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With Universal Service Fund Contributions at 32 Percent, Experts Debate Its Sustainability

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Photo of South Dakota Public Utility Commissioner Chris Nelson from Hub City Radio

January 29, 2021 – With contributions into a program intended to extend basic telecommunications services to all Americans now adding an additional 32 cents on top of every dollar of telecommunications service, experts on January 15 debated whether, and how, the Universal Service Fund can be sustained.

There seem to be two proposed solutions to what all agreed was an untenable status quo: First, Congress could appropriate USF out of general revenues. Alternatively, mandatory contributions into the USF could be broadened beyond voice telecommunications services and begin to level fees on broadband internet.

Either way, change seems to be coming, said the four panelists mulling the program at a forum convened by the Federal Communications Bar Association.

Currently, the USF program only requires telecommunications and voice-over-internet protocol providers to collect a percentage of revenues. That percentage amount is set quarterly by the Universal Service Administration Company, a non-profit entity that has been delegated this task by the Federal Communications Commission.

The USF fund administered by USAC pays for programs that expand telecommunications and broadband to rural areas, and also to lower-income Americans, schools and libraries, and rural healthcare.

Now there is a 31.8 percent fee added to all voice telecom bills

In December, the FCC released a public notice that the January through March 2021 contribution was 31.8 per cent of user revenues, a new record. Companies can decide whether to pay it from their own reserves or pass it on to subscribers.

Many agree the program, which is runs about $10 billion per year, is unsustainable. That’s particularly so with voice service revenues declining.

Chris Nelson, vice chairman of the South Dakota Public Utilities Commission, said taxing broadband service would be acceptable because “we tax everything else.” He alluded to the taboo call for taxing the internet and said that he struggled to make sense of it. He argued that a higher number of landline telephone users are elderly. It doesn’t make sense to charge them more, he said.

Nelson, who is part of a bipartisan organization that has been pressing for USF reform for years, said a hybrid model would work best. That is, half of the contribution can come from residential connections (at a cost to the customer about 55 to 60 cents) and the other half can come from enterprise, at about 8 percent of revenues.

Part of the reason for the increase is what some see as the inverse relationship between telecom revenues and the contribution — as telecom revenues decline, the relative contribution amount increases. John Windhausen, executive director of the Schools, Health and Libraries Broadband Coalition, said telecom revenues have declined from $67 billion at one point to $34 billion, pointing primarily to the decrease in wireless revenues over the years. Windhausen estimated that expanding the USF base to include broadband revenues would push the contribution down to 2.5 per cent. That won’t affect broadband adoption, he said.

“Including the broadband revenues into the base provides a more stable funding base, so the base of broadband revenues and telecom revenues together is increasing, and there’s even the possibility that the contribution factor would come down in the future as the base of broadband revenues continues to increase,” Windhausen said.

Windhausen added that Congress can supplement this proposed model with appropriations, but said that an appropriation model shouldn’t wholly replace the current fund.

Some say that the revolving Universal Service Fund should be replaced by congressional appropriation

On the flip side, some are clamoring for congressional appropriations, which proponents argue would allow for more stability from broad taxation and would open up the fund to more legislative oversight. AT&T and former FCC chairman Ajit Pai have pushed for this model.

Earlier in January, Pai suggested $50 billion from the record-setting windfall of the ongoing C-Band spectrum auction should be put into the USF for the next five years.

Mary Henze, assistant vice president of federal regulatory affairs at AT&T, doubled-down on this model as a panelist. She said the USF should move to have a congressional budget line item. That was a position also supported by Daniel Lyons, professor at the Boston College Law School who teaches telecom law. He has historically pushed that position, he said.

Lyons said the program would be subject to direct congressional oversight, which would address any fraud or abuse issues in the existing system through inquiries and hearings. He also said direct appropriations would avoid the “market distortions” of trying to tax some goods and not others to fund the program, such as a surcharge on connections or broadband service.

Screenshot from the FCBA event

“They encourage strategic behavior by consumers,” said Lyons, referring to efforts to make communications services fall outside the jurisdiction of the FCC.

Henze said part of solving the market distortion problem is to bring technology companies into the base to spread the contribution out further so it is ultimately less harmful to individual companies or consumers.

The timeline for taxing broadband would also be a problem, Henze argued. Whereas she said it could take companies another year to make that adjustment, Congress, which is now be controlled by Democrats, can quickly put appropriations on budget. Windhausen suggested potentially asking Congress to give the FCC a deadline to come up with a new contribution mechanism in 18 months.

Opponents of making it a congressional budget item included Nelson. He conceded that his opposition come down to politics: Turnover of members of Congress could mean radically different views on appropriations from year to year.

If your company has any questions regarding the steep hike in USF contribution factor or would like to engage in a Communications Taxes & Fees “Optimization” to potentially minimize the economic impact of the ever-skyrocketing Federal USF contribution costs and end user pass-through surcharges, please contact Jonathan S. Marashlian of The CommLaw Group at jsm@commlawgroup.com or 703-714-1313.

Assistant Editor Ahmad Hathout has spent the last half-decade reporting on the Canadian telecommunications and media industries for leading publications. He started the scoop-driven news site downup.io to make Canadian telecom news more accessible and digestible. Follow him on Twitter @ackmet

Universal Service

Universal Service Fund in Need of Reform, Said Panelist at Broadband Community Summit Event

The Universal Service Fund’s base is shrinking.

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Photo of Carol Mattey speaking.

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.”

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FCC

Petition Challenges Constitutionality of Roles FCC, USAC Play in Universal Service Fund

The legal brief comes at a time when the FCC studies the future of the fund.

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Illustration from Consumers' Research

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.

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Expert Opinion

John Harrington: The FCC’s Proposed E-Rate Bidding Portal Expands Federal Power, Not Local Decision Makers

This shift away from local autonomy for procurement would be the most radical change to the program since its inception.

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The author of this Expert Opinion is John Harrington, CEO of Funds For Learning.

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.

Broadband Breakfast accepts commentary from informed observers of the broadband scene. Please send pieces to commentary@breakfast.media. The views expressed in Expert Opinion pieces do not necessarily reflect the views of Broadband Breakfast and Breakfast Media LLC.

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