State Commissioners Look to USF Revamps

LOUISVILLE -- Just as states are pursuing a few approaches to shore up their own USFs, state regulators have a similar array of ideas about how the federal government can put its funds for broadband and other telecom services on sounder financial footing. In interviews on the sidelines of NARUC's gathering and in phone interviews for those who didn't travel here for the Sunday-Wednesday event, commissioners generally agreed the path the federal USF is on isn't sustainable because the percentage fee on some telecom services that consumers are levied on their monthly bills has gone up in recent years.

The FCC without Congress could expand USF assessment to revenue from the voice component on the Microsoft Xbox videogame system and similar big tech services, or possibly enterprise cloud transport, FCC Commissioner Brendan Carr told a partially virtual panel Wednesday. The agency could also seek comment on long-term proposals, he said. Carr supports Congress expanding USF assessment to big tech, including videostreamers that represent 75% of downstream traffic and digital advertising companies like Google and Facebook, he said. Assessing digital ads has the advantage of not imposing a consumer-facing charge, said Carr: “The current approach is simply not sustainable.”

At both the state and federal levels, the revenue base for USF -- which is wireline and wireless phone-service intrastate revenue -- has been shrinking as fewer people use landlines, state regulators said in interviews here. The revenue that's subject to such assessments fell some 63% in the past two decades to $29.1 billion for 2021, telecom consultant Carol Mattey estimated to us and in a recent report for the USForward consortium. It wants the FCC to address the rising USF contribution factor by spreading costs among more consumers by assessing the fee based on broadband internet access service revenue (see 2109130053).

State commissioners' ideas for addressing the increasing portion of bills that are charged for USF include moving from a revenue-based regime, as USF follows, to a surcharge for each phone line. And many commissioners, even those who back connections-based assessments, favor or at least think it's worth investigating eventually expanding the type of services that pay into the federal fund to include broadband. That could make a big dent in what traditional phone-service customers pay into USF; USForward estimates the rate could go down to about 4%. Otherwise, the revenue available to be assessed to make up the contribution base could fall approximately 25% to $22.9 billion by 2026, Mattey estimates for the coalition. Its proposal is backed by Incompas, NTCA, Public Knowledge and the Schools, Health & Libraries Broadband Coalition.

The contribution factor is 29.1% this quarter after hitting a record of 33.4% in Q2, show figures consultant Billy Jack Gregg shared with us. Demand for USF money has been high this year because of "additional funding for schools and libraries because of the pandemic" and for high-cost funds because of the overlap of the end of FCC Connect America Fund Phase II funding with the start of the Rural Digital Opportunity Fund, he emailed. "Demand will be lower in 2022 because virtually all CAF II funding will end and there will be no overlap with RDOF. In addition, it appears that low-income and rural health funding during 2022 will be lower than 2021."

States' Changes

States that switched from revenue- to connections-based levies on the intrastate portion of wireless and wireline phone revenue have had success and mostly smooth-going, commissioners said. Nebraska and Utah are among those states, while commissioners in Connecticut and Indiana said such an approach could make sense. The head of Arizona's agency discussed possible changes in her state.

Nebraska switched to a connections regime for retail customers in April 2019, setting the monthly surcharge at $1.75/connection, "and it hasn't been modified since then," emailed Public Service Commission Director-Nebraska USF/Telecommunications Cullen Robbins. "It has helped stabilize our fund," said Commissioner Tim Schram (R). "So far, it’s been pretty seamless." He estimated Nebraska USF revenue has held steady since the change. Schram is concerned about the coming Jan. 1 switch for business voice service, worrying that there's no cap on the number of lines that can be assessed per organization. "We’re going to keep an open mind after" the enterprise-side transition to "see what the revenues are," Schram said.

USF contribution change should be a NARUC priority in the year ahead, said Nebraska PSC Commissioner Crystal Rhoades (D). “I’m going to do everything I can to make it so.” Switching to a connections-based contribution mechanism stabilized Nebraska USF, and Rhoades recommends it for federal and other state programs that remain based on a percentage of revenue.

Utah's similar changeover a few years ago also generally went well, said Public Service Commission Chair Thad LeVar. The "original move to a per access line contribution method generated plenty of attention" and also a CTIA lawsuit that was resolved out of court (see 1807030046), but "it has not generated very much attention" as rates fluctuated, he said: "We’ve adjusted the amount a few times" and it has since returned to the original 36 cents a month per connection.

