Universal Service Fund: Background and
Options for Reform
Angele A. Gilroy
Specialist in Telecommunications Policy
June 30, 2011
Congressional Research Service
7-5700
www.crs.gov
RL33979
CRS Report for Congress
P
repared for Members and Committees of Congress
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 2010, $73.7 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. The FCC’s national broadband plan, Connecting America: The National
Broadband Plan, calls for a major restructuring of the USF to enable it to take a major role in
achieving the goal of nationwide broadband access and adoption. The FCC has initiated a series
of proceedings to achieve this goal.
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 framing the debate.
The current policy debate has focused on five concerns: the scope of the program; who should
contribute and what methodology should be used to fund the program; eligibility criteria for
benefits; concerns over possible program fraud, waste, and abuse; and the impact of the
Antideficiency Act (ADA) on the USF.
It is anticipated that Universal Service Fund reform will continue to be a topic of congressional
interest. The House Energy and Commerce Committee and the Senate Commerce, Science, and
Transportation Committee have included USF reform on their agendas of issues for consideration
and oversight. Two measures (S. 297, H.R. 2163) relating to USF have been introduced to date. S.
297 amends Section 254 of the Communications Act of 1934 to provide for a permanent
exemption for the USF from the Antideficiency Act. H.R. 2163 expands the USF’s Lifeline
program to provide discounts, to eligible subscribers, for broadband Internet service.
This report will be updated as events warrant.
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Universal Service Fund: Background and Options for Reform
Contents
Introduction ................................................................................................................................ 1
The Universal Service Concept ................................................................................................... 2
The Federal Universal Service Fund............................................................................................ 2
High-Cost Program ............................................................................................................... 3
Low-Income Program ........................................................................................................... 3
Schools and Libraries or “E-Rate” Program........................................................................... 3
Rural Health Care Program ................................................................................................... 4
Funding ................................................................................................................................ 4
Disbursements ...................................................................................................................... 6
Policy Options ............................................................................................................................ 7
Program Scope...................................................................................................................... 7
Contribution Methodology .................................................................................................... 9
Expanding the Base......................................................................................................... 9
Intrastate Revenues ......................................................................................................... 9
Numbers or Connections ............................................................................................... 10
Distribution Methodology ................................................................................................... 10
Primary or Single Line Limitation ................................................................................. 11
Reverse Auctions .......................................................................................................... 12
Identical Support Rule................................................................................................... 12
Capping ........................................................................................................................ 13
Improved Targeting....................................................................................................... 14
Fraud, Waste, and Abuse ..................................................................................................... 14
Antideficiency Act Compliance........................................................................................... 17
FCC National Broadband Plan .................................................................................................. 18
High-Cost Program ............................................................................................................. 18
Connect America and Mobility Funds ................................................................................. 18
Low-Income Program ......................................................................................................... 19
Schools and Libraries and Rural Health Care Programs ....................................................... 19
Funding .............................................................................................................................. 21
Implementation ................................................................................................................... 21
High Cost Program ....................................................................................................... 21
Low Income Program.................................................................................................... 23
Schools and Libraries Program...................................................................................... 24
Rural Health Care Program ........................................................................................... 24
Congressional Activity .............................................................................................................. 25
112th Congress .................................................................................................................... 25
111th Congress..................................................................................................................... 25
Figures
Figure 1. USF Disbursements by Program 2010 .......................................................................... 6
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Tables
Table A-1. Universal Service Fund Contribution Factors ........................................................... 28
Table A-2. USF Support by State 2009 ...................................................................................... 29
Appendixes
Appendix A. USF Contribution Factors and State Support ......................................................... 28
Appendix B. Congressional Activity: 110th Congress ................................................................. 30
Contacts
Author Contact Information ...................................................................................................... 33
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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, since 1998 almost $73.7 billion in support has been
disbursed 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, movies, 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 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. How this concept should be defined, how
1 Communications Act of 1934, as amended [47 U.S.C.151 et seq.].
2 See http://www.usac.org/about/universal-service/fund-facts/fund-facts.aspx.
3 For a discussion of issues relating to broadband deployment, access, and regulation see CRS Report R40230, The
Evolving Broadband Infrastructure: Expansion, Applications, and Regulation, by Patricia Moloney Figliola, Angele A.
Gilroy, and Lennard G. Kruger.
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Universal Service Fund: Background and Options for Reform
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 20th 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-subsidization 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 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; 47 USC) 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
4 Communications Act of 1934, as amended, Title I sec.1[47 U.S.C. 151].
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.
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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 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 Discounts are eligible for one connection,
either wired or wireless, per household.
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% for
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.
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, or in the case of some wireless options no charge for the basic package.
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Universal Service Fund: Background and Options for Reform
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, adjusted for inflation prospectively beginning with funding year 2010, for
this program.11
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. 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.12 Similar 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. In
addition, in 2007 the FCC established the “Rural Health Care Pilot Program” to help public and
non-profit health care providers build state and region-wide broadband networks dedicated to the
provision of health care services.13
Funding
The USF receives no federal monies but is funded by mandatory contributions from
telecommunications carriers that provide interstate service.14 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
11 In a September 23, 2010, order modifying the E-rate program the FCC included among its modifications the indexing
of the $2.25 billion cap of the program to account for inflation starting with funding year 2010 of the program; during
periods of deflation the funding cap will remain at the level from the previous funding year. In the Matter of Schools
and Libraries Universal Service Support Mechanism; A National Broadband Plan For Our Future, CC Docket No. 02-
6; GN Docket No. 09-51 (paras. 34-40). Available at http://hraunfoss.fcc.gov/edocs-public/attachmatch/FCC-10-
175A1.pdf.
12 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.
13 For additional information on this program, including funding commitments, see the RHCD website:
http://www.universalservice.org/rhc/.
14 These companies include wireline telephone companies, wireless telephone companies, paging service providers and
interconnected Voice over Internet Protocol (VoIP) providers.
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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 Table A-1, from 2003 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 7.3% in the first
quarter of 2003 to a high of 11.1% in the second quarter of 2005. Since reaching that high, the
factor had begun to moderate; however, the contribution factors for the second and third quarters
of 2007, at 11.7% and 11.3% respectively, were a strong reversal of this trend, resulting in a
significant increase from the first quarter 2007 contribution factor of 9.7%. Since reaching a high
of 11.7% the contribution factor began to moderate with a first quarter 2008 factor of 10.2%. The
contribution factor once again began to climb and reached an historic high of 15.5% for the first
quarter of 2011. The contribution factor for the second quarter of 2011 at 14.9% represented a
slight moderation from the previous quarter. This moderate downward trend has continued with a
third quarter 2011 factor of 14.4 %, but still represents the fourth highest rate on record. The
overall growth in the factor over this decade remains a significant policy concern. (See “Policy
Options” section, below, 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% rule, that is, if their
interstate end-user revenues represent less than 12% of their combined interstate and international
end-user revenues. In other cases the FCC has determined that selected 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.15 The current (effective June 2006) safe harbor for wireless
carriers and VoIP providers is set at 37.1% and 64.9% of total revenues, respectively.16
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.17
15These 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.
16 FCC Updates Approach for Assessing Contributions to the Federal Universal Service Fund. Available at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-266030A1.pdf.
17 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.
