October 23, 2019 – The three remaining state members of the Federal-State Joint Board on Universal Service have submitted a Recommended Decision to the Federal Communications Commission (FCC) that proposes changing the existing contribution mechanism for federal universal service programs.[1]

The state members make two significant recommendations to the FCC: (1) expand the universal service fund (USF) contribution base to include broadband Internet access service, and (2) adopt a connections-based USF assessment on residential communications services and an expanded revenues-based assessment on business services. Under these proposals, connections-based assessments would account for 50 percent of USF demand, with the other half coming from revenues-based assessments.

The state members also recommend that the FCC establish a firm budget for each of the four universal service fund programs with those budgets not growing any more than the Consumer Price Index for any given year, and recommend the FCC take specific steps to assure the continued viability of state universal service mechanisms promoted by Congress in the 1996 Act.

The submission is the state members’ response to an August 2014 FCC request for recommendations from the Joint Board on how to modify the USF contribution system. In a letter accompanying the Recommended Decision, the state members explain that they alone decided to submit their proposals to the FCC because the federal members of the Joint Board have refused to consider the state member proposals. The state members “see nothing productive coming from prolonging the silence between the [state and federal members].” More on that below.

There is some good stuff in the Recommended Decision for stakeholders that support broadening the USF base to include broadband service. Reforming USF contributions will be (is) the next big universal service fight. Really, it’s been an ongoing issue for the last 10 years. It gets hot for a while, then cools down. All signs point to the issue heating up again in 2020. There is already an informal working group made up of stakeholders that support USF contributions reform that is having regular meetings on these issues, formulating plans of attack. Unfortunately, they still face an uphill battle. The current Republican-led FCC opposes adding broadband to the list of services that contribute to the USF. However, the current FCC Chairman has made rural broadband one of his signature issues, and ultimately, USF contributions is a rural broadband matter.

Let’s take a look at how we got to the Recommended Decision, followed by a closer examination of the state members’ primary proposals and the letter submitted to the FCC with the order.

Short Background On The Universal Service Joint Board

First off, who or what is the Federal-State Joint Board on Universal Service? The Joint Board was established in March 1996, to make recommendations to implement the universal service provisions of the Telecommunication Act of 1996. It is comprised of FCC Commissioners, State Utility Commissioners, and a consumer advocate representative. Over the past 25 years, the Joint Board has had a role in every major universal service policy decision.

2014 – FCC Asks Joint Board To Examine USF Contributions Reform Issues

In August 2014, the FCC released an Order directing the Joint Board to examine the record developed in response to the FCC’s Further Notice of Proposed Rulemaking released in April 2012 – at the time, it was the FCC’s most recent effort to reform the USF contribution methodology.[2] The FCC asked the Joint Board to provide recommendations on how the existing contribution mechanism should be modified.[3] The FCC wanted a response in April of 2015. The Joint Board was directed to examine the main issues of the 2012 USF Contributions FNPRM:

• Which services and service providers should contribute to universal service?

• How should the FCC assess USF contributions – using a revenue-based system, a connections-based methodology, a numbers-based system, or a hybrid approach?

• How can the FCC improve the administration of the USF contribution system – to provide greater transparency and clarity regarding contribution obligations, reduce costs associated with administering the contribution system, and improve the overall operation and administration of the contributions system?

• How will changes to the FCC’s USF contributions system affect state USF programs?

• How will changes to the FCC’s USF contributions system impact service providers’ ability to recover universal service contributions from customers?

Presumably, over the past five years, the Joint Board has been analyzing these USF contribution issues. During this time, both federal and state members have changed, and the board has been involved in examining other universal service related issues. However, five years is probably more than enough time to make the recommendations requested in the 2014 referral order.

State Members: It Is Time For The FCC To Act!

In its Recommended Decision, the state members say the FCC needs to act now because the current USF contribution system is crumbling. Truth be told, the system has been crumbling for a while now. For about the past 15-20 years, the USF contribution base – interstate and international revenues of wireline and wireless telecommunications services – has been shrinking. It has declined from $72.27 billion in 2005 to $60.45 billion in 2015.[4] The USF contribution factor for the fourth quarter of 2019 hit 25 percent, the highest ever. It gave 2019 the highest yearly average USF contribution factor ever – 22.05 percent. At the same time, USF disbursements have increased from $1.46 billion in 2001 to $8.37 billion in 2015.[5] As the state members point out, USF contributions are imposed on conventional telecommunications services, while corresponding USF support distributions are targeted on the deployment and the availability of broadband services. Seems like it is well past time to synch up contributions with distributions.

State Member Recommendation 1 – Revise USF Assessable Revenues & Services To Include Broadband Internet Access

The state members of the Joint Board recommend expanding USF contribution base “to include a broader class of services that touch the public communications network,” including broadband Internet access service. This is the core issue of the USF contributions reform debate.

