Tag Archives: USF

The Courts Tackle USF

The U.S. Court of Appeals for the Fifth Circuit in New Orleans ruled, in a 9-7 vote, that the FCC’s Universal Service Fund structure is unconstitutional. The ruling comes in response to a lawsuit brought by Consumers’ Research, a conservative non-profit corporation.

The Fifth Circuit opined: In the Telecommunications Act of 1996, Congress delegated its taxing power to the FCC. FCC then subdelegated the taxing power to a private corporation. That private corporation, in turn, relied on for-profit telecommunications companies to determine how much American citizens would be forced to pay for the ‘universal service’ tax that appears on cell phone bills across the Nation. We hold this misbegotten tax violates Article I, § 1 of the Constitution. That constitutional article vested taxing power in Congress. . . Our court today holds that the delegation of Congress’s taxing power, first to a federal agency, and then to a private entity, violates the Vesting Clause of Article I of the Constitution.

Two other appeal courts have recently ruled in favor of the FCC on two similar complaints. The Supreme Court refused to take an appeal of one of those rulings.

It’s an interesting legal ruling because Congress clearly gave the FCC the authority to establish the Universal Service Fund and to create public fees to fund it. Attacks on the USF have often centered around the FCC’s decision to establish the non-profit corporation USAC (Universal Service Administration Company) to operate the USF. My recollection is that USAC was created so that a wide variety of industry players and the public would have input into operating the USF rather than letting it be done by the politically appointed FCC Commissioners. The FCC wisely didn’t want FCC politics to interfere with the day-to-day operation of the USF.

For those of you not familiar with USAC, the company has an operating statement that the entity “does not make policy or interpret statutes or rules or the intent of Congress, the FCC, or any state or federal agency. The Board is comprised of members that represent a wide range of the telecom industry from telcos, long-distance companies, cellular carriers, cable companies, schools, libraries, Tribal communities, rural health care organizations, state regulators, consumer advocates, and the public.

The other long-term argument against the Universal Service Fund is that the fee assessed against telephone services and other related products is a tax and not a fee. Congress clearly had the intention when it created the USF that fees would be used to fund and operate the missions of the USF. The argument in this lawsuit is that FCC has granted tremendous power to a private company to establish a tax that people pay on their phone bills. I suspect that if the FCC had decided to directly administer the fund the argument would be that it is unconstitutional for the FCC to impose a tax on people.

The judges that ruled against the USF clearly don’t like what Congress ordered in 1996. They are hiding behind the argument that delegating the operations of the USF to USAC somehow makes the process unconstitutional. It’s odd that a ruling like this can be made 28 years after Congress directed the FCC to create the Universal Service Fund. It’s an issue that courts have heard for years, and they always sided with the FCC and USAC.

This is all part of the bigger political battle over who has the power to make decisions – the White House, Congress, or the Courts. This ruling, which used the term ‘misbegotten tax’ to describe USF fees, is clearly not coming from the neutral arbiter we expect from the court system. Unless some semblance of normalcy between the branches of government is reestablished at the federal level, we’re likely going to see more court decisions that overturn issues and practices that we assumed were settled long ago.

Subsidizing Rural Broadband Networks

We are preparing to award over $44 billion to construct rural broadband networks. Almost by definition, these networks will be built in rural areas where it’s hard to justify a business plan where revenues generated from the grant areas are sufficient to fund the ongoing operation and eventual upgrades to any broadband networks.

The FCC has addressed this issue in the past, and numerous FCC programs have provided ongoing subsidies for rural broadband networks. The FCC has been very careful over the past decades to create separate subsidies for small telephones and cooperatives versus the largest telephone companies. The reasons for the distinction had to do with economy of scale. A higher level of subsidy has been provided to smaller telcos since it was reasoned that small rural companies have a hard time staying afloat without a subsidy.

Conversely, the historic reasoning of regulators was that large telcos didn’t need as much subsidy, or even any subsidy since the big companies also operated in county seats and large cities. Historic regulation assumed that the profits generated in urban and suburban areas could be used to subsidize rural areas.

The original subsidy to small telcos came from the Universal Service Fund (USF). Not every small telco received a subsidy, and the amount of any FCC subsidy was calculated according to the cost structure of each small telco. Small companies would annually calculate costs, and the amount of subsidy benefited the rural companies with the highest costs.

