Detailed Information on the
Universal Service Fund High Cost Assessment

Collect performance data on a quarterly basis at the time of the contribution factor filing. Once sufficient data is collected to provide a reliable baseline, establish targets for the performance measures.

Continue review of the USF IPIA audits and determine further opportunities to improve USF oversight.

Examine means to control significant cost growth of the program through both short-term measures and more fundamental program reforms, to ensure the long-term viability of the fund and its ability to meet universal service goals.

Increase financial oversight of USF

Conduct comprehensive review of USF performance measures, management, administration, policy, and oversight.

Is the program purpose clear?

Explanation: Section 254 of the United States Code Title 47, as amended, states a specific purpose for the High Cost program -- to provide support to rural, insular and high-cost areas in sufficient amounts to make rates comparable between rural and urban areas. The High Cost program is part of the Universal Service Fund (USF) program administered by the Federal Communications Commission (FCC) under this statute.

Evidence: 47 U.S.C. § 254(b)(3) Access in Rural and High Cost Areas. -- Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas, and are available at rates that are reasonably comparable to rates charged for similar services in urban areas.

Does the program address a specific and existing problem, interest, or need?

Explanation: The High Cost program addresses the higher cost of serving rural areas, providing support so that basic telephone services will be available in rural areas at rates that are affordable and reasonably comparable to rates in urban areas. Sparse population, terrain, and other factors make it more expensive to serve some areas. The "loop" refers to the connection from the provider's central office to the customer's premises. Loops tend to be longer and more expensive to build and maintain in rural areas. The difference in average loop cost is an indicator of the difference in cost to serve a customer in a high cost area versus a consumer in a relatively low cost area. Average loop cost per subscriber for rural companies is $31.50, while the average loop cost for non-rural companies is $21.32. Unless such areas become more heavily populated or the costs of serving longer loops decreases due to technological advances, these areas will continue to have a higher cost of service and require higher rates to recover costs. Accounting and statistical models predict that a reduction in universal service funding would increase rates in rural areas absent funding from other sources, or large efficiency gains. However, some studies suggest that ensuring rates are reasonably comparable may not have a large effect on telephone subscribership, and many households above the poverty line would continue to purchase telephone service without reduced rates from the subsidy. Overall household telephone subscribership has fallen despite large increases in the high cost program.

Evidence: See, e.g. Wimmer, B., and Rosston, G., "Winners and Losers from the Universal Service Subsidy Battle", (1999) (Suggesting that only a small percentage of lines should be considered high cost lines, and increasing subsidies to high cost areas has a large impact on the size of the program but is likely to have a de-minimus effect on subscribership) http://siepr.stanford.edu/papers/pdf/99-8.pdf, FCC telephone subscribership report (May 2005); Crandall and Waverman, "Who Pays for Universal Service, When Telephone Subsidies Become Transparent", (2000); Cave, M., Majumdar, S., and Vogelsang, I., editors, Handbook of Telecommunications Economics, Volume 1, Elsevier, (2002), pp. 464-465 (also citing Eriksson, R., Kaserman, D., and Mayo, J., (1998), Targeted and untargeted subsidy schemes: Evidence from the post-divestiture efforts to promote universal service, Journal of Law and Economics, 41,) 447-502.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: There are other Federal, state, and local efforts that support high cost carriers, though in different ways and to smaller degrees. The Rural Utility Service (RUS) administered by the Department of Agriculture provides support to rural carriers through loans to rural telephone companies for the improvement and expansion of telecommunications services in rural areas. Although the loans must be repaid, RUS loans cost less than credit available through the commercial sector. A private entity, the Rural Telephone Finance Cooperative also provides financing to rural carriers. State programs only address differences in rates within the state and are designed to complement the Federal program, and state support is generally small compared to the federal high cost program (except in a few states such as California).

