Universal Service Fund: Background and Options for Reform
Universal Service Fund:
Background and Options for Reform
Updated November 25, 2008
Angele A. Gilroy
Specialist in Telecommunications
Resources, Science, and Industry Division
Universal Service Fund:
Background and Options for Reform
Summary
The concept that all Americans should be able to afford access to the
telecommunications network, commonly called the “universal service concept” can
trace its origins back to the 1934 Communications Act. Since then, the preservation
and advancement of universal service has been a basic tenet of federal
communications policy, and Congress has historically played an active role in
helping to preserve and advance universal service goals. The passage of the
Telecommunications Act of 1996 (P.L. 104-104) not only codified the universal
service concept, but also led to the establishment, in 1997, of a federal Universal
Service Fund (USF or Fund) to meet the universal service objectives and principles
contained in the 1996 Act. According to Fund administrators, from 1998 through
end of year 2005, $43.5 billion was distributed, or committed, by the USF, with all
The Federal Communications Commission (FCC) is required to ensure that
there be “specific, predictable and sufficient...mechanisms to preserve and advance
universal service.” However, changes in telecommunications technology and the
marketplace, while often leading to positive benefits for consumers and providers,
have had a negative impact on the health and viability of the USF, as presently
designed. These changes have led to a growing imbalance between the entities and
revenue stream contributing to the fund and the growth in the entities and programs
eligible to receive funding. The desire to expand access to broadband and address
what some perceive as a “digital divide” has also placed focus on what role, if any,
the USF should take to address this issue.
There is a growing consensus among policy makers, including some in
Congress, that significant action is needed not only to ensure the viability and
stability of the USF, but also to address the numerous issues surrounding its
appropriate role in a changing marketplace. How this concept should be defined,
how these policies should be funded, who should receive the funding, and how to
ensure proper management and oversight of the Fund are among the issues expected
to frame the debate.
The current policy debate has focused on four major concerns: the scope of the
program; who should contribute and what methodology should be used to fund the
program; eligibility criteria for benefits; and concerns over possible program fraud,
waste, and abuse. A separate and more narrowly focused issue, the impact of the
Antideficiency Act (ADA) on the USF, has also become an issue of concern.
Legislative measures to address the reform, restructuring and expansion into
broadband of the USF (S. 101, S. 711, S. 3491, H.R. 42, H.R. 2054, H.R. 5806, H.R.
Congress.
This report will be updated as events warrant.
Contents
In troduction ......................................................1
The Universal Service Concept.......................................2
The Federal Universal Service Fund...................................3
High-Cost Program............................................3
Low-Income Program..........................................4
Schools and Libraries or “E-Rate” Program.........................4
Rural Health Care Program......................................4
Funding .....................................................5
Disbursements ................................................6
Policy Options....................................................7
Program Scope................................................8
Contribution Methodology......................................10
Expanding the Base.......................................10
Intrastate Revenues.......................................10
Numbers or Connections...................................11
Distribution Methodology......................................11
Primary or Single Line Limitation............................12
Reverse Auctions.........................................13
Identical Support Rule.....................................13
Capping ................................................14
Improved Targeting.......................................15
Fraud, Waste, and Abuse.......................................15
Antideficiency Act Compliance..................................18
Joint Board Recommendation and the FCC Response....................19
Joint Board Recommendation...................................19
FCC Response...............................................21
Activity in the 110th Congress.......................................22
Legislation ..................................................23
Appendix .......................................................26
List of Figures
Figure 1. USF Disbursements by Program 2007.........................7
List of Tables
Table 1. Universal Service Fund Contribution Factors....................26
Table 2. USF Support by State 2006..................................27
Universal Service Fund:
Background and Options for Reform
Introduction
The concept that all Americans should be able to afford access to the
telecommunications network is commonly called the “universal service concept.”1
This concept can trace its origins back to the 1934 Communications Act. Since then
the preservation and advancement of universal service has been a basic tenet of
federal communications policy, and Congress has historically played an active role
in helping to preserve and advance universal service goals. In 1996 Congress passed
the Telecommunications Act of 1996 (P.L. 104-104), which not only codified the
universal service concept, but also led to the establishment of a federal Universal
Service Fund (USF or the Fund) to meet the universal service objectives and
principles contained in the 1996 Act. According to Fund administrators, since 1997
over $50 billion in support has been disbursed by the USF, with all 50 states, the
District of Columbia, and all territories receiving some benefit.2
Over the past decade the telecommunications sector has undergone a vast
transformation fueled by rapid technological growth and subsequent evolution of the
marketplace. A wide range of new services have become available, offered by a
growing list of traditional as well as nontraditional providers. One of the results of
this transformation is that the Nation’s expectations for communications services
have also grown. In the past, access to the public switched network through a single
wireline connection, enabling voice service, was the standard of communications.
Today the desire for simple voice connectivity has been replaced by the demand, on
the part of consumers, business, and government, for access to a vast array of
multifaceted fixed and mobile services. Consumers are also demanding greater
flexibility and may choose to gain access to the same content over a variety of
technologies, whether it be a computer, a television, or a mobile telephone. The
trend towards sharing information, such as music, movies, or photographs, is also
growing, making it necessary to ensure that network upload speeds match download
capabilities. These advances require that networks transition into converged next-
generation wireline and wireless broadband networks capable of meeting these
demands. One of the challenges facing this transition is the desire to ensure that all
citizens have access to an affordable and advanced telecommunications infrastructure
so that all members of American society may derive the benefits.3
1 Communications Act of 1934, as amended [47 U.S.C.151 et seq.].
2 See [http://www.usac.org/about/universal-service/fund-facts/fund-facts.aspx].
3 For a discussion of issues relating to broadband deployment, access, and regulation see
(continued...)
Technological advances such as the ability of the Internet to provide data, voice,
and video, the bundling of service offerings, the advancement of wireless services,
and the growing convergence of the telecommunications sector have, according to
many policy makers, made it necessary to reexamine traditional policy goals such as
the advancement of universal service mandates. These changes in technology and
the marketplace, a declining funding base and significant increases in the amount of
support disbursed by the Fund, have led to concerns that the USF is in need of
reform. There is a growing consensus, among policy makers, including some in
Congress, that significant action is needed not only to ensure the viability and
stability of the USF, but also to address the numerous issues surrounding such
reform. The 110th Congress may take a prominent role in this debate. How this
concept should be defined, how these policies should be funded, who should receive
the funding, and how to ensure proper management and oversight of the Fund are
among the issues expected to frame the policy debate.
The Universal Service Concept
Since its creation in 1934 the Federal Communications Commission (FCC, or
Commission) has been tasked with “mak[ing] available, so far as possible, to all the
people of the United States, ... a rapid, efficient, Nation-wide, and world-wide wire4
and radio communications service with adequate facilities at reasonable charges....”
This mandate led to the development of what has come to be known as the universal
service concept.
The universal service concept, as originally designed, called for the
establishment of policies to ensure that telecommunications services are available to
all Americans, including those in rural, insular and high cost areas, by ensuring that
rates remain affordable. During the twentieth century, government and industry
efforts to expand telephone service led to the development of a complex system of
cross subsidies to expand the network and address universal service goals. The
underlying goal of the cross-subdization policy was to increase the number of
subscribers to the network by shifting costs among network providers and
subscribers. Profits from more densely populated, lower cost urbanized areas helped
to subsidize wiring and operation costs for the less populous, higher cost rural areas.
Higher rates and equipment charges for business and long distance customers helped
to subsidize the charges for residential local calling. The funding for universal
service objectives was built into the rate structure and effectively, most telephone
subscribers have contributed to universal service goals for decades.5
3 (...continued)
CRS Report RL33542, Broadband Internet Regulation and Access: Background and Issues,
by Angele A. Gilroy and Lennard G. Kruger.
4 Communications Act of 1934, as amended, Title I sec.1[47 U.S.C. 151].
5 Specific federal programs such as the Rural Telephone Bank and Rural Utilities Service
loan programs were also developed to assist high cost rural areas.
With the advent of competition and the breakup of the Bell System, the complex
system of cross subsidies that evolved to support universal service goals was no
longer tenable. The Telecommunications Act of 1996 (P.L. 104-104; 47USC)
codified the long-standing commitment by U.S. policymakers to ensure universal
service in the provision of telecommunications services (Sec. 254). The 1996 Act
also required that every telecommunications carrier that provides interstate
telecommunications services be responsible for universal service support [Sec.