The FCC adopted a major change to the rural subsidy program in 2014 with the USF/ICC Transformation Order. This made the compensation for small telcos more complicated and created different subsidies for different kinds of costs – but the subsidies still benefited the highest-cost small telcos. The subsidy program for small telcos eventually morphed to include the A-CAM program.

Before the USF/ICC Order, only a small portion of big telephone company areas were eligible for any USF subsidy. The ICC Order was a huge win for big telcos, and subsequent to the Order, the FCC created the CAF II subsidy for the most rural locations served by the big telcos. Suddenly, many billions of dollars of subsidy flowed to big telcos to upgrade rural DSL speeds to at least 10/1 Mbps.

In recent years, the FCC opened subsidy programs to a wider range of carriers than just incumbent telephone companies. Both the CAF II reverse auction and the Rural Development Opportunity Fund (RDOF) were conducted using a reverse auction and were available to any ISP. Some of these funds went to telcos, but also went to cable companies, fixed wireless ISPs, and new start-up fiber overbuilders.

This history raises an interesting question. The BEAD grants are not a subsidy program. As a grant program, practically every dollar spent with BEAD funds must be used to build broadband infrastructure – with only some minor reimbursements allowed to cover the cost of complying with the grant paperwork. The BEAD money does not cover any operating expenses for the rural networks that will be built.

In a post-BEAD world, there will be a reshuffled mix of rural broadband networks – properties still operated by small telcos, properties that are still receiving CAF II or RDOF subsidies, and areas built with BEAD or ARPA grants that will not be receiving any subsidies. Some of the BEAD properties will be operated by giant telcos and cable companies, while others will be operated by a wide range of smaller ISPs. The FCC will have created a real mess in rural America, with adjoining areas receiving drastically different levels of federal support – even when the local cost characteristics are identical.

I find it inevitable that companies that win BEAD will start lobbying for operating subsidies within a few years of networks being constructed. The FCC will be faced with the challenge of coming up with a sustainable subsidy program for all rural broadband networks. I think the FCC has several possible paths to take in the post-BEAD world:

The FCC could continue with existing subsidy programs with no acknowledgement that there is a wide disparity between areas that get and don’t get subsidies. The FCC could randomly decide on new subsidy programs to support subsets of companies – perhaps a subsidy program for BEAD winners and another for RDOF properties.

Or the FCC could start all over and design a subsidy program for the post-BEAD world. The best subsidy program would be cost-based, like the original USF. The original cost-based USF looked at the company-wide costs of each ISP, not at the costs to operate in rural areas. Under a cost-based system, small rural companies would likely get the most subsidy per subscriber while large ISPs that operate urban networks would likely get nothing and would be expected to support rural properties with urban profits.

Another option would be that the same amount of subsidy goes to support every rural subscriber, regardless of who owns the ISP business.

There has been a tickle in the back of my brain for the last year wondering why companies like AT&T, Charter, and Comcast seem to be willing to pursue grants for rural areas where it will be a challenge for revenues to fully cover costs. The big telcos have been working feverishly to ditch copper networks, and it’s hard to understand why they are now willing to go back into rural areas that have low density and long drive times.

But it recently struck me – these big companies are betting on the FCC creating a future subsidy program for areas being built with the current flood of ARPA and BEAD grants. I can’t see any other way to justify some of the grants I’ve seen the big companies accept. My bet is that we’ll barely make it through the BEAD grant awards before the big company start lobbying for new subsidy programs that benefit them more than other rural ISPs.

Can ACP be Sustainable?

By now, everybody has written about the pending end of the Affordable Connectivity Program (ACP). This is the federal program that provides a $30 monthly discount for broadband for low-income households and up to a $75 discount in tribal areas. The fund is available to homes with a household income under 200% of the federal poverty level or homes that participate in various federal low-income subsidy programs.

The ACP program was funded by the Infrastructure Investment and Jobs Act and was seeded with $14.2 billion, which was part of the $65 billion allocated to broadband. However, the original funding is running dry, and the FCC forecasts that the last month of fund disbursement will be April unless Congress acts to refill the funding. The FCC has already notified ISPs that they can’t add any new participants after February 7. For much of last year, the fund was growing by over 500,000 participants per month.

