USForward Report Recommends Way To Reform The Universal Service Fund – Adding Broadband Revenue Will Cause USF Contribution Factor To Fall Under 4%

September 14, 2021 – Broadband advocacy organizations NTCA–The Rural Broadband Association, INCOMPAS, and the Schools, Health & Libraries Broadband (SHLB) Coalition have sponsored a report that examines several options for reforming the universal service fund (USF) contribution system.[1]

Ultimately, the report recommends adding broadband internet access service revenue to the USF contribution base. This change, the report shows, will stabilize the fund and cause the USF contribution factor to fall below four percent.

The report, titled USForward, was written by Carol Mattey, a former long-time FCC official in the agency’s Wireline Competition Bureau.[2] The report is full of excellent data and makes one of the best arguments for reforming USF contributions. Go read it. Now, here are some of the points.

USF Contributions

Today, companies that provide interstate telecommunications services – wireline voice, mobile voice, and VoIP – must contribute to the USF.[3] In comparison, revenue derived from the provision of information services, including broadband Internet access services, have never been included in the USF contribution base.[4]

The amount of money telecom service providers remit to the USF is based on a calculation of their end-user revenues from these services and the quarterly USF contribution factor. Every fiscal quarter, there are more than 2,000 USF contributors, but 10 companies and their affiliates “collectively report close to 80% of the billed interstate and international retail revenues reported” for USF contribution purposes.[5]

The current system has been in place since 1997, when wireline voice services (and long-distance) were a large source of revenue for telecommunications carriers. Over the past 24 years, however, the communications marketplace has evolved dramatically – the telecom revenue contribution base continues to steadily decline, and it is more difficult to identify revenues that should be included in the USF contribution base. All of this has made administration of the USF more difficult, and in general, has destabilized the USF. The USF contribution factor’s ascent to record highs confirms this.

Here are two key data points from the USForward report that summarizes what is happening:

• The “contribution base” – the revenues used to calculate USF contributions – has declined 63% in the last two decades, from $79.9 billion in 2001 to $29.6 billion in 2021.

• Meanwhile, the “contribution factor” – which is the USF fee assessed on interstate and international telecommunications service and certain telecommunications revenues – has increased from 6.9% in 2001 to a historic high of 33.4% in the second quarter of 2021.[6]

Declining Mobile Telecom Revenues

There are a number of reasons why telecommunications revenues are declining. As mentioned, people have turned to broadband services instead of long-distance and other phone services. One other important reason for the declining USF contribution base, however, is how mobile wireless phone revenue is reported. Mobile wireless revenues make up a big chunk of USF contributions. But those assessable mobile wireless revenues continue to decrease every year. Today, most people use their cell phone primarily for data services, not for talking. The USForward report explains that the way mobile providers report their revenue is changing and that impacts contributions:

The dramatic drop in USF contribution base is largely due to a steep decline in reported assessable mobile revenues: mobile operators are classifying most of their monthly service revenues as “data,” not “voice.[7]

To be clear, the FCC’s rules covering allocation of revenue for bundled services allows the use of any “reasonable method” to allocate revenues among bundled services.

USForward, FCC Must Reform USF Contributions Now: An Analysis Of Options – Assessing Broadband Revenues Is The Best Option

Over the past few years, support for USF contributions reform within the communications industry has grown. Many stakeholders believe the current USF system has bent to its breaking point and fundamental reform is needed. The USForward report is another effort to push the FCC to take action.

The USForward report analyzes several options for reforming USF contributions: (1) modifying the current revenues-based contribution methodology to assess broadband internet access service revenues, (2) assessing connections, or (3) assessing telephone numbers. In general, these are the same options that have been on the table since at least 2010.[8]

Ultimately, the report makes the case for adding broadband internet access service revenues to the USF in order to stabilize the program for the future. Here are the reasons:

• First, it is appropriate as a matter of public policy to assess broadband internet access service revenues because all four programs in the USF promote universal broadband.

• Second, broadband internet access service revenues are expected to be stable in the future, with the potential for some modest growth.

• Third, it is a solution that can be implemented more quickly than the alternatives.

• Fourth, there is a significant advantage to retaining the current revenues-based system because most of the revenues reported to the FCC for USF purposes come from publicly traded companies that are audited and subject to stringent financial reporting standards for their revenues.

• Fifth, assessing both broadband internet access service and voice services removes the incentives of providers to arbitrarily allocate revenues from bundled services to one service and not the other.[9]

Assessing Broadband Revenue = 4% USF Contribution Factor

Notably, the USForward report concludes that assessing broadband revenue will drop the USF contribution factor to under four percent. Practically speaking, there would be a new USF charge on the broadband portion of consumers’ bills, but the charge on individuals’ cell phone bills would decrease dramatically. Granted, all of this based on a number of assumptions.

Assessing broadband internet access service revenues would expand the current USF contribution base and stabilize the USF funding system, and the contribution factor would drop from levels projected to approach 40% (or even higher) to less than 4%.[10] 

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[1] New Report Recommends Path Forward for Universal Service Fund: Include Broadband to Save It, Press Release, NTCA–The Rural Broadband Association (Sep. 14, 2021), https://www.ntca.org/ruraliscool/newsroom/press-releases/2021/14/new-report-recommends-path-forward-universal-service.

[2] USForward, FCC Must Reform USF Contributions Now: An Analysis Of Options, Carol Mattey, Mattey Consulting, LLC (Sep. 2021) (USForward Report), https://www.ntca.org/sites/default/files/documents/2021-09/FINAL%20USForward%20Report%202021%20for%20Release.pdf.

[3] 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). This is 254(d)’s mandatory contribution obligation. Section 254(d) also provides the FCC discretionary authority to exempt carriers whose USF 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.” Id. See also Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, ¶802 (1997).

[4] These “non-telecommunications revenues…grew from $173.2 billion in 2010 to $361.2 billion in 2019, according to the 2020 USF Monitoring Report.” USForward Report at p. 9.

[5] USForward Report at p. 14 (citing 2020 USF Monitoring Report, Table 1.7.).

[6] USForward Report at p. 3.

[7] USForward Report at p. 10.

[8] See e.g., National Broadband Plan, Recommendation 8.10 (2010), https://www.fcc.gov/general/national-broadband-plan; 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).

[9] USForward Report at pp. 3-4.

[10] USForward Report at p. 16.