Debate Over How to Fund the Federal USF Continues with Potential Impacts for Tech Companies, ISPs, and Consumers

Debate Over How to Fund the Federal USF Continues with Potential Impacts for Tech Companies, ISPs, and Consumers

August 4, 2022, Covington Alert

The aptly named Universal Service Fund (“USF” or the “Fund”) provides billions of dollars in annual funding for programs that are designed to enhance access in the U.S. to communications services, including broadband. While demand for broadband service has grown significantly over the past several years, the base of revenues available to pay into the Fund has decreased substantially. This has raised a number of questions regarding the future of the USF, including the rules that should govern the size of contributions to the USF and who should be paying them. While the FCC is studying the issue, some Internet Service Providers (“ISPs”) are calling for Congress to change the law so that online video, search and social media sites and applications would be required to contribute to the Fund—representing a major shift in the basic assumptions of USF funding.

The purpose of this document is to explain how the debate over USF funding has developed and why there is increased focus on expanding the types of services that are assessed for purposes of contributions to the Fund. In doing so, we provide background information on the USF, explain the reason why some are seeking to reform it, and offer suggestions for the best way to monitor the USF funding debate.

One point worth acknowledging at the outset is that although the recent Infrastructure Investment and Jobs Act (“IIJA”) allocated roughly $42.5 billion largely to the construction of broadband networks in unserved and underserved regions, this significant one-time expenditure is not expected to obviate the need for continued spending to support the ongoing deployment, upgrading, and maintenance of broadband infrastructure and services – not to mention efforts to make broadband affordable to all persons in the U.S. Thus, while the IIJA will be very meaningful in the overall policy objective of improving access to broadband, it is not expected to eliminate the need for continued USF funding.

The FCC considers universal service to be “the cornerstone” of the Communications Act of 1934, as amended (the “Act”) that helped to make telephone service ubiquitous. The Telecommunications Act of 1996 expanded the goal of universal service to include both traditional telecommunications and internet-based services, with an emphasis on providing access to these services for those living in rural areas that are costly to serve, schools and libraries, and households with low incomes. To that end, the FCC established four permanent programs within the USF to meet these objectives: (1) the Connect America Fund (also known as “High-Cost Support”) for unserved and underserved (i.e., rural and Tribal) areas; (2) Lifeline for low income consumers, including initiatives to expand affordability on Tribal lands; (3) an initiative to expand service to Schools and Libraries (known as “E-Rate”); and (4) an initiative to expand service to rural health care providers (the “Rural Health Care” program). These are popular programs that generally enjoy bipartisan support.

USF is funded through assessments on revenues generated by the sale of telecommunications service (e.g., service over traditional circuit-switched or mobile lines, certain business/enterprise telecom solutions), and interconnected Voice over Internet Protocol (“iVoIP”) service. These contributions, which providers are legally obligated to make, are calculated as a percentage of interstate and international end-user revenues generated by providers from their sale of these assessable services. That percentage is referred to as the “contribution factor.”

The contribution factor changes quarterly, depending on the demand for universal service support, and is calculated by a the Universal Service Administrative Company (“USAC”). USAC is a private, not-for-profit company established by the FCC to administer the USF. In 2021, USAC disbursed approximately $8.5 billion in funding through the four permanent USF programs using funds collected from service providers. Service providers are permitted to pass through their contribution obligations to their end users and just about all of them do. This is reflected in the line item surcharges for “Universal Service Fund” contributions that most consumers and businesses see in their monthly invoices.

The USF has been around in one form or another for decades, and its current explicit funding mechanism has not changed significantly in the past 25 years (though it has evolved from an initial focus on supporting telecommunications service to a focus on supporting broadband service, too). The push to reform USF and the sources of its funding are being driven by two competing variables: the decline in revenues that fund the USF, on the one hand, and increased demands for support from the Fund itself, on the other hand.

A. The contribution base is shrinking, while demand for broadband-related support continues to grow—leading to a high contribution factor.

Even though most USF support is used to make broadband service available and affordable, revenues from the sale of broadband internet access services are not included in the contribution base. As communications-related spending by consumers and businesses has shifted from telephony to broadband services, the pool of revenue assessed for USF—known as the “contribution base”—therefore has declined. As a result, the contribution factor for calculating USF assessments has grown from around six percent two decades ago to some 33 percent in the most recent quarter. This means that for every dollar spent on assessable communications services, consumers and businesses pay an additional 33 cents into the USF.

At the same time that revenues assessed for the USF have declined, the need for support from the USF has grown because demand for broadband service has increased significantly and shows no sign of abating. The FCC has continued to respond to this growth in demand for USF support on a bipartisan basis by increasing the size of (i.e., the amount of funding available for) USF programs. Even before the COVID-19 pandemic underscored the importance of broadband for every American household, there were notable expansions in USF spending in response to increased need. In short, expansion of USF spending has further driven up the contribution factor to generate enough contribution revenue to fund broadband needs.

B. Interested parties have proposed a number of solutions to shore up revenues for the USF.

With USF spending so appropriately attuned to increased broadband needs, some in telecom policy circles are suggesting that the most logical way to reduce the contribution factor and at the same time maintain required funding levels is to include and assess revenue for the provision of broadband service in the contribution base. For example, in a report commissioned by INCOMPAS, NTCA–The Rural Broadband Association, and the Schools, Health & Libraries Broadband (SHLB) Coalition, a former FCC official estimated that expanding the contribution base to include broadband access revenues would lower the contribution factor to less than four percent.

