45-50. 
79
 National Broadband Plan at 145 (footnotes omitted). 
80
 OBI, The Broadband Availability Gap at 33. Two key principles underlying the OBI model’s design are that 
“[o]nly profitable business cases will induce incremental network investments” and that “[i]nvestment decisions are 
made on the incremental value they generate.”  Id. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
16
                                                     
37. We seek comment on whether to take into account the revenues earned from all services 
provided over broadband networks in calculating support under the CAF, such as broadband and video 
revenues, as opposed to basing support only on costs.  If we include video revenues, should we also take 
into account costs associated with the provision of video services, such as programming costs?  We seek 
comment on potential methods for estimating revenues and what revenues should be included, if the 
Commission were to consider revenues, as well as costs, in determining CAF support.  We recognize that 
different services may be available in different parts of the country, and prices may vary in different 
areas.  We also recognize that take rates for various services may vary depending upon a number of 
demographic factors.  For example, the National Broadband Plan model uses demographic factors to 
estimate broadband adoption rates at the census block level.
81
  What information should the Commission 
use in order to take into account revenues in determining support levels? 
38. If the Commission were to include revenues in a model to determine broadband support, 
we seek comment on the methodology that the National Broadband Plan model uses to estimate 
incremental revenues.  Incremental revenue in the National Broadband Plan model is the product of two 
main components:  the number of incremental customers and the average revenue per user (ARPU).
82
  
The Commission staff analysis recognizes that some key assumptions on which the model is based may 
have a “disproportionately large” impact on the size of the investment gap.
83
  Two of these major 
assumptions relate to the revenue calculation:  “[t]he take rate for broadband in unserved areas will be 
comparable to the take rate in served areas with similar demographics;” and “[t]he average revenue per 
product or bundle will evolve slowly over time.”
84
  To estimate broadband adoption rates, Commission 
staff used broadband-adoption survey data that broke out responses by various demographic factors and a 
widely accepted technology adoption mathematical model to develop take rates for every census block in 
the nation.
85
  These census block penetration rates were then scaled to estimate the take rate of related 
services (voice, video), the effect of bundled services, and the stratification of tiering (basic vs. 
premium).
86
  To develop an approximation for ARPU, Commission staff estimated an individual ARPU 
value for each product category (data, voice, and video), as well as an ARPU value for the product 
bundle, and a low and high version of the data, voice, video and bundle product categories to reflect 
customer segmentation.
87
 
39. We seek comment on the time frame within which any model can be expected reliably to 
forecast expected revenues.  The National Broadband Plan model calculates the NPV of cash flows over 
20 years.  A forward-looking cost model estimates the costs of technologies currently being deployed and 
reasonably accurate input values can be developed by looking at current costs and equipment lifetimes. 
 
81
 The OBI analysis assumes, however, that the take rate for broadband in unserved areas will be the same as in 
served areas with similar demographics.  See infra para. 38. 
82
 OBI, The Broadband Availability Gap at 35.  The number of incremental customers is based on the technology 
modeled so that revenues are not double counted.  For example, if the model calculates the costs of shortening loop 
lengths to deliver data and video services, only incremental data and video related revenue would be considered; 
voice revenues would not be included.  Id. 
83
 Id. at 42. 
84
 Id. 
85
 See id. at 45-50.  The demographic variables used in the National Broadband Plan model that were positively 
correlated with broadband adoption were:  income greater than $100,000; income between $75,000 – $100,000; 
college degree or greater education.  Those that were negatively correlated were:  less than high school education; 
senior citizen (65+); rural; and high school degree only.  Id. at 45. 
86
 See id. at 48-49.. 
87
 See id. at 50-51 & Exhibit 3-V. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
17
try 
                                                     
The Commission staff estimate of revenues is primarily based on current prices and forecasts, although 
the revenue attributed to incremental voice revenue for telephone companies is set equal to the ARPU for 
a similar cable Voice over Internet Protocol (VoIP) product to account for recent market trends.  How 
often should a revenue model be updated to reflect changes in prices and market trends?  If calculations 
are made for a shorter time period, how should the model account for the residual value of assets whose 
lifetimes are longer than the study period (e.g., how does one account for the residual value of fiber in a 
ten-year study)? 
40. The National Broadband Plan model uses 11.25% as the discount rate, identifies the 
expected cash flows associated with building and operating a network over the project’s lifetime of 20 
years, and computes the net present value of those cash flows.
88
  We seek comment on whether this is an 
appropriate approach for purposes of determining CAF support amounts.  We also seek comment more 
generally on how often key model inputs should be updated. 
d. Geographic Areas  
41. The National Broadband Plan model initially estimates the incremental costs of 
deploying broadband to unserved areas and the incremental revenues associated with that deployment at a 
very granular geographic level, the census block.
89
  Commission staff reasoned that using the average 
cost per household of existing deployments, even if adjusted for differences in population density, would 
risk underestimating costs because unserved areas tend to have much lower densities than the coun
overall.
90
  Although geographic granularity is important in capturing the real costs associated with 
providing broadband service in rural and remote areas, Commission staff concluded that it does not make 
sense to evaluate whether to build a network at the census block level.
91
  In the real world, private sector 
firms typically will evaluate the profitability of deployment decisions at a larger, more aggregated 
service-area level than a census block.
92
  Commission staff concluded that estimating lowest-cost 
technologies on a census block basis could lead to an unrealistic patchwork quilt of different technologies 
in contiguous census blocks and aggregated financial outputs to the county level.  Thus, the National 
Broadband Plan model estimates the amount of additional funding required to close the broadband 
availability gap by assessing the gap of various technologies at the county level.
93
 
42. We seek comment on what geographic area the Commission should use in calculating the 
cost of deploying a network and providing services, and on whether the Commission should use neutral 
geographic units, as recommended in the National Broadband Plan.
94
  We seek comment on the 
advantages and disadvantages of using a particular geographic area to determine either the costs or the 
gap between costs and revenues.  As Commission staff explains, if the geography is too big, there will be 
portions that would be more efficiently (less expensively) served by an alternate technology, but if the 
 
88
 OBI, The Broadband Availability Gap at 33. 
89
 One of the key principles underlying the model’s design is:  “Capturing the local (dis-)economies of scale that 
drive local profitability requires granular calculations of costs and revenues.”  Id. 
90
 Id. at 38; see also id. at 8-9 & Exhibits 1-E, 1-F. 
91
 Id. at 36. 
92
 Another key principle underlying the model’s design is:  “Network-deployment decisions reflect service-area 
economies of scale.”  Id. at 35. 
93
 Id. at 37. 
94
 See National Broadband Plan at 145 (“The FCC should evaluate eligibility and define support levels on the basis 
of neutral geographic units such as U.S. Census-based geographic areas, not the geographic units associated with 
any particular industry segment.”). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
18
                                                     
geography is too small it will be subscale, thereby leading to more inefficiency and higher costs (and 
support levels).  The National Broadband Plan model uses counties because they “appear large enough in 
most cases to provide the scale benefits but not so large as to inhibit the deployment of the most cost-
effective technology,” while remaining technology neutral.
95
  We seek comment on whether this is a 
workable approach for future CAF universal service funding decisions. 
2. Expedited Process for Providing Funding to Extend Networks in Unserved 
Areas 
43. We believe that it is critical to constrain growth in the legacy high-cost support 
mechanisms while we develop rules for a more efficient and accountable universal service funding 
mechanism.  At the same time, we recognize that firms today are upgrading and modernizing their 
networks to offer a wide array of new services to consumers.  The National Broadband Plan recommends 
that the Commission “create a fast-track program in CAF for providers to receive targeted funding for 
new broadband construction in unserved areas.”
96
  Such funding could, for instance, be provided to areas 
identified as “unserved” once the Broadband Data Improvement Act mapping is completed in February 
2011.
97
  We seek comment on the best way to create an accelerated process to distribute funding to 
support new deployment of broadband-capable networks in unserved areas during the period we are 
considering final rules to implement fully the new CAF funding mechanism.  In particular, we seek 
comment on whether there is an efficient method for delivering a set amount of support, which does not 
require the use of a model. 
44. For example, shortly after passage of the American Recovery and Reinvestment Act,
98
 a 
group of economists recommended that a competitive procurement auction be used to allocate funding 
under the Recovery Act.
99
  The group noted that “it is difficult to design a grant application system to 
ensure that firms receive only the minimum subsidy necessary to achieve the goal.”
100
  They argued that 
 
95
 OBI, The Broadband Availability Gap at 37. 
96
 National Broadband Plan at 144. 
97
 See Broadband Data Improvement Act of 2008, Pub. L. No. 110-385, 122 Stat. 4096 (codified at 47 U.S.C. §§ 
1301-1304) (BDIA).  On July 2, 2009, the National Telecommunications Information Agency (NTIA) released a 
Notice of Funding Availability (NOFA), which defined several key terms for the purposes of the state broadband 
program.  Department of Commerce, National Telecommunications and Information Administration, State 
Broadband Data and Development Grant Program, Docket No. 0660-ZA29, Notice of Funds Availability, 74 Fed. 
Reg. 32545, 32555 (July 8, 2009) (NTIA State Mapping NOFA).  The NOFA defines “broadband” to include data-
transmission technology with advertised speeds of at least 768 kbps downstream and at least 200 kbps upstream to 
end users.  NTIA State Mapping NOFA, 74 Fed. Reg. at 32548.  An area is “unserved” for purposes of the NOFA if 
90% of households in the area lack access to facilities-based terrestrial broadband service.  Id.  NTIA later issued a 
clarification of the Technical Appendix to the NTIA State Mapping NOFA, and provided additional guidance to its 
implementation of the Program by posting responses to Frequently Asked Questions.  See Department of 
Commerce, National Telecommunications and Information Administration, State Broadband Data and Development 
Grant Program, Docket No. 0660-ZA29, Notice of Funds Availability; Clarification.  74 Fed. Reg. 40569 (Aug. 12, 
2009); NTIA, State Broadband Data and Development Program (Broadband Mapping Program) Frequently Asked 
Questions, http://www.ntia.doc.gov/broadbandgrants/BroadbandMappingFAQs%20_090812.pdf (rel. Aug. 12, 
2009) (NTIA Aug. 12 FAQs). 
98
 American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009) (Recovery Act).  The 
Recovery Act was signed into law on February 17, 2009. 
99
 Paul Milgrom, Gregory Rosston, Andrzej Skrzypacz & Scott Wallston, “Comments of 61 Concerned Economists:  
Using Procurement Auctions to Allocate Broadband Stimulus Grants,” (April 13, 2009) (submitted to NTIA and 
Rural Utilities Service (RUS)) (61 Economists’ Proposal); see Appendix B. 
100
 Id. at 2. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
19
                                                     
“[a]n objective, ‘mechanistic’ approach that applies specific, quantitative criteria can be both easier to 
implement and lead to more efficient outcomes than traditional grant application review.”
101
  Among 
other things, such an approach can “inherently induce firms to contribute their own investment to increase 
the chance that their bid is accepted.”
102
 
45. The procurement auction proposal by this group of economists is similar in many ways to 
reverse auction proposals that have been previously considered by the Commission.  In any reverse 
auction procedure, it is necessary to establish precise definitions of what parties are asked to bid for, 
including the geographic boundaries of the areas to be served and a precise definition of the service 
quality that winning bidders would be expected to provide.
103
  The economists’ proposal potentially 
differs from some reverse auction proposals in that bidding parties themselves would be allowed to 
specifically define the geographic units and other service characteristics associated with their bids.
104
  To 
select winning proposals from those submitted, it would therefore be necessary to establish a scoring rule 
such that all proposals could be evaluated on an easily understood and unambiguous basis.  Such a 
mechanism could be implemented relatively quickly without addressing the full complexities inherent in 
other reverse auction proposals.  For example, it would not require the development of a cost or cost and 
revenue model to set reserve prices.  In addition, it would minimize the potential problem with reverse 
auctions concerning few bidders in a specific area, because proposals for different areas would compete 
against each other.  Thus, all bids for all unserved areas in the United States would be competing for a 
limited, defined amount of funding.  There are limitations with such an approach, however.  For instance, 
because this approach involves one-time grants, it does not appear suitable for areas where operating costs 
exceed revenues and thus where continuing support is required. 
46. The National Broadband Plan concluded that “[i]n some areas, subsidizing all or part of 
the initial capex will allow a service provider to have a sustainable business.  Elsewhere, subsidizing 
initial capex will not be enough; service providers will need support for continuing costs.”
 105
  Based on 
available information, Commission staff estimated that “[s]upport for one-time deployment or upgrades 
will likely be enough to provide broadband to 46% of the seven million unserved housing units.”
106
  The 
National Broadband Plan stated that “USF resources are finite, and policymakers need to weigh tradeoffs 
in allocating those resources . . .” and recommended as a guiding principle that policymakers should seek 
to “maximize the number of households that are served by broadband meeting the National Broadband 
Availability Target.”
 107
  If the Commission has a finite amount of funding available in a given year to 
support the new deployment of broadband-capable networks, could a competitive procurement auction be 
used to maximize the number of households that would gain access to broadband? 
47. We seek comment on whether some form of competitive procurement auction could be 
an efficient mechanism to determine subsidies for the extension of new broadband-capable infrastructure 
in unserved areas.  For instance, could such a competitive process be used to target one-time subsidies to 
extend broadband-capable networks in areas where revenues are likely to be sufficient to cover ongoing 
 
101
 Id. at 3. 
102
 Id. at 4. 
103
 For example, build-out requirements and minimum speed and other quality standards would be pre-specified. 
104
 Some reverse auction proposals have suggested a package bidding format based on pre-defined geographic units 
such as counties.  Under the economists’ proposal, bidders would be allowed to propose arbitrary geographic units 
based on their own business models. 
105
 National Broadband Plan at 138. 
106
 Id. 
107
 Id. at 143. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
20
                                                     
costs of operation?
108
  We also seek comment on the appropriate scoring function to use if a procurement 
auction mechanism is adopted for this purpose.  The economists’ proposals suggests that “[t]his could be 
a simple metric, such as ‘newly served population’ (defined as the population to which service above a 
minimum bandwidth threshold is newly available) or a more involved measure such as ‘effective 
bandwidth supplied’ (defined as the population to which service is newly available adjusted for the speed 
of service).”
109
  One important aspect of a scoring rule is the set of weights used to evaluate new service 
to unserved areas based on perceived cost or customer density.  For example, a simple rule that ranks 
proposals based on the minimum subsidy required per newly served household would tend to favor 
proposals to serve relatively low cost regions.  We invite specific comments on rules that could be used to 
evaluate proposals to provide differing speeds of access in excess of 4 Mbps actual download and 1 Mbps 
actual upload, or differing qualities of access. 
48. Parties are also invited to comment specifically on any other aspects of the procurement 
auction mechanism outlined in the economists’ proposal, including build-out requirements and 
compliance and auditing features.  For instance, what would be an appropriate time frame in which the 
winning bidder must make the required investment?  What percentage of the winning bid should be 
provided before construction begins, and what conditions must a recipient meet before remaining 
installments are paid?  What certifications regarding performance should be made, and how should the 
Commission verify that conditions have been satisfactorily met? 
III. NOTICE OF PROPOSED RULEMAKING 
A. Background 
49. The Commission has acknowledged the benefits of comprehensive reform of the current 
high-cost mechanisms.
110
  Indeed, the Joint Statement on Broadband recommends that the universal 
service fund and the intercarrier compensation system “be comprehensively reformed to increase 
accountability and efficiency, encourage targeted investment in broadband infrastructure, and emphasize 
the importance of broadband to the future of these programs.”
111
  The National Broadband Plan 
recommends significant changes to the current high-cost program, and this notice of proposed rulemaking 
 
108
 By “one-time” we refer to a fixed amount of subsidy that could be paid in installments. 
109
 61 Economists’ Proposal, at 5-6; see Appendix B. 
110
 See, e.g., High-Cost Universal Service Support, Federal-State Joint Board on Universal Service, WC Docket No. 
05-337, CC Docket No. 96-45, Notice of Proposed Rulemaking, 23 FCC Rcd 1467 (2008) (Identical Support Rule 
Notice); High-Cost Universal Service Support, Federal-State Joint Board on Universal Service, WC Docket No. 05-
337, CC Docket No. 96-45, Notice of Proposed Rulemaking, 23 FCC Rcd 1495 (2008) (Reverse Auctions Notice); 
High-Cost Universal Service Support, Federal-State Joint Board on Universal Service, WC Docket No. 05-337, CC 
Docket No. 96-45, Notice of Proposed Rulemaking, 23 FCC Rcd 1531 (2008) (Joint Board Comprehensive Reform 
Notice); High-Cost Universal Service Reform; Federal-State Joint Board on Universal Service; Lifeline and Link 
Up; Universal Service Contribution Methodology; Numbering Resource Optimization; Implementation of the Local 
Competition Provisions in the Telecommunications Act of 1996; Developing a Unified Intercarrier Compensation 
Regime; Intercarrier Compensation for ISP-Bound Traffic; IP-Enabled Services, CC Docket Nos. 96-45, 99-200, 
96-98, 01-92, 99-68, WC Docket Nos. 05-337, 03-109, 06-122, 04-36, Order on Remand and Report and Order and 
Further Notice of Proposed Rulemaking, 24 FCC 6475 (2008) (Comprehensive Reform FNPRM), aff’d  Core 
Communications, Inc. v.FCC, 592 F.3d 139 (D.C. Cir. 2010). 
111
 Joint Statement on Broadband, GN Docket No. 10-66, Joint Statement on Broadband, FCC 10-42, para 3 (rel. 
Mar. 16, 2010) (Joint Statement on Broadband). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
21
                                                     
(NPRM) represents an important first step in seeking public comment on the roadmap to universal access 
to broadband.
112
   
50. The National Broadband Plan recommends that the Commission cut inefficient funding 
of legacy voice service and refocus universal service funding to directly support modern communications 
networks that will provide broadband as well as voice services.
113
  In this NPRM, we propose to contain 
growth in legacy high-cost support mechanisms as a critical first step to transitioning to a more efficient 
and accountable funding mechanism, recognizing that consumers across America ultimately pay for 
universal service.  We propose specific reforms to the legacy high-cost program that could be initially 
implemented to create a pathway to a more efficient and targeted mechanism for funding broadband.  We 
seek comment on these proposals.  We encourage input from everyone.  We are particularly interested in 
input from Tribal governments on these specific proposals, and we specifically ask whether there are any 
unique circumstances in Tribal lands that would necessitate a different approach.  Similarly, we request 
comment on whether there are any unique circumstances in insular areas that would necessitate a different 
approach. 
B. Discussion 
1. Controlling the Size of the High-Cost Program 
51. As an essential first step toward repurposing the universal service fund to support 
broadband as well as voice service, we must ensure that the size of the fund remains reasonable.  The 
National Broadband Plan recommends that the Commission take steps to manage the universal service 
fund so that its total size remains close to its current level (in 2010 dollars) to minimize the burden of 
increasing universal service contributions on consumers.
114
  The Commission already has taken action to 
control the overall size of the high-cost fund.  In 2008, the Commission adopted on an interim basis an 
overall competitive ETC high-cost cap of approximately $1.4 billion, pending comprehensive USF 
reform.
115
  Similarly, today we seek comment on capping legacy high-cost support provided to incumbent 
telephone companies at 2010 levels, which would have the effect of creating an overall ceiling for the 
legacy high-cost program.
116
  Such a cap would remain in place while the Commission determines how to 
distribute funds in a more efficient, targeted manner to those areas of the country where no firm can 
operate profitably without government support, while minimizing burdens on American consumers who 
ultimately pay for universal service through carrier pass-through charges.   
 
