Who Should Pay for Universal Service?

Although news about Comcast’s acquisition of Time Warner Cable started to percolate this week (and there will be much more next week – we promise), we reach back today to look at a small action taken by the Federal Communications Commission earlier this month that could lead to a loud debate down the road.

As regular Benton readers are well aware, universal service is a cornerstone of the law that established the FCC, the Communications Act of 1934, and is the principle that all Americans should have access to communications services. Traditionally, universal service policies have helped make telephone service ubiquitous, even in remote rural areas. The Telecommunications Act of 1996 expanded the traditional goal of universal service to include increased access to both telecommunications and advanced services -- such as high-speed Internet -- for all consumers at just, reasonable and affordable rates. The 1996 Act established principles for universal service that specifically focused on increasing access to evolving services for consumers living in rural and insular areas, and for consumers with low-incomes. Additional principles called for increased access to high-speed Internet in the nation’s schools, libraries and rural health care facilities. The FCC established four programs within the Universal Service Fund to implement the statute. The four programs are:

1. Connect America Fund (formally known as High-Cost Support) for rural areas. This program provides support to certain qualifying telephone companies that serve high-cost areas, thereby ensuring that the residents of these regions have access to reasonably comparable service at rates reasonably comparable to urban areas.
2. Lifeline: This program assists low-income customers by helping to pay for monthly telephone charges so that telephone service is more affordable. In addition, Link Up America helps low-income consumers living on Tribal lands with a one-time discount of $100 on the initial installation fee for a traditional wireline telephone, or activation fee for a wireless telephone, for the primary residence. It also allows subscribers to pay the remaining amount that they owe on a deferred schedule, interest free. (More on Lifeline)
3. The Schools and Libraries, also known as E-rate, program provides telecommunication services (e.g., local and long-distance calling, both fixed and mobile, high-speed data transmission lines), Internet access, and internal connections (the equipment that delivers these services to particular locations) to eligible schools and libraries. (More on E-rate)
4. The Rural Health Care program allows rural health care providers to pay rates for telecommunications services similar to those of their urban counterparts, making telehealth services affordable, and also subsidizes Internet access.

The 1996 Act states:

“Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the [FCC] to preserve and advance universal service. The [FCC] may exempt a carrier or class of carriers from this requirement if the carrier's telecommunications activities are limited to such an extent that the level of such carrier's contribution to the preservation and advancement of universal service would be de minimis. Any other provider of interstate telecommunications may be required to contribute to the preservation and advancement of universal service if the public interest so requires.”

On August 7, the FCC released an order asking the Federal-State Joint Board on Universal Service to provide recommendations on how the FCC should modify the universal service contribution methodology. The Joint Board, for those scoring at home, was created by provisions in the Telecommunications Act of 1996 and first established in March 1996 to make recommendations to implement the universal service provisions of the 1996 Act. The Joint Board is comprised of FCC Commissioners, State Utility Commissioners, and a consumer advocate representative. (see current membership) The Joint Board is co-chaired by FCC Commissioner Jessica Rosenworcel and Pennsylvania Public Utility Commission member James Cawley.

In a 1997 order implementing the Telecommunications Act of 1996, the FCC chose to assess contributions to the Universal Service Fund based on end-user revenues. Since that time, however, network convergence and technological innovation have transformed the telecommunications industry, and the contribution system has become increasingly complex and difficult to administer.

The FCC last asked the public for input on the contribution methodology in 2012. In that proceeding, the FCC asked who should contribute, how contributions should be assessed, and how to make the system more transparent and fair. The FCC is now asking the Joint Board to review that proceeding to develop recommendations, with a particular focus on how any modifications to the contribution system would impact achievement of the statutory principle that there be state as well as federal mechanisms to preserve and advance universal service. The FCC also asks the Joint Board to consider how to further the goals of improving the efficiency, fairness and sustainability of the contribution system.

Currently, the Universal Service Fund is paid for by contributions from telecommunications carriers, including wireline and wireless companies, and interconnected Voice over Internet Protocol (VoIP) providers, including cable companies that provide voice service, based on an assessment on their interstate and international end-user revenues. The Universal Service Administrative Company (USAC) administers the four programs and collects monies for the Universal Service Fund under the direction of the FCC. The FCC’s annual monitoring report tracks contributions and disbursements. Some consumers may notice a “Universal Service” line item on their telephone bills. This line item appears when a company chooses to recover its USF contributions directly from its customers by billing them this charge. The FCC does not require this charge to be passed on to customers. Each company makes a business decision about whether and how to assess charges to recover its Universal Service costs. These charges usually appear as a percentage of the consumer’s phone bill. Companies that choose to collect universal service fees from their customers cannot collect an amount that exceeds their contribution to the USF. They also cannot collect any fees from a Lifeline program participant.

Telecommunications companies must pay a percentage of their interstate end-user revenues to the Universal Service Fund. This percentage is called the contribution factor. The contribution factor changes four times a year (quarterly) and is increased or decreased depending on the needs of the Universal Service programs. By way of example, on June 12, 2014, the FCC proposed that the universal service contribution factor for the third quarter of 2014 would be 0.157 or 15.7 percent based on a projected need to raise just over $2.15 billion for the four universal service programs in that quarter.

The debate contribution methodology is likely to flare up around who pays into the Universal Service Fund and how much. Traditionally, contributions were based on a landline phone-dominated world and now consumers are increasingly relying on wireless and broadband-delivered services. The FCC recognizes high-speed Internet as the 21st Century’s essential communications technology, and is working to make broadband as ubiquitous as voice, while continuing to support voice service. FCC Commissioner Michael O’Rielly supported the FCC’s referral to the Joint Board but included this caution:

“As we start down this important path, however, I would caution that contributions reform should not be seen as a backdoor way of increasing the size of the universal service fund or imposing new fees on the Internet. For example, I would be concerned by any effort to assess IP addresses. I hope that the Joint Board, and ultimately the Commission, will consider reforms that modernize contributions without inhibiting broadband investment or imposing additional burdens on the consumers that pay to support universal service.”

Although we haven't seen much coverage or reaction to the FCC action, state regulators welcomed it. “[T]hese are exactly the kinds of decisions Congress had in mind when it created the Joint Board in the first place. The Joint Board process ensures that the agency will receive expert recommendations from the States officials closest to the consumers affected by changes to the Universal Service program," said Chris Nelson on behalf of the National Association of Regulatory Utility Commissioners’ Committee on Telecommunications. Nelson is the chair of that committee, a commissioner on the South Dakota Public Utilities Commission, and a member of the Joint Board as well.

The FCC asks the Joint Board to present its recommendations no later than April 7, 2015. By statute, the FCC must complete any proceeding to implement the Joint Board’s recommendations within one year of receiving them. So, obviously, this’ll be a simmering debate for some time, but not without flare-ups, for sure. We’ll be tracking and, as always, we’ll see you in the Headlines.

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