FCC Proposes Capping Fund Used to Close the Digital Divide

Benton Foundation

Friday, June 7, 2019

Weekly Digest

FCC Proposes Capping Fund Used to Close the Digital Divide

 You’re reading the Benton Foundation’s Weekly Digest, a recap of the biggest (or most overlooked) telecommunications stories of the week. The digest is delivered via e-mail each Friday.

Round-Up for the Week of June 3-7, 2019

Robbie McBeath

On Friday, May 31, the Federal Communications Commission launched a proceeding to seek comment on establishing an overall cap on the Universal Service Fund (USF). USF programs provide subsidies that make telecommunications and broadband services more available and affordable for millions of Americans. The Notice of Proposed Rulemaking (NPRM) asks a lot of questions about how an overall cap to the fund would work. But does this NPRM actually move the U.S. nearer to closing the digital divide?

How did we get here?

The Communications Act of 1934 -- the law that created the Federal Communications Commission -- established the notion of “universal service” as a foundational principle for communications policy. Congress set the FCC’s mission to “make available so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, rapid, efficient, Nationwide, and world-wide wire and radio communication services with adequate facilities at reasonable charges."

The Three Republican Commissioners
FCC Commissioner Brendan Carr (left)
Commissioner Michael O'Rielly, and Chairman Ajit Pai

The Communications Act was amended by the Telecommunications Act of 1996 and universal service remained a guiding principle. The Telecommunications Act enshrined preservation and advancement of universal service based on these principles: 

  1. Quality services should be available at just, reasonable, and affordable rates.
  2. Access to advanced telecommunications and information services should be provided in all regions of the Nation.
  3. Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.
  4. All providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service.
  5. There should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service.
  6. Elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced telecommunications services.

Based on these principles, the FCC has created -- and, in recent years modernized -- four programs supported by the Universal Service Fund:

  1. Connect America Fund (formerly known as High-Cost Support) -- The largest of the four programs, CAF provides subsidies to telecommunications companies to expand connectivity infrastructure (wired and wireless, telephony and broadband) in unserved or underserved areas. 
  2. Schools and Libraries (E-Rate) Program -- Provides discounts to schools and libraries to ensure affordable access to high-speed broadband and voice services.
  3. Rural Health Care Program -- Allows rural health care providers to pay rates for broadband services similar to those of their urban counterparts, making telehealth services affordable.
  4. Low-Income (Lifeline) Program -- Assists people with lower-incomes to make monthly telephone (wireline or wireless) and broadband charges more affordable. The Lifeline program is the only USF program that lacks a self-enforcing cap, but it is under its own “soft cap” limit. 

The USF is supported by fees on long-distance telecommunications revenues. These fees are passed on to consumers. In 2018, the proposed Universal Service contribution factor exceeded 20%, meaning that just over one-fifth of every dollar that users spend on long-distance voice services goes towards the USF.

The New Proceeding

The FCC’s NPRM seeks comment on “promoting greater fiscal responsibility in the Universal Service Fund” and “ways to evaluate the financial aspects of the four Universal Service programs in a more holistic way.” 

The NPRM suggests a combined $11.42 billion annual cap on the four USF programs. The proposed cap matches the sum of the four programs’ authorized budgets for 2018, and would be indexed to keep pace with inflation. Below are the 2018 numbers for each USF program:

2018 Cap ($ billions)
2018 Disbursement ($ billions)
Connect America Fund
Rural Health Care
Source: FCC, Telecompetitor

[The disbursements for Connect America Fund exceeded the program cap – a situation that was able to occur because excess funding collected for that program from previous years was kept in reserve.]

The FCC projects that the USF's total disbursements will be $10.2 billion in 2019 and remain below $10.5 billion annually through 2023. But a cap would put an upper bound on what the programs could spend in the future. The topline budget would not eliminate the FCC’s ability to increase funding for a particular program, but the cap would require the FCC to expressly consider the consequences and tradeoffs of spending decisions for the overall fund.

Some specific questions the NPRM seeks comment on:

  • What should the overall cap be? $11.42 billion, the sum of the authorized budgets for USF in 2018?
  • How should the cap be adjusted over time to keep pace with inflation?  Should there be an index specific to each USF program? And how should such program-specific indices apply to an overall USF cap? 
  • Implementing the Cap
    • If disbursements are projected to exceed the overall USF cap, should USF expenditures be reduced? Or cap the commitments?
    • What is the best way to track and make public universal service demand levels? 
      • Should the FCC adopt procedures to establish a five-year forecast for projected program disbursements? 
      • Should these forecasts be publicly available? 
  • Changes to Individual Programs
    • How should funding be prioritized among the four universal service programs? based on: The cost-effectiveness of each program? The estimated improper payment rates? The types of services to be funded or by the rurality of the recipient? Additionally, how can pilot USF programs or funding for emergency expenditures be prioritized in comparison to the existing USF programs? 
    • Should there be a maximum amount that a program can be reduced? Should any funding reduction distinguish between increased demand due to disasters and unexpected increases? 
    • Are there other changes that would better align the four programs to reduce duplicative work or simplify the administration of the overall cap?
    • The FCC says it wants to balance program needs with contribution burdens imposed on ratepayers. The FCC requests information and data related to the economic efficiency costs associated with increasing contributions above current levels. The FCC seeks concrete proposals that illustrate how program effectiveness would be measured and how it would affect the allocation of contributions between the individual programs.
    • The FCC seeks comment on combining the E-Rate and Rural Health Care program budgets and caps since both programs promote the use of advanced services to anchor institutions that have similar needs for high-quality broadband services.