Evidence: The High Cost program provided $3.5B in 2004. See Universal Service Administrative Company (USAC) 2004 Annual Report, at www.universalservice.org/download/pdf/2004AnnualReport.pdf. For 2005, nearly $2.2 billion in RUS rural telecommunication loans were made available, RUS Notice of Funding Availability; There are 21 states that provide high cost support, and some other states that provide support for state communications networks, GAO 02-187; State plans typically provide high-cost support for the same network elements as the federal USF program and are designed to supplement the federal USF program. See e.g., Alaska, available at www.state.ak.us/rca/Telecom/ausf/ausf_overview.pdf; California, www.cpuc.ca.gov/static/industry/telco/public+programs/index.htm, Colorado, available at www.dora.state.co.us/puc/rules/723-41.pdf; South Carolina, available at www.state.sc.us/sclac/Reports/2005/USF.htm.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The High Cost program subsidies generally make rural incumbent carriers whole, regardless of their investment decisions, business model, or the presence of competition in the market by guaranteeing "reasonable" rates of return (see case law cited below). Although the purpose of the program is to help promote reasonably comparable rates between urban and rural areas, the extent of rate comparability needed to promote universal service is unclear. Some things cost more in rural areas, but other consumer products and services like housing cost less. In some cases, the program goes beyond ensuring reasonably comparable rates between urban and rural areas as carriers receiving the subsidy charge less than comparable urban rates for monthly service, and some rural phone cooperatives pay dividends to consumers that equal or exceed their phone charges. Because the high cost program is funded through a charge assessed on long distance, it makes usage more expensive and could actually decrease the value of access to the network as charges increase to meet the demands on the fund. Over time, the FCC has adjusted regulations to improve program efficiency and accountability. At the same time, there are limits to what the FCC has been able to achieve through regulation. Recent Congressional action, for example, limited the FCC's ability to control growth in the high cost fund by better targeting the subsidy.

Evidence: 47 USC Sec. 254; Kraemer, Levin, and May "The Myths and Realities of Universal Service" (2005); Wimmer and Rosston "Winners and Losers in the Universal Service Battle" (2000); GAO-02-187; Paul Davidson, "Fees pad by all phone customers help rural phone firms prosper", USA Today November 2004; Comprehensive Review of Universal Service Fund Management, Administration, and Oversight, WC Docket No. 05-195; 47 CFR Part 54; Bluefield Water Works & Improv. Co. v. Public Service Commission of West Virginia, 262 U.S. 679, 693 (1923) ("The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties."); FCC High Cost actions at www.fcc.gov/wcb/universal_service/highcost.html; PL 108-447.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The High Cost program is targeted to small companies, rural companies, companies with large tracts of rural areas, and to the most rural geographic zones within companies and data suggests that it reduces the price differential between urban and rural areas. In some cases, however, the high cost program provides subsidies to some carriers that lead to rates that are less than rates charged for comparable service in urban areas, or in some extreme cases carriers have refunded monthly charges back to consumers. Also, the rapidly increasing size of the high cost program is due in large part to an increasing number of competitive carriers entering high cost markets and qualifying for high cost subsidies. Even if competitive carriers win lines from a subsidized incumbent carrier, there is no reduction to the incumbent carrier's high cost subsidy support. From 2003 through the first quarter of 2005, nearly all of the growth in the high cost fund was due to payments to competitive carriers. In 2004, over $330 million, or 9.5% of payments were made to competitive carriers. The Federal-State Joint Board recommended in 2004 that the FCC consider limiting eligibility for the subsidy, possibly by restricting funding to a primary line. The recommendation was part of a package of proposals intended to ensure the viability of the Universal Service Fund. Congress has prevented the FCC from exploring the primary line issue in FY 2005 and in FY 2006.

Evidence: Access Charge Reform, Price Cap Performance Review for Local Exchange Carriers, Low-Volume Long-Distance Users, Federal-State Joint Board on Universal Service, Sixth Report and Order in CC Docket Nos. 96-262 and 94-1, Report and Order in CC Docket No. 99-249, Eleventh Report and Order in CC Docket No. 96-45, 15 FCC Rcd 12962, 13043-44, para. 196 (2000) (CALLS Order). See, e.g., 47 CFR § 54.315 (support from many high cost mechanisms can be disaggregated); 47 CFR § 36.631 (higher level of loop support targeted to smaller carriers with below 200,000 loops). 47 CFR § 54.315; GAO 02-187; USAC charts of funding allocation between incumbent and competitive carriers, available at www.universalservice.org/hc/download/pdf/graphs/CETC%20Disb%20%25%20Graph.pdf; 2005 Consolidated Appropriations Act.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The High Cost program does not currently have performance measures. The FCC could look at telephone subscribership in high cost areas, with the goal to decrease the percentage of households that do not have access to telecommunications services while maintaining or lowering the average cost per subsidized line. The FCC monitors factors that are likely to be affected by the high cost program, such as subscribership and rates, which could serve as the basis for long-term performance measures if tied more closely to high cost support.

Evidence: See Fund Management NPRM, FCC 05-124, paras. 24-25, 30. The FCC tracks telephone penetration using Census data. See Telephone Subscribership Report; report also shows subscribership levels by state, income level, race, age, household size, and employment status, available at www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/subs1104.pdf (Telephone Subscribership Report); See also FCC Reference Book, available at www.fcc.gov/wcb/iatd/stats.html (reference book for data about rates, price indices, and expenditures for telephone service).

