Tag Archives: Universal Service Fund

Top-to-Bottom Review of USF

FCC Chairman Brendan Carr has been promising a top-to-bottom review of the Universal Service Fund (USF), and on April 29, the FCC released a Notice of Proposed Rulemaking (NPRM) that looks specifically at the High-Cost fund mechanisms that provide ongoing subsidies to ISPs operating in very rural markets. The High-Cost fund is the USF program that most people in the country (and even the industry) don’t understand.

The High-Cost program was initially created to support rural telephone companies in rural markets with the highest network costs per customer. Over time, the subsidy transitioned to provide support for rural broadband networks. Subsidies are paid today through several mechanisms: Connect America Fund Broadband Loop Support (CAF BLS), High Cost Loop Support (HCLS), and the sunsetting Alternative Connect America Cost Model (A-CAM) I, Revised A-CAM I, and A-CAM II mechanisms. Each of these plans is available to a different set of telcos or carriers, and the rules for participating in these plans are written in legalese that would probably confound most readers.

This new FCC NPRM asks a lot of questions about High-Cost support, with an eye towards possibly radically changing the program. The specific areas of questions asked by the FCC include:

Is Change Needed? The NPRM asks if these programs should be modified. It offers three options for respondents: 1) update the mechanisms to reflect the current rural broadband landscape; 2) create a new fixed-support mechanism to replace A-CAM and the other subsidies, or 3) do nothing and let the current A-CAM plan sunset over time and disappear.

Types of Support Needed. The NPRM asks about the type of support that might be appropriate in different circumstances, such as when a carrier is already providing service in an area, when a competitor appears in a rural market, or when new broadband infrastructure is being brought to a subsidy area by BEAD or other funding programs.

Impact of Satellite. The FCC asks if there should be any recognition or consideration in the subsidy plans to recognize low-orbit satellites.

Deployment Obligations. What should a high-cost subsidy recipient have to do in return for accepting the subsidies in terms of constructing infrastructure or maintaining networks?

Extension of the Current A-CAM? The payments for the current A-CAM programs will sunset between 2026 and 2028. The FCC is asking if all of the various remaining plans should be put on the same timeline.

IP Transition. The FCC wants to know if there is a role for the Universal Service Fund to be used to encourage telcos and carriers to complete the IP transition away from TDM technology.

The FCC is also looking at the other parts of the Universal Service Fund. At the end of April, the FCC voted to implement an online competitive portal where ISPs can bid to provide broadband service for schools and libraries that qualify to participate in the E-Rate program. The stated purpose for going to an online portal is to reduce waste, fraud, and abuse.

In April, the FCC issued an NPRM that asks for feedback about the Lifeline Fund. Among the FCC’s proposals in the NPRM is to end the Lifeline subsidy for telephone-only service. The agency also wants to strengthen the use of the National Verifier database that verifies eligibility. The agency was prompted into action when it was alerted that $5 million in Lifeline funds had been distributed to carriers to support service people who had died.

Finally, in April, the FCC sought comments on the structure and operations of USAC, the non-profit agency that administers the USF.

The Accelerating Rate of Deregulation

We’re less than eight months into the new administration, and when considering that short amount of time, there has been an unprecedented amount of deregulation coming out of the federal government related to broadband and telecom issues. Regulatory changes aren’t just coming from the FCC, but also from the White House, NTIA, Congress, and other agencies like the FTC.

The trend to deregulate under a Republican administration is not a surprise. For example, we heard a lot of deregulation rhetoric when FCC Chairman Ajit Pai took over the FCC. His FCC tackled deregulation, but at a much slower pace than the current administration. Brendan Carr hit the ground running in this new administration when he was named as Chairman soon after the inauguration.

Following is a list I made of deregulatory changes I can recall that have happened this year, and I’m sure I’ve missed a few.