254(d)] and that such charges be made explicit [Sec. 254(e)].6 The 1996 Act also
expanded the concept of universal service to include, among other principles, that
elementary and secondary schools and classrooms, libraries, and rural health care
providers have access to telecommunications services for specific purposes at
discounted rates [Sec. 254(b)(6) and 254(h).]
The Federal Universal Service Fund
Over the years this concept fostered the development of various FCC policies
and programs to meet this goal. A new federal Universal Service Fund (USF or Fund)
was established in 1997 to meet the specific objectives and principles contained in
the 1996 Act. The USF is administered by the Universal Service Administrative
Company (USAC), an independent-not-for-profit organization, under the direction
of the FCC. The FCC, through the USF, offers universal service support through a
number of direct mechanisms that target both providers of and subscribers to7
telecommunications services. The USF provides support and discounts for providers
and subscribers through four programs: high-cost support; low-income support;8
schools and libraries support; and rural health care support.
High-Cost Program
High-cost support, provided through the high cost program, is an example of
provider-targeted support. Under the high cost program, eligible telecommunications
carriers, usually those serving rural, insular, and high cost areas, are able to obtain
funds to help offset the higher than average costs of providing telephone service.9
This mechanism has been particularly important to rural America where the lack of
subscriber density leads to significant costs.
6 Sec. 254 (d) also states that other providers of interstate telecommunications may be
required to contribute to the preservation and advancement of universal service if it is in the
public interest.
7 Many states participate in or have programs that mirror FCC universal service mechanisms
to help promote universal service goals within their individual states.
8 For further information on the FCC’s universal service support mechanisms see
[ h t t p : / / www.f c c . go v/ c gb/ c ons ume r f a c t s / uni ve r s a l s e r vi c e .ht ml ] .
9 The high-Cost Fund consists of five sub-funds which address specific needs: High-Cost
Loop Support; High-Cost Model Support; Local Switching Support; Interstate Common
Line Support; and Interstate Access Support.
Low-Income Program
FCC universal service policies have been expanded to target low-income
subscribers. Two income-based programs, Lifeline and Link-Up, established in the
mid-1980s, were developed to assist economically needy individuals. The Link-Up
program, established in 1987, assists low-income subscribers pay the costs associated
with the initiation of telephone service, and the Lifeline program, established in
1984, assists low-income subscribers pay the recurring monthly service charges
incurred by telephone subscribers.10
Schools and Libraries or “E-Rate” Program
Under universal service provisions contained in the 1996 Act, elementary and
secondary schools and classrooms, and libraries are designated as beneficiaries of
universal service discounts. Universal service principles detailed in Section
254(b)(6) state that “Elementary and secondary schools and classrooms ... and
libraries should have access to advanced telecommunications services...” The act
further requires in Section 254(h)(1)(B) that services within the definition of
universal service be provided to elementary and secondary schools and libraries for
education purposes at discounts, that is at “rates less than the amounts charged for
similar services to other parties.”
The FCC established the Schools and Libraries Division within the Universal
Service Administrative Company (USAC) to administer the schools and libraries
or “E (education)-rate” program to comply with these provisions. Under this
program, which became effective, January 1, 1998, eligible schools and libraries
receive discounts ranging from 20 to 90 percent for telecommunications services
depending on the poverty level of the school’s (or school district’s) population and
its location in a high cost telecommunications area. Three categories of services are
eligible for discounts: internal connections (e.g., wiring, routers and servers); Internet
access; and telecommunications and dedicated services, with the third category
receiving funding priority. Unlike the high-cost and low-income programs, the FCC
established a yearly ceiling, or cap, of $2.25 billion for this program.
Rural Health Care Program
Section 254(h) of the 1996 Act requires that public and non-profit rural health
care providers have access to telecommunications services necessary for the
provision of health care services at rates comparable to those paid for similar services
in urban areas. Subsection 254(h)(1) further specifies that “to the extent technically
feasible and economically reasonable” health care providers should have access to
advanced telecommunications and information services. The FCC established the
Rural Health Care Division (RHCD) within the USAC to administer the universal
support program to comply with these provisions. Under FCC-established rules only
public or non-profit health care providers are eligible to receive funding. Eligible
health care providers, with the exception of those requesting only access to the
10 Support is not given directly to the subscriber but to their designated telecommunications
service provider, who in turn charge these subscribers lower rates.
Internet, must also be located in a rural area.11 Similarly to the Schools and Libraries
program, this support program went into effect on January 1, 1998 and a funding
ceiling, or cap, was established, in this case at $400 million annually. The primary
use of the funding is to provide reduced rates for telecommunications and
information services necessary for the provision of health care.12
Funding
The USF receives no federal monies but is funded by mandatory contributions
from telecommunications carriers that provide interstate service.13 Under current
rules, a carrier’s contributions are assessed based on a percentage of its interstate and
international end-user telecommunications revenues. This percentage is called the
contribution factor. The FCC calculates the contribution factor based on anticipated
funding needs of the USF in the upcoming quarter. This information is submitted
quarterly, to the FCC, by USAC’s universal service administrator. The contribution
factor is calculated four times a year, on a quarterly basis, and may increase,
decrease, or remain the same depending on the needs of the universal service
programs drawing on the USF. The FCC’s Wireline Competition Bureau releases a
public notice stating the proposed factor. After 14 days, absent any FCC action, the
factor becomes final. As shown in Appendix Table 1, from 2001 to the first half of
2005 the contribution factor generally saw a steady increase. During that period the
contribution factor varied from a low of 6.7 percent in the first quarter of 2001 to a
high of 11.1 percent in the second quarter of 2005. Since reaching that high, the
factor had begun to moderate; however, the contribution factors for the second and
third quarters of 2007, at 11.7 percent and 11.3 percent respectively, were a strong
reversal of this trend, resulting in a significant increase from the first quarter 2007
contribution factor of 9.7 percent. Since reaching a high of 11.7 percent the
contribution factor began to moderate with a first quarter 2008 factor of 10.2 percent.
However the contribution factor has once again begun to climb reaching 11.4 percent
for both the third and fourth quarters of 2008. The overall growth in the factor over
this decade remains a significant policy concern. (See Policy Options section of this
report for a discussion of some of the reasons attributed to this increase.)
There are some exceptions to this funding process. Under the FCC’s rules
telecommunications providers are not required to contribute in a given year to
universal service if their annual contributions to the program would be de minimis,
that is less than $10,000 in that year, or if they provide only international services.
Filers are also not required to contribute based on international revenues if their
interstate end-user revenues meet the 12 percent rule, that is, if their interstate end-
user revenues represent less than 12 percent of their combined interstate and
11 Any health care provider that does not have toll-free access to the Internet can receive
support. Support is available for limited long distance charges for accessing the Internet.
This has become an increasingly rare occurrence, however, and the last time such support
was given was in 2001.
12 For additional information on this program, including funding commitments, see the
RHCD website: [http://www.universalservice.org/rhc/].
13 These companies include wireline telephone companies, wireless telephone companies,
paging service providers and interconnected Voice over Internet Protocol (VoIP) providers.
international end-user revenues. In other cases the FCC has determined that selected
categories of providers, for example, wireless carriers and interconnected VoIP
providers, may, but are not required to, base their contributions on an FCC-
established revenue percentage, or “safe harbor,” that attempts to estimate the
percentage of the provider’s total revenues that are interstate and international end-
user revenues.14 The current (effective June 2006) safe harbor for wireless carriers
and VoIP providers is set at 37.1 percent and 64.9 percent of total revenues,
respect i v el y. 15
Many assessed providers have chosen, but are not required, to recover USF
contributions directly from their customers. They pass through universal service
payments directly to consumers and earmark a universal service charge on
subscriber’s bills. This is legal and a common industry practice. However, if an
assessed provider does choose to collect USF fees directly from their customers the
provider is not permitted to recover, through a federal universal service line item on
a customer’s bill, an amount that exceeds the universal service charge contribution
fact or. 16
Disbursements
According to USAC, universal service support disbursements, for calendar year
2007, totaled about $6.95 billion.17 Figure 1, below, shows the breakdown of
calendar year 2007 USF disbursements as a percentage by individual program. High
Cost support accounted for 61.6 percent of total disbursements, or $4.3 billion.