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Universal Service Fund: Background and Options for Reform
Disbursements
According to USAC, universal service support disbursements for calendar year 2010 totaled $8.0
billion.18 Figure 1, below, shows the breakdown of calendar year 2010 USF disbursements as a
percentage by individual program. High Cost support accounted for 53.7% of total disbursements,
or $4.3 billion. Schools and Libraries support represented 28.7% of disbursements, totaling $2.3
billion. Low Income support was 16.5% of disbursements, totaling $1.3 billion. Disbursements
for Rural Health Care support were $86.0 million, or 1.1% of disbursements. (It should be noted
that “commitments” for the schools and libraries support program and the rural health care
program are not the same as “disbursements.” Commitments authorize beneficiaries to spend up
to a total dollar figure of USF money committed for procuring telecommunications services,
while disbursements pay for specific activities actually carried out and for which beneficiaries
have received “commitments” of USF support. In the aggregate, applicants end up spending less
than the total amounts of dollars committed. Commitments operate on a school year calendar,
July 1-June 30, and disbursements are reported on a calendar year basis.) Although subscribers
benefit from the USF, only companies that provide the services draw money directly from the
fund.
Figure 1. USF Disbursements by Program 2010
Source: Data from USAC 2010 Annual Report (unaudited data).
Table A-2 provides data on USF payments and contributions broken down by state and program
for 2009. The data show that service providers (and their subscribers) in every state, territory, and
commonwealth received, to varying degrees, some 2009 USF payments. For example, all
received at least some payments from the Low Income program, all received support from the
Schools and Libraries program, and all with the exception of the District of Columbia and
Connecticut received payments from the High Cost program. Payments from the Rural Health
Care program were received by 45 states and 3 territories. The allocation of benefits varies
18 These figures are based on USAC 2009 unaudited financial data. Detailed data, including state-specific information,
on USF support can be found in the Universal Service Company 2009 Annual Report at http://www.usac.org/_res/
documents/about/pdf/USAC-annual-report-2009.pdf.
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depending on which individual program is examined. However, when overall net dollar flow19 is
examined 25 states and the District of Columbia were net contributors to the 2009 USF program
as a whole. The service providers in the remaining 25 states and 5 territories were net receivers,
that is they received more payments from the USF, for 2009, 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.20 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.
Policy Options
The FCC is required to ensure that there be “specific, predictable and sufficient ... mechanisms to
preserve and advance universal service.”21 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.22
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
19 Contribution allocation among states is an FCC staff estimate. Net dollar flow is annual payments minus estimated
contributions.
20 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.
21 47 U.S.C. Sec. 254 (b)(5).
22 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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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 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. More recently, however, the
Joint Board was once again called upon to reexamine this issue and came up with a different
conclusion. The Joint Board, on November 19, 2007, recommended that the FCC change the mix
of services eligible for universal service support and concluded that “the universal availability of
broadband Internet services” be included in the Nation’s communications goals and hence be
supported by Federal universal service funds.23 The FCC in its national broadband plan,
Connecting America: the National Broadband Plan, released March 16, 2010, to Congress, has
recommended that access to and adoption of broadband be a national goal and has proposed that
the USF be restructured to become a vehicle to help reach this goal. (See the “FCC National
Broadband Plan” section of this report, below, for more details on how the USF could be
transformed to help achieve this recommendation.)
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
23 For a summary of the Joint Board’s recommendations see http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-
07J-4A1.pdf.
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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.24
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.25 For example,
in 1998 the FCC established a revenue percentage, or safe harbor, of 15% of revenues for
determining the USF contribution for wireless carriers. That percentage has been increased twice
since and is currently set at 37.1%. In a June 2006 decision, the FCC further expanded the pool of
contributors by requiring that providers of interconnected VoIP contribute to the USF and
established a safe harbor of 64.9%.26 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
24 For example, provisions contained in the American Recovery and Reinvestment Act (P.L. 111-5) call for the
disbursement of $7.2 billion in broadband funding, and the USDA’s Rural Utilities Service has a broadband loan and
grant program for rural areas. For information on these programs see CRS Report R40436, Broadband Infrastructure
Programs in the American Recovery and Reinvestment Act, by Lennard G. Kruger, CRS Report R41164, Distribution
of Broadband Stimulus Grants and Loans: Applications and Awards, by Lennard G. Kruger, and CRS Report
RL33816, Broadband Loan and Grant Programs in the USDA’s Rural Utilities Service, by Lennard G. Kruger.
25 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.
26 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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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 the same on
behalf of high-cost 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.27 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.28
Distribution Methodology
Another major issue facing USF reform concerns the eligibility criteria used to distribute USF
funds. Over the past 12 years (1998-2010) annual USF receipts have grown from $2.3 billion to
an estimated $8.0 billion and the contribution factor needed to support this growth has almost
tripled to reach an all time high of 15.5% for the first quarter of 2011. While this factor has
slightly moderated, to a current 14.4 %, 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. More specifically 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.
However, the High Cost program has experienced significant growth (30.4%), with
27 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.
28 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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disbursements increasing from $3,273.2 million to $4,267.7 million over the most recent seven
year (2003-2010) period; and as a result, is the major factor contributing to the USF’s recent
overall growth. 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 slightly more than $1.2
billion for 2010. On the other hand, while incumbent eligible telecommunications carriers still
receive a significant majority of funds from the High Cost program, revenues disbursed in 2003
and 2010 decreased from $3.2 billion to $3.1 billion.29 The FCC’s May 2008 decision to place an
interim cap on High Cost payments to competitive eligible telecommunications carriers has
helped to mitigate this trend. (See “Capping” section, below, for a further discussion.) A more
recent trend which has added to the overall increase in the USF has been the growth, after years
of relative stability, in the Low Income program. Disbursements to the Low Income program have
increased from $822 million in 2008 to an estimated $1.3 billion in 2010. This recent growth can
be attributed, to some degree, to the entrance of pre-paid wireless providers to the Lifeline
program. According to the FCC, pre-paid wireless eligible telecommunications carriers now
account for one-third of all Lifeline reimbursements.30 An increase in eligible households, due to
the recession, is also a likely contributing factor. Whether this will become a growing trend,
placing further pressure on the Lifeline program, or is a limited uptick, is yet to be determined.
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 support rule,” using reverse auctions to determine eligibility, placing a cap (or ceiling)
on funds, and improving targeting. Improving management of all four funds to eliminate any
fraud, waste, or abuse, has also been a focus of reform efforts.
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.31 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
29 More specifically, High Cost program revenues disbursed between 2003 and 2010 to incumbents decreased from
$3,234.9 million to $3,055.1 million. USF fund data taken from USAC annual reports available at http://www.usac.org/
about/governance/annual-reports/.
30 In the Matter of Lifeline and Link Up Reform and Modernization, Federal-State Joint Board on Universal Service,
Lifeline and Link Up. WC Docket No. 11-42, CC Docket No. 96-45, WC Docket No. 03-109, Notice of Proposed
Rulemaking, released March 4, 2011,( para 27). Available at http://www.fcc.gov//Daily_Releases/Daily_Business/
2011/db0304/FCC-11-32A1.pdf.
31 It should be noted, however, that the 109th,, 110th, and 111th Congresses enacted legislation prohibiting the FCC from
using any of its appropriated funds to change its rules, or regulations, to limit USF support payments to a single
connection, or primary line (P.L. 109-108, Title VI, Sec. 622; P.L. 110-161, Title V, Sec. 511; P.L. 111-8, Title V, Sec.