  • Chairman Carr came in with the intentions of killing Title II regulation of broadband and net neutrality, but was spared the effort when, in early January, the U.S Court of Appeals for the 6th Circuit struck down the regulations that had been adopted by the previous FCC.
  • The FCC’s signature deregulatory thrust has been labeled as Delete, Delete, Delete, which is a streamlined way to eliminate obsolete regulations. In practice, it appears that the FCC has decided to take shortcuts and has shortened the timeline or totally eliminated the ability for public comments before regulations are eliminated.
  • The FCC canceled rules that allowed the Universal Fund to pay for WiFi on school buses. The FCC is currently killing rules that would allow the USF to fund hotspots for lending in libraries.
  • The FCC made it easier for telcos to retire copper by putting a 2-year moratorium on public notices of upcoming copper retirements. The FCC is now working to make the temporary rules permanent.
  • In perhaps the biggest change, the White House ordered NTIA to cease the implementation of the $2.75 billion Digital Equity Act that was to be used for teaching people how to use computers, making sure every household had a computer or tablet, and promoting subscription to home broadband.
  • NTIA weakened the $42.5 billion BEAD grant program. The agency:
    • Watered down the assumed preference for fiber and tried to give more funding to alternative technologies like satellite.
    • Eliminated the mandate that anybody building a BEAD network had to have at least one broadband product that would be affordable for low-income households.
    • Weakened labor requirements and got rid of the preference for prevailing and union wages.
    • Perhaps the biggest long-term impact of the BEAD changes is that NTIA has seemingly defined satellite broadband as a legitimate broadband option for homes, meaning most homes can now be said to have a broadband option.
    • It looks like all of these changes might mean a $10-$20 billion reduction from the expected $42.5 billion program.
  • The FCC stopped the implementation of lower rates for telephone and video calls in jails and prisons.
  • The Federal Trade Commission halted the implementation of Click to Cancel, which would have mandated that any company that lets a customer subscribe online must make it just as easy to cancel service online.
  • While not specifically deregulation, the FCC has ignored its own timeline for kicking off the 5G for Rural America Fund, which is supposed to bring a lot more cell towers to rural America.
  • Courts continue to weaken the FCC’s authority. Several rulings in 2024 weakened the FCC. For example, Loper Bright Enterprises v. Raimondo overturned the Chevron Doctrine, which brings into question the ability of the FCC to enact laws that were not specifically mandated by Congress. This year, McLaughlin Chiropractic v. McKesson Corp gave District Courts more leeway to disagree with rulings made by federal agencies like the FCC.

To be fair, there are some new regulations to go along with the deregulation effort:

  • The FCC adopted some new regulations for poles related mostly to how pole owners must react to large orders for getting onto poles.
  • Congress reinstituted the spectrum auction for the FCC. However, that new law may reclaim some WiFi and CBRS spectrum for auction, which is key for rural and home broadband.
  • Tariffs on most imported goods have increased the cost of building broadband networks, particularly for electronics.
  • The FCC is suddenly opining on the content on network television and has threatened the broadcast licenses of the large broadcasters.

I couldn’t decide how to categorize the recent issue where the FCC said it was going to examine and try to kill any state regulation of AI. Should that be categorized as more deregulation, or an increase in federal regulation?

This is a huge number of changes for only an eight-month period, and I have to wonder how far the deregulation effort will go over the next few years.

What’s Next for USF?

The Supreme Court recently ruled that the FCC has the authority to operate and fund the Universal Service Fund, overturning rulings by the U.S. Court of Appeals for the Fifth Circuit, which agreed with Consumers’ Research and said that the USF is unconstitutional.

This puts the issue back on the table of somehow fixing the USF, which universally is regarded as broken. The current funding mechanism of taxing interstate telephone services is becoming untenable, with the current USF fee set at 36% of the applicable revenue source.

It seems likely that only Congress can fix USF, and a bipartisan group of Senators and Representatives has created the Universal Service Working Group to take a fresh look at both the funding and the uses of the USF.

Senator Deb Fischer (R-NE), one of the members of the working group, has created a comment portal on her website to get feedback from the public on Universal Service Fund reform. This is similar to the public comments that are routinely solicited by the FCC for issues it is considering. The portal says that comments will be sent to all members of the USF working group. Comments made to the FCC are more formal and are made available to the public – these comments may remain within the working group.

