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Original Intent of the FCC Universal Service Fund

Why was Reform Necessary?

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Back in 1997 the goals of the Universal Service Fund (USF) made a lot of sense - ensure every American had access to affordable telephone service. Fourteen years later, with many Americans relying on broadband (fixed and mobile) to use Voice over Internet Protocol (VoIP) for primary phone service, the Universal Service Fund was due for a major overhaul. In addition to the rapidly evolving broadband marketplace, and the innovative applications being developed to carry voice, video, and data, reform became increasingly necessary to curb abuses and loopholes.

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There were four primary programs within the original Universal Service Fund. The most complex of the four, the high cost program, ensured that consumers in all parts of the nation had access to telephone service comparable to their urban counterparts. Another major program ensured that low-income consumers had access to affordable telephone service.

The other two programs were related to broadband Internet access - one for rural health care programs which support "telemedicine" or "electronic medical record" initiatives. The fourth USF program, referred to as the E-Rate program, provides subsidies for Internet access, including network infrastructure to support high speed Internet access for schools.

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The formulas contained within the USF to subsidize each of these programs were highly complex, and had become prone to abuse which diverted funds from the primary purposes originally envisioned for the fund. As of the first quarter of 2011, almost 16% of a telecommunications company's interstate and end-user's revenues were from the USF fee received.

Despite the loopholes and reports of abuse, the Universal Service Fund achieved many of its intended goals. In addition to making affordable phone service available to almost all Americans, funding from USF revenues allowed many rural telecommunication providers to expand their networks to include broadband service. A major consideration of rural telecommunication providers while deciding to expand the reach of their facilities was continued dependency on USF revenue to fund operations. Reliance on USF funding for continued operations and expansion allowed rural telecommunications providers to receive USDA (United States Department of Agriculture) and RUS (Rural Utilities Service) loans and grants for both telephone and broadband access.

In late 2011 the FCC voted unanimously to overhaul the USF to expand broadband Internet service to provide broadband to the millions of Americans currently without service. The new plan means higher fees on consumer's landline telephone bills, but the funds will now support broadband services. Since the FCC currently regulates telephone service, and not broadband service, telephone surcharges were the only way the FCC could implement the changes. The expected increase in consumer telephone bills would initially be up to 50 cents monthly, rising to $2.50 per month within five years.

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The Universal Service Fund generates approximately $4.5 billion in public revenue, which will now be used to subsidize broadband Internet service in areas of the country where providing service would be too costly for incumbent providers. Although broadband providers have been blamed for not bringing broadband to these areas, the reality is that providing broadband to these remote areas are not profitable enough to sustain a profitable business model to continue providing service to its customers. The areas which are currently unserved by broadband providers are primarily in areas where the terrain is challenging to run fiber, or too mountainous for wireless broadband,or simply too sparsely populated for commercial providers to invest in.

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When the new FCC USF reform measures rules were originally announced, FCC Chairman Julius Genachowski said,"We are taking a system designed for the Alexander Graham Bell era of rotary telephones and modernizing it for the era of Steve Jobs and the Internet future he imagined."FCC Commissioner Robert McDowell says the goal of the program should actually be a point in time where the fund should no longer be required. "It is my hope that competitive forces will flourish and the development of new technologies will create additional efficiencies throughout the system."

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While there is little disagreement with Chairman Genachowski's assessment of the outdated USF rules, there has been widespread criticism of the reform measures and their impact on rural telecommunication providers, and their continuing operation.

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