Looking ahead: Will Universal Service Fund reform finally happen?

The Universal Service Fund (USF) – which financially supports several of the FCC's high-cost and low-income broadband programs, at roughly $8 billion annually – has been going through a tough time.

This past year saw the USF dragged before federal court in cases brought by a conservative public interest group questioning the fund's legality.

The fifth and sixth circuit courts initially ruled against the petitioners, but the fifth circuit then agreed to hear the case en banc in September and has yet to rule. Some expect that ruling to come in the first quarter of 2024.

"It seemed to me that the FCC is going to lose," said Blair Levin, policy analyst for New Street Research, in conversation with Light Reading, regarding the hearing in September. But what's important is the degree of that loss, he added.

"If the court rules that the relationship with [the Universal Service Administrative Co. (USAC)] has to be reformed, they can reform it. That would cause some problems, but it's not that huge of a deal," said Levin. "If the court says you can't collect this money unless Congress gives you tighter guidelines, well that's a really big deal."

If the latter happens, Levin still expects the court to stay its own decision to await an appeal to the Supreme Court. "But if it doesn't, yeah, it could stop programs," he said.

Related:How ACP negotiations might shake out

Notably, the same conservative group that brought the suit just lost its case on this in the eleventh circuit court.

Pressure for Big Tech to contribute

Even if the court were to uphold the USF as it is, reform is necessary for the program which relies on contributions via declining voice service revenues.

Both the FCC and Congress have been studying the issue, and pressure is mounting for tech companies to contribute to the fund. Indeed, a new bipartisan bill introduced in the Senate in November, dubbed the Lowering Broadband Costs for Consumers Act of 2023, would reform the USF and require the FCC to include broadband providers and "edge providers," or Big Tech companies, as contributors.

That bill, in its current form, would exclude edge providers that "transmitted less than 3 percent of the estimated quantity of broadband data" in a year, and "earned less than $5,000,000,000 in revenue in the United States during the most recent year." It also would not impact broadband and edge providers when "the revenue of the provider is such that the level of contribution of the provider to the preservation and advancement of universal service would be de minimis."

The legislation, introduced by Senators Markwayne Mullin (R-OK), Mark Kelly (D-AZ) and Mike Crapo (R-ID), received public support from several industry groups, including USTelecom. 

In a statement, Brandon Heiner, SVP of government affairs at USTelecom, said the bill would "help ensure [USF's] long-term impact and sustainability by modernizing its contributions system to include the dominant Big Tech companies which benefit significantly from the broadband connectivity made possible by the Fund."

Reform USF to save ACP

The legislation also has support from firms like Strand Consult, which sees it as an opportunity to save both the USF and the Affordable Connectivity Program (ACP). The ACP, which is subsidizing broadband for 22 million households, will run out of funding by April 2024. And even if Congress were to pass a short-term extension, which is unexpected, the program still needs a long-term solution.

According to Strand Consult, saving the USF with funding from providers that are benefitting from the program will also save the ACP.

"While the program makes broadband more affordable for end users, it drives enormous revenue for the largest edge providers, at least $1500 per user per year for the largest edge providers like Alphabet, Meta, Amazon, Apple, Netflix, Microsoft, and ByteDance (TikTok). However, the ACP is paid for by the taxpayers – and currently funded with deficit spending – and the money is slated to run out in early 2024," wrote Strand Consult in a research note.

"While the Lowering Broadband Costs for Consumers Act does not address ACP explicitly, its construct can be used to merge ACP into USF to fund the popular affordability program without burdening consumers, taxpayers, or future generations," the firm added.

In a conversation with Light Reading, Roslyn Layton, executive vice president at Strand Consult, said she sees "a glimmer of hope" for this bill to move forward in 2024, as it is a "bipartisan play."

"Many Democrats think that Big Tech needs to put skin in the game, and that they also have a social responsibility, just as Republicans think. So that's why this is becoming a greater possibility," she said.

Layton and others also think that, through USF reform and a streamlining of its programs, the ACP could ultimately replace the Lifeline program, which provides up to a $9.25 monthly subsidy for phone or Internet service, a fraction of the ACP benefit.

"You could square the circle by saying, look, we recognize there's too much bloat ... and sort of organize it all into a single program, USF/ACP. We use vouchers, we make these reforms and then we're off to the races," said Layton. "That kind of reform is something Republicans would care about."