Order Code RL33979
Universal Service Fund:
Background and Options for Reform
April 25, 2007
Angele A. Gilroy
Specialist in Telecommunications
Resources, Science, and Industry Division

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Universal Service Fund: Background and Options for
Reform
Summary
The concept that all Americans should be able to afford access to the
telecommunications network, commonly called the “universal service concept” can
trace its origins back to the 1934 Communications Act. Since then, the preservation
and advancement of universal service has been a basic tenet of federal
communications policy, and Congress has historically played an active role in
helping to preserve and advance universal service goals. The passage of the
Telecommunications Act of 1996 (P.L.104-104) not only codified the universal
service concept, but also led to the establishment, in 1997, of a federal Universal
Service Fund (USF or Fund) to meet the universal service objectives and principles
contained in the 1996 Act. According to Fund administrators, from 1998 through
end of year 2005, $43.5 billion was distributed, or committed, by the USF, with all
50 states, the District of Columbia and all territories receiving some benefit.
The Federal Communications Commission (FCC) is required to ensure that
there be “specific, predictable and sufficient...mechanisms to preserve and advance
universal service.” However, changes in telecommunications technology and the
marketplace, while often leading to positive benefits for consumers and providers,
have had a negative impact on the health and viability of the USF, as presently
designed. These changes have led to a growing imbalance between the entities and
revenue stream contributing to the fund and the growth in the entities and programs
eligible to receive funding. The desire to expand access to broadband and address
what some perceive as a “digital divide” has also placed focus on what role, if any,
the USF should take to address this issue
There is a growing consensus among policy makers, including some in
Congress, that significant action is needed not only to ensure the viability and
stability of the USF, but also to address the numerous issues surrounding its
appropriate role in a changing marketplace. How this concept should be defined,
how these policies should be funded, who should receive the funding, and how to
ensure proper management and oversight of the Fund are among the issues expected
to frame the debate.
The current policy debate surrounding USF reform has focused on four major
concerns: the scope of the program; who should contribute and what methodology
should be used to fund the program; eligibility criteria for benefits; and concerns over
possible program fraud, waste, and abuse. A separate and more narrowly focused
issue, the impact of the Antideficiency Act (ADA) on the USF, has also become an
issue of concern.
Legislative measures to address the reform, restructuring and expansion into
broadband of the USF (S. 101, S. 711, H.R. 42) as well as those that address ADA
compliance (H.R. 278, S. 609, S. 101) have been introduced in the 110th Congress.
This report will be updated as events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Universal Service Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Federal Universal Service Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
High-Cost Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Low-Income Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Schools and Libraries or “E-Rate” Program . . . . . . . . . . . . . . . . . . . . . . . . . 4
Rural Health Care Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Program Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Contribution Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Expanding the Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Intrastate Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Numbers or Connections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Distribution Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Primary or Single Line Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reverse Auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Identical Cost Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Capping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Improved Targeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fraud, Waste, and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Antideficiency Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Activity in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. USF Disbursements by Program 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Tables
Table 1. Universal Service Fund Contribution Factors . . . . . . . . . . . . . . . . . . . . 20
Table 2. USF Support by State 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

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Universal Service Fund: Background and
Options for Reform
Introduction
The concept that all Americans should be able to afford access to the
telecommunications network is commonly called the “universal service concept.”
This concept can trace its origins back to the 1934 Communications Act.1 Since then
the preservation and advancement of universal service has been a basic tenet of
federal communications policy, and Congress has historically played an active role
in helping to preserve and advance universal service goals. In 1996 Congress passed
the Telecommunications Act of 1996 (P.L. 104-104), which not only codified the
universal service concept, but also led to the establishment of a federal Universal
Service Fund (USF or the Fund) to meet the universal service objectives and
principles contained in the 1996 Act. According to Fund administrators, from 1998
through end of calendar year 2005, $43.5 billion was distributed, or committed, by
the USF, with all 50 states, the District of Columbia, and all territories receiving
some benefit.2
Over the past decade the telecommunications sector has undergone a vast
transformation fueled by rapid technological growth and subsequent evolution of the
marketplace. A wide range of new services have become available, offered by a
growing list of traditional as well as nontraditional providers. One of the results of
this transformation is that the Nation’s expectations for communications services
have also grown. In the past, access to the public switched network through a single
wireline connection, enabling voice service, was the standard of communications.
Today the desire for simple voice connectivity has been replaced by the demand, on
the part of consumers, business, and government, for access to a vast array of
multifaceted fixed and mobile services. Consumers are also demanding greater
flexibility and may choose to gain access to the same content over a variety of
technologies, whether it be a computer, a television, or a mobile telephone. The
trend towards sharing information, such as music or photographs, is also growing,
making it necessary to ensure that network upload speeds match download
capabilities. These advances require that networks transition into converged next-
generation wireline and wireless broadband networks capable of meeting these
demands. One of the challenges facing this transition is the desire to ensure that all
1 Communications Act of 1934, as amended [47 U.S.C.151et seq.].
2 See [http://www.usac.org/about/universal-service/fund-facts/fund-facts.aspx].

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citizens have access to an affordable and advanced telecommunications infrastructure
so that all members of American society may derive the benefits.3
Technological advances such as the ability of the Internet to provide data, voice,
and video, the bundling of service offerings, the advancement of wireless services,
and the growing convergence of the telecommunications sector have, according to
many policy makers, made it necessary to reexamine traditional policy goals such as
the advancement of universal service mandates. These changes in technology and
the marketplace, a declining funding base and significant increases in the amount of
support disbursed by the Fund, have led to concerns that the USF is in need of
reform. There is a growing consensus, among policy makers, including some in
Congress, that significant action is needed not only to ensure the viability and
stability of the USF, but also to address the numerous issues surrounding such
reform. The 110th Congress may take a prominent role in this debate. How this
concept should be defined, how these policies should be funded, who should receive
the funding, and how to ensure proper management and oversight of the Fund are
among the issues expected to frame the policy debate.

