June 14, 2017 – NTCA—The Rural Broadband Association and US Telecom have filed a joint petition requesting temporary forbearance from the application of universal service fund (“USF”) contribution rules to broadband Internet access transmission services provided by rural local exchange carriers (“RLECs”). [1] The two broadband associations are seeking forbearance “pending the completion of comprehensive USF contributions reform.”

USF Contributions Background

Pursuant to Section 254(d) of the Communications Act, every telecommunications carrier that provides interstate telecommunications services must contribute to the USF. [2] Section 254(d) provides the Federal Communications Commission (“FCC”) discretionary authority to exempt carriers whose contributions would be de minimis, as well as permissive authority to require “[a]ny other provider of interstate telecommunications…to contribute to the preservation and advancement of universal service if the public interest so requires.” [3]

Under the FCC’s rules, carriers contribute to the USF based on a percentage of their interstate and international end-user telecommunications revenues and revenue from certain provisions of interstate telecommunications (whether offered on a common carrier or private carrier basis). [4] In comparison, revenues derived from the provision of information services, including broadband Internet access services, have never been included in the USF contribution base.

When the FCC first adopted its USF contribution rules, fixed voice service carried over copper lines accounted for a majority of telecommunications carrier revenue. Since then, there have been swift and significant changes to the telecommunications marketplace. Providers and consumers continue to migrate to new technologies and advanced services. In general, these changes have given rise to uncertainty, inefficiency, and market distortions – problems which result in the inability to identify USF-assessable revenues, a continuous decline in the contribution base, and universal service contribution factors that hover around record high numbers. Recognizing this, the FCC has made piecemeal changes to the USF contribution system over the years, but unfortunately, it has not been able to adopt fundamental reform.

History of USF Contributions and RLEC Broadband Service

The history of USF contribution requirements for RLECs that act as Internet service providers (“ISPs”), either directly or through wholly-owned affiliates, is vastly different from other ISPs. In 2005, the FCC classified wireline broadband Internet access service as an information service. At the time, wireline broadband provided by RLECs was more commonly known as Digital Subscriber Line (DSL) service, which was provided over telephone lines. The FCC concluded that “facilities-based providers of wireline broadband Internet access services must continue to contribute to existing universal service support mechanisms based on the current level of reported revenue for the transmission component of their wireline broadband Internet access services.” [5] Revenues associated with the Internet access portion were exempt from contributions. The FCC’s decision was also based on policy goals – to preserve existing levels of universal service funding, and to ensure that there continue to be specific, predictable, and sufficient mechanisms to preserve and advance universal service.

In contrast, RLEC contribution requirements are strikingly different from the obligations of ISPs that began as cable television providers. Cable providers started using their facilities to provide Internet access services in the mid-1990s. Unlike local exchange carriers, cable providers were not regulated as telecommunications carriers and were never forced to “unbundle” the transmission component of their broadband Internet access service and offer it to unaffiliated entities. In 2002, the FCC declared that cable modem broadband service was an information service – a single, integrated service that enables the subscriber to utilize Internet access service through a cable provider’s facilities. Because cable modem ISPs themselves provided information services to end users, not telecommunications, they were never required to contribute to the USF based on end-user revenues from the provision of broadband services. Nor did they have any USF-assessable transmission component revenue. Even when the FCC classified all retail broadband Internet access services as telecommunications services in the 2015 Open Internet Order, cable ISPs were excused from USF contribution obligations because the FCC decided to “forbear in part from the first sentence of section 254(d) and [its] associated rules insofar as they would immediately require new universal service contributions associated with broadband Internet access service.” [6]

Additionally, for purposes of assessing the arguments in the NTCA and US Telecom joint petition, it’s important to note that USF contribution obligations within the RLEC industry were segmented as a result of the 2016 Rate-of-Return Reform Order. Those RLECs that were able to opt in to the ACAM cost model no longer have a USF contribution obligation for their broadband transmission service. Under the cost model, universal service support flows “without reference to the actual incurrence of underlying regulated costs.”