The portal includes nine questions, and respondents can respond to any or all of the questions. Comments can be typed into a text box associated with each question or emailed to the working group. Comments are due by midnight, September 15. Following are the specific questions being asked by the Universal Service Working Group:

Effectiveness of the Program

  • How should Congress evaluate the effectiveness of each USF program in achieving their respective missions to uphold universal service?
  • How well has each USF program fulfilled Section 254 of the Communications Act of 1996?
  • Has the FCC adequately assessed each USF program against consistent metrics for performance and advancement of universal service?

Considerations of Reform

  • What reforms within the four existing USF programs would most improve their: Transparency, Accountability, Cost-effectiveness, Administration, and Role supporting universal service?
  • What reforms would ensure that the USF contribution factor is sufficient to preserve universal service?
  • What reforms would reduce waste, fraud, and abuse in each of the four USF programs?
  • What actions would improve coordination and efficiency among USF programs and other FCC programs, as well as broadband programs housed at other federal agencies?
  • For any recommendations on reforms, does the Commission currently have the feasibility and authority to make such changes?
  • Is the USF administrator, the Universal Service Administrative Company (USAC), sufficiently accountable and transparent? Is USAC’s role in need of reform?

Respondents are not required to answer every question, only those for which they have feedback. As can be seen, these are serious policy questions. Undoubtedly, the big industry lobbying groups will weigh in. But this is also a chance for ISPs, local governments, and school systems  to weigh in. I’m going to respond to a few of the questions. I’m available to help anybody who wants to be heard on these important questions.

USF and Cloud Services

The Computer & Communication Industry Association (CCIA) released a paper recently warning about the impact of imposing Universal Service fees on what it characterizes as cloud services. CCIA is an association that lobbies on behalf of some of the largest web companies like Amazon, Meta, Google, Apple, Netflix, and Cloudflare.

The author quantifies the impacts of imposing a USF fee on cloud service providers and uses an example of a 5% USF fee on cloud services. Some of the cited impacts include:

  • The author of the report says that the cloud service industry is extremely price-sensitive and that there would be a loss of business if a cloud service provider passes USF fees to customers. The report says that a 1% increase in the price of cloud services would result in a drop in business between 0.5% and 0.6%.
  • A 5% fee passed on to customers would decrease national GDP between $59 billion and $148 billion annually. This means impacts on State GDPs, with California having a downside as large as $25 billion, Texas an impact up to $17 billion, and South Carolina an impact of as much as $2.2 billion. To put that last number into perspective, the total annual State budget for South Carolina in 2024 was only $40.2 billion.
  • The industry invests around $54 billion annually on infrastructure, and the report suggests that this would cause the industry to cut back on new investments by $7.6 billion.
  • A 5% fee would increase overall national inflation by up to 0.13%.

It’s somewhat refreshing to see that the lobbyists in other industries are as willing to greatly exaggerate claims about the impact of regulatory and legal changes as the telecom industry. Let’s put the claims to a reasonableness test.

The total Universal Service Fund was $8.5 billion in 2024. USF is funded today entirely by a fee levied on telecommunications services. There are no proposals that I’ve seen that would ask cloud companies to fund that entire amount – the current bills being contemplated by the House and Senate would ‘equitably’ allocate the fee between telecom services, broadband services, and ‘edge services’, which is the same as what the paper calls cloud services.

It’s hard to think that the share of USF allocated to cloud companies would be much more than perhaps $3 billion per year – far smaller than the 5% increase included in the CCIA analysis. A $3 billion fee would not create the dire consequences warned by the paper.

Cloud companies are already paying a significant portion of USF fees that are imposed on the fiber circuits sold for Internet backbone. Fiber circuits to data centers are a big piece of the fiber transport network that is part of the telecom base for USF. Reducing the USF fees paid by telecom companies would significantly reduce the fees charged for backbone fiber. This might offset a significant portion of new direct fees on cloud companies.

The interesting thing that nobody knows yet is which companies in the cloud industry would pay any new fees. That’s something that would only be solidified by Congress at the time they adopted the new method of funding the USF. The fees charge to telecom companies are assessed on everyone from the giant telcos down to the smallest telco. The impact of a USF fee on cloud companies will be diluted if the fees are spread across a wider number of companies than just the large members of CCIA.