Some parties (including many of the largest ISPs) have suggested instead that the contribution base should be widened to include revenues from popular online services. Parties advocating this approach essentially argue for a paradigm shift in the funding mechanism. Under this new model, online services that consumers access over broadband networks would become responsible for supporting those networks financially, even though private ISPs own and operate those networks and receive monthly subscriber fees from those very same consumers. In many ways, this approach is not dissimilar to proposals currently being advocated for in Europe by incumbent telecommunications carriers and ISPs. Critics assert that these proposals would violate long-established norms regarding the relationship between communications networks and the services that consumers access over those networks, among other concerns.

In the U.S., developments in this space are pending in all three branches of government. We summarize below the key venues in which action is currently is taking place: the FCC, the Fifth and Sixth Circuits, and Congress.

A. FCC’s “Future of USF” Report

The IIJA required the FCC to initiate a proceeding by December 15, 2021, to evaluate the implications of the IIJA on how the FCC should achieve its universal service goals for broadband. The IIJA mandates that the report discuss the FCC’s options for improving its effectiveness in achieving universal service goals for broadband in light of the IIJA, including its allocation to the construction of broadband in unserved and underserved areas and communities. In response to a public call for input, many commenters in this proceeding chose to focus on USF contributions and urged the FCC to include this issue in its report to Congress, which is due in just a little over a week, by August 12, 2022.

While the FCC’s report to Congress may not result in any immediate action, it nevertheless is likely to be a focal point for the debate over USF reform and is likely to shape future conversations in this space.

B. Court Challenges

In the U.S. Court of Appeals for the Fifth Circuit, a group of challengers operating under the banner of Consumers’ Research and Cause Based Commerce have filed multiple court challenges, alleging that the FCC’s approval of the USF quarterly contribution factor exceeds the FCC’s statutory authority and violated the U.S. Constitution and other federal laws. These same challengers filed a nearly identical petition in the Sixth Circuit. In contrast to the debate over who should contribute to the USF, in which the importance of the Fund’s existence is fully acknowledged, these parties have taken direct aim at USF itself. They allege that the entire funding mechanism that has been in place for some 25 years – in which Congress delegated the FCC authority to raise and spend USF funds, and the FCC appointed USAC to assist in administration of those responsibilities – is an unconstitutional delegation of authority, among other claims.

The FCC, supported by a diverse coalition of parties that have relied on USF for years to build networks and serve the public, as well as members of Congress and public interest advocates, have vigorously opposed these judicial challenges. Among other points, the FCC and its broad base of supporters assert that Congress provided ample guidance to the FCC in the Communications Act regarding the USF, fully consistent with controlling precedent of the U.S. Supreme Court. Briefing on the principal Fifth Circuit case (Case No. 22-60008) is nearly complete but no oral argument has been scheduled as of yet.

While the FCC has strong defenses, if the court were to side with the challengers then revenue for the USF program could drop to zero and result in severe consequences. This also likely would place immense pressure on Congress to develop a new funding mechanism, and it presumably would lead to a vigorous debate over the contributions methodology including who must contribute to the program and how.

C. Legislative Activity

There also is Congressional interest in continuing the debate around changes to USF funding.

For example, the Funding Affordable Internet with Reliable (“FAIR”) Contributions Act (S.2427), which was introduced by Senator Roger Wicker (R-MS) in July 2021, would require the FCC to conduct a study and submit to Congress a report specifically concerning the feasibility of funding USF through contributions supplied by “edge providers,” which the FAIR Contributions Act would define as providers “of online content or services, such as a search engine, a social media platform, a streaming service, an app store, a cloud computing service, or an e-commerce platform.” Beyond conducting a study, the FAIR Contributions Act also would direct the FCC to explain to Congress what “statutory authority the [FCC] would require to enact such a change.” This bill was voted out of the Senate Commerce Committee on May 11, 2022, with an amendment to provide that the required study would also consider expanding the contribution base to include ISPs. It remains pending in the Senate. Rep. Markwayne Mullin (R-OK-2) recently introduced a similar bill in the House (H.R.8575), which was referred to the Energy and Commerce Committee on July 28, 2022.

Another bill, Reforming Broadband Connectivity Act of 2021 (S.3236), was introduced by Senator Amy Klobuchar (D-MN) in November 2021, and would call for the FCC to “conduct a study assessing the need to expand the contribution base” of USF to ensure the requirement to contribute “is imposed fairly and equitably,” and to submit a report to Congress with the results of that study. The Act would also require the FCC to conduct a rulemaking to reform the contribution system, “including by expanding the contribution base” of USF. An identical companion bill (H.R.6314) was introduced by Rep. Joe Neguse (D-CO-2) in the House of Representatives in December 2021. The likelihood of success of these legislative efforts remains unclear at this point, as they are still in their early stages.

The FCC will issue its “Future of USF” report to Congress by August 12. Regardless of whether or how the report addresses the expansion of the contribution base, this will continue to be a topic of interest for industry participants, particularly given the pending litigation and ongoing legislative efforts. As such, all stakeholders should be planning now (if they have not already) for a sustained debate on the Hill and, to a certain extent, at the FCC, on expanding the USF contribution base to include ISP revenues, streaming revenues, or both.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Communications and Media practice.