The USF Conundrum

[author: Glenn S. Richards]

The Federal Communications Commission (FCC) is considering whether to make fundamental changes to how carriers (and ultimately their customers) pay for federal programs that provide greater access to telecommunications and Internet services. The dilemma facing the FCC is that Universal Service Fund (USF) program expenses are increasing, while interstate and international telecommunications revenues, the source of the funding, are on the decline. Facing a carrier contribution rate that is now 17.4 percent - a hefty rate in any economy - the FCC is looking at alternatives to revenues, including assessments based on telephone numbers or network connections.

No one disputes the laudable goals of USF. These include funding for: a) carriers who provide free or low cost telecommunications services to the poor; b) high cost telephone companies so that customers in rural and remote areas can access telecommunications at rates similar to customers in the cities; c) schools and libraries to get discounted rates for essential telecommunications services; and d) telecommunications services for rural health care providers. In 1998, these programs cost about $3.9 billion. In 2012 the cost will be more than $9.5 billion. The FCC has taken steps recently to cap or slow the growth of these programs, and put in place rules and regulations to reduce fraud, waste and abuse.

The growth on the expense side has put added pressure on the revenue side - all of which comes from carriers providing interstate and international telecommunications and VoIP services. As a result of the declining cost of telecommunications services combined with reduced demand because of email and free voice services, there has been a reduction in assessable revenues from 1998 to 2012, from $80 billion to about $66 billion. Accordingly, the contribution factor has risen from 3.19 percent in 1998 to 17.4 percent today. The FCC adjusts the contribution factor quarterly.

Large users of telecommunications services, carriers and consumer groups are participating in a FCC proceeding that is considering whether to change how USF is funded. Large users are particularly concerned about changes that might shift a greater portion of the contributions to business users or services used by businesses. They are also looking for a stable revenue source, concerned that the quarterly changes impose substantial burdens on budgeting by businesses that purchase large quantities of telecommunications services.

One option proposed to the FCC would be to make administrative changes to the current revenue system. These could include expanding the contribution base to include additional services, including broadband service, which is now exempt. Another option would be to establish an annual contribution factor, eliminating the volatility of quarterly changes.

A more fundamental change that has been proposed would be a monthly assessment on telephone numbers. Supporters suggest telephone numbers provide a stable base for funding, and can easily be monitored, reported and verified. Some opponents suggest that assessing telephone numbers would unfairly burden entities with lots of telephone numbers, including universities.

A third option would be to assess physical connections to either the public telephone network or the Internet. Connections are verifiable and less subject to changes in technology. However, the debate continues whether assessments should vary based on capacity or connection speed, and how to assess connections between carriers.

This is expected to be near the top of the FCC's to-do list for 2013.