A Better Way to Fund USF

USF-logoThe Universal Service Fund (USF) is shifting its focus dramatically and this leads me to ask if there ought to be a more equitable way to fund this effort.

Historically, the USF was established to help pay for providing telephone service in high cost and remote parts of the country. Largely, it worked and telephone networks were expanded to places that certainly never would have gotten service without these funds. Then, over the years, Congress and the FCC expanded the role of the USF and it was also used to provide telecom services to schools and libraries and to bring telecom and data services to rural health care providers. And as each of these new functions was added the size of the fund grew to over $8 billion.

But now there are big shake-ups in all of the traditional functions of the USF. Subsidies for rural telephony are being phased-out and instead these subsidies are going to be used to promote rural broadband. A significant number of billions of dollars are going to be given to companies over the next seven years that are willing to build rural broadband to places that don’t have it today. The money provided for schools and libraries has been refocused on getting gigabit connections to schools and libraries.

And so the fund is becoming very much focused on bringing better broadband to places that need it. But surprisingly, this is still being funded almost entirely by a surcharge on interstate and international telecommunications services. And there are some real problems with using interstate long distance as the base for collecting the fee.

First, the revenues used for long distance have dropped annually since the turn of the century. Long distance has gotten so cheap that it’s not something that is even noticed much by consumers any more, except perhaps in some rural communities that still charge a lot for long distance. Long distance has become such a commodity that it is often built into the base rate for telephone service. About the cheapest charge I’ve seen for this is where Charter is selling telephone lines with unlimited long distance in some of their markets for $15 per month.

The same thing has happened to interstate transport for special access service. It was routine just a decade ago to charge $4,000 – $6,000 per month for a DS3, which is about 45 Mbps of dedicated bandwidth. But today you can buy a gigabit of bandwidth for a fraction of that cost – and buy it from somebody who is not selling it as special access and who does not add a fee for USF to that charge.

As the amount spent on interstate long distance has continued to drop, the USF assessments have climbed as a percentage of the interstate revenues. I have a few clients who now have a USF assessment of over 17% of their interstate billings. Years ago this started as a rather small fee, but it is a noticeable item on customers’ bills, particularly on buyers of special access.

So if the new data-centric USF is going to work, we need to somehow expand the assessment base. Interstate telco revenues are going to continue to drop. There are only a few places that the assessment base can be expanded, but they are major sources of new revenue. First, cell phones get some USF assessment today, but not as large of a share as landlines. There is also the possibility of expanding USF to include intrastate long distance, but that gets into a messy jurisdictional fight.

The biggest way to spread out the USF fee and make it more reasonable and more sustainable is to assess it on broadband services. This is now easier to do since broadband is covered under Title II. But Congress has real heartburn against ‘taxing the Internet’ which I can’t understand. The original push to not tax the Internet came during the late 1990s as the new broadband services were growing. At that time the political wisdom was that you don’t tax a burgeoning industry and give it a chance to get on its feet.

But there is probably not a more mature industry in the country now than broadband. As far as home utilities, it now comes in third in penetration rates behind electricity and water. Adding a 50 cent per month tax on broadband would not cause any great economic burdens and would spread out the funding to the USF fund. Besides, who better to tax to get broadband to rural places and schools than all of the people who already have broadband?

Unfortunately it will take an act of Congress to change the way that the USF is funded. That is likely only to happen as part of a larger new Telecom Act, something that is overdue. But I can’t see any realistic way that this is going to happen with our split government. Republicans are likely to use a new telecom act to try to defund network neutrality and to cut back on the FCC’s powers in general. And as long as there is a democratic president a new act is not going to get signed. So I guess USF funding reform goes on hold with many other telecom issues that we ought to be addressing.

4 thoughts on “A Better Way to Fund USF

  1. Dear Doug:
    As I was reading your thesis on the need to redirect USF funding, I was kind of laughing to myself. How many of us would step up and say, “Yes, please. You need to ‘tax’ me (more) for this…” Ya, right. But that is not the most unlikely part of this equation. Read on.
    In all seriousness, you are absolutely right. The USF is being funded by an ever-dwindling pot of telephone users and revenues, and they are being asked to subsidize more and more high-cost/low-income, etc., Broadband services. The current Broadband users are not even paying for the subsidies for Broadband services, let alone anything close to ‘their fair share.’ To make the requisite adjustments would just make sense… would seem fair and just.
    I laugh because (living in Germantown Md., just outside of WDC) getting the US Congress to do ANYTHING these days — right or wrong — is an emphatic impossibility. It would be easier to get pigs to fly, than to get Congress to act.
    And as soon as an issue advocate gets a bee under their bonnet, or their pantaloons in a little wad, they buy all sorts of airtime for commercials on WTOP to wax poetic about how the wasteful Congress is about to do them wrong… We can almost hear the mournful sound-tracks now!!
    Long story short — You are right. Good luck.

    ~ Ron

  2. For clarity, internet service has for a number of years, been classified as ‘interstate’ telecom services. Your retail provider may not be charging you, but they are obligated to contribute, so this idea of expanding it to cover broadband services, has already sailed and is occurring and contributing currently.

    From the FCC website: (https://www.fcc.gov/encyclopedia/universal-service)

    The Universal Service Fund is paid for by contributions from providers of telecommunications based of an assessment on their interstate and internation end-user revenues. Examples of entities that contribute to the Fund are telecommunications carriers, including wireline and wireless companies, and interconnected Voice over Internet Protocol (VoIP) providers, including cable companies that provide voice service.

    • One would think that USF applies to customer broadband circuits, but it does not. Yes, the FCC classified Internet access as Interstate many years ago. But Congress also passed a different law that prohibited charging any taxes on Internet service. And so USAC has never assessed USF fees on general end-user broadband, nor is anybody allowed to put a tax for broadband on customers’ bills. There is USF charged on Interstate special access circuits, which means you can nail a customer a tax for buying a T1 but not for providing them with a much larger bandwidth pipe if it’s not considered as special access. It’s just one of those regulatory loopholes where broadband was classified as Interstate for one purpose but not counted as interstate for another. This is exactly the loophole that I am suggesting gets closed.

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