502; and P.L. 111-117, Division C, Title V Sec. 502).
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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.
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.32 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 possibly resulting in stranded investment, erratic funding,
and ultimately inferior networks.
Identical Support 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 support
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
32 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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Universal Service Fund: Background and Options for Reform
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.
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.
The federal-state Joint Board recommended that the FCC immediately impose an interim cap on a
portion of the high cost fund.33 More specifically the Joint Board, in a May 1, 2007, action, issued
a recommendation that the FCC place an interim, emergency cap on the amount of high-cost
support that competitive eligible telecommunications carriers receive for each state from the High
Cost program. The Joint Board recommended that the support be based on the average level of
competitive eligible telecommunications carrier support distributed in that state in 2006 and that
the interim cap apply until one year from the date that it makes its recommendation regarding
comprehensive USF reform. This is seen as a temporary measure to curb the growth of the High
Cost program until more permanent action can be taken to reform the USF. The FCC, in a May
11, 2007, action, adopted a notice of proposed rulemaking34 seeking comment on this
recommendation; comments and reply comments were received in June 2007.
On May 1, 2008, the FCC adopted, by a 3-2 vote, an interim cap on payments to competitive
eligible telecommunications carriers to the High Cost fund. Total annual support is capped, with
some limited exceptions,35 at the level of support received in each state, during March 2008, on
33 Joint Board Recommends Cap On High-Cost Fund. Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/
DOC-272806A1.pdf.
34 In the Matter of High-Cost Universal Service Support and Federal-State Joint Board on Universal Service, WC
Docket No. 05-337, CC Docket No. 96-45, Notice of Proposed Rulemaking, released May 14, 2007. Available at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-88A1.pdf.
35 Competitive eligible telecommunications carriers that serve tribal lands or Alaska Native regions and competitive
telecommunications carriers that file their own cost data will not be subject to a cap.
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Universal Service Fund: Background and Options for Reform
an annualized basis. The decision went into effect August 1, 2008, and will remain in place only
until the FCC adopts comprehensive high cost universal service reform.36
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, and see such proposals to be more long-term efforts, progress is being made.
Provisions in the American Recovery and Reinvestment Act (P.L. 111-5) called for the
development and maintenance of a national broadband inventory map, which was released in
February 2011, and additional efforts are also underway to improve and refine data collection.37
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,”38 was initially 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.39 The USAC, as the 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 August 2007 the FCC adopted a series of measures to safeguard the USF to deter fraud, waste,
and abuse. Included in the measures taken are those that extend the debarment rules (three years)
36 For further information see the FCC’s adopted order available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/
FCC-08-122A1.pdf. For a summary and discussion of this order see Federal Register, Vol. 73, No. 128, July 2, 2008,
p. 37882.
37 For information on broadband mapping and data collection efforts see CRS Report RL30719, Broadband Internet
Access and the Digital Divide: Federal Assistance Programs, by Lennard G. Kruger and Angele A. Gilroy.
38 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.
39 For example, see Schools and Libraries Program: Actions Taken to Improve Operational 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.
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Universal Service Fund: Background and Options for Reform
and sanctions for criminal and civil violations beyond the Schools and Libraries Program to cover
all four programs; tighten rules requiring timely payments and assessing penalties or interest for
late payments on USF contributors; and increase record keeping requirements for both
contributors and beneficiaries. In addition the FCC, as recommended by the GAO, adopted
performance measures, for all four programs and for USAC.40
A GAO report focusing on the USF’s High Cost Program was released in July 2008. The report,
FCC Needs to Improve Performance Management and Strengthen Oversight of the High-Cost
Program, noted that the “FCC has not established performance goals or measures [for the
Program].” Furthermore, the GAO stated “In the absence of performance goals and measures, the
Congress and the FCC are limited in their ability to make informed decisions about the future of
the high-cost program.” Although the GAO acknowledged that “the FCC has begun preliminary
efforts to address these shortcomings,” problems with these efforts still exist.41
The FCC, in an August 15, 2008, action, adopted a Notice of Inquiry (NOI) seeking public
“comment on ways to further strengthen management, administration, and oversight of the
USF ... define more clearly the goals of the USF ... identify any additional quantifiable
performance measures” and “comment on whether, and if so, to what extent the Commission’s
oversight of the USF can be improved.”42 Citing the steps the FCC has already taken to
strengthen its oversight and management of the Fund, and the recent benefits and improvements
that have been made, the FCC, however, acknowledged both the demand for “constant scrutiny
and assessment of the Commission’s oversight efforts” as well as the GAO’s July 2008
recommendation that the FCC take steps to improve its oversight of the USF. This NOI has been
initiated, according to the FCC, to continue to assess and solicit public input to develop additional
rules and safeguards to protect the Fund.
The FCC’s Office of the Inspector General (OIG) has also been active in pursuing oversight of
the USF focusing initially on the E-rate program. 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.43 More recently, however, the OIG has also expanded its audit efforts
to include the remaining three USF programs and audits of USF contributors.
In 2006, USAC took additional action by initiating with the OIG “a large-scale beneficiary audit
program” covering all four USF programs and planned to “conduct more than 450 audits of
program beneficiaries and contributors.”44 The result of this audit, which was comprised of 459
audits of USF program participants for beneficiaries of all four programs and contributors to the
USF, was released by the OIG in October 2007. According to the preliminary OIG analysis of the
audits, using estimates extrapolated from incomplete audits which covered beneficiaries of all
four programs as well as contributors,
40 For a summary of this final rule see Federal Register, Vol. 72, No.184, September 24, 2007, p. 54214.
41 This report is available at http://www.gao.gov/new.items/do8633.pdf.
42 See In the Matter of Comprehensive Review of the Universal Service Fund Management, Administration, and
Oversight, released on September 12, 2008, available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-
189A1.pdf.
43 Semiannual Reports issued by the FCC’s OIG are available at http://www.fcc.gov/oig/oigreportssemiannual.html.
44 USAC 2006 Annual Report, p.11. Available at http://www.usac.org/_res/documents/about/pdf/usac-annual-report-
2006.pdf.
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in general the audits indicated compliance with the [FCC’s] rules, although erroneous
payment rates exceeded 9% in most USF program segments. The audit resulted in the
following erroneous payment rates: contributors payments, 5.5% ($385,000,000); Low
Income, 9.5% ($75,500,000); Schools and Libraries, 12.9% ($210,000,000); High Cost,
16.6% ($618,000,000) and Rural Health Care, 20.6% ($4,450,000).45
USAC has completed all the audit work left unfinished in the first three rounds of the OIG USF
audits and found that the actual improper payment rate was significantly lower than early
estimates. For example, the “improper” payment rate in the High Cost Program dropped to 2.7%
from the earlier reported 16.6% and the Schools and Libraries Program improper payment rate
dropped to 8.6% form the earlier estimate of 12.8%.46 It should also be noted that an “erroneous
payment” as defined by OMB, is “any payment that should not have been made or that was made
in an incorrect amount,” which includes overpayments, underpayments, and the inappropriate
denial of a payment or service.47
Despite this activity, however, the OIG continues to cite the need for additional resources, stating
that “Although we have made progress in achieving the goal of establishing a more effective
oversight program, we need significant increases in audit, investigative, and legal resources to
achieve the goal of having a truly effective oversight program.”48 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.49
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.50
As was the case in the 110th and 111th Congresses, the 112th Congress is expected to continue its
review of the USF, and all four of the programs will be subject to oversight to prevent any fraud,
waste, or abuse. (See “Congressional Activity,” below, for a discussion of congressional oversight
activities.) Concerns about fraud and abuse are shared by both critics and supporters of the
program. For example, critics of the E-rate program have used examples of fraud, waste, and
45 FCC Office of the Inspector General Semiannual Report to Congress, April 1, 2007 -September 30, 2007, p. 17.
Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-278589A1.pdf. For a detailed analysis of the OIG
audit see FCC Office of the Inspector General, Initial Statistical Analysis of Data from the 2006/2007 Compliance
Audits, October 3, 2007. Available at http://www.fcc.gov/oig/ under release date October 3, 2007.