Each of the four USF programs is capped or is operating under a targeted budget. But, as the NPRM notes, the FCC “has not examined the program holistically to determine the most efficient and responsible use of these federal funds.” “By explicitly linking the expenditures in multiple USF programs through the overall cap, we seek to promote a robust debate on the relative effectiveness of the programs.”

The NPRM states that a USF cap could:

  • Promote meaningful consideration of spending decisions by the FCC
  • Limit the contribution burden borne by ratepayers
  • Provide regulatory and financial certainty
  • Promote efficiency, fairness, accountability, and sustainability of the USF programs

FCC Commissioner Michael O’Rielly has been leading the effort on USF reform, to “inject more fiscal responsibility into the USF”. 

“At its heart, this effort is about protecting the hardworking American consumers who bear the burden of paying regressive USF fees, and promoting and maintaining universal service in a more predictable, efficient, and responsible manner.”
-- FCC Commissioner Michael O’Rielly

Some key reasons for the NPRM from Commissioner O’Rielly:

  • "Wasteful overbuilding” with USF funds remains one of the fund’s most serious problems.
  • The FCC has repeatedly raised the budgets of the different USF programs without being required to offset spending elsewhere, or to consider the implications for the health of the whole fund. An overall budget would require the FCC to “more thoughtfully consider the cost-effectiveness of its spending decisions.” 
  • Untrammeled USF spending is what “ultimately impedes digital access, not a cap on the fund.” According to Commissioner O’Rielly, “[A]ny increase in USF expenditures is paid for by consumers, and, since the USF fee is non-progressive, providers generally assess it equally against all their consumers. The burden of an increased contribution fee, therefore, falls disproportionately on low-income households because they pay a greater portion of their income toward telecommunications services than high-income households.”

Commissioner O’Rielly also “set the record straight on several misconceptions” in the wake of the circulation of the NPRM earlier this Spring. He notes that:

  1. The NPRM initiatives a dialogue, and does NOT constitute a final order
  2. The proposed budget would NOT cut funding to Universal Service
  3. The NPRM is NOT a backdoor way to establish a budget on Lifeline


1. Pits Programs Against Each Other

“Examining tradeoffs” and promoting a robust debate on the “relative effectiveness of the programs” can be interpreted as pitting the USF programs against each other. 

This was a concern of the two dissenting FCC commissioners, Jessica Rosenworcel and Geoffrey Starks. "The proposal would pit deserving beneficiaries—anchor institutions, students, patients, and Americans who lack broadband—against one another in a fight for Universal Service funds,” wrote Commissioner Starks. “This would be a terrible result. The circulated item takes us in the wrong direction.”

“I do not support an approach that fosters the universal service hunger games,” wrote FCC Commissioner Jessica Rosenworcel. 

Commissioner O’Rielly also referenced the issue in his statement, saying there was no “Hunger Games” scenario to played among potential USF recipients and that it is “disingenuous to suggest otherwise.”

2. Mapping, Not Capping

USF programs are designed to move the country towards universal access. But an ongoing problem at the FCC is getting accurate measurements of the digital divide itself. 
"[T]he cap is arbitrary because it has no relation to the actual nature of the Internet inequality problem in this country. How can we cap the amount of money needed to support broadband when we don't even know the number and locations of the Americans that still need to be connected?" Commissioner Starks said. He continued:

Instead of imposing an arbitrary cap, the FCC should be improving its data collection and analysis capabilities so it can understand the true nature of the problem and measure its progress. In short, the FCC should be focused on mapping not capping.

3. At Odds with FCC’s Statutory Duty

The main concern that has been raised with the NPRM is that it is at odds with the FCC’s statutory duty to promote and advance universal service, and may ultimately hinder the progress to close the digital divide. 

Public Knowledge opposes capping the USF: 

The Commission is obligated to ensure that digitally redlined communities, tribal communities, rural communities, and low-income consumers have the resources necessary for equitable access to education, telehealth services, and economic opportunities. The proposal to cap the USF program is just another signal that the Commission’s current leadership has chosen to severely weaken the FCC’s long standing universal service mission.

