An $8 Billion US Phone Subsidy Is at Risk From Legal Challenges

A decades-old subsidy that helps poor people and rural areas pay for telecom services is at risk in a legal battle that could heat up in 2023 — and saddle tech companies with new fees if the program needs rebuilding after the litigation.

The $8.6 billionUniversal Service Fund, a linchpin of US communications funding since the late 1990s, helps more than 8 million people afford phone and internet service. The conservative advocacy group Consumers’ Research filed lawsuits in three US courts saying the program should be invalidated because its funding is set by regulators, rather than by Congress, which has taxing authority.

There’s a high chance one of the courts will strike down the program in 2023, shifting the battle to the US Supreme Court, where justices skeptical of US regulatory agencies are likely to hand the challengers a win, Matthew Schettenhelm, a Bloomberg Industry analyst, said in an interview.

If the program is declared unconstitutional “that becomes a catalyst” for Congress to act, Schettenhelm said. “That hikes the risk for big-tech platforms, since one of the most prominent proposals is to make them pay into the program for the first time.”

The Universal Service Fund is overseen by the Federal Communications Commission. The program takes in fees from telephone calls by consumers and spends that money to help needy people pay for service, both wireless and fixed lines. It’s also used to build telecommunications networks in hard-to-reach areas, and to connect libraries and rural health care clinics.

Funding Trouble

Tapping tech to feed the fund has been raised in Washington with increasing frequency as the subsidy’s funding mechanism wheezes. Its fees are assessed against old-fashioned voice calls, which are diminishing. To keep revenue steady, rates have jumped. They’re now at nearly 33% of assessed services, compared with 16% a decade earlier. Predictions of even higher rates abound.

Telecom providers such as AT&T Inc. and Verizon Communications Inc. collect the fees and funnel them back to the program. They also receive payments from the fund. Those companies are eager to avoid a future of ever-increasing rates as traditional phone service wanes.

“The contributions base should be expanded to include those companies that benefit the most from broadband connectivity,” Nirali Patel, senior vice president at USTelecom, a trade group whose members include AT&T and Verizon, said in an emailed statement.

Patel specified “dominant edge providers that drive the vast majority of Internet traffic but don’t contribute to the fund.”

The tech companies being eyed for contributions oppose the idea, said Carl Szabo, general counsel of NetChoice, a trade group with members including Amazon.com Inc., Alphabet Inc.’s Google, and Facebook-owner Meta Platforms Inc.

“At a time of heightened inflation and a failing economy, the last thing government should be doing is increasing taxes on Americans and American businesses,” Szabo said in an email. “The FCC should look to its existing funding and identify rampant waste rather than seek to tax American businesses.”

At a Dec. 21 news conference, FCC Chairwoman Jessica Rosenworcel called the fund “an important tool for ensuring communications for everyone everywhere.” She said the court challenges will be “an important part” of discussions about the fund’s future.

Ideas for bolstering the fund include tapping tech, and also charging fees against broadband providers such as Comcast Corp. and Charter Communications Inc., the FCC said in an August report that didn’t recommend a course of action.

“As far as we can tell, neither Congress nor the FCC have a plan to continue universal service payments if a court rules the current system illegal,” Blair Levin, an analyst for New Street Research, said in a research note last month. He predicted “political chaos and pain” if a court rules that the current program is illegal.

Lawsuits Filed

Will Hild

Source: Consumers’ Research

Consumers’ Research began life in 1929 as a product testing lab, before shifting its mission to advocacy. It filed suits in the 5th, 6th and 11th circuits. The 5th circuit heard arguments Dec. 5, and is likely to rule in the first half of 2023, said Schettenhelm, the analyst.

In the litigation, Consumers’ Research said Congress unconstitutionally handed the power to raise fees to the FCC.

“This is the kind of unbridled taxing power that the founders were very concerned about,” Will Hild, executive director of Consumers’ Research, said in an interview.

A Universal Service Fund representative declined to comment. The FCC in a court filing defended the program against what it called “baseless” claims.

Republican and Democratic members of Congress defended the program in a court filing, calling claims the FCC lacks direction from Congress “historically baseless and simply incorrect.”

“Our constituents rely on affordable internet services funded by the USF,” said the legislators, who include Senator John Thune, a Republican from South Dakota, and Senator Amy Klobuchar, a Minnesota Democrat.

Still, Hild, a former staffer for the conservative Federalist Society, said taxation is the job of Congress, not regulators.

“Consumers need someone they can shake their fist at,” he said.

--With assistance from Emily Birnbaum.

To contact the reporter on this story:
Todd Shields in Washington at tshields3@bloomberg.net

To contact the editors responsible for this story:
Lucas Shaw at lshaw31@bloomberg.net

Christopher Palmeri, Rob Golum

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