112
 The American Recovery and Reinvestment Act of 2009 required the Commission to deliver a National 
Broadband Plan to Congress.  See Pub. L. No. 111-5, 123 Stat. 115 (2009).  The Commission delivered the National 
Broadband Plan to Congress on March 16, 2010.  FCC Sends National Broadband Plan to Congress, FCC News 
Release (dated Mar. 16, 2010).  Federal Communications Commission, Connecting America:  The National 
Broadband Plan, Ch. 8 (rel. March 16, 2010) (National Broadband Plan). 
113
 National Broadband Plan at 147-48. 
114
 National Broadband Plan at 149. 
115
 High-Cost Universal Service Support; Federal-State Joint Board on Universal Service, WC Docket No. 05-337, 
CC Docket No. 96-45, Order, 23 FCC Rcd 8834 (2008), aff’d, Rural Cellular Ass’n v. FCC, 588 F.3d 1095 (D.C. 
Cir. 2009).  The Commission adopted a limited exception to the cap for competitive ETCs serving tribal lands or 
Alaska Native regions.   
 
116
 In 2007, the Federal-State Joint Board on Universal Service recommended an overall cap for the high-cost 
support mechanisms and a transition in which existing funding mechanisms would be reduced, and all, or a 
significant share, of savings transferred to proposed new funds for broadband and mobility.  High-Cost Universal 
Service Support; Federal-State Joint Board on Universal Service, WC Docket No. 05-337, CC Docket No. 96-45, 
Recommended Decision, 22 FCC Rcd 20477, 20484, paras. 26-27 (Fed.-State Jt. Bd. 2007). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
22
                                                     
52. We seek comment on how the Commission could implement such a cap.  Alternatively, 
we invite other proposals that would ensure that the overall size of the high-cost fund stays at or below 
current levels.  Should the Commission impose an overall cap on legacy high-cost support for incumbent 
LECs at 2010 levels?  Should the Commission impose a cap on each individual high-cost mechanism (to 
the extent each is not already capped) at 2010 levels?  Should the Commission freeze per-line support for 
each carrier at 2010 levels?  For example, the Alliance for Rural CMRS Carriers proposed that incumbent 
LEC support amounts per line be capped at either March 2008 or March 2010 levels.
117
  We seek 
comment on this proposal.  Alternatively, should the Commission freeze the total amount of support a 
carrier receives in a particular study area at 2010 levels?  Are there other ways to implement such a cap?  
What rule changes would be required to implement this proposal?  How would the Commission 
implement this proposal in conjunction with the reforms identified in the following paragraphs?  In 
addition, what implications would this proposal have for other Commission rules, such the Commission’s 
current pricing rules, and should the implementation of this proposal be coordinated with any other 
regulatory actions? 
2. Specific Steps to Cut Legacy High-Cost Support   
53. As discussed in more detail below, the National Broadband Plan identifies several 
specific first steps that could reduce funding in the legacy high-cost support mechanisms and recommends 
that those savings be used to further the goals of universalizing broadband without increasing the overall 
size of the universal service fund.  The National Broadband Plan recognizes that shifting funds could have 
transitional impacts and recommends that “[a]s the FCC considers this policy shift, it should take into 
account the impact of potential changes in free cash flows on providers’ ability to continue to provide 
voice service and on future broadband network deployment strategies.”
118
  Below, we seek comment on 
the first steps set forth in the National Broadband Plan.  To the extent that any commenter believes that 
these proposals, or the proposal to cap legacy high-cost support, would negatively affect affordable voice 
service for consumers today, we would encourage such a commenter to identify all assumptions and to 
provide data, including information on network investment plans over the next five years and free cash 
flows, to support that position.  The intent of these proposals is to eliminate the indirect funding of 
broadband-capable networks today through our legacy high-cost programs,
119
 which is occurring without 
transparency or accountability for the use of funds to extend broadband service.  We seek comment on the 
timing of implementing such reforms in conjunction with the creation of a more efficient and targeted 
 
117
 See Letter from David LaFuria, Counsel for Alliance for Rural CMRS Carriers, to Marlene H. Dortch, Secretary, 
FCC, CC Docket No. 96-45, WC Docket No. 05-337, GN Docket No. 09-47, 09-51, 09-137 (Mar. 3, 2010) (urging 
the FCC to adopt an interim cap for incumbent telephone company support per line at either March 2010 or March 
2008 levels, pending comprehensive USF reform).  Specifically, the Alliance for Rural CMRS Carriers propose that: 
1) ILECs would receive the amount of per-line support they are eligible to receive as of the effective date of the cap 
(either March 2008 or March 2010) until comprehensive reform of the federal universal service support mechanism 
is implemented; 2) Beginning on the date that the interim plan commences, ILEC support would be calculated each 
quarter by simply determining whether an ILEC’s support has increased on a per-line basis since the effective date 
of the cap (either March 2008 or March 2010); 3) If an ILEC’s per-line support has increased, support would be 
determined by multiplying the current number of access lines in service by the capped per-line amount; 4) If the 
ILEC’s per-line support has decreased, then it will receive its support without any adjustments. 
118
 National Broadband Plan at 147. 
119
 Under the Commission’s so-called “no barriers” policy, high-cost support for voice services indirectly supports 
the deployment of broadband capable networks.  See Rural Task Force Order, 16 FCC Rcd at 11322, para. 200 
(“The public switched telephone network is not a single-use network.  Modern network infrastructure can provide 
access not only to voice services, but also to data, graphics, video, and other services. . . . Thus, although the high-
cost loop support mechanism does not support the provision of advanced services, our policies do not impede the 
deployment of modern plant capable of providing access to advanced services.”). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
23
framework that will provide support for broadband and voice.  We encourage commenters to address 
when each rule change should be implemented and how specific reforms should be sequenced to provide 
regulatory clarity for ongoing private sector investment. 
54. In addition, we seek comment on the relationship between such universal service reforms 
and carriers’ rates, including intercarrier compensation rates, under the Commission’s current pricing 
rules.
120
  We seek comment both on the likely rate impacts under existing pricing rules that would arise 
from the possible universal service reforms and any appropriate responses.  We also note that many rural 
rate-of-return carriers participate in the National Exchange Carrier Association (NECA) pooling process 
for their interstate access charges.  If universal service support under the legacy programs were frozen for 
such carriers, are there special considerations resulting from operation of the NECA pool that would 
unfairly advantage or disadvantage certain carriers?  The Commission previously has expressed concern 
about the risks of continued participation in NECA pools by carriers that were subject to incentive 
regulation.
121
  We seek comment on whether such concerns would remain if all rate-of-return carriers 
converted to incentive regulation.  Would the pool be able to continue to operate pursuant to regulation 
other than rate-of-return?   
55. Shifting Rate-of-Return Carriers to Incentive Regulation.  The National Broadband Plan 
recommends that the Commission “require rate-of-return carriers to move to incentive regulation.”
122
  We 
seek comment on requiring current rate-of-return companies to convert to some form of incentive 
regulation.  We note that a number of companies have voluntarily converted to price cap regulation in the 
last two years.
123
  In such cases, the Commission effectively converted the companies’ interstate common 
                                                      
(continued….) 
120
 For example, under the Commission’s existing price cap rules, if a carrier no longer received IAS support to help 
meet its revenue requirement for particular regulated services, it could recover those revenues through new 
intercarrier compensation charges if its subscriber line charge (SLC) was at the applicable cap.  47 C.F.R. §§ 69.153 
(presubscribed interexchange carrier charge), 69.154 (per-minute carrier common line charge).  If the carrier’s SLC 
was not at the applicable cap, the carriers likely could seek an exogenous cost adjustment, resulting first in an 
increase in the SLC, and only then in new intercarrier compensation charges, to the extent that additional cost 
recovery was necessary.   
As another example, under the Commission’s price cap rules, price cap carriers are allowed to increase their price 
cap indices if their earnings fall below 10.25%.  47 C.F.R. § 61.45(d)(1)(vii).  Price cap carriers forego this right, 
however, if they avail themselves of “pricing flexibility” regulatory relief.  47 C.F.R. § 69.731. 
121
 Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non-Price Cap Incumbent Local 
Exchange Carriers and Interexchange Carriers, Federal-State Joint Board on Universal Service, CC Docket Nos. 
96-45, 00-256, Report and Order and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd 4122, 4163, 
para. 91 (2004) (MAG Second Further Notice).   
122
 National Broadband Plan at 147. 
123
 A number of the mid-sized telephone companies recently have elected to convert to price-cap regulation.   See 
Windstream Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief, WC Docket No. 07-
171, Order, 23 FCC Rcd 5294 (2008) (Windstream Order); Petition of Puerto Rico Telephone Company, Inc. for 
Election of Price Cap Regulation and Limited Waiver of Pricing and Universal Service Rules; Consolidated 
Communications Petition for Conversion to Price Cap Regulation and for Limited Waiver Relief; Frontier Petition 
for Limited Waiver Relief upon Conversion of Global Valley Networks, Inc., to Price Cap Regulation, WC Docket 
Nos. 07-292, 07-291, 08-18, Order, 23 FCC Rcd 7353 (Wireline Comp. Bur. 2008); ACS of Alaska, Inc., ACS of 
Anchorage, Inc., ACS of Fairbanks, Inc. and ACS of the Northland, Inc., Petition for Conversion to Price Cap 
Regulation and Limited Waiver Relief, WC Docket No. 08-220, Order, 24 FCC Rcd 4664 (Wireline Comp. Bur. 
2009);  CenturyTel, Inc., Petition  for Conversion to Price Cap Regulation and for Limited Waiver Relief, WC 
Docket No. 08-191, Order, 24 FCC Rcd 4677 (Wireline Comp. Bur. 2009).  See also, e.g.,  Pleading Cycle 
Established for Comments on Vitelco Petition for Conversion to Price Cap Regulation and Other Limited Waiver 
Relief, WC Docket No. 10-39, Public Notice, DA 10-272 (rel. Feb. 18, 2010); Pleading Cycle Established for 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
24
al.   
line support (ICLS) to a frozen amount per line.  We seek comment on whether the Commission should 
replace rate-of-return regulation with the price-cap framework recently adopted for voluntary 
conversions,
124
 an alternative price-cap framework, or some other form of incentive regulation.
125
  We 
seek comment on the costs and the benefits that would be realized by converting all rate-of-return carriers 
to price cap regulation or other incentive regulation.  We seek comment on whether, in an increasingly 
competitive marketplace, and with carriers’ service offerings expanding beyond regulated services, the 
current rate-of-return framework, which considers only regulated costs and revenues, has become less 
appropriate. 
56. We seek comment on whether we should convert ICLS to a frozen amount per line, 
which would have the effect of limiting growth in the legacy high-cost program.
126
  We seek comment on 
whether this reform should be implemented at the same time as any measures the Commission may adopt 
to provide targeted funding for the deployment of broadband-capable infrastructure to areas that are 
unserved, or should such a rule change occur before the development of the CAF, or otherwise be 
coordinated with some other regulatory action such as conversion to incentive regulation.  The National 
Broadband Plan recognizes that the savings realized by eliminating future growth in the legacy ICLS 
program represent funding that could be redirected toward achieving broadband-related goals.
127
  We 
seek comment on this propos
57. Elimination of Interstate Access Support.  The National Broadband Plan also 
recommends that the Commission “redirect access replacement funding known as Interstate Access 
Support (IAS) toward broadband deployment.”
128
  Thus, we now seek comment on the elimination of 
interstate access support (IAS).  When the Commission created IAS in 2000, it said that it would revisit 
(Continued from previous page)                                                             
Comments on FairPoint Petition for Conversion to Price Cap Regulation and for Other Limited Waiver Relief, WC 
Docket No. 10-47, Public Notice, DA 10-299 (rel. Feb. 25, 2010); Pleading Cycle Established for Comments on 
Windstream Petition for Limited Waiver Relief, WC Docket No. 10-55, Public Notice, DA 10-397 (rel. Mar. 9, 
2010). 
124
 In the Windstream Order, the Commission directed Windstream to establish initial price cap indexes for its price 
cap baskets using January 1st rates for the year of conversion and base period demand for the calendar year 
immediately prior to the conversion.  The Commission required Windstream to target its average traffic-sensitive 
(ATS) rate to $0.0065 per ATS minute of use pursuant to section 61.3(qq) of the Commission’s rules, using an X-
factor of 6.5 percent.  Finally, the Commission granted Windstream a waiver to allow it to continue to receive ICLS 
for the converted study areas.  Windstream was required to forego any recovery of a presubscribed interexchange 
carrier charge or carrier common line charge and forego assessing a $7.00 non-primary residential line subscriber 
line charge in conjunction with its receipt of frozen per-line ICLS.  See generally, Windstream Order, 23 FCC Rcd 
5294. 
125
 The Commission has sought comment in the past on other alternative incentive regulation schemes, and whether 
they might be appropriate for rate-of-return carriers.  See, e.g., MAG Second Further Notice, 19 FCC Rcd at 4153-
64, paras. 68-94. 
126
 Specifically, in the Windstream Order, the Commission required that Windstream’s per-line ICLS be calculated 
at the preceding calendar year per-line disaggregated ICLS amounts, and frozen at those per-line levels going 
forward, and that its aggregate annual ICLS support be capped at an amount equal to its overall ICLS for the year 
preceding the conversion (after application of any required true-ups).  Windstream Order, 23 FCC Rcd at 5302-04, 
paras. 20-21.  As noted above, as a condition of its receipt of frozen per-line ICLS support, Windstream, among 
other things, committed to forgo the recovery of any PICC or CCL charge.  Id. at 5300-01, para. 14. 
127
 National Broadband Plan at 147-148. 
128
 Id. at 147. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
25
this funding mechanism “to ensure that such funding is sufficient, yet not excessive.”
129
  That re-
examination has not occurred.   
58. Specifically, we now seek comment on eliminating sections 54.800-54.809 of our rules 
and transferring any IAS funding levels as of the date of elimination to the new Connect America Fund to 
provide support for broadband-capable networks.
130
 We invite commenters to propose an appropriate 
timeline for the elimination of these rules and any glide-path that may be necessary to ensure that 
recipients continue to be able to provide voice services during the transition 
59. Sprint and Verizon Wireless Voluntary Commitments.  The National Broadband Plan also 
recommends that the Commission “issue an order to implement the voluntary commitments of Sprint and 
Verizon Wireless to reduce the high-cost funding they receive as competitive eligible telecommunications 
carriers to zero over a five-year period as a condition of earlier merger decisions.”
131
  The Commission 
will consider shortly an order clarifying how to implement Verizon Wireless’s and Sprint’s voluntary 
commitments.
132
   
60. Elimination of Competitive ETC High-Cost Support.  The National Broadband Plan 
recommends that the Commission phase out remaining competitive ETC funding under the existing 
funding mechanisms over a five-year period and target the savings toward the deployment of broadband-
capable networks and other reforms in the plan.
133
  We seek comment on this proposal.   
61. We seek comment on whether we should ramp down competitive ETC support under the 
legacy programs, and if so, how the transition should occur.  For example, should the Commission reduce 
support on a pro rata basis (e.g., 20% reduction each year) for each state?  Should the Commission reduce 
support at an accelerated rate of decline?  Should the Commission reduce support on a proportional basis 
for all states, or in some other manner, and if so, on what basis?  Would there be any impact on existing 
                                                      
129
 Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Low-Volume Long 
Distance Users; Federal-State Joint Board on Universal Service, CC Docket Nos. 96-262, 94-1, 99-249, 96-45, 
Sixth Report and Order, Report and Order, and Eleventh Report and Order, 15 FCC Rcd 12962, 13047, para. 203 
(2000), aff’d in part, rev’d in part, and remanded in part, Texas Office of Public Util. Counsel et al. v. FCC, 265 
F.3d 313 (5th Cir. 2001); on remand, Access Charge Reform; Price Cap Performance Review for LECs; Low-
Volume Long Distance Users; Federal-State Joint Board on Universal Service, CC Docket Nos. 96-262, 94-1, 99-
249, 96-45, Order on Remand, 18 FCC Rcd 14976 (2003).  
 
130
 National Broadband Plan at 147-148. 
131
 Id. at 147. 
132
  Verizon Wireless agreed to a five-year phase-out of its competitive ETC high cost support for any properties that 
it retained after mandated divestitures. Applications of Cellco Partnership d/b/a Verizon Wireless and Atlantis 
Holdings LLC for Consent to Transfer Control of Licenses, Authorizations, and Spectrum Manager and De Facto 
Transfer Leasing Arrangements and Petition for Declaratory Ruling that the Transaction is Consistent with Section 
310(b)(4) of the Communications Act, WT Docket No. 08-95, File Nos. 0003463892, et al., ITC-T/C-20080613-
00270, et al., ISP-PDR-20080613-00012, Memorandum Opinion and Order and Declaratory Ruling, 23 FCC Rcd 
17444, 17529–17532, paras. 192–197 (2008).  Similarly, Sprint agreed to a five-year phase-out of its competitive 
ETC high-cost support as part of its transaction with Clearwire.  Applications of Sprint Nextel Corporation and 
Clearwire Corporation For Consent to Transfer Control of Licenses, Leases and Authorizations, WT Docket No. 
08-94, File Nos. 0003462540 et al., Memorandum Opinion and Order and Declaratory Ruling, 23 FCC Rcd 17570, 
17612, para. 108 (2008).  The National Broadband Plan recommended that this recaptured competitive ETC funding 
be used to implement the recommendations in the plan.  National Broadband Plan at 147. 
133
 National Broadband Plan at 147-148.  Competitive ETC support per line is based on the incumbent telephone 
company’s support per line.  47 C.F.R. § 54.307.  As a consequence, the support a competitive ETC receives is not 
based on either its costs or the costs of the most efficient technology to support customers in a given area. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
26
subscribers of competitive ETCs if the Commission were to reduce competitive ETC support under the 
legacy funding mechanisms?  How should reductions in legacy high-cost support for all competitive 
ETCs be coordinated with implementation of Verizon Wireless’s and Sprint’s voluntary commitments to 
phase-out legacy high-cost support over a five year period? 
62. General Proposals.  Commenters are invited to submit other proposals to eliminate or 
reduce funding levels in the legacy high-cost support mechanisms to transition to efficient funding levels 
in the Connect America Fund.  We encourage parties that submit alternative proposals to identify specific 
rule changes and quantify the impact of such changes. 
IV. PROCEDURAL MATTERS 
A. Initial Regulatory Flexibility Analysis 
63. As required by the Regulatory Flexibility Act of 1980, as amended,
134
 the Commission 
has prepared an Initial Regulatory Flexibility Analysis (IRFA) for this NPRM, of the possible significant 
economic impact on a substantial number of small entities by the policies and rules proposed in this 
further notice.  The IRFA is in Appendix A.
135
  Written public comments are requested on this IRFA.  
Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments 
on the NPRM.  The Commission will send a copy of the NPRM, including this IRFA, to the Chief 
Counsel for Advocacy of the Small Business Administration.
136
  In addition, the NPRM and IRFA (or 
summaries thereof) will be published in the Federal Register.
137
 
B. Paperwork Reduction Act Analysis 
64. This document discusses potential new or revised information collection requirements.  
The reporting requirements, if any, that might be adopted pursuant to this NPRM are too speculative at 
this time to request comment from the OMB or interested parties under section 3507(d) of the Paperwork 
Reduction Act.
138
  Therefore, if the Commission determines that reporting is required, it will seek 
comment from the OMB and interested parties prior to any such requirements taking effect.
139
  In 
addition, pursuant to the Small Business Paperwork Relief Act of 2002, we will seek specific comment on 
how we might “further reduce the information collection burden for small business concerns with fewer 
than 25 employees.”
140
  Nevertheless, interested parties are encouraged to comment on whether any new 
or revised information collection is necessary, and if so, how the Commission might minimize the burden 
of any such collection. 
C. Ex Parte Presentations 
65. These matters shall be treated as a “permit-but-disclose” proceeding in accordance with 
the Commission’s ex parte rules.
141
  Persons making oral ex parte presentations are reminded that 
memoranda summarizing the presentations must contain summaries of the substance of the presentations 
                                                      