46 USAC 2009 Annual Report, pp.2, 6, 12. Available at http://www.usac.org/_res/documents/about/pdf/usac-annual-
report-2009.pdf.
47 See p. 17, OIG Semiannual Report to Congress, April 1, 2007-September 30, 2007, for the full OMB definition of an
“erroneous payment” Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-278589A1.pdf.
48 FCC Office of the Inspector General Semiannual Report to Congress, April 1, 2007 -September 30, 2007, p. 16.
Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-278589A1.pdf.
49 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/.
50 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/opa/pr/2005/April/05_at_169.htm; and Two New Jersey
Executives Agree to Plead Guilty in Nationwide Scheme to Defraud the Federal E-Rate Program. Available at
http://www.usdoj.gov/opa/pr/2008/April/08_at_334.html.
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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 six times, once to December 31, 2006, in conjunction with the
Science, State, Justice, and Commerce appropriations measure (P.L. 109-108); again for an
additional one-year exemption (until December 31, 2007) as part of the CR2007 (H.J.Res. 20;
P.L. 110-5); once again a one-year extension (until December 31, 2008) as part of the
Consolidated Appropriations Act of 2008 (H.R. 2764; P.L. 110-161); again an extension until
December 31, 2009, as part of the 2009 Omnibus Appropriations bill (H.R. 1105; P.L. 111-8),
again until December 31, 2010, as part of the 2010 Consolidated Appropriations Act (H.R. 3288;
P.L. 111-117), and most recently until December 31, 2011, as part of the Continuing
Appropriations and Surface Transportation Extensions Act, 2011 (H.R. 3082;P.L. 111-322).
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 at the close of the first session of
the 112th Congress and 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, such as S. 297 pending in the 112th Congress, 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.
The FCC has resolved, at least temporarily, any compliance problems. Former 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
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Commerce Committee members that funds will be sufficient and that E-rate program
commitment letters will not be delayed.51 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.
FCC National Broadband Plan
Provisions contained in the American Recovery and Reinvestment Act of 2009 (ARRA) called for
the FCC to develop, and submit to Congress, a national broadband plan (NBP) to ensure that
every American has “access to broadband capability.”52 This plan, Connecting America: The
National Broadband Plan,53 submitted to Congress on March 16, 2010, calls for the USF to play
a major role in achieving this goal. The NBP calls for the USF to be transformed, in three stages
over a 10-year period, from a mechanism to support voice telephone service to one that supports
the deployment, adoption, and utilization of broadband. More specifically, two new funds, the
Connect America Fund and a Mobility Fund, are created, the High Cost program is phased-out,
while the Low Income, E-rate, and Rural Health Care programs are modified and assume wider
responsibilities. Before these transitions should occur, however, the NBP recommends that the
FCC continue to take steps to improve USF performance and accountability through stronger
oversight and management and enhanced data collection and reporting.54
High-Cost Program
The goal of the reform of the High Cost program is to transition it from one that primarily
supports voice communications to one that supports a broadband platform that enables multiple
applications, including voice. Although some carriers that receive high-cost funding do use it to
deploy broadband capable infrastructure, currently there is no requirement that recipients of high-
cost funding provide any households in their service areas with broadband. The NBP recommends
that the High-Cost program be phased-out and replaced in stages, over the next 10 years, to
directly support high-capacity broadband networks through a newly created Connect America
Fund and a Mobility Fund.55 More specifically, the NBP recommends that the legacy High-Cost
program cease operation by 2020 and support be given solely to providers who offer broadband
that offers high-quality voice through the Connect America Fund.56
Connect America and Mobility Funds
The NBP recommends the creation of two new funds: the Connect America Fund (CAF) and the
Mobility Fund (MF). The CAF is created to support the provision of affordable broadband and
51 Remarks by former Chairman Martin during confirmation hearings before the Senate Commerce, Science and
Transportation Committee, September 12, 2006.
52 American Recovery and Reinvestment Act of 2009, P.L. 111-5, sec. 6001 (k)(2)(D).
53A copy of this plan is available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-296935A1.pdf.
54 NBP, Chapter 8, Availability, recommendation 8.1.
55 Much of this transition is detailed in Chapter 8, Availability, of the NBP.
56 NBP, Chapter 8, Availability, recommendation 8.13.
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voice with at least 4 Mbps actual download speed and 1 Mbps of actual upload speed. The NBP
recommends that the FCC adhere to the following principles in developing the CAF: funding
should only be provided in geographic areas where there is no private sector business case to
provide broadband and high-quality voice grade service; there should be at most one subsidized
provider of broadband per geographic area; eligibility criteria should be company and technology
agnostic; ways to drive funding to efficient levels, including market-based mechanisms where
appropriate, to determine the firms selected for and the levels of support given should be
identified by the FCC; recipients of funding must be subject to accountability requirements and
subject to enforceable timelines for achieving access as well as a broadband provider-of-last
resort obligation.57
The MF is created to provide targeted funding to ensure that all states achieve the national
average for 3G wireless coverage used for both voice and data. The MF will provide one-time
support for deployment of 3G networks. 3G availability, according to the NBP, will improve the
business case for the development of 4G networks in harder-to-serve areas and potentially benefit
public safety users. The NBP further recommends that the FCC “... select an efficient method,
such as a market-based mechanism, for supporting mobility in targeted areas.”58
Low-Income Program
According to an FCC conducted broadband consumer survey 36% of non-adopters of broadband
cited a financial reason as the main reason they do not have broadband service at home.59 To
address this barrier the NBP recommends that both Low-Income programs, Lifeline and Link Up,
be expanded to increase broadband adoption levels for low-income households.60 The NBP
recommends that the FCC require that ETC’s receiving funds permit Lifeline customers to apply
Lifeline discounts to any service or package that includes basic voice service. In this way Lifeline
customers can apply their discounts to bundled offerings (i.e., voice and data) making broadband
service more affordable.61
The NBP also recommends that the FCC integrate the expanded Lifeline and Link Up programs
with state and local e-government efforts as well as facilitate pilot programs to obtain information
to determine what program design elements most effectively increase adoption rates. Upon
completion of the pilot programs the FCC is directed to report to Congress on these results and
begin a “... full scale implementation of a low-income program for broadband.”62
Schools and Libraries and Rural Health Care Programs
The NBP contains almost a dozen recommendations to modernize and improve the E-rate
program.63 These recommendations focus on three goals: improve flexibility, deployment, and use
57 NBP, Chapter 8, Availability, recommendation 8.2.
58 NBP, Chapter 8, Availability, recommendation 8.3.
59 NBP, Chapter 9, Adoption and Utilization, 9.1, Understanding Broadband Adoption.
60 Details of this expansion are addressed in, Chapter 9, Adoption and Utilization, of the NBP.
61 NBP, Chapter 9, Adoption and Utilization, recommendation 9.1.
62 NBP, Chapter 9, Adoption and Utilization, recommendation 9.1.
63 A detailed discussion of all of these recommendations is contained in NBP Chapter 11,Education.Section 11.3,
Modernizing Educational Broadband Infrastructure.
