Please welcome today’s guest blogger and co-author of this post, Peter Radizeski. Peter is President of RAD-INFO INC, a Tampa telecom consulting firm. Peter’s co-author, Rogers Clawson, is GCN’s Director of Corporate Strategies and Solutions.

What is the Universal Service Fund (USF)?what is the universal service fund

All telecommunication providers and wholesalers have to pay a contributory surcharge to the Universal Service Fund (USF). The cost of this subsidy is typically passed onto the end consumer, much the same was as how a sales tax is only applied to the end good and paid by the consumer. The USF allows the FCC to promote Universal Service, which is widespread access to telecommunication services like Voice and Broadband Internet in the United States. These funds are typically allocated to projects such as building out Broadband Internet to historically underserved rural communities, improving connectivity options for rural healthcare providers, making Internet more affordable for places of education such as Libraries, and subsidizing telecommunications services for low income / fixed income consumers.

What is the mission of the USF?

The USF is the revenue that pays for the FCC mission of Universal Service. Universal Service is defined as follows by the FCC: “The Communications Act of 1934 stated that all people in the United States shall have access to rapid, efficient, nationwide communications service with adequate facilities at reasonable charges.”

Who oversees the USF?

The Universal Service Administrative Company (USAC) is the independent, not-for-profit organization that oversees the USF. Designated by the FCC, the USAC manages nearly $10 billion in annual funds and allocates those funds for specific projects either directly to government contractors or to other intra-government departments such as the Department of Agriculture.

Exactly where and how are USF funds allocated?

In coordination with FCC policies, the USAC delivers USF funds to four primary programs administered by the USAC:

  1. Schools and Libraries (E-Rate) Program, which helps schools and libraries obtain affordable high-speed Internet and telecommunications services
  2. Rural Health Care Program, which funds advanced connectivity options for medical facilities in rural communities
  3. Lifeline Program, which provides voice and broadband service subsidies to eligible low income and fixed income families
  4. High Cost Program, which promotes telecommunications infrastructure development in remote and underserved communities, where this development is usually cost prohibitive

What is the quarterly rate?

Each telecommunications provider’s contribution to the USF is based on a percentage of their interstate and international end-user revenues. This percentage, which changes throughout the year, is known as the quarterly rate.

How is the USF rate determined?

Each quarterly rate is determined by the projected needs of the USF programs, and the projected revenue of the providers per their quarterly filings.

To what products does the USF surcharge apply?

All telecommunications service providers and certain other providers of telecommunications must contribute to the federal USF based on a percentage of their interstate and international end-user telecommunications revenues. These companies include wireline phone companies, wireless phone companies, paging service companies and certain Voice over Internet Protocol (VoIP) providers. Conferencing services (at least the voice component for audio conferencing bridges) are subject to the surcharge. Internet Access (i.e. Broadband service such as cable modem and DSL service) is not currently taxed, but the underlying telecom service (pipe) may be subject to the surcharge. As such, businesses tend to be charged USF because of the underlying access costs that are associated with the delivery of the service.

How is the fund divided among the programs?

According to the Tech Policy blog, “Since 1996, the fund has doubled in size, costing over $8 billion annually. Surprisingly, only about a quarter of this revenue (~$2B) goes to Lifeline/Link-Up, the service most envision when they hear ‘universal service.’ Over $2 billion is spent on E-Rate, and over half of the fund – $4.5 billion annually – goes directly to a small selection of mostly rural carriers through the aptly-named High-Cost Fund. While carriers’ USF costs grow, the revenue base for telecommunications and VoIP is shrinking, as consumers cut their landlines and shift to other forms of communication. This has led the Universal Service Fund surcharge to skyrocket, from 3% in 1998 to a whopping 16.8% for the first quarter of 2015.”

What is High Cost and who receives those monies?

High Cost describes rural telephone service. In rural areas, there may only be 42 people per square mile. (In metro areas there are an average of 283.) The cost to deliver a copper wire for phone service is expensive. It is subsidized by the USF. The rural incumbent carrier gets money to provide that phone service at a similar rate to an urban consumer. These monies are shifting from voice services to broadband. In other words, the rural provider must provide Broadband to its residents in order to receive the USF money.

What is CAF?

The Connect America Funds (I & II) are a part of the High-Cost program. According to the FCC, “The Connect America Fund (CAF) – also known as the universal service High-Cost program – is the FCC’s program to expand access to voice and broadband services for areas where they are unavailable.  Through one component of the program, called CAF Phase II, the FCC provides funding to local telephone companies to subsidize the cost of building new network infrastructure or performing network upgrades to provide voice and broadband service in areas where it is lacking.” The FCC is trying to bridge the Digital Divide gap between rural and urban areas.

The CAF is described by the current FCC Chairman as a program “comparable to extending electricity and phone service to rural America early in the twentieth century, and building the interstate highway system in the 1950s and ’60s.” The premise is that Internet Access is becoming a requirement for all Americans in order to complete school homework, take classes, apply for jobs and even get health-care, via tele-health.

Opponents of the funds have called it welfare for ILECs. In some ways, that may seem accurate, but the cost to deliver service–voice and/or Internet–to rural areas is expensive. It is described in policy as under-served because a provider cannot afford to offer broadband everywhere. If there are 42 people per square mile, we can estimate that as 10 or 11 dwellings per that square mile. The economics of delivering fiber to 11 dwellings in a square mile is a lot different than hitting a subdivision in a suburb. The CAF is designed to incentivize carriers to deliver service to these rural areas. Like voice service, Internet Access is becoming a necessity in daily living.

There have been abuses in these programs (especially in the Lifeline program) but those companies have been fined and barred from the program. There isn’t a program that doesn’t invite some abuse, but throwing away the apple cart because two apples are bad isn’t the answer either.

Others have said that if you live in a rural area, you should accept that you can’t get affordable Internet Access. While that seems like a good idea on the service, legacy voice services on a copper wire are going away. They are transitioning the entire phone system to all-IP. VoIP services require an Internet connection. Also, school homework, classes, job applications and more have online requirements. In addition, many remote jobs (like call center agents) require a broadband connection. And while there are 36 NFL cities, a large swath of America is rural. Even with so many people living in urban areas with greater density, every state has rural areas where citizens, voters, and taxpayers live. They, too, should have access to the Internet.

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