134
 5 U.S.C. § 603. 
135
 See Appendix A. 
136
 See 5 U.S.C. § 603(a). 
137
 Id. 
138
 See 44 U.S.C. § 3507(d). 
139
 Paperwork Reduction Act of 1995, Pub. L. No. 104-13, 109 Stat. 163 (1995). 
140
 Small Business Paperwork Relief Act of 2002, Pub. L. No. 107-198, 116 Stat. 729 (2002); 44 U.S.C. § 
3506(c)(4). 
141
 47 C.F.R. §§ 1.1200-1.1216. 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
27
and not merely a listing of the subjects discussed.  More than a one- or two-sentence description of the 
views and arguments presented is generally required.
142
  Other requirements pertaining to oral and written 
presentations are set forth in section 1.1206(b) of the Commission’s rules.
143
 
D. Comment Filing Procedures 
66. Pursuant to sections 1.415 and 1.419 of the Commission’s rules,
144
 interested parties may 
file comments and reply comments regarding the NOI and NPRM on or before the dates indicated on the 
first page of this document.  Comments may be filed using:  (1) the Commission’s Electronic Comment 
Filing System (ECFS); (2) the Federal Government’s e-Rulemaking Portal; or (3) by filing paper 
copies.
145
 
67. Electronic Filers:  Comments may be filed electronically using the Internet by accessing 
the ECFS:  http://fjallfoss.fcc.gov/ecfs/ or the Federal e-Rulemaking Portal:  http://www.regulations.gov. 
68. Paper Filers:  Parties who choose to file by paper must file an original and four copies of 
each filing.  If more than one docket or rulemaking number appears in the caption of this proceeding, 
filers must submit two additional copies for each additional docket or rulemaking number. 
69. Filings can be sent by hand or messenger delivery, by commercial overnight courier, or 
by first-class or overnight U.S. Postal Service mail.  All filings must be addressed to the Commission’s 
Secretary, Office of the Secretary, Federal Communications Commission. 
70. All hand-delivered or messenger-delivered paper filings for the Commission’s Secretary 
must be delivered to FCC Headquarters at 445 12
th
 St., SW, Room TW-A325, Washington, DC 20554.  
All hand deliveries must be held together with rubber bands or fasteners.  Any envelopes must be 
disposed of before entering the building.  Commercial overnight mail (other than U.S. Postal Service 
Express Mail and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol Heights, MD  20743.  
U.S. Postal Service first-class, Express, and Priority mail must be addressed to 445 12
th
 Street, S.W., 
Washington DC  20554. 
71. People with Disabilities:  To request materials in accessible formats for people with 
disabilities (Braille, large print, electronic files, audio format), send an e-mail to fcc504@fcc.gov or call 
the Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-418-0432 (tty). 
72. Parties should send a copy of their filings to Charles Tyler, Telecommunications Access 
Policy Division, Wireline Competition Bureau, Federal Communications Commission, Room 5-A452, 
445 12th Street, S.W., Washington, D.C. 20554, or by e-mail to charles.tyler@fcc.gov.  Parties shall also 
serve one copy with the Commission’s copy contractor, Best Copy and Printing, Inc. (BCPI), Portals II, 
445 12th Street, S.W., Room CY-B402, Washington, D.C. 20554, (202) 488-5300, or via e-mail to 
fcc@bcpiweb.com. 
73. Documents in this proceeding will be available for public inspection and copying during 
business hours at the FCC Reference Information Center, Portals II, 445 12th Street S.W., Room CY-
A257, Washington, D.C. 20554.  The documents may also be purchased from BCPI, telephone (202) 488-
5300, facsimile (202) 488-5563, TTY (202) 488-5562, e-mail fcc@bcpiweb.com. 
                                                      
142
 47 C.F.R. § 1.1206(b)(2). 
143
 47 C.F.R. § 1.1206(b). 
144
 47 C.F.R. §§ 1.415, 1.419. 
145
 See Electronic Filing of Documents in Rulemaking Proceedings, GC Docket No. 97-113, Report and Order, 13 
FCC Rcd 11322 (1998). 
 Federal Communications Commission FCC 10-58 
 
 
 
 
 
28
V. ORDERING CLAUSES 
74. Accordingly, IT IS ORDERED that, pursuant to the authority contained in sections 1, 2, 
4(i), 201-205, 214, 254, and 403 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 152, 
154(i), 201-205, 214, 254, and 403 this notice of inquiry IS ADOPTED. 
75. IT IS FURTHER ORDERED that, pursuant to the authority contained in sections 1, 2, 
4(i), 201-205, 214, 254, and 403 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 152, 
154(i), 201-205, 214, 254, and 403, and section 1.411 of the Commission’s rules, 47 C.F.R. § 1.411, this 
notice of proposed rulemaking IS ADOPTED. 
76. IT IS FURTHER ORDERED that the Commission’s Consumer and Governmental 
Affairs Bureau, Reference Information Center, SHALL SEND a copy of this notice of proposed 
rulemaking, including the Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of 
the Small Business Administration. 
77. IT IS FURTHER ORDERED, pursuant to sections 1.4(b)(1) and 1.103(a) of the 
Commission’s rules, 47 C.F.R. §§ 1.4(b)(1), 1.103(a), that this notice of notice of proposed rulemaking 
SHALL BE EFFECTIVE on the date of publication in the Federal Register. 
FEDERAL COMMUNICATIONS COMMISSION 
 
 
 
Marlene H. Dortch  
Secretary
 Federal Communications Commission FCC 10-58 
 
 
29 
er.  
                                                     
APPENDIX A 
 
Initial Regulatory Flexibility Analysis 
 
1. As required by the Regulatory Flexibility Act (“RFA”),
1
 the Commission prepared this 
Initial Regulatory Flexibility Analysis (“IRFA”) of the possible significant economic impact on small 
entities by the policies and rules proposed in this Notice of Proposed Rulemaking (NPRM).  The 
Commission requests written public comments on this IRFA.  Comments must be identified as responses 
to the IRFA and must be filed on or before the dates indicated on the first page of this NPRM.  The 
Commission will send a copy of the NPRM, including this IRFA, to the Chief Counsel for Advocacy of 
the Small Business Administration (SBA).
2
  In addition, the NPRM and IRFA (or summaries thereof) 
will be published in the Federal Regist
3
I. Need for, and Objectives of, the Notice:   
 
2. On March 16, 2010, the Commission released a Joint Statement on Broadband stating 
that “[t]he nearly $9 billion Universal Service Fund (USF) and the intercarrier compensation (ICC) 
system should be comprehensively reformed to increase accountability and efficiency, encourage 
targeted investment in broadband infrastructure, and emphasize the importance of broadband to the 
future of these programs.”
4
  On the same day, the Commission delivered to Congress a National 
Broadband Plan recommending that the Commission adopt cost-cutting measures for existing voice 
support and create a Connect America Fund (CAF), without increasing the overall size of the Fund, to 
support the provision of broadband communications in areas that would be unserved without such 
support or that depend on universal service support for the maintenance of existing broadband service.
5
 
3. The National Broadband Plan recommends that the Commission take steps to manage the 
universal service fund so that its total size remains close to its current level (in 2010 dollars) to minimize 
the burden of increasing universal service contributions on consumers.
6
  The NPRM seeks comment on 
specific common-sense reforms to contain growth in the legacy high-cost support mechanisms and 
identify savings that can be shifted toward broadband.  Specifically, the NPRM seeks comment on 
capping legacy high-cost support provided to incumbent telephone companies at 2010 levels;
7
 shifting 
rate-of-return carriers to incentive regulation and converting interstate common line support to a frozen 
amount per line;
8
 eliminating interstate access support;
9
 and eliminating high-cost support for competitive 
eligible telecommunications carriers.
10
 
 
1
 5 U.S.C. § 603. The RFA, 5 U.S.C. §§ 601-612, has been amended by the Small Business Regulatory Enforcement 
Fairness Act of 1996 (SBREFA), Public Law No. 104-121, Title II, 110 Stat. 857 (1996). 
2
 5 U.S.C. § 603(a). 
3
 Id. 
4
 Joint Statement on Broadband, GN Docket No. 10-66, Joint Statement on Broadband, FCC 10-42 (rel. Mar.16, 
2010) at 2. 
5
 Federal Communications Commission, Connecting America: The National Broadband Plan, (rel. Mar. 16, 2010) 
(National Broadband Plan) at 144. 
6
 See id. at 149. 
7
 See NPRM, paras. 51-52. 
8
 See id., paras. 55-56. 
9
 See id., paras. 57-58. 
10
 See id., paras. 60-61. 
 Federal Communications Commission FCC 10-58 
 
 
30 
 
                                                     
II. Legal Basis: 
 
4. This legal basis for any action that may be taken pursuant to the NPRM is contained in 
sections 1, 2, 4(i), 201-205, 214, 254, and 403 of the Communications Act of 1934, as amended, 47 
U.S.C. §§ 151, 152, 154(i), 201-205, 214, 254, and 403, and section 1.411 of the Commission’s rules, 47 
C.F.R. § 1.411. 
III. Description and Estimate of the Number of Small Entities to which the Rules Will Apply: 
 
5. The RFA directs agencies to provide a description of, and where feasible, an estimate of 
the number of small entities that may be affected by the proposed rules and policies, if adopted.
11
  The 
RFA generally defines the term “small entity” as having the same meaning as the terms “small 
business,” “small organization,” and “small governmental jurisdiction.”
12
  In addition, the term “small 
business” has the same meaning as the term “small business concern” under the Small Business Act.
13
  
A “small business concern” is one which: (1) is independently owned and operated; (2) is not dominant 
in its field of operation; and (3) satisfies any additional criteria established by the SBA.
14
6. Small Businesses.  Nationwide, there are a total of approximately 29.6 million small 
businesses, according to the SBA.
15
   
7. Small Organizations.  Nationwide, as of 2002, there are approximately 1.6 million small 
organizations.
16
  A “small organization” is generally “any not-for-profit enterprise which is 
independently owned and operated and is not dominant in its field.”
17
  
8. Small Governmental Jurisdictions.  The term “small governmental jurisdiction” is 
defined generally as “governments of cities, towns, townships, villages, school districts, or special 
districts, with a population of less than fifty thousand.”
18
  Census Bureau data for 2002 indicate that 
there were 87,525 local governmental jurisdictions in the United States.
19
  We estimate that, of this total, 
84,377 entities were “small governmental jurisdictions.”
20
  Thus, we estimate that most governmental 
jurisdictions are small.   
9. We have included small incumbent local exchange carriers in this present RFA analysis.  
As noted above, a “small business” under the RFA is one that, inter alia, meets the pertinent small 
 
11
 5 U.S.C. § 603(b)(3). 
12
 5 U.S.C. § 601(6). 
13
 5 U.S.C. § 601(3) (incorporating by reference the definition of “small-business concern” in the Small Business 
Act, 15 U.S.C. § 632).  Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies “unless an 
agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity 
for public comment, establishes one or more definitions of such term which are appropriate to the activities of the 
agency and publishes such definition(s) in the Federal Register.” 
14
 15 U.S.C. § 632. 
15
  See SBA, Office of Advocacy, “Frequently Asked Questions,” http://web.sba.gov/faqs (accessed Apr. 2010). 
16
 Independent Sector, The New Nonprofit Almanac & Desk Reference (2002). 
17
 5 U.S.C. § 601(4). 
18
  5 U.S.C. § 601(5).  
19
  U.S. Census Bureau, Statistical Abstract of the United States: 2006, Section 8, p. 272, Table 415.  
20
  We assume that the villages, school districts, and special districts are small, and total 48,558.  See U.S. Census 
Bureau, Statistical Abstract of the United States:  2006, section 8, p. 273, Table 417.  For 2002, Census Bureau data 
indicate that the total number of county, municipal, and township governments nationwide was 38,967, of which 
35,819 were small.  Id.  
 Federal Communications Commission FCC 10-58 
 
 
31 
d 
                                                     
business size standard (e.g., a telephone communications business having 1,500 or fewer employees), 
and “is not dominant in its field of operation.”
21
  The SBA’s Office of Advocacy contends that, for RFA 
purposes, small incumbent local exchange carriers are not dominant in their field of operation because 
any such dominance is not “national” in scope.
22
  We have therefore included small incumbent local 
exchange carriers in this RFA analysis, although we emphasize that this RFA action has no effect on 
Commission analyses and determinations in other, non-RFA contexts. 
10. Incumbent Local Exchange Carriers (“ILECs”).  Neither the Commission nor the 
SBA has developed a small business size standard specifically for incumbent local exchange services.  
The appropriate size standard under SBA rules is for the category Wired Telecommunications Carriers.  
Under that size standard, such a business is small if it has 1,500 or fewer employees.
23
  According to 
Commission data,
24
 1,311 carriers have reported that they are engaged in the provision of incumbent 
local exchange services.  Of these 1,311 carriers, an estimated 1,024 have 1,500 or fewer employees and 
287 have more than 1,500 employees.  Consequently, the Commission estimates that most providers of 
incumbent local exchange service are small businesses that may be affected by our proposed action. 
11. Competitive Local Exchange Carriers (“CLECs”), Competitive Access Providers 
(“CAPs”), “Shared-Tenant Service Providers,” and “Other Local Service Providers.”  Neither the 
Commission nor the SBA has developed a small business size standard specifically for these service 
providers.  The appropriate size standard under SBA rules is for the category Wired Telecommunications 
Carriers.  Under that size standard, such a business is small if it has 1,500 or fewer employees.
25
  
According to Commission data,
26
 1005 carriers have reported that they are engaged in the provision of 
either competitive access provider services or competitive local exchange carrier services.  Of these 1005 
carriers, an estimated 918 have 1,500 or fewer employees and 87 have more than 1,500 employees.  In 
addition, 16 carriers have reported that they are “Shared-Tenant Service Providers,” and all 16 are 
estimated to have 1,500 or fewer employees.  In addition, 89 carriers have reported that they are “Other 
Local Service Providers.”  Of the 89, all have 1,500 or fewer employees.  Consequently, the Commission 
estimates that most providers of competitive local exchange service, competitive access providers, 
“Shared-Tenant Service Providers,” and “Other Local Service Providers” are small entities that may be 
affected by our proposed action. 
12. Local Resellers.  The SBA has developed a small business size standard for the category 
of Telecommunications Resellers.  Under that size standard, such a business is small if it has 1,500 or 
fewer employees.
27
  According to Commission data,
28
 151 carriers have reported that they are engaged 
in the provision of local resale services.  Of these, an estimated 149 have 1,500 or fewer employees an
 
21 
15 U.S. C. § 632. 
22
 Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, FCC (May 27, 
1999).  The Small Business Act contains a definition of “small-business concern,” which the RFA incorporates into 
its own definition of “small business.”  See 15 U.S.C. § 632(a) (“Small Business Act”); 5 U.S.C. § 601(3) (“RFA”).  
SBA regulations interpret “small business concern” to include the concept of dominance on a national basis.  See 13 
C.F.R. § 121.102(b). 
23
 13 C.F.R. § 121.201, North American Industry Classification System (NAICS) code 517110.   
24
 FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, “Trends in Telephone Service” 
at Table 5.3, Page 5-5 (Aug. 2008) (“Trends in Telephone Service”).  This source uses data that are current as of 
November 1, 2006.   
25 
13 C.F.R. § 121.201, NAICS code 517110. 
26 
“Trends in Telephone Service” at Table 5.3. 
27
 13 C.F.R. § 121.201, NAICS code 517310. 
28
 “Trends in Telephone Service” at Table 5.3. 
 Federal Communications Commission FCC 10-58 
 
 
32 
8 
oposed action. 
uge 
.  
                                                     
two have more than 1,500 employees.  Consequently, the Commission estimates that the majority of 
local resellers are small entities that may be affected by our proposed action. 
13. Toll Resellers.  The SBA has developed a small business size standard for the category 
of Telecommunications Resellers.  Under that size standard, such a business is small if it has 1,500 or 
fewer employees.
29
  According to Commission data,
30
 815 carriers have reported that they are engaged 
in the provision of toll resale services.  Of these, an estimated 787 have 1,500 or fewer employees and 2
have more than 1,500 employees.  Consequently, the Commission estimates that the majority of toll 
resellers are small entities that may be affected by our proposed action. 
14. Interexchange Carriers (“IXCs”).  Neither the Commission nor the SBA has developed 
a small business size standard specifically for providers of interexchange services.  The appropriate size 
standard under SBA rules is for the category Wired Telecommunications Carriers.  Under that size 
standard, such a business is small if it has 1,500 or fewer employees.
31
  According to Commission 
data,
32
 300 carriers have reported that they are engaged in the provision of interexchange service.  Of 
these, an estimated 268 have 1,500 or fewer employees and 32 have more than 1,500 employees.  
Consequently, the Commission estimates that the majority of IXCs are small entities that may be 
affected by our pr
15. Satellite Telecommunications and All Other Telecommunications.  These two 
economic census categories address the satellite industry.  The first category has a small business size 
standard of $15 million or less in average annual receipts, under SBA rules.
33
  The second has a size 
standard of $25 million or less in annual receipts.
34
  The most current Census Bureau data in this 
context, however, are from the (last) economic census of 2002, and we will use those figures to ga
the prevalence of small businesses in these categories
35
16. The category of Satellite Telecommunications “comprises establishments primarily 
engaged in providing telecommunications services to other establishments in the telecommunications 
and broadcasting industries by forwarding and receiving communications signals via a system of 
satellites or reselling satellite telecommunications.”
36
  For this category, Census Bureau data for 2002 
show that there were a total of 371 firms that operated for the entire year.
37
  Of this total, 307 firms had 
annual receipts of under $10 million, and 26 firms had receipts of $10 million to $24,999,999.
38
  
Consequently, we estimate that the majority of Satellite Telecommunications firms are small entities that 
might be affected by our action. 
17. The second category of All Other Telecommunications comprises, inter alia, 
“establishments primarily engaged in providing specialized telecommunications services, such as 
satellite tracking, communications telemetry, and radar station operation. This industry also includes 
 
29
 13 C.F.R. § 121.201, NAICS code 517310.   
30 
“Trends in Telephone Service” at Table 5.3. 
31 
13 C.F.R. § 121.201, NAICS code 517110. 
32
 “Trends in Telephone Service” at Table 5.3. 
33
  13 C.F.R. § 121.201, NAICS code 517410. 
34
  13 C.F.R. § 121.201, NAICS code 517919. 
35
  13 C.F.R. § 121.201, NAICS codes 517410 and 517910 (2002).   
36
  U.S. Census Bureau, 2007 NAICS Definitions, “517410 Satellite Telecommunications”; 
http://www.census.gov/naics/2007/def/ND517410.HTM.  
37
  U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size 
(Including Legal Form of Organization),” Table 4, NAICS code 517410 (issued Nov. 2005). 
38
   Id.  An additional 38 firms had annual receipts of $25 million or more. 
 Federal Communications Commission FCC 10-58 
 
 
33 
eless 
                                                     
establishments primarily engaged in providing satellite terminal stations and associated facilities 
connected with one or more terrestrial systems and capable of transmitting telecommunications to, and 
receiving telecommunications from, satellite systems.”
39
  For this category, Census Bureau data for 2002 
show that there were a total of 332 firms that operated for the entire year.
40
  Of this total, 303 firms had 
annual receipts of under $10 million and 15 firms had annual receipts of $10 million to $24,999,999.
41
  
Consequently, we estimate that the majority of All Other Telecommunications firms are small entities 
that might be affected by our action. 
18. Wireless Telecommunications Carriers (except Satellite).  Since 2007, the Census 
Bureau has placed wireless firms within this new, broad, economic census category.
42
  Prior to that time, 
such firms were within the now-superseded categories of “Paging” and “Cellular and Other Wireless 
Telecommunications.”
43
  Under the present and prior categories, the SBA has deemed a wireless 
business to be small if it has 1,500 or fewer employees.
44
  Because Census Bureau data are not yet 
available for the new category, we will estimate small business prevalence using the prior categories and 
associated data.  For the category of Paging, data for 2002 show that there were 807 firms that operated 
for the entire year.
45
  Of this total, 804 firms had employment of 999 or fewer employees, and three 
firms had employment of 1,000 employees or more.
46
  For the category of Cellular and Other Wir
Telecommunications, data for 2002 show that there were 1,397 firms that operated for the entire year.
47
  