The Universal Service Concept
Since its creation in 1934 the Federal Communications Commission (FCC, or
Commission) has been tasked with “... mak[ing] available, so far as possible, to all
the people of the United States, ... a rapid, efficient, Nation-wide, and world-wide
wire and radio communications service with adequate facilities at reasonable
charges....”4 This mandate led to the development of what has come to be known as
the universal service concept.
The universal service concept, as originally designed, called for the
establishment of policies to ensure that telecommunications services are available to
all Americans, including those in rural, insular and high cost areas, by ensuring that
rates remain affordable. During the twentieth century, government and industry
efforts to expand telephone service led to the development of a complex system of
cross subsidies to expand the network and address universal service goals. The
underlying goal of the cross-subdization policy was to increase the number of
subscribers to the network by shifting costs among network providers and
subscribers. Profits from more densely populated, lower cost urbanized areas helped
to subsidize wiring and operation costs for the less populous, higher cost rural areas.
Higher rates and equipment charges for business and long distance customers helped
to subsidize the charges for residential local calling. The funding for universal
3 For a discussion of issues relating to broadband deployment, access, and regulation see
CRS Report RL33542, Broadband Internet Regulation and Access: Background and Issues,
by Angele A. Gilroy and Lennard G. Kruger.
4 Communications Act of 1934, as amended, Title I sec.1[47 U.S.C. 151].

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service objectives was built into the rate structure and effectively, most telephone
subscribers have contributed to universal service goals for decades.5
With the advent of competition and the breakup of the Bell System, the complex
system of cross subsidies that evolved to support universal service goals was no
longer tenable. The Telecommunications Act of 1996 (P.L. 104-104; 47USC)
codified the long-standing commitment by U.S. policymakers to ensure universal
service in the provision of telecommunications services (Sec. 254). The 1996 Act
also required that every telecommunications carrier that provides interstate
telecommunications services be responsible for universal service support [Sec.
254(d)] and that such charges be made explicit [Sec. 254(e)].6 The 1996 Act also
expanded the concept of universal service to include, among other principles, that
elementary and secondary schools and classrooms, libraries, and rural health care
providers have access to telecommunications services for specific purposes at
discounted rates [Sec. 254(b)(6) and 254(h).]

The Federal Universal Service Fund
Over the years this concept fostered the development of various FCC policies
and programs to meet this goal. A new federal Universal Service Fund (USF or Fund)
was established in 1997 to meet the specific objectives and principles contained in
the 1996 Act. The USF is administered by the Universal Service Administrative
Company (USAC), an independent-not-for-profit organization, under the direction
of the FCC. The FCC, through the USF, offers universal service support through a
number of direct mechanisms that target both providers of and subscribers to
telecommunications services.7 The USF provides support and discounts for providers
and subscribers through four programs: high-cost support; low-income support;
schools and libraries support; and rural health care support.8
High-Cost Program High-cost support, provided through the high cost
program, is an example of provider-targeted support. Under the high cost program,
eligible telecommunications carriers, usually those serving rural, insular, and high
cost areas, are able to obtain funds to help offset the higher than average costs of
5 Specific federal programs such as the Rural Telephone Bank and Rural Utilities Service
loan programs were also developed to assist high cost rural areas.
6 Sec. 254 (d) also states that other providers of interstate telecommunications may be
required to contribute to the preservation and advancement of universal service if it is in the
public interest.
7 Many states participate in or have programs that mirror FCC universal service mechanisms
to help promote universal service goals within their individual states.
8 For further information on the FCC’s universal service support mechanisms see
[http://www.fcc.gov/cgb/consumerfacts/universalservice.html].

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providing telephone service.9 This mechanism has been particularly important to
rural America where the lack of subscriber density leads to significant costs.
Low-Income Program FCC universal service policies have been expanded
to target low-income subscribers. Two income-based programs, Lifeline and Link-
Up, established in the mid-1980s, were developed to assist economically needy
individuals. The Link-Up program, established in 1987, assists low-income
subscribers pay the costs associated with the initiation of telephone service, and the
Lifeline program, established in 1984, assists low-income subscribers pay the
recurring monthly service charges incurred by telephone subscribers.10
Schools and Libraries or “E-Rate” Program Under universal service
provisions contained in the 1996 Act, elementary and secondary schools and
classrooms, and libraries are designated as beneficiaries of universal service
discounts. Universal service principles detailed in Section 254(b)(6) state that
“Elementary and secondary schools and classrooms ... and libraries should have
access to advanced telecommunications services...” The act further requires in
Section 254(h)(1)(B) that services within the definition of universal service be
provided to elementary and secondary schools and libraries for education purposes
at discounts, that is at “rates less than the amounts charged for similar services to
other parties.”
The FCC established the Schools and Libraries Division within the Universal
Service Administrative Company (USAC) to administer the schools and libraries
or “E (education)-rate” program to comply with these provisions. Under this
program, which became effective, January 1, 1998, eligible schools and libraries
receive discounts ranging from 20 to 90 percent for telecommunications services
depending on the poverty level of the school’s (or school district’s) population and
its location in a high cost telecommunications area. Three categories of services are
eligible for discounts: internal connections (e.g., wiring, routers and servers); Internet
access; and telecommunications and dedicated services, with the third category
receiving funding priority. Unlike the high-cost and low-income programs, the FCC
established a yearly ceiling, or cap, of $2.25 billion for this program.
Rural Health Care Program Section 254(h) of the 1996 Act requires that
public and non-profit rural health care providers have access to telecommunications
services necessary for the provision of health care services at rates comparable to
those paid for similar services in urban areas. Subsection 254(h)(1) further specifies
that “to the extent technically feasible and economically reasonable” health care
providers should have access to advanced telecommunications and information
services. The FCC established the Rural Health Care Division (RHCD) within the
USAC to administer the universal support program to comply with these provisions.
9 The high-Cost Fund consists of five sub-funds which address specific needs: High-Cost
Loop Support; High-Cost Model Support; Local Switching Support; Interstate Common
Line Support; and Interstate Access Support.
10 Support is not given directly to the subscriber but to their designated telecommunications
service provider, who in turn charge these subscribers lower rates.