The bottom line is that the CCIA analysis is downright silly when it threatens that a $3 billion fee on cloud services might wipe out 5% of South Carolina’s annual State budget or might decrease national GDP by at least $59 billion. But you have to give it to lobbyists – the purpose of the analysis was to provide talking points for politicians in DC, and I suspect it provided the talking points CCIA was looking for.

This blog is being published on Friday morning. Later this morning, the Supreme Court should be announcing the results of the case that asks if the FCC has the authority to operate the Universal Service Fund. Expect my reaction to that case on Monday if the Court decides the FCC has the authority – expect something sooner if they don’t.

USF at the Supreme Court

The U.S. Supreme Court will hear oral arguments on March 26 in the case of FCC v. Consumers’ Research regarding the constitutionality of the Universal Service Fund. The Court will be reviewing a ruling by the U.S. Court of Appeals for the Fifth Circuit that said that the USF is unconstitutional. That ruling conflicted with rulings from two other appeal courts that largely blessed the FCC and USF.

The case that drove this to the Supreme Court was filed by Consumers’ Research, a nonprofit activist group. The 11th Circuit ruled that the method used to fund the USF is an illegal tax that didn’t have any specific direction or approval from Congress. Consumers’ Research also argues that Congress neglected its legislative responsibility by giving the collection process to the FCC. They argue that rather than specifying a budget for the USF, Congress gave the FCC the power to decide how big the fund will be.

The case might more aptly be renamed as The Telecom Industry v Consumers’ Research because parties from across the industry have filed amicus briefs supporting the FCC and the Universal Service Fund. For example, a brief was filed jointly by NTCA – The Rural Broadband Association, USTelecom, and the Competitive Carriers Association. That brief argues that the FCC has the authority to operate the USF, including the ability to oversee USAC, the day-to-day administrator of the fund.

Another brief filed jointly by NRTC, NRECA, CFC, and many other organizations focuses on the benefits of the Universal Service Fund and the impact on the public if the fund is eliminated. They also argue that the way the FCC administers the fund is constitutional.

Like almost every topic these days, the USF question has become political. A group of fifteen GOP Attorneys General filed a brief in the case that asks the Court to rule that the USF is unconstitutional. They acknowledge that a lot of good comes from the USF, but argue that it is more important to stop Congress from delegating powers to agencies.

As is usual with Supreme Court cases, the press and public will try to decipher the temperature of the justices on the issue. It’s likely that a decision won’t be rendered until this summer.

If SCOTUS scuttles the current USF, it will be up to Congress to decide if it values the functions being done by the fund. Congress could probably authorize the current USF and the FCC’s role in a law with only a few paragraphs of language. Congress could also preempt this challenge at any time before the ruling. The whole industry recognizes that the USF needs reform, particularly in the way it is funded. That’s likely to be the sticky point for finding a Congressional solution because the funding question pits a lot of powerful lobbies against each other.

USF and the New Administration

Today’s blog considers some of the changes that might be made to the Universal Service Fund (USF) by a new administration. This fund was created by the FCC to support broadband access and affordability in rural and low-income communities. The fund supports four major programs: Connect America Fund, Lifeline, E-Rate, and Rural Health Care. The fund is roughly $9 billion per year. The fund is currently paying for the rest of the RDOF subsidy to build rural broadband infrastructure. The fund will also be covering the EACAM subsidy paid for faster infrastructure for rural telcos and cooperatives. The FCC recently announced it would be using the USF funds to cover the $9 billion 5G Fund for Rural America.

Interestingly, the FCC shut Starlink out of the RDOF program in 2022. It seems too late to revisit the RDOF funding since a lot of the networks funding by that program have been funded. However, there have been some significant defaults of RDOF funding from companies like Mercury Wireless, and it’s conceivable those funds could be redirected to satellite broadband. I’m not sure what mechanism could be used to do that, but it’s possible.

The Programs. If any investigation into USF is opened, it would be natural to take a look at the programs supported by the USF to see if any should be trimmed or modified. The USF programs are generally well-regarded by Congress, but there has been criticism against some of the details of each of the programs.