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: The High Cost program does not currently have performance measures. However, the Commission is seeking comment on measures for the program, including the appropriate targets and timeframes.

Evidence: See Fund Management NPRM, FCC 05-124

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The High Cost program does not currently have annual performance measures, but is seeking comment through an NPRM. The FCC should consider performance measures that consider the cost incidence of USF charges on consumers, or average USF charges per household. Such a measure could be paired with a measure of penetration, for example, the FCC could seek to maintain or reduce the cost of USF per household, while maintaining subscribership levels.

Evidence: See Fund Management NPRM, FCC 05-124, 24-25, 30; and Telephone Subscribership Report. NO 0%

Does the program have baselines and ambitious targets for its annual measures?

Explanation: The High Cost program does not have annual measures. However, the Commission is seeking comment on appropriate annual targets and timeframes.

Evidence: See Fund Management NPRM, FCC 05-124, para. 30; and questions 2.1-2.3 above.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Because the program received a no for questions 2.1 and 2.3, the answer must be no. Program participants, including state public utility commissioners and carriers, certify annually that they will comply with FCC regulations and certify under law and commit to using the support for intended purposes. While the carriers must submit estimated and actual data to qualify for support, there is no tie between these submissions and the goals of the program. The FCC should consider establishing incentives for carriers to make cost-effective investment decisions that reduce the strain on the high cost fund while maintaining or improving service to consumers in their areas. Also, the high cost program is administered by the Universal Service Administrative Company (USAC) on behalf of the FCC. The FCC should establish performance requirements for the USF Administrator to improve management and accountability for the program.

Evidence: See Fund Management NPRM, FCC 05-124, paras. 24-25, 30. See 47 U.S.C. § 54.254(e) ("A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services or which the support is intended."). See 47 CFR §§ 54.313 and 54.314 (carriers must use support for authorized purposes). See 47 CFR §§ 54.809 and 54.904 (carrier certifications).

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: Independent evaluations do not occur on a regular basis, however there are several relevant evaluations of the program's effectiveness in advancing universal service. Independent entities periodically conduct evaluations of the High Cost program, including academic institutions and the GAO. Evaluations of the High Cost program are also made in conjunction with FCC proceedings that examine the high cost fund. In addition, industry groups and consulting firms provide information and suggestions regarding the effectiveness of the High Cost program, although not all such evaluations meet the standards of an independent evaluation as they are funded by carriers or other service providers who have a vested interest in USF requirements. The FCC is also considering establishing regular reviews.

Evidence: See, e.g., Kraemer, Levin, and May "The Myths and Realities of Universal Service" (2005); Wimmer and Rosston "Winners and Losers in the Universal Service Battle" (2000); Crandall and Waverman, "Who Pays for Universal Service, When Telephone Subsidies Become Transparent", (2000); Cave, M., Majumdar, S., and Vogelsang, I., editors, Handbook of Telecommunications Economics, Volume 1, Elsevier, (2002), pp. 464-465 (also citing Eriksson, R., Kaserman, D., and Mayo, J., (1998); GAO 02-187; See Federal Communications Commission, Office Of Inspector General, Strategic Plan for Oversight of the Universal Service Fund, available at www.fcc.gov/oig/USFStrategicAuditPlan.pdf (2002) (OIG Audit Plan). See e.g., Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non-Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, CC Docket No. 00-256, Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate-of-Return Regulation, CC Docket No. 98-77, Prescribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, CC Docket No. 98-166, Notice of Proposed Rulemaking, 16 FCC Rcd 460 (2001) (MAG NPRM); Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non-Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, CC Docket No. 00-256, Second Report and Order and Further Notice of Proposed Rulemaking, Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Fifteenth Report and Order, Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate-of-Return Regulation, CC Docket No. 98-77, Report and Order, Prescribing the Authorized Rate of Return From Interstate Services of Local Exchange Carriers, CC Docket No. 98-166, Report and Order, 16 FCC Rcd 19613, 19636, paras. 46-49 (2001) (MAG Order); see e.g., Access Charge Reform, CC Docket 96-262, Notice of Proposed Rulemaking, 14 FCC Rcd 16872 (1999) (CALLS NPRM); CALLS Order, 15 FCC Rcd 12962, 13005, at para. 108; and Fund Management NPRM, FCC 05-124.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Because the program lacks annual and long-term performance goals, this answer must be no. The USF is funded by mandatory contributions from interstate telecommunications service providers, and resource needs are included in USAC's quarterly filings of demand estimates. These are transparent in that they are publicly available, however, they do not tie resource needs to program performance. Carriers generally pass these charges onto consumers, increasing the relative price for long-distance phone service for consumers, especially as the High Cost program grows. Although the program is funded through mandatory contributions, as performance measures are developed, resource needs (including administrative costs) should be tied to the accomplishment of performance goals.