Just about everybody I know is betting against a miracle from Congress. The White House asked Congress to fund the ACP plan for a year for over $6 billion, and that seems like a big ask for a Congress that was the least productive in over a hundred years.

But even if the ACP gets funded somehow, either now or later this year, how sustainable is ACP if Congress has to act every year to renew it? Congress seems to be constantly at loggerheads over every low-income subsidy programs, and it seems like ACP would be a target for some legislators to kill every year.

There are members of Congress questioning if the funding is being well spent. For example, I’ve heard the stories of some big ISPs that had a low-income program for $9.99 per month that jacked up the fees to $30 when ACP could pay the bill.

Another issue to consider is that over 54% of the ACP funding is going to subsidize cell phones and not home broadband. There are many good arguments to be made that a subsidy is needed to provide cell phones to the homeless. But cell phones are not a good substitute for home broadband, particularly for a home with students. Unfortunately, most of the rumors of ACP fraud also concern unscrupulous cellular companies.

There have been calls for moving the ACP under the FCC’s Universal Service Fund. That would be a way to make the plan sustainable and remove it from the annual Congressional budget battles. But $6 billion a year would be a heavy push for the USF. There has been a lot of talk about changing the method of funding USF since the current funding that is based on telecom revenues is shrinking each year. It does seem possible that a reduced fund of a few billion per year could be rolled into the USF, particularly if ACP replaces the FCC’s Lifeline Fund.

There is no predicting Congress, and this bill could come up for a floor vote in time to save the fund for 2024. My guess is that even if ACP is funded, it will be at lower levels. It’s likely that legislators would reduce the income qualification to something lower than 200% of the poverty level and eliminate or lower the eligibility for cell phones. But I think it’s more likely that a Congress that can’t seem to pass a budget will not do anything with ACP before the fund runs dry. And once that happens, it will get easier and easier over time for Congress to ignore it.

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.

Funding the Universal Service Fund

The FCC’s Universal Service Fund (USF) has been a mainstay in the telecom industry since it was created in 1997 as a result of the Telecommunications Act of 1996. That Act explicitly ordered the FCC to adopt the following universal service principles – all of the FCC’s actions with the USF are derived from these simple principles.

  • Promote the availability of quality services at just, reasonable, and affordable rates.
  • Increase nationwide access to advanced telecommunications services.
  • Advance the availability of such services to all consumers, including those in low-income, rural, insular, and high-cost areas, at rates that are reasonably comparable to those charged in urban areas.
  • Increase access to telecommunications and advanced services in schools, libraries, and rural health care facilities.
  • Provide equitable and non-discriminatory contributions from all providers of telecommunications services for the fund supporting universal service programs

The size of the USF has remained stable over the last decade, with USF disbursements in 2012 of $8.7 billion and 2021 disbursements of $8.5 billion. The USF is funded by an assessment on interstate telecommunications services. This includes a variety of telecommunications services – with the largest source of funding being assessed in landline telephone service, interstate long-distance, cellular and texting services, interstate private lines, and a host of smaller telecommunications services.

The USF is facing a big challenge because keeping the size of the USF stable has been an ever-increasing burden on those paying into the fund since interstate services have been steadily declining. To put this into perspective, the assessment on interstate services was 16.7% in the first quarter of 2017 and grew to 33% in the third quarter of 2022.

In the IIJA legislation, Congress ordered the FCC to take a fresh look at the USF. It ordered the agency to explore both the uses of the USF and the sources of USF funding.

The FCC reported back to Congress as ordered, and the FCC largely said that it still believes that its uses of the USF funding are appropriate and should continue into the future. There are critics of many of the functions funded by the USF, such as the 2020 RDOF reverse auction, but there is nearly universal support of programs like supporting broadband for schools and rural healthcare.

As part of the review of the USF, the FCC considered two funding ideas:

  • One of the easiest ways to spread the costs of funding the USF would be to expand the assessments to include broadband. This would lower the assessment rate from 33% to some tiny amount depending on how the assessment for broadband is calculated.
  • The FCC also explored the idea of assessing USF to “edge providers,” which are the large Internet firms such as streaming video providers, digital advertising firms, and cloud services companies – companies like Netflix, Facebook, and Amazon. This would shift most of the burden for funding the USF from the public to businesses – although businesses typically pass USF fees back to the public. But edge providers that offer free services like Facebook, Twitter, and Google search would have to eat the cost of such assessments.