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Under FCC-established rules only public or non-profit health care providers are
eligible to receive funding. Eligible health care providers, with the exception of
those requesting only access to the Internet, must also be located in a rural area.11
Similarly to the Schools and Libraries program, this support program went into effect
on January 1, 1998 and a funding ceiling, or cap, was established, in this case at $400
million annually. The primary use of the funding is to provide reduced rates for
telecommunications and information services necessary for the provision of health
care.12
Funding
The USF receives no federal monies but is funded by mandatory contributions
from telecommunications carriers that provide interstate service.13 Under current
rules, a carrier’s contributions are assessed based on a percentage of its interstate and
international end-user telecommunications revenues. This percentage is called the
contribution factor. The FCC calculates the contribution factor based on anticipated
funding needs of the USF in the upcoming quarter. This information is submitted
quarterly, to the FCC, by USAC’s universal service administrator. The contribution
factor is calculated four times a year, on a quarterly basis, and may increase,
decrease, or remain the same depending on the needs of the universal service
programs drawing on the USF. The FCC’s Wireline Competition Bureau releases a
public notice stating the proposed factor. After 14 days, absent any FCC action, the
factor becomes final. As shown in Appendix A Table 1, from 2000 to the first half
of 2005 the contribution factor generally saw a steady increase. During that period
the contribution factor varied from a low of 5.5 percent in the third quarter of 2000
to a high of 11.1 percent in the second quarter of 2005. Since reaching that high, the
factor had begun to moderate; however, the contribution factor for the second quarter
of 2007, at 11.7 percent, is a strong reversal of this trend, resulting in a significant
increase from the first quarter 2007 contribution factor of 9.7 percent. (See Policy
Options section of this report for a discussion of some of the reasons attributed to this
increase.)

There are some exceptions to this funding process. Under the FCC’s rules
telecommunications providers are not required to contribute in a given year to
universal service if their annual contributions to the program would be de minimis,
that is less than $10,000 in that year, or if they provide only international services.
Filers are also not required to contribute based on international revenues if their
interstate end-user revenues meet the 12 percent rule, that is, if their interstate end-
user revenues represent less than 12 percent of their combined interstate and
international end-user revenues. In other cases the FCC has determined that selected
11 Any health care provider that does not have toll-free access to the Internet can receive
support. Support is available for limited long distance charges for accessing the Internet.
This has become an increasingly rare occurrence, however, and the last time such support
was given was in 2001.
12 For additional information on this program, including funding commitments, see the
RHCD website: [http://www.universalservice.org/rhc/].
13 These companies include wireline telephone companies, wireless telephone companies,
paging service providers and interconnected Voice over Internet Protocol (VoIP) providers.

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categories of providers, for example, wireless carriers and interconnected VoIP
providers, may, but are not required to, base their contributions on an FCC-
established revenue percentage, or ”safe harbor,” that attempts to estimate the
percentage of the provider’s total revenues that are interstate and international end-
user revenues.14 The current safe harbor for wireless carriers and VoIP providers is
set at 37.1 percent and 64.9 percent of total revenues, respectively.15
Many assessed providers have chosen, but are not required, to recover USF
contributions directly from their customers. They pass through universal service
payments directly to consumers and earmark a universal service charge on
subscriber’s bills. This is legal and a common industry practice. However, if an
assessed provider does choose to collect USF fees directly from their customers the
provider is not permitted to recover, through a federal universal service line item on
a customer’s bill, an amount that exceeds the universal service charge contribution
factor.16
Disbursements
According to USAC, universal service support disbursements, for calendar year
2006, totaled about $6.6 billion.17 Figure 1, below, shows the breakdown of 2006
USF disbursements as a percentage by individual program. High Cost support
accounted for 61.8 percent of total disbursements, or $4.1 billion. Schools and
Libraries support represented 25.2 percent of disbursements, totaling $1.7 billion.18
Low Income support was 12.4 percent of disbursements, totaling $820.4 million.
Commitments for Rural Health Care support were about $40.6 million, or 0.6 percent
of disbursements.19 Although subscribers benefit from the USF, only companies that
provide the services draw money directly from the fund.
14 These providers have expressed concern over their inability to distinguish between their
interstate and intrastate revenues. However, in lieu of using the safe harbor percentage they
do have the option to submit traffic study data to show that they should contribute less.
15 FCC Updates Approach for Assessing Contributions to the Federal Universal Service
Fund. Available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-
266030A1.pdf].
16 It should also be noted that an assessed provider is not permitted to collect any fees from
a lifeline or link-up subscriber, unless that subscriber has incurred long-distance charges.
17 These figures are based on USAC 2006 unaudited financial data. Detailed data, including
state-specific information, on USF support can be found in the Universal Service Company
2006 Annual Report at [http://www.usac.org/_res/documents/about/pdf/USAC-annual-
report-2006.pdf].
18 Disbursements for the schools and libraries support program and the rural health care
program operate on a school year calendar and represent commitments as of December 31,
2006 for the funding year which runs from July 1- June 30. Therefore, these figures do not
represent the full yearly commitment made to these programs.
19 See footnote 16, above.

