How to Fund Universal Broadband Service Without the Universal Service Fund

The Fifth Circuit Court of Appeals threw federal broadband policy into chaos recently by declaring the Universal Service Fund unconstitutional. The decision threatens to shut down the FCC’s longstanding system of collecting fees from telecommunications customers to subsidize rural broadband deployment and Internet access for low-income households, schools, and other programs.

But this upheaval is also an opportunity. For years, policymakers have acknowledged the need to overhaul the USF because of its ballooning fees, potential for waste, and outdated priorities. Now, with its legal foundation in question, Congress has a clear mandate to reallocate funding to vital broadband programs like the Affordable Connectivity Program (ACP), while eliminating outdated and redundant initiatives.

USF works by extracting a mandatory fee, euphemistically dubbed a “contribution factor,” telecommunications services, which is nominally paid by telecommunications companies but actually shows up on consumers’ bills. The fee is set as a percentage of how much money the USF will need to disburse every quarter. In recent years, that contribution factor has soared above 30 percent and stayed there consistently.

The Fifth Circuit’s decision centered on who holds the authority over the USF and how that authority was acquired. Though Congress authorized the FCC to create USF, that was not the end of the story. The power that Congress delegated to the FCC was tantamount to the power to tax, and the court cast some doubt on whether Congress can delegate such a core legislative function. Furthermore, the FCC subsequently delegated administrative power over USF operations to a private entity called the Universal Service Administrative Company (USAC). Even if the first delegation was proper, the court held, its combination with the second one wasn’t.

This case has created a circuit split. Two other Federal Appeals courts have upheld USF in substantially similar cases. So, it is unclear how the FCC can proceed. The Supreme Court will likely need to make that decision once and for all. There is, however, good reason to think the current Supreme Court, which has recently shown skepticism toward Congress delegating authority to administrative agencies, will uphold the Fifth Circuit’s decision.

Regardless of how the legal situation develops from here, USF is still in need of reform to put it on sounder footing and better target federal funds to the target the highest priority broadband policies.

The goal of USF should be to close the digital divide by getting people who don’t yet have Internet service online. And this should entail targeting programs to the causes of the digital divide. According to NTIA data, the biggest reasons are lack of interest and cost. A rational broadband policy, therefore, would focus funding on these issues. To address lack of interest, universal service funding should prioritize digital inclusion and literacy efforts that build trust and demonstrate the benefits of connectivity. And to address cost barriers, we need an efficient and flexible program that makes broadband affordable to low-income households. We had exactly that with the Affordable Connectivity Program (ACP), but Congress let it lapse in May.

Up until now, USF has gotten its priorities backwards. The lion’s share of USF funding went to rural broadband deployments even though NTIA data show that only 2 percent of households say lack of availability is the main reason they don’t use the Internet. At the same time, the federal government is poised to make broadband available for every household with a $42.45 billion deployment program. Even more, low-earth-orbit satellite service is now available across the country. So, a reformed USF should turn the focus from infrastructure deployment to digital inclusion and affordability. The resulting suite of programs would likely be smaller in total than today’s USF because it would be more targeted toward addressing specific problems rather than underwriting so many huge infrastructure spending projects. This alone would be a good start to deal with the bloating “contribution factor.”

Finally, Congress should directly appropriate the funding for broadband programs. Direct appropriations would avoid all the constitutional issues raised by the Fifth Circuit and provide a broader base for contributions. Appropriated funds are paid by all taxpayers, which both reflects the broad societal benefits of universal connectivity and reduces the burden on any one subset of individuals to pay for it.

The Fifth Circuit has put up a roadblock for current universal service efforts, but it was time to change course anyway. By enacting targeted reforms, federal broadband policy will be more sustainable and effective than it was before.

Joe Kane is director of broadband and spectrum policy at the Information Technology and Innovation Foundation. Previously, he was a technology policy fellow at the R Street Institute, where he covered spectrum policy, broadband deployment and regulation, competition, and consumer protection. Earlier, Joe was a graduate research fellow at the Mercatus Center, where he worked on Internet policy issues, telecom regulation, and the role of the FCC. This piece is exclusive to Broadband Breakfast.  

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