Schools and Libraries support represented 26.0 percent of disbursements, totaling
$1.8 billion. Low Income support was 11.8 percent of disbursements, totaling $822.8
million. Commitments for Rural Health Care support were about $37.4 million, or
0.5 percent of disbursements. (It should be noted that disbursements for the schools
and libraries support program and the rural health care program operate on a school
year calendar and represent commitments as of December 31, 2007 for the funding
year which runs from July 1- June 30. Therefore, these figures do not represent the
full yearly commitment made to these programs.) Although subscribers benefit from
the USF, only companies that provide the services draw money directly from the
fund.
14 These providers have expressed concern over their inability to distinguish between their
interstate and intrastate revenues. However, in lieu of using the safe harbor percentage they
do have the option to submit traffic study data to show that they should contribute less.
15 FCC Updates Approach for Assessing Contributions to the Federal Universal Service
Fund. Available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/
DOC-266030A1.pdf].
16 It should also be noted that an assessed provider is not permitted to collect any fees from
a lifeline or link-up subscriber, unless that subscriber has incurred long-distance charges.
17 These figures are based on USAC 2007 unaudited financial data. Detailed data, including
state-specific information, on USF support can be found in the Universal Service Company
report-2007.pdf].
Figure 1. USF Disbursements by Program 2007
High Cost
61. 6%
S c hool s /
Li brari es
Low Income26.0%
11.8%Rural Health
0. 5 %
Source: Data from USAC 2007 Annual Report (unaudited data).
Appendix Table 2, provides data on USF payments and contributions broken
down by state and program for 2006. The data show that service providers (and their
subscribers) in every state, territory and commonwealth received, to varying degrees,
some 2005 USF payments. For example, all received at least some payments from
both the Low Income program and, with the exception of American Samoa, the
Schools and Libraries program. The allocation of benefits vary depending on which
individual program is examined. However, when overall net dollar flow18 is
examined 24 states and the District of Columbia were net contributors to the 2006
USF program as a whole. The service providers in the remaining 26 states and 5
territories were net receivers, that is they received more payments from the USF, for
2006, than estimated contributions. Although there is some variation within programs
and among states in any given year, on the whole whether a particular state is a net
receiver of, or contributor to the USF program, is a fairly stable pattern.19 In general,
rural states with low population density typically tend to benefit most as they receive
significant funding from the High Cost program, but tend to contribute less to the
USF program overall, since they tend to generate lower telecommunications
revenues.
Policy Options
The FCC is required to ensure that there be “specific, predictable and sufficient20
... mechanisms to preserve and advance universal service.” However, changes in
telecommunications technology and the marketplace, while often leading to positive
18 Contribution allocation among states is an FCC staff estimate. Net dollar flow is annual
payments minus estimated contributions.
19 For a breakdown of USF distributions and contributions by state for previous years see
Table 1.12 of the FCC’s Universal Service Monitoring Report. Monitoring reports issued
since 1991 are available at [http://www.fcc.gov/wcb/iatd/monitor.html].
20 47 U.S.C. Sec. 254 (b)(5).
benefits for consumers and providers, have had a negative impact on the health and
viability of the USF, as presently designed. These changes have led to a growing
imbalance between the entities and revenue stream contributing to the fund and the
growth in the entities and programs eligible to receive funding. The desire to expand
access to broadband and address what some perceive as a “digital divide” has also
placed focus on what role, if any, the USF should take to address this issue.21
The current policy debate surrounding USF reform has focused on four major
concerns: the scope of the program; who should contribute and what methodology
should be used to fund the program; eligibility criteria for benefits; and concerns over
possible program fraud, waste, and abuse. A separate and more narrowly focused
issue, the impact of the Antideficiency Act (ADA) on the USF, also has become an
issue of concern.
Program Scope
One of the major policy debates surrounding universal service is whether access
to advanced telecommunications services (i.e., broadband) should be incorporated
into universal service objectives. The term universal service, when applied to
telecommunications, refers to the ability to make available a basket of
telecommunications services to the public, across the nation, at a reasonable price.
As directed in the 1996 Telecommunications Act [Section 254(c)], a federal-state
Joint Board was tasked with defining the services which should be included in the
basket of services to be eligible for federal universal service support; in effect using
and defining the term “universal service” for the first time. The Joint Board’s
recommendation, which was subsequently adopted by the FCC in May 1997,
included the following in its universal services package: voice grade access to, and
some usage of, the public switched network; single line service; dual tone signaling;
access to directory assistance; emergency service such as 911; operator services;
access and interexchange (long distance) service.
Some policy makers have expressed concern that the FCC-adopted definition
is too limited and does not take into consideration the importance and growing
acceptance of advanced services such as broadband and Internet access. They point
to a number of provisions contained in the Universal Service section of the 1996 Act
to support their claim. Universal service principles contained in Section 254(b)(2)
state that “Access to advanced telecommunications services should be provided to
all regions of the Nation.” The subsequent principle (b)(3) calls for consumers in
all regions of the Nation including “low-income” and those in “rural, insular, and
high cost areas” to have access to telecommunications and information services
including “advanced services” at a comparable level and a comparable rate charged
for similar services in urban areas. Such provisions, they state, dictate that the FCC
expand its universal service definition.
21 For a discussion of the issues surrounding the “digital divide” see CRS Report RL30719,
Broadband Internet Access and the Digital Divide: Federal Assistance Programs, by
Lennard G. Kruger and Angele A. Gilroy.
The 1996 Act does take into consideration the changing nature of the
telecommunications sector and allows for the universal service definition to be
modified if future conditions warrant. Section 254(c)of the act states that “universal
service is an evolving level of telecommunications services” and the FCC is tasked
with “periodically” reevaluating this definition “taking into account advances in
telecommunications and information technologies and services.” Furthermore, the
Joint Board is given specific authority to recommend “from time to time” to the FCC
modification of the definition of the services to be included for federal universal
service support. The Joint Board, in July 2002, concluded such an inquiry and
recommended that at that time no changes be made in the list of services eligible for
universal service support. The FCC, in a July 10, 2003 order (FCC 03-170) adopted
the Joint Board’s recommendation, thereby leaving unchanged the list of services
supported by Federal universal service. More recently, however, the Joint Board was
once again called upon to reexamine this issue and came up with a different
conclusion. The Joint Board, on November 19, 2007, recommended that the FCC
change the mix of services eligible for universal service support and concluded that
“the universal availability of broadband Internet services” be included in the Nation’s
communications goals and hence be supported by Federal universal service funds.22
The FCC is not required to adopt Joint Board recommendations, but is given up to
one year to complete a proceeding to consider them.23 (See Joint Board
Recommendation and the FCC Response section for a discussion of the Joint Board
recommendation issued in November 2007.)
Other policy makers caution that a more modest approach is appropriate given
the “universal mandate” associated with this definition. Also at issue is the
uncertainty and costs associated with mandating nationwide deployment of such
advanced services as a universal service policy goal. Some have expressed concern
that given the pressures currently facing the Fund, and their impact on the
contribution factor, the inclusion of broadband services, at this time, is taking on too
large a mandate. Current policy concerns regarding both the contribution and
distribution mechanisms should be addressed first, they state, prior to any expansion
of the USF definition. Furthermore, they state, the USF has already taken on limited
broadband deployment responsibilities through the E-rate and Rural Health Care
programs, and indirectly through the High Cost program, as funding is used to
upgrade existing telephone networks. If ubiquitous broadband deployment is a
national policy goal, they state, policymakers should not place further stress on the
USF program but should seek out other means of achieving this goal which may be
more effective, such as providing economic incentives, easing economic regulation,
encouraging municipal ownership, expanding other existing programs or establishing
a new program.24
22 For a summary of the Joint Board’s recommendations see [http://hraunfoss.fcc.gov/
edocs_public/attachma tch/FCC-07J -4A1.pdf].
23 It should be noted that the FCC is not required to implement the recommendations of the
Federal-State Joint Board; however, the presence of three FCC commissioners on the Board
gives much weight to their recommendations.
24 For example, the USDA’s Rural Utilities Service has a broadband loan and grant program
for rural areas. For information on this program see CRS Report RL33816, Broadband
(continued...)
Contribution Methodology
One of the major policy questions surrounding USF reform is to what degree,
if any, there should be a change in the way the program is funded. A consensus has
been forming that some reform to broaden the contribution base is needed. How this
should be accomplished however, remains open to debate. Proposals range from
modest options to expand the existing funding base, to broadening the base to include
intrastate revenues, to calling for a complete restructuring of the contribution
methodology.