Of this total, 1,378 firms had employment of 999 or fewer employees, and 19 firms had employment of 
1,000 employees or more.
48
  Thus, we estimate that the majority of wireless firms are small. 
19. 2.3 GHz Wireless Communications Services.  This service can be used for fixed, 
mobile, radiolocation, and digital audio broadcasting satellite uses.  The Commission defined “small 
business” for the wireless communications services (“WCS”) auction as an entity with average gross 
revenues of $40 million for each of the three preceding years, and a “very small business” as an entity 
with average gross revenues of $15 million for each of the three preceding years.
49
  The SBA has 
 
39
  U.S. Census Bureau, 2007 NAICS Definitions, “517919 All Other Telecommunications”; 
http://www.census.gov/naics/2007/def/ND517919.HTM#N517919.   
40
  U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size 
(Including Legal Form of Organization),” Table 4, NAICS code 517910 (issued Nov. 2005). 
41
  Id.  An additional 14 firms had annual receipts of $25 million or more. 
42
  U.S. Census Bureau, 2007 NAICS Definitions, “517210 Wireless Telecommunications Categories (Except 
Satellite)”; http://www.census.gov/naics/2007/def/ND517210.HTM#N517210. 
43
 U.S. Census Bureau, 2002 NAICS Definitions, “517211 Paging”; 
http://www.census.gov/epcd/naics02/def/NDEF517.HTM.; U.S. Census Bureau, 2002 NAICS Definitions, “517212 
Cellular and Other Wireless Telecommunications”; http://www.census.gov/epcd/naics02/def/NDEF517.HTM. 
44
  13 C.F.R. § 121.201, NAICS code 517210 (2007 NAICS).  The now-superseded, pre-2007 C.F.R. citations were 
13 C.F.R. § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS). 
45
  U.S. Census Bureau, 2002 Economic Census, Subject Series:  Information, “Establishment and Firm Size 
(Including Legal Form of Organization,” Table 5, NAICS code 517211 (issued Nov. 2005). 
46
  Id.  The census data do not provide a more precise estimate of the number of firms that have employment of 
1,500 or fewer employees; the largest category provided is for firms with “1000 employees or more.” 
47
  U.S. Census Bureau, 2002 Economic Census, Subject Series:  Information, “Establishment and Firm Size 
(Including Legal Form of Organization,” Table 5, NAICS code 517212 (issued Nov. 2005). 
48
  Id.  The census data do not provide a more precise estimate of the number of firms that have employment of 
1,500 or fewer employees; the largest category provided is for firms with “1000 employees or more.” 
49
 Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), Report 
and Order, 12 FCC Rcd 10785, 10879, para. 194 (1997). 
 Federal Communications Commission FCC 10-58 
 
 
34 
                                                     
approved these definitions.
50
  The Commission auctioned geographic area licenses in the WCS service.  
In the auction, which was conducted in 1997, there were seven bidders that won 31 licenses that 
qualified as very small business entities, and one bidder that won one license that qualified as a small 
business entity.   
20. 1670-1675 MHz Services.  An auction for one license in the 1670-1675 MHz band was 
conducted in 2003.  One license was awarded.  The winning bidder was not a small entity. 
21. Wireless Telephony.  Wireless telephony includes cellular, personal communications 
services, and specialized mobile radio telephony carriers.  As noted, the SBA has developed a small 
business size standard for Wireless Telecommunications Carriers (except Satellite).
51
  Under the SBA 
small business size standard, a business is small if it has 1,500 or fewer employees.
52
  According to 
Trends in Telephone Service data, 434 carriers reported that they were engaged in wireless telephony.
53
  
Of these, an estimated 222 have 1,500 or fewer employees and 212 have more than 1,500 employees.
54
  
We have estimated that 222 of these are small under the SBA small business size standard. 
22. Broadband Personal Communications Service.  The broadband personal 
communications services (“PCS”) spectrum is divided into six frequency blocks designated A through F, 
and the Commission has held auctions for each block.  The Commission has created a small business 
size standard for Blocks C and F as an entity that has average gross revenues of less than $40 million in 
the three previous calendar years.
55
  For Block F, an additional small business size standard for “very 
small business” was added and is defined as an entity that, together with its affiliates, has average gross 
revenues of not more than $15 million for the preceding three calendar years.
56
  These small business 
size standards, in the context of broadband PCS auctions, have been approved by the SBA.
57
  No small 
businesses within the SBA-approved small business size standards bid successfully for licenses in 
Blocks A and B.  There were 90 winning bidders that qualified as small entities in the Block C auctions.  
A total of 93 “small” and “very small” business bidders won approximately 40 percent of the 1,479 
licenses for Blocks D, E, and F.
58
  In 1999, the Commission reauctioned 155 C, D, E, and F Block 
licenses; there were 113 small business winning bidders.
59
 
23. In 2001, the Commission completed the auction of 422 C and F Broadband PCS licenses 
in Auction 35.  Of the 35 winning bidders in this auction, 29 qualified as “small” or “very small” 
businesses.
60
  Subsequent events, concerning Auction 35, including judicial and agency determinations, 
resulted in a total of 163 C and F Block licenses being available for grant.  In 2005, the Commission 
completed an auction of 188 C block licenses and 21 F block licenses in Auction 58.  There were 24 
 
50
 See Alvarez Letter 1998. 
51
 13 C.F.R. § 121.201, NAICS code 517210. 
52 
Id. 
53
 “Trends in Telephone Service” at Table 5.3. 
54
 “Trends in Telephone Service” at Table 5.3. 
55
 See Amendment of Parts 20 and 24 of the Commission’s Rules – Broadband PCS Competitive Bidding and the 
Commercial Mobile Radio Service Spectrum Cap, Report and Order, 11 FCC Rcd 7824, 7850-7852, paras. 57-60 
(1996) (“PCS Report and Order”); see also 47 C.F.R. § 24.720(b). 
56
 See PCS Report and Order, 11 FCC Rcd at 7852, para. 60. 
57
 See Alvarez Letter 1998. 
58 
FCC News, “Broadband PCS, D, E and F Block Auction Closes,” No. 71744 (rel. Jan. 14, 1997). 
59
 See “C, D, E, and F Block Broadband PCS Auction Closes,” Public Notice, 14 FCC Rcd 6688 (WTB 1999). 
60
 See “C and F Block Broadband PCS Auction Closes; Winning Bidders Announced,” Public Notice, 16 FCC Rcd 
2339 (2001). 
 Federal Communications Commission FCC 10-58 
 
 
35 
S-1 
s”) 
million 
e licenses.  
ch 
s 
small business 
has average gross revenues that are not more than $3 million for the preceding three years.   The SBA 
winning bidders for 217 licenses.
61
  Of the 24 winning bidders, 16 claimed small business status and 
won 156 licenses.  In 2007, the Commission completed an auction of 33 licenses in the A, C, and F 
Blocks in Auction 71.
62
  Of the 14 winning bidders, six were designated entities.
63
  In 2008, the 
Commission completed an auction of 20 Broadband PCS licenses in the C, D, E and F block licenses in 
64
Auction 78.  
24. Advanced Wireless Services.  In 2008, the Commission conducted the auction of 
Advanced Wireless Services (“AWS”) licenses.
65
  This auction, which as designated as Auction 78, 
offered 35 licenses in the AWS 1710-1755 MHz and 2110-2155 MHz bands (“AWS-1”).  The AW
licenses were licenses for which there were no winning bids in Auction 66.  That same year, the 
Commission completed Auction 78.  A bidder with attributed average annual gross revenues that 
exceeded $15 million and did not exceed $40 million for the preceding three years (“small busines
received a 15 percent discount on its winning bid.  A bidder with attributed average annual gross 
revenues that did not exceed $15 million for the preceding three years (“very small business”) received a 
25 percent discount on its winning bid.  A bidder that had combined total assets of less than $500 
and combined gross revenues of less than $125 million in each of the last two years qualified for 
entrepreneur status.
66
  Four winning bidders that identified themselves as very small businesses won 17 
licenses.
67
  Three of the winning bidders that identified themselves as a small business won fiv
Additionally, one other winning bidder that qualified for entrepreneur status won 2 licenses.   
25. 700 MHz Band Licenses.   The Commission previously adopted criteria for defining 
three groups of small businesses for purposes of determining their eligibility for special provisions su
as bidding credits.
68
  The Commission defined a “small business” as an entity that, together with it
affiliates and controlling principals, has average gross revenues not exceeding $40 million for the 
preceding three years.
69
  A “very small business” is defined as an entity that, together with its affiliates 
and controlling principals, has average gross revenues that are not more than $15 million for the 
preceding three years.
70
  Additionally, the lower 700 MHz Service had a third category of 
status for Metropolitan/Rural Service Area (“MSA/RSA”) licenses.  The third category is 
“entrepreneur,” which is defined as an entity that, together with its affiliates and controlling principals, 
71
                                                      
61
 See “Broadband PCS Spectrum Auction Closes; Winning Bidders Announced for Auction No. 58,” Public Notice, 
20 FCC Rcd 3703 (2005). 
62
 See “Auction of Broadband PCS Spectrum Licenses Closes; Winning Bidders Announced for Auction No. 71,” 
Public Notice, 22 FCC Rcd 9247 (2007). 
63
 Id.  
64
 See Auction of AWS-1 and Broadband PCS Licenses Rescheduled For August 13, 3008, Notice of Filing 
Requirements, Minimum Opening Bids, Upfront Payments and Other Procedures For Auction 78, Public Notice, 23 
FCC Rcd 7496 (2008) (“AWS-1 and Broadband PCS Procedures Public Notice”).  
65
 See AWS-1 and Broadband PCS Procedures Public Notice, 23 FCC Rcd 7496.  Auction 78 also included an 
auction of Broadband PCS licenses. 
66
 Id. at 23 FCC Rcd at 7521-22. 
67
 See “Auction of AWS-1 and Broadband PCS Licenses Closes, Winning Bidders Announced for Auction 78, 
Down Payments Due September 9, 2008, FCC Forms 601 and 602 Due September 9, 2008, Final Payments Due 
September 23, 2008, Ten-Day Petition to Deny Period”, Public Notice, 23 FCC Rcd 12749-65 (2008). 
68  
See Reallocation and Service Rules for the 698-746 MHz Spectrum Band (Television Channels 52-59), Report and 
Order, 17 FCC Rcd 1022 (2002) (“Channels 52-59 Report and Order”). 
69
  See Channels 52-59 Report and Order, 17 FCC Rcd at 1087-88, ¶ 172. 
70
  See id. 
71
  See id, 17 FCC Rcd at 1088, ¶ 173. 
 Federal Communications Commission FCC 10-58 
 
 
36 
                                                     
approved these small size standards.
72
  The Commission conducted an auction in 2002 of 740 licenses 
(one license in each of the 734 MSAs/RSAs and one license in each of the six Economic Area Groupings 
(EAGs)).  Of the 740 licenses available for auction, 484 licenses were sold to 102 winning bidders.  
Seventy-two of the winning bidders claimed small business, very small business or entrepreneur status 
and won a total of 329 licenses.
 73
  The Commission conducted a second auction in 2003 that included 
256 licenses:  5 EAG licenses and 476 Cellular Market Area licenses.
74
  Seventeen winning bidders 
claimed small or very small business status and won 60 licenses, and nine winning bidders claimed 
entrepreneur status and won 154 licenses.
75
  In 2005, the Commission completed an auction of 5 licenses 
in the lower 700 MHz band (Auction 60).  There were three winning bidders for five licenses.  All three 
winning bidders claimed small business status. 
26. In 2007, the Commission adopted the 700 MHz Second Report and Order.
76
  The Order 
revised the band plan for the commercial (including Guard Band) and public safety spectrum, adopted 
services rules, including stringent build-out requirements, an open platform requirement on the C Block, 
and a requirement on the D Block licensee to construct and operate a nationwide, interoperable wireless 
broadband network for public safety users.  In 2008, the Commission commenced Auction 73 which 
offered all available, commercial 700 MHz Band licenses (1,099 licenses) for bidding using the 
Commission’s standard simultaneous multiple-round (“SMR”) auction format for the A, B, D, and E 
block licenses and an SMR auction design with hierarchical package bidding (“HPB”) for the C Block 
licenses.  Later in 2008, the Commission concluded Auction 73.
77
  A bidder with attributed average 
annual gross revenues that did not exceed $15 million for the preceding three years (very small business) 
qualified for a 25 percent discount on its winning bids.  A bidder with attributed average annual gross 
revenues that exceeded $15 million, but did not exceed $40 million for the preceding three years, 
qualified for a 15 percent discount on its winning bids.  There were 36 winning bidders (who won 330 of 
the 1,090 licenses won) that identified themselves as very small businesses.  There were 20 winning 
bidders that identified themselves as a small business that won 49 of the 1,090 licenses won.
78
  The 
provisionally winning bids for the A, B, C, and E Block licenses exceeded the aggregate reserve prices 
for those blocks.  However, the provisionally winning bid for the D Block license did not meet the 
applicable reserve price and thus did not become a winning bid.
79
 
 
72
  See Letter from Aida Alvarez, Administrator, SBA, to Thomas Sugrue, Chief, WTB, FCC (Aug. 10, 1999) 
(“Alvarez Letter 1999”). 
73 
 See “Lower 700 MHz Band Auction Closes,” Public Notice, 17 FCC Rcd 17272 (WTB 2002). 
74  
See “Lower 700 MHz Band Auction Closes,” Public Notice, 18 FCC Rcd 11873 (WTB 2003). 
75
  See id. 
76
 Service Rules for the 698-746, 747-762 and 777-792 MHz Band, WT Docket No. 06-150, Revision of the 
Commission’s Rules to Ensure Compatibility with Enhanced 911 Emergency Calling Systems, CC Docket No. 94-
102, Section 68.4(a) of the Commission’s Rules Governing Hearing Aid-Compatible Telephone, WT Docket No. 01-
309, Biennial Regulatory Review – Amendment of Parts 1, 22, 24, 27, and 90 to Streamline and Harmonize Various 
Rules Affecting Wireless Radio Services, WT Docket No. 03-264, Former Nextel Communications, Inc. Upper700 
MHz Guard Band Licenses and Revisions to Part 27 of the Commission’s Rules, WT Docket No. 06-169, 
Implementing a Nationwide, Broadband Interoperable Public Safety Network in the 700 MHz Band, PS Docket No. 
06-229, Development of Operational, Technical and Spectrum Requirements for Meeting Federal, State, and Local 
Public Safety Communications Requirements Through the Year 2010, WT Docket No. 96-86, Second Report and 
Order, FCC 07-132 (2007) (“700 MHz Second Report and Order”), 22 FCC Rcd 15289 (2007).  
77
 Auction of 700 MHz Band Licenses Closes, Winning Bidders Announced for Auction 73, Down Payments Due 
April 3, 2008, FCC Forms 601 and 602 April 3, 2008, Final Payment Due April 17, 2008, Ten-Day Petition to Deny 
Period, Public Notice, 23 FCC Rcd 4572 (2008). 
78
 Id. 23 FCC Rcd at 4572-73. 
79
 Id. 
 Federal Communications Commission FCC 10-58 
 
 
37 
uard 
                                                     
27. 700 MHz Guard Band Licenses.  In the 700 MHz Guard Band Order, the Commission 
adopted size standards for “small businesses” and “very small businesses” for purposes of determining 
their eligibility for special provisions such as bidding credits and installment payments.
80
  A small 
business in this service is an entity that, together with its affiliates and controlling principals, has average 
gross revenues not exceeding $40 million for the preceding three years.
81
  Additionally, a very small 
business is an entity that, together with its affiliates and controlling principals, has average gross 
revenues that are not more than $15 million for the preceding three years.
82
  SBA approval of these 
definitions is not required.
83
  In 2000, the Commission conducted an auction of 52 Major Economic 
Area (“MEA”) licenses.
84
  Of the 104 licenses auctioned, 96 licenses were sold to nine bidders.  Five of 
these bidders were small businesses that won a total of 26 licenses.  A second auction of 700 MHz G
Band licenses commenced and closed in 2001.  All eight of the licenses auctioned were sold to three 
bidders.  One of these bidders was a small business that won a total of two licenses.
85
 
28. Specialized Mobile Radio.  The Commission awards “small entity” bidding credits in 
auctions for Specialized Mobile Radio (SMR) geographic area licenses in the 800 MHz and 900 MHz 
bands to firms that had revenues of no more than $15 million in each of the three previous calendar 
years.
 86
  The Commission awards “very small entity” bidding credits to firms that had revenues of no 
more than $3 million in each of the three previous calendar years.
87
  The SBA has approved these small 
business size standards for the 900 MHz Service.
88
  The Commission has held auctions for geographic 
area licenses in the 800 MHz and 900 MHz bands.  The 900 MHz SMR auction was completed in 1996.  
Sixty bidders claiming that they qualified as small businesses under the $15 million size standard won 
263 geographic area licenses in the 900 MHz SMR band.  The 800 MHz SMR auction for the upper 200 
channels was conducted in 1997.  Ten bidders claiming that they qualified as small businesses under the 
$15 million size standard won 38 geographic area licenses for the upper 200 channels in the 800 MHz 
SMR band.
89
  A second auction for the 800 MHz band was conducted in 2002 and included 23 BEA 
licenses.  One bidder claiming small business status won five licenses.
90
 
29. The auction of the 1,053 800 MHz SMR geographic area licenses for the General 
Category channels was conducted in 2000.  Eleven bidders won 108 geographic area licenses for the 
General Category channels in the 800 MHz SMR band qualified as small businesses under the $15 
 
80
  See Service Rules for the 746-764 MHz Bands, and Revisions to Part 27 of the Commission’s Rules, Second 
Report and Order, 15 FCC Rcd 5299 (2000) (“746-764 MHz Band Second Report and Order”). 
81
  See 746-764 MHz Band Second Report and Order, 15 FCC Rcd at 5343, para. 108. 
82
  See id. 
83   
See id., 15 FCC Rcd 5299, 5343, para. 108 n.246 (for the 746-764 MHz and 776-794 MHz bands, the 
Commission is exempt from 15 U.S.C. § 632, which requires Federal agencies to obtain SBA approval before 
adopting small business size standards). 
84
  See “700 MHz Guard Bands Auction Closes:  Winning Bidders Announced,” Public Notice, 15 FCC Rcd 18026 
(2000). 
85
 See “700 MHz Guard Bands Auction Closes: Winning Bidders Announced,” Public Notice, 16 FCC Rcd 4590 
(WTB 2001). 
86
 47 C.F.R. § 90.814(b)(1). 
87  
47 C.F.R. § 90.814(b)(1). 
88
  See Alvarez Letter 1999.   
89
 See “Correction to Public Notice DA 96-586 ‘FCC Announces Winning Bidders in the Auction of 1020 Licenses 
to Provide 900 MHz SMR in Major Trading Areas,’” Public Notice, 18 FCC Rcd 18367 (WTB 1996). 
90
 See “Multi-Radio Service Auction Closes,” Public Notice, 17 FCC Rcd 1446 (WTB 2002). 
 Federal Communications Commission FCC 10-58 
 
 
38 
                                                     
million size standard.
91
  In an auction completed in 2000, a total of 2,800 Economic Area licenses in the 
lower 80 channels of the 800 MHz SMR service were awarded.
92
  Of the 22 winning bidders, 19 claimed 
small business status and won 129 licenses.  Thus, combining all three auctions, 40 winning bidders for 
geographic licenses in the 800 MHz SMR band claimed status as small business. 
30. In addition, there are numerous incumbent site-by-site SMR licensees and licensees with 
extended implementation authorizations in the 800 and 900 MHz bands.  We do not know how many 
firms provide 800 MHz or 900 MHz geographic area SMR pursuant to extended implementation 
authorizations, nor how many of these providers have annual revenues of no more than $15 million.  One 
firm has over $15 million in revenues.  In addition, we do not know how many of these firms have 1500 
or fewer employees.
93
  We assume, for purposes of this analysis, that all of the remaining existing 
extended implementation authorizations are held by small entities, as that small business size standard is 
approved by the SBA. 
31. Cellular Radiotelephone Service.  Auction 77 was held to resolve one group of 
mutually exclusive applications for Cellular Radiotelephone Service licenses for unserved areas in New 
Mexico.
94
  Bidding credits for designated entities were not available in Auction 77.
95
  In 2008, the 
Commission completed the closed auction of one unserved service area in the Cellular Radiotelephone 
Service, designated as Auction 77.  Auction 77 concluded with one provisionally winning bid for the 
unserved area totaling $25,002.
96
 