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Figure 1. USF Disbursements by Program 2006
High Cost
61.8%
Schools/Libaries
25.2%
Low Income
Rural Health
12.4%
0.6%
Source: Data from USAC 2006 Annual Report (unaudited data).
Appendix A Table 2, provides data on USF payments and contributions broken
down by state and program for 2005. The data show that service providers (and their
subscribers) in every state, territory and commonwealth received, to varying degrees,
some 2005 USF payments. For example, all received at least some payments from
both the Low Income program and the Schools and Libraries program. The
allocation of benefits vary depending on which individual program is examined.
However, when overall net dollar flow20 is examined 23 states and the District of
Columbia were net contributors to the 2005 USF program as a whole. The service
providers in the remaining 27 states and 5 territories were net receivers, that is they
received more payments from the USF, for 2005, than estimated contributions.
Although there is some variation within programs and among states in any given
year, on the whole whether a particular state is a net receiver of, or contributor to the
USF program, is a fairly stable pattern.21 In general, rural states with low population
density typically tend to benefit most as they receive significant funding from the
High Cost program, but tend to contribute less to the USF program overall, since they
tend to generate lower telecommunications revenues.
20 Contribution allocation among states is an FCC staff estimate. Net dollar flow is annual
payments minus estimated contributions.
21 For a breakdown of USF distributions and contributions by state for previous years see
Table 1.12 of the FCC’s Universal Service Monitoring Report. Monitoring reports issued
since 1991 are available at [http:www.fcc.gov/wcb/iatd/monitor.html].

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Policy Options
The FCC is required to ensure that there be “specific, predictable and sufficient
... mechanisms to preserve and advance universal service.”22 However, changes in
telecommunications technology and the marketplace, while often leading to positive
benefits for consumers and providers, have had a negative impact on the health and
viability of the USF, as presently designed. These changes have led to a growing
imbalance between the entities and revenue stream contributing to the fund and the
growth in the entities and programs eligible to receive funding. The desire to expand
access to broadband and address what some perceive as a “digital divide” has also
placed focus on what role, if any, the USF should take to address this issue.23
The current policy debate surrounding USF reform has focused on four major
concerns: the scope of the program; who should contribute and what methodology
should be used to fund the program; eligibility criteria for benefits; and concerns over
possible program fraud, waste, and abuse. A separate and more narrowly focused
issue, the impact of the Antideficiency Act (ADA) on the USF, also has become an
issue of concern.
Program Scope
One of the major policy debates surrounding universal service is whether access
to advanced telecommunications services (i.e., broadband) should be incorporated
into universal service objectives. The term universal service, when applied to
telecommunications, refers to the ability to make available a basket of
telecommunications services to the public, across the nation, at a reasonable price.
As directed in the 1996 Telecommunications Act [Section 254(c)], a federal-state
Joint Board was tasked with defining the services which should be included in the
basket of services to be eligible for federal universal service support; in effect using
and defining the term “universal service” for the first time. The Joint Board’s
recommendation, which was subsequently adopted by the FCC in May 1997,
included the following in its universal services package: voice grade access to, and
some usage of, the public switched network; single line service; dual tone signaling;
access to directory assistance; emergency service such as 911; operator services;
access and interexchange (long distance) service.
Some policy makers have expressed concern that the FCC-adopted definition
is too limited and does not take into consideration the importance and growing
acceptance of advanced services such as broadband and Internet access. They point
to a number of provisions contained in the Universal Service section of the 1996 Act
to support their claim. Universal service principles contained in Section 254(b)(2)
state that “Access to advanced telecommunications services should be provided to
all regions of the Nation.” The subsequent principle (b)(3) calls for consumers in
22 47 U.S.C. Sec. 254 (b)(5).
23 For a discussion of the issues surrounding the “digital divide” see CRS Report RL30719,
Broadband Internet Access and the Digital Divide: Federal Assistance Programs, by
Lennard G. Kruger and Angele A. Gilroy.

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all regions of the Nation including “low-income” and those in “rural, insular, and
high cost areas” to have access to telecommunications and information services
including “advanced services” at a comparable level and a comparable rate charged
for similar services in urban areas. Such provisions, they state, dictate that the FCC
expand its universal service definition.
The 1996 Act does take into consideration the changing nature of the
telecommunications sector and allows for the universal service definition to be
modified if future conditions warrant. Section 254(c)of the act states that “universal
service is an evolving level of telecommunications services” and the FCC is tasked
with “periodically” reevaluating this definition “taking into account advances in
telecommunications and information technologies and services.” Furthermore, the
Joint Board is given specific authority to recommend “from time to time” to the FCC
modification of the definition of the services to be included for federal universal
service support. The Joint Board, in July 2002, concluded such an inquiry and
recommended that at that time no changes be made in the list of services eligible for
universal service support. The FCC, in a July 10, 2003 order (FCC 03-170) adopted
the Joint Board’s recommendation, thereby leaving unchanged the list of services
supported by Federal universal service. However the Joint Board is again in the
process of reevaluating the USF program and it is anticipated that recommendations
to expand the program to include broadband services to the list of supported services
may be among those suggested. This process is a lengthy one, however, and once the
Joint Board has forwarded its recommendations the FCC is given up to one year to
complete a proceeding to consider them.24
Other policy makers caution that a more modest approach is appropriate given
the “universal mandate” associated with this definition. Also at issue is the
uncertainty and costs associated with mandating nationwide deployment of such
advanced services as a universal service policy goal. Some have expressed concern
that given the pressures currently facing the Fund, and their impact on the
contribution factor, the inclusion of broadband services, at this time, is taking on too
large a mandate. Current policy concerns regarding both the contribution and
distribution mechanisms should be addressed first, they state, prior to any expansion
of the USF definition. Furthermore, they state, the USF has already taken on limited
broadband deployment responsibilities through the E-rate and Rural Health Care
programs, and indirectly through the High Cost program, as funding is used to
upgrade existing telephone networks. If ubiquitous broadband deployment is a
national policy goal, they state, policymakers should not place further stress on the
USF program but should seek out other means of achieving this goal which may be
more effective, such as providing economic incentives, easing economic regulation,
encouraging municipal ownership, expanding other existing programs or establishing
a new program.25
24 It should be noted that the FCC is not required to implement the recommendations of the
Federal-State Joint Board, however, the presence of three FCC commissioners on the Board
gives much weight to their recommendations.
25 For example, the USDA’s Rural Utilities Service has a broadband loan and grant program
for rural areas. For information on this program see CRS Report RL33816, Broadband
(continued...)