Expanding the Base. One option is to broaden the base of entities that must
contribute to the Fund, by calling for technology neutral funding. The FCC has taken
a number of actions, over the years, to expand the pool of contributors, thereby25
broadening the base of entities supporting the Fund. For example, in 1998 the FCC
established a revenue percentage, or safe harbor, of 15 percent of revenues for
determining the USF contribution for wireless carriers. That percentage has been
increased twice since and is currently set at 37.1 percent. In a June 2006 decision,
the FCC further expanded the pool of contributors by requiring that providers of
interconnected VoIP contribute to the USF.26 Some policy makers have
recommended that the list of providers be expanded to include broadband providers
which were removed from the base when the FCC ruled that Internet access services
are information services, not telecommunications services. However, they generally
recommend that this expansion be contingent on the understanding that USF support
be used to upgrade the telecommunications infrastructure to include broadband
capabilities.
Intrastate Revenues. Another proposal calls for broadening the revenue
base by assessing fees on intrastate as well as interstate/international revenues.
Although this would provide an additional source for USF funds, many state that this
option may not be available absent Congressional action to specifically designate
intrastate revenues as a source for federal USF contributions. The recommendation
for specific Congressional clarification is based, to a large part, on a successful court
challenge of an earlier attempt by the FCC to collect support for the E-rate program
based on combined interstate and intrastate revenues. In the case of Texas Office of
Public Utility Counsel v. FCC (183F.3d; 393;1999) the United States Court ofth
Appeals, 5 Circuit concluded that “the agency (FCC) exceeded its jurisdictional
authority when it assessed contributions for sec. 254(h), ‘schools and libraries’
programs based on combined intrastate and interstate revenues of interstate
telecommunications providers and when it asserted its jurisdictional authority to do
24 (...continued)
Loan and Grant Programs in the USDA’s Rural Utilities Service, by Lennard G. Kruger.
25 However, it should be noted that in a reversal of this trend, the FCC, in an August 2005
decision, exempted digital subscriber line (DSL) service from USF assessments on the basis
of its August 2005 “information service” classification.
26 See FCC Updates Approach For Assessing Contributions To The Federal Universal
Service Fund, available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-
the same on behalf of high-cast support.” Proponents of including intrastate revenues
cite technological and marketplace changes which have eroded the distinction
between interstate and intrastate services as well as the growth of combined calling
plans in support of such action. Some, however, have expressed concern over the
potential negative impact that the inclusion of intrastate revenues may have on state-
supported USF programs since many are funded by intrastate telecommunications
revenues.
Numbers or Connections. Another proposal calls for a shift in the basis of
support away from revenues to a completely new methodology based on working
numbers or connections. Under this proposal contributions for USF would be
assessed based on a monthly flat fee, or charge, per working telephone number.
Since users need a discrete number to connect to the public switched network,
supporters claim this proposal would lead to a more stable assessment, would be
technologically neutral, would spread contributions over a broader base, and would
be easier to administer.27 Opponents, however, state that using a numbers-based
approach shifts the burden of USF from high volume users directly to all subscribers
as a regressive fixed charge. This, they state, not only adds a financial burden on low
volume subscribers, who may be elderly, and/or on low and fixed incomes, but could
possibly lead to subscriber drop-off, thereby defeating the purpose of the USF28
program.
Distribution Methodology
Another major issue facing USF reform concerns the eligibility criteria used to
distribute USF funds. Over the past decade (1997-2007) annual USF receipts have
grown from $1.8 billion to an estimated $7.2 billion and the contribution factor
needed to support this growth has more than doubled to reach an all time high of 11.7
percent for the second quarter of 2007. This significant rise in the funding level, and
subsequently the contribution factor, has led to an examination of the Fund’s
eligibility criteria and distribution methodology as concerns have been voiced over
the long term sustainability of the Fund and the cost burden it imposes on
contributors.
Examination of USF program revenue flows, since 2003, shows that three of the
four programs, Low Income, Schools and Libraries, and Rural Health Care, have
been relatively stable or declining. However, the High Cost program has experienced
significant growth (31 percent), with disbursements increasing from $3,261.1 million
to $4,270.8 million over the four year period; and as a result, is the major factor
27 For a more detailed discussion supporting this proposal see The USF by the Numbers
Coalition, The Benefits of a Numbers-Based Collection for Universal Service. Available at
[http://files.ctia.org/ pdf/PositionPaper_numberscoalition_USF.pdf].
28 For a more detailed discussion opposing a numbers-based proposal see Losing Numbers:
How America’s Most Vulnerable Consumers Could Suffer Under Universal Service Fund
Reform. Available at [http://keepusffair.org/KeepUSFFair/resources.html].
contributing to the USF’s recent overall growth.29 Within the High Cost program the
growth can be traced to support given to competitive eligible telecommunications
carriers. For example, payments for competitive eligible telecommunications
carriers, which are largely wireless carriers, increased from $1 million in 2000, to
$126.7 million in 2003, but are estimated by USAC to total $1 billion for 2006 and
potentially may go as high as $2.5 billion by 2009.30 On the other hand, while
incumbent eligible telecommunications carriers still receive the majority of funds
from the High Cost program, revenues disbursed in 2003 and 2007 decreased from
$3.2 billion to $3.1 billion.31
Hence, most policy discussions regarding the distribution methodology focus
on proposals to stem the growth of the High Cost Program by limiting eligibility
criteria and/or controlling the amount of funding disbursed. A variety of proposals,
to be used on their own or in combination, are being discussed including limiting
USF support to a single line per household, eliminating the “identical support rule,”
using reverse auctions to determine eligibility, placing a cap (or ceiling) on funds,
and improving targeting.
Primary or Single Line Limitation. As presently designed, USF support
is available to multiple lines per household. Some policy makers have proposed that
one way to curb the increase in funding requirements is to limit eligibility criteria.
USF funding, they state, should be limited to a single or primary line, not multiple32
access. The universal service mandate, they claim, is not to artificially construct a
competitive marketplace with multiple carriers in areas that are not able to support
a single carrier, but to ensure that high cost areas receive service at a reasonable rate.
The use of USF funds to support multiple carriers in high cost areas, they claim, is
an abuse of funds and places unnecessary strain on those supporting the program.
Others however, have argued that limiting USF support to a single provider relegates
those areas to a lower standard, which does not fulfill the universal service principle
to afford consumers in rural, insular and high cost areas, access to
telecommunications and information services that are “reasonably comparable to
those services provided in urban areas...”(Sec. 254 [b] [3]). High cost areas, they
state, should have the benefits and choices of competition and the opportunity to
select from a variety of providers just like other regions of the nation. Line
limitations, opponents state, will only discourage investment in rural infrastructure.
29 Testimony of Billy Jack Gregg, Director, Consumer Advocate Division, Public Service
Commission of West Virginia, before the Senate Commerce, Science, and Transportation
Committee, March 1, 2007. Available at [http://commerce.senate.gov
/public/index.cfm?FuseAction=Hearing.Hearing_ID=1819].
30 Testimony of FCC Chairman Kevin Martin before the Federal-State Joint Board on
Universal Service, February 20, 2007. Available at [http://hraunfoss.fcc.gov/edocs
_public/attachma tch/DOC-271011A1.pdf].
31 Ibid., Gregg. More specifically, revenues disbursed between 2003 and 2007 decreased
from $3,234.9 million to $3,105.3 million.
32 It should be noted, however, that both the 109th and 110th Congresses enacted legislation
prohibiting the FCC from using any of its appropriated funds to change its rules, or
regulations, to limit USF support payments to a single connection, or primary line (PL. 109-
Reverse Auctions. One proposal under consideration for selecting an
eligible carrier is the use of reverse auctions, or competitive bidding. Under this
method a geographic area would be designated as high cost, providers interested in
offering service would be asked how little universal service support they would need
to provide service and the provider that submits the lowest bid, all else equal, would
receive the funds.33 This approach, in theory, would result in a decrease in funding
for High Cost support since it would be based on low bids submitted by providers
instead of on the current method that is based on the embedded costs of the
incumbent telecommunications provider in the area. This, supporters claim, will lead
to the use of the most efficient technology and will relieve the growing pressure on
USF funds. However, there is no single methodology that must be used and the
reverse auction concept could be designed in a number of ways and impose a variety
of requirements and obligations. For example, some support a phased-in approach
to reverse auctions where it is used solely to select a competitive carrier for an area
while the designated incumbent eligible telecommunications carrier remains under
the present system indefinitely, or for a specific time period. Others suggest that an
auction system could reward the lowest bidder with the most support, but still give
other participants some limited support. Still others suggest the establishment of a
pilot program to test for successes and/or unintended consequences. On the other
hand, others have expressed reservations about adopting reverse auctions stating that
many questions remain about how to implement reverse auctions, how to administer
the costs associated with their adoption, and the long term impact they would have
on consumers as well as providers. Concerns were also expressed that a reverse
auction would not create a favorable environment for network investment possibly
resulting in stranded investment, erratic funding, and ultimately inferior networks.
