The 1996 Act also altered the federal  mechanism for funding universal service by requiring telecommunications  carriers and other entities providing interstate telecommunications service  to contribute to USF, unless exempted by FCC. FCC Aims to Improve Efficiency and Provide Support for Broadband through Changes to the High- Cost Program

		FCC Adopted New Rules to Support Broadband

FCC adopted new rules to fundamentally change the high-cost program  by extending the program to support broadband capable networks. FCC also established an automatic review trigger if  the program budget is threatened to be exceeded. Establishing public interest obligations for all eligible carriers. Under the USF Transformation Order, FCC requires all carriers  to offer broadband services in their supported service areas, meet certain  broadband performance requirements, and report regularly on associated  broadband performance measures. FCC Is Implementing Changes to Its Funding Distribution to Improve Program Efficiency

In the USF Transformation Order, FCC changed its method for  distributing funds to carriers to address some of the recognized program  inefficiencies. According to FCC, these changes will allow it to reduce  high-cost support for carriers providing only voice services and make  funds available to carriers for the deployment of both voice and  broadband-capable networks. FCC Has Taken Steps to Address Previously Identified Oversight and Management Challenges, but Issues Remain

		FCC Steps to Address Management Challenges

We and OMB have each issued a report in the last 7 years critical of  FCC’s management of the high-cost fund and in the USF Transformation  Order, FCC has taken several steps to address these challenges. The  management challenges we identified included a lack of performance  goals and measures for the program and weak internal controls, resulting  in FCC’s limited ability to oversee the actions of carriers or the data they  provide. In 2005, OMB criticized FCC’s inability to measure the effect of  the fund on subscribership in rural areas or to base funding decisions on  any indication of measurable benefits. To address these challenges,  FCC has (1) established performance goals and measures for the high- cost program, (2) improved its internal control mechanisms over the fund,  and (3) directed USAC to undertake additional oversight and  management actions. Gaps in FCC’s Oversight and Management of the High-Cost Program

While FCC has taken steps to address several shortcomings of the high- cost program, our review of the order has identified gaps in FCC’s plans  to better oversee the program and make it more effective and efficient. Specifically, we determined that FCC lacks (1) a data-analysis plan for  carrier data it will collect, and (2) a mechanism to link carrier rates and  revenues with USF support payments. Furthermore, such analysis would  enable FCC to adjust the size of the Connect America Fund based on  sound evaluation and would allow Congress and FCC to make better  informed decisions about the future of the program and how program  efficiency could be improved. One of FCC’s performance goals (and a requirement in statute) is to  ensure that rates for broadband and voice services are reasonably  comparable in all regions of the country. However, in the USF Transformation Order, FCC reported that many rural  carriers are offering basic local rates for telephone service that are lower  than the average basic local rate paid by urban consumers. However, FCC has not stated what factors, such as carrier revenues, will  be included in the model. FCC has stated that it is not equitable for all  consumers to subsidize the cost of service for some consumers who pay  local service rates that are significantly lower than the national average. Therefore,  although FCC would like to prevent consumers from subsidizing carriers  whose rates for basic local service are artificially low, its incentive  mechanism to raise rural rates will not reduce the financial burden placed  on all consumers as there is currently no connection between the amount  of support payments a carrier receives and the revenue a carrier earns,  through rates or any other source. As a way to control the size of the fund, the Joint Board  recommended that FCC consider a carrier’s revenues when calculating  its need for USF support but FCC declined to implement this  recommendation. Recommendations for Executive Action

FCC should take the following two actions:
To determine the overall effectiveness of the Connect America Fund  as well as improve the oversight and transparency of the high-cost  program, establish a specific data-analysis plan for the carrier data  and make the information publicly available. In particular, the report provides information on (1) FCC’s plans for  repurposing the USF high-cost program for broadband services and (2)  how FCC is planning to address previously identified oversight and  management challenges as it broadens the scope of the program. The National Broadband Plan made 11 recommendations as it  relates to universal service.
Why GAO Did This Study

The high-cost program within the Universal Service Fund (USF) provides subsidies to telecommunications carriers that serve rural and other remote areas with high costs of providing telephone service. The annual program cost has grown from $2.6 billion in 2001 to over $4 billion in 2011, primarily funded through fees added to consumers phone bills. The program is managed by the Federal Communications Commission (FCC), which noted that providing universal access to broadband is the universal service challenge of our time. Accordingly, FCC made changes to the program to make funds available to support both telephone and broadband. GAO previously reported that using USF monies for broadband could cause the size of the fund to greatly expand unless FCC improved its management and oversight to ensure the programs cost-effectiveness. This requested report examines FCCs (1) plans for repurposing the high-cost program for broadband, and (2) plans to address previously identified management challenges as it broadens the programs scope. GAO reviewed and analyzed pertinent FCC orders, associated stakeholder comments, and reports related to USF and interviewed federal and industry stakeholders, as well as economists and experts.

What GAO Found

Under the USF Transformation Order, FCC adopted new rules to fundamentally change the high-cost program by extending the program to support broadband capable networks. For example, FCC established a $4.5-billion annual program budget for the next 6 years, created new fundscalled the Connect America Fund and the Mobility Fundthat will support broadband deployment, and established public interest obligations for the carriers as a condition of receiving funds. Specifically, FCC will require carriers to offer broadband services in their supported service areas, meet certain broadband performance requirements, and report regularly on associated broadband performance measures. FCC also changed its method for distributing funds to carriers to address some of the recognized inefficiencies with the program. According to FCC, these changes will allow it to reduce high-cost support for carriers providing only voice services and make funds available to carriers to offer both voice and broadband services.
FCC has taken several steps to address previously identified oversight and management challenges that GAO and the Office of Management and Budget (OMB) have raised in the last 7 years, but issues remain. Management challenges identified by GAO included a lack of performance goals and measures for the program and weak internal controls, while OMB criticized FCCs inability to base funding decisions on measurable benefits. In response, FCC established performance goals and measures for the high-cost program and improved internal control mechanisms over the fund. While these are noteworthy actions, GAO identified gaps in FCCs plans to better oversee the program and make it more effective and efficient. In particular, FCC has not addressed its inability to determine the effect of the fund and lacks a specific data-analysis plan for carrier data it will collect. Such analysis would enable FCC to adjust the size of the Connect America Fund based on data-driven evaluation and would allow Congress and FCC to make better informed decisions about the programs future and how program efficiency could be improved.
GAO also found that FCC lacks a mechanism to link carrier rates and revenues with support payments. A requirement in statute is for rates for telecommunications services to be reasonably comparable in rural and urban areas, but FCC has noted that some rural carriers are offering basic local rates for telephone services that are lower than the average basic rate paid by urban consumers. FCC has stated that it is not equitable for all consumers to subsidize the cost of service for some consumers who pay local service rates that are significantly lower than the national average and has therefore instituted an incentive mechanism for carriers to increase artificially low consumer rates. Although FCC would like to prevent consumers from subsidizing carriers that offer service at artificially low rates, its incentive mechanism to raise rural rates will not reduce the financial burden placed on all consumers as there is currently no connection between the support payments a carrier receives and the carriers rates and revenues. The Federal-State Joint Board on Universal Service recommended that FCC consider a carriers revenues when calculating its need for support payments, but in the past, FCC declined to implement this recommendation. FCC is developing a new model to calculate carrier support, but has not stated what factors will be included.

What GAO Recommends

FCC should (1) establish a specific data-analysis plan for carrier data to determine program effectiveness, and (2) consult with the Joint Board as it examines the factors for calculating carrier support payments. FCC concurred with the recommendations and provided technical comments.