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Contribution Methodology
One of the major policy questions surrounding USF reform is to what degree,
if any, there should be a change in the way the program is funded. A consensus has
been forming that some reform to broaden the contribution base is needed. How this
should be accomplished however, remains open to debate. Proposals range from
modest options to expand the existing funding base, to broadening the base to include
intrastate revenues, to calling for a complete restructuring of the contribution
methodology.

Expanding the Base. One option is to broaden the base of entities that must
contribute to the Fund, by calling for technology neutral funding. The FCC has taken
a number of actions, over the years, to expand the pool of contributors, thereby
broadening the base of entities supporting the Fund.26 For example, in 1998 the FCC
established a revenue percentage, or safe harbor, of 15 percent of revenues for
determining the USF contribution for wireless carriers. That percentage has been
increased twice since and is currently set at 37.1 percent. In a June 2006 decision,
the FCC further expanded the pool of contributors by requiring that providers of
interconnected VoIP contribute to the USF.27 Some policy makers have
recommended that the list of providers be expanded to include broadband providers
which were removed from the base when the FCC ruled that Internet access services
are information services, not telecommunications services. However, they generally
recommend that this expansion be contingent on the understanding that USF support
be used to upgrade the telecommunications infrastructure to include broadband
capabilities.
Intrastate Revenues. Another proposal calls for broadening the revenue
base by assessing fees on intrastate as well as interstate/international revenues.
Although this would provide an additional source for USF funds, many state that this
option may not be available absent Congressional action to specifically designate
intrastate revenues as a source for federal USF contributions. The recommendation
for specific Congressional clarification is based, to a large part, on a successful court
challenge of an earlier attempt by the FCC to collect support for the E-rate program
based on combined interstate and intrastate revenues. In the case of Texas Office of
Public Utility Counsel v. FCC (183F.3d; 393;1999) the United States Court of
Appeals, 5th Circuit concluded that “...the agency (FCC) exceeded its jurisdictional
authority when it assessed contributions for sec. 254(h), ‘schools and libraries’
programs based on combined intrastate and interstate revenues of interstate
telecommunications providers and when it asserted its jurisdictional authority to do
25 (...continued)
Loan and Grant Programs in the USDA’s Rural Utilities Service, by Lennard G. Kruger.
26 However, it should be noted that in a reversal of this trend, the FCC, in an August 2005
decision, exempted digital subscriber line (DSL) service from USF assessments on the basis
of its August 2005 “information service” classification.
27 See FCC Updates Approach For Assessing Contributions To The Federal Universal
Service Fund, available at [http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-
266030A1.pdf].

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CRS-11
the same on behalf of high-cast support.” Proponents of including intrastate revenues
cite technological and marketplace changes which have eroded the distinction
between interstate and intrastate services as well as the growth of combined calling
plans in support of such action. Some, however, have expressed concern over the
potential negative impact that the inclusion of intrastate revenues may have on state-
supported USF programs since many are funded by intrastate telecommunications
revenues.

Numbers or Connections. Another proposal calls for a shift in the basis of
support away from revenues to a completely new methodology based on working
numbers or connections. Under this proposal contributions for USF would be
assessed based on a monthly flat fee, or charge, per working telephone number.
Since users need a discrete number to connect to the public switched network,
supporters claim this proposal would lead to a more stable assessment, would be
technologically neutral, would spread contributions over a broader base, and would
be easier to administer.28 Opponents, however, state that using a numbers-based
approach shifts the burden of USF from high volume users directly to all subscribers
as a regressive fixed charge. This, they state, not only adds a financial burden on low
volume subscribers, who may be elderly, and/or on low and fixed incomes, but could
possibly lead to subscriber drop-off, thereby defeating the purpose of the USF
program.29
Distribution Methodology
Another major issue facing USF reform concerns the eligibility criteria used to
distribute USF funds. Over the past decade (1997-2007) annual USF receipts have
grown from $1.8 billion to an estimated $7.2 billion and the contribution factor
needed to support this growth has more than doubled to reach an all time high of 11.7
percent for the second quarter of 2007. This significant rise in the funding level, and
subsequently the contribution factor, has led to an examination of the Fund’s
eligibility criteria and distribution methodology as concerns have been voiced over
the long term sustainability of the Fund and the cost burden it imposes on
contributors.
Examination of USF program revenue flows, since 2003, shows that three of the
four programs, Low Income, Schools and Libraries, and Rural Health Care, have
been relatively stable or declining. However, the High Cost program has experienced
significant growth (31 percent), with disbursements increasing from $3,261.1 million
to $4,270.8 million over the four year period; and as a result, is the major factor
28 For a more detailed discussion supporting this proposal see The USF by the Numbers
Coalition, The Benefits of a Numbers-Based Collection for Universal Service. Available at
[http://files.ctia.org/pdf/PositionPaper_numberscoalition_USF.pdf].
29 For a more detailed discussion opposing a numbers-based proposal see Losing Numbers:
How America’s Most Vulnerable Consumers Could Suffer Under Universal Service Fund
Reform. Available at [http://keepusffair.org/KeepUSFFair/resources.html].