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of infrastructure; improve program efficiency; and foster innovation. Among these
recommendations are those that call for the FCC to initiate rulemakings to streamline the
applications process, raise the yearly cap on funding to account for inflation, and set goals for
minimum broadband connectivity for schools and libraries; adopt the pending notice of proposed
rulemaking to remove barriers to off-hours community use of E-rate funded resources; expand E-
rate support for internal connections to more schools and libraries; improve data collection efforts
on use of E-rate funds; provide more flexibility to purchase the lowest-cost broadband solutions;
and make overall broadband-related E-rate program expenses more cost-efficient.
Citing the importance of health care to the lives of consumers and its importance to the national
economy the NBP calls for reform of the Rural Health Care Program. The NBP calls for the
restructuring and expansion of its program components.64 The NBP recommends that the existing
Internet Access Fund be replaced with a Health Care Broadband Access Fund, subsidy support be
increased beyond the current 25%, the application process be simplified, and, unlike the present
Fund, eligibility be expanded beyond rural health care providers to include both rural and urban
health care providers, based on need.65 It also recommends that the FCC establish a Health Care
Broadband Infrastructure Fund, based on lessons learned from the Pilot Program, to subsidize
network deployment to health care delivery locations where existing network infrastructure is
insufficient.66 Additional recommendations for the Rural Health Care Program include those that
suggest the FCC expand the definition of eligible health care provider to include long-term care
facilities, off-site administrative offices, data centers and other similar locations and suggest that
Congress consider expanding the definition for eligibility to include providing support of certain
for-profit entities.67 To help protect against, fraud, waste, and abuse the NBP recommends that the
FCC require that participating institutions meet outcomes-based performance measures to
measure the efficient use of health IT to ensure that funds are used to not only build and deploy
broadband infrastructure, but to improve the country’s health delivery system.68
The NBP also recommends that federal and state policies, including USF policies, should
facilitate demand aggregation for broader community use and not develop policies that result in
dedicated, single purpose networks, such as school networks funded by E-rate, or hospitals
funded through the Rural Health Care program. Citing the extremely low connection rates and
other unique challenges facing Tribal lands, the NBP specifically recommends that Congress
amend the 1934 Communications Act to provide the FCC with the discretion to permit anchor
institutions on Tribal lands to share broadband network capacity funded through the E-rate and
rural health care programs with other community institutions designated by Tribal governments.69
The NBP also recommends that Congress consider amending the 1934 Communications Act to
help Tribal libraries overcome barriers to E-rate eligibility arising from state laws.70
64 A detailed discussion on the Rural Health Care Program recommendations is contained in NBP Chapter 10, Health
Care.
65 NBP, Chapter 10, Health Care, recommendation 10.6
66 NBP, Chapter 10, HealthCare, recommendation 10.7.
67 NBP, Chapter 10, Health Care, recommendation 10.8.
68 NBP, Chapter 10, Health Care, recommendation 10.9.
69 NBP, Chapter 8, Availability, recommendations 8.20 and 8.21.
70 NBP, Chapter 11, Education, recommendation 11.22
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Funding
The NBP calls for a major restructuring of the USF, but recommends that the funding level be
maintained close to its current size (in 2010 dollars). The NBP recommends that $15.5 billion
(present value in 2010 dollars) be shifted, through selected reforms, over the next decade from the
existing USF High Cost program to support the transition to broadband.71 However, the NBP also
recommends that if Congress wishes to accelerate this transition it could allocate to the CAF
additional general funds of “... a few billion dollars per year over a two to three year period.”72
The NBP also recommends that the USF contribution base be broadened and the FCC “... adopt
revised contribution methodology rules to ensure that USF remains sustainable over time.”73 It
does not, however, provide specific guidance on how this should be accomplished. Furthermore,
the NBP acknowledges the relationship between its broadband goals and the USF contribution
factor and seeks to “... minimize the burden of increasing universal service contributions on
consumers.”74
Implementation
The NBP contains over 208 recommendations involving a wide range of Executive Branch
agencies, Congress, nonfederal and nongovernmental entities as well as the FCC; approximately
60 of these recommendations call for FCC action. The FCC has initiated a series of proceedings
which will provide further guidance regarding how the FCC-specific recommendations will be
implemented. These proceedings will flush out the details and give all stakeholders an
opportunity to provide input into how the FCC should proceed to implement the
recommendations contained in the NBP. The FCC also announced, on June 14, 2010, the
establishment of a Universal Service Working Group, an in-house multi-bureau group to facilitate
collaboration between the bureaus to further the universal service goals established in the
National Broadband Plan.75
High Cost Program
The FCC took two major steps towards implementing the NBP recommendations to reform the
USF High Cost program by adopting two Notices of Proposed Rulemaking: one to create a
Mobility Fund to address access to advanced wireless services; and the other to create a Connect
America Fund to promote the development of broadband services.
Mobility Fund
The FCC adopted, on October 14, 2010, a Notice of Proposed Rulemaking (NPRM) to seek
comment on proposals to create a Mobility Fund (MF) to improve the coverage of 3G wireless, or
71 NBP, Chapter 8, Availability, recommendation 8.6.
72 NBP, Chapter 8, Availability, recommendation 8.15.
73 NBP, Chapter 8, Availability, recommendation 8.10.
74 NBP, chapter 8, Availability, recommendation 8.12.
75 FCC Chairman Julius Genachowski Announces Launch of Universal Service Working Group. Released June 14,
2010. Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-298775A1.pdf.
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better, services.76 Under this proposal the MF would provide one-time support, ranging from a
total of $100 million to $300 million, to areas that currently do not have access to advanced
wireless services, defined as those that offer mobile wireless voice telecommunications services,
e-mail, and Internet access. The NPRM proposes using a reverse auction mechanism to make the
support to service providers to extend 3G or better mobile voice and Internet service coverage in
specified unserved areas.77 The NPRM also seeks comment on a range of additional proposals,
including whether to make support available to any unserved area in the nation or target support
by making it available to limited areas; minimum performance and coverage requirements for MF
support; suggested administrative, management, and oversight functions to deter fraud, waste,
and abuse; and whether the MF initiative should be repeated. The comment and reply periods are
now closed.
