Gregory Rosston

Federal Communications Commission Chairman Brendan Carr has called for a “top-to-bottom” review of the Universal Service Fund. His best defensive move is to preserve a rare USF success that happened 15 years ago and has quietly reduced the real burden of High Cost support. His more ambitious task is to confront the political economy that blocks structural reform and leaves rural customers dependent on permanently subsidized providers.

The Internet protocol (IP) interconnection transition generates unavoidable costs for intercarrier compensation (ICC)-dependent rural carriers, and deferring those costs to “future proceedings” predictably leads to pressure for permanent new Universal Service Fund (USF) support. The Technology Policy Institute proposes a Voluntary IP Service Transition Auction (VISTA) that converts those implicit future liabilities into explicit, time-limited transition payments.

A problem inherent to the Broadband, Equity, Access, and Deployment Program and any similar infrastructure subsidy program: Winners’ incentive to come back to the government later to ask for more subsidies and the inability to credibly claim they won’t. The post-award incentive to return to the trough does not have an easy solution.

Commerce Secretary Howard Lutnick’s National Telecommunications and Information Agency is trying to make the $42 billion Broadband Equity, Access, and Deployment program more efficient. However, at least one new provision threatens to undercut these efficiency incentives. NTIA’s new rules improve the previous administration’s rules in many important ways. They eliminate requirements unrelated to broadband that resulted in making it more complicated and expensive for states to create and implement their plans.

Two very real Universal Service Fund (USF) problems need to be addressed: funding and spending. The way the program is funded is inefficient, unsustainable, and regressive. Regardless of the judicial outcome, the tax that the court declared unconstitutional is both inefficient, by taxing a small, price-sensitive, declining base, and regressive, with a higher proportional burden falling on those least able to afford it. The program spends too much money on the wrong things. The High Cost Fund in particular, which accounts for about half of total spending, is outdated and wasteful.

On May 2, the Senate will hold a hearing on “The Future of Broadband Affordability.” The Affordability Connectivity Program (ACP) that provides subsidies for more than 20 million low-income households will expire in May. Without the extension, these families will see the cost of the internet service increase by up to $30 per month and prompt some families to drop internet service altogether.

We write to provide economic insight to help states maximize the benefits of its Broadband Equity Access and Deployment (BEAD) and other funds for its residents. Several economic concepts are critical to maximizing the benefit of the BEAD money for state residents.  

The Universal Service Fund (USF) is inefficient, ineffective, and funded by a regressive tax mechanism. Several reforms could improve the program:

The Infrastructure Investment and Jobs Act (IIJA) included some $42.45 billion to ensure “access to affordable, reliable, high-speed broadband” throughout the United States. However, $42 billion is unlikely to be sufficient to serve all households. To maximize the number of households receiving service, awards need to ensure sufficient quality at the lowest cost.

The National Telecommunications and Information Administration (NTIA) is beginning an epic effort to implement the broadband provisions of the Infrastructure Investment and Jobs Act (IIJA). Congress allocated $42.45 billion to build rural broadband through the Broadband Equity, Access, and Development (BEAD) Program, and these resources have the potential to provide internet access to most if not all households that do not currently have access. NTIA states in its Notice of Funding Opportunity (NOFO) that its focus is to provide service to unserved and underserved areas.