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CRS-12
contributing to the USF’s recent overall growth.30 Within the High Cost program the
growth can be traced to support given to competitive eligible telecommunications
carriers. For example, payments for competitive eligible telecommunications
carriers, which are largely wireless carriers, increased from $1 million in 2000, to
$126.7 million in 2003, but are estimated by USAC to total $1 billion for 2006 and
potentially may go as high as $2.5 billion by 2009.31 On the other hand, while
incumbent eligible telecommunications carriers still receive the majority of funds
from the High Cost program, revenues disbursed in 2003 and 2007 decreased from
$3.2 million to $3.1 million.32
Hence, most policy discussions regarding the distribution methodology focus
on proposals to stem the growth of the High Cost Program by limiting eligibility
criteria and/or controlling the amount of funding disbursed. A variety of proposals,
to be used on their own or in combination, are being discussed including limiting
USF support to a single line per household, eliminating the “identical cost rule,”
using reverse auctions to determine eligibility, placing a cap (or ceiling) on funds,
and improving targeting.
Primary or Single Line Limitation. As presently designed, USF support
is available to multiple lines per household. Some policy makers have proposed that
one way to curb the increase in funding requirements is to limit eligibility criteria.
USF funding, they state, should be limited to a single or primary line, not multiple
access.33 The universal service mandate, they claim, is not to artificially construct a
competitive marketplace with multiple carriers in areas that are not able to support
a single carrier, but to ensure that high cost areas receive service at a reasonable rate.
The use of USF funds to support multiple carriers in high cost areas, they claim, is
an abuse of funds and places unnecessary strain on those supporting the program.
Others however, have argued that limiting USF support to a single provider relegates
those areas to a lower standard, which does not fulfill the universal service principle
to afford consumers in rural, insular and high cost areas, access to
telecommunications and information services that are “...reasonably comparable to
those services provided in urban areas...”(Sec. 254 [b] [3]). High cost areas, they
state, should have the benefits and choices of competition and the opportunity to
select from a variety of providers just like other regions of the nation. Line
limitations, opponents state, will only discourage investment in rural infrastructure.
30 Testimony of Billy Jack Gregg, Director, Consumer Advocate Division, Public Service
Commission of West Virginia, before the Senate Commerce, Science, and Transportation
Committee, March 1, 2007. Available at [http://commerce.senate.gov
/public/index.cfm?FuseAction=Hearing.Hearing_ID=1819].
31 Testimony of FCC Chairman Kevin Martin before the Federal-State Joint Board on
Universal Service, February 20, 2007. Available at [http://hraunfoss.fcc.gov/edocs
_public/attachmatch/DOC-271011A1.pdf].
32 Ibid., Gregg. More specifically, revenues disbursed between 2003 and 2007 decreased
from $3,234.9 million to $3,105.3 million.
33 It should be noted, however, that the 109th Congress enacted legislation prohibiting the
FCC from using any of its FY2006appropriated funds to change its rules, or regulations, to
limit USF support payments to a single connection, or primary line (PL. 109-108, Title VI,
Sec. 622).

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CRS-13
Reverse Auctions. One proposal under consideration for selecting an
eligible carrier is the use of reverse auctions, or competitive bidding. Under this
method a geographic area would be designated as high cost, providers interested in
offering service would be asked how little universal service support they would need
to provide service and the provider that submits the lowest bid, all else equal, would
receive the funds.34 This approach, in theory, would result in a decrease in funding
for High Cost support since it would be based on low bids submitted by providers
instead of on the current method that is based on the embedded costs of the
incumbent telecommunications provider in the area. This, supporters claim, will lead
to the use of the most efficient technology and will relieve the growing pressure on
USF funds. However, there is no single methodology that must be used and the
reverse auction concept could be designed in a number of ways and impose a variety
of requirements and obligations. For example, some support a phased-in approach
to reverse auctions where it is used solely to select a competitive carrier for an area
while the designated incumbent eligible telecommunications carrier remains under
the present system indefinitely, or for a specific time period. Others suggest that an
auction system could reward the lowest bidder with the most support, but still give
other participants some limited support. Still others suggest the establishment of a
pilot program to test for successes and/or unintended consequences. On the other
hand, others have expressed reservations about adopting reverse auctions stating that
many questions remain about how to implement reverse auctions, how to administer
the costs associated with their adoption, and the long term impact they would have
on consumers as well as providers. Concerns were also expressed that a reverse
auction would not create a favorable environment for network investment and high
cost areas could be left with inferior networks.
Identical Cost Rule. The criteria used for the distribution of funds for the
High Cost program has also come under scrutiny. High Cost program fund
distribution is based on what is known as the “identical cost rule.” Under this rule
funds are distributed to competitive eligible telecommunications carriers based on the
embedded costs, or per line support, of the incumbent carrier. Typically the
incumbent carrier is a wireline carrier while the competitive carrier is a wireless
carrier. The infrastructure costs associated with the investment and maintenance of
a wireline system are generally significantly higher than those associated with a
wireless system. Therefore some have questioned whether basing funding levels on
the incumbent carrier’s costs, particularly when support is based on a more expensive
infrastructure, is reasonable, or even fair. Switching to a more refined distribution
methodology, more reflective of a carrier’s actual costs they claim, would help to
alleviate some of the pressure facing funding of the High Cost program. Furthermore
they state, it is anticipated that the growth in competitive eligible telecommunications
carriers will be increasing based on the number of applications pending at the FCC,
and that therefore addressing this issue is of growing significance.
34 The provider would be required to meet certain “carrier of last resort” obligations, which
would be detailed when the bids are solicited. For example, the carrier would be required
to offer a specific package of services and provide that service to the entire designated
service area (regardless of cost), and would have to meet interconnection mandates.

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CRS-14
Capping. Some have also proposed placing a cap, as a temporary or
permanent measure, on the funds available for distribution to competitive eligible
telecommunications carriers through the High Cost program. Supporters of capping
claim that it will prevent the uncontrolled growth of this part of the High Cost
program, which is the major contributor to the overall growth in the USF. In turn
they state, this will bring stability to the Fund and the USF contribution factor. They
note that both the E-rate and the Rural Health Care programs operate under yearly
caps, and with the exception of the Low Income program which has been relatively
stable, the High Cost program is the only program with no built-in restraints on its
growth. Others however are opposed to implementing a cap. They point out that
placing a cap on an existing program, such as the High Cost program, could lead to
confusion and be very disruptive. The dynamic, they state, is very different than
capping programs, such as the E-rate and Rural Health Care, at their inception. The
High Cost program, they claim, is an ongoing program responsible for providing
basic voice service and connection to the network, a fundamental tenet of the
universal service mandate. The placing of a cap on this program, they claim, could
have significant unintended consequences which could undermine universal service
goals.
Improved Targeting. An additional proposal calls for making a better effort
to target areas of need by using better mapping technology (geographic information
systems or GIS) or modeling to determine support for eligible telecommunications
carriers. Some claim that the designated areas for support are too large and cover
areas which might not be in need of USF support. Designating areas for USF support
that do not need such subsidies only encourages the influx of eligible carriers into
areas that they might choose to enter absent such support, they claim, and leads to the
use of funds which may be more appropriately used elsewhere. Taking a more refined
and precise approach, they state, will result in using funds more effectively in areas
that truly need support. While most support such efforts, many see such proposals
to be more long term efforts which are still under development.