Connect America Fund
The FCC proposed, in a Notice of Proposed Rulemaking (NPRM) and Further Notice of
Proposed Rulemaking (FNPRM), to eliminate and shift the money from the current High Cost
program by establishing a new Connect America Fund. Coupled with this action will be a shift in
focus from voice to subsidize broadband, which would include voice access. The NPRM and
FNPRM, adopted on February 8, 2011, call for this transition to occur in three phases over the
next 10 years.78 Numerous steps are proposed, to complete the transition of the current High Cost
program to a “new, more efficient, broadband-focused Connect America Fund,” to accelerate
broadband deployment. The USF concept is broadened to include the adoption of the principle
“that universal service support should be directed where possible to networks that provide
advanced services, as well as voice services” and suggests that broadband and mobility should be
added to the definition of supported services. The proposal calls for the use of a reverse auction to
provide broadband to unserved areas by awarding a “significant amount of funding” (from $500
million to more than $1 billion) in 2012 as a one-time infusion, with the potential for future
auctions. Recipients could be either fixed (wireline or wireless) or mobile wireless providers.
The notices seek comment on a wide range of proposals, some more immediate and others more
long term, to complete this transition. Included among these proposals, which are open for
comment by all stakeholders, are whether the use of reverse auctions, or another mechanism, is
appropriate to bring broadband to underserved areas; whether the per-line subsidy should be
capped at $3,000 per year in high-cost areas in the continental United States, absent exceptional
circumstances; whether existing carriers should be given the first option to continue serving a
given area, or whether some other option should be pursued; whether the minimum broadband
speed should be set at 4 megabits per second actual downstream and 1 megabit per second actual
76 In the Matter of Universal Service Reform, Mobility Fund. WT Docket No. 10-208, Notice of Proposed rulemaking,
adopted October 14, 2010. Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-182A1.pdf.
77 It should be noted that the Obama Administration’s FY2012 budget calls for a “national wireless initiative,” with a
one-time infusion of $5 billion into the USF, to extend 4G wireless coverage to at least 98% of the population, within
five years.
78 In the Matter of Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and
Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support; Developing a[n] Unified
Intercarrier Compensation Regime; Federal-State Joint Board on Universal Service; Lifeline and Link-Up. WC Docket
No. 10-90, GN Docket No. 09-51, WC Docket No. 07-135, WC Docket No. 05-337, CC Docket No. 01-92, CC Docket
No. 96-45, WC Docket No. 03-109, Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking,
adopted February 8, 2011. Available at http://www.fcc.gov/Daily_Releases/Daily_Business/2011/db0209/FCC-11-
13A1.pdf.
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upstream, or 3 megabits/768 kilobits per second, or a different speed requirement; how often
broadband speed requirements should be reevaluated; what public interest obligations should
apply to eligible telecommunications carriers; ending the identical support rule; adopting
performance goals and metrics; the appropriate role of the states in preserving and advancing
universal service, and the expected level of financial commitment from the states. Comments
were due April 18, 2011, and replies by May 23, 2011.
Low Income Program
The FCC adopted, on March 3, 2011, a notice of proposed rulemaking (NPRM) seeking comment
on a set of reforms to “modernize and drive tougher accountability measures” for the Lifeline and
Link Up components of the Low Income program.79 The FCC is soliciting comments on proposed
changes that will better position the program to, among other concerns, take on the expanded role,
detailed in the NBP, as a provider of broadband service. The NPRM seeks to modernize the
program to accommodate broadband while still controlling program size, strengthen program
administration and accountability, increase protections against fraud, waste, and abuse, and
improve enrollment and outreach efforts. More specifically the proposed reforms include those to
create a National Accountability Database to verify consumer eligibility and a uniform national
framework for validating ongoing eligibility; eliminate funding for services that go unused for
more than 60 days; evaluate the need for a temporary or permanent cap to control program
growth; permit eligible households to use Lifeline discounts on bundled voice and broadband
service offerings; address the unique situations facing residents on Tribal lands; and establish
pilot programs, from savings from reforms, to test strategies for supporting broadband services.
Comments were due April 21, 2011, and replies May 10 and 25, 2011.
Separately, the FCC adopted, on June 17, 2011, a report and order to address “potential waste” in
the Lifeline and Link Up programs by strengthening rules to prevent support payments for
multiple services to the same individual.80 The FCC clarified that an eligible consumer may only
receive support for “a single telephone line in their principle residence” and codified that “... no
qualifying consumer is permitted to receive more than one Lifeline subsidy concurrently.”81 This
clarification is necessary, according to the FCC, since consumers now have multiple Lifeline
options, through wireless carriers, in contrast to the past when most consumers only had one
option for telephone service through their incumbent telephone company’s wireline service. To
further insure that no duplication occurs the FCC has required that: USAC notify consumers that
are receiving multiple benefits that they are allowed only one Lifeline-subsidized phone service;
consumers in violation be given 30 days to select which subsidized service they wish to keep; and
companies not chosen must de-enroll the consumer from the Lifeline service within five days
after notification by USAC that they have been deselected by the consumer. The expectation is
that the dollars saved by removing duplicative Lifeline support will be used to help cover costs
79 In the Matter of Lifeline and Link Up Reform and Modernization, Federal-State Joint Board on Universal Service,
Lifeline and Link Up. WC Docket No. 11-42, CC Docket No. 96-45, WC Docket No. 03-109, Notice of Proposed
Rulemaking, released March 4, 2011. Available at http://www.fcc.gov//Daily_Releases/Daily_Business/2011/db0304/
FCC-11-32A1.pdf.
80 In the Matter of Lifeline and Link Up Reform and Modernization, Federal-State Joint Board on Universal Service,
Lifeline and Link Up, WC Docket no. 11-42, CC Docket No. 96-45, WC Docket No. 03-109. Available at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db0621/FCC-11-97A1.pdf.
81 In the Matter of Lifeline and Link Up Reform and Modernization, para 3 and para 8.
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associated with a yet-to-be-established pilot program to help expand the Low Income program to
provide broadband services.
Schools and Libraries Program
Reform of the Schools and Libraries Program (E-Rate Program) is also underway. The FCC
adopted, September 23, 2010, an order to “upgrade(d) and modernize(d)” the E-rate program.82
While significant these new rules are viewed by the FCC as “a first stage in a multi-stage upgrade
of the E-rate program.”83
Included among the proposals that were adopted are those that allow applicants to lease
broadband from a wider range of options, including dark fiber; permit schools to allow
community use of E-rate funded services outside of school hours; index the yearly $2.25 billion
funding cap to account for inflation as of the FY2010 funding year; support eligible services to
the residential portion of schools that serve students in special circumstances (e.g., schools on
Tribal lands, schools that meet special medical needs; juvenile justice facilities); permit schools
and libraries to receive consideration when disposing of and/or recycling E-rate-funded obsolete
equipment; streamline the application process; increase protections against fraud, waste, and
abuse by codifying the competitive bidding requirements and clarifying ethics obligations; and
establish a limited pilot program to support off-campus wireless connectivity for portable learning
devices outside of regular school or library learning hours.84
Rural Health Care Program
A NPRM initiating reforms to the Rural Health Care Program to expand the reach and use of
broadband connectivity by health care providers was adopted on July 15, 2010.85 The FCC
maintains the existing $400 million funding cap but proposes three major changes to the existing
program: creation of a new health infrastructure program that would support up to 85% of the
new regional or statewide network broadband project construction costs to serve public and non-
profit healthcare providers (a 15% private funding match would be required); creation of a health
broadband services program that would subsidize 50% of the monthly recurring costs for access
to broadband services for eligible entities; and expansion of the definition of “eligible health care
provider” to include such entities as skilled nursing facilities, renal dialysis centers and facilities,
82 In the Matter of Schools and Libraries Universal Service Support Mechanism, A National Broadband Plan For Our
Future, CC Docket No. 02-6, GN Docket No. 09-51. Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/
FCC-10-175A1.pdf.