Identical Support Rule. The criteria used for the distribution of funds for
the High Cost program has also come under scrutiny. High Cost program fund
distribution is based on what is known as the “identical support rule.” Under this
rule funds are distributed to competitive eligible telecommunications carriers based
on the embedded costs, or per line support, of the incumbent carrier. Typically the
incumbent carrier is a wireline carrier while the competitive carrier is a wireless
carrier. The infrastructure costs associated with the investment and maintenance of
a wireline system are generally significantly higher than those associated with a
wireless system. Therefore some have questioned whether basing funding levels on
the incumbent carrier’s costs, particularly when support is based on a more expensive
infrastructure, is reasonable, or even fair. Switching to a more refined distribution
methodology, more reflective of a carrier’s actual costs they claim, would help to
alleviate some of the pressure facing funding of the High Cost program. Furthermore
they state, it is anticipated that the growth in competitive eligible telecommunications
carriers will be increasing based on the number of applications pending at the FCC,
and that therefore addressing this issue is of growing significance.
33 The provider would be required to meet certain “carrier of last resort” obligations, which
would be detailed when the bids are solicited. For example, the carrier would be required
to offer a specific package of services and provide that service to the entire designated
service area (regardless of cost), and would have to meet interconnection mandates.
Capping. Some have also proposed placing a cap, as a temporary or
permanent measure, on the funds available for distribution to competitive eligible
telecommunications carriers through the High Cost program. Supporters of capping
claim that it will prevent the uncontrolled growth of this part of the High Cost
program, which is the major contributor to the overall growth in the USF. In turn
they state, this will bring stability to the Fund and the USF contribution factor. They
note that both the E-rate and the Rural Health Care programs operate under yearly
caps, and with the exception of the Low Income program which has been relatively
stable, the High Cost program is the only program with no built-in restraints on its
growth. Others however are opposed to implementing a cap. They point out that
placing a cap on an existing program, such as the High Cost program, could lead to
confusion and be very disruptive. The dynamic, they state, is very different than
capping programs, such as the E-rate and Rural Health Care, at their inception. The
High Cost program, they claim, is an ongoing program responsible for providing
basic voice service and connection to the network, a fundamental tenet of the
universal service mandate. The placing of a cap on this program, they claim, could
have significant unintended consequences which could undermine universal service
goals.
The federal-state Joint Board recommended that the FCC immediately impose34
an interim cap on a portion of the high cost fund. More specifically the Joint Board,
in a May 1, 2007 action, issued a recommendation that the FCC place an interim,
emergency cap on the amount of high-cost support that competitive eligible
telecommunications carriers receive for each state from the High Cost program. The
Joint Board recommended that the support be based on the average level of
competitive eligible telecommunications carrier support distributed in that state in
2006 and that the interim cap apply until one year from the date that it makes its
recommendation regarding comprehensive USF reform. This is seen as a temporary
measure to curb the growth of the High Cost program until more permanent action
can be taken to reform the USF. The FCC, in a May 11, 2007 action, adopted a35
notice of proposed rulemaking seeking comment on this recommendation;
comments and reply comments were received in June 2007.
On May 1, 2008, the FCC adopted, by a 3-2 vote, an interim cap on payments
to competitive eligible telecommunications carriers to the high cost fund. Total
annual support is capped, with some limited exceptions,36 at the level of support
received in each state, during March 2008, on an annualized basis. The decision
34 Joint Board Recommends Cap On High-Cost Fund. Available at
[http://hraunfoss.fcc.gov/ edocs_public/attachmatch/DOC-272806A1.pdf].
35 In the Matter of High-Cost Universal Service Support and Federal-State Joint Board on
Universal Service, WC Docket No. 05-337, CC Docket No. 96-45, Notice of Proposed
Rulemaking, released May 14, 2007. Available at [http://hraunfoss.fcc.gov/edocs_public/
attachma tch/FCC-07-88A1.pdf].
36 Competitive eligible telecommunications carriers that serve tribal lands or Alaska Native
regions and competitive telecommunications carriers that file their own cost data will not
be subject to a cap.
went into effect August 1, 2008, and will remain in place only until the FCC adopts
comprehensive high cost universal service reform.37
Improved Targeting. An additional proposal calls for making a better effort
to target areas of need by using better mapping technology (geographic information
systems or GIS) or modeling to determine support for eligible telecommunications
carriers. Some claim that the designated areas for support are too large and cover
areas which might not be in need of USF support. Designating areas for USF support
that do not need such subsidies only encourages the influx of eligible carriers into
areas that they might choose to enter absent such support, they claim, and leads to the
use of funds which may be more appropriately used elsewhere. Taking a more refined
and precise approach, they state, will result in using funds more effectively in areas
that truly need support. While most support such efforts, many see such proposals
to be more long term efforts which are still under development.
Fraud, Waste, and Abuse
Directly related to the funding issue are concerns expressed by policy makers
over the potential for possible fraud, waste, or abuse of the program. While all USF
programs have the potential for mismanagement, the E-rate program, “due to its
materiality and an initial assessment of its potential for waste, fraud, and abuse...”38
has been singled out for particular attention. The ability to ensure that only eligible
services are funded, that funding is disbursed at the proper level of discount, that
alleged services have been received, and the integrity of the competitive bidding
process is upheld have been questioned. A series of Government Accountability
Office (GAO) reports raising concerns about the financial oversight of the E-rate
program prompted additional Congressional scrutiny.39 The USAC, as the
administrator responsible for the management and oversight of the USF, initiated a
number of measures to address specific E-rate concerns and extended them to all
USF programs. These measures include establishing a whistleblower hotline to
report violations and conducting random and targeted audits of USF program
participants and contributors.
In August 2007 the FCC adopted a series of measures to safeguard the USF to
deter fraud, waste, and abuse. Included in the measures taken are those that extend
37 For further information see the FCC’s adopted order available at
[http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-122A1.pdf]. For a summary and
discussion of this order see Federal Register, Vol. 73, No. 128, July 2, 2008, p. 37882.
38 Federal Communications Commission Office of the Inspector General, Semiannual
Report to Congress, April 1, 2006 — September 30, 2006, p.8. Available at
[ ht t p: / / www.f cc.gov/ oi g/ oi gr epor t ssemi annual .ht ml ] .
39 For example, see Schools and Libraries Program: Actions Taken to Improve Operational
Procedures Prior to Committing Funds (March 1999) GAO/RCED-99-51; Schools and
Libraries Program: Application and Invoice Review Procedures Need Strengthening
(December 2000) GAO-01-105; Schools and Libraries Program: Update on E-Rate Funding
(May 2001) GAO-01-672; Greater Involvement Needed by FCC in the Management and
Oversight of the E-Rate Program (February 2005) GAO-05-151. Available at
[ ht t p: / / www.ga o.gov/ docsear ch/ t opi c.php] .
the debarment rules (three years) and sanctions for criminal and civil violations
beyond the Schools and Libraries Program to cover all four programs; tighten rules
requiring timely payments and assessing penalties or interest for late payments on
USF contributors; and increase record keeping requirements for both contributors and
beneficiaries. In addition the FCC, as recommended by the GAO, adopted
performance measures, for all four programs and for USAC.40
A GAO report focusing on the USF’s High Cost Program was released in July
2008. The report, FCC Needs to Improve Performance Management and Strengthen
Oversight of the High-Cost Program, noted that the “FCC has not established
performance goals or measures [for the Program].” Furthermore, the GAO stated
“In the absence of performance goals and measures, the Congress and the FCC are
limited in their ability to make informed decisions about the future of the high-cost
program.” While the GAO acknowledged that “the FCC has begun preliminary
efforts to address these shortcomings,” problems with these efforts still exist.41
The FCC, in an August 15, 2008, action, adopted a Notice of Inquiry (NOI)
seeking public “comment on ways to further strengthen management, administration,
and oversight of the USF ... define more clearly the goals of the USF ... identify any
additional quantifiable performance measures” and “comment on whether, and if so,
to what extent the Commission’s oversight of the USF can be improved.”42 Citing
the steps the FCC has already taken to strengthen its oversight and management of
the Fund, and the recent benefits and improvements that have been made, the FCC,
however, acknowledged both the demand for “constant scrutiny and assessment of
the Commission’s oversight efforts” as well as the GAO’s July 2008
recommendation that the FCC take steps to improve its oversight of the USF. This
NOI has been initiated, according to the FCC, to continue to assess and solicit public
input to develop additional rules and safeguards to protect the Fund.