32. Private Land Mobile Radio (“PLMR”).  PLMR systems serve an essential role in a 
range of industrial, business, land transportation, and public safety activities.  These radios are used by 
companies of all sizes operating in all U.S. business categories, and are often used in support of the 
licensee’s primary (non-telecommunications) business operations.  For the purpose of determining 
whether a licensee of a PLMR system is a small business as defined by the SBA, we use the broad 
census category, Wireless Telecommunications Carriers (except Satellite).  This definition provides that 
a small entity is any such entity employing no more than 1,500 persons.
97
  The Commission does not 
require PLMR licensees to disclose information about number of employees, so the Commission does 
not have information that could be used to determine how many PLMR licensees constitute small entities 
under this definition.  We note that PLMR licensees generally use the licensed facilities in support of 
other business activities, and therefore, it would also be helpful to assess PLMR licensees under the 
standards applied to the particular industry subsector to which the licensee belongs.
98
 
33. As of March 2010, there were 424,162 PLMR licensees operating 921,909 transmitters in 
the PLMR bands below 512 MHz.  We note that any entity engaged in a commercial activity is eligible 
 
91
 See “800 MHz Specialized Mobile Radio (SMR) Service General Category (851-854 MHz) and Upper Band 
(861-865 MHz) Auction Closes; Winning Bidders Announced,” Public Notice, 15 FCC Rcd 17162 (2000). 
92
 See, “800 MHz SMR Service Lower 80 Channels Auction Closes; Winning Bidders Announced,” Public Notice, 
16 FCC Rcd 1736 (2000). 
93
 See generally 13 C.F.R. § 121.201, NAICS code 517210. 
94
 See Closed Auction of Licenses for Cellular Unserved Service Area Scheduled for June 17, 2008, Notice and 
Filing Requirements, Minimum Opening Bids, Upfront Payments, and Other Procedures for Auction 77, Public 
Notice, 23 FCC Rcd 6670 (2008). 
95
 Id.  at 6685. 
96
 See Auction of Cellular Unserved Service Area License Closes, Winning Bidder Announced for Auction 77, 
Down Payment due July 2, 2008, Final Payment due July 17, 2008, Public Notice, 23 FCC Rcd 9501 (2008).  
97 
See 13 C.F.R. § 121.201, NAICS code 517210. 
98
 See generally 13 C.F.R. § 121.201. 
 Federal Communications Commission FCC 10-58 
 
 
39 
                                                     
to hold a PLMR license, and that any revised rules in this context could therefore potentially impact 
small entities covering a great variety of industries. 
34. Fixed Microwave Services.  Fixed microwave services include common carrier,
99
 
private operational-fixed,
100
 and broadcast auxiliary radio services.
101
  At present, there are 
approximately 22,015 common carrier fixed licensees and 61,670 private operational-fixed licensees and 
broadcast auxiliary radio licensees in the microwave services.  The Commission has not created a size 
standard for a small business specifically with respect to fixed microwave services.  For purposes of this 
analysis, the Commission uses the SBA small business size standard for the category Wireless 
Telecommunications Carriers (except Satellite), which is 1,500 or fewer employees.
102
  The Commission 
does not have data specifying the number of these licensees that have no more than 1,500 employees, 
and thus are unable at this time to estimate with greater precision the number of fixed microwave service 
licensees that would qualify as small business concerns under the SBA’s small business size standard.  
Consequently, the Commission estimates that there are 22,015 or fewer common carrier fixed licensees 
and 61,670 or fewer private operational-fixed licensees and broadcast auxiliary radio licensees in the 
microwave services that may be small and may be affected by the rules and policies proposed herein.  
We note, however, that the common carrier microwave fixed licensee category includes some large 
entities. 
35. 39 GHz Service.  The Commission created a special small business size standard for 39 
GHz licenses – an entity that has average gross revenues of $40 million or less in the three previous 
calendar years.
103
  An additional size standard for “very small business” is: an entity that, together with 
affiliates, has average gross revenues of not more than $15 million for the preceding three calendar 
years.
104
  The SBA has approved these small business size standards.
105
  The auction of the 2,173, 39 
GHz licenses, began and closed in 2000.  The 18 bidders who claimed small business status won 849 
licenses.  
36. Local Multipoint Distribution Service.  Local Multipoint Distribution Service 
(“LMDS”) is a fixed broadband point-to-multipoint microwave service that provides for two-way video 
telecommunications.
106
  The auction of the 986 LMDS licenses began and closed in 1998.  The 
 
(continued….) 
99
 See 47 C.F.R. §§ 101 et seq. for common carrier fixed microwave services (except Multipoint Distribution 
Service). 
100
 Persons eligible under parts 80 and 90 of the Commission’s Rules can use Private Operational-Fixed Microwave 
services.  See 47 C.F.R. Parts 80 and 90.  Stations in this service are called operational-fixed to distinguish them 
from common carrier and public fixed stations.  Only the licensee may use the operational-fixed station, and only for 
communications related to the licensee’s commercial, industrial, or safety operations. 
101
 Auxiliary Microwave Service is governed by Part 74 of Title 47 of the Commission’s Rules.  See 47 C.F.R. Part 
74.  This service is available to licensees of broadcast stations and to broadcast and cable network entities.  
Broadcast auxiliary microwave stations are used for relaying broadcast television signals from the studio to the 
transmitter, or between two points such as a main studio and an auxiliary studio.  The service also includes mobile 
television pickups, which relay signals from a remote location back to the studio. 
102 
13 C.F.R. § 121.201, NAICS code 517210. 
103
  See Amendment of the Commission’s Rules Regarding the 37.0-38.6 GHz and 38.6-40.0 GHz Bands, ET Docket 
No. 95-183, Report and Order, 12 FCC Rcd 18600 (1997). 
104  
Id. 
105
  See Letter from Aida Alvarez, Administrator, SBA, to Kathleen O’Brien Ham, Chief, Auctions and Industry 
Analysis Division, WTB, FCC (Feb. 4, 1998); see Letter from Hector Barreto, Administrator, SBA, to Margaret 
Wiener, Chief, Auctions and Industry Analysis Division, WTB, FCC (Jan. 18, 2002). 
106
  See Rulemaking to Amend Parts 1, 2, 21, 25, of the Commission’s Rules to Redesignate the 27.5-29.5 GHz 
Frequency Band, Reallocate the 29.5-30.5 Frequency Band, to Establish Rules and Policies for Local Multipoint 
Distribution Service and for Fixed Satellite Services, Second Report and Order, Order on Reconsideration, and Fifth 
 Federal Communications Commission FCC 10-58 
 
 
40 
(Continued from previous page)                                                            
Commission established a small business size standard for LMDS licenses as an entity that has average 
gross revenues of less than $40 million in the three previous calendar years.
107
  An additional small 
business size standard for “very small business” was added as an entity that, together with its affiliates, 
has average gross revenues of not more than $15 million for the preceding three calendar years.
108
  The 
SBA has approved these small business size standards in the context of LMDS auctions.
109
  There were 
93 winning bidders that qualified as small entities in the LMDS auctions.  A total of 93 small and very 
small business bidders won approximately 277 A Block licenses and 387 B Block licenses.  In 1999, the 
Commission re-auctioned 161 licenses; there were 32 small and very small businesses winning that won 
119 licenses. 
37. Rural Radiotelephone Service.  The Commission has not adopted a size standard for 
small businesses specific to the Rural Radiotelephone Service.
110
  A significant subset of the Rural 
Radiotelephone Service is the Basic Exchange Telephone Radio System (“BETRS”).
111
  In the present 
context, we will use the SBA’s small business size standard applicable to Wireless Telecommunications 
Carriers (except Satellite), i.e., an entity employing no more than 1,500 persons.
112
  There are 
approximately 1,000 licensees in the Rural Radiotelephone Service, and the Commission estimates that 
there are 1,000 or fewer small entity licensees in the Rural Radiotelephone Service that may be affected 
by the rules and policies proposed herein. 
38. 1.4 GHz Band Licensees.  The Commission conducted an auction of 64 1.4 GHz band 
licenses 
113
 in 2007.
114
  In that auction, the Commission defined “small business” as an entity that, 
together with its affiliates and controlling interests, had average gross revenues that exceed $15 million 
but do not exceed $40 million for the preceding three years, and a “very small business” as an entity that, 
together with its affiliates and controlling interests, has had average annual gross revenues not exceeding 
$15 million for the preceding three years.
115
  Neither of the two winning bidders sought designated entity 
status.
116
 
39. Incumbent 24 GHz Licensees.  This analysis may affect incumbent licensees who were 
relocated to the 24 GHz band from the 18 GHz band, and applicants who wish to provide services in the 
24 GHz band.  The applicable SBA small business size standard is that of Wireless Telecommunications 
Carriers (except Satellite).  This category provides that such a company is small if it employs no more 
than 1,500 persons.
117
  The broader census data notwithstanding, we believe that there are only two 
licensees in the 24 GHz band that were relocated from the 18 GHz band, Teligent
118
 and TRW, Inc.  It is 
 
(continued….) 
Notice of Proposed Rule Making, 12 FCC Rcd 12545, 12689-90, ¶ 348 (1997) (“LMDS Second Report and Order”). 
107
  See LMDS Second Report and Order, 12 FCC Rcd at 12689-90, ¶ 348. 
108
  See id. 
109
  See Alvarez to Phythyon Letter 1998. 
110 
The service is defined in § 22.99 of the Commission’s Rules, 47 C.F.R. § 22.99. 
111
 BETRS is defined in §§ 22.757 and 22.759 of the Commission’s Rules, 47 C.F.R. §§ 22.757 and 22.759. 
112 
13 C.F.R. § 121.201, NAICS code 517210. 
113
 See “Auction of 1.4 GHz Bands Licenses Scheduled for February 7, 2007,” Public Notice, 21 FCC Rcd 12393 
(WTB 2006). 
114
 See “Auction of 1.4 GHz Band Licenses Closes; Winning Bidders Announced for Auction No. 69,” Public Notice, 
22 FCC Rcd 4714 (2007) (“Auction No. 69 Closing PN”). 
115
 Auction No. 69 Closing PN, Attachment C. 
116
 See Auction No. 69 Closing PN. 
117
 13 C.F.R. § 121.201, NAICS code 517210. 
118
 Teligent acquired the DEMS licenses of FirstMark, the only licensee other than TRW in the 24 GHz band whose 
 Federal Communications Commission FCC 10-58 
 
 
41 
(Continued from previous page)                                                            
our understanding that Teligent and its related companies have fewer than 1,500 employees, though this 
may change in the future.  TRW is not a small entity.  There are approximately 122 licensees in the 
Rural Radiotelephone Service, and the Commission estimates that there are 122 or fewer small entity 
licensees in the Rural Radiotelephone Service that may be affected by the rules and policies proposed 
herein.   
40. Future 24 GHz Licensees.  With respect to new applicants in the 24 GHz band, we have 
defined “small business” as an entity that, together with controlling interests and affiliates, has average 
annual gross revenues for the three preceding years not exceeding $15 million.
119
  “Very small business” 
in the 24 GHz band is defined as an entity that, together with controlling interests and affiliates, has 
average gross revenues not exceeding $3 million for the preceding three years.
120
  The SBA has 
approved these definitions.
121
  The Commission will not know how many licensees will be small or very 
small businesses until the auction, if required, is held. 
41. Broadband Radio Service and Educational Broadband Service.  Broadband Radio 
Service systems, previously referred to as Multipoint Distribution Service (“MDS”) and Multichannel 
Multipoint Distribution Service (“MMDS”) systems, and “wireless cable,” transmit video programming 
to subscribers and provide two-way high speed data operations using the microwave frequencies of the 
Broadband Radio Service (“BRS”) and Educational Broadband Service (“EBS”) (previously referred to 
as the Instructional Television Fixed Service (“ITFS”)).
122
  In connection with the 1996 BRS auction, the 
Commission established a small business size standard as an entity that had annual average gross 
revenues of no more than $40 million in the previous three calendar years.
123
  The BRS auctions resulted 
in 67 successful bidders obtaining licensing opportunities for 493 Basic Trading Areas (“BTAs”).  Of the 
67 auction winners, 61 met the definition of a small business.  BRS also includes licensees of stations 
authorized prior to the auction.  At this time, we estimate that of the 61 small business BRS auction 
winners, 48 remain small business licensees.  In addition to the 48 small businesses that hold BTA 
authorizations, there are approximately 392 incumbent BRS licensees that are considered small 
entities.
124
  After adding the number of small business auction licensees to the number of incumbent 
licensees not already counted, we find that there are currently approximately 440 BRS licensees that are 
defined as small businesses under either the SBA or the Commission’s rules.  In 2009, the Commission 
conducted Auction 86, the sale of 78 licenses in the BRS areas.
125
  The Commission offered three levels 
of bidding credits: (i) a bidder with attributed average annual gross revenues that exceed $15 million and 
 
license has been modified to require relocation to the 24 GHz band. 
119
 Amendments to Parts 1, 2, 87 and 101 of the Commission’s Rules To License Fixed Services at 24 GHz, Report 
and Order, 15 FCC Rcd 16934, 16967, ¶ 77 (2000) (“24 GHz Report and Order”); see also 47 C.F.R. 
§ 101.538(a)(2). 
120
 24 GHz Report and Order, 15 FCC Rcd at 16967, para. 77; see also 47 C.F.R. § 101.538(a)(1). 
121
 See Letter from Gary M. Jackson, Assistant Administrator, SBA, to Margaret W. Wiener, Deputy Chief, 
Auctions and Industry Analysis Division, WTB, FCC (July 28, 2000). 
122
 Amendment of Parts 21 and 74 of the Commission’s Rules with Regard to Filing Procedures in the Multipoint 
Distribution Service and in the Instructional Television Fixed Service and Implementation of Section 309(j) of the 
Communications Act – Competitive Bidding, MM Docket No. 94-131 and PP Docket No. 93-253, Report and Order, 
10 FCC Rcd 9589, 9593, ¶ 7 (1995) (“MDS Auction R&O”).   
123
 47 C.F.R. § 21.961(b)(1). 
124
 47 U.S.C. § 309(j). Hundreds of stations were licensed to incumbent MDS licensees prior to implementation of 
Section 309(j) of the Communications Act of 1934, 47 U.S.C. § 309(j).  For these pre-auction licenses, the 
applicable standard is SBA’s small business size standard. 
125
 Auction of Broadband Radio Service (BRS) Licenses, Scheduled for October 27, 2009, Notice and Filing 
Requirements, Minimum Opening Bids, Upfront Payments, and Other Procedures for Auction 86, Public Notice, 24 
FCC Rcd 8277 (2009). 
 Federal Communications Commission FCC 10-58 
 
 
42 
                                                     
do not exceed $40 million for the preceding three years (small business) will receive a 15 percent 
discount on its winning bid; (ii) a bidder with attributed average annual gross revenues that exceed $3 
million and do not exceed $15 million for the preceding three years (very small business) will receive a 
25 percent discount on its winning bid; and (iii) a bidder with attributed average annual gross revenues 
that do not exceed $3 million for the preceding three years (entrepreneur) will receive a 35 percent 
discount on its winning bid.
126
  Auction 86 concluded in 2009 with the sale of 61 licenses.
127
  Of the ten 
winning bidders, two bidders that claimed small business status won 4 licenses; one bidder that claimed 
very small business status won three licenses; and two bidders that claimed entrepreneur status won six 
licenses. 
42. In addition, the SBA’s Cable Television Distribution Services small business size 
standard is applicable to EBS.  There are presently 2,032 EBS licensees.  All but 100 of these licenses 
are held by educational institutions.  Educational institutions are included in this analysis as small 
entities.
128
  Thus, we estimate that at least 1,932 licensees are small businesses.  Since 2007, Cable 
Television Distribution Services have been defined within the broad economic census category of Wired 
Telecommunications Carriers; that category is defined as follows:  “This industry comprises 
establishments primarily engaged in operating and/or providing access to transmission facilities and 
infrastructure that they own and/or lease for the transmission of voice, data, text, sound, and video using 
wired telecommunications networks. Transmission facilities may be based on a single technology or a 
combination of technologies.”
129
  The SBA has developed a small business size standard for this 
category, which is:  all such firms having 1,500 or fewer employees.  To gauge small business 
prevalence for these cable services we must, however, use current census data that are based on the 
previous category of Cable and Other Program Distribution and its associated size standard; that size 
standard was:  all such firms having $13.5 million or less in annual receipts.
130
  According to Census 
Bureau data for 2002, there were a total of 1,191 firms in this previous category that operated for the 
entire year.
131
  Of this total, 1,087 firms had annual receipts of under $10 million, and 43 firms had 
receipts of $10 million or more but less than $25 million.
132
  Thus, the majority of these firms can be 
considered small.   
43. Cable Television Distribution Services.   Since 2007, these services have been defined 
within the broad economic census category of Wired Telecommunications Carriers; that category is 
defined as follows:  “This industry comprises establishments primarily engaged in operating and/or 
providing access to transmission facilities and infrastructure that they own and/or lease for the 
transmission of voice, data, text, sound, and video using wired telecommunications networks. 
 