83 The FCC notes in paragraph 5 that the proposals adopted in this order do not address all of the proposals raised in the
E-rate NPRM adopted May 20, 2010. A copy of the NPRM, In the Matter of Schools and Libraries Universal Service
Support Mechanism; A National Broadband Plan CC Docket No. 02-6; GN Docket No. 09-51 is available at
http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-83A1.pdf.
84 The FCC announced on March 9, 2011, the selection of 20 schools and libraries as part of a wireless pilot program,
“Learning On-The-Go,” to be funded from $9 million from the E-rate program. The pilot program will help K-12
students connect to the Internet at home and increase access to digitized materials, and help library patrons find and
apply for jobs. Qualified pilot programs will be funded, assuming compliance with all program requirements, in the
2011-12 school year. For a list of selectees see FCC Chairman Julius Genachowski Announces Recipients Of
Innovative Wireless Pilot Projects At Digital Roundtable in New York City, released March 9, 2011. Available at
http://www.fcc.gov/Daily_Releases/Daily_Business/2011/db0309/DOC-305088A1.pdf.
85 In the Matter of Rural Health Care Support Mechanism, WC Docket No. 02-06. Available at http://www.fcc.gov/
Daily_Releases/Daily_Business/2010/db0715/FCC-10-125A1.pdf.
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data centers, and administrative offices. Comment is also sought on issues such as prioritizing
funding requests; establishing performance measures; and whether there are any “unique
circumstances” in Tribal lands or insular areas “that would necessitate a different approach.”
Comments and replies on the NPRM have already been filed.
Congressional Activity
112th Congress
It is anticipated that Universal Service Fund reform will continue to be a topic of congressional
interest. Both the House Energy and Commerce Committee and the Senate Commerce, Science,
and Transportation Committee have included USF reform on their agendas of issues for
consideration and oversight. The chairman and ranking members of the House Energy and
Commerce Committee and the Subcommittee on Telecommunications and Technology have
requested, in a June 22, 2011, letter to the FCC, USF data focusing on the High Cost and Low
Income programs to assist them to better understand the USF and its operations.
Two measures (H.R. 2163, S. 297) relating to USF have been introduced to date. Representative
Matsui introduced, on June 14, 2011, H.R. 2163, the “Broadband Affordability Act of 2011.” This
measure expands the USF’s low-income Lifeline program to include subscribership to broadband
services at reduced rates. Eligibility requirements are the same as those used for the current
Lifeline telephone program. Provisions require the FCC to establish regulations to prevent
eligible households from receiving more than a single subsidy per household. The FCC is tasked
with establishing the amount of support and determining whether state matching funds will be
required for participation as well as determining how broadband service is defined. Broadband
service providers are required to obtain FCC authorization to participate in the program, but the
program is neutral as to what type of technology is used and does not require a provider to be
classified as eligible telecommunications carrier to participate. S. 297, introduced February 7,
2011, by Senator Rockefeller, amends Section 254 of the Communications Act of 1934 to provide
for a permanent exemption for the USF from the Antideficiency Act.
111th Congress
The House Subcommittee on Communications, Technology, and the Internet and the Senate
Commerce Committee are among the committees that held hearings on USF reform and the
FCC’s national broadband plan. Former House Communications Subcommittee Chairman
Boucher and Representative Terry released, on July 22, 2010, a bill (H.R. 5828) which addressed
comprehensive reform of the USF. H.R. 5828, the “Universal Service Reform Act of 2010,”
provided for a major restructuring of the USF. Included among its provisions were those that
expanded the USF to include support for broadband services; widened the contribution base to
support the USF; required the FCC to develop new cost models for calculating USF support;
limited fund eligibility; prohibited the FCC from adopting a primary line restriction; and directed
the FCC to establish performance goals and measures for each program to strengthen
accountability. The House Communications Subcommittee held a hearing, September 16, 2010,
on the measure, but no further action was taken.
Then-House Energy and Commerce Committee Chairman Waxman and other committee
members also expressed interest in examining USF reform and released USF data requested by
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committee and subcommittee members from the FCC, focusing on USF support, that is being
used to better understand the USF and its operations.86
Legislation (H.R. 3646, H.R. 4619, S. 2879) to expand the role of the USF was introduced. In a
move to address the issue of affordability of broadband for low-income households
Representative Matsui introduced, on September 24, 2009, H.R. 3646, the “Broadband
Affordability Act of 2009.” This measure expanded the USF’s low-income Lifeline program to
include subscribership to broadband services at reduced rates. Eligibility requirements were the
same as those used for the current Lifeline telephone program. The FCC was tasked with
establishing the amount of support and determining whether state matching funds will be required
for participation. Broadband service provider were required to obtain FCC authorization to
participate in the program, but the program was neutral as to what type of technology is used and
did not require a provider to be classified as eligible telecommunications carrier. H.R. 4619, the
“E-Rate 2.0 Act of 2010,” introduced February 9, 2010, by Representative Markey, expanded the
E-rate program to address access to broadband. This bill created three temporary pilot programs
to expand access to broadband by: extending funding to qualifying low-income students for
vouchers to be used for monthly service fees for broadband services at home; expanding the E-
rate program to include discounts for community colleges and head start programs; and funding
an electronic books project. H.R. 4619 also called for the FCC to take steps to “streamline and
simplify” the E-rate program application process and adjusted the current $2.25 billion annual
program cap to account for inflation.
S. 2879, the “Broadband Opportunity and Affordability Act,” introduced on December 11, 2009,
by Senator Rockefeller, directed the FCC to conduct a two-year pilot program by expanding the
Lifeline program, to include broadband services. The FCC was tasked with establishing the
amount of support, determining whether state matching funds would be required for participation,
and ensuring that the program is technologically neutral in terms of providers. After 18 months of
operation the FCC was required to submit a report to the Senate Commerce and the House Energy
and Commerce committees on the status of the pilot program. S. 2879 also required the FCC to
initiate a notice of inquiry to determine whether the Link Up program should be expanded to
reduce the cost of initiating broadband service and report its findings to the Senate Commerce
and House Energy and Commerce committees.
Action to address the Antideficiency Act (ADA) exemption was also undertaken. In keeping with
previous Congressional efforts legislation to extend the ADA exemption for one year periods was
enacted. The Consolidated Appropriations Act, 2010, which was enacted into law (P.L. 111-117),
contained a provision to extend the USF ADA exemption until December 31, 2010; this
exemption was extended once again, until December 31, 2011, as part of the Continuing
Appropriations and Surface Transportation Extensions Act, 2011 (H.R. 3082; P.L. 111-322). S.
348, introduced January 29, 2009, by Senate Commerce Committee Chairman Rockefeller, and
H.R. 2135, introduced April 28, 2009, by Representative Rehberg, as well as provisions contained
in H.R. 5828, provided for a permanent ADA exemption for the USF, but none of these measures
received further consideration.
86 This data was similar to that which was formerly requested in the 110th Congress by Representative Waxman who at
the time was Chairman of the House Oversight and Government Reform Committee. For a further discussion of this
activity in the 110th Congress see Appendix B.