The FCC’s Office of the Inspector General (OIG) has also been active in
pursuing oversight of the USF focusing on the E-rate program in particular. Since
2002 the OIG has included in its semi-annual reports coverage of its specific efforts
to oversee E-rate program activity, including audits, to ensure program integrity.43
More recently, however, the OIG has also expanded its audit efforts to include the
remaining three USF programs and audits of USF contributors.
In 2006, USAC took additional action by initiating with the OIG “a large-scale
beneficiary audit program” covering all four USF programs and planned to “conduct
40 For a summary of this final rule see Federal Register, Vol. 72, No.184, September 24,
41 This report is available at [http://www.gao.gov/new.items/do8633.pdf].
42 See In the Matter of Comprehensive Review of the Universal Service Fund Management,
Administration, and Oversight, released on September 12, 2008, available at
[http://hraunfoss.fcc.gov/ edocs _public/attachma tch/FCC-08-189A1.pdf].
43 Semiannual Reports issued by the FCC’s OIG are available at [http://www.fcc.gov
/oig/oigreportssemi annual.html ].
more than 450 audits of program beneficiaries and contributors.”44 The result of this
audit, which was comprised of 459 audits of USF program participants for
beneficiaries of all four programs and contributors to the USF, was released by the
OIG in October 2007. According to the OIG analysis of 459 audits, which covered
beneficiaries of all four programs as well as contributors,
in general the audits indicated compliance with the [FCC’s] rules, although
erroneous payment rates exceeded 9% in most USF program segments. The audit
resulted in the following erroneous payment rates: contributors payments, 5.5%
($385,000,000); Low Income, 9.5% ($75,500,000); Schools and Libraries, 12.9%
($210,000,000); High Cost, 16.6% ($618,000,000) and Rural Health Care, 20.6%45
($4,450,000).
It should be noted that an “erroneous payment” as defined by OMB, is “any payment
that should not have been made or that was made in an incorrect amount...” which
includes overpayments, underpayments and the inappropriate denial of a payment or
servi ce. 46
Despite this activity, however, the OIG continues to cite the need for additional
resources, stating that “Although we have made progress in achieving the goal of
establishing a more effective oversight program, we need significant increases in
audit, investigative, and legal resources to achieve the goal of having a truly effective
oversight program.”47 The FCC’s Enforcement Bureau is the primary entity within
the FCC tasked with enforcing the provisions of the Communications Act, including
those related to Section 254 (universal service). The Enforcement Bureau pursues
violators and initiates enforcement actions including notices of liability, suspensions,
consent decrees, and debarments.48
The Department of Justice (DOJ) has also taken an active role in pursuing
instances of deliberate fraud related, in particular, to the E-rate program. The
Antitrust Division of the DOJ has established a task force to investigate E-rate fraud
44 USAC 2006 Annual Report, p.11. Available at [http://www.usac.org/_res/documents/
about/pdf/usac-annual-report-2006.pdf].
45 FCC Office of the Inspector General Semiannual Report to Congress, April 1, 2007 -
September 30, 2007, p. 17. Available at [http://hraunfoss.fcc.gov/edocs_public/
attachmatch/DOC-278589A1.pdf]. For a detailed analysis of the OIG audit see FCC Office
of the Inspector General, Initial Statistical Analysis of Data from the 2006/2007 Compliance
Audits, October 3, 2007. Available at [http://www.fcc.gov/oig/] under release date October
46 See p. 17, OIG Semiannual Report to Congress, April 1, 2007-September 30, 2007, for
the full OMB definition of an “erroneous payment” Available at [http://hraunfoss.fcc.gov/
edocs_public/attachma tch/DOC-278589A1.pdf].
47 FCC Office of the Inspector General Semiannual Report to Congress, April 1, 2007 —
September 30, 2007, p. 16. Available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/
DOC-278589A1.pdf].
48 A brief overview of the Enforcement Bureau’s USF enforcement responsibilities and a list
of recent enforcement actions is available at [http://www.fcc.gov/eb/usfc/].
and has prosecuted a number of individuals and companies leading to fines,
restitution, program debarments, and imprisonment.49
As the 110th Congress continues its review of the USF, all four of the programs
will be subject to oversight to prevent any fraud, waste, or abuse. (See “Activity in
the 110th Congress,” below, for a discussion of Congressional oversight activities.)
Concerns about fraud and abuse are shared by both critics and supporters of the
program. For example, critics of the E-rate program have used examples of fraud,
waste, and abuse to call for a halt to the program or at a minimum, its suspension
until additional safeguards are in place. Supporters also want to ensure the integrity
of all four programs since the misuse of funds or unreasonable administrative costs
not only leave the program vulnerable to critics, but would only decrease available
funding to meet the program’s goals.
Antideficiency Act Compliance
A more narrowly focused policy issue relating to the operation of the USF deals
with Antideficiency Act (ADA) compliance. With the guidance of the Office of
Management and Budget (OMB) the FCC decided, in August of 2004, that the
accounting requirements contained in the ADA should be applied to the operation of
the USF. Under this accounting methodology, the government is precluded from
incurring obligations prior to the funds being available. E-rate fund commitment
letters, which are issued far in advance of actual funds payment, were considered to
be obligations. Therefore ADA compliance requires that the funds be on hand to
cover obligations and the program was required to have the cash on hand to cover all
of the commitment letters. USAC changed the timing of its funds distribution in
order to meet this requirement, leading to a temporary four-month suspension (from
August through November 2004) of E-rate funding commitments. The temporary halt
in the disbursement of E-rate funding commitments, the concern that funding for
other USF programs might be disrupted and that compliance might necessitate a
significant increase in USF revenues, brought this issue to Congressional attention.
The 108th Congress enacted legislation to provide for a one-year exemption
(through December 31, 2005) from the ADA for the USF (P.L. 108-494). Since then
the temporary one-year exemption has been extended three times, once to December
31, 2006, in conjunction with the Science, State, Justice, and Commerce
appropriations measure (P.L. 109-108); once again for an additional one-year
exemption (until December 31, 2007) as part of the CR2007 (H.J.Res. 20; P.L.
110-5); and most recently a one year extension (until December 31, 2008) as part of
the Consolidated Appropriations Act of 2008 (H.R. 2764; P.L. 110-161). Whether
the USF program should be required to comply with the accounting provisions
contained in the ADA and if so what consequences that may have for USF programs
is expected to continue to be an issue. Once again this exemption will expire at the
49 For example, see Six Corporations And Five Individuals Indicted In Connection With
Schemes To Defraud The Federal E-Rate Program. Available at [http://www.usdoj.gov/
opa/pr/2005/April/05_at_169.htm]; and Two New Jersey Executives Agree to Plead Guilty
in Nationwide Scheme to Defraud the Federal E-Rate Program. Available at
[http://www.usdoj .gov/opa/p r/2008/April/08_at_334.html ].
close of the 110th Congress and Congress may choose to address this issue in a
variety of ways. It may continue to enact legislation to provide short-term relief by
extending the temporary exemption. Also it could choose to enact legislation to
provide the USF program with a permanent exemption from ADA requirements, or
it may choose to take no further action allowing the temporary exemption to expire,
thereby requiring the FCC to ensure, through whatever steps it deems necessary, that
the USF is in full compliance with ADA requirements.
The FCC has resolved, at least temporarily, any compliance problems. FCC
Chairman Martin, in response to questioning during his September 2006 Senate
confirmation hearing, stated that the Commission has concluded that the ADA does
apply to the USF. However, he assured Commerce Committee members that funds
will be sufficient and that E-rate program commitment letters will not be delayed.50
Some, however, have continued to express concern that the actions taken by the FCC
are only temporary and that ADA compliance may jeopardize disbursements for not
only the E-Rate program, but possibly other USF programs, and may cause a
significant increase in the contribution factor.
