Do We Still Need the Universal Service Fund?

There is currently a policy debate circulating asking who should pay to fund the FCC’s Universal Service Fund. For decades the USF has collected fees from telephone carriers providing landline and cellular phones – and these fees have been passed on to consumers. As landline telephone usage has continued to fall, the fees charged to customers have increased. There have been calls for years to fix the USF funding mechanism by spreading the fees more widely.

Since the fund today is mostly being used to support broadband, the most logical way to expand funding is by collecting the fee from ISPs – which would also likely pass the fees on to consumers. A new idea has surfaced that suggests that the USF should instead be funded by the biggest users of the Internet – being Netflix, Google, Facebook, and others. This argument was likely started by the big ISPs who wanted to deflect the fee obligations elsewhere. The argument is that the big web companies get tremendous benefits from the Internet without paying towards the basic infrastructure.

As I’ve read this back-and-forth debate, I was struck by a different thought. Instead of expanding funding for the USF, we ought to be talking about curtailing it. The Universal Service Fund is used for several purposes. USF funds the subsidies to get cheaper broadband for schools and libraries. The fund also pays for getting better broadband for rural health care facilities. These seem like worthwhile programs that should continue to be funded.

But the USF also has been supporting the Lifeline program that gives a $9.25 monthly discount to qualifying low-income homes. The amount of that monthly subsidy hasn’t been changed in years and has become more irrelevant over time. Some of the big ISPs have completely dropped out of the program, such as AT&T that ditched participation in most states where it is still a telco. There were always rumors that the fund included a lot of fraud – but we never saw enough detail to ever understand if this was true.

It seems like the current White House and Congress have a better alternative to Lifeline. The ARPA bill created the Emergency Broadband Benefit that gives low-income homes a $50 discount on broadband during the pandemic. Congress has suggested replacing that with a more permanent $30 discount. If Congress gets its act together and passes the infrastructure bill, then it’s time to have a serious talk about eliminating the FCC’s Lifeline program. There is no need to have both programs.

The final use of the Universal Service Fund is what I often refer to as the FCC’s slush fund. The FCC lets this fund accumulate and supposedly uses it to improve broadband in the country. But frankly, the FCC is terrible at this. Consider the history of this piece of the USF:

  • This money was originally intended to support rural telephone companies. State regulators capped telephone rates in most states in the range of $15 – $20 per month, and that was not enough revenue to support the telephone networks in high-cost areas. The Congress and the FCC had decided many years ago that the U.S. economy was best served if everybody was connected to the telephone network, and this might have been the biggest boon to rural America after electrification. This was an effective policy, and at one point, we had a 99% telephone penetration rate in the country. This fund was needed, but had big flaws. The FCC handed out the money based on formulas instead of looking at the need of individual telcos. This resulted in some telcos and commercial telco owners getting incredibly rich from an over-generous subsidy. There was never any serious attempt at the FCC to get this right.
  • But as landline telephone service has been transplanted by cellular service and VoIP, the FCC transitioned this fund to subsidize rural broadband. Perhaps the best use of the funding was the ACAM program that gave money to rural telcos, many of which leveraged the money and took big loans to build rural fiber. When people marvel at the amount of rural fiber in the Dakotas – it was funded by the ACAM program. But this plan also had some faults when some telcos used the ACAM to upgrade DSL and pocketed much of the subsidy.
  • After this, the FCC used the slush fund for a series of disastrous funding plans. The first was CAF II, where the FCC gave $11 billion to the largest telcos to upgrade rural DSL to 10/1 Mbps. This funding was given at a time when 10/1 Mbps was already too slow. A few telcos used the money properly but made little dent in improving broadband since tweaking out-of-date rural DSL didn’t make broadband much better. I’m not alone in thinking that some of the big telcos pocketed much of this money. They made a few cosmetic upgrades but largely used the money straight to bottom line profits. The FCC was so aghast at the way this funding was wasted that it tacked on an extra $2 billion payment to the telcos after the end of the program.
  • Next, the FCC held a small reverse auction with some money left over from CAF II. Some of this money went to worthwhile fiber projects, but money also went to ISPs like Viasat – a mind-numbing use of federal subsidies.
  • Next came the RDOF reverse auctions. I think we’ll look back a decade from now and judge that this funding did far more harm than good. If you follow my blog, you know I believe that the FCC mucked up this program in half a dozen ways, each of which will have long-term consequences in the neighborhoods where the FCC got it wrong.
  • Finally, the FCC tried to fund a $6 billion 5G fund that would have handed subsidies to cellular carriers to extend cell coverage into areas where it’s needed. But there was so much deception in the reporting of rural cellular speeds that the FCC finally pulled the plug on this – although I think this idea is likely to roar back to life one of these days.

The bottom line is that the FCC is incredibly inept in administering the slush fund. I don’t know why anybody would think that a regulatory agency made up mostly of industry lawyers could be the best place to entrust billions of dollars of broadband funding. It’s hard to imagine that the FCC could have done any worse over the last decade with this slush fund. I’m pretty sure that any six readers of this blog could have chatted over beers and come up with better ways to use the money.

So rather than have the debate of whether AT&T or Facebook should fund the Universal Service Fund – why don’t we have the debate about largely eliminating the fund? I can’t think of any reason why we should continue to let the FCC gum up rural subsidy programs. Let’s find a way to fund the school, libraries, and rural health care, and let’s get the FCC out of the business of goofing up subsidies.

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