There have been several lawsuits over the last few years that challenge the legitimacy of the FCC’s Universal Service Fund (USF). A suit from a non-profit group called Consumers’ Research argues that USF fees are actually taxes and that the original creation of the USF was unconstitutional since it gave the FCC the power to levy taxes.
Several lawsuits have already been decided in favor of the FCC in the 5th and 6th U.S. Circuit Courts of Appeals. But in June, the 5th Circuit, based in New Orleans, agreed to rehear the case before the full court. That hearing was held last week and press reports say that the questions at the hearing seemed to be in favor of the petitioners who want to shut down the USF.
There is also an appeal of the other rulings that are pending before the U.S. Supreme Court. There is also a case from Consumers’ Research that is pending at the 11th Circuit and the D.C. Circuit Courts.
The Universal Service Fund has been popular with the public and many politicians because the FCC has been using the USF to tackle issues that are broadly referred to these days as the digital divide. The E-Rate program provides subsidized broadband to make sure there is connectivity in the poorest schools in the country. The Rural Health Care program subsidizes broadband connections for rural healthcare clinics.
A few of the USF programs have been more controversial. The Lifeline Program was originally used to provide a discount for telephone bills for low-income homes but has been repurposed to provide broadband discounts. Critics have charged for years that the program was rife with fraud, but the FCC finally instituted a portal that does a better job of verifying eligibility. The High Cost program has provided subsidies and grants to extend rural broadband. Among the programs have been a few that are controversial such as the CAF II program that gave subsidies to the biggest rural telcos to increase DSL speeds to 10/1 Mbps, and the more recent RDOF program that allocated subsidies to unserved parts of the country through a reverse auction. The FCC is considering using this fund to expand rural cellular towers.
The biggest issue facing the USF is that the funding mechanism is inadequate. The fees that fund the USF are assessed on Interstate telephone services and traditional Interstate regulated data circuits – revenue streams that continue to shrink. The USF fee on these items has continued to creep upward to make up for the shrinking and has grown to become a 30% fee on the services.
One of the obvious fixes to the funding would be to spread the USF fee over the huge number of broadband subscriptions in the country. This makes a lot of sense since the Universal Fund is used almost entirely these days to tackle broadband gaps. But the big ISPs have lobbied heavily against the idea and have instead been pushing for the fee to be assessed to big tech companies like Amazon, Google, Meta, and Apple. The big ISPs say it would be unfair for them to subsidize the web giants, It’s an argument I’ve never fully understood since the ISPs wouldn’t be paying the fees and would pass the fees on to consumers. The big web companies have an equally powerful lobby these days and have fought against this idea. This is an argument that has been going on for several decades but has been heating up over the last year as it’s becoming obvious that the Universal Service Fund cannot remain viable with the existing funding mechanism.
The USF seems to be popular with federal legislators, but there has been no noticeable movement in Congress to fix the USF funding mechanism. The original funding mechanism was established by the FCC from authority granted by the Telecommunications Act of 1996, which is badly out of date with the modern broadband industry. Congress could fix the funding mechanism at any time, but it doesn’t seem like legislators want to choose between the big ISPs and tech companies.
All of this could be made mute if a Court rules that the way that the FCC funds the USF is unconstitutional. The USF could theoretically be shut down quickly if the funding mechanism is turned off. That would mean the end of Lifeline discounts, of broadband payments to schools, libraries, and health care clinics, and a cessation of funding for RDOF and ACAM. Congress could fix the issue by creating an actual tax instead of a fee set by the FCC – and perhaps it will take a drastic court action to get Congress to act.