Rural Broadband

A new report recommends that the Universal Service Fund (USF) contribution base should be expanded to include broadband internet access service revenues. The current methodology is unsustainable, the report argues.

The “USForward” report, from Carol Mattey, founder of Mattey Consulting and former deputy chief of the FCC Wireline Competition Bureau, was written in conjunction with NTCA—The Rural Broadband Association; INCOMPAS, the internet and competitive networks association; and the Schools, Health & Libraries Broadband Coalition.

The USF Contribution Base

The USF pays some of the costs of operating telecom and broadband networks in high-cost rural areas and also covers some connectivity costs for rural telehealth, for low-income Lifeline subscribers and for schools and libraries. Traditionally the USF program was focused on voice service but now focuses in large part on broadband.

However, the program is still funded in the same way that it was when it was focused on voice services. Service providers pay into the fund as a percentage of their telecom revenues, which are comprised, in large part, of voice services, and they pass these costs on to customers that use those services as a charge on their bills.

As the report explains, those telecom revenues – known as the USF contribution base — have been declining, causing a higher and higher percentage of revenues to go toward USF.

From USForward Report

A previous Telecompetitor analysis reached a similar conclusion, finding that the contribution factor – the percentage of telecom revenues that goes toward USF – could climb to nearly 50% by 2030.

As Mattey puts it, the funding mechanism is “under significant duress” and “jeopardizes the universal broadband connectivity mission for our nation without immediate FCC reform.”

Possible Solutions

The report explores three possible solutions that have been proposed, including a subscriber charge per physical connection or a subscriber charge per phone number, in addition to the recommended solution of including broadband internet access revenues in the contribution base.

Mattey argues that the latter option would reduce the contribution factor from its current level of around 30% to less than 4%.

From USForward Report

Including broadband internet access revenues is the best solution to the USF contribution base dilemma for several reasons, the report argues, including:

  • It’s an appropriate approach, considering that all four USF programs promote universal broadband
  • Broadband internet access service revenues are expected to be stable in the future, with the potential for some modest growth
  • The solution could be implemented more quickly than either of the other alternatives
  • Most of the revenues that figure into the contribution base are from publicly traded companies that are audited and subject to stringent financial reporting standards, providing an additional level of assurance that contributions are accurately reported
  • The solution would remove the current incentive for providers to arbitrarily allocate bundled services to one service rather than another

The latter issue is a bigger concern than some may realize, according to Mattey’s analysis.

As she explains, providers that bundle voice service with internet access can allocate only a small portion of the bundled price to voice. This is a particularly big concern regarding mobile operators, according to her analysis, which shows that mobile revenues subject to inclusion in the USF contribution base declined 66% between 2010 and 2019, in comparison with a 35% decline overall.

From USForward Repot

Will It Fly?

Some policymakers – including FCC officials – traditionally have been unwilling to endorse the idea of including broadband in the USF contribution base out of fear that opponents will label it as “taxing the internet.”

Some of these opponents argue that funding for broadband should be allocated by legislators from the general fund. And as the COVID-19 pandemic has awakened legislators to the importance of universal broadband, those legislators have made a considerable amount of funding available for rural deployments, for telehealth, for students and library patrons and for low-income households – the same areas that the USF supports.

It’s important to note, though, that all the recent legislation requires funding to be spent over a period of no more than a few years, while the USF is designed to make funding available on an ongoing basis.

It’s also worth noting that the infrastructure bill adopted in the Senate would require the FCC to evaluate USF policies in the light of all the broadband funding – albeit short-term funding — that has been made available.

Will the FCC take the opportunity to reform the USF contribution base? It’s an area Telecompetitor will be watching closely.

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