USF Contribution Factor Could Jump to Near 20%, Gregg Says; Some Concerned

The USF contribution factor could spike in Q3 from 17.4 percent to 19.6 percent or more of carriers' U.S. interstate and international (long-distance) telecom end-user revenue, said industry consultant Billy Jack Gregg in his quarterly email update. He cited Universal Service Administrative Co. projections of increased USF demand, particularly for E-rate school and library discounts, as the driver, and said the contribution (or assessment) factor could go even higher if projected industry revenue declines, as it has been trending. A 19.6 percent factor would be "the highest assessment factor ever." The previous high was 18.2 percent in Q1 of 2016, he said Wednesday. Some reacted to us with concern.

"I think the jump in the USF contribution factor for the third quarter will be the catalyst to revive the effort to reform the USF contribution methodology," Gregg emailed us. The FCC in 2014 asked a federal-state joint board to recommend changes to the USF contribution system, but its efforts were repeatedly delayed: first by the commissioner's reclassification of broadband internet access as a Title II telecom service under the Communications Act in 2015; then by court challenges to that decision; and finally by the November election, Republican takeover of the FCC and departure of Commissioner Jessica Rosenworcel, the previous chairwoman of the joint board.

Gregg's USF numbers and projections are generally very accurate, USTelecom Senior Vice President Jon Banks told us. "This is a signal that we all need to be paying attention to the USF contribution base because without a stable flow of money to USF, we can’t support essential programs such as the [Connect America Fund] program that delivers broadband in rural areas." Others also backed renewed efforts to make changes. "Tackling the question of how USF is supported is just as important as addressing the question of what USF supports," emailed NTCA Senior Vice President Mike Romano. "Both are key to sustainability and achieving the goals of Congress articulated in the statute, and spreading the contribution responsibility more equitably among network users remains essential."

Some also looked to Capitol Hill for possible changes. “The current USF system desperately needs more funding, but Congress should also pass a new complementary federal program requiring large OTT [over the top internet] providers to help pay for their data transport in rural areas," emailed Andrew Ehrlich, a partner at Total Spectrum/Steve Gordon & Associates, a consulting group that lists its clients and former clients. "The system is tragically unfair because content is delivered for free in the rural areas because the last mile cable, wireless and wireline owners lack any market power.”

Some were more wary. “I don't think a one-quarter jump in the contribution factor is a reason for panic," emailed John Windhausen, executive director of the Schools, Health & Libraries Broadband Coalition: "It seems that a good portion of the jump is a result of a one-time accounting change to the E-rate program. To be honest, I thought that we would have exceeded the 20% level several years ago. The existing contribution mechanism is not sustainable in the long run, but the short-run is lasting longer than predicted.”

No current commissioner commented Wednesday, nor did USAC, NARUC or a leading state regulator on the joint board. An aide to Commissioner Mignon Clyburn did pass along some comments she had made previously. “I don’t think the burden should be on what some people still call legacy services to support the rest of the entire services, including advanced services,” she told Law360 (password protected) in December. In March testimony, she said "USF modernization ... means reforming the contribution system, which is increasingly becoming a heavy tax on seniors.”

Commissioner Mike O'Rielly, now joint board federal chairman, backed the 2014 order that referred USF contributions to the joint board. "Contributions reform should not be seen as a backdoor way of increasing the size of the universal service fund or imposing new fees on the Internet," he said in a statement accompanying the order. "I would be concerned by any effort to assess IP addresses."

Gregg pointed to language in Section 254(d) of the Communications Act that says every telecom carrier providing "interstate telecommunications services shall contribute" to USF, and that other providers of "interstate telecommunications may be required to contribute ... if the public interest so requires." When the FCC reclassified broadband under Title II in the 2015 net neutrality order, "they reclassified broadband as an 'interstate telecommunications service,' which meant that broadband providers should have been required to contribute into the USF," he said. However, "the FCC also issued partial forbearance on the requirement for broadband providers to contribute."

FCC Chairman Ajit Pai proposed to undo the Title II broadband classification and return to a Title I information service classification (see 1704260054). "If the FCC eventually reclassifies broadband so that it is no longer an 'interstate telecommunications service,' then broadband would no longer be subject to the mandatory contribution requirements of Section 254(d)," Gregg said. "Since broadband would still be 'interstate telecommunications,' the FCC could exercise their discretion to extend the contribute requirement to broadband providers."