John Windhausen Jr., executive director of the Schools, Health & Libraries Broadband Coalition (SHLB Coalition), said:

The FCC's proposal to adopt an overall cap on the USF is unfortunate, counter-productive, and contrary to congressional intent. Congress directed the FCC to make 'sufficient' funding available to meet our nation's universal service goals, not to prohibit spending that is necessary to reach those goals.

Left Unanswered

The NPRM fails to address many of the pressing questions that have dogged USF policy discussions over the years. Questions like: Can we and should we broaden the USF contribution base? Which providers should be eligible for subsidies? And, most importantly, how will the FCC ensure affordable, advanced telecommunications and information services are provided in all regions of the Nation?

These questions are pressing because of the changing marketplace over the years for telecommunications services. With widespread adoption of wireless phone plans that do not charge for long-distance calls and internet-based calling apps like Skype, traditional long-distance voice revenues continue to decline. At the same time, the goals of the USF program have expanded to include broadband as well as voice service. So why does the FCC use voice revenues to pay for a program that is increasingly broadband-focused? And will this change? Will we see true USF contribution reform? 

For Commissioner O’Rielly, contribution reform is a non-starter. He takes an almost spiritual opposition to the idea of including broadband revenues in the USF contribution base. Arguing that USF fees ultimately impact low-income consumers the most, Commissioner O'Rielly said, “the regressive nature of the fee is also why I believe with the core of my being we should never, ever apply it to broadband Internet access service. Doing so would effectively place a sin tax on the Internet—and thus runs totally counter to the goal of universal connectivity.”

“Instead of broadening the base, I want to get overall spending under control,” O’Rielly said in February 2018. “I would start by making a real effort to find efficiencies and savings within and across all USF programs.” (Ironically, O’Rielly said this just a few weeks after FCC Chairman Ajit Pai proposed increasing USF high-cost program spending by $500 million.)

Concerning which service providers should be eligible for subsidies, Chairman Pai and Commissioner O'Rielly support limiting participation in USF programs as a way to protect against waste, fraud, and abuse. In February 2017, in one of his first acts as FCC chairman, Pai revoked the designations of nine companies as Lifeline broadband providers. The action drew a strong response from the public interest community. Benton Senior Fellow Gigi Sohn wrote at the time that Chairman Pai's actions "will make the market for Lifeline broadband services less competitive, limiting choice and keeping prices high."

Pai's 2017 Lifeline proposal also sought strict limitations on subscribers' lifetime use and the program's budget, and a ban on wireless resellers, which provide around 70% of Lifeline-supported connections. Sohn described the moves as indefensible, saying Chairman Pai and Commissioner O'Rielly "fundamentally disagree with the structure and goals of the Lifeline program and will seek to undermine it in word and deed." 

While the Lifeline proposals haven't been formally approved, they remain on the table. And the effect has been felt nevertheless. “Our statistics suggest the program has shrunk 30 percent under Chairman Pai’s watch,” said John Heitmann, a partner at Kelley Drye & Warren LLP who has represented Lifeline-participating companies. 

The fundamental questions that arise from the NPRM are these: How will the FCC ensure affordable, advanced telecommunications and information services are provided in all regions of the Nation? And how will a cap make USF more effective at closing the digital divide?


The adoption of the NPRM -- on a 3-2 party-line vote -- now means the FCC will take public comment (technically, after the NPRM is published in the Federal Register) for three months before, theoretically, considering this input and moving to a final vote. 

The Benton Foundation released a press release after the NPRM was released last week. Being late on a Friday afternoon, you will hopefully excuse us for being a bit blunt: “The FCC once again proves that Friday is 'take out the trash day' in our national capital; its latest proposal is pure garbage.” 

You can follow along with the debate around USF daily by subscribing to Headlines -- the only free, reliable, and non-partisan daily digest that curates and distributes news related to universal broadband.

Quick Bits

Weekend Reads (resist tl;dr)

ICYMI from Benton

Benton Foundation Opposes Proposal to Cap Fund to Close Digital Divide

June 10-14 Events

June 11 -- Do Digital Services Taxes Unfairly Target US Internet Companies?, ITIF

June 12 -- FCC Tribal Workshop

June 12 -- 14th Hearing on Competition and Consumer Protection in the 21st Century, FTC

June 12 -- Oversight of the Federal Communications Commission, Senate Commerce Committee Hearing

June 13 -- Broadband Deployment Advisory Committee, FCC

  • Benton, a non-profit, operating foundation, believes that communication policy - rooted in the values of access, equity, and diversity - has the power to deliver new opportunities and strengthen communities to bridge our divides. Our goal is to bring open, affordable, high-capacity broadband to all people in the U.S. to ensure a thriving democracy.

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Kevin Taglang

Kevin Taglang
Executive Editor, Communications-related Headlines
Benton Foundation
727 Chicago Avenue
Evanston, IL 60202
headlines AT benton DOT org

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By Robbie McBeath.