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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.

Managing 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.

Broadband's Impact

Tech Trade Group Report Argues for USF Funding from Broadband Companies

Consulting firm Brattle Group said in a report the move would be economically sound.

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Screenshot of Chip Pickering, INCOMPAS CEO

WASHINGTON, September 19, 2023 – Tech company trade group INCOMPAS and consulting firm Brattle Group released on Tuesday a report arguing for adding broadband providers as contributors to the Universal Service Fund.

The USF spends roughly $8 billion each year to support four programs that provide internet subsidies to low-income households, health care providers, schools, and libraries. The money comes from a tax on voice service providers, causing lawmakers to look for alternative sources of funding as more Americans switch from phone lines to broadband services.

The Federal Communications Commission administers the fund through the Universal Service Administration Company, but has left it to Congress to make changes to the contribution pool.

The report argues that broadband providers should be one of those sources. It cites the fact that USF funds are largely used for broadband rather than voice services and that broadband adoption is increasing as phone line use decreases.

“The USF contribution base needs to change to account for the fact that connectivity implies not just voice telephone services, but predominantly broadband internet access,” the report says.

It also rebuts arguments for adding tech companies like INCOMPAS members Google and Amazon to the contribution pool, saying they represent a less stable source of income for the program and that added fees for services like streaming could affect . 

The report is the latest salvo in an ongoing dispute between tech companies and broadband providers over who should support the USF in the future, with broadband companies arguing big tech should be tapped for funding as they run businesses on the networks supported by the fund.

Sens. Ben Lujan, D-N.M., and John Thune, R-S.D. established in May a senate working group to explore potential reforms to the program. The group heard comments in August  from associations of tech and broadband companies, each outlining arguments for including the other industry in the USF contribution base.

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Universal Service

Rural Providers Urge FCC to Verify Unsubsidized Coverage Ahead of Enhanced ACAM Awards

The FCC’s challenge process is insufficient to allocate Enhanced ACAM funds, the Rural Broadband Association said.

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Screenshot of Michael Romano, executive vice president of the NTCA

WASHINGTON, September 18, 2023 – Rural broadband companies are pushing the Federal Communications Commission to require unsubsidized providers to prove their coverage in rural areas.

The calls come weeks after the FCC announced funding offers under the Enhanced Alternative Connect America Cost Model, or Enhanced ACAM. The model allocates support to providers already receiving funding through the Universal Service Fund.

The new allocation of funds takes into account whether an area is already served at the required speed threshold – 100 Mbps download and 20 Mbps upload, faster than the previous Connect America Cost Model – by an unsubsidized provider. Areas the FCC deemed to be served only by an unsubsidized provider were excluded from awards and less money was made available to recipients operating in the same area as an unsubsidized provider.

Providers who were offered Enhanced ACAM funding must accept or decline their offers by September 29, but the FCC will accept challenges from awardees and make adjustments to the awards until 2025.

In a September 15 filing to the FCC, NTCA – The Rural Broadband Association said the process for challenging these determinations is insufficient and urged the agency to require unsubsidized carriers to certify their reported coverage where Enhanced ACAM funds .

The challenge process is lacking, the association said, because it relies on the FCC’s broadband map and the accompanying challenge procedures. 

The map data includes maximum speeds available at a given location, but it does not reflect potential decreases in speed that happen when many people are simultaneously using a fixed wireless network – the technology many rural providers use – and does not include information on standalone voice service, which a provider must offer to meet the agency’s definition of an unsubsidized competitor.

The agency told Enhanced ACAM recipients to submit concerns on these and other issues not captured by the map via public comment in its docket system and to challenge unsubsidized coverage and speeds through its standard broadband map challenge process

FCC speed data is also difficult to challenge, the NTCA said in its filing. Challenges alleging a carrier’s provided speed is lower than that recorded in the data cannot be submitted in bulk, but must be submitted individually. That makes it difficult to determine if an unsubsidized provider offers lower speeds than they reported for large areas.

Requiring certifications from unsubsidized providers would provide “a well-structured and well-defined supplemental process,” for submitting challenges to Enhanced ACAM allocations, the association wrote.

The NTCA met with agency officials ahead of the award announcements to ask for the same certification, according to an ex parte filing from July 24.

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Universal Service

Telecoms and Tech Giants Disagree on Where to Find More Universal Service Funds

The USF is facing dwindling funds and pending court challenges.

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Photo of Sen. Ben Luján, D-N.M. from his Senate office

WASHINGTON, August 29, 2023 – Telecommunications companies and tech giants disagree on who should provide funding for the Universal Service Fund.

The fund’s money comes from a tax on voice service providers, putting its future in jeopardy as more Americans switch from phone lines to broadband services. The USF spends roughly $8 billion a year to buoy four programs that provide internet subsidies to low-income households, health care providers, schools, and libraries.

In filings submitted to a Senate working group evaluating potential reforms to the program, telecoms argued in public comments that some of this money should be paid by tech companies who provide online services. Tech companies advocated tapping more broadband providers for funds.

The Computer & Communications Industry Association, a trade group representing some of the biggest tech companies in the U.S., said in an August 21 filing that the USF could be saved by one action: “include all providers of internet connectivity in the USF contributions base.”

The National Telephone Cooperative Association, a group of smaller broadband providers that serve rural areas, argued in an August 25 filing that tech companies gain so much from expanded broadband coverage that they should pay directly into the USF, saying “internet-based businesses that benefit from widespread availability and affordability of broadband should contribute to that objective.”

The constitutionality of the USF’s funding model is being questioned in court. On September 19, the Fifth Circuit Court of Appeals will rehear a case brought by the conservative nonprofit Consumers’ Research. 

The group argues that in establishing the USF with the Telecommunications Act of 1996, Congress gave the FCC unfettered authority to collect taxes. It also alleges that the FCC has abused this authority by delegating the distribution of funds to a subordinate organization, the Universal Service Administration Company. 

The Fifth Circuit originally struck down the petition, saying Congress put adequate guardrails on the FCC’s authority. Three of its five judges were present to hear arguments and hand down a ruling, but the rehearing in September will involve the full court.

The Sixth Circuit denied a similar petition from Consumers’ Research on the same grounds as the 5th Circuit. The group has suits pending in the Eleventh Circuit and D.C.

Sens. Ben Luján, D-N.M., and John Thune, R-S.D., convened the working group in May to evaluate potential reforms to the USF’s structure and guide future policymaking.

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