USForward: FCC Must Reform USF Contributions Now - An Analysis of the Options

The Federal Communications Commission’s (FCC) Universal Service Fund (USF or Fund) has been one of the nation’s most important tools for connecting our nation, including rural communities, low-income families, schools, libraries, and rural health care facilities. However, the funding mechanism that supports the Fund is under significant duress. The “contribution base” – the revenues used to calculate USF contributions – has declined 63% in the last two decades, from $79.9 billion in 2001 to $29.6 billion in 2021. Meanwhile, the “contribution factor” – which is the USF fee assessed on interstate and international telecommunications service and certain telecommunications revenues – has increased from 6.9% in 2001 to a historic high of 33.4% in the second quarter of 2021. Assuming a continuation of historical trends, the contribution factor could approach 40% or more in the coming years. This situation is unsustainable and jeopardizes the universal broadband connectivity mission for our nation without immediate FCC reform. To ensure the enduring value of the USF program and America’s connectivity goals, we must have a smart and substantive conversation about the program’s future. At the request of INCOMPAS, NTCA – the Rural Broadband Association, and the Schools, Health & Libraries Broadband (SHLB) Coalition, this report analyzes several options for FCC reform of the current status quo that have been pending in FCC rulemakings dating back to the early 2000’s: (1) modifying the current revenues-based contribution methodology to assess broadband internet access service revenues, (2) assessing connections, or (3) assessing telephone numbers. Reforming the current revenues-based system to include broadband internet access service revenues is the preferred approach, both as a matter of policy and ease of implementation. Doing so would reduce the contribution factor to less than 4%.

• First, it is appropriate as a matter of public policy to assess broadband internet access service revenues because all four programs in the USF promote universal broadband. The revenues from broadband internet access services that are increasingly used by Americans today should contribute to the USF programs that support the expansion of such services to all. This will better reflect the value of broadband internet access service in today’s marketplace for both consumers and businesses.
• Second, broadband internet access service revenues are expected to be stable in the future, with the potential for some modest growth. This would stabilize the funding mechanism and stop the death spiral in the current USF contribution methodology.
• Third, it is a solution that can be implemented more quickly than the alternatives. It would be far less uncertain than seeking congressional intervention and can be done by the FCC pursuant to its current statutory mandate. FCC reform of the USF contribution mechanism now is an important first step in stabilizing the current system.
• Fourth, there is a significant advantage to retaining the current revenues-based system because most of the revenues reported to the FCC for USF purposes come from publicly traded companies that are audited and subject to stringent financial reporting standards for their revenues. This external financial scrutiny would provide an additional level of assurance that the metric used to assess USF contributions is accurately reported.
• Fifth, assessing both broadband internet access service and voice services removes the incentives of providers to arbitrarily allocate revenues from bundled services to one service and not the other. This creates an inequitable situation where some end users continue to pay into USF, while others do not, yet everyone benefits from the positive network externalities of universal connectivity made possible from the four USF programs that support broadband-capable networks and service.