The FCC decided not to take a position on the two funding ideas. The report to Congress said that the agency probably doesn’t have the authority to expand the USF assessment to these two groups of payers. The FCC thinks that Congress would have to act to change the method of USF assessments.

It will be interesting to see if Congress decides to take up the USF issue. One of the key issues facing Congress will be deciding if it wants to fund and continue the ACP program that provides a $30 discount from broadband for low-income homes. Congress assigned the operation of that fund to USAC, a non-profit organization that works under FCC guidance to operate the USF.

I have to think there are those in Congress that take exception to the FCC’s assessment that it is using the USF wisely. There are a lot of critics of recent programs like CAF II and RDOF. There have been plenty of critics of the Lifeline program, and I assume there are those against continuing the ACP low-income discounts. One of the risks that the FCC faces is that Congress might decide to resize or eliminate programs if it takes up the issue.

Is it Time to Tax the Internet?

There is a law advancing in the Maryland legislature that would tax Internet advertising. The law, if enacted would collect taxes from online advertising done by Google, Facebook, and others. The tax would immediately be challenged in court due to our history of not taxing things related to the Internet.

The idea of not taxing the Internet began with the Internet Tax Freedom Act in 1998. That law grandfathered taxes imposed in 13 states on Internet access but prohibited it elsewhere. The law also prohibited local governments from imposing taxes on electronic commerce. The law imposed a 3-year moratorium on such taxes and was extended eight times until the tax prohibition was made permanent in the Trade Facilitation and Trade Enforcement Act in 2015.

There are other precedents for not taxing electronics commerce. For example, the Supreme Court ruled in 1967 that requiring remote vendors to collect sales taxes would impose an undue constraint on interstate commerce. The prohibition against sales taxes for out-of-state sellers was strengthened in 1992 in the Supreme Court’s ruling in Quill Corporation v. North Dakota that prohibited a state from collecting sales taxes unless a business has a physical presence in a state. These prohibitions were assumed to also apply to sales made over the Internet if the seller lived in a different state than the buyer.

However, such rulings change over time and the Supreme Court reversed the older decisions in 2018 in the case of South Dakota v Wayfair, Inc. The Court effectively ruled that states can require remote sellers of any kind, including online sellers to collect state sales taxes. Since that ruling, many states have imposed sales taxes on Internet sales.

Opponents of the tax on advertising say that the proposed law would violate the intent of the Internet Freedom Act to not tax electronic commerce. The application of a tax to advertising is different enough from a sales tax that the Supreme Court ruling won’t automatically apply. If the law is passed it will likely have to go to the Supreme Court. To a non-lawyer like me, it seems the issue is similar enough to sales taxes that there is a good chance that at tax on advertising would be allowed. Even if it allowed, such a tax has the significant challenge of identifying the advertising revenue that applies to a given state. For example, what portion of nationwide advertising for Ford trucks would apply to Maryland?

The Maryland law does freshly raise the question of whether it’s time to tax the Internet. The original Internet Tax Freedom Act was an attempt by Congress to protect the fledgling broadband business. It’s debatable if the growth of the Internet would have been slowed had there been a few dollars of taxes applied to broadband bills like were applied to landline telephone bills. But the new Internet companies were the darlings of Wall Street, and Congress decided to keep broadband products free from taxation.

The broadband tax that’s most needed is a surcharge on broadband to help fund the FCC’s Universal Service Fund. Many states also have similar funds. The USF is currently being funded by fees charged to landlines and cellphones. The purpose of the fund is currently to promote broadband for places that don’t have it. The fund will be paying for the $20.4 billion RDOF grants for rural broadband and the $9 billion 5G Fund grants to improve rural cellular coverage. It’s silly that we aren’t charging a small fee onbroadband users to help pay for rural broadband – everybody in the country benefits when there is broadband everywhere. I can’t fathom a justification for having landlines users pay for rural broadband but not broadband customers.

Congress is often mystifying. I can understand the initial ban against Internet taxes, although I don’t believe such taxes would have hampered the explosive growth of broadband. But I can’t think of any justification in 2015 for making the ban on Internet taxes permanent. Considering the huge problems that lack of rural broadband just caused during the COVID-19 crisis, there is no justification for not increasing the funding for the Universal Service Fund, and the easiest way to do so is to tax broadband customers.

