FCC Commissioner Renews Call For Means-Testing Universal Service Fund High-Cost Program

April 15, 2019 – Federal Communications Commission (FCC) Commissioner Michael O’Rielly has renewed his call for the FCC to incorporate means-testing into the universal service fund’s high cost program. Commissioner O’Rielly made the plea in a statement accompanying the Report and Order eliminating the FCC’s rate floor rule.[1] Here is the full paragraph on means-testing from Commissioner O’Rielly’s statement:

To further guarantee protection of USF ratepayers, I also sought a commitment from the Chairman to introduce basic means-testing reforms to the high cost program. As I have stated in the past, I fundamentally disagree with our current monolithic approach that treats all individuals within a geographic area as having the same means. Just like urban America features individuals of all different incomes, rural America is not universally poor, and many rural Americans are in fact very wealthy. While I applaud their success, it makes no sense to allocate scarce USF dollars to those individuals who are more than able to pay full freight. Why should we be in the business of subsidizing telephone service to a billionaire’s fourth home or ranch, especially when the USF fee is regressive and therefore disparately burdens low-income consumers? The federal government tailors subsidies to a consumer’s means in numerous subsidy programs, including Medicare, and the USF should be no exception. That is why, along with former Commissioner Clyburn, I initiated a conversation to incorporate means-testing into the high cost program. I appreciate the Chairman’s willingness and promise to work with me to initiate appropriate reforms while not imposing excessive burdens on rural providers.[2]

So what is this all about? Well, in his statement, Commissioner O’Rielly implied he voted in favor of eliminating the rate floor rule on the condition that the FCC take other action to “guarantee protection of USF ratepayers.” Means-testing, Commissioner O’Rielly believes, is a way to help allocate USF support to where it is truly needed. Means-testing could be used to further stretch finite USF support – to get more broadband benefit out of each dollar.

Broadband stakeholders, regulators, legislators, and the public should always be open to considering new ideas about how to break down the digital divide and get the entire country connected online. You never know where the next great policy idea will hatch. Unfortunately, means-testing is not the next great policy idea.

Means-testing works for determining who should receive Lifeline benefits – a monthly discount on communications service. Means-testing, however, is not a good idea when applied to the high-cost program, which supports the construction of networks.

Here is one way means-testing would work for new fiber builds. Let’s say it costs a broadband provider $50,000 per mile of fiber, and the provider is building out to 100 homes. To implement means-testing, the broadband provider would have to determine which residences are occupied by individuals with gross incomes over $1 million (or some other financial threshold), and then charge these locations the full cost of connection to the network. How do you identify which homes are owned by wealthy individuals? Maybe have each homeowner submit tax returns to the broadband provider? What assets would be included when determining whether a home exceeds the threshold? Would it be easier to use the value of the home to make this decision? Regardless, the broadband provider would be able to allocate expenses to determine the full cost of connection to the network for each location. What if certain homes decided not to take service after the network is built? Presumably, the broadband provider would not receive high-cost USF support for homes occupied by individuals with gross incomes over the threshold, but the costs of adding them to the network would still be there. The network would have to pass every location, and there would be ongoing costs. What happens when certain high-income homes decline service and decline to pay for the full portion of the connection costs? It seems you would have to get express written commitments from homeowners obligated to pay full connection costs prior to starting any construction project if means-testing was required. Anyway, I’m just thinking out loud here. But my point is, after thinking about means-testing for a few minutes, it just doesn’t seem like it could work at all.

What Is Means-Testing?

A means test is a determination of whether an individual or family unit is eligible for government assistance, based upon whether the individual or unit possesses the means (i.e., income, assets, or money) to do without that assistance. Means-testing is commonly used as part of welfare programs intended to reduce poverty. In the U.S. for example, means-testing is used to determine eligibility for Medicaid, Temporary Assistance for Needy Families, Section 8 housing assistance, Supplemental Nutrition Assistance Program, Pell Grants, Federal Supplemental Educational Opportunity Grants, Federal Work-Study Programs, and direct subsidized student loans.

Individuals or household units with incomes meeting a certain percentage of the poverty threshold or within some other measurement would qualify for these programs. In contrast, someone that is wealthy does not receive help from federal or state governments to cover basic needs like food, shelter, or health insurance. The universal service fund’s Lifeline program employs means-testing to determine whether an individual qualifies for Lifeline benefits.

