Funding the USF

The Universal Service Fund (USF) has a bleak future outlook if the FCC continues to ignore the funding crisis that supports the program. The fund continues to be funded with a fee levied against the combined Interstate and international portion of landlines, cellphones and certain kinds of traditional data connections sold by the big telcos. The ‘tax’ on Interstate services has grown to an indefensible 25% of the retail cost of the Interstate and international portion of these products.

The FCC maintains arcane rules to determine the interstate portion of things like a local phone bill or a cellular bill. There are only a tiny handful of consultants that specialize in ‘separations’ – meaning the separation of costs into jurisdictions – who understand the math behind the FCC’s determination of the base for assessing USF fees.

The USF has done a lot of good in the past and is poised to do even more. The segment of the program that brings affordable broadband to poor schools and libraries is a success in communities across the country. The USF is also used to subsidize broadband to non-profit rural health clinics and hospitals. I would argue that the Lifeline program that provides subsidized phone service has done a huge amount of good. The $9.25 per month savings on a phone or broadband bill isn’t as effective today as it once was because the subsidy isn’t pegged to inflation. But I’ve seen firsthand the benefits from this plan that provided low-cost cellphones to the homeless and connected them to the rest of society. There are numerous stories of how the subsidized cellphones helped homeless people find work and integrate back into society.

The biggest potential benefit of the fund is bringing broadband solutions to rural homes that still aren’t connected to workable broadband. We’ve gotten a hint of this potential in some recent grant programs, like the recent CAF II reverse auction. We’re ready to see the USF create huge benefits as the FCC starts awarding $20.4 billion in grants from the USF, to be dispersed starting in 2021. If that program is administered properly then huge numbers of homes are going to get real broadband.

This is not to say that the USF hasn’t had some problems. There are widespread stories about fraud in the Lifeline program, although many of those stories have been exaggerated in the press. A decent amount of what was called fraud was due to the ineptitude of the big phone companies that continued to collect USF funding for people who die or who are no longer eligible for the subsidy. The FCC has taken major steps to fix this problem by creating a national database of those who are eligible for the Lifeline program.

The biggest recent problem with the USF came when the FCC used the fund to award $11 billion to the big telcos in the CAF II program to upgrade rural broadband to speeds of at least 10/1 Mbps. I’ve heard credible rumors that some of the telcos pocketed much of that money and only made token efforts to tweak rural DSL speeds up to a level that households still don’t want to buy. It’s hard to find anybody in the country who will defend this colossal boondoggle.

However, we’ve learned that if used in a smart way that the USF can be used to bring permanent broadband to rural America. Every little pocket of customers that gets fiber due to this funding can be taken off the list of places with no broadband alternatives. Areas that get fixed wireless are probably good for a decade or more, and hopefully, those companies operating these networks will pour profits back into bringing fiber (which I know some USF fund recipients are doing).

But the USF is in real trouble if the FCC doesn’t fix the funding solution. As traditional telephone products with an interstate component continue to disappear the funds going into the USF will shrink. If the funding shrinks, the FCC is likely to respond by cutting awards. Somebody might win $1 million from the upcoming grant program but then collect something less as the fund decreases over time.

The fix for the USF is obvious and easy. If the FCC expands the funding base to include broadband products, the percentage contribution would drop significantly from the current 25% and the fund could begin growing again. The current FCC has resisted this idea vigorously and it’s hard to ascribe any motivation other than that they want to see the USF Fund shrink over time. This FCC hates the Lifeline program and would love to kill it. This FCC would prefer to not be in the business of handing out grants. At this point, I don’t think there is any alternative other than waiting for the day when there is a new FCC in place that embraces the good done by the USF rather than fight against it.

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