Auditing the Universal Service Fund

I recently heard FCC Commissioner Geoffrey Starks speak to the Broadband Communities meeting in Alexandria, Virginia. He expressed support for finding broadband solutions and cited several examples of communities that don’t have good broadband access today – both due to lack of connectivity and due to the lack of affordable broadband.

One of his more interesting comments is that he wants the FCC to undertake a ‘data-driven’ analysis of the effectiveness of the Universal Service Fund over the last ten years. He wants to understand where the fund has succeeded and where it has failed. Trying to somehow measure the effectiveness of the USF sounds challenging. I can think of numerous successes and failures of USF funding, but I also know of a lot of situations that I would have a hard time classifying as a success or failure.

Consider some of the challenges of looking backward. Over the last decade, the definition of broadband has changed from 4/1 Mbps to 25/3 Mbps. Any USF funds that supported the older speeds will look obsolete and inadequate today. Was using USF funding nine years ago to support slow broadband by today’s standards a success or a failure?

One of the biggest challenges of undertaking data-driven analysis is that the FCC didn’t gather the needed data over time. For example, there has only been a limited amount of speed testing done by the FCC looking at the performance of networks built with USF funding. A more rigorous set of testing starts over the next few years, but I think even the new testing won’t tell the FCC what they need to know. For example, the FCC just changed the rules to let the big telcos off the hook when they decided that USF recipients can help to decide which customers to test. The big telcos aren’t going to test where they didn’t build upgrades or where they know they can’t meet the FCC speed requirements.

The FCC will find many successes from USF funding. I’m aware of many rural communities that have gotten fiber that was partially funded by the ACAM program. These communities will have world-class broadband for the rest of this century. But ACAM money was also used in other places to build 25/3 DSL. I’m sure the rural homes that got this DSL are thankful because it’s far better than what they had before. But will they be happy in a decade or two as their copper networks approach being a century old? Are the areas that got the DSL a success or a failure?

Unfortunately, there are obvious failures with USF funding. Many of the failures come from the inadequate mapping that influenced USF funding decisions. There are millions of households for which carriers have been denied USF funding because the homes have been improperly classified as having broadband when they do not. Commissioner Stark said he was worried about using these same maps for the upcoming RDOF grants – and he should be.

Possibly the biggest failures come from what I call lack of vision by the FCC. The biggest example of this is when they awarded $11 billion to fund the CAF II program for the big telcos, requiring 10/1 Mbps speeds at a time when the FCC had already declared broadband to be 25/3 Mbps. That program was such a failure that the CAF II areas will be eligible for overbuilding using the RDOF grants, barely after the upgrades are slated to be completed. The Universal Service Fund should only support building broadband to meet future speed needs and not today’s needs. This FCC is likely to repeat this mistake if they award the coming RDOF grants to provide 25/3 Mbps speeds – a speed that’s arguably inadequate today and that clearly will be inadequate by the time the RDOF networks are completed seven years from now.

I hope the data-driven analysis asks the right questions. Again, consider CAF II. I think there are huge numbers of homes in the CAF II service areas where the big telcos made no upgrades, or upgraded to speeds far below 10/1 Mbps. I know that some of the big telcos didn’t even spend much of their CAF II funding and pocketed it as revenue. Is the audit going to look deep at such failures and take an honest look at what went wrong?

Commissioner Stark also mentioned the Lifeline program as a failure due to massive fraud. I’ve followed the Lifeline topic closely for years and the fraud has been nowhere near the magnitude that is being claimed by some politicians. Much of the blame for problems with the program came from the FCC because there was never any easy way for telcos to check if customers remained eligible for the program. The FCC is in the process of launching such a database – something that should have been done twenty years ago. The real travesty of the Lifeline program is that the big telcos have walked away. For example, AT&T has stopped offering Lifeline in much of its footprint. The FCC has also decided to make it exceedingly difficult for ISPs to join the program, and I know of numerous ISPs that would love to participate.

I try not to be cynical, and I hope an ‘audit’ isn’t just another way to try to kill the Lifeline program but is instead an honest effort to understand what has worked and not worked in the past. An honest evaluation of the fund’s problems will assign the blame for many of the fund’s problems to the FCC, and ideally, that would stop the current FCC from repeating the mistakes of the past.

