The 31.8% Universal Service Fund (USF) contribution factor for 1^st Quarter 2021 and the ascendency of broadband to that of an essential service for our Nation’s citizens during the Covid-19 pandemic may prove to be the tipping point on USF contribution reform. The multi-year funding commitments under several USF-funded programs underscore the need for reform, as noted in recent article in Bloomberg Law.

This blog entry assumes USF programs will retain a major role in supporting broadband availability and affordability for unserved and underserved communities and individuals, including possible expansion of the E-rate program to support broadband service for students of low-income families lacking broadband connectivity. Funding from other programs such as those administered by the Rural Utilities Service (RUS) and those enacted by Congress in the Consolidated Appropriations Act of 2021, the Coronavirus Response and Relief Supplemental Appropriations Act will likely continue for the foreseeable future.

Background

In the Telecommunications Act of 1996, Congress added a standalone provision (codified at 47 USC § 254) for funding, preserving, and advancing universal service. This provision directed the FCC to adopt a universal service program grounded on several principles, including that “consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.”

The generally accepted position that information services revenues are not USF-assessable is anchored in both the rigid, definition-based structure of the Communications Act and in § 254 (d) which establishes two classes of universal service contributors: telecommunications carriers that provide interstate telecommunications services (the “mandatory contributors”) and, as determined by the FCC (exercising its “permissive authority”) other providers of interstate telecommunications.  Telecommunications carriers and other providers are obligated to contribute, “on an equitable and nondiscriminatory basis…to preserve and advance universal service.”

The current funding mechanism implemented in 2000 is an adjustable percentage of end-user revenues for interstate (and most international) telecommunications services and telecommunications.  While likely based on trends in revenue generation during the mid-1990s, the unforeseen is now reality.  Revenues from interstate (and most international) telecommunications services and telecommunications are in decline as revenues from non-assessable information services (including Internet access services) are accelerating. The quarterly adjusted contribution factor has been on an upward trajectory for 20 years.

1^st Quarter 2002        6.8 %

1^st Quarter 2011        15.5 %

1^st Quarter 2016        18.2 %

1^st Quarter 2020        21.2 %

1^st Quarter 2021        31.8 %

Since 2002, the FCC initiated several proceedings looking to expand the base of USF-assessable services. The most consequential is the 2006 Report and Order and Notice of Proposed Rulemaking in which the FCC extended USF contribution obligations to providers of interconnected VoIP services, exercising its permissive authority under Section 254(d) and concluding these entities are “providers of interstate communications” for purposes of universal service. The Commission determined that interconnected VoIP was a competitive alternative to legacy wireline voice services and, among other factors, stressed that USF contribution obligations should be assessed on a technology-neutral basis. Importantly, the FCC had not (and still has not) classified interconnected VoIP as either a telecommunications service or an information service. 

The 2012 Comprehensive Review

The FCC’s 2012 Further Notice of Proposed Rulemaking provides a comprehensive review of previous USF reform efforts and constitutes the Commission’s last serious effort to reverse the trajectory of the USF contribution factor. The FNPRM elicited comments looking to resolve long-standing questions of whether certain services are USF-assessable and, most importantly, approaches for establishing a more sustainable USF funding base, including:

• a “value-added” approach in which each underlying service provider contributes based on the revenues it obtains rather than the current retail service model in which service providers contribute based on end-user revenues

• attributing a dollar value to the transmission component of information services and assessing USF contributions on that value

• relying on a case-by-case approach under its Section 254 (d) permissive authority to assess end-user revenues from other services per its decision on interconnected VoIP service revenues

• by assessments based on assigned wireless and wireline telephone numbers

• a connections-based system with multiple tiers based on speed or capacity increments

While a voluminous record was generated, no meaningful reforms or clarifications were adopted.

The Missed Opportunity

In the 2015 Open Internet Order, the FCC established net neutrality rules for the vast preponderance of Internet access service available in the United State, referred to as Broadband Internet Access Service (BIAS). The authority to adopt these rules was grounded in the Commission’s “re-classification” of BIAS from its longstanding status as an information service to a telecommunications service, subjecting BIAS providers to regulations under Title II of the Communications Act. However, the FCC punted on whether BIAS revenues would be subject to USF contribution rules, deferring the question to a subsequent proceeding.

The deferred proceeding on USF contributions was never initiated by Chairman Tom Wheeler and, subsequently, the Commission under Chairman Ajit Pai “re-classified” BIAS as an ‘information service” in its Restoring Internet Freedom Order. Despite fundamentally different conclusions on the status of BIAS under the Communications Act, in separate decisions, the D.C. Circuit affirmed the reclassification determinations in each of these FCC decisions.

Where Do We Stand in 2021?

At the close of his tenure as Chairman of the FCC, Ajit Pai acknowledged the challenges in funding USF programs and recommended $50 billion of the C-Band Auction receipts be set aside to fund these programs for up to five years. This contrasts to the decision of former FCC Commissioner Michael O’Reilly, as Chairman of the Federal-State Joint Board, refusing in 2019 to forward to the FCC USF contribution reform concepts offered by the Joint Board’s State Members.

USTelecom recently released its “First 100 Days: Building Our Connected Future; An Open Letter to President Biden and the 117^th Congress,” setting out a series of telecom and technology proposals, including extending broadband to the 17 million school-age children lacking broadband connectivity in their homes. To secure reliable USF funding, USTelecom recommends “…direct Congressional appropriations and expanding the base of financial support for universal connectivity beyond just telephone consumers to include a broader cross-section of the Internet ecosystem, including its largest companies.” In part, the proposal tracks AT&T’s blog post from last summer recommending Congress directly appropriate funds to support USF programs. Another commentator recently suggested major technology companies that benefit from widespread highspeed Internet access should be USF contributors.

The Path Forward Remains to be Determined

For meaningful USF reform, two questions need to be answered: Whether Congress or the FCC should take the lead in establishing more sustainable and predictable funding mechanisms and how should those funding mechanisms be structured? A related goal should be to maintain the USF contribution factor within 3% to 6% of net service charges. Currently, the USF contribution factor, state transaction taxes, and carrier regulatory cost recovery charges, collectively add 35% to 40% to the monthly charges for interstate private line service.

Based on the Commission’s consideration of the question over the last two decades, the prevailing view is that the Communications Act limits the FCC’s authority/discretion to establish a more reliable funding mechanism. More creative approaches other than those already considered likely will be required to connect the separate universes of “information services” on the one hand and “telecommunications services” and “telecommunications” on the other. Thus, a legislative solution appears warranted.

Assuming predictability is important, direct appropriations by Congress may not be the best approach. Proposals to shift funds budgeted for USF support to other programs to meet overall budget restraints in subsequent years is a risk that should be minimized. On the other hand, Congress can amend the Communications Act to expand the USF funding base.

An approach that focuses on transmission capabilities, whether an information service or a telecommunications service, would be more inclusive and technology neutral. Funding derived under this approach could be supplemented by an annual assessment on technology companies that benefit most directly from the widespread availability of highspeed Internet access service, as noted above. The assessment could equal a meaningful, adjustable percentage of the annual projected USF program funding requirements.