"The biggest issue with implementation -- I would say it has been mostly smooth -- was dealing with prepaid wireless service" and figuring out how to calculate such fund payments, LeVar said. A 2020 law allowed for point-of-sale collection of a fee meant to be equivalent to the per line charge, which took effect this July 1, the chair said. "The only hiccup we had is once that bill went into effect, is one prepaid wireless provider double paid," he said. "So we just had to refund that."

Arizona's head telecom regulator isn't satisfied with how its high-cost USF works. She wants it to be able to be used for broadband deployment and not just for landline service and said she asked staff to come up with a plan. "We’re trying to rework how the whole fund is structured," said Arizona Corporation Commission Chairwoman Lea Marquez Peterson (R): She doesn't want to increase the surcharge. The issue is that "we’re already collecting the funds -- they are not utilized," said Marquez Peterson. "We have one company that is collecting the funds." That telco, Frontier Communications, declined to comment.

Increasing Fees

Other state regulators haven't settled on a new approach, but the shrinking revenue base that necessitates increasing what phone-service customers pay on intrastate service may prompt changes, regulators said.

Like elsewhere with traditional USF collection, Indiana's phone-service revenue base has been declining, noted Karl Henry, senior analyst with the Indiana Utility Regulatory Commission Communications Division. That could mean there will be an increase in the assessment rate. IURC officials said what to do about this, such as broadening the array of services that pay in, could be discussed in proceedings like an upcoming triennial review. Commissioner Sarah Freeman, who spoke with us in person while the telecom staffer participated by phone, noted that growth in the federal contribution rate has "been exponential" and "it's not sustainable."

The Indiana USF is 1.4%, which rose in April from 1.09%, a URC spokesperson emailed Tuesday. "A further increase to 2.26% is being considered by the Commission following a filing by the IUSF Oversight Committee recommending the increase," she said of cause No. 42144 S3. "You’re increasing the burden on the small pool of people paying into the fund right now," Freeman said of the federal USF's rising contribution factor. Another idea would be to charge higher fees to the end-users who consume the most service/bandwidth. Freeman said she's not advocating personally for any one approach and that she's speaking on her behalf and not that of Universal Service Administrative Co., on whose board she represents NARUC.

"It would make sense to me as a finance major to broaden the base as best we can," Connecticut Public Utilities Regulatory Authority Commissioner Michael Caron said of the federal USF. "But I recognize that those who aren’t in the base may be resistant to that. But on the other hand, its unsustainable, the current model." He described himself as "in a listening and observing mode" on funding USF.

Methods Debated

Assessing broadband would be “a real mistake” from a policy and practical perspective, Carr told NARUC. It would increase broadband bills, making the service unaffordable for some. Switching to appropriations-based funding is “interesting” but “cuts against” the 1990s determination to insulate USF from the annual appropriation process, said Carr.

"The fund absolutely needs to maintain sustainability,” and the “only way to do that is with contribution methodology reform,” said panel moderator and South Dakota Public Utilities Commission Chairman Chris Nelson (R). He's state chair of the Joint Board on Universal Service; he and other state members earlier recommended connections-based contributions.

Assessing broadband is a simple change that the FCC can do now without Congress, said Mattey. The biggest reason USF revenue is declining is a reduction in assessable mobile revenue since voice but not data is assessed, she said. Consumers wouldn’t pay more because the proposal would reduce the voice surcharge as it added a broadband fee, she said.

Industry panelists supported appropriations. Congress has spent hundreds of billions of dollars for broadband, representing “a sea change," said AT&T Assistant Vice President-Public Policy Beth Fujimoto. Appropriations might be the “fairest way,” she said. The FCC should formally consider Carr’s proposal, but the USForward plan would make broadband less affordable when Congress is trying to do the opposite, Fujimoto said.

"I question whether the time is now” to change USF contribution, said NCTA Vice President-State Affairs Rick Cimerman. With about $127.3 billion appropriated this year for broadband, “a decade’s worth of USF in one tranche” is coming, said Cimerman, adding that $787.7 billion more from COVID-19 and stimulus laws can be used for broadband. Don’t assess broadband, he said. "You don't tax something we want more of."

NARUC Notebook

NARUC’s utility broadband resolution passed the board Tuesday with a minor amendment. Sponsor Commissioner Brandon Presley (D), of the Mississippi PSC, successfully added the term “appropriate agencies” to legislatures and commissions that should find ways to lower legislative and regulatory barriers to network deployment by energy companies. The Telecom Committee advanced the resolution Monday (see 2111080051).

A Nebraska bill to overturn the state’s utility broadband ban was narrowly defeated in the last legislative session, Rhoades told us. The commissioner sees “growing frustration” among legislators, commissioners and constituents, she said. “People are not satisfied with the system as it currently stands and are willing to try other ways to get this done.”