Fraud, Waste, and Abuse
Directly related to the funding issue are concerns expressed by policy makers
over the potential for possible fraud, waste, or abuse of the program. While all USF
programs have the potential for mismanagement, the E-rate program, “due to its
materiality and an initial assessment of its potential for waste, fraud, and abuse...”35
has been singled out for particular attention. The ability to ensure that only eligible
services are funded, that funding is disbursed at the proper level of discount, that
alleged services have been received, and the integrity of the competitive bidding
process is upheld have been questioned. A series of Government Accountability
Office (GAO) reports raising concerns about the financial oversight of the E-rate
program prompted additional Congressional scrutiny.36 The USAC, as the
35 Federal Communications Commission Office of the Inspector General, Semiannual
Report to Congress, April 1, 2006 – September 30, 2006, p.8. Available at
[http://www.fcc.gov/oig/oigreportssemiannual.html].
36 For example, see Schools and Libraries Program: Actions Taken to Improve Operational
(continued...)

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CRS-15
administrator responsible for the management and oversight of the USF, initiated a
number of measures to address specific E-rate concerns and extended them to all
USF programs. These measures include establishing a whistleblower hotline to
report violations and conducting random and targeted audits of USF program
participants and contributors. In 2006, USAC took additional action by initiating
“...a large-scale beneficiary audit program” and “...expects to conduct more than 450
audits of program beneficiaries and contributors by mid-2007.”37
The FCC’s Office of the Inspector General (OIG) has also been active in
pursuing oversight of the USF focusing on the E-rate program in particular. Since
2002 the OIG has included in its semi-annual reports coverage of its specific efforts
to oversee E-rate program activity, including audits, to ensure program integrity.38
More recently, however, the OIG has also expanded its audit efforts to include the
remaining three USF programs and audits of USF contributors. Despite this activity,
however, the OIG continues to cite the need for additional resources, stating that
“...the primary obstacle to an effective, independent oversight program has been, and
continues to be, inadequate audit and investigative resources so that OIG can conduct
its own audits and provide adequate support to investigations.”39 The FCC’s
Enforcement Bureau is the primary entity within the FCC tasked with enforcing the
provisions of the Communications Act, including those related to Section 254
(universal service). The Enforcement Bureau pursues violators and initiates
enforcement actions including notices of liability, suspensions, consent decrees, and
debarments.40

The Department of Justice (DOJ) has also taken an active role in pursuing
instances of deliberate fraud related, in particular, to the E-rate program. The
Antitrust Division of the DOJ has established a task force to investigate E-rate fraud
and has prosecuted a number of individuals and companies leading to fines,
restitution, program debarments and imprisonment.41
36 (...continued)
Procedures Prior to Committing Funds (March 1999) GAO/RCED-99-51; Schools and
Libraries Program: Application and Invoice Review Procedures Need Strengthening
(December 2000) GAO-01-105; Schools and Libraries Program: Update on E-Rate Funding
(May 2001) GAO-01-672; Greater Involvement Needed by FCC in the Management and
Oversight of the E-Rate Program (February 2005) GAO=05=151. Available at
[http://www.gao.gov/docsearch/topic/php].
37 USAC 2006 Annual Report, p.11. Available at [http://www.usac.org/_res/documents
/about/pdf/usac-annual-report-2006.pdf].
38 Semiannual Reports issued by the FCC’s OIG are available at [http://www.fcc.gov
/oig/oigreportssemiannual.html].
39 Semiannual Report to Congress, April 1, 2006 – September 30, 2006,of the Inspector
General, p. 8.
40 A brief overview of the Enforcement Bureau’s USF enforcement responsibilities and a list
of recent enforcement actions is available at [http://www.fcc.gov/eb/usfc/].
41 For example, see Six Corporations And Five Individuals Indicted In Connection With
Schemes To Defraud The Federal E-Rate Program. Available at [http://www.usdoj.gov

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CRS-16
As the 110th Congress continues its review of the USF it is likely that all four
of the USF programs will be subject to oversight to prevent any fraud, waste, or
abuse. Concerns about fraud and abuse are shared by both critics and supporters of
the program. Critics of the E-rate program have used examples of fraud, waste, and
abuse to call for a halt to the program or at a minimum its suspension until additional
safeguards are in place. Supporters also want to ensure the integrity of all four
programs since the misuse of funds or unreasonable administrative costs not only
leave the program vulnerable to critics, but would only decrease available funding
to meet the program’s goals.
Antideficiency Act Compliance
A more narrowly focused policy issue relating to the operation of the USF deals
with Antideficiency Act (ADA) compliance. With the guidance of the Office of
Management and Budget (OMB) the FCC decided, in August of 2004, that the
accounting requirements contained in the ADA should be applied to the operation of
the USF. Under this accounting methodology, the government is precluded from
incurring obligations prior to the funds being available. E-rate fund commitment
letters, which are issued far in advance of actual funds payment, were considered to
be obligations. Therefore ADA compliance requires that the funds be on hand to
cover obligations and the program was required to have the cash on hand to cover all
of the commitment letters. USAC changed the timing of its funds distribution in
order to meet this requirement, leading to a temporary four-month suspension (from
August through November 2004) of E-rate funding commitments. The temporary halt
in the disbursement of E-rate funding commitments, the concern that funding for
other USF programs might be disrupted and that compliance might necessitate a
significant increase in USF revenues, brought this issue to Congressional attention.
The 108th Congress enacted legislation to provide for a one-year exemption
(through December 31, 2005) from the ADA for the USF (P.L. 108-494). Since then
the temporary one-year exemption has been extended twice, once to December 31,
2006 in conjunction with the Science, State, Justice, and Commerce appropriations
measure (P.L. 109-108) and once again for an additional one-year exemption (until
December 31, 2007) as part of the CR2007 (H.J.Res. 20; P.L. 110-5). Whether the
USF program should be required to comply with the accounting provisions contained
in the ADA and if so what consequences that may have for USF programs is
expected to continue to be an issue. Once again this exemption will expire and the
110th Congress may choose to address this issue in a variety of ways. It may continue
to enact legislation to provide short-term relief by extending the temporary
exemption. Also it could choose to enact legislation to provide the USF program
with a permanent exemption from ADA requirements, or it may choose to take no
further action allowing the temporary exemption to expire, thereby requiring the FCC
to ensure, through whatever steps it deems necessary, that the USF is in full
compliance with ADA requirements.
41 (...continued)
/opa/pr/2005/April/05_at_169.htm].

