rural broadbandStakeholders today urged the U.S. Senate to address a funding shortfall in the Universal Service Fund estimated at approximately $210 million annually, with the goal of spurring broadband deployment to rural areas by covering a portion of deployment costs. In a hearing conducted by the Senate Commerce Subcommittee on Communications, Technology, Innovation and the Internet, Shirley Bloomfield — CEO of NTCA—The Rural Broadband Association — suggested several options for addressing the USF funding shortfall, including increasing each ratepayer’s contribution to the fund by the cost of one Starbucks coffee annually.

Also in the hearing, financial analyst Michael Balhoff urged the commission to raise the rate of return for rural carriers and to incent the nation’s largest local carriers to sell their rural lines to smaller carriers, which he said are more likely to invest in broadband. Balhoff is senior partner and cofounder of Charlesmead Advisors, a financial firm focusing on rural telecom.

USF Funding Shortfall
As the FCC transitioned the USF program to focus more heavily on broadband, small rural carriers had the option of receiving support based on a cost model or remaining on the traditional high-cost program, which bases support on embedded costs. The USF funding shortfall came to light when more carriers than anticipated chose the cost model option, resulting in a $160 million annual funding shortfall. The FCC subsequently freed up an additional $50 million annually for that program, and addressed the remaining $110 million shortfall by delaying or reducing carriers’ broadband buildout requirements.

Carriers remaining on the traditional high-cost program also face a funding shortfall, which NTCA estimates at $100 million annually. Carriers in that program also are subject to additional funding cuts moving forward, which according to Balhoff, were imposed in order to maintain the budget for the program at 2011 levels.

Those budget control mechanisms are difficult to predict and this uncertainty has driven some carriers to postpone or even cancel anticipated broadband deployments, Balhoff said. For evidence, he pointed to the take rate for the Rural Utilities Service program that loans money to rural carriers at low interest rates. After awarding the entire annual $690 million budget for that program for several years in a row, the take rate dropped substantially beginning in 2011. The take rate has not been higher than 31% since 2011 and has been as low as 11.6%, according to Charlesmead.

Statement of
Michael Balhoff (Source: Charlesmead Advisors)

Balhoff also argued that the FCC should not have made the decision in 2016 to reduce the rate of return for rural carriers from 11.25% to 9.75% over a period of years, arguing that the cost of capital for those carriers is increasing, not decreasing.

The USF funding shortfall is “difficult to square with Section 254” of the Telecommunications Act, which states that USF funding must be “sufficient,” Balhoff said.

Balhoff also argued that small rural carriers have made more progress than larger carriers in deploying broadband to high-cost areas – an argument that FCC data also supports. Larger carriers, he said, are more likely to invest in other areas of their business that can provide greater returns. The large carriers, he said “are not properly incented to invest in those areas.”

His recommendation?

“We should incent them to sell,” he said.

In detailed comments filed with the senate committee, Balhoff said one solution would involve “forgiving sale-related taxes imposed on the sellers” so that sales can be made at prices that will give the buyers “sufficient financial headroom for greater subsequent investments.”

Addressing the Shortfall
In her testimony, Bloomfield offered three suggestions for addressing the USF funding shortfall, including:

  • Using funds that the FCC has collected but has not yet dispersed
  • Increasing the contribution by a small amount equal to the cost of one Starbucks coffee per year per customer
  • Congress could direct supplemental funding to the USF program

Those three recommendations did not include what Daniel Schatz, Democratic senator from Hawaii, called “the elephant in the room” – expanding the contribution base for the USF, which is currently funded as a percentage of carriers’ long-distance voice revenues. Although NTCA has recommended expanding that base, Bloomfield said doing so would take two to three years and that a more immediate solution is needed.