126
 Id. at 8296. 
127
 Auction of Broadband Radio Service Licenses Closes, Winning Bidders Announced for Auction 86, Down 
Payments Due November 23, 2009, Final Payments Due December 8, 2009, Ten-Day Petition to Deny Period, 
Public Notice, 24 FCC Rcd 13572 (2009). 
128
 The term “small entity” within SBREFA applies to small organizations (nonprofits) and to small governmental 
jurisdictions (cities, counties, towns, townships, villages, school districts, and special districts with populations of 
less than 50,000).  5 U.S.C. §§ 601(4)-(6).  We do not collect annual revenue data on EBS licensees. 
129
  U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers” (partial 
definition); http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.  
130
  13 C.F.R. § 121.201, NAICS code 517110. 
131
  U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, Table 4, Receipts Size of Firms for 
the United States:  2002, NAICS code 517510 (issued November 2005). 
132
  Id.  An additional 61 firms had annual receipts of $25 million or more. 
 Federal Communications Commission FCC 10-58 
 
 
43 
nual 
                                                     
Transmission facilities may be based on a single technology or a combination of technologies.”
133
  The 
SBA has developed a small business size standard for this category, which is:  all such firms having 
1,500 or fewer employees.  To gauge small business prevalence for these cable services we must, 
however, use current census data that are based on the previous category of Cable and Other Program 
Distribution and its associated size standard; that size standard was:  all such firms having $13.5 million 
or less in annual receipts.
134
  According to Census Bureau data for 2002, there were a total of 1,191 
firms in this previous category that operated for the entire year.
135
  Of this total, 1,087 firms had an
receipts of under $10 million, and 43 firms had receipts of $10 million or more but less than $25 
million.
136
  Thus, the majority of these firms can be considered small. 
44. Cable Companies and Systems.  The Commission has also developed its own small 
business size standards, for the purpose of cable rate regulation.  Under the Commission’s rules, a “small 
cable company” is one serving 400,000 or fewer subscribers, nationwide.
137
  Industry data indicate that, 
of 1,076 cable operators nationwide, all but eleven are small under this size standard.
138
  In addition, 
under the Commission’s rules, a “small system” is a cable system serving 15,000 or fewer subscribers.
139
  
Industry data indicate that, of 6,635 systems nationwide, 5,802 systems have under 10,000 subscribers, 
and an additional 302 systems have 10,000-19,999 subscribers.
140
  Thus, under this second size standard, 
most cable systems are small. 
45. Cable System Operators.  The Communications Act of 1934, as amended, also contains 
a size standard for small cable system operators, which is “a cable operator that, directly or through an 
affiliate, serves in the aggregate fewer than 1 percent of all subscribers in the United States and is not 
affiliated with any entity or entities whose gross annual revenues in the aggregate exceed 
$250,000,000.”
141
  The Commission has determined that an operator serving fewer than 677,000 
subscribers shall be deemed a small operator, if its annual revenues, when combined with the total 
annual revenues of all its affiliates, do not exceed $250 million in the aggregate.
142
  Industry data 
indicate that, of 1,076 cable operators nationwide, all but ten are small under this size standard.
143
  We 
 
133
  U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers” (partial 
definition); http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.  
134
  13 C.F.R. § 121.201, NAICS code 517110. 
135
  U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, Table 4, Receipts Size of Firms for 
the United States:  2002, NAICS code 517510 (issued November 2005). 
136
  Id.  An additional 61 firms had annual receipts of $25 million or more. 
137
  47 C.F.R. § 76.901(e).  The Commission determined that this size standard equates approximately to a size 
standard of $100 million or less in annual revenues.  Implementation of Sections of the 1992 Cable Act: Rate 
Regulation, Sixth Report and Order and Eleventh Order on Reconsideration, 10 FCC Rcd 7393, 7408 (1995). 
138
  These data are derived from:  R.R. Bowker, Broadcasting & Cable Yearbook 2006, “Top 25 Cable/Satellite 
Operators,” pages A-8 & C-2 (data current as of June 30, 2005);  Warren Communications News, Television & 
Cable Factbook 2006, “Ownership of Cable Systems in the United States,” pages D-1805 to D-1857. 
139
  47 C.F.R. § 76.901(c).   
140
  Warren Communications News, Television & Cable Factbook 2008, “U.S. Cable Systems by Subscriber Size,” 
page F-2 (data current as of Oct. 2007).  The data do not include 851 systems for which classifying data were not 
available. 
141
  47 U.S.C. § 543(m)(2); see 47 C.F.R. § 76.901(f) & nn. 1-3. 
142
  47 C.F.R. § 76.901(f); see Public Notice, FCC Announces New Subscriber Count for the Definition of Small 
Cable Operator, DA 01-158 (Cable Services Bureau, Jan. 24, 2001). 
143
  These data are derived from:  R.R. Bowker, Broadcasting & Cable Yearbook 2006, “Top 25 Cable/Satellite 
Operators,” pages A-8 & C-2 (data current as of June 30, 2005); Warren Communications News, Television & 
Cable Factbook 2006, “Ownership of Cable Systems in the United States,” pages D-1805 to D-1857. 
 Federal Communications Commission FCC 10-58 
 
 
44 
                                                     
note that the Commission neither requests nor collects information on whether cable system operators 
are affiliated with entities whose gross annual revenues exceed $250 million,
144
 and therefore we are 
unable to estimate more accurately the number of cable system operators that would qualify as small 
under this size standard. 
46. Open Video Systems.  The open video system (“OVS”) framework was established in 
1996, and is one of four statutorily recognized options for the provision of video programming services 
by local exchange carriers.
145
  The OVS framework provides opportunities for the distribution of video 
programming other than through cable systems.  Because OVS operators provide subscription 
services,
146
 OVS falls within the SBA small business size standard covering cable services, which is 
“Wired Telecommunications Carriers.”
147
  The SBA has developed a small business size standard for 
this category, which is:  all such firms having 1,500 or fewer employees.  To gauge small business 
prevalence for such services we must, however, use current census data that are based on the previous 
category of Cable and Other Program Distribution and its associated size standard; that size standard 
was:  all such firms having $13.5 million or less in annual receipts.
148
  According to Census Bureau data 
for 2002, there were a total of 1,191 firms in this previous category that operated for the entire year.
149
  
Of this total, 1,087 firms had annual receipts of under $10 million, and 43 firms had receipts of $10 
million or more but less than $25 million.
150
  Thus, the majority of cable firms can be considered small.  
In addition, we note that the Commission has certified some OVS operators, with some now providing 
service.
151
  Broadband service providers (“BSPs”) are currently the only significant holders of OVS 
certifications or local OVS franchises.
152
  The Commission does not have financial or employment 
information regarding the entities authorized to provide OVS, some of which may not yet be operational.  
Thus, again, at least some of the OVS operators may qualify as small entities. 
47. Cable Television Relay Service.  This service includes transmitters generally used to 
relay cable programming within cable television system distribution systems.  This cable service is 
defined within the broad economic census category of Wired Telecommunications Carriers; that 
category is defined as follows:  “This industry comprises establishments primarily engaged in operating 
and/or providing access to transmission facilities and infrastructure that they own and/or lease for the 
transmission of voice, data, text, sound, and video using wired telecommunications networks. 
Transmission facilities may be based on a single technology or a combination of technologies.”
153
  The 
 
144
  The Commission does receive such information on a case-by-case basis if a cable operator appeals a local 
franchise authority’s finding that the operator does not qualify as a small cable operator pursuant to § 76.901(f) of 
the Commission’s rules.  See 47 C.F.R. § 76.909(b). 
145
  47 U.S.C. § 571(a)(3)-(4).  See Annual Assessment of the Status of Competition in the Market for the Delivery of 
Video Programming, Thirteenth Annual Report, 24 FCC Rcd 542, 606 ¶ 135 (2009) (“Thirteenth Annual Cable 
Competition Report”).  
146
  See 47 U.S.C. § 573. 
147
 U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers”; 
http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.  
148
  13 C.F.R. § 121.201, NAICS code 517110. 
149
  U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, Table 4, Receipts Size of Firms for 
the United States:  2002, NAICS code 517510 (issued November 2005). 
150
  Id.  An additional 61 firms had annual receipts of $25 million or more. 
151
  A list of OVS certifications may be found at http://www.fcc.gov/mb/ovs/csovscer.html. 
152
  See Thirteenth Annual Cable Competition Report, 24 FCC Rcd at 606-07 ¶ 135.  BSPs are newer firms that are 
building state-of-the-art, facilities-based networks to provide video, voice, and data services over a single network.   
153
  U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers” (partial 
definition); http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.  
 Federal Communications Commission FCC 10-58 
 
 
45 
                                                     
SBA has developed a small business size standard for this category, which is:  all such firms having 
1,500 or fewer employees.  To gauge small business prevalence for cable services we must, however, 
use current census data that are based on the previous category of Cable and Other Program Distribution 
and its associated size standard; that size standard was:  all such firms having $13.5 million or less in 
annual receipts.
154
  According to Census Bureau data for 2002, there were a total of 1,191 firms in this 
previous category that operated for the entire year.
155
  Of this total, 1,087 firms had annual receipts of 
under $10 million, and 43 firms had receipts of $10 million or more but less than $25 million.
156
  Thus, 
the majority of these firms can be considered small. 
48. Multichannel Video Distribution and Data Service.  MVDDS is a terrestrial fixed 
microwave service operating in the 12.2-12.7 GHz band.  The Commission adopted criteria for defining 
three groups of small businesses for purposes of determining their eligibility for special provisions such 
as bidding credits.  It defined a very small business as an entity with average annual gross revenues not 
exceeding $3 million for the preceding three years; a small business as an entity with average annual 
gross revenues not exceeding $15 million for the preceding three years; and an entrepreneur as an entity 
with average annual gross revenues not exceeding $40 million for the preceding three years.
157
  These 
definitions were approved by the SBA.
158
  On January 27, 2004, the Commission completed an auction 
of 214 MVDDS licenses (Auction No. 53).  In this auction, ten winning bidders won a total of 192 
MVDDS licenses.
159
  Eight of the ten winning bidders claimed small business status and won 144 of the 
licenses.  The Commission also held an auction of MVDDS licenses on December 7, 2005 (Auction 63).  
Of the three winning bidders who won 22 licenses, two winning bidders, winning 21 of the licenses, 
claimed small business status.
160
 
49. Internet Service Providers.  The 2007 Economic Census places these firms, whose 
services might include voice over Internet protocol (VoIP), in either of two categories, depending on 
whether the service is provided over the provider’s own telecommunications connections (e.g. cable and 
DSL, ISPs), or over client-supplied telecommunications connections (e.g. dial-up ISPs).  The former are 
within the category of Wired Telecommunications Carriers,
161
 which has an SBA small business size 
standard of 1,500 or fewer employees.
162
  The latter are within the category of All Other 
 
154
  13 C.F.R. § 121.201, NAICS code 517110. 
155
  U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, Table 4, Receipts Size of Firms for 
the United States:  2002, NAICS code 517510 (issued November 2005). 
156
  Id.  An additional 61 firms had annual receipts of $25 million or more. 
157
 Amendment of Parts 2 and 25 of the Commission’s Rules to Permit Operation of NGSO FSS Systems Co-
Frequency with GSO and Terrestrial Systems in the Ku-Band Frequency Range; Amendment of the Commission’s 
Rules to Authorize Subsidiary Terrestrial Use of the 12.2-12.7 GHz Band by Direct Broadcast Satellite Licenses and 
their Affiliates; and Applications of Broadwave USA, PDC Broadband Corporation, and Satellite Receivers, Ltd. to 
provide A Fixed Service in the 12.2-12.7 GHz Band, ET Docket No. 98-206, Memorandum Opinion and Order and 
Second Report and Order, 17 FCC Rcd 9614, 9711, ¶ 252 (2002).   
158
 See Letter from Hector V. Barreto, Administrator, U.S. Small Business Administration, to Margaret W. Wiener, 
Chief, Auctions and Industry Analysis Division, WTB, FCC (Feb.13, 2002). 
159
 See “Multichannel Video Distribution and Data Service Auction Closes,” Public Notice, 19 FCC Rcd 1834 
(2004).  
160
 See “Auction of Multichannel Video Distribution and Data Service Licenses Closes; Winning Bidders Announced 
for Auction No. 63,” Public Notice, 20 FCC Rcd 19807 (2005). 
161
 U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers”, 
http://www.census.gov/naics/2007/def/ND517110.HTM#N517110. 
162
 13 C.F.R. § 121.201, NAICS code 517110 (updated for inflation in 2008). 
 Federal Communications Commission FCC 10-58 
 
 
46 
                                                     
Telecommunications,
163
 which has a size standard of annual receipts of $25 million or less.
164
  The most 
current Census Bureau data for all such firms, however, are the 2002 data for the previous census 
category called Internet Service Providers.
165
  That category had a small business size standard of $21 
million or less in annual receipts, which was revised in late 2005 to $23 million.  The 2002 data show 
that there were 2,529 such firms that operated for the entire year.
166
  Of those, 2,437 firms had annual 
receipts of under $10 million, and an additional 47 firms had receipts of between $10 million and 
$24,999,999.
167
  Consequently, we estimate that the majority of ISP firms are small entities. 
50. The ISP industry has changed dramatically since 2002.  The 2002 data cited above may 
therefore include entities that no longer provide Internet access service and may exclude entities that 
now provide such service.  To ensure that this IRFA describes the universe of small entities that our 
action might affect, we discuss in turn several different types of entities that might be providing Internet 
access service. 
51. We note that, although we have no specific information on the number of small entities 
that provide Internet access service over unlicensed spectrum, we include these entities in our IRFA.  
IV. Description of Projected Reporting, Recordkeeping and Other Compliance Requirements: 
 
52. As discussed above, the NPRM seeks comment on a number of specific reforms to 
contain the growth in the legacy high-cost support mechanisms and identify savings that can be shifted 
toward broadband.
168
  Under the Commission’s current rules, eligible telecommunications carriers 
(ETCs) file certain information with the Commission, the Universal Service Administrative Company 
(USAC), and/or the National Carrier Exchange Association (NECA) that is used to determine the 
amount of high-cost support each ETC receives.  The proposals in the NPRM to cap or eliminate 
support, if eventually adopted, are not likely to substantially change the current reporting, recordkeeping, 
and compliance requirements, and would, in some cases, reduce such burdens.  The proposal to shift 
rate-of-return carriers to incentive regulation likely would result in certain one-time reporting 
requirements related to the conversion, such as establishing initial price cap indexes for price cap 
baskets.
169
  In addition, some ongoing reporting, recordkeeping and other compliance requirements may 
change after the conversion from rate-of-return regulation, but may result in less burdensome 
requirements, in some cases.  We do not have an estimate of potential reporting, recordkeeping, and 
compliance burdens, because it is too speculative at this time to anticipate the number of carriers that 
would be required to convert to incentive regulation, or what type of incentive regulation would be 
required.  We anticipate that commenters will provide the Commission with reliable information on any 
costs and burdens on small entities. 
V. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant 
Alternatives Considered: 
 
 
163
 U.S. Census Bureau, 2007 NAICS Definitions, “517919 All Other Telecommunications”; 
http://www.census.gov/naics/2007/def/ND517919.HTM#N517919.   
164
 13 C.F.R. § 121.201, NAICS code 517919 (updated for inflation in 2008). 
165
 U.S. Census Bureau, “2002 NAICS Definitions, “518111 Internet Service Providers”; 
http://www.census.gov/eped/naics02/def/NDEF518.HTM. 
166
 U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size 
(Including Legal Form of Organization),” Table 4, NAICS code 518111 (issued Nov. 2005). 
167
 An additional 45 firms had receipts of $25 million or more. 
168
 See supra para. 3. 
169
 See NPRM, para. 55 note 122. 
 Federal Communications Commission FCC 10-58 
 
 
47 
                                                     
53. The RFA requires an agency to describe any significant alternatives that it has considered 
in reaching its approach, which may include the following four alternatives, among others: (1) the 
establishment of differing compliance or reporting requirements or timetables that take into account the 
resources available to small entities; (2) the clarification, consolidation, or simplification of compliance 
or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, 
standards; and (4) an exemption from coverage of the rule, or any part thereof, for small entities.
170
   
54. As discussed above, the NPRM seeks comment the NPRM seeks comment on capping 
legacy high-cost support provided to incumbent telephone companies; shifting rate-of-return carriers to 
incentive regulation and converting interstate common line support to a frozen amount per line; 
eliminating interstate access support; and eliminating high-cost support for competitive eligible 
telecommunications carriers.
171
  The NPRM seeks comment generally on the proposed universal service 
reforms and carriers’ rates under the Commission’s current pricing rules, and specifically seeks comment 
on whether there are special considerations resulting from the operation of the NECA pool that would 
unfairly advantage or disadvantage certain carriers.
172
  The NPRM also seeks comment on the cost s and 
benefits that would be realized by converting all rate-of-return carriers to price cap or other incentive 
regulation.
173
  We anticipate that the record will reflect whether the overall benefits of such a 
requirement would outweigh the burdens on small entities, and if so, suggest alternative ways in which 
the Commission could lessen the overall burdens on small entities.  We encourage small entity comment. 
VI. Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules: 
 
55. None. 
 
 
170
 5 U.S.C. § 603. 
171
 See supra, para. 3.  
172
 See NPRM, para. 54.  The NECA pool is composed of rate-of-return carriers that generally are much smaller than 
the price cap carriers. 
173
 See NPRM, para. 55. 
 Federal Communications Commission FCC 10-58 
 
 
48 
APPENDIX B 
 
Comments of 61 Economists 
 
 
 
Comments of 61 Concerned Economists 
 
Using Procurement Auctions to Allocate Broadband Stimulus Grants 
 
Submitted to the Nati ation Agency (NTIA)  onal Telecommunications Inform
and Rura e (RUS) l Utilities Servic
April 13, 2009 
 
Contacts: 
Paul Milgrom 
Economics Department 
 
Stanford University 
579 Serra Mall at Galvez
tanford, CA 94305 
ilgrom@stanford.edu 
S
m
 
nomic Policy Research 
Gregory Rosston 
Stanford Institute for Eco
 
Stanford University 
579 Serra Mall at Galvez
Stanford, CA 94305 
grosston@stanford.edu 
Andrzej Skrzypacz 
usiness Graduate School of B
Stanford University 
350 Memorial Way 
tanford, CA  94305 
ndy@gsb.stanford.edu 
S
a
 
ute 
Scott Wallsten 
Technology Policy Instit
05 
1401 Eye St., NW 
Washington, DC 200
scott@wallsten.net 
 
 
Executive Summary 
The signatories to this document are economists who have studied telecommunications, 
auctions, and competition policy.
1
 While we may disagree about the stimulus package, we 
believe that it is important to implement mechanisms that make stimulus spending as 
efficient as possible.  To that end, we have come together to encourage the National 
elecommunications Information Agency (NTIA) and Rural Utilities Service (RUS) to adopt T
auction mechanisms to allocate broadband stimulus grants. 
 
The broadband stimulus NOI asks which mechanisms NTIA and RUS should use to 
distribute grants and how those mechanisms address shortcomings in traditional grant and 
loan programs. In this note we explain why procurement auctions are more efficient and 
more consistent with the stimulus goals of allocating funds quickly than a traditional grant 
review process.  We recommend that NTIA/RUS use procurement auctions to distribute at 
least part of the stimulus funds. 
The American Recovery and Reinvestment Act (ARRA) requires NTIA/RUS to distribute 
$7.2 billion in broadband subsidies.  The broadband component of the Act has dual, and not 
entirely consistent, objectives of providing immediate economic stimulus and improving 
broadband service.  NTIA/RUS faces a formidable challenge in determining how to spend 
the money quickly and efficiently in ways that meet these goals.  The traditional grant 
application process is long, complicated, and involves subjective and arbitrary decisions 
egarding which projects to fund.  In other words, requesting and reviewing grant r
applications is not an effective way to implement the plan. 
 
Procurement auctions, in contrast, provide a mechanism that can allocate grant money 
quickly, efficiently, and according to well?defined rules.  As a result, procurement auctions 
offer NTIA/RUS the most promising method of maximizing broadband improvement while 
also creating some level of “temporary, timely, and targeted” stimulus.  We therefore 
trongly recommend that NTIA/RUS adopt procurement auctions as its preferred method s
of distributing grants. 
 
This memo has three parts.  First, it explains why the traditional grant application process 
is unsuitable for this task and why procurement auctions are better suited.  Second, it 
sketches out a procurement auction plan.  This plan is intended to be a starting point from 
which auction design experts would proceed to build and implement a fully functional 
auction. Finally, we explain that even if policymakers are skeptical of procurement 
auctions, one could be implemented quickly as part of an initial tranche of stimulus funding 
in order to test its efficacy relative to traditional approaches. This approach would allow 
TIA/RUS to quickly expand upon or modify the procurement auction program in 
ubsequent funding rounds.  
N
s
 
                                                        
1
 The analysis and opinions here in are the sole responsibility of the signatories to these comments.  The 
signatories are not appearing on behalf of any other person or entity and have received no compensation for 
the production of these comments. 
 
 
 
 
Table of Contents 
 I. Introduction ...................................................................................................................................................... 1
II. Pr   ocurement Auctions are more Efficient than Traditional Grantmaking Approaches .. 2
  A. Traditional Approaches for Distributing Grants are Cumbersome and Slow ................. 2
  B. Procurement Auctions Can Allocate Funds Flexibly, Efficiently and Fairly ..................... 3
. ........... 4 C Clear Selection Criteria are Critical for any Selection Program ..................................
III. A Straw?Man Procurement Auction Plan for Allocating NTIA/RUS Broadband 
Su id  bs ies ...................................................................................................................................................................... 5
  A. Auction Design ............................................................................................................................................ 5
  B. Process Considerations ........................................................................................................................... 6
  C. Compliance and Accountability ........................................................................................................... 8
IV. NTIA/RUS Should Use Procurement Auctions to Allocate a At Least A Portion of the 
 First Wave of Broadband Stimulus Funding and Expand the Program if Successful ................. 9
. Conclusion....................................................................................................................................................... 10 V
 
1 
 
which auction design expert
I. Introduction 
The signatories to this document are economists who have studied telecommunications, 
auctions, and competition policy.
2
 While we may disagree about the stimulus package, we 
believe that it is important to implement mechanisms that make stimulus spending as 
efficient as possible.  To that end, we have come together to encourage the National 
elecommunications Information Agency (NTIA) and Rural Utilities Service (RUS) to adopt T
auction mechanisms to allocate broadband stimulus grants. 
 