Funding. The most immediate issue to address is the current USF funding framework. Telecommunications service providers are assessed a fee for interstate and international telecom, and the base of revenues has been steadily shrinking. FCC Commissioner Brandon Carr has lobbied to spread the assessment base to include tech companies like Google and Facebook. Senator Ted Cruz, who will likely be the Chairman of the Senate Commerce Committee, has suggested that the USF should be funded with general tax revenues so that Congress can have a more direct say in how the money is spent.

Adding to the likelihood that USF might be changed is that the Supreme Court has agreed to hear conflicting lower court rulings on the topic. While two courts said the FCC has the authority to operate the USF, the Fifth Circuit Court of Appeals ruled in July that the current method of funding is unconstitutional. That court referred to the fee on telecom services as a “misbegotten tax”. Another issue identified by the court is how the FCC has outsourced the operation of the USF to the Universal Service Administrative Company (USAC), a non-profit company formed for this sole purpose. A Supreme Court approval of the FCC might mean no changes, while a rejection would mandate a whole new approach.

Low-Income Broadband Subsidies. The USF currently supports the Lifeline program which provides a $9.25 subsidy for qualifying households for telephone or broadband service. There was a lot of discussion in 2024 about somehow moving the now-dead ACP plan into USF. The ACP plan provided a $30 monthly subsidy for broadband bills for qualifying households. There was a lot of bipartisan support in Congress for somehow funding ACP, and the consensus was that the issue would have passed had the issue made it to a vote.

There has been a lot of recent speculation that a lot of the $42.5 billion BEAD grants will go to satellite service. One of the original parameters from the BEAD legislation was that any ISP taking the funds is supposed to have a program to support low-income subscribers. That might be the impetus for revamping ACP to make satellite service more affordable. And that could mean renewing ACP or increasing the size of the USF.

Obviously, this is all speculation, and USF is not likely on anybody’s front burner, unless the Supreme Court puts it there. However, it seems highly likely that Congress and the FCC will revisit the USF sometime in 2025.

Can the FCC Fund the ACP?

A lot of folks have been pleading with the FCC to pick up the tab to continue the the Affordable Connectivity Program (ACP). Folks are assuming that the FCC has the ability to take on the ACP program inside the Universal Service Fund. To make that work, the FCC would have to apply a monthly assessment against all broadband users – something the FCC should have the authority to do if it votes to reinstate Title II authority over broadband at its April meeting.

What might it look like for the FCC to absorb the dying ACP program? FCC Chairwoman Jessica Rosenworcel told Congress that rolling the ACP into the USF could add $9.00 to monthly broadband and telephone bills. She also cited an internal FCC report that found that broadband bills could increase between $5.28 and $17.96 per month. I decided to kick the tires on the FCC’s estimates.

Taking over the Existing ACP. The existing ACP has 23.3 million recipients. That includes 13 million cellular customers, and the rest using landline or wireless broadband. It’s not easy to pin down the number of U.S. broadband customers that a fee might be assessed to. For example, there are numerous wholesale arrangements that would have to be defined – like assessing the fee on a landlord who includes broadband in the rent. Using a variety of sources, I assumed there about 121 million total broadband customers that could be assessed a fee to support ACP.

Funding the current ACP with a monthly fee on all broadband users equates to a monthly fee of $5.78. However, the monthly ACP fund disbursements grew 28% over the last year, so an initial fee would have to be set higher to prepare for growth over the next year. That means the starting USF fee might have to be something like $7.50 per month, and there would have to be additional future increases to the fee until the ACP fund reached equilibrium. It’s not hard to envision the broadband fee growing significantly beyond $10 per month in a few years.

This also raises the uncomfortable question about giving low-income households a $30 monthly discount and then charging the same folks to fund the program. If low-income households are excused from the USF fee, then the fee to everybody else would be increased by another 20%.

Exclude Cellular from ACP. There is a lot of controversy about giving the ACP discount to cellular customers. Almost all of the cellular companies involved in the program are cellular resellers, and most of the suspected ACP fraud involves cellular ACP claims.