NTCA and US Telecom Forbearance Petition

NTCA and US Telecom are seeking temporary forbearance from USF contribution requirements for RLEC-provided broadband Internet access transmission services whether tariffed or offered on a de-tariffed basis. Forbearance is requested “until such time as the [FCC] reaches a decision on whether any and all broadband services (and not just RLEC-provided broadband Internet access transmission services) should be required to contribute to support of federal USF programs or completes some other form of contributions reform.”

First, NTCA and US Telecom explain that in the 2015 Open Internet Order, the FCC “found ‘limited forbearance’ from USF contributions obligations for broadband Internet access services pending comprehensive reform to be in the public interest.” They argue that the FCC should now extend forbearance to the one group of broadband providers that was left out of that decision – RLECs that did not elect model-based support. These RLECs were excluded at the time in an effort to maintain the status quo, pending a future opportunity for broader reform in the contributions docket. But, as pointed out in the petition, “no visible progress has been made toward...completing a process for comprehensive contributions reform,” and “actual resolution...seems to keep becoming ever more distant.”

Next, NTCA and US Telecom argue that subjecting a certain class of RLEC broadband providers and their subscribers to contributions while all other broadband providers are given a pass is anti-competitive. The requirements impose pricing pressure that makes it difficult for RLECs “to provide services at rates that are ‘reasonably comparable’ to those in urban areas where providers do not contribute to the viability and sustainability of USF programs.” NTCA and US Telecom estimate that “many RLEC consumers could see an immediate reduction of $7.18 – or much greater – on their monthly bills to the extent RLEC-provided broadband Internet access transmission services are no longer uniquely subject to a USF contributions obligation.”

NTCA and US Telecom also address the impracticality of the optional relief from contribution obligations provided by the FCC in the Rate-of-Return Reform Order. There, the FCC determined that if a “rate-of-return carrier chooses to detariff its wholesale consumer broadband-only loop offering, it no longer will be voluntarily offering the transmission as a service that is assessable for contributions purposes.” [7] However, as NTCA and US Telecom explain, the “mechanical operation” of the FCC’s current cost recovery rules prevent RLECs from taking advantage of this option. If an RLEC ceases to offer broadband transmission service on a common carrier basis, the RLEC would be electing to cease contributing on the associated revenues. But, “it would also be electing in effect to cease recovering those costs through regulated rates or pool settlements or to receive HCLS, ICLS, or CAF-BLS for the underlying costs of that transmission.” [8] Loss of support is not an option for RLECs.

What are the Practical Effects of the Petition?

Some opposition to NTCA’s and US Telecom’s petition should be expected. If it is granted, there will be less USF-assessable revenue, which will cause the quarterly USF contribution factor to rise. By removing the revenues associated with broadband Internet access transmission services of RLECs that did not elect model support from the contribution base, NTCA and US Telecom estimate that the USF contribution factor for the third quarter of 2017 would increase from 17.1 to 17.3 percent. They further estimate that for a consumer purchasing $50 per month in telecommunications services, the requested forbearance would result in a universal service fee increase of roughly $0.10 per month, or $1.20 per year. Though NTCA and US Telecom explain that there would be a cost savings for some. Because the USF assessment is a charge that gets passed through to consumers, the effect of removing the obligation would be a cost savings to certain rural consumers. Considering both outcomes, USF critics, of course, will focus on the increase to the USF contribution factor, and certainly will not be supportive of a request that would result in an increase in fees for some consumers.

Second, NTCA’s and US Telecom’s petition, even though it only concerns a discreet issue, renews the call for comprehensive USF contribution reform. The discriminatory treatment of RLEC broadband transmission services described in the petition is an uncomplicated example of why the broken USF contribution system needs to be fixed. It raises the question once again of why USF contribution obligations should apply unequally to similar services that utilize different technologies. Such arbitrary distinctions harm consumers and broadband providers, and negatively affect broadband deployment and adoption.

Finally, putting USF contribution reform back on the radar may be a good idea in light of the FCC’s recent decision to reconsider the 2015 Open Internet Order. There were some industry stakeholders that thought the Order would lead to fundamental USF contribution reform. The decision to reclassify broadband as a telecommunications service gave the FCC strong regulatory authority over broadband, and thus an easier path to contribution reform. To be clear, some were convinced that the forbearance from Section 254(d) precluding new universal service contributions associated with broadband service adopted in that Order would be lifted at some point. But, those hopes were dashed last month when Chairman Pai rolled out his proposal to repeal Title II net neutrality rules. Assuming the repeal is successful, when broadband service reverts to being an information service under the Communications Act, mandatory contributions on broadband revenue are no longer a reality.

