On May 18, 2017, at its May Open Meeting, the Federal Communications Commission (“FCC”) adopted a Notice of Proposed Rulemaking and Order on a two-one vote, seeking comment on whether it should reform the so-called rural “rate floor” on basic voice service or eliminate it entirely. The rural rate floor rule requires carriers receiving Connect America Fund support to charge rural customers a minimum monthly rate or risk losing subsidies. The FCC imposed a two-year freeze on the rural rate floor to provide it with sufficient time to consider the proposed reforms. The rulemaking is yet another reversal of a policy supported by former FCC Chairman Wheeler, which current Chairman Pai dissented from as a Commissioner, and represents another step by the Pai FCC to roll back its predecessor’s actions.

The FCC created the rural rate floor rule in 2011 in response to concerns that rural carriers used universal service support to subsidize artificially low rates. The FCC found this disparity potentially undermined its duty to support “reasonably comparable” services between rural and urban areas. As a result, the rural rate floor rule reduces the universal service support for carriers whose rates (plus state-mandated fees) fall below a floor set by the FCC based on charges for comparable service in urban areas. Following its adoption, the rural rate floor continued to increase, eventually surpassing the charges for basic phone service in some urban areas.

Rural telecommunications providers and consumer advocates allege that the rural rate floor undercuts the FCC’s obligation to ensure the affordability of basic services. Critics claim that the rule results in rural customers losing access to basic voice service, with a particular impact on older Americans and Tribal communities. Critics also claim that the rural rate floor fails to account for lower average incomes in rural areas and support more localized rate floor calculations to ensure the costs of basic services in rural areas remain reasonably comparable to charges in urban areas.

The FCC seeks comment on these arguments and whether it should reform the rural rate floor methodology or eliminate the rule entirely. Specifically, the FCC asks whether rural carriers should be allowed to charge lower rates than their urban counterparts without losing subsidies, and whether it should replace the single, national rate floor with more localized state and regional rate floors. The FCC also requested input on how the rural rate floor intersects (and potentially undermines) state authority over rate regulation. The FCC seeks comment on the rural rate floor’s impact on universal service contributions, noting that current rules redistribute any subsidy reductions to other carriers instead of lowering carriers’ overall contribution burden. Finally, reflecting its recent emphasis on economics-driven decision making, the FCC invited commenters to submit cost-benefit analyses, questioning whether the rural rate floor and its accompanying reporting obligations impose unnecessary administrative and compliance costs.

The FCC also froze the rural rate floor at $18 (the current limit), preventing an increase to $20/month scheduled for July. The freeze will expire in two years if the FCC does not take any action to reform the rural rate floor.

The proposed rulemaking differs significantly from the discussion draft the FCC circulated weeks before the meeting. Most importantly, the discussion draft stated that the FCC expected commenters to strongly support eliminating the rural rate floor rule and indicated the FCC would eliminate the rule later this year. By contrast, the proposed rulemaking leaves the door open to keeping some reformed version of the rural rate floor alive. The differences between the discussion draft and the proposed rulemaking provide rare insight into the FCC’s deliberations, a consequence of Chairman Pai’s recent process reforms designed to increase transparency.

Despite the softened language, both Commissioner O’Rielly and Commission Clyburn criticized aspects of the proposed rulemaking. Commissioner O’Rielly suggested he would have dissented if the proposed rulemaking remained aimed at eliminating the rural rate floor. The Commissioner expressed his support for the rule, stating that rural carriers should recoup some revenue from subscribers before relying on federal subsidies. The Commissioner noted that the rule does not prevent carriers from charging lower rates below the rural rate floor; it just prevents them from using subsidies to keep such rates artificially low. In contrast to Chairman Pai, Commissioner O’Rielly questioned the assumption that rural customers cannot afford unsubsidized rates and called for means-testing support to rural and other high-cost areas. In an unexpected dissent, Commission Clyburn echoed Commissioner O’Rielly’s call for means-testing high-cost support in order to crack down on universal service waste. The Commissioner advocated for comprehensive reform in how the FCC hands out high-cost support and dissented because the proposed rulemaking was limited to rural rate floor issues.

Whether the rural rate floor will undergo significant reform or even survive the proposed rulemaking remain open questions. What is certain is that telecommunications issues impacting rural and other high-cost areas will remain an area of FCC focus. Comments on the proposed rulemaking will be due 30 days after Federal Register publication, with reply comments due 45 days after Federal Register publication.