If ACP is limited to landline (and fixed wireless) customers, the broadband fee would be a lot smaller. With the current number of ACP enrollees, the FCC broadband fee would be roughly $2.54 per month. However, it seems likely that a lot of ACP recipients receiving the discount on cellphones would convert that to a home broadband connection, which would quickly boost the fee.

The most common qualification for ACP is participation in the SNAP program that provides food subsidies for low-income households. There are currently 21.6 million households that get SNAP benefits, and if all of them applied for the ACP discount, the monthly fee to fund the USF would equate to  $5.36. The current economy has historically low unemployment rates, and a future dip in the economy could quickly add to households eligible for SNAP and ACP.

Assessing a Fee on Broadband Isn’t Easy. It’s more challenging than you might think to assess a fee on every broadband customers. A fee on single family homes and standalone businesses is fairly straightforward. But there are a lot of complicated broadband billing arrangements. Landlords for both residents and businesses often build broadband into the rent. Landlords might drop broadband rather than pay a fee for every tenant. There are many arrangements providing free broadband to public housing. There are many varieties of wholesale broadband relationships that would have to be figured out.

Impact of Raising Rates. It’s not hard to imagining the furor that would ensue if people drop their broadband connection as unaffordable because of the extra fee. One of Chairman Rosenworcel’s fears is that funding broadband this way would push a lot of broadband rates to an unaffordable level.

Conclusion. I think Chairwoman Rosenworcel is in the right range with her estimate if you trend the current ACP recipients to grow for a few more years. However, the FCC has alternatives. If ACP recovery was limited to home broadband and not cellphones, it looks like the fee might might top out at $6 or $7 – lower than her $9 projection. If cell phones remain eligible for ACP, it’s not hard to envision the USF fee growing far past her cited $9 fee – that might be how the FCC predicted a $17 fee.

But the real issue isn’t the size of the monthly fee – but whether the FCC is willing to take on the responsibility. If the FCC was to assess a $5 – 7 fee on every broadband user, the agency would be in the crosshairs by both sides of the political spectrum. Realistically, it also seems likely that an attempt by the FCC to implement such a fee would be challenged and end up in court for years – which wouldn’t help anybody.

The FCC is obviously being cautious, but they might be right in doing so. Tackling such a controversial solution with such high visibility would likely put the FCC under a lot of scrutiny, which might even bring the entire Universal Service Fund under attack. I know it’s not the answer that people want to hear, but the best solution is for Congress to fix ACP – unfortunately, nobody is feeling highly hopeful about that.

Universal Service Fund Under Fire

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.

Cybersecurity for Schools

FCC Chairwoman Jessica Rosenworcel recently asked the other FCC Commissioners to support a proposal to spend $200 million over three years to bolster school cybersecurity. Rosenworcel plans to issue a Notice for Proposed Rulemaking (NRPM) soon for her proposal. The NPRM will set off a round of public comments and then a ruling if a majority of the Commissioners agree with the final set of rule changes.

There seems to be some need for better school security systems. According to Emsisoft, a New Zealand-based anti-viral and anti-malware company, there were ransomware attacks on 44 U.S. universities and colleges and 45 on school districts in 2022. That was up slightly over 88 attacks in 2021. According to Emsisoft, school IT networks are a popular target since they have less security and staff with less training than corporations.

This announcement immediately raised the question for me of why the FCC is considering this. The U.S. Department of Education has a 2023 budget of $79.6 billion. I can’t help but wonder why school and university cybersecurity is not the responsibility of the USDE, state governments, or local school systems rather than the FCC.

Rosenworcel is proposing that this effort get funded from the Universal Service Fund, specifically the recently launched Learn Without Limits program that is part of the E-Rate program that subsidizes broadband connections for schools with a high percentage of low-income students. According to Rosenworcel’s press release, this could be done without undermining E-Rate’s primary mission of promoting digital equity for schools.

The E-Rate program is perhaps the most popular program at the FCC since it helps poor school districts afford gigabit broadband connections. I can see why the FCC wants to ride that wave of popularity. Rosenworcel has made other interesting proposals recently that would also come from the E-Rate program.

