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Focus on Regulation

FCC Proposes Changes on How to Pay for Universal Service as Program Shifts to Broadband

How telephone companies and others contribute to the multi-billion dollar Universal Service Fund (“USF”) is going to change, and comments regarding the proposed new rules are due by July 9, 2012.  The FCC proposed changes that could expand the pool of services that have to contribute to USF, which subsidizes communications services for high-cost rural areas, low income individuals, schools and libraries, and rural healthcare facilities.  Currently, the FCC imposes USF obligations on interstate telephone and VOIP providers but not on broadband Internet providers.  As consumers shift communications services from traditional telephone services to broadband Internet services, the USF contribution rate, which was originally around 6% of interstate (long-distance) revenues, has grown to more than 15%.

In December, the FCC announced a multi-year plan to shift USF support from telephone service to broadband connections.  In its latest rulemaking, the FCC proposes several options for paying for the new plan.  One option is to continue imposing a charge on the revenues of service providers while expanding the types of services that would be subject to the charge.  For instance, many commercial entities obtain a mix of services that combine traditional “telecommunications services” (which are assessable) with “information services” like broadband Internet (which, at the retail level, is not assessed).  The FCC would like to capture the telecommunications portion of these mixed services, which today may not be assessed but appear to account for a large percentage of business use.

Two other approaches would depart from revenue-based collections.  Under the first approach, USF charges would be collected on the number of “connections”—for example, a telephone connection or a broadband Internet connection.  Under the other, USF charges would be based on the quantity of “numbers”—telephone and maybe IP addresses.  The FCC is also considering a connections/numbers hybrid approach.  A connections-based or a connections/numbers hybrid approach would expand the number of contributors while allowing the FCC to avoid making distinctions on a service-by-service basis.

This contribution reform should not affect how the program subsidizes services.  As part of its decision last year, the Commission also adopted rules to cap USF growth (and the corresponding growth in the tax).  For instance, the FCC capped spending for the high-cost program at $4.5 billion.

It remains to be seen how these proposed changes will affect consumers.  For example, if the Commission applies a revenues-based approach to a wider range of services, those who already subscribe to a service that has contribution obligations (e.g., voice telephone service) will likely see those contribution amounts go down, while contribution obligations would increase for subscribers of other services, such as broadband Internet service.  In such a scenario, it could be a wash to consumers who subscribe to multiple types of services (e.g., “triple-play” packages) because rates will decrease for individual services but USF would be assessed on more services.  Thus, if the Commission adopts a numbers, connections, or a hybrid approach, the net effect will depend on the individual consumer’s setup.