HOUSTON, May 3, 2022 – As funding for the Universal Service Fund continues to fall year over year, the Federal Communications Commission is evaluating options to reform it.

During Broadband Communities Summit 2022, Principal Consultant for Mattey Consulting LLC, Carol Mattey anticipated what kind of changes to the Universal Service Fund that stakeholders could expect in the coming years.

The Universal Service Fund is responsible for funding several high-profile financial benefits including the Rural Digital Opportunity Fund, the Connect America Fund, E-Rate, the Lifeline Program, and the Rural Healthcare Program.

The USF is funded through compulsory service provider contributions. Though those contributions have historically been based on providers’ interstate and international telecommunications service revenues, critics of the program argue that providers are increasingly able to dodge these contributions by reclassifying their sources of revenue.

A common misconception for dwindling contributions is cord cutting, Mattey said. As more people drop landlines, there is simply less voice revenue – but that is only part of the issue.

Mattey said that while information revenues have increased through consumer use of the internet, voice revenues have fallen. This disparity has caused the telecommunication contribution to skyrocket and could be nearly 30 percent in 2022.

Mattey explained that most companies simply bill their consumers to offset that amount, and as a result, the contribution has been disproportionately burdened by the elderly who are more likely to use landlines.

When addressing potential reforms, Mattey pointed to three most likely possibilities being considered: broadband internet access revenue, a flat fee per voice and broadband connection, and a flat fee per phone number.

“Any reform needs to be simple and must be able to be audited,” she said. “The current system is not equitable.”

WASHINGTON, April 19, 2022 – A petition filed last week is requesting a U.S. appeals court find unconstitutional the process by which the Universal Service Fund is funded and how its administration has been delegated.

The petitioners, including non-profit research house Consumers’ Research and communications service provider Cause Based Commerce Inc., plead to the U.S. court of Appeals for the Fifth Circuit that Congress handed the Federal Communications Commission under the Telecommunications Act of 1996 unfettered delegatory authority to raise revenues for the roughly $8-billion annual program that seeks to expand basic telecommunications services across the country – including to low-income Americans, schools and libraries and rural healthcare.

That offloading of duties with “no formula, ceiling, or other meaningful or objective restrictions” is contrary to the nondelegation doctrine, the petitioners argue, which is a Constitutional limit that does not allow Congress to delegate to other branches its own legislative authority.

“The Framers [of the Constitution] understood ‘that it would frustrate ‘the system of government ordained by the Constitution’ if Congress could merely announce vague aspirations and then assign others the responsibility of adopting legislation to realize its goals,” the petition read.

Congress has improperly given taxation powers and inappropriately delegated power to a private entity, petitioners argue

The petitioners, who name the FCC as a respondent, argue that because the money raised for the fund comes from telecommunications companies, which often pass those costs down to customer voice service bills, Congress has effectively given the FCC taxation powers – a solely legislative authority.

Additionally, they argue that the FCC itself is in violation of the nondelegation doctrine by outsourcing the administration of the USF to a private entity called the Universal Service Administrative Company, which announces the amount needed to be obtained every quarter to meet the fund’s objectives. They argue that because the process for determining the amount and the FCC’s approval of it happens “only days before the new quarter begins,” the FCC has “no option” but to approve whatever USAC says.

“This unaccountable state of affairs has unsurprisingly led to skyrocketing costs, with the contribution rate quintupling since 2002, as well as rampant waste, fraud, and abuse,” the petition said, referring to the percent of voice service revenues that must be collected to support the program.

In one quarter last year, the contribution percentage reached a record high of 33.4 percent of declining voice revenues. Advocates for the USF have been calling for a more sustainable model for the fund, including broadening the contribution base to include broadband revenues and big tech platforms, with others calling for scrapping all that and just adding the required amount from a congressional budget item.

As such, the petitioners say the USF should be floated by money from federal revenues.

“If Congress believes these programs are worthy of funding, it should have to endure the public scrutiny and beneficial debate of raising money and proposing an appropriation for them,” the petition said. “But “[b]y shifting responsibility to a less accountable branch, Congress protects itself from political censure—and deprives the people of the say the framers intended them to have.”

Some argue that general taxation revenues should fund the Universal Service Fund

Advocates of general taxation for the fund, including AT&T and former FCC Chairman Ajit Pai, have often pointed to the added benefit of having congressional oversight to minimize fraud and abuse.

The petitioners have the support of non-profit technology think tank TechFreedom, which filed a brief with the court to boost the position. TechFreedom had by then already submitted comments to the FCC on its study of the future of the USF, arguing that the money should come from general taxation and that the FCC “cannot unilaterally” expand the fund to include contributions from big technology platforms. The FCC’s consultation included a question about that jurisdiction question, with parties including affordable communications advocate Public Knowledge and Carol Mattey, who urged the expansion of the fund to include broadband revenues, arguing that the FCC has jurisdiction to expand the base because it’s in the public interest.