For example, Rosenworcel recommended that E-Rate be used to provide mobile hotspots on school buses. That seems to be an extension of bringing broadband to schools, to bring broadband to students who have long bus rides. She’s also recommended that E-Rate be used to provide Wi-Fi hotspots for students and library patrons. This also extends broadband to students but seems to be in competition with the funding from the Infrastructure Investment and Jobs Act, which is providing billions of dollars for digital equity that would also provide money for hotspots.

The main reason this raises an issue for me is that the Universal Service Fund is funded with an ever-increasing fee burden on voice lines and interstate broadband services. There has been widespread unhappiness with the FCC USF fees. There doesn’t seem to be any appetite at the FCC to let the size of the Universal Service Fund shrink when it makes sense. Instead, the FCC keeps finding new ways to spend the pot of money.

While cybersecurity for schools seems like an important function, cybersecurity is not broadband. If the FCC can sink money into cybersecurity in this manner, then what’s next – money for training for school system IT employees? I’m sure I’ll get some negative comments about my position, but I am not against somebody helping schools with cybersecurity issues. I just can’t see why this is the responsibility of the FCC.

The FCC and USF

The FCC quietly won two court cases over the last month that most folks have not heard about. A group of complainants brought a suit against the FCC, saying that the agency didn’t have explicit direction from Congress for the creation of the Universal Service Fund (USF) or the authority to delegate the operation of the USF to a third party. Years ago, the FCC prompted the creation of the non-profit firm Universal Service Administrative Company (USAC) to administer the day-to-day operations of the $10 billion fund.

The plaintiffs pleaded that the FCC didn’t have the constitutional authority to create the Universal Service Fund since that was not specifically spelled out by Congress. Specifically, plaintiffs argued that the FCC was violating the nondelegation doctrine, a legal principle that says that Congress cannot delegate its legislative powers to other entities.

The first ruling was issued by the Fifth Circuit Court of Appeals and the ruling came down squarely on the side of the FCC. The Court said that Section § 254 of the Telecommunications Act of 1996 had given the FCC explicit authority to advance and preserve universal telecommunications service and that the agency’s decision to create the USF falls under that authority given to the FCC by Congress. A similar decision was recently reached by the Sixth Circuit Court of Appeals.

The Universal Service Fund has always been controversial, and this is not the first challenge to its authority. There are a lot of people who don’t think the FCC should effectively have the power to levy a tax on telecommunications services, the primary tool for funding the USF. The FCC is careful to call this a fee, but to folks who pay it, the distinction between a fee and a tax is hard to see.

The Courts also upheld the FCC’s right to delegate the administration of the Universal Service Fund to USAC. The courts noted that USAC is purely administrative and doesn’t have any authority to create rules. The rulings found that USAC makes proposals to the FCC on ideas for using the fund – ideas the FCC is free to ignore.

If the FCC had lost these cases, it would have been devastating to some highly popular programs. The most popular is probably the Schools and Libraries (E-Rate) program, where the FCC subsidizes fast Internet connection for schools that have a high percentage of low-income students. The USF also administers subsidies to get broadband to rural healthcare facilities and the Lifeline program that provides a discount on broadband bills.

Probably the most controversial use of the USF is the Connect America Fund which provides subsidies to support rural broadband. The fund was used for the CAF II program that was supposed to improve rural DSL for the largest telcos – at a time when DSL was already obsolete and copper wire maintenance was nonexistent. This money was used to create the often-criticized RDOF program that held a reverse auction for funds to support rural broadband. The FCC has been studying the use of the fund to build more rural cell towers.

The FCC is not entirely out of the woods, and there is one more similar challenge to its authority pending in the 11th Circuit Court. Historically, strong rulings like the first two would limit the chance of a different ruling in another court. However, it seems lately that courts are more independently making decisions that are not based on prior rulings.

It would be an interesting scenario if the FCC’s authority to operate the USF is ended. All current broadband subsidies would likely come to a screeching halt. It’s likely that at least a few states would leap in and fill such a void, but that would mean a plethora of subsidy programs by states – which also could be challenged. But it would also likely mean that many states would do nothing.