The broadband stimulus NOI asks which mechanisms NTIA and RUS should use to 
distribute grants and how those mechanisms address shortcomings in traditional grant and 
loan programs.
3
 In this note we explain why procurement auctions are more efficient and 
more consistent with the stimulus goals of allocating funds quickly than a traditional grant 
review process.  We recommend that NTIA/RUS use procurement auctions to distribute at 
least part of the stimulus funds.
4
 
The American Recovery and Reinvestment Act (ARRA) requires NTIA/RUS to distribute 
$7.2 billion in broadband subsidies.  The broadband component of the Act has dual, and not 
entirely consistent, objectives of providing immediate economic stimulus and improving 
broadband service.  NTIA/RUS faces a formidable challenge in determining how to spend 
the money quickly and efficiently in ways that meet these goals.  The traditional grant 
application process is long, complicated, and involves subjective and arbitrary decisions 
egarding which projects to fund.  In other words, requesting and reviewing grant r
applications is not an effective way to implement the plan. 
 
Procurement auctions, in contrast, provide a mechanism that can allocate grant money 
quickly, efficiently, and according to well?defined rules.  As a result, procurement auctions 
offer NTIA/RUS the most promising method of maximizing broadband improvement while 
also creating some level of “temporary, timely, and targeted” stimulus.  We therefore 
trongly recommend that NTIA/RUS adopt procurement auctions as its preferred method s
of distributing grants. 
 
This memo has three parts.  First, it explains why the traditional grant application process 
is unsuitable for this task and why procurement auctions are better suited.  Second, it 
sketches out a procurement auction plan.  This plan is intended to be a starting point from 
s would proceed to build and implement a fully functional 
                                                        
2
 The analysis and opinions here in are the sole responsibility of the signatories to these comments.  The 
s or ignatories are not appearing on behalf of any other person or entity and have received no compensation f
the production of these comments. 
3
 Section 5a asks: “What mechanisms for distributing stimulus funds should be used by NTIA and USDA in 
addition to traditional grant and loan programs?” Section 5b asks: “How would these mechanisms address 
shortcomings, if any, in traditional grant or loan mechanisms in the context of the Recovery Act?”  Because the 
l  egislation appears to forbid the of use demand?side vouchers for the vast majority of the stimulus money, we
have focussed on supply?side mechanisms. 
4
 The term “reverse auction” has been used in the context of universal service as a synonym for procurement 
auction. 
2 
 
dollars. 
auction. Finally, we explain that even if policymakers are skeptical of procurement 
auctions, one could be implemented quickly as part of an initial tranche of stimulus funding 
in order to test its efficacy relative to traditional approaches. This approach would allow 
TIA/RUS to quickly expand upon or modify the procurement auction program in 
ubsequent funding rounds.  
N
s
 
II. Procurement Auctions are more Efficient than Traditional 
Grantmaking Approaches 
A. Traditional Approaches for Distributing Grants are Cumbersome and Sl
Traditionally, subsidy programs require firms to submit lengthy applications and the 
government to pick the “best ones” after reviewing all the competing applications.  This 
pproach has at least three problems for the purpose of distributing the funds from the 
ow 
a
stimulus bill. 
 
First, the traditional approach is inherently time?consuming.  Firms must complete 
complex proposals that government officials must subsequently spend time reviewing.  
USDA’s Rural Utility Service (RUS), whose awards include broadband support, noted in its 
2007 Annual Report that in 2006 the average application took six months to process (and 
this was an improvement from previous years when the average processing time was 
nearly a year).
5
  That estimate does not include time firms spent preparing those 
pplications.  Complex broadband grants have taken far longer—s everal years in some a
instances.
6
  Such delays are inconsistent with the goals of speedy stimulus grants. 
 
Second, the qualitative nature of the applications makes it difficult to compare one project 
to another.  For example, it will be difficult to choose between, say, a fiber project in Texas 
and a wireless project in North Dakota.  Reviewing and deciding between large numbers of 
grant applications will inevitably lead to inconsistent and seemingly arbitrary decisions. 
nd, the unpredictability of decisions will make it harder for companies to determine and A
propose the most appropriate projects.  
 
Third, it is difficult to design a grant application system to ensure that firms receive only 
the minimum subsidy necessary to achieve a goal.  To determine the “correct” subsidy level 
the government could attempt to calculate the necessary subsidy using available 
information, but this effort would be time?intensive, costly, and inaccurate.  Alternatively, it 
could rely on the applicant’s own estimate, but applicants have little incentive to ask for the 
bare minimum required.  Either approach will result in a suboptimal allocation of subsidy 
                                                        
5
 USDA Rural Utility Service. 2007. USDA Rural Development: Bringing Broadband to Rural America. 
http://www.rurdev.usda.gov/rd/pubs/RDBroadbandRpt.pdf 
6
 Open Range Communications disclosed that it had spent over three years and submitted over 30,000 pages 
of application materials before its RDUP loan was granted. See 
http://www.businesswire.com/news/google/20071022006575/en 
3 
 
Procurement auctions have s
g
 
Reviewing grant applications is not an appropriate way to distribute broadband stimulus 
grants.  NTIA/RUS requires a more objective and efficient methodology.  Competitive 
bidding by procurement auction is the best approach. 
B. Procurement Auctions Can Allocate Funds Flexibly, Efficiently and Fairly 
An objective, ”mechanistic” approach that applies specific, quantitative criteria can be both 
easier to implement and lead to more efficient outcomes than traditional grant application 
eview. Procurement auctions, in particular, can lead to more efficient grant disbursal than r
traditional qualitative approaches.
7
 
 
An auction is a mechanism for making smart allocation choices when confronted with 
overwhelming amounts of information and no relevant market exists.  In a typical auction 
for a good, bids increase until the auction identifies the entity willing to pay the most for 
the good being auctioned.  In the simplest procurement or “reverse” auction, bids consist of 
how much an entity must be paid to provide a good or service.  The procurement auction 
hus identifies the entity willing to provide the good or service for the smallest amount of t
money. 
 
Though it may sound exotic, a procurement auction is just a competitive bidding process 
and analogous to any government procurement.  When the government needs to purchase 
something, it describes specifically what it wants, firms submit bids to provide the service, 
and the government picks the firm that submits the best bid.
8
  The best bid may be the 
lowest, but the government may also take other factors into account when making the 
decision, especially in the case of complex projects.
9
  
In procurement auctions for broadband, the government would specify its objective and 
ask firms to bid for the right to meet that objective.  Consider, for example, a rural area with 
no broadband service.  The government can ask firms to bid for a subsidy that would make 
it profitable for the firm to provide service.  Firms and other organizations would compete 
against each other by bidding down the subsidy they need to offer service.  The firm that 
. commits to provide broadband in that area for the smallest subsidy would win the grant
everal advantages over traditional methods of distributing 
n rules are in place they relieve the government of the task of rants.  First, once the auctio
                                                        
7
 The Federal Communications Commission (FCC) and Congress realized more than a decade ago that the 
traditional proposal?review approach was inefficient.  Historically the FCC had granted spectrum licenses 
based on comparative hearings.  These hearings could not be done quickly and put the FCC in the impossible 
position of processing tractor trailer?loads of paperwork to decide which companies were best suited to 
providing services in a given spectrum band.  In 1994, the FCC began to allocate spectrum via auctions, which 
could occur quickly and allocate spectrum far more efficiently than could any administrative comparative 
p
 
rocess.  This model has been used successfully in the U.S. and around the world ever since. 
8
 See some federal procurement guidelines here: http://www.whitehouse.gov/omb/procurement/index_guides.html
9
 While it is easier to conduct this process for simple products, the government also uses it to supply highly 
complex goods like weapons systems See, for example, 
http://www.nytimes.com/2008/03/10/business/worldbusiness/10tanker.html?fta=y and www.gao.gov/cgi-
bin/getrpt?GAO-06-364.  
4 
 
 
identifying the “best” projects – the government sets forth its objectives in advance of the 
auction.  This also enables and encourages bidders to tailor their projects to the 
government’s actual criteria. Second, because auctions use competition among providers to 
determine the subsidy required to achieve any particular goal, the government does not 
have to estimate the subsidy actually required for any given project. Reducing the subsidy 
for any given project frees up money that can be used for additional projects.  Finally, they 
inherently induce firms to contribute their own investment to increase the chance that 
their bid is accepted.
10
  
C. Clear Selection Criteria are Critical for any Selection Program 
 
Crucial to the success of any plan, not just procurement auctions, is having clear objectives.  
In the case of the broadband stimulus the objectives include creating new jobs and 
improving broadband.  It is not possible to maximize both objectives simultaneously.  From 
the language of the Act and public discussions about it thus far we can assume that the 
ost important objective is to maximize new broadband availability subject to creating m
some minimum level of new economic activity. 
 
In general, stimulus funds would be awarded to those bidders that maximize broadband 
expansion with the lowest subsidy amount. Through the auction process bidders would be 
ble to “bid down” the subsidy as they compete with other bidders seeking the same a
stimulus dollars. 
 
Careful auction design is crucial to ensuring an efficient outcome.  It is important to keep in 
mind two general points.  First, the criteria on which the bids will be scored or ranked must 
be clear.  As a simple example, bids could consist of subsidy requested per household 
connected or per household to which broadband service is newly available.
11
  Then bids 
ould be ranked from smallest subsidy requested to the largest, and funds distributed c
according to that ranking. 
 
Second, the ability to “game” the procurement process increases with the ambiguity of the 
rules and the number of criteria included in a bid.  For example, an auction in which firms 
had to demonstrate that their bid was in the “public interest” and specify a subsidy per 
household, the number of new households served, the service speeds, reliability, latency, 
obility, and price would probably not work well due to the ambiguity of what, exactly, 
public interest” means and the large number of criteria on which firms bid. 
m
“
                                                        
10
 Procurement auctions are sound and have been used successfully around the world to bring 
telecommunications services to areas that previously had none.  Experiences in other countries, including 
Australia, India, Chile, Peru, and others demonstrate that procurement auctions can substantially bring down 
th the e subsidies required to induce buildout.  Their experiences also teach us that it will be important to get 
details right. 
11
 It will be important not to confuse supply and demand for broadband.  About half of all people without 
broadband say that they are not interested in it.  Because the stimulus focuses primarily on supply, we may 
want to focus on newly available broadband as opposed to newly adopted. 
5 
 
more involved measure such
Note that the need to identify unambiguous, simple criteria on which to judge bids in 
advance of the auction is actually an advantage, not a disadvantage, of procurement 
auctions.  It may appear at first blush that traditional grant reviews do not face similar 
roblems, but that is incorrect.  If a grant review process does not undergo the same p
identification task then it will likely lead to arbitrary and inconsistent decisions. 
 
In addition to those very general points, this auction must be designed in a way that does 
not arbitrarily benefit one technology over another.  Organizations could, therefore, bid to 
upgrade copper services in order to make DSL feasible, upgrade or install coaxial cable to 
facilitate cable broadband, or upgrade or install wireless and satellite broadband 
quipment.   With scoring rules set out in advance bidders could know how they would 
ave to bid and consider competing technologies or providers in other geographic areas. 
e
h
 
III. A Straw?Man Procurement Auction Plan for Allocating NTIA/RUS 
Broadband Subsidies 
A. Auction Design 
This section describes economic methodology and other considerations for devising an 
effective procurement auction program.  The detailed rules of the auction will be crucial, as 
hey will affect the outcome.t
12
  NTIA/RUS will have to make several decisions as it creates 
these rules.  We list some of the issues below. 
 
The first step is the same for both a procurement auction and a traditional grant review 
process: NTIA/RUS must identify and define unserved and underserved regions.  Ideally, 
most of these regions would be specified to have similar numbers of 
unserved/underserved households, so that the service costs across regions can be easily 
compared, and to be just large enough that projects of that scale are meaningful to the 
bidders. NTIA/RUS could identify these areas using existing data or bidders could propose 
nd certify unserved areas.  Each eligible project would need to offer qualifying service to a
at least 95% of the unserved households in the region.
13
  
 
Having defined either the regions or the mechanism for defining the regions, the rules for 
the procurement auction begin to diverge from the traditional grant review process.  
NTIA/RUS should set out a framework for scoring projects in terms of a standard unit of 
supply. This could be a simple metric, such as “newly served population” (defined as the 
population to which service above a minimum bandwidth threshold is newly available) or a 
 as “effective bandwidth supplied” (defined as the population 
                                                        
12
 If there is enough time, it would be useful to design experiments to test auction rules.  In section III, we 
suggest allocating the money in tranches to learn about the process and make changes based on those 
outcomes.   
 
13
 The required percentage of homes in the area could be set at a different level, or it could be set by the 
bidders and scored as part of the auction evaluation. 
6 
 
Technology Opportunities Pr
While ARRA does not 
to which service is newly available adjusted for the speed of service.
14
)   Each bid would be 
characterized in terms of effective supply and cost.  We advise against introducing 
additional dimensions to the evaluation. It is particularly problematic to introduce 
ubjective criteria, which undermine the quick and objective comparisons required by an s
effective auction.  
 
n a sealed?bid auction, the winning bids maximize the total effective supply, subject to the I
government’s spending and other constraints.  
 
Ideally, the government would include multiple regions with a limited budget in a single 
auction, in order to encourage competition among bidders offering diverse services in 
different areas. Particularly in large auctions, the government should allow bidders to 
specify a maximum number of projects that they might win from any non?overlapping sets 
of projects and a further maximum for collections of such sets of projects. By protecting 
idders from the risk of winning too many projects in any set and overall, this feature b
encourages firms to submit additional proposals, increasing the level of competition.  
 
Auctions are adaptable to respect a wide range of policy concerns. The government could 
use instruments similar to ones that have been employed in FCC auctions, such as limiting 
the number of projects won by any single bidder or offering bidding credits to small 
businesses. And, to spread the effects of the subsidy geographically, the government could 
ive greater weight to the first households served in a state or region than to additional g
households.  
 
We recommend that pay?as?bid pricing applies: winning bidders should provide the project 
nd receive the subsidy described in their bids.  This system is simple and pay?as?bid a
pricing is common in procurement auctions.  
 
The variations we have described relate to characteristics of the bidder or the region being 
served. It is easy in principle to add other sorts of factors to the bidding menu. However, 
the more dimensions on which firms bid, the more likely it becomes that there are easy 
ways for firms to game the system.  We recommend limiting the factors to price and 
effective supply, especially in the first implementation to test the auction system. With a 
traightforward first step, auctions can be implemented rapidly and realize most of the 
ompetitive benefits from moving to this type of system. 
s
c
 
B. Process Considerations 
As a threshold matter, procurement auctions are allowed under ARRA.  The Broadband 
ogram was established to provide “competitive grants.”
15
  
tely define the term “competitive grant,” procurement auctions separa
                                                        
14
 An adjustment factor would reward bidders for providing higher speed service to unserved population. For 
ex e could have a factor of 1, 10 mbps a factor of 1.5, 50 mbps, a factor of 2 and 100 mbps, ample, 1 mbps servic
a factor of 3. 
15
 ARRA, Sec. 6001(g). 
7 
 
qualified to bid in the origina
ho
are simply a methodology for implementing a competitive grant program, and in this 
respect should be seen as the fairest and most transparent way of doing so.
16
 
The framework around which an effective procurement auction can be built is simple, and 
immediately suggests where substantial improvements over traditional grant review or 
other types of procurement auction can be made.   
Indication of Intent and Prescreening.  In order to avoid an extended post?
bidding process of weeding out and correcting frivolous bidding and overbidding, a 
procurement auction process must include a pre?bid indication of intent from prospective 
bidders and a simple prescreening process.  Prescreening could be as simple as a statement 
committing to meet all requirements of ARRA and the procurement auction rules, coupled 
with a showing that the bidder can (1) meet ARRA’s 20% contribution requirement and (2) 
pay debts up to the subsidies it receive.
17
   
Substantive Preconditions.  In order to limit the considerations for award as much 
as possible, everything extraneous to price should be made a precondition to bid – that is, 
any bid will assume the preconditions and any cost of compliance to be included in the bid.  
Doing so will increase transparency and limit the subjectivity of the final decision?making 
process.  For example, in implementing the open access requirement, NTIA should set its 
rule and require bidders to meet it – bids that do not comply with the rule will be rejected.  
Allowing bidders to opt out of specific substantive requirements would invite gaming and 
undermine the objectivity of the procurement auction, removing the rationale for using an 
auction in the first place.  Thus, NTIA should establish specific requirements for how it 
wants bidders to meet the substantive requirements set forth in Section 6001(e) through 
(h) of ARRA.  Moreover, bids that fail to include clear metrics and reporting intervals 
consistent with these requirements should be rejected. 
Combinatorial Bids and Trading.  Just as ARRA requires that competitive grants 
be technologically neutral, the size and scope of bidders has also been left open.  Indeed, 
ARRA appears to encourage a broad range of types and sizes of bidders.  This range reflects 
an underlying emphasis in ARRA’s broadband sections on flexibility and creativity – letting 
the market figure out the best way of allocating funds and expanding broadband.  Rules for 
procurement auctions should further the goal of flexibility by making clear that bidders 
may combine to serve specific areas, or combine areas, as their bids may specify.  
Furthermore, subject to full compliance with implementing rules, NTIA should allow rights 
to receive the subsidy, once won, to be freely traded.  Winners should be allowed to 
subcontract or transfer their obligation to another entity that would have otherwise been 
l auction.  A precondition for a workable trading system, 
ar and enforced benchmarks and buildout expectations.  wever, is that there are cle
                                                        
16
 For a regulation to survive a challenge under the Administrative Procedure Act, a court must conclude that 
the regulation was not “arbitrary and capricious” or an “abuse of discretion.”  Given the benefits of using 
procurement auctions to distribute competitive grants, and ARRA’s clear emphasis on speedy distribution of 
gr  ants, an agency deciding to distribute funds under ARRA that opted for a less efficient and less transparent
method would likely be required to explain what other factors made its decision reasonable. 
17
 In order to avoid tipping their hands too early, a series of ranges of subsidies can be established, with the 
rules specifying that combined bids would be assumed to be able to meet the total of the combined ranges. 
8 
 
outcome may make it possib
                                        
Provided that the underlying build out and other performance requirements are met, 
creating a trading system will allow winners to consolidate or diversify their obligations in 
a rational and efficient manner. 
Transparency of Information.  To the maximum extent possible, and consistent 
with how other auctions such as spectrum auctions have been conducted, information 
about the winning bidder or bidders, the amounts bid, and performance assurances must 
be made public and easily accessible online.  It has already been established that 
transparency of information in a procurement auction does not violate any confidentiality 
of bidders that might otherwise be protected under the Federal Procurement Regulations.
 
18
  Accordingly, NTIA should make this explicit in its implementing regulations, and explain 
that transparency of the process is essential not only to ensure fairness of the auction itself 
but also to aid in compliance. 
C. Compliance and Accountability 
Any subsidy or procurement plan—auction or otherwise—must include a strong 
mechanism for determining that firms fulfill their obligations. Performance and related 
assurances, such as performance bonds and other mechanisms apply to any grant program 
and are not unique to procurement auctions.  No matter what mechanism NTIA might 
choose to allocate competitive grants, it will still have to address compliance and auditing.  
To some extent, simple prescreening of bidders will address compliance issues by ensuring 
that only serious bidders are engaging in the process.  However, NTIA must also apply 
traditional performance assurance mechanisms, which are briefly discussed here.  
It may be possible to require winning firms to put money in escrow that will be returned to 
them once they can certify that they have met their obligations (or returned in tranches as 
they show progress towards the goal). Forfeiture bonds are another approach. The auction 
design itself may be an important factor in determining whether post?auction obligations 
are met.  
Winning bidders must make good on their bids.  Holding them accountable and making 
ure that the subsidy actually created new economic activity requires two conditions to be s
true. 
 