Joint Board Recommendation and the FCC
Response
In 2004 the FCC asked the Joint Board to review the FCC’s rules relating to the
high-cost universal support mechanisms for rural carriers. In May 2007, the Joint
Board recommended that the FCC impose, as a temporary measure, an interim
emergency cap on the amount of high-cost support that competitive eligible
telecommunications carriers receive for each state from the High Cost program to
halt the increasing growth of the High Cost Fund. (See the Capping section for more
details.) Concurrent with that action the Joint Board committed to forwarding a more
comprehensive recommendation to the FCC within six months.
Joint Board Recommendation
The Joint Board, on November 20, 2007, forwarded its further recommendation
for comprehensive high-cost universal service reform to the FCC.51 Included among
the Joint Board’s recommendations are those which expand the scope of the universal
service basket of services, and propose fundamental change to the USF High Cost
Fund.
The Joint Board recommended that the definition of the basket of services
eligible for universal service support be expanded beyond the current basic voice
telecommunications services to include the universal availability of: mobility services
50 Remarks by Chairman Martin during confirmation hearings before the Senate Commerce,
Science and Transportation Committee, September 12, 2006.
51 See In the Matter of High-Cost Universal Service Support Federal-State Joint Board on
Universal Service released on November 20, 2007 available at [http://hraunfoss.fcc.gov/
edocs_public/attachma tch/FCC-07J -4A1.pdf].
(defined as wireless voice); and broadband Internet services, at affordable and
comparable rates for all rural and non-rural areas. However, unlike currently where
an eligible telecommunications carrier must provide all supported services to receive
support, under the proposed system a carrier is not required to offer all three services
(voice, mobility, and broadband) in order to receive any high-cost support.
The recommendation also calls for the High Cost Fund to be restructured and
capped over an unspecified transition period. The current High Cost fund would be
divided into three separate funds: a broadband fund, a wireless mobility fund, and a
provider-of-last-resort fund. Each fund would have a separate distribution
mechanism and a separate funding allocation. Combined funding for the three would
be capped at $4.5 billion, which is approximately equal to the 2007 level of high-cost
funding, and would be distributed in the following manner: the broadband fund at
$300 million; the wireless fund at $1.0 billion; and the provider-of-last-resort fund
at $3.2 billion.52 The states, pursuant to federal rules, would be given a major role
in the administering and awarding of funds from both the broadband and mobility
funds; however, USAC would process and audit the funds. Funding grants for all
three funds would be awarded to only one provider in any geographic area.
Recommendations regarding the provider-of-last-resort fund, which would
replace the legacy support systems for incumbent local exchange carriers, were more
general in nature as agreement among Board members on specific changes was not
reached. However, the Board did recommended that this fund be comprised of the
sum of all current incumbent local exchange carrier support systems and for the
present, generally remain intact. The Board did recommend that the FCC establish
a process and timetable to review and modernize the existing high-cost mechanisms
and develop “a coherent system that can be applied to all incumbent carriers” (para.
Furthermore, the Joint Board recommended that the identical cost rule be
eliminated. The Joint Board concluded that “it is no longer in the public interest to
use federal universal service support to subsidize competition and build duplicate
networks in high-cost areas” (para. 35). It was noted that many of the wireless
carriers currently receiving support through the identical support rule will be eligible
to receive support from the mobility fund (para. 28). (See “Identical Support Rule”
section for a further discussion.)
The Joint Board also recommended that the FCC seek further comment on
changing the distribution methodology for high-cost funds to an auction mechanism.
While not specifically endorsing the use of reverse auctions, the Joint Board did state
that reverse auctions “may offer advantages over current high-cost distribution
mechanisms” (para. 6). Details on how such a process should be implemented where
left up to the FCC.
52 The Joint Board anticipates that over the long term total funding levels can and should be
decreased as broadband and wireless infrastructure deployment becomes widespread (para.
The Joint Board also recommended that the FCC seek further public comment
on a host of additional issues. Those issues that the Joint Board felt needed
additional comment include what the most effective mechanism is to determine the
appropriate allocation of broadband and mobility funds among the states; the most
effective method to determine unserved areas for broadband and wireless coverage;
the appropriate level of broadband service for which universal service support would
be eligible; whether Low-Income program participants will be negatively affected by
these recommendations; how to implement and the appropriate number of years to
transition to the new structure and when a review of the transition process should
occur; and whether any aspects of the three funds approach would require
reconciliation with federal law.
FCC Response
In response to the Joint Board recommendation the FCC, on January 29, 2008,
released three notices of proposed rulemaking dealing with specific aspects of
universal service. These notices request public comment53 on a host of issues facing
universal service reform including elimination of the identical support rule, the use
of reverse auctions for the distribution of high cost universal service funds; and the
comprehensive reform of the high cost universal service support mechanism.
The identical support rule notice of proposed rulemaking (FCC 08-4) seeks
public comment on the FCC’s tentative conclusions that the identical support rule be
eliminated; and that the current system of supporting competitive eligible
telecommunications carriers based on the costs of incumbent wireline carriers be
replaced by support based on the actual costs the competitive eligible carrier incurs
by providing the supported services.54 Comment is also sought on the methodologies
for determining relevant costs, and other matters relating to how the support should
be calculated.
The reverse auctions notice of proposed rulemaking (FCC 08-5) seeks public
comment on the merits of using reverse auctions to determine the amount of high-
cost universal service support provided to eligible telecommunications carriers
serving rural, insular, and high-cost areas.55 The FCC tentatively concludes that
“reverse auctions offer several potential advantages over current high-cost support
mechanisms, and that the Commission should develop an auction mechanism to
determine high-cost universal service support” (para. 1).56 Comments are sought on
53 Comments were due May 5, 2008 with replies due June 2, 2008.
54 In the Matter of High-Cost Universal Service Support, Federal-State Joint Board on
Universal Service. Available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-
55 In the Matter of High-Cost Universal Service Support, Federal-State Joint Board on
Universal Service. Available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-
56 However it should be noted that FCC Commissioners Copps and Adelstein dissented from
the tentative conclusion reached in the reverse auctions notice. See the statement of
(continued...)
the advantages of using a reverse auction mechanism as well as myriad issues
relating to auction design and mechanics. Included among such issues are: eligibility
requirements for participation; whether there should be a single winner versus
multiple winners; how the subsidy should be computed and distributed; the
appropriate design of the geographic service area; the definition of the universal
service obligation; how to set the “reverse price” (i.e., maximum subsidy level) for
the auctioned area; auction design issues such as whether to allow combined bidding,
simultaneous round bidding, or a single round sealed bid format; the appropriate
length of time between auctions; and whether the FCC should establish a pilot
program to test the use of reverse auctions to replace the current high-cost program
in a particular area and if so, how it should be implemented. Comment on whether
a pilot program to disburse high-cost support targeted to broadband Internet access
services is also sought.
A third proposed rulemaking (FCC 08-22) is a broad-based proceeding that
seeks comment on the overall Joint Board recommendation, released in November
2007, to amend the high-cost program.57 This notice, which also incorporates the two
other proposed rulemakings and their subsequent responses, is a comprehensive
notice seeking comment on any and all aspects of the recommendation.
Activity in the 110th Congress
The 110th Congress is taking an active role regarding USF oversight and reform.
Legislative measures to address the reform, restructuring, and expansion into
broadband of the USF have been introduced (S. 101, S. 711, S. 3491, H.R. 42, H.R.
2054, H.R. 5806, H.R. 6320, H.R. 6356, H.R. 7000). The Senate Commerce
Committee held a March 1, 2007 hearing on the challenges facing the USF and the
House Telecommunications Subcommittee held a June 24, 2008 hearing focusing on
the future of universal service including the role of broadband and its role in the
future of the program. FCC oversight hearings held by the Senate Commerce
Committee and the House Telecommunications Subcommittee, as well as hearings
on broadband deployment held by the House Small Business Committee included
examination of USF issues. Furthermore, the Senate Commerce Committee held a
June 12, 2007 hearing to examine the federal-state Joint Board’s recommendation
that the FCC place an interim, emergency cap on the amount of high-cost support that
competitive eligible telecommunications carriers receive for each state from the High
Cost program. (For a further discussion of this proposal see the section on
“capping,” above.)
