How Should We Fund Universal Service?

USACThe Universal Service Fund today is funded primarily from telephony revenues. That made a lot of sense historically because the fund was used to support programs that were mostly telephony related. Consider the following uses of USF for 2013:

High Cost Fund                      $4.17 B

Lifeline                                    $1.80 B

Rural Healthcare                    $0.16 B

Schools and Libraries            $2.20 B

Total                                         $8.33 B

The High Cost Fund and Lifeline Funds have always been used almost entirely to support telephony. And there has also always been a telephony component of the Schools and Libraries Fund even though in recent years it has been targeted more for data. With the Connect America Fund ruling of a few years ago the FCC is about to embark on a major shift in the way that USF funds are used. The High Cost Fund support, which is about half of the disbursement will be directed over time to support broadband for places that are either unserved or underserved by broadband today. This fund historically went to support rural telephony but now will support rural broadband.

Further, the Schools and Libraries program was recently redirected to use more of it’s funding to support bringing fast internet connection to schools. The goal is to bring very high-speed Internet to 99% of schools within the next five years.

Since a large portion of the USF is now being redirected towards broadband, it raises the natural question if broadband customers in the country should pay to support this fund. Years ago the FCC’s logic was that urban telephone users ought to chip in to support rural telephone users and one must ask if that same logic now makes sense for data. Today the USF is funded through surcharges on landline phones, cellular phones and special access.

The fee on landline phones has grown to as much as 16%. The USF levy on cell phones is currently around 5.8%. The surcharge on special access is also as much as 16% and this is the fee that most makes me ask the question if we are funding this correctly. These circuits are traditional TDM-based telephony and include such things as T1s, DS3s and OC48s that are sold to large customers. Consider a DS3. This is normally used to provide dedicated transport and it is equal to about 45 Mbps of dedicated bandwidth. But if a customer instead purchases a dedicated 50 Mbps Ethernet product they avoid the USF surcharge. It doesn’t make sense that two nearly identical products are treated so differently. The main reason for this difference is that the special access circuit is considered as an Interstate telephony service by the FCC while the Ethernet service is considered as an information service. Even if both are used for the identical purpose.

When DSL and cable modems were new there was a big push by the telcos and the cable companies to keep taxes away from these products. The argument made then was that the FCC should not do anything that might quash the fledgling data industry. The cry at the time was. “Do not tax the Internet”. So in response to the taxation and other issues the FCC declared that Internet connections are information services and are not telco services. This is the same classification that is causing all of the furor in the net neutrality discussion.

There have been various unsuccessful bills introduced into congress since 2006 to change the way that USF is funded. Part of this is due to the intense lobbying from the industry, but a lot of it has to do with this very sticky classification of Internet service. Congress recently asked for input to this question and got the same responses it’s gotten for a decade. Companies that sell Internet connections don’t want Internet access to be taxed and just about everybody else does.

But it makes no sense to charge as much as a 16% surcharge on landline telephones, which continue to slowly die as a product line. And it makes even less sense to penalize a company that buys a high-speed connection from a special access tariff rather than buying an alternate Ethernet product. And it makes no sense to tax the voice portion of cellphones but not the data portion. It’s time to assess the USF fee on everything telco related. In doing so the surcharge rate would be reasonably low on all products. It’s gotten out of hand now that some of the USF surcharges have grown as high as 16%.

But changing the USF formula then gets wrapped up into the whole issue of whether the FCC can regulate the Internet, because levying a surcharge in Internet product will be seen as a form of regulation. All I know is, if there is going to continue to be a Universal Service Fund that it ought to be funded as broadly as possible so as to not discriminate against some telecom products but not others. Otherwise, as landline voice continues to wane as a product the USF allocation will be shifted largely to cellphone voice. There has to be a more sensible solution.


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