Evidence: USAC Quarterly Demand filings, available at www. universalservice.org; Federal Communications Commission, FY 2005 Budget Estimates to Congress. This document can be found at: ftp.fcc.gov/Reports/fcc2005budget_complete.pdf; Fund Management NPRM, FCC 05-124.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: The High Cost program lacks a long term strategic plan that includes annual or long-term goals and performance measures. The FCC should develop such a plan, building around the long-term goals of the USF High Cost program as well as a timeline for adopting a plan. However, the FCC has recognized the need to evaluate the administration and management of the program. The FCC is currently seeking to address strategic planning deficiencies. In the recently released NPRM, the FCC seeks comment on performance measures for the high cost program, recognizing that "effective program management requires the implementation of meaningful performance measures."

Evidence: Fund Management NPRM, FCC 05-124.

Are all regulations issued by the program/agency necessary to meet the stated goals of the program, and do all regulations clearly indicate how the rules contribute to achievement of the goals?

Explanation: The High Cost program is mandated by statute. Through the rulemaking process, the FCC analyzes its rules to ensure that they meet the statutory purpose of the high cost program. The FCC orders adopting the rules describe the reasoning and justification for the regulations. In addition, Section 11 of the Telecommunications Acts requires the FCC to evaluate its regulations and eliminate any unnecessary regulations every two years. However, there are statutory limits to regulations issued by the agency, including court challenges and statutory restrictions from implementing recommendations of the Federal-State Joint Board.

Evidence: See evidence above, Wireline Competition Bureau, Federal Communications Commission Biennial Regulatory Review 2002, WC Docket No. 02-213, GC Docket No. 02-390, Staff Report, 18 FCC Rcd 4622, 4724 (WCB, 2002), issued concurrently with The 2002 Biennial Review, GC Docket No. 02-390, Report, 18 FCC Rcd 4726 (2002); 47 U.S.C § 161 (biennial review) Staff Report, Wireline Competition Bureau, Biennial Regulatory Review 2004, WC Docket 04-179, 20 FCC Rcd 263, 282, 302 (WCB, Jan. 5, 2005) (recommending elimination of 47 CFR 36.601(c), 36.602 (expense adjustment for hold-harmless support for non-rural carriers); 47 CFR 54.311 (interim hold-harmless provision for non-rural carriers).

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: The Universal Service Administrative Company (USAC), the not-for-profit organization appointed by the FCC in 1997 to administer the USF, does not collect performance data from carriers, so the answer must be no. Data collections from program recipients are used to administer the program, rather than to improve management and performance. Carriers provide line count and cost data which USAC uses to develop High Cost program demand estimates and manage program disbursements, however, there are no regular audits of the cost and line count data collected from carriers. The FCC regularly collects data from a variety of sources related to telephone subscribership and service; it is not directly tied to High Cost program performance and efficiency.

Evidence: USAC Filing Requirements and Deadlines Tool available at http://form498.universalservice.org/hc/filing_tool/; FCC Telephone Subscribership Report; FCC Monitoring Report, available at http://www.fcc.gov/wcb/iatd/stats.html. FCC Reference Book, available at http://www.fcc.gov/wcb/iatd/stats.html. See Federal-State Joint Board on Universal Service, Order, CC Docket 96-45, 19 FCC Rcd 11538, at para. 1 (2004).

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: While the High Cost & Low Income Committee of the USAC Board that oversees the program operates under the rules established by the FCC, there is no contract or other agreement which sets performance standards and expectations for the program administrator. The FCC's Independent Auditor cited a lack of clearly defined roles and responsibilities for USF financial management. USAC's role is not clear, and there is no evidence that the administrator is held accountable for cost, schedule, and performance results, nor for compliance with FCC regulations including restrictions on making or interpreting policy or statute. There is no specific evidence that Federal managers and program partners are held accountable for cost, schedule, and performance results. The FCC should establish specific, measurable standards for program administration. For Federal managers, such accountability should be built into their performance evaluations. Other program partners could also be required to achieve specific performance standards.

Evidence: See 47 CFR 54; USAC Board of Directors and its by-laws are located at: www.universalservice.org/board and www.universalservice.org/download/usacbylaws.pdf; FCC 2004 Performance and Accountability Report.

Are funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: Federal law and FCC regulations specify that funds should be used only for their approved purposes and carriers must certify to that effect; however, absent sufficient oversight there is no way to be sure. The FCC is aware of one past investigation, which was closed with a conviction. The OIG and USAC plan to conduct approximately 250 audits on a random sample of carriers receiving High Cost subsidies to ensure funds are being used for the intended purpose. The 2006 Budget requests funds for the FCC to improve management and oversight of the Universal Service Fund. In addition, the FCC is working closely with USAC to improve financial reporting.