Broadening the USF Funding Base

The funding mechanism to pay for the Universal Service Fund is broken. The USF is funded from fees added to landline telephones, cell phones and on large business data connections that are still billed using telco special access products (T1s and larger circuits). The USF fee has now climbed to an exorbitant month tax of 20% of the portion of those services that are deemed to be Interstate by the FCC. This equates to a monthly fee of between a dollar or more for every landline phone and cellphone (the amount charged varies by carrier).

The funding mechanism made sense when it was originally created. The fee at that time was assessed on landlines and was used to built and strengthen landline service in rural America. When the USF fee was introduced the nationwide penetration rate of landlines in urban America was over 98%, and the reasoning was that those with phone service ought to be charged a small fee to help bring phone service to rural America. The concept behind universal service is that everybody in the country is better off when we’re all connected to the communications network.

However, over time the use of the Universal Service Fund has changed drastically and this money is now the primary mechanism that FCC is using to pay for the expansion of rural broadband. This pot of money was used to fund the original CAF II programs for the big telcos and the A-CAM program for the smaller ones. It’s also the source of the Mobility Fund which is used to expand rural cellular coverage.

Remember the BDAC? That’s the Broadband Deployment Advisory Committees that was created by Chairman Ajit Pai when he first took the reins at the FCC. The BDAC was split into numerous subcommittees that looked at specific topics. Each BDAC subcommittee issued a report of recommendations on their topic, and since then little has been heard from them. But the BDAC subcommittees are still meeting and churning out recommendations.

The BDAC subcommittee tasked with creating a State Model Code has suggested the broadening of the funding for the USF. This is the one committee that is not making recommendations for the FCC but rather suggesting ideas that states ought to consider. The Committee has suggested that states establish a fee, similar to the federal USF fee and use the fee to expand broadband in each state. Many states have already done something similar and have created state Universal Service Funds.

The recommendation further suggests that states tax anybody that benefits from broadband. This would include not just ISPs and customers of ISPs, but also the big users of the web like Netflix, Google, Amazon, Facebook, etc. The reasoning is that those that benefit from broadband ought to help pay to expand broadband to everybody. The BDAC recommended language has been modified a few times because the original language was so broad that almost everybody in the country would be subject to the tax, and we’ve learned over years that taxation language needs to be precise.

This is not the first time that this idea has been floated. There are many who suggested in the past to the FCC that USF funding should be expanded to include broadband customers. Just as telephone customers were charged to fund the expansion of the telephone network it makes sense to tax broadband customers to expand broadband. But this idea has always been shot down because early in the life of the Internet the politicians in DC latched onto the idea of not taxing the Internet. This made sense at the time when we needed to protect the fledgling ISP industry – but that concept is now quaintly obsolete since Internet-related companies are probably collectively the world’s biggest industry and hardly need shielding from taxation.

AT&T is a member of this BDAC subcommittee and strongly supports the idea. However, AT&T’s motivations are suspect since they might be the biggest recipient of state USF funds. We saw AT&T lobbyists hijack the state broadband grant program in California and grab all of the money that would have been used to build real rural broadband in the state. The big carriers have an overly large influence in statehouses due to decades of lobbying, and so there is a concern that they support this idea for their own gain rather than supporting the idea of spreading broadband. We just saw AT&T lobbyists at the federal level sneak in language that makes it hard to use the e-Connectivity grants from competing with them.

But no matter how tainted the motivation of those on the BDAC committee, this is an idea with merit. It’s hard to find politicians anywhere who don’t think we should close the broadband gap. It’s clear that it’s going to take some government support to make this work. Currently, there are a number of state broadband grant programs, but these programs generally rely annually on allocations from the legislature – something that is always used annually as a bargaining chip against other legislative priorities. None of these grant programs have allocated enough money to make a real dent in the broadband shortfalls in their states. If states are going to help solve the broadband gap they need to come up with a lot more money.

Setting up state USF funds with a broad funding base is one way to help solve the rural broadband divide. This needs to be done in such a way that the money is used to build the needed fiber infrastructure that is needed to guarantee broadband for the rest of the century – such funds will be worthless if the money is siphoned instead to the pockets of the big telcos. It makes sense to assess the fees on a wider base, and I can’t see any reasonable objection against charging broadband customers but also charging big broadband-reliant companies like Netflix, Google, Amazon, and Facebook. The first state to try this will get a fight from those companies, but hopefully the idea of equity will win since it’s traffic from these companies that is driving the need for better broadband infrastructure.