The First? Mention Of Means-Testing: FCC Commissioners O’Rielly And Clyburn 2017 Blog Post On Means-Testing The USF High-Cost Program

The first (?) mention of means-testing the high-cost program came in May 2017 when FCC Commissioners Michael O’Rielly and Mignon Clyburn coauthored an article published on the FCC’s official blog. In the blog, the FCC Commissioners asked whether means-testing could bring “efficiencies” to the universal service fund’s high-cost support mechanism.[3] Commissioners O’Rielly and Clyburn, a Republican and a Democrat, respectively, stated they agree with existing views of some economists that the high-cost program is inefficient because “poor urban consumers pay significant telecommunications fees to subsidize affluent phone customers in Aspen, Colorado and Jackson Hole, Wyoming.” Here’s some more:

[W]e currently subsidize access to communications for people who don’t need or deserve governmental assistance. In other words, we should end the practice of spending scarce USF high-cost support to illogically subsidize the cost of communications services for very rich people who happen to live in the more rural portions of our nation.[4]

Commissioners O’Rielly and Clyburn then suggested the FCC release a formal item “in the very near future” soliciting comment on implementing means-testing for the high-cost fund. They initially identified a number of issues for consideration:

• Would means-testing make the high-cost program more efficient (advantages and disadvantages)?  Given our limited budget, would it enable the Commission and/or providers to retarget USF funding to areas or consumers in greater need of support?

• Should the Commission require that consumers identified as having adjusted gross income (AGI) levels above a set threshold ($1 million or $500,000) to pay the full cost of providing service to their locations? How would consumers above the threshold be identified?

• Should the FCC utilize means-testing as a weighting factor in future reverse auctions or other distributions of USF support?

• Should the FCC exclude support for households in high-cost areas where the FCC determines that a service area has a substantially high percentage of households with income at or above the 95th percentile of national household income levels or an equivalent measurement?

The FCC’ s 2018 NPRM On Reforming High-Cost USF

There is one more important FCC item related to means-testing the USF high-cost program. In March 2018, the FCC released a Report and Order, Third Order on Reconsideration, and Notice of Proposed Rulemaking that continue the FCC’s efforts to reform the high-cost USF support mechanism rules that apply to rate-of-return carriers.[5] Among other things, in the NPRM, the FCC sought comment on adopting means-testing within the USF high-cost program. Below is the relevant paragraph:

We seek comment on whether there are other alternatives we should consider to further enhance the efficiency of the legacy high-cost program and target support to where it is most needed.  For example, should we target support not only to high-cost areas but low-income areas as well?  Should we adopt means-testing within the high-cost program?386 Either approach could target support where it is needed most by focusing only on areas or consumers with lower household income.  Should we award support for high-cost areas through a portable consumer subsidy or voucher?387  Would a voucher system increase the choices available to consumers?  Should we target support to States with less ability to fund the deployment of broadband in rural areas?  How should we identify States that are most in need of support, and how can we do so while avoiding perverse incentives?  Are there other alternatives we should consider?  Commenters should address considerations of timeliness, ease of administration, and cost effectiveness for each alternative.[6]

In case you’re wondering, the means-testing proposal was panned by commenters. But surprisingly, it now seems the proposal is not dead. As mentioned earlier, it appears Commissioner O’Rielly will get another crack at it – perhaps a formal NPRM or NOI dedicated to incorporating means-testing into the high-cost program, maybe along with some other proposals related to policing the USF high-cost fund.

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[1] Connect America Fund, WC Docket No. 10-90, Report And Order, FCC 19-32 (rel. Apr. 15, 2019).

[2] Statement Of Commissioner Michael O’Rielly, FCC 19-32.

[3] Michael O’Rielly and Mignon Clyburn, Would Means-Testing Bring More Efficiencies to the High-Cost Program? (May 31, 2017), https://www.fcc.gov/news-events/blog/2017/05/31/would-means-testing-bring-more-efficiencies-high-cost-program.

[4] Id.

[5] Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC Docket No. 14-58, Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Report and Order, Third Order On Reconsideration, and Notice Of Proposed Rulemaking, FCC 18-29 (rel. Mar. 23, 2018).

[6] Id. at ¶166.