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Momentum Grows to Shore Up FCC Subsidy Programs, But Deal Elusive

Feb. 2, 2021, 11:01 AM

Pressure is rising on the Federal Communications Commission and Congress to rethink an $8 billion fund that subsidizes phone and broadband service, as it teeters on a shrinking budget base.

Telecom companies, industry trade groups, and former government officials are ramping up warnings about the FCC’s Universal Service Fund, enabled by surcharges on monthly telephone bills. As subscribers steadily forsake traditional phone service for internet-based communications, revenue has plummeted by nearly 40% over the last decade.

The program funds four FCC programs that subsidize broadband for rural and low-income households, schools and libraries, and telehealth services.

Big phone companies like AT&T Inc., entities that benefit from USF programs, and public interest groups see the Biden administration as a new opportunity to press their case for an overhaul of the funding mechanism. But despite widespread agreement that something must be done, no broad consensus on a solution has emerged amid the brewing debate.

“The system is at a breaking point and you have both the big companies, the recipients of USF funding and consumer advocates saying it’s got to be fixed,” Gigi Sohn, a former Democratic FCC official, said. “The devil is in the details.”

The USF budget is funded by phone companies, which are required to contribute a percentage, adjusted by the FCC on a quarterly basis, of their interstate and international phone service revenues to it. Consumers ultimately fund the program because phone companies typically pass on the cost of their contributions by adding charges onto monthly phone bills.

The contribution percentage is currently set at a record 31.8%, meaning that subscribers pay a 31.8% fee on their telephone bills. The system disproportionately impacts the very people the fund’s programs are aimed at helping, because low-income households are more likely to have trouble paying their phone bills.

Democrats have weighed expanding the funding base to include more services, such as broadband internet revenues, but that proposal is fiercely opposed by Republicans who decry it as a tax on the internet. Meanwhile, some top Republicans, including recently departed FCC Chairman Ajit Pai, have recently backed a proposal from AT&T to scrap the contributions system all together and have Congress fund USF programs through the appropriations process.

Some stakeholders worry that the appropriations plan would only increase financial instability, given the frequency of budget fights in Congress.

USTelecom, an industry group whose members include AT&T Inc. and Verizon Communications Inc., recently urged Congress and the Biden administration to consider “direct congressional appropriations and expanding the base of financial support for universal connectivity” for the USF.

Spokespeople for the House Energy and Commerce Committee and Senate Commerce, Science and Transportation Committee didn’t respond to requests for comment about whether lawmakers would act.

A bipartisan bill introduced in the previous Congress by then-House Agriculture Committee Chairman Collin Peterson (D-Minn.) would have expanded the USF funding base to include internet services. The bill, which was sponsored by eight Democrats and five Republicans, was referred to the House Energy and Commerce Committee, which didn’t act on the legislation.

The FCC could act on its own by launching a public comment period and proposing new rules to update the USF funding mechanism. An agency spokeswoman declined to comment on whether acting chairwoman Jessica Rosenworcel (D) would take such action.

Mignon Clyburn, a former Democratic FCC commissioner who advised the Biden transition, wants the FCC to refresh the Obama-era debate on the USF, and come up with a solution.

“I recognize right now that the FCC has to do a lot of things,” Clyburn said. “Should it happen tomorrow? Maybe not. Should it happen this year? Absolutely.”

The Obama-era FCC directed a panel of federal and state telecom officials to provide recommendations for updating the revenue stream for the fund. But the board’s state and federal members failed to agree on recommendations, and its work stopped during the Trump administration.

State members of the board, which in 2019 released their own plan for updating the fund, said in an FCC filing that they “worked diligently and collaboratively” on recommendations throughout 2016, but that work stalled in 2017 after then-FCC Commissioner Mike O’Rielly (R) replaced Rosenworcel on the board. O’Rielly opposes adding broadband internet service revenues to the USF funding base.

Dwindling Funding

The USF’s annual $8 billion budget supports four FCC programs: High Cost, the largest, provides funding to telecom carriers to expand broadband in rural areas; Lifeline, which gives poorer households $9.25 per month toward phone and broadband service; E-rate, which subsidizes school and library connections; and Rural Health Care for telehealth services.

In 2019, more than $5 billion was disbursed for rural broadband, nearly $2 billion for E-Rate, $981 million for Lifeline, and $250 million on rural telehealth services. The programs have reached 128,000 schools and libraries, over 9,000 rural health care clinics, and more than 9 million lower income and high cost-area households, according to the Universal Service Administrative Co., the FCC-designated nonprofit that administers the fund.

Phone service revenues have shrunk from $72.3 billion in 2010 to $47.5 billion in 2019, according to an annual report by federal and state officials who monitor the fund. The decline has forced the FCC to repeatedly hike the percentage of phone service revenues that must be contributed to the fund up to the current 31.8%.

“Given these trend lines, dramatic reform of the mechanism can no longer wait,” Joan Marsh, executive vice president of federal regulatory affairs at AT&T Inc., said in a recent blog post.

Possible Paths

Pai, in a recent speech, endorsed the idea pushed by AT&T of Congress funding USF programs through appropriations.

Other proposals include charging fees per telephone connection or phone number instead of relying on overall phone service revenues. USTelecom has questioned whether big tech companies should help fund universal service programs.

Recommendations released by the FCC board’s state members would expand the funding base to include broadband internet service revenues and shift fees to residential telephone connections and business telecommunications service revenues.

With so much dissension, it’s unclear how quickly a solution will emerge, even amid widespread acknowledgment that something must change. The broad consensus on the need for an update may help spur the FCC or Congress to push for a solution, Carol Mattey, a telecom industry consultant and former FCC official, said.

“Everybody agrees that the current system is unworkable, unsustainable and something different would be better than the status quo,” Mattey said.

To contact the reporter on this story: Jon Reid in Washington at jreid@bloomberglaw.com

To contact the editors responsible for this story: Melissa B. Robinson at mrobinson@bloomberglaw.com, Keith Perine at kperine@bloomberglaw.com

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