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The FCC has taken a step toward USF contribution base reform. The commission asked Congress to “provide the commission with the legislative tools needed to make changes to the contributions methodology and base” for the Universal Service Fund (USF). The goal would be to “reduce the financial burden on consumers, to provide additional certainty for entities that will be required to make contributions and to sustain the fund and its programs over the long term.”

The request for help from Congress came in a report on the future of the USF released yesterday by the FCC and sent to Congress. The FCC was directed to prepare the report in the Infrastructure Investment and Jobs Act (IIJA), which includes $65 billion in broadband funding. The report was intended to evaluate the impact of the IIJA and other broadband funding programs on the USF. 

The USF helps cover the cost of deploying and operating communications networks in high-cost rural areas. In addition, it covers some of the costs of communications services for low-income households, it covers some communications costs for schools and libraries, and it covers some communications costs for rural healthcare.

As Telecompetitor has previously reported, the USF is currently funded by communications service providers as a percentage of interstate telecommunications services, comprised in large part of voice services, because the system was set up when USF was primarily a voice-focused program. As telecommunications revenues have declined, the percentage of those revenues that providers must pay into the fund – and which the providers pass on to their customers — has increased dramatically. In essence, the current funding mechanism is becoming increasingly unsustainable.

The FCC acknowledges this in the report but stops short of recommending how the USF contribution base should be changed. Instead, the commission summarizes key reform recommendations made by various stakeholders and offers some pros and cons for each option. In discussing the pros and cons, however, the FCC seems to offer less support for some of the recommendations than for others. More on that later in the post.

Among the options discussed: expanding the contribution base to include broadband internet access revenues (BIAS), having Congress appropriate funding for the USF, and expanding the contribution base to include “edge providers” such as Netflix and Amazon that benefit from widespread broadband connectivity and that represent a large portion of total internet traffic. Their contribution could come in the form of a tax on their advertising revenues, for example.

According to the report, “there is significant ambiguity in the record regarding the scope of the commission’s existing authority to broaden the base of contributors.” In asking Congress to provide “legislative tools” to make changes to the contribution methodology, the FCC is basically asking Congress to give the commission the authority to expand the contribution base.

USF Contribution Base Reform Options

The FCC report notes that multiple stakeholders that submitted comments to the commission about the future of USF voiced support for the USForward Report from Mattey Consulting. The USForward Report recommends expanding the contribution base to include BIAS revenues. Doing so could reduce the contribution factor from 30% to about 4% of provider revenues, according to the report.

Critics of this idea argue, however, that this would increase the cost of broadband. Some of them also note that business customers currently bear a heavy share of USF contributions because business customers are heavier users of telecommunications (a.k.a. voice) services. But if BIAS revenues were included in the contribution base, consumers would be responsible for a greater share of the contributions, the critics say.

If you parse some of the language in the FCC report, this argument seems to have resonated with the commission. In asking for help from Congress, for example, the commission cites reducing the financial burden on consumers as a key reform goal.

The report also recommends that contribution base reform should aim to “avoid raising the cost of broadband service and shifting the financial burden from corporations to consumers.”

As for the recommendation that Congress directly appropriate funding for USF, the FCC cites commenters that said this approach would lack stability, which is crucial to the USF program. This argument also seemed to resonate with the FCC: The commission had the perfect opportunity in the report to ask Congress to directly appropriate funds if it believed that was the best approach, but that’s not what the commission is asking for.

The upshot is that the recommendation that seems to have the strongest FCC support is the one that would involve getting edge providers such as Amazon and Netflix to pay into the fund. The report has almost nothing negative to say about this idea, other than noting that INCOMPAS argues that “investments by edge providers in their products and networks benefit the broader broadband ecosystem” and noting that, according to the Entertainment Software Alliance, “the online marketplace has thrived in part because of the low cost of entry, which would be jeopardized by USF assessments.”

At least one FCC commissioner clearly favors the edge provider approach. In a statement accompanying the Future of Universal Service report, FCC Commissioner Brendan Carr reiterated arguments that he made in an op-ed piece last year.

“This approach would . . . better align with the historic construct that entities that benefit from the USF program should contribute,” he said in his statement about the report.

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