Evidence: See 47 U.S.C. section 254 (high cost recipients must use funds for intended purpose); 47 CFR sections 54.313, 54.314 (states have to certify that carriers receiving high cost support are only using funds for the intended purposes); The OIG reports to Congress at www.fcc.gov/oig/oigreports.html; OIG 2005 Audit Plan, www.fcc.gov/oig/FY_2005_Audit_Plan.pdf (OIG 2005 Audit Plan); Fund Management NPRM, FCC 05-124; FCC FY 2004 Performance and Accountability Report; and 2006 Budget.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: There is no evidence that the high cost program explicitly encourages carriers to achieve efficiencies and cost effective delivery of telecommunications services, or metrics in place to measure and achieve efficient program execution. In terms of the subsidy support, competitive carriers entering a market receive payment based on the incumbent carriers' costs. Also, there is no reduction in support for incumbent carriers who lose lines to competitive carriers, creating inefficiencies in program execution and growing demands for High Cost support. FCC regulations have established some policies which are intended to improve efficiencies, including promoting standards for determining eligible carriers, caps on certain support levels and basing support for non-rural carriers on an efficient carrier's forward looking costs. USAC's administrative costs for the High Cost Fund program are approved on a quarterly basis as part of the contribution factor filings, however, there is no evidence of procedures to measure and achieve cost- effective program administration over time. In developing performance measures, the FCC should include measures that reflect efficiencies and cost effectiveness.

Evidence: 47 CFR § 32.6720 (Expense Account -- General and Administrative); 47 CFR § 36.601(c) (limiting expense adjustment);47 CFR § 36.621(a)(4) (limiting Corporate Operations Expenses); 47 CFR § 36.605 (Safety Net Additive Support) 47 CFR § 54.305(a) (limiting per line support for carriers acquiring lines from other carriers); See e.g., Fund Management NPRM, FCC 05-124; See Contribution Factor Public Notices www.fcc.gov/wcb/universal_service/quarter.html; USAC Quarterly Administrative Filings, at www.universalservice.org/overview/filings.

Does the program collaborate and coordinate effectively with related programs?

Explanation: Several states have universal service programs that are similar to the Federal High Cost program, funded through charges assessed on intrastate communications. The FCC has established a cost allocation system that carriers must follow, which allow separation of regulated costs into intrastate and interstate costs to both identify the association between the costs and rates for state-based or intrastate costs and the rates for federal or interstate costs. This is an open process subject to review by the public, and allows the FCC to identify and prevent cross subsidy of intrastate and interstate activities and services. Through the Federal-State Joint Board on Universal Service and other FCC rulemaking procedures, there is a degree of collaboration as state utility commissions are represented on the Board. Finally, the FCC allows states to request additional high cost support where states demonstrate that they cannot use intrastate subsidies to establish rural rates that are reasonably comparable to urban rates.

Evidence: See Federal-State Joint Board on Universal Service information available at www.fcc.gov/wcb/universal_service/JointBoard/welcome.html; Tenth Circuit Remand Order, 18 FCC Rcd at 22614-16, at paras. 93-96.

Does the program use strong financial management practices?

Explanation: Auditors have cited material weaknesses in the Universal Service Fund, including the high cost program. Financial information provided by USAC is not always accurate or timely. FCC's independent auditor found that the FCC did not apply or implement adequate review procedures to ensure that financial information provided for the USF was accurate and reasonable prior to inclusion in financial statements, with significant material errors and adjustments only identified as a result of the audit process. The FCC is working with USAC to address these issues and improve financial management. Pursuant to FCC direction, USAC is converting the fund to Federal accounting and budgetary standards and is required to maintain universal service funds in accordance with the United States Government Standard General Ledger (USGSGL) to improve financial management and safeguard the Fund. By October 2005, auditors of the USF will make a determination of whether USF balances are fairly stated in all material respects. The FCC continues to address program modifications to improve USF procedures through ongoing proceedings. The FCC's rules require quarterly and annual reports from USAC. There are annual audits of the financial statements of the FCC and USAC.

Evidence: See Application of Generally Accepted Accounting Principles for Federal Agencies and Generally Accepted Government Auditing Standards to the Universal Service Fund, CC Docket No. 96-45, Order, 18 FCC Rcd 19911 (2003) (GAAP Order). See Fund Management NPRM, FCC 05-124, at paras. 32, 60. See 47 CFR § 54.702(g-h) (Administrator quarterly and annual reports) See 47 CFR § 54.717 (Audits of the Administrator) 47 CFR § 54.705(c)(iv) (USAC High Cost and Low Income Committee has authority to have audit performed). 47 CFR § 54.702(n) (USAC must account for financial transactions in accordance with GAAP for federal agencies). 47 CFR § 54.717 (USAC must be audited annually).