Funding the USF Broadband Programs

A number of telecom advocacy groups came together recently to ask the FCC to increase the budget for the high-cost portion of the Universal Service Fund to at least $2.4 billion for the next fiscal year just begun on October 1. The joint filing was by ITTA – The Voice of America’s Broadband Providers, USTelecom – The Broadband Association, NTCA – The Rural Broadband Association and WTA – Advocates for Rural Broadband.

Small telcos are specifically asking that the FCC fully fund the commitments made to them in 2016 for the A-CAM program. This is the fund that is providing money to rural telcos to upgrade their networks to at last 25/3 Mbps – although it seems like most companies are using the money to upgrade to fiber. That program is bringing a permanent broadband solution to numerous rural communities.

The A-CAM and other high-cost support programs are not currently fully funded. This is due to several factors. First, more small telcos accepted A-CAM funding than the FCC anticipated, creating a bigger financial commitment than was expected. But more importantly, the FCC has been tapping the Universal Service Fund for other broadband commitments such as the CAF II program that gave billions to the large telcos to upgrade to only 10 Mbps. This same fund is also used to provide e-rate funding for schools to get affordable broadband, to support libraries, to support rural healthcare and to provide the lifeline program to make telephone and broadband more affordable for low-income households.

It would be a challenge for the FCC to meet the request and I’m not sure there is an easy way for them to do so. The Universal Service Fund is funded by fees assessed against landline telephone service, cellphone service and against broadband connections that are deemed to be interstate in nature – these are generally broadband connections sold by regulated telcos using the soon-to-be-obsolete TDM technology.

This fee is an additive to these services and the rate being charged has climbed over the years as the number of both landline telephones and special access transport circuits has dropped. In the last quarter the assessment topped 20% for the first time and has climbed over the years. I can recall when the assessment was under 5%.

This all creates a dilemma for the FCC. The revenues against which USF can be assessed are shrinking. Landline use continues to plummet; cellphone prices are trending downward and special access is being displaced by other kinds of transport. As much as the FCC might want to fully fund rural broadband, it has numerous other obligations to meet from the same pile of money like the e-rate program and rural healthcare broadband.

There has been talk for years of expanding the USF base. If the USF fee was assessed against home and business broadband the overall percentage would plummet from today’s 20% rate. However, Congress nixed the idea of assessing USF against broadband by sticking to the philosophy that we should not tax the Internet. This was a concept that was introduced when broadband was a fledgling industry, which somehow became a mantra that is outdated. Broadband revenues dwarf the fees for products like landline telephone service.

The FCC’s hands are tied from assessing USF against broadband by Congress. But even if Congress changed their mind, the FCC has now given up regulation of broadband and they might not have the authority to assess a fee on a product they declare they don’t regulate.

It’s to everybody’s benefit that the FCC finds a way to fund commitments they made for rural broadband just a few years ago. The FCC has some latitude and they could probably apply all fund shortfalls against another program like CAF II – but with the lobbying power of the big telcos that’s unlikely.

The FCC also has another huge source of revenue they could tap. The agency has been collecting gigantic fees for the auction of spectrum in recent years and there is no reason that all or part of this money couldn’t be diverted to rural broadband. However, this also would require action by Congress, which directly diverted auction fees to the US treasury earlier this year when they enacted the Ray Baum bill.

The funding shortfalls are mostly the result of the FCC committing more funds than are available in the fund. Since the USF is funded by fees on services, the fund can’t have cost overruns and spend more money than it has – unlike many other government programs. Every time I hear the FCC announce a new initiative out of the Universal Service Fund I always wonder which other parts of the fund will be raided. I think we now know that it’s funding for rural broadband.

Means Testing for FCC Funding – Part II

Yesterday I wrote about the recent blog by FCC Commissioners Michael O’Rielly and Mignon Clyburn that suggests that there ought to be a means test for anybody accepting Universal Service Funds. Yesterday I looked at the idea of using reverse auctions for allocating funds – an idea that I think would only serve to shift broadband funds to slower technologies, most likely rural cellular service for broadband. Today I want to look at two other ideas suggested by the blog.