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CRS-17
The FCC has resolved, at least temporarily, any compliance problems. FCC
Chairman Martin, in response to questioning during his September 2006 Senate
confirmation hearing, stated that the Commission has concluded that the ADA does
apply to the USF. However, he assured Commerce Committee members that funds
will be sufficient and that E-rate program commitment letters will not be delayed.42
Some, however, have continued to express concern that the actions taken by the FCC
are only temporary and that ADA compliance may jeopardize disbursements for not
only the E-Rate program, but possibly other USF programs, and may cause a
significant increase in the contribution factor.
42 Remarks by Chairman Martin during confirmation hearings before the Senate Commerce,
Science and Transportation Committee, September 12, 2006.

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CRS-18
Activity in the 110th Congress
The 110th Congress is taking an active role regarding USF oversight and reform.
Legislative measures to address the reform, restructuring, and expansion into
broadband of the USF have been introduced (S. 101, S. 711, H.R. 42) and the Senate
Commerce Committee held a March 1, 2007 hearing on the challenges facing the
USF. FCC oversight hearings held by the Senate Commerce Committee and the
House Telecommunications Subcommittee, as well as hearings on broadband
deployment held by the House Small Business Committee included examination of
USF issues.
A provision to extend for one year (until December 31, 2007) the USF
exemption from the Antideficiency Act (ADA) was passed as part of the FY2007
continuing resolution (H.J.Res. 20) and was signed into law (P.L. 110-5). Two stand
alone measures (H.R. 278, S. 609) as well as a provision contained in S. 101 calling
for a permanent ADA exemption also have been introduced. It is anticipated that the
110th Congress will continue its oversight and examination of the USF, but it remains
unclear whether any legislation to address the myriad issues surrounding the USF
will be enacted.
Legislation
H.J.Res. 20 (Obey)
Revised Continuing Appropriations Resolution, 2007. An appropriations
measure that contains a provision to extend for one year (until December 31, 2007)
the USF exemption from the Antideficiency Act. Signed into law (PL. 110-5)
February 15, 2007.
H.R. 42 (Velázquez)
A bill to amend the Communications Act of 1934 to continue in effect and
expand the Lifeline Assistance Program and the Link Up Program, and for other
purposes. Introduced January 4, 2007; referred to the Subcommittee on
Telecommunications and the Internet February 2, 2007.
H.R. 278 (Cubin)
A bill to amend section 254 of the Communications Act of 1934 to provide that
the funds received as universal service contributions and the universal service
support programs established pursuant to that section are not subject to certain
provisions of Title 31, United states Code, commonly known as the Antideficiency
Act. Introduced January 5, 2007; referred to the Subcommittee on
Telecommunications and the Internet February 2, 2007.
S. 101 (Stevens)
A bill to update and reinvigorate universal service provided under the
Communications Act of 1934 and to exempt universal service contributions and
disbursements from the Antideficiency Act. Introduced January 4, 2007; referred to
the Committee on Commerce, Science, and Transportation January 4, 2007.

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CRS-19
S. 609 (Rockefeller)
A bill to amend Section 254 of the Communications Act of 1934 to provide that
funds received as universal service contributions and the universal service support
programs established pursuant to that section are not subject to certain provisions of
Title 31, United States Code, commonly known as the Antideficiency Act.
Introduced February 15, 2007; referred to the Committee on Commerce, Science, and
Transportation February 15, 2007.
S. 711 (Smith)
A bill to amend the Communications Act of 1934 to expand the contribution
base for universal service, establish a separate account within the universal service
fund to support the deployment of broadband service in unserved areas of the United
States, and for other purposes. Introduced February 28, 2007; referred to the
Committee on Commerce, Science, and Transportation February 28, 2007.

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CRS-20
Appendix A
Table 1. Universal Service Fund Contribution Factors
Year
Quarter
Factor
2000
First
5.9 %
Second
5.7
Third
5.5
Fourth
5.7
2001
First
6.7%
Second
6.9
Third
6.9
Fourth
6.9
2002
First
6.8%
Second
7.3
Third
7.3
Fourth
7.3
2003
First
7.3%
Second
9.1
Third
9.5
Fourth
9.2
2004
First
8.7%
Second
8.7
Third
8.9
Fourth
8.9
2005
First
10.7%
Second
11.1
Third
10.2
Fourth
10.2
2006
First
10.2%
Second
10.9
Third
10.5
Fourth
9.1
2007
First
9.7%
Second
11.7
Source: Quarterly Public Notices on universal service contribution factors. Federal Communications
Commission.

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CRS-21
Table 2. USF Support by State 2005
Source: Universal Service Monitoring Report, Table 1.12, Federal Communications Commission.
December 2006

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