Has the program taken meaningful steps to address its management deficiencies?

Explanation: The Commission has taken meaningful steps in the past few years to address management deficiencies. In April 2005, the Commission issued an NPRM seeking comment from program stakeholders on ways to improve management and administration of the Universal Service Fund programs managed by USAC, including the High Cost program. The Commission is also seeking comment on appropriate performance measures for the high cost program. In October 2003, the Commission directed USAC to implement Federal budgetary and accounting standards for the Universal Service Fund. Deficiencies in program management are generally identified through external reviews, program audits, or in the course of FCC rulemaking. The FCC periodically reviews the administrative procedures in the High Cost program and modifies these procedures where appropriate.

Evidence: For a list of FCC actions regarding the High Cost program, see www.fcc.gov/wcb/universal_service/highcost.html. See e.g., Rural Task Force Recommendation, FCC 00J-3; Rural Task Force Order, 16 FCC Rcd 11244; see also MAG NPRM, 16 FCC Rcd 460; MAG Order, 16 FCC Rcd 19613. See CALLS NPRM, 14 FCC Rcd 16872; CALLS Order, 15 FCC Rcd 12962; Fund Management NPRM, FCC 05-124 See GAAP Order, 18 FCC Rcd 19911 (amending the FCC's rules governing certain financial reporting and auditing requirements applicable to the Universal Service Fund); Fund Management NPRM, FCC 05-124, at paras. 9-22, 33, 44-52.

Does the program have oversight practices that provide sufficient knowledge of grantee activities?

Explanation: The High Cost program requires certification from carriers that funds are used for intended purposes, however, the FCC OIG has stated "fraud is an inherent risk in the Universal Service Fund (USF) core business process: collection, certification, and disbursement of funds" and while the FCC has taken action to address fraud in the USF business process, more action is needed. The OIG has not yet performed an evaluation of the high cost program, but has plans to do so once resources become available. The 2006 Budget includes a request to improve FCC management and oversight for the Universal Service Fund. While regulations require that funds must be used for intended purposes, and states have to certify that the companies are using the funds appropriately, there is no evidence that current oversight practices provide sufficient knowledge of grantee activities.

Evidence: See 47 U.S.C. § 254(e); 47 CFR §§ 54.313 and 54.314 (requiring states to annually certify that incumbent local exchange carriers and eligible telecommunications carriers are using support for authorized purposes); OIG 2005 Audit Plan; 2006 Budget; FCC 2004 PAR, OIG Management Challenges; 47 CFR §§ 54.313, 54.314 (state certifications).

Does the program collect grantee performance data on an annual basis and make it available to the public in a transparent and meaningful manner?

Explanation: The FCC relies on Census data for telephone penetration rates, however these data do not show penetration rates for areas whose rates are subsidized by the high cost program. USAC collects data on disbursements, telephone subscriber penetration, rates, the number of states, carriers receiving support. USAC data are presented in a variety of publicly available reports on an annual or quarterly basis, but these data do not reflect performance. The FCC should adopt performance measures that reflect grantee performance and the impact of USF High Cost funds in achieving program goals.

Evidence: See FCC Monitoring Report, available at http://www.fcc.gov/wcb/iatd/stats.html; FCC Reference Book, available at http://www.fcc.gov/wcb/iatd/stats.html. See USAC Quarterly Reports, at http://www.universalservice.org/overview/filings (publicly available information including projected fund size).

Did the program seek and take into account the views of all affected parties (e.g., consumers; large and small businesses; State, local and tribal governments; beneficiaries; and the general public) when developing significant regulations?

Explanation: The rules governing the program have been adopted in notice and comment proceedings consistent with the Administrative Procedure Act. Further, all data collections have been implemented consistent with the Paperwork Reduction Act, which requires public notice and comment. Parties to high cost proceedings include consumer groups, state utility commissions, state consumer advocates, large and small carriers either individually, or through their associations. This is an ongoing process for the FCC. Most recently, the FCC initiated a proceeding that seeks comment from all interested parties on fund management generally.