“This double delegation – and, worse, private delegation – has led to lax oversight, runaway budgets, wasteful spending, and outright fraud,” alleged TechFreedom in its brief.

“It was bad enough that Congress handed such broad and ill-defined regulatory power to an independent agency – a government entity not subject to direct control by democratically elected leadership,” TechFreedom said, adding for the FCC to pass that power over to USAC without Congress’s permission  “means that the USF is not subject to any congressionally established procedural guardrails.”

TechFreedom furthers its complaint by arguing that USAC directors “are not properly appointed” and the FCC’s “rubber-stamping of USAC’s proposals violates the Administrative Procedure Act.”

The free markets non-profit the Competitive Enterprise Institute and the think tank the Free State Foundation also filed a joint brief with other professors and institutes arguing that the administration of the USF has effectively usurped Congress’s power to levy taxes via the ability of service providers to pass down the cost of the fund to consumers.

“The Constitution does not permit Congress to circumvent the legislative process by allowing an independent agency (guided by a private company owned by an industry trade group) to raise and to spend however much money it wants every quarter for ‘universal service’ at the expense of every American who pays a monthly phone bill,” the joint submission said.

Intervenors named in the case – who are not parties to it but can submit comments to help the court – include the Benton Institute, the National Digital Inclusion Alliance, the Center for Media Justice, the Schools, Health and Libraries Broadband Coalition, the National Telecommunications Cooperative Association, and the Competitive Carriers Association.

The mission of the E-rate program is to help connect students and library patrons to the internet and provide the support for goods and services necessary to make that happen.

Now, at a time in history when online connections are more important than ever, government agencies should be empowering local leaders, not interfering with their decisions.

Instead, on December 16, 2021, the Federal Communications Commission announced plans to take away local procurement control from schools and libraries participating in the program with its proposed E-rate bidding portal. Those who do not comply with the proposed mandate will lose vital financial support, reducing the internet connections available for students and library patrons.

Schools and libraries cannot afford to lose their internet access, and local staff does not have time to learn a new, duplicative bidding system. This would be the most radical change to the program I have witnessed since its inception in 1997.

FCC’s proposed E-rate bidding portal

The sweeping overhaul proposed by the FCC to the E-rate funding program would nationalize internet procurement for all K-12 schools and libraries that participate.

The proposed rulemaking would establish one centralized bidding system managed by the Universal Service Administrative Company. Currently, service providers submit bids directly to applicants for E-rate supported products and services.

I have several areas of concern with the proposal, including:

• USAC is not an authorized procurement agent.
• Local officials use other request for proposal systems 99.5% of the time.
• Procurement requires judgment; local systems exist to manage expectations, protests, bid openings and more.
• USAC is experienced at reviewing applications but inexperienced at managing the bidding process.

In 2014, FCC determined not to upload all E-rate bids. Why change now?

In July 2014, the FCC overhauled the E-rate program, emphasizing the importance of affordable internet access, cost-effective purchasing decisions and a more effective application process for schools and libraries.

A key strategy in achieving these goals was enhanced public access to information. The FCC called for a new online system for gathering data and publishing it all online, concluding that “increasing pricing transparency is likely to increase competition and drive down prices.”

Ultimately, the FCC decided that requiring all bids to be uploaded was unnecessary and could even be counterproductive to the program’s health.

So instead, the FCC struck a balance between transparency and simplification: only the prices for winning bids would be published, but applicants would still be required to produce copies of all bids, including the losing bids, when requested.

One must wonder, if increasing the burden and complexity of the E-rate program was not a good idea when it was modernized in 2014, what has changed to make it a good idea now?

Current E-rate rules are working

The Funds For Learning 2021 E-rate Trends Report found that 97% of respondents believe that more students or library patrons are connected because of the current E-rate program. 68% of respondents agreed that the competitive bidding process lowered costs for services.

The E-rate program is a vital lifeline for every school district in the country. Schools and libraries depend on the E-rate program for their unique connectivity needs.

This proposal would create a one-size-fits-all system, while we believe that procurement decisions are best made at the local level.

I urge the commission not to implement the proposed E-rate bidding portal.

Rather than federalizing the procurement of E-rate eligible goods and services, the public would be better served if the commission would focus its efforts on updating the existing E-rate eligible services list and instructing USAC to improve the E-rate Productivity Center online application portal.

The FCC has extended the Comment deadline for the proposal to April 27, 2022, with the deadline for filing Reply Comments now May 27, 2022. If you agree that local purchasing decisions should be managed at the local level, please sign this petition, and let the FCC know.

John Harrington is the CEO of Funds For Learning, the nation’s leading E-rate compliance services firm that helps schools receive federal funding for student Internet access and communications. Since 1997, Mr. Harrington has supported groups in all 50 U.S. states, helping schools apply for more than $1 billion in assistance through the Universal Service Funding program. This piece is exclusive to Broadband Breakfast.

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