House Oversight and Government Reform Committee Chairman Waxman
announced, July 28, 2008, that his Committee is gathering information from industry
56 (...continued)
Commissioner Michael J. Copps and the statement of Commissioner Jonathan S. Adelstein
attached to the cited notice of proposed rulemaking.
57 In the Matter of High-Cost Universal Service Support, Federal-State Joint Board on
Universal Service. Available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-
recipients as part of an oversight investigation of the USF. The inquiry is focusing
on the High Cost Fund portion of the program and requests for information have been
sent to the 24 companies that, according to the FCC, are the top ten recipients of
federal high cost funds from 2006 through 2008 as well as the those that have
received the ten highest per-line subsidies, by location, for 2006 and 2007. According
to a memorandum58 Chairman Waxman sent to the Committee, he is not accusing any
of these companies of wrongdoing, but feels that the gathering of additional
information about and Committee oversight of the USF program will “benefit” the
program and “may offer useful information to the state and federal policymakers as
they formulate proposals for USF reform.” This inquiry, he further states, “is
consistent with the Committee’s strong interest in ensuring accountability in both the
government and private sector....” Companies have been requested to respond to a
series of questions by August 25, 2008.59
A provision to extend for one year (until December 31, 2007) the USF
exemption from the Antideficiency Act (ADA) was passed as part of the FY2007
continuing resolution (H.J.Res. 20) and was signed into law (P.L. 110-5). Another
one year extension (until December 31, 2008) was passed as part of the Consolidated
Appropriations Act of 2008 (H.R. 2764; P.L. 110-161). Two additional provisions
pertinent to the USF are also contained in P.L. 110-161. One provision prohibits the
FCC from using its FY2008 funds to limit USF support to a primary, or single, line.
The other provision permits the transfer of up to $21,480,000 of FY2008 funds from
the USF to monitor the USF to prevent and remedy fraud, waste, and abuse, and to
conduct audits and investigations by the OIG.
Two stand alone measures (H.R. 278, S. 609) as well as a provision contained
in S. 101 and H.R. 2054 calling for a permanent ADA exemption also have been
introduced. It is anticipated that the 110th Congress will continue its oversight and
examination of the USF, but it remains unclear whether any legislation to address the
myriad issues surrounding the USF will be enacted.
Legislation
P.L. 110-161 (H.R. 2764)
Consolidated Appropriations Act, 2008. For the USF extends for one year
(until December 31, 2008) the USF exemption for the Antideficiency Act (Title V,
Sec. 510); prohibits the FCC from using its FY2008 funds to limit USF support to
a primary, or single, line (Title V, Sec. 511); permits the transfer of up to
$21,480,000 of FY2008 funds from the USF to monitor the Program to prevent and
remedy fraud, waste, and abuse, and to conduct audits and investigations by the OIG
(Title V, FCC Salaries and Expenses). Signed by President, December 26, 2007.
58 Memorandum to Members of the Committee on Oversight and Government Reform, from
Chairman Henry A. Waxman, regarding Universal Service Fund High Cost Program
Subsidies, July 28, 2008. Available at [http://oversight.house.gov/documents/
59 Examples of the letters sent to the companies are available at [http://oversight.house.gov/
story.asp?ID=2123].
P.L. 110-5 (H.J.Res. 20)
Revised Continuing Appropriations Resolution, 2007. Extends for one year
(until December 31, 2007) the USF exemption for the Antideficiency Act (Sec.
H.R. 42 (Velázquez)
The Serving Everyone with Reliable, Vital Internet, Communications, and
Education Act of 2007. A bill to amend the Communications Act of 1934 to continue
in effect and expand the Lifeline Assistance Program and the Link Up Program, and
for other purposes. Introduced January 4, 2007; referred to the Subcommittee on
Telecommunications and the Internet February 2, 2007.
H.R. 278 (Cubin)
A bill to amend section 254 of the Communications Act of 1934 to provide that
the funds received as universal service contributions and the universal service
support programs established pursuant to that section are not subject to certain
provisions of Title 31, United states Code, commonly known as the Antideficiency
Act. Introduced January 5, 2007; referred to the Subcommittee on
Telecommunications and the Internet February 2, 2007.
H.R. 2054 (Boucher)
The Universal Service Reform Act of 2007. A bill to reform the universal
service provisions of the Communications Act of 1934, and for other purposes.
Introduced April 26, 2007; referred to the Committee on Energy and Commerce.
H.R. 2829 (Serrano)
The Financial Services and General Government Appropriations Bill, 2008. A
bill to provide for FY2008 appropriations for selected agencies including the FCC.
The House-passed version contained a provision to authorize the FCC to transfer up
to $20.98 million from the USF to monitor and conduct audits of the USF to prevent
fraud, waste, and abuse; passed (240-179) the House, June 28, 2007. The Senate
Appropriations Committee-passed version contains language that extends for one
year (December 31, 2008) the exemption of the USF from the Antideficiency Act
(Title V, sec. 501) and prohibits limiting USF funding to a single, or primary line
(Title V, sec. 502). Reported out of Committee July 13, 2007 (S.Rept. 110-129).
H.R. 5806 (Rush)
The School Emergency Notification Deployment Act. A bill to permit universal
support (E-rate funds) to public and nonprofit elementary and secondary schools
under the Communications Act of 1934 to be used for enhanced emergency
notification services. Introduced April 15, 2008; referred to the Committee on Energy
and Commerce.
H.R. 6320 (Markey)
The Twenty-first Century Communications and Video Accessibility Act of
2008. A bill to ensure that individuals with disabilities have access to emerging
Internet Protocol-based communication and video programming technologies in the
21st Century. Introduced June 19, 2008; referred to the Committee on Energy and
Commerce.
H.R. 6356 (Barton)
The Universal Service Reform, Accountability, and Efficiency Act of 2008. A
bill to reform the collection and distribution of universal service support under the
Communications Act of 1934. Introduced June 24, 2008; referred to the Committee
on Energy and Commerce.
H.R. 7000 (Waxman)
The Universal Roaming Act of 2008. A bill to require any eligible carrier
receiving universal service support for the provision of services for rural, insular, and
high cost areas to offer automatic roaming services to any technically compatible
carrier upon request. Introduced September 23, 2008; referred to the Committee on
Energy and Commerce.
S. 101 (Stevens)
The Universal Service for Americans Act, or USA Act. A bill to update and
reinvigorate universal service provided under the Communications Act of 1934 and
to exempt universal service contributions and disbursements from the Antideficiency
Act. Introduced January 4, 2007; referred to the Committee on Commerce, Science,
and Transportation January 4, 2007.
S. 609 (Rockefeller)
A bill to amend Section 254 of the Communications Act of 1934 to provide that
funds received as universal service contributions and the universal service support
programs established pursuant to that section are not subject to certain provisions of
Title 31, United States Code, commonly known as the Antideficiency Act.
Introduced February 15, 2007; referred to the Committee on Commerce, Science, and
Transportation February 15, 2007.
S. 711 (Smith)
The Universal Service for the 21st Century Act. A bill to amend the
Communications Act of 1934 to expand the contribution base for universal service,
establish a separate account within the universal service fund to support the
deployment of broadband service in unserved areas of the United States, and for other
purposes. Introduced February 28, 2007; referred to the Committee on Commerce,
Science, and Transportation.
S. 3491 (Stevens)
The Telehealth for America Act of 2008. A bill to amend the Communications
Act of 1934 to improve the effectiveness of rural health care support under section
254(h) of that Act. Introduced September 16, 2008; referred to the Committee on
Commerce, Science, and Transportation.
Appendix
Table 1. Universal Service Fund Contribution Factors
Y e ar Quarter F actor
Second6.9
Third6.9
Fourth6.9
Second7.3
Third7.3
Fourth7.3
Second9.1
Third9.5
Fourth9.2
Second8.7
Third8.9
Fourth8.9
Second11.1
Third10.2
Fourth10.2
Second10.9
Third10.5
Fourth9.1
Second11.7
Third11.3
Fourth11.0
Second11.3
Third11.4
Fourth11.4
Source: Quarterly Public Notices on universal service contribution factors. Federal Communications
Commission.
Table 2. USF Support by State 2006
Source: Universal Service Monitoring Report, Table 1.12, Federal Communications Commission. December 2007.