Evidence: See High Cost Orders and NPRMs, at www.fcc.gov/wcb/universal_service/highcost.html. Rural Task Force Order, 16 FCC Rcd 11244; see also MAG Order, 16 FCC Rcd 19613; see also CALLS Order, 15 FCC Rcd 12962; Federal-State Joint Board on Universal Service, CC Docket 96-45, Ninth Report and Order and Eighteenth Order on Reconsideration, 14 FCC Rcd 20432 (1999) (Ninth Report and Order), reversed in part and remanded in part, Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2001); Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Forward-Looking Mechanism for High-Cost Support for Non-Rural LECs, CC Docket No. 97-160, Tenth Report and Order, 14 FCC Rcd 20156 (1999) (Tenth Report and Order); Tenth Circuit Remand Order, 18 FCC Rcd 22559.

Did the program prepare adequate regulatory impact analyses if required by Executive Order 12866, regulatory flexibility analyses if required by the Regulatory Flexibility Act and SBREFA, and cost-benefit analyses if required under the Unfunded Mandates Reform Act; and did those analyses comply with OMB guidelines?

Explanation: FCC regulations are not subject to E.O. 12866 or the Unfunded Mandates Reform Act. They are subject to the Regulatory Flexibility Act and SBREFA. The order initiating the program rules, and subsequent implementing decisions, complied with the Regulatory Flexibility Act. OMB reviews FCC rules under the Paperwork Reduction Act. The FCC considers the costs of implementing regulations for small businesses in the course of rulemaking proceedings in accordance with the Regulatory Flexibility Act.

Evidence: See High Cost Orders, at www.fcc.gov/wcb/universal_service/highcost.html. See Rural Task Force Recommendation, FCC 00J-4; Rural Task Force Order, 16 FCC Rcd 11244, 11335-40, paras. 242-258 (FRFA analysis); MAG NPRM, 16 FCC Rcd 460, 468-72, paras. 26-37 (IRFA analysis); MAG Order, 16 FCC Rcd 19613, 19727-41, paras. 278-326 (FRFA analysis).

Does the program systematically review its current regulations to ensure consistency among all regulations in accomplishing program goals?

Explanation: The FCC reviews and updates its High Cost program regulations as necessary to improve the program, account for market or industry changes and to improve program efficiency. In addition, Section 11 of the Telecommunications Act requires the FCC to evaluate its regulations and eliminate any unnecessary regulations every two years. The FCC addresses the relationship between intercarrier access charge reform and USF charges, issuing orders to reduce implicit subsidies from access charges and make them explicit through the USF, which has had the effect of growing the High Cost program.

Evidence: See High Cost Orders, at www.fcc.gov/wcb/universal_service/highcost.html; See e.g., MAG Order, 16 FCC Rcd 19613, 19615-16. See also CALLS Order, 15 FCC Rcd 12962, 67; 47 U.S.C. § 161; Staff Report, Wireline Competition Bureau, Biennial Regulatory Review 2004, WC Docket 04-179, 20 FCC Rcd 263, 282, 302 (WCB, Jan. 5, 2005) (recommending elimination of 47 CFR 36.601(c), 36.602 (expense adjustment for hold-harmless support for non-rural carriers); 47 CFR 54.311 (interim hold-harmless provision for non-rural carriers).

Are the regulations designed to achieve program goals, to the extent practicable, by maximizing the net benefits of its regulatory activity?

Explanation: The High Cost program is designed to ensure that rural rates are reasonably comparable to urban rates, and regulations are designed to minimize reporting burdens. However, there is no evidence that regulations are designed to maximize net benefits of regulatory activity. Subsidies are not targeted to consumers based on need. Low-income urban consumers could be implicitly subsidizing rates for high-income consumers who would likely still subscribe to telephone service even if monthly rates reflected cost.

Evidence: See Questions 1.2, 1.4, and 1.5. See RTF Order, 16 FCC Rcd 11244; see also MAG Order, 16 FCC Rcd 19613; see also CALLS Order, 15 FCC Rcd 12962; Ninth Report and Order, 14 FCC Rcd 20432, reversed in part and remanded in part, Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2001); Tenth Report and Order, 14 FCC Rcd 20156; Tenth Circuit Remand Order, 18 FCC Rcd 22559; Also, e.g., 47 CFR §§ 54.802, 54.903, 36.611, 36.612.

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: As noted above, the FCC has not adopted long-term outcome-oriented performance goals for the High Cost program, so the answer must be no. The FCC is seeking comment on appropriate performance goals for the high cost program. Consumer monthly charges (rates) exceeding an urban benchmark are found in less than 1% of population, although it's not clear that keeping rates for high cost areas at or below urban benchmarks has a strong impact on telephone subscribership, or that the benefits of keeping rates below costs exceeds the cost of the high cost program. Telephone subscribership is more correlated with income rather than geographic location. Subscribership levels have been high, but have fallen despite growth in high cost subsidies. Currently, more than 99% of U.S. population lives in areas where telephone rates are at or below the FCC rate benchmark. Rural states subscribe to telephone service in the almost the same proportion as urban states, with a difference of 0.2%.