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An additional provision pertinent to the USF is also contained in P.L. 111-117. This provision
prohibits the FCC from using its FY2010 funds to limit USF support to a primary, or single, line.
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Appendix A. USF Contribution Factors and State
Support
Table A-1. Universal Service Fund Contribution Factors
Year Quarter
Factor
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
Third 11.3
Fourth 11.0
2008
First 10.2%
Second 11.3
Third 11.4
Fourth 11.4
2009
First 9.5%
Second 11.3
Third 12.9
Fourth 12.3
2010
First 14.1%
Second 15.3
Third 13.6
Fourth 12.9
2011
First 15.5%
Second 14.9
Third 14.4
Fourth
Source: Quarterly Public Notices on universal service contribution factors. Federal Communications
Commission.
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Table A-2. USF Support by State 2009
Source: Universal Service Monitoring Report, Table 1.12, Federal Communications Commission. December
2010.
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Appendix B. Congressional Activity: 110th Congress
The 110th Congress took an active role regarding USF oversight and reform. Legislative measures
to address the reform, restructuring, and expansion into broadband of the USF were introduced
(S. 101, S. 711, S. 3491, H.R. 42, H.R. 2054, H.R. 5806, H.R. 6320, H.R. 6356, H.R. 7000), but
not enacted. The Senate Commerce Committee held a March 1, 2007, hearing on the challenges
facing the USF and the House Telecommunications Subcommittee held a June 24, 2008, hearing
focusing on the future of universal service including the role of broadband and its role in the
future of the program. 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. Furthermore, the
Senate Commerce Committee held a June 12, 2007, hearing to examine the federal-state Joint
Board’s recommendation that the FCC place an interim, emergency cap on the amount of high-
cost support that competitive eligible telecommunications carriers receive for each state from the
High Cost program. (For a further discussion of this proposal see the section on “Capping,”
above.)
The House Oversight and Government Reform Committee under the direction of then-Chairman
Waxman requested information from industry recipients as part of an oversight investigation of
the USF. The inquiry focused on the High Cost Fund portion of the program and requested
information from 24 companies that, according to the FCC, are the top 10 recipients of federal
high cost funds from 2006 through 2008 as well as the those that have received the 10 highest
per-line subsidies, by location, for 2006 and 2007. According to a memorandum87 Chairman
Waxman sent to the committee, he was not accusing any of these companies of wrongdoing, but
felt that the gathering of additional information about and committee oversight of the USF
program will “benefit” the program and “may offer useful information to the state and federal
policymakers as they formulate proposals for USF reform.” This inquiry, he further stated, “is
consistent with the Committee’s strong interest in ensuring accountability in both the government
and private sector.”88
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). Another one-year extension (until December 31, 2008) was
passed as part of the Consolidated Appropriations Act of 2008 (H.R. 2764; P.L. 110-161). Two
stand-alone measures (H.R. 278, S. 609) as well as provisions contained in S. 101 and H.R. 2054
calling for a permanent ADA exemption were introduced, but not enacted. Two additional
provisions pertinent to the USF are also contained in P.L. 110-161. One provision prohibits the
FCC from using its FY2008 funds to limit USF support to a primary, or single, line. The other
provision permits the transfer of up to $21,480,000 of FY2008 funds from the USF to monitor the
USF to prevent and remedy fraud, waste, and abuse, and to conduct audits and investigations by
the OIG.
87 Memorandum to Members of the Committee on Oversight and Government Reform, from Chairman Henry A.
Waxman, regarding Universal Service Fund High Cost Program Subsidies, July 28, 2008. Available at
http://oversight.house.gov/documents/20080728094856.pdf.
88 Examples of the letters sent to the companies are available at http://oversight.house.gov/story.asp?ID=2123.
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P.L. 110-161 (H.R. 2764)
Consolidated Appropriations Act, 2008. For the USF extends for one year (until December 31,
2008) the USF exemption for the Antideficiency Act (Title V, Sec. 510); prohibits the FCC from
using its FY2008 funds to limit USF support to a primary, or single, line (Title V, Sec. 511);
permits the transfer of up to $21,480,000 of FY2008 funds from the USF to monitor the Program
to prevent and remedy fraud, waste, and abuse, and to conduct audits and investigations by the
OIG (Title V, FCC Salaries and Expenses). Signed by President, December 26, 2007.
P.L. 110-5 (H.J.Res. 20)
Revised Continuing Appropriations Resolution, 2007. Extends for one year (until December 31,
2007) the USF exemption for the Antideficiency Act (Sec. 20946). Signed by President, February
15, 2007.
H.R. 42 (Velázquez)
The Serving Everyone with Reliable, Vital Internet, Communications, and Education Act of 2007.
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.
H.R. 2054 (Boucher)
The Universal Service Reform Act of 2007. A bill to reform the universal service provisions of
the Communications Act of 1934, and for other purposes. Introduced April 26, 2007; referred to
the Committee on Energy and Commerce.
H.R. 2829 (Serrano)
The Financial Services and General Government Appropriations Bill, 2008. A bill to provide for
FY2008 appropriations for selected agencies including the FCC.
The House-passed version contained a provision to authorize the FCC to transfer up to $20.98
million from the USF to monitor and conduct audits of the USF to prevent fraud, waste, and
abuse; passed (240-179) the House, June 28, 2007. The Senate Appropriations Committee-passed
version contains language that extends for one year (December 31, 2008) the exemption of the
USF from the Antideficiency Act (Title V, sec. 501) and prohibits limiting USF funding to a
single, or primary line (Title V, sec. 502). Reported out of committee July 13, 2007 (S.Rept. 110-
129).
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H.R. 5806 (Rush)
The School Emergency Notification Deployment Act. A bill to permit universal support (E-rate
funds) to public and nonprofit elementary and secondary schools under the Communications Act
of 1934 to be used for enhanced emergency notification services. Introduced April 15, 2008;
referred to the Committee on Energy and Commerce.
H.R. 6320 (Markey)
The Twenty-first Century Communications and Video Accessibility Act of 2008. A bill to ensure
that individuals with disabilities have access to emerging Internet Protocol-based communication
and video programming technologies in the 21st Century. Introduced June 19, 2008; referred to
the Committee on Energy and Commerce.
H.R. 6356 (Barton)
The Universal Service Reform, Accountability, and Efficiency Act of 2008. A bill to reform the
collection and distribution of universal service support under the Communications Act of 1934.
Introduced June 24, 2008; referred to the Committee on Energy and Commerce.
H.R. 7000 (Waxman)
The Universal Roaming Act of 2008. A bill to require any eligible carrier receiving universal
service support for the provision of services for rural, insular, and high cost areas to offer
automatic roaming services to any technically compatible carrier upon request. Introduced
September 23, 2008; referred to the Committee on Energy and Commerce.
S. 101 (Stevens)
The Universal Service for Americans Act, or USA Act. 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.
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)
The Universal Service for the 21st Century Act. 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.
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S. 3491 (Stevens)
The Telehealth for America Act of 2008. A bill to amend the Communications Act of 1934 to
improve the effectiveness of rural health care support under section 254(h) of that act. Introduced
September 16, 2008; referred to the Committee on Commerce, Science, and Transportation.
Author Contact Information
Angele A. Gilroy
Specialist in Telecommunications Policy
agilroy@crs.loc.gov, 7-7778
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