How Do We Pay For Universal Service?

Friday, September 17, 2021

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Kevin Taglang
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As the Infrastructure Investment and Jobs Act awaits a vote in the House of Representatives later this month, a debate over the future of the Federal Communications Commission’s Universal Service Fund (USF) is already starting. Provisions in the infrastructure bill call for the FCC to quickly complete an evaluation of how the legislation will impact how the FCC’s achieves the goal of deploying broadband to all Americans. Congress wants to know how the FCC can be more effective in achieving this goal. 

One brewing USF issue is how we pay for it. A report released this week by the Schools, Health & Libraries Broadband (SHLB) Coalition, INCOMPAS, and NTCA-The Rural Broadband Association thoughtfully examines the issue. 

Prior to the Telecommunications Act of 1996, the USF operated as a mechanism by which interstate long-distance carriers were assessed to subsidize telephone service to low-income households and high-cost areas. The Communications Act of 1934 stated that all people in the United States shall have access to rapid, efficient, nationwide communications service with adequate facilities at reasonable charges.

The Telecommunications Act of 1996 expanded the traditional definition of universal service—affordable, nationwide telephone service to include among other things rural health care providers and eligible schools and libraries. Today, the FCC provides universal service support through four mechanisms:

  1. The High Cost Program, which includes 11 active funds, provides support to build out infrastructure or provide service to communities that currently receive little or no communication services.
  2. The Lifeline Program offers a monthly benefit of up to $9.25 towards phone or internet services for eligible subscribers.
  3. The Rural Health Care Program funds voice and broadband serves to allow rural health care providers to pay rates for telecommunications services similar to those of their urban counterparts, making telehealth services affordable.
  4. The Schools and Libraries Support Mechanism, popularly know as the “E-Rate,” provides discounts for telecommunication services (e.g., local and long-distance calling, high-speed lines), Internet access, and internal connections (the equipment to deliver these services) to eligible schools and libraries.

The new report, USForward, is written by Carol Mattey who has over 30 years of experience as a senior executive in the U.S. government, consultant, and lawyer focusing on communications public policy. From 2010 to 2017, Mattey was Deputy Chief of the Wireline Competition Bureau at the Federal Communications Commission, focusing on the FCC’s ongoing initiatives to reform the USF’s $9 billion in annual spending. She lays out the problem—and possible solutions—facing policymakers in the excerpt from her executive summary that follows:

The funding mechanism that supports the USF is under significant duress. The “contribution base”—the revenues used to calculate USF contributions—has declined 63% in the last two decades, from $79.9 billion in 2001 to $29.6 billion in 2021. Meanwhile, the “contribution factor”—which is the USF fee assessed on interstate and international telecommunications service and certain telecommunications revenues—has increased from 6.9% in 2001 to a 29.1% in the fourth quarter of 2021. Assuming a continuation of historical trends, the contribution factor could approach 40% or more in the coming years. This situation is unsustainable and jeopardizes the universal broadband connectivity mission for our nation without immediate FCC reform.

To ensure the enduring value of the USF program and America’s connectivity goals, we must have a smart and substantive conversation about the program’s future. Mattey’s report analyzes several options for FCC reform of the current status quo that have been pending in FCC rulemakings dating back to the early 2000’s: (1) modifying the current revenues-based contribution methodology to assess broadband internet access service revenues, (2) assessing connections, or (3) assessing telephone numbers.

Today, USF fees are assessed on reported end user (retail) telecommunications revenues of wireline and mobile providers, cable operators and others providing interconnected Voice over Internet Protocol (VoIP). Contributors are required to pay the assessment based on their reported revenues, and they typically pass those fees along to consumers and businesses. The FCC does not assess wholesale (provider-to-provider) service revenues, nor does it assess information services, retail fixed broadband internet access or retail mobile data services that provide internet access.

The most dramatic decline in reported retail revenues has been for mobile services. Reported retail mobile telecommunications service revenues (namely, mobile voice) declined 66% between 2010 and 2019; most mobile service revenues are attributed to data service, which is not assessed.

In contrast, local service revenues – which include both traditional landline telephone service and interconnected VoIP – declined 36% over this period, while toll (long-distance) revenues declined 35%.

Meanwhile, revenues not subject to assessment (such as broadband internet access) have grown dramatically, more than doubling in the last decade, from $173 billion to $361 billion. It is apparent that service providers that bundle voice service with broadband internet access service are allocating only a small portion of the monthly rate to the assessable service (voice telephony).

Reforming the current revenues-based system to include broadband internet access service revenues is the preferred approach, both as a matter of policy and ease of implementation. Doing so would reduce the contribution factor to less than 4%.

First, it is appropriate as a matter of public policy to assess broadband internet access service revenues because all four programs in the USF promote universal broadband. The revenues from broadband internet access services that are increasingly used by Americans today should contribute to the USF programs that support the expansion of such services to all. This will better reflect the value of broadband internet access service in today’s marketplace for both consumers and businesses.

Second, broadband internet access service revenues are expected to be stable in the future, with the potential for some modest growth. This would stabilize the funding mechanism and stop the death spiral in the current USF contribution methodology.

Third, it is a solution that can be implemented more quickly than the alternatives. It would be far less uncertain than seeking congressional intervention and can be done by the FCC pursuant to its current statutory mandate. FCC reform of the USF contribution mechanism now is an important first step in stabilizing the current system.

Fourth, there is a significant advantage to retaining the current revenues-based system because most of the revenues reported to the FCC for USF purposes come from publicly traded companies that are audited and subject to stringent financial reporting standards for their revenues. This external financial scrutiny would provide an additional level of assurance that the metric used to assess USF contributions is accurately reported.

Fifth, assessing both broadband internet access service and voice services removes the incentives of providers to arbitrarily allocate revenues from bundled services to one service and not the other. This creates an inequitable situation where some end users continue to pay into USF, while others do not, yet everyone benefits from the positive network externalities of universal connectivity made possible from the four USF programs that support broadband-capable networks and service.

Reform of the current system of financing universal service is long overdue. The FCC has sought comment multiple times on various permutations of the options analyzed in this report and has the ability to move forward to assess broadband internet access service revenues without congressional action. The rapid increase in the contribution factor over the last decade and potentially in the future puts the stability of the entire USF at risk. While other proposals to help finance universal broadband may warrant further examination, the FCC should reform the current contribution methodology now to assess broadband internet access service revenues.

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Upcoming Events

Sept 21—Spectrum Policy Symposium: Modernizing US Spectrum Strategy and Infrastructure (NTIA)

Sept 21—Seizing this Historic Moment to Close the Broadband Access Gap (Heartland Forward)

Sept 22—Connecting Minority Communities Pilot Program Webinar (NTIA)

Sept 22-24—49th Annual Research Conference on Communications, Information, and Internet Policy (TPRC)

Sept 22—Banking on Digital: The Race To Transformation (Bloomberg)

Sept 22—Closing the Digital Divide in the Rural South (Georgetown)

Sept 23—Race and Digital Inequity: The Impact on Poor Communities of Color (Michelson 20MM Foundation)

Sept 23—System Error to System Success: Where Big Tech Went Wrong and How We Can Reboot (New America)

Sept 23—IP3 Awards (Public Knowledge)

Sept 23—Connecting Minority Communities Pilot Program Webinar (NTIA)

Sept 24—National Tribal Broadband Summit (Department of Interior)

Sept 27—USForward: Securing the Future of USF (SHLB Coalition)

Sept 28—6G Summit on Connecting the Unconnected (Marconi Society)

Sept 30—September 2021 Open FCC Meeting

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