USF Rates Spike Again

By Lawson Faulkner

Last week, the FCC announced yet another rate hike for its Universal Service Fund (USF), a controversial program responsible for subsidizing American broadband infrastructure.

On Wednesday, FCC officials mandated a 34.4 percent contribution factor for telecommunications companies generating end-user revenue, up from 32.8 percent during the second quarter of 2024. Though officially charged to the phone companies, in practice these fees are paid directly by customers and constitute a tax on phone service. There has long been bipartisan support for USF funding reform, but lawmakers have struggled to reach a consensus on what that should look like. Following a recent, high-profile challenge to its constitutionality, some critics have called for an outright abolition of the USF altogether.

Under the Telecommunications Act of 1996, the USF was established to expand broadband access to rural and low-income communities. Funded by contributions from wireline and wireless service customers, the USF is responsible for managing a plethora of subsidiary programs, including Lifeline, E-Rate, High Cost, and Rural Health Care. However, according to the Universal Service Administrative Company, the FCC has recently sought USF reform to “eliminate waste in the programs”, while simultaneously safeguarding broadband expansion.

Throughout the telecommunications industry, sentiment has been steadily building against USF contribution mandates, with quarterly rate hikes becoming a staple of the program as the customer base for landline telephones shrinks and demands on the revenue raised grow. According to Rhonda Johnson, Executive VP of Federal Regulatory Affairs at AT&T, “ratcheting up the financial burden on the narrow and ever-dwindling base of traditional phone users to pay for the USF is unsustainable.” Unless substantive reform is enacted, incessant rate hikes will continue to drive USF funders to their inevitable demise.

This industry-wide ambivalence to the USF has been channeled into recent landmark litigation. At the behest of Consumers’ Research, a conservative non-profit organization, a petition questioning the constitutionality of the USF has been working its way through the legal system. The complaint targeted the delegation of “Congress’s revenue-raising and taxing powers to an unelected agency bureaucracy without clear and meaningful limitations.” Unfortunately, the Supreme Court declined to review the case last week, siding with previous rulings from the sixth and eleventh U.S. circuit courts of appeal. Despite this setback, numerous industry pundits have offered solutions to the USF’s woes through internal reform. According to the American Action Forum, these proposals can largely be grouped into three alternatives. First, some advocates have suggested an expansion to the telecommunication services eligible for USF contribution. However, some critics have urged caution, insisting that expanded contributions “could affect adoption and retention rates of broadband services.” Second, some have called for increased contributions from technology companies, who utilize broadband infrastructure at a disproportionately high volume. According to a 2021 study, streaming services comprised 75% of all traffic on sampled broadband networks within rural communities.

Under the Telecommunications Act of 1996, the USF was established to expand broadband access to rural and low-income communities. Funded by contributions from wireline and wireless service customers, the USF is responsible for managing a plethora of subsidiary programs, including Lifeline, E-Rate, High Cost, and Rural Health Care. However, according to the Universal Service Administrative Company, the FCC has recently sought USF reform to “eliminate waste in the programs”, while simultaneously safeguarding broadband expansion.

Throughout the telecommunications industry, sentiment has been steadily building against USF contribution mandates, with quarterly rate hikes becoming a staple of the program as the customer base for landline telephones shrinks and demands on the revenue raised grow. According to Rhonda Johnson, Executive VP of Federal Regulatory Affairs at AT&T, “ratcheting up the financial burden on the narrow and ever-dwindling base of traditional phone users to pay for the USF is unsustainable.” Unless substantive reform is enacted, incessant rate hikes will continue to drive USF funders to their inevitable demise.

This industry-wide ambivalence to the USF has been channeled into recent landmark litigation. At the behest of Consumers’ Research, a conservative non-profit organization, a petition questioning the constitutionality of the USF has been working its way through the legal system. The complaint targeted the delegation of “Congress’s revenue-raising and taxing powers to an unelected agency bureaucracy without clear and meaningful limitations.” Unfortunately, the Supreme Court declined to review the case last week, siding with previous rulings from the sixth and eleventh U.S. circuit courts of appeal.

Despite this setback, numerous industry pundits have offered solutions to the USF’s woes through internal reform. According to the American Action Forum, these proposals can largely be grouped into three alternatives. First, some advocates have suggested an expansion to the telecommunication services eligible for USF contribution. However, some critics have urged caution, insisting that expanded contributions “could affect adoption and retention rates of broadband services.” Second, some have called for increased contributions from technology companies, who utilize broadband infrastructure at a disproportionately high volume. According to a 2021 study, streaming services comprised 75% of all traffic on sampled broadband networks within rural communities.

Lastly, many critics of the USF have proposed an overt abolition of the program. In 2023, Digital Liberty advocated for sunsetting the USF in favor of the Broadband Equity, Access and Deployment (BEAD) program for deployment and the Affordable Connectivity Plan (ACP) for access. This strategy would involve the divestiture and privatization of USF broadband networks, along with other excessive federal broadband subsidy programs. According to a 2022 report by the Congressional Research Service (CRS), there are “over 100 federal programs—administered by 15 agencies—that could be used to expand [broadband] access”, calling into question the utility of the USF.

Regardless of the superior solution, it is undeniable that the USF needs substantive reform. By foolishly relying on ossified communications services to fund broadband expansion, the USF has looted American consumers through crippling contribution rates. In an already oversaturated field of federal broadband subsidizers, the relevance of the USF dwindles with each quarterly rate hike. Lawmakers should move to reign in the exorbitant demands of the USF.