When the FCC began its reform of the universal service fund regime a year ago, it consciously did not include proposals to reform the current contribution mechanism – where fees are assessed on interstate telecommunications service revenues to fund distributions from the universal service fund. Unfortunately, with interstate traffic declining and with the overall universal service fund growing, the contribution rate has increased dramatically over the past decade – to approximately 18%. From any objective standpoint, this fee is excessive. The Commission is particularly concerned since it burdens lower income customers. As a result of these problems, there is a question about the fund’s sustainability. Moving to a predictable, long term contribution mechanism has to be a critical goal for any provider drawing from the fund.
In addition these mega-problems, the contribution system is riddled with distinctions that make little or no sense. For instance, similar services can be offered over telecommunications or information (IP) service networks, but the fee is levied only on telecommunications revenues. Further, the federal fee is assessed on interstate revenues despite state boundaries having little to do with what communications services consumers buy.
There are two generally accepted reasons why the Commission did not undertake reform of the contribution system last year. First, the Commission wanted to limit the size of and growth in the universal service fund. This is evidenced by the Commission’s $4.5B budget for the Connect America Fund and reforms in the Lifeline Fund. If contribution reform occurred at the same time as distribution reform, there would be a tendency to allow the fund to grow as the base upon which fees would be assessed would expand. The other reason for postponing action is that while several years ago there appeared to be a consensus about how to reform the contribution mechanism. That convergence no longer exists. In other words, for both legal and policy reasons, there appears to be no readily apparent or easily achieved solution. That means it will take time for the Commission to act.
Now that the Commission has made major strides in reforming the distribution regime, Chairman Genachowski announced that this year the FCC would move to undertake changes to the contribution mechanism, and the Commission is scheduled to begin that process at its open meeting later in April. So, we now know when the proceeding will start. But when will it end? Right now, for many reasons, the end is not yet in sight.
First, as discussed above, there is no consensus on how to expand the base on which a fee will be assessed. In general, there needs to be a nexus between those who benefit from “universal” availability and those who pay the fee. The current fee is based on the argument that every telephone user benefits from having every other end user connected. Does that same premise work in a broadband world? In addition, it is important that the fee not skew the market, that is, it should be applied as equally as possible to services that are substitutes. Finally, a fee should not unfairly burden consumers.
So, what options might the Commission consider? Should fees be levied on any service using a telephone number? Any connection to the public switched network? Any broadband connection to the Internet? Should it be applied to any application provider (e.g. Google or Amazon) sending traffic to a broadband end user? What about private networks interconnected with the public network or the Internet? And, of course, there is the purist response that if universal service produces benefits for all Americans, it should be assessed by the Congress accordingly. Moreover, even assuming there could be agreement on policy, how extensive is the FCC's authority to levy a fee on these activities? This legal question is a major challenge.
And, of course, there is the political issue: is it wise for the FCC to assess a fee on new activities in an election year?
The Commission demonstrated with recent universal service reforms that it is not reticent to undertake "big policy." However, contribution reform clearly is a daunting task...and it will occur while the Commission continues to implement, clarify, and reconsider its recent distribution reforms. So, while the Commission is about to embark on this journey, it likely going to take some time to get there. That said, any provider having an interest in drawing from the fund needs to urge the Commission to move as quickly as possible and, to facilitate the process, present realistic policy solutions that are acceptable to a large base of interested parties.