Expanding the base, the state members believe, is squarely within the FCC’s current statutory authority. For what it’s worth, there are many USF stakeholders that agree with this view. The state members recommend that the FCC use its Section 254(d) permissive authority to expand the USF contribution base to include broadband Internet access service.[6]

They frame the issue using “the public interest” standard. The FCC has legal authority to extend contribution requirements to a broader class of providers where it is in the public interest. Here, the state members explain, expanding the contribution base to include broadband is a necessary step to achieve the FCC’s articulated goals for universal service: efficiency, fairness, and sustainability. They go on to explain why for each goal.

Notably, the state members of the Joint Board reject one of the primary arguments against assessing revenue from broadband service – that it “may deter broadband investment or adoption.” According to the state members, “[t]here is little in the record to demonstrate that broadening the contribution base as recommended would have that effect.”[7] They say broadband is too essential, and besides, broadening the base will result in a decrease to consumers’ USF fees:

Broadband access is widely considered an essential service and an equitable assessment is not going to dissuade customers from subscribing. Expanding the contribution base to include all services that touch the public communications network, particularly with budgetary control measures in place, will result in a reduced contribution assessment factor, causing the burden placed on existing telecommunications services and their respective consumers to decrease.[8]

State Member Recommendation 2 – Adopt A Hybrid Approach To USF Assessments

The state members recommend the FCC adopt a connections-based USF assessment on residential communications services and an expanded revenues-based assessment on business services. Under this proposal, connections-based assessments would account for 50 percent of USF demand.

A connections-based mechanism for residential services, according to the state members, offers advantages to maintaining or making incremental adjustments to the current revenues-based mechanism that are not present in the other approaches. Here are the basic details for implementing the change:

• The FCC should determine the connection fee based on residential connections reported on FCC Form 477.

• The FCC will need to revise Form 477 by collecting residential connections separate from business connections, and requiring carriers to certify to the accuracy of the data reported.

• A per-connection fee should be assessed separately for voice and broadband.

• The FCC should structure the mechanism such that the revenues obtained from residential connections would support 50 percent of the overall federal universal service fund demand.

• Based upon FCC staff reported data, as of 2015, the estimated per-connection surcharge for residential wireline and wireless services connections (including broadband access connections), would initially be set around 55 to 60 cents ($0.55 -$0.60) per connection.[9]

With respect to business communications services, the state members recommend the FCC assess contributions using an expanded revenues mechanism. They say the FCC “should determine the contribution factor for the enterprise market based on an expanded revenues system that includes current and future generation virtual private network (Gen VPN) services, Video Conferencing, Web Conferencing, Unified Communications, and business wireless broadband access services.”[10] The state members recommend structuring the mechanism so that revenue-based fees would fund the remaining 50 percent of USF demand. They claim that “[b]ased on the Commission staff’s estimated units and demand, the revenues-based contribution assessment rate would be reduced to around 8 percent, which is about half of what the revenues-based assessment factor is today.”[11]

State Members Say Federal Members Refuse To Continue Helping

In a letter accompanying the Recommended Decision, the state members explain that during a February 2019 meeting, the federal members of the Joint Board refused to consider the state members’ proposals. The letter then states that there has been no further meetings or communication among the state and federal Joint Board members. The state members decided to submit their proposals to the FCC, in part because they “see nothing productive coming from prolonging the silence between the [state and federal members].” That pretty much tells you what the federal members of the Joint Board think of the state members’ proposals…

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[1] Federal State Joint Board on Universal Service, WC Docket No. 96-45; Universal Service Contribution Methodology, WC Docket No. 06-122; A National Broadband Plan For Our Future, GN Docket No. 09-51, Recommended Decision (Oct. 15, 2019) (Recommended Decision). The following three state regulatory Commissioners make up the state members of the Federal-State Joint Board: Honorable Chris Nelson (SD), Honorable Sally Talberg (MI), Honorable Stephen Bloom (OR). See Universal Service Federal-State Joint Board Listing at https://docs.fcc.gov/public/attachments/DOC-358250A1.pdf.

[2] 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 (Apr. 30, 2012).

[3] Federal State Joint Board on Universal Service, WC Docket No. 96-45; Universal Service Contribution Methodology, WC Docket No. 06-122; A National Broadband Plan For Our Future, GN Docket No. 09-51, Order, FCC 14-116 (Aug. 7, 2014). The FCC also asked the Joint Board to consider “how any modifications to the contribution system would impact achievement of the statutory principle that there be state as well as federal mechanisms to preserve and advance universal service.” Id. at ¶ 1.

[4] Recommended Decision at ¶ 9 (citing 2016 Universal Service Monitoring Report).

[5] Id.

[6] Pursuant to Section 254(d) of the Communications Act, every telecommunications carrier that provides interstate telecommunications services must contribute to the USF. 47 U.S.C. § 254(d). Section 254(d) also grants the FCC 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.” Id.

[7] Recommended Decision at ¶ 17.

[8] Id.

[9] Recommended Decision at ¶ 23.

[10] Recommended Decision at ¶ 24.

[11] Id.