The Battle Over Sufficient USF Support and Rural Broadband Deployment

To understand the petition’s broader implications, the NCTA and US Telecom request should be viewed in context of rural broadband deployment efforts. The universal service statute requires specific, predictable and sufficient mechanisms to preserve and advance universal service. Due to the FCC’s reforms adopted in the Rate-of-Return Reform Order, however, most RLECs – at least those that were not allowed to move to model-based support – would say the current high-cost support mechanism is woefully underfunded. Section 254 also demands that rural areas have broadband service “at rates that are reasonably comparable to rates charged...in urban areas.” Many RLECs are not able to provide affordable broadband service to their subscribers. This is the reality that is driving the NTCA and US Telecom forbearance petition. As mentioned above, NTCA and US Telecom estimate that “many RLEC consumers could see an immediate reduction of $7.18 – or much greater – on their monthly bills to the extent RLEC-provided broadband Internet access transmission services are no longer uniquely subject to a USF contributions obligation.” The relief requested by the petition will help decrease the cost of rural broadband.

Aside from articulating a regulatory solution that will provide tangible benefits to rural America, the petition implicitly raises this question: Should broadband services continue to be exempt from contributing to the viability and sustainability of USF programs that are increasingly oriented to promote broadband services? NTCA (but maybe not US Telecom?), of course, would answer this question with a resounding no. This too is a regulatory solution that the FCC could adopt today. It does not matter what happens with the net neutrality repeal. The FCC has always had legal authority to declare that revenue from all broadband Internet access services is USF-assessable. Whether the FCC can and should exercise its 254(d)-permissive authority to make broadband revenue USF-assessable were two of the many issues teed up for comment in the last major FCC inquiry on USF contribution reform. As noted in the petition, the contribution reform docket has been pending for eleven years, and arguably the record in that docket has been complete for five years. It’s just a matter of taking action.

[1] WC Docket No. 06-122 and WC Docket No.______, Petition of NTCA–The Rural Broadband Association and the United States Telecom Association for Targeted, Temporary Forbearance Pursuant to 47 U.S.C. § 160(c) from Application of Contributions Obligations on Broadband Internet Access Transmission Services Pending Universal Service Fund Comprehensive Contributions Reform (filed June 14, 2017) (Petition).

[2] 47 U.S.C. § 254(d).  The first sentence of 254(d) is the mandatory contribution obligation.

[3] The FCC used this permissive authority to require interconnected VoIP providers to contribute to the USF. See In re Universal Service Contribution Methodology, WC Docket No. 06-122, 21 FCC Rcd 7518 (2006), aff'd in part, vacated in part sub nom., Vonage Holdings Corp. v. FCC, 489 F.3d 1232 (D.C. Cir. 2007).

[4] 47 C.F.R. § 54.706. In 2012, the FCC determined that about 2,900 telecommunications providers contributed to the USF, roughly 3,100 providers that would otherwise be required to contribute qualified for the de minimis exemption, and nearly three-quarters of USF contributions came from the following five companies: AT&T Inc., CenturyLink, Inc., Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Communications, Inc. Universal Service Contributions Methodology, WC Docket No. 06-122, A National Broadband Plan for our Future, GN Docket No. 09-51, Further Notice of Proposed Rulemaking, FCC 12-46, ¶9 (2012).

[5] Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, et al., CC Docket No. 02-33, et al., Report and Order and Notice of Proposed Rulemaking, FCC 05-150, 20 FCC Rcd 14853, ¶113 (2005).

[6] Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, FCC 15-24, 30 FCC Rcd 5601, ¶488 (2015) (2015 Open Internet Order).

[7] Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order, Order and Order on Reconsideration, and Further Notice of Proposed Rulemaking, FCC 16-33, 31 FCC Rcd 3087, ¶193, n. 428 (2016) (Rate-of-Return Reform Order).

[8] Petition at 10-11.