The blog suggests that rural customers ought to pay more for broadband since it costs more to provide broadband in sparsely populated areas. I think the FCC might want to do a little research and look at the actual prices charged today for broadband where commercial companies have built rural broadband networks. It’s something I look at all of the time and all over the country, and from what I can see the small telcos, cooperatives, WISPs and others that serve rural America today already charge more than what households pay for broadband in urban areas – sometimes considerably more. I am sure there are exceptions to this and perhaps the Commissioners have seen some low rural pricing from some providers. But I’ve looked at the prices of hundreds of rural ISPs and have never seen prices below urban rates.

The small rural ISPs have to make a commercial go of their broadband networks and they’ve realized for years that the only way to do that is to charge more. In most urban areas there is a decent broadband option starting around $40 per month and you rarely see a price close to that in rural America. If you see a low price in rural America it probably offers a very slow speed of perhaps a few Mbps, which certainly doesn’t compare to the 60 Mbps I get from Charter for $44.95 per month.

The issue of rural pricing does raise one policy issue. Historically the Universal Service Fund was used for precisely what this blog seems not to like – to hold telephone rates down in rural America so that everybody in the country could afford to be connected. That policy led to the country having telephone penetration rates for decades north of 98%. I’m not advocating that USF funds ought to be used to directly hold down rural broadband rates, but it’s worth a pause to remember that was the original reason that the Universal Service Fund was started and it worked incredibly well.

The second idea raised by the blog is that Universal Service Funds ought not be used to build broadband to wealthy customers. They suggest that perhaps federal funding ought not to be used to bring broadband to “very rich people who happen to live in the more rural portions of our nation.”  The blog worries that poor urban people will be subsidizing ‘some of the wealthiest communities in America.’  I am sure in making that statement that the Commissioners must have a few real-life communities in mind. But I work all over the country and there are not very many pockets of millionaires in rural America, except perhaps for farmers.

Farmers are an interesting case when it comes to broadband. By definition farmers are rural. But US agriculture is the largest industry in the country and the modern farmer needs broadband to be effective. We are headed soon towards a time when farm yields can increase dramatically by use of IoT sensors, farm robots and other high technology that is going to require broadband. I know that a lot of the rural communities that are clamoring for broadband are farming communities – because those farms are the economic engine that drives numerous counties and regions of the country. I don’t think it’s unreasonable if we are going to rethink policy to talk about bringing broadband to our largest industry.

The FCC blog suggests that perhaps wealthier individuals ought to pay for the cost of getting connected to a broadband network. It’s certainly an interesting idea, and there is precedent. Rural electric companies have always charged the cost of construction to connect customers that live too far from their grid. But with that said we also have to remember that rural electric grids were purposefully built to reach as many people as possible, often with the help of federal funding.

This idea isn’t practical for two reasons. It’s already incredibly hard today to finance a fiber network. I picture the practical problem of somehow trying to get commitments from farmers or other wealthy individuals as part of the process of funding and building a broadband network. As somebody who focuses mostly on financing fiber networks this would largely kill funding new networks. To get the primary borrower and all of the ‘rich’ people coordinated in order to close a major financing is something that would drive most lenders away – it’s too complicated to be practically applied. The FCC might want to consult with a few bankers before pushing this idea too far.

But there is a more fundamental issue and the FCC blog touches upon it. I’m trying to imagine the FCC passing a law that would require people to disclose their income to some commercial company that wants to build a fiber network. I’m not a lawyer, but that sounds like it would bump against all sorts of constitutional issues, let alone practical ones. For example, can you really picture having to report your income to AT&T?  And I then go back to the farmers again. Farmers don’t make a steady income – they have boom years and bust years. Would we put them on or off the hook for contributing towards a fiber network based upon their most recent year of income?

I certainly applaud the Commissioners for thinking outside the box, and that is a good thing when it leads to discussions of ways to improve the funding process. I will be the first to tell you that the current USF distributions are not always sensible and equitable and there is always room for improvement. Some of the ideas suggested by the blog have been discussed in the past and it never hurts to revisit ideas. But what most amazes me about the suggestions made by this blog is that the proposed solutions would require a heavy regulatory hand – and this FCC, or at least its new Chairman has the goal of reducing regulation. To impose a means test or income test would go in the opposite direction and would require a new layer of intrusive regulations.