First, the firm must undertake the promised investment within a specified period of time.  
The firm should be given part of the subsidy immediately so that it can begin construction 
and receive the remainder in increments related to the number of households to which it 
as provided access.  Firms that do not meet the promises made in their bids should be h
penalized to ensure that they have sufficient incentive to meet their obligations.   
 
Second, the investment must not have occurred without the subsidy.  Whether the 
investment is inframarginal is very difficult to know and it may not be possible to 
determine the answer conclusively for any given firm.  Nevertheless, evaluating the 
le to discern the amount of new investment created.   
                 
18
 Matter of: MTB Group, Inc., 2005 WL 433615, 2005 U.S. Comp. Gen. LEXIS 34 (2006) 
9 
 
IV. NTIA/RUS Should Use Procurement Auctions to Allocate a At Least 
A Portion of the First Wave of Broadband Stimulus Funding and 
Expand the Program if Successful 
We realize that using competitive auctions for disbursing subsidy grants may be viewed as 
a change in process and that there may be some risk.  As such, if auctions are not used for 
the entire subsidy process, we think that at least some real world analysis should take 
place to see how auctions perform compared to the traditional process rather than 
rejecting auctions completely. This section describes how such an incremental approach to 
using auctions could be implemented in the grant system. 
As NTIA/RUS have indicated, the stimulus awards are likely to be awarded over time.  We 
believe that that NTIA/RUS would be wise to disburse broadband grants in successive 
waves or rounds, so that it can improve its disbursal mechanisms iteratively throughout 
the lifecycle of the program. Within this context, we recommend that NTIA/RUS designate 
one or more geographical regions in which the first wave of funds is distributed exclusively 
through a procurement auction process.  
This approach sets up a natural experiment allowing comparison of procurement auctions 
to the traditional approach. If the experiment is successful, the procurement auction 
mechanism can be expanded in scope to encompass other regions and stimulus dollars 
(potentially all remaining stimulus funds). Regardless of what mechanism is ultimately 
used, the lessons from the procurement auction pilot will help NTIA/RUS to learn and 
adapt its award mechanisms.   
A procurement auction can be implemented quickly. While there are many options for 
designing the auction system, that fact should not serve as an argument against auctions:  
auctions can be implemented rapidly.  In fact, auctions may take a little more time to design 
upfront than a generic submission system, but the investment upfront is likely to speed the 
overall process because it will make selection much more rapid and less arbitrary (and 
hence less subject to ex post litigation).  Other countries have proposed and implemented 
procurement auctions for universal service rapidly and successfully.
19
   
One way to use auctions for a portion of the first wave of stimulus grants would be to 
divide the  country into large geographical regions. The “Regional Economic Area 
Grouping” (REAG) used by the FCC in spectrum auctions is one possible scheme to 
consider. In this scheme, the continental United States is divided into six regions, each 
containing roughly 50 million citizens and encompassing both rural and urban areas. An 
alternative would be to designate similarly?sized regions as aggregations of states. 
Whatever scheme is used, it is important that the regions are roughly similar in terms of 
population size and urban/rural mix. 
                                                        
19
 See Wallsten, Scott,  “Reverse Auctions and Universal Telecommunications Service: Lessons from Global 
Experience” Federal Communications Law Journal.  http://www.law.indiana.edu/fclj/pubs/v61/no2/9?
WALLSTENFINAL.pdf 
10 
 
Then, in the first wave of stimulus disbursal, regions consisting of one?third of the U.S. 
population (roughly 100 million citizens) would be served through procurement auction of 
stimulus funds. The remaining two?thirds would be served by a conventional grant review 
process. A timeline would be established requiring that the first wave of funds—whether 
by procurement auction or by traditional grant review—shall be completed within six 
months. The amount of funding allocated to the first wave should reflect a practical 
assessment of what is feasible to disburse using the traditional process in a six?month 
timeframe. At the end of the period, the NTIA/RUS should take one month to compare 
results of the two programs and to assess the results, before making a determination 
whether to use procurement auctions in subsequent rounds.  
Should NTIA/RUS decide to continue or expand the use of procurement auctions, the 
mechanism can be tweaked to incorporate lessons from the first wave. However, even if 
NTIA/RUS decides to proceed through entirely conventional means, the procurement 
auction will undoubtedly provide important lessons (e.g., bidder receptiveness to 
quantitative targets) that will inform refinements to the conventional approach.  
V. Conclusion 
A traditional grant application review process may prove to be inadequate to the herculean 
task of distributing broadband stimulus grants.  It is likely to be slow, cumbersome, and 
will result in a suboptimal allocation of resources.  By contrast, competitive bidding, 
through the use of procurement auctions, can allocate the funds quickly and efficiently. 
While we advocate using procurement auctions to distribute all of the broadband stimulus 
money, allocating even a portion of the funds using procurement auctions would be useful 
as an experiment.  At a minimum, the broadband stimulus funds present a golden 
opportunity to implement rigorous evaluation techniques, which will generate knowledge 
that can be applied to other current and future programs.  To that end it is important to 
include procurement auctions as one approach to be tested. 
11 
 
Respectfully submitted, 
Daniel Ackerberg 
lifornia, Los Angeles University of Ca
 
ames Alleman 
lorado 
J
University of Co
 
enneth Arrow 
ersity 
K
Stanford Univ
 
usan Athey 
ity 
S
Harvard Univers
 
onathan Baker 
sity 
J
American Univer
 
illiam Baumol 
ity 
W
New York Univers
on 
 
oleman BazelC
Brattle Group 
 
imothy Bresnahan 
rsity 
T
Stanford Unive
 
eremy Bulow 
iversity 
J
Stanford Un
 
Jeff Carlisle 
 
eon?Koo Che 
rsity 
Y
Columbia Unive
 
eter Cramton 
land 
P
University of Mary
 
regory Crawford 
ick 
G
University of Warw
 
erald Faulhaber 
f Pennsylvania 
G
University o
 
eremy Fox 
niversity of Chicago 
J
U
 
Jacob Goeree 
ute of Technology  California Instit
 
rent Goldfarb 
land 
B
University of Mary
 
hane Greenstein 
 University 
S
Northwestern
 
obert Hahn 
 University 
R
Georgetown
 
obert Hall 
rsity 
R
Stanford Unive
 
ard Hanson 
ersity 
W
Stanford Univ
 
arry Harris 
orporated 
B
Economists Inc
 
obert Harris 
California 
R
University of 
 
anice Hauge 
rth Texas 
J
University of No
 
erry Hausman 
tts Institute of Technology 
J
Massachuse
 
ohn Hayes 
sociates 
J
Charles River As
 
Thomas Hazlett 
niversity 
 
George Mason U
en Hendricks 
as 
K
University of Tex
 
rishna Jayakar 
University 
K
Penn State 
 
John Kagel 
Ohio State University 
12 
 
 
lfred Kahn 
rsity 
A
Cornell Unive
 
lan Kremer 
rsity 
I
Stanford Unive
 
ijay Krishna 
rsity 
V
Penn State Unive
 
homas Lenard 
cy Institute 
T
Technology Poli
 
onathan Levin 
ity 
J
Stanford Univers
 
uanchuan Lien 
nstitute of Technology  
Y
California I
 
ohn Mayo 
ersity 
J
Georgetown Univ
 
avid McAdams 
ty 
D
Duke Universi
 
aul Milgrom 
iversity 
P
Stanford Un
 
oger Noll 
ersity 
R
Stanford Univ
 
ruce Owen 
ersity 
B
Stanford Univ
 
harles Plott 
tute of Technology 
C
California Insti
 
obert Porter 
n University 
R
Northwester
 
hilip Reny 
ago 
P
University of Chic
 
regory Rosston 
tanford University 
G
S
 
David Salant 
ool of Economics Toulouse Sch
 
cott Savage 
do 
S
University of Colora
 
 
illiam SamuelsonW
Boston University 
 
ichard Schmalensee 
titute of Technology 
R
Massachusetts Ins
 
arius Schwartz 
niversity 
M
Georgetown U
 
oav Shoham 
 
Y
Stanford University
 
ndrzej Skrzypacz 
rsity 
A
Stanford Unive
 
ernon Smith 
sity 
V
Chapman Univer
 
rett Tarnutzer B
BT Consultancy 
 
ichael Topper 
search 
M
Cornerstone Re
 
aniel Vincent 
aryland 
D
University of M
 
oel Waldfogel 
nnsylvania 
J
University of Pe
 
cott Wallsten 
licy Institute 
S
Technology Po
 
obert Weber 
versity 
R
Northwestern Uni
 
radley Wimmer 
vada, Las Vegas 
B
University of Ne
 
Karen Wrege 
13 
 
KBEnterprises 
 
 
Lixin Ye 
Ohio State University 
 
 
 Federal Communications Commission FCC 10-58 
 
 
65 
APPENDIX C 
 
Omnibus Broadband Initiative, The Broadband Availability Gap 
 
 Federal Communications Commission FCC 10-58 
 
 
217 
STATEMENT OF 
CHAIRMAN JULIUS GENACHOWSKI 
 
Re: Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN 
Docket No. 09-51, High-Cost Universal Service Support, WC Docket No. 05-337 
 
This item is an important milestone in our deeply important effort to ensure that every American, 
no matter where they live or what they earn, has access to affordable, high-quality broadband 
communications service.  It will not be easy.  But that is what we are committed to do.  It is necessary that 
we do so to promote economic growth, job creation and broad opportunity for all Americans in the 21st 
Century. 
 
Last month, the Commission delivered to Congress a plan to promote world-leading 
communications infrastructure in the United States – to match, and surpass, broadband deployment in 
other countries with which we compete.  One of the key components of the National Broadband Plan – 
and the Commission Joint Statement on Broadband – was comprehensive reform of the universal service 
program.  Today’s item is the first in a series of proceedings to implement that vision. 
 
This proceeding will lay the groundwork for a system that provides universal service support for 
broadband and voice services in an efficient and targeted manner.  Today’s Notices suggest common-
sense reforms to cap growth and cut inefficient funding of voice networks.  And they seek comment on 
the use of a model to assist with determining levels of universal service support for broadband 
communications, so that rural and other carriers, which have done so much to provide basic telephone 
service to Americans who otherwise would not have it, can provide 21
st
 Century communications services 
to those Americans.  That support must be sufficient to ensure that providers can offer quality broadband 
service to high cost areas, without unfairly burdening those who ultimately bear the costs of universal 
service. 
 
The comprehensive universal service reform that the National Broadband Plan envisions will take 
time, but cannot take too long.  We do not want flash cuts.  We want a reasonably paced and certain 
approach to converting universal service to broadband communications.  That is why the Plan sets out a 
step-by-step approach, suggesting that the Commission begin with action, and act steadily and 
consistently as we work with all stakeholders to get the job done.  This item begins that process by 
seeking the best way to create an accelerated process to fund deployment of broadband networks in 
unserved areas, while the Commission works on fully implementing the new Connect America Fund. 
 
I thank the staff for their hard work on this item, and I look forward to working with my 
colleagues to make affordable, high-quality broadband available to all Americans. 
 
 Federal Communications Commission FCC 10-58 
 
 
218 
STATEMENT OF 
COMMISSIONER MICHAEL J. COPPS 
 
Re: Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN 
Docket No. 09-51, High-Cost Universal Service Support, WC Docket No. 05-337 
 
I approve both the NOI and the NPRM before us as the Commission makes good on its pledge to 
be fast-off-the-mark in implementing the National Broadband Plan.  The comprehensive reform of the 
Universal Service Fund is, as we’ve all known for a long time, integral to getting broadband ubiquitously 
deployed and adopted.  Today we begin to move in earnest toward a Twenty-first century Universal 
Service program that delivers for broadband what Twentieth century Universal Service delivered for 
voice service—and more.   
  
Comprehensive reform is never painless and when it comes to building a new Universal Service 
system, shared sacrifice will be required from just about every stakeholder. Maybe, probably, this is why 
the Commission has never successfully tackled comprehensive Universal Service reform before.  
Previous Commissions undertook partial fixes and adjustments to existing USF programs to address 
discrete problems or contain costs.  Sometimes real problems were solved, but at other times this 
approach had the unfortunate consequence of pushing interested parties apart rather than bringing them to 
the table to pursue workable, long-term solutions.   
  
Today parts of the country have only legacy voice services—sometimes not even that—under the 
current high-cost Universal Service program, while others have access to truly amazing broadband-
capable networks funded indirectly through that same high-cost program.  While we often rightly 
complain about the lapses, we should also recognize the achievements.  Regardless of where the funding 
comes from, I commend those providers who have made broadband deployment a priority.  For example, 
a lot of small rural telcos often went where others feared to tread and brought broadband to some pretty 
remote places.  Their efforts should be not only recognized, but applauded.  Now our challenge is to 
retool the Universal Service system to provide the efficient and targeted support needed to bring high 
speed, value-laden broadband to all our citizens.  The National Broadband Plan commits to such action 
and today this Commission takes important steps with the NOI and the NPRM. 
  
While I am supportive of most of what we do today, the record will show that I have expressed 
concerns in the past about some of the suggestions put forward here.  In particular, as it seeks to develop a 
detailed analytic foundation for the distribution of Universal Service support, the NOI places strong 
emphasis on the use of reverse auctions.  When I supported the previous Commission’s decision to seek 
comment on the merits of reverse auctions for distributing Universal Service support, I cautioned that the 
prospect of using such a mechanism raised many questions that still remain unanswered.  For instance, 
how do we ensure that the winning bidder provides the services for which support is received?  What 
happens if the auction winner decides to discontinue its operation in the supported area?  Who will pick 
up the pieces and how will that be decided?  What will be the rules of the road and how will they be 
established?  And enforced?  I’m not saying these questions are unanswerable and I am hopeful we will 
develop an extensive record on these issues, but I do emphasize that answering all these—and I’m sure 
other—questions and allaying all doubts are the necessary predicates of my support. 
  
The NPRM proposes several options for containing the growth of the high-cost Universal Service 
program.  I have been wary of some of the earlier makeshift attempts by the Commission to curtail the 
overall size of the Universal Service Fund because these efforts have too often served as delay tactics to 
avoid the tougher challenge of comprehensive reform.  Clearly, the situation has changed with this new 
Commission, and I recognize that the proposals in the NPRM seek to phase out legacy support while we 
ramp up direct funding for broadband through the Connect America Fund.  We need to do this, no 
question about it.  But let’s recognize that many of the proposals in the NPRM—which may very well be 
necessary and overdue—require major actions that will be burdensome for some, perhaps most, Universal 
 Federal Communications Commission FCC 10-58 
 
 
219 
Service participants.  Here, too, compiling a full and viable record is the key to success.  And let’s also 
emphasize that while we are shifting Universal Service to support broadband, at the same time we must 
make sure that voice service is available nationwide.  Go to Indian Country to see how much remains to 
be done on this score. 
  
I commend the Chairman for initiating this very important proceeding in the first month 
following the birth of the National Broadband Plan.  And I thank the staff of the Wireline Competition 
Bureau for drafting an item that parses out a very complex issue, with, I am sure, more to come.  This is 
the time, more so than any time in the nearly nine years I have been around this place, to truly and 
comprehensively reform Universal Service.  We have the commitment, we have the Plan, and now we 
begin to implement.  This item makes a great start.  We begin to glimpse the prize at the end of the road—
a first-rate broadband network covering the length and breadth of the nation.   
  
 
 Federal Communications Commission FCC 10-58 
 
 
220 
STATEMENT OF 
COMMISSIONER ROBERT M. McDOWELL 
 
Re: Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN 
Docket No. 09-51, High-Cost Universal Service Support, WC Docket No. 05-337 
 
Today we take an important first step on our journey toward badly needed Universal Service 
reform.  USF is America’s largest telecommunications subsidy program, which redistributes nearly $9 
billion per year.  If we have been able to agree on only one thing at the FCC, it is that the Universal 
Service subsidy system is antiquated, arcane, inefficient and just downright broken.  For instance, since 
1998 the contribution factor has increased from 5.53 percent to more than 15 percent today.  Positive and 
constructive change must happen as soon as possible. 
 
In November of 2008, the Commission came close to a bi-partisan, groundbreaking agreement to 
resolve many of the most vexing challenges facing not only Universal Service but intercarrier 
compensation as well.  Unfortunately, needless roadblocks were thrown in our way.  But today we have 
an opportunity to regain our momentum and pursue honest, constructive and comprehensive reform for 
the benefit of American consumers. 
 
I therefore support the Notice of Proposed Rulemaking (“NPRM”) and Notice of Inquiry (“NOI”) 
regarding Universal Service reform now before us.  First, the NOI seeks comments as to whether the 
Commission should use a cost model for a new support mechanism for broadband.  And, if so, the NOI 
seeks comments on how a model should be structured.  Second, the NPRM seeks comments on potential 
ways to contain the growth of the fund through cuts in the existing system, putting out for comment the 
cuts that were outlined in the Broadband Plan and also soliciting additional ideas.  I am encouraged and 
pleased that we are seriously examining the possible benefits of employing reverse auctions.  
 
As I have mentioned over the years, comprehensive Universal Service reform must adhere to five 
basic principles.  The Commission should:   
 
  (1) contain the growth of the Fund;  
  (2) in a limited and fiscally sound manner, explore the possibility of    
  broadening the base of contributors;  
  (3) reduce the contribution burden;  
  (4) ensure competitive neutrality; and  
  (5) eliminate waste, fraud and other abuses of the system.  
 
To achieve effective and meaningful Universal Service reform, the Commission will need to 
engage in a complex analysis of potential costs surrounding any changes to the fund.  Today’s NPRM and 
NOI start that process.   
 
I thank the Chairman for his leadership in this area.  I also thank Sharon Gillett and the diligent 
team in the Wireline Bureau for your tireless work on these issues.  I look forward to working with you 
and my colleagues on an expeditious, transparent and fair process in pursuit of sensible reforms. 
 
 Federal Communications Commission FCC 10-58 
 
 
221 
STATEMENT OF 
COMMISSIONER MIGNON L. CLYBURN 
 
Re: Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN 
Docket No. 09-51, High-Cost Universal Service Support, WC Docket No. 05-337 
 
With this item we embark upon an ambitious and long-overdue mission:  the comprehensive 
reform of our universal service system to support broadband in geographic areas where there is no 
business case to deploy or operate broadband.  In order for us to successfully accomplish this mission, we 
must begin with a good road map.  The item before us identifies the issues to consider when devising our 
map.  I thank the staff for their hard work in identifying these issues in the National Broadband Plan and 
for their effort on this item.  
 
While the start of any journey can be very exciting, it also can be fraught with anxiety.  I 
recognize there are many reasons for industry to be apprehensive.  However, I hope as we begin the 
discussion of how to design a new support system and realize cost savings in our current system that we 
remain focused on our essential goal of fully connecting all Americans to voice and broadband services.   
      
 Federal Communications Commission FCC 10-58 
 
 
222 
STATEMENT OF 
COMMISSIONER MEREDITH A. BAKER 
 
Re: Connect America Fund, WC Docket No. 10-90, A National Broadband Plan for Our Future, GN 
Docket No. 09-51, High-Cost Universal Service Support, WC Docket No. 05-337 
 
As I have said many times, I believe that it is critical that we move toward comprehensive reform 
of the Universal Service Fund, targeted to broadband investment.  As a nation, we need to transition to a 
support mechanism that is effective, efficient, and sustainable for areas where market forces are not 
sufficient to drive broadband services to America’s consumers.  The Notice before us is an important first 
step down that road.  Universal service reform will be a challenging—and perhaps sometimes 
frustrating—endeavor.  I have expressed concerns about the ballooning size of the Fund and I am 
convinced that some hard choices will have to be made to keep it under control.  But I am convinced that 
we have a window of opportunity to finally make the changes that this program desperately needs.  I also 
strongly support seeking comment on the possible implications of using a cost model in a new support 
mechanism for broadband and I hope to see active participation from all sectors of industry and the 
public.  Building a strong record to be the foundation for reform is always important—but never more so 
than when we consider whether to adopt, and if so, how to structure a cost model.  I look forward to 
working with the Chairman and my fellow commissioners to tackle universal service reform, and I would 
like to thank the staff for their thoughtful work on this item.