Evidence: Fund Management NPRM, FCC 05-124, at para. 30. See Monitoring Report, available at http://www.fcc.gov/wcb/iatd/stats.html; Reference Report available at http://www.fcc.gov/wcb/iatd/stats.html (containing data on telephone rates and subscribership levels).

Does the program (including program partners) achieve its annual performance goals?

Explanation: The High Cost program does not currently have performance measures, but the FCC is currently seeking comment on appropriate performance measures, baselines, and targets for the program.

Evidence: Fund Management NPRM, FCC 05-124.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: As the High Cost program lacks a measure of efficiency, the answer must be no. Program participants are subject to some limitations designed to improve cost efficiencies, including limitations on corporate operations expenses that can be considered in determining program support. However, there is no evidence that carriers must operate in an efficient manner. Subsidies for many carriers are set to ensure a minimum rate of return on business operations, which could support business models that are inefficient or would otherwise fail. Program size has been increasing rapidly and telephone subscribership has been falling slightly. An increasing amount of funding is used to support competitive carriers, with no reduction to the subsidies provided to incumbent carriers even if they lose lines to competitors.

Evidence: Telephone Subscribership Report; Universal Service Monitoring Report; 47 CFR § 32.6720 (Expense Account -- General and Administrative); 47 CFR § 36.601-4 (limiting expense adjustment (support)); 47 CFR § 36.621(a)(4) (limiting Corporate Operations Expenses).

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: There are no federal programs that seek to make rates comparable between rural and urban areas. The purpose of the High Cost program is to maintain rate comparability. The RUS program does not seek to equalize rates between rural and urban areas, although it shares the goal of supporting rural consumers' access to telecommunications services. Some states have their own high cost programs, which are complementary to the federal program but may have additional requirements and standards beyond the requirements of the Federal High Cost program. Such programs, to the extent that they impose additional requirements, must have additional specific, predictable, and sufficient support mechanisms that do not rely on or burden the Federal program, as required by the 1996 Telecommunications Act. The state programs are limited to intrastate subsidies while the federal high cost program focuses on interstate subsidies. Given the vast difference in scope between the Federal and state high cost programs, and the supplementary nature of the state programs, they are not directly comparable.

Evidence: Twenty-three states have implemented high-cost universal service programs to supplement the monies received from the federal USF program. These states are AK, AR, AZ, CA, CO, HA, ID, IL, KS, ME, NE, NV, NM, OK, OR, PA, SC, TX, UT, VT, WA, WI, WY. State plans typically provide high-cost support for the same network elements as the federal USF program and are designed to supplement the federal USF program. See e.g., the Alaska, available at www.state.ak.us/rca/Telecom/ausf/ausf_overview.pdf; California, available at www.cpuc.ca.gov/static/industry/telco/public+programs/index.htm, Colorado, available at www.dora.state.co.us/puc/rules/723-41.pdf; South Carolina, available at - www.state.sc.us/sclac/Reports/2005/USF.htm.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: In 2002, the GAO conducted a study which supports the FCC's measure of rural/urban rate comparability. The study found that monthly rural (non MSA) rates were very close to urban (central city, suburban) rates (average difference = $0.21). This evaluation was at the national level. While the statute lays out the purpose of the program is to ensure rates between rural and urban areas are comparable, it is not clear that this supports the overall goal of Universal Service. Economic studies of the program have suggested that subscribership is not as sensitive to base rates, and many would still subscribe to telephone service even if charges were closer to actual cost.

Evidence: Examples of independent evaluations are provided in Evidence above. See Fund Management NPRM, FCC 05-124, at paras. 32, 60.

Were programmatic goals (and benefits) achieved at the least incremental societal cost and did the program maximize net benefits?

Explanation: There is no evidence that High Cost program has evaluated alternative approaches to demonstrate that its regulatory approach maximizes net benefits. The FCC suggests that providing targeted and capped support at the levels set for the various high cost mechanisms also achieves the goal of explicit, competitively neutral support at the lowest incremental societal cost, and that mandating rate caps without providing support could result in price increases for other services causing distortions and economic inefficiency, at a higher societal cost than the High Cost program. As noted above, however, the current system also causes distortions and economic inefficiency and the use of subsidies to equalize the rates between rural and urban areas may not further the goals of advancing universal service.

Evidence: 7 CFR § 32.6720 (Expense Account -- General and Administrative) 47 CFR § 36.601-4 (limiting expense adjustment (support)) 47 CFR § 36.621(a)(4) (limiting Corporate Operations Expenses) See Fund Management NPRM, FCC 05-124, at paras. 32