Rural Broadband: The Roles of the Rural
Utilities Service and the Universal Service
Fund
Angele A. Gilroy
Specialist in Telecommunications Policy
Lennard G. Kruger
Specialist in Science and Technology Policy
May 9, 2012
Congressional Research Service
7-5700
www.crs.gov
R42524
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Rural Broadband: The Roles of the Rural Utilities Service and the Universal Service Fund
Summary
Since the initial deployment of broadband in the late 1990s, Congress has viewed broadband
infrastructure deployment as a means towards improving regional economic development, and in
the long term, to create jobs. According to the National Broadband Plan, the lack of adequate
broadband infrastructure is most pressing in rural America, where the costs of serving large
geographical areas, coupled with low population densities, often reduce economic incentives for
telecommunications providers to invest in and maintain broadband infrastructure and service.
Historically, the federal government has provided financial assistance to give telecommunications
providers the capital to invest in rural telecommunications infrastructure and to maintain an
adequate return on their investment. Currently, there are two ongoing federal vehicles which
direct money to fund broadband in rural areas: the broadband and telecommunications programs
at the Rural Utilities Service (RUS) of the U.S. Department of Agriculture, and the Universal
Service Fund (USF) programs under the Federal Communications Commission (FCC).
While both the RUS and USF programs share some of the same goals (e.g., improving broadband
availability and adoption in rural areas), the two programs are different with respect to their
funding mechanism, scope, and emphasis. For example, RUS grants and loans are used as up-
front capital to invest in broadband infrastructure, while the USF provides ongoing subsidies to
keep the operation of telecommunications and broadband networks in high cost areas
economically viable for providers. Another key difference is that the RUS programs are funded
through annual appropriations, while USF is funded through mandatory contributions from
telecommunications carriers that provide interstate service, and is not subject to the annual
congressional budget process.
Both programs are currently at a pivotal point in the 112th Congress. The statute authorizing the
Rural Broadband Loan and Loan Guarantee program was significantly modified in the 2008 farm
bill, and may be addressed once more in the 2012 farm bill. Meanwhile, the USF is undergoing a
major and unprecedented transition through a series of reforms being developed by the FCC, and
Congress has adopted an oversight role with respect to those reforms. In shaping and monitoring
the future evolution of these programs, Congress is assessing how best to leverage these programs
to ensure that the goals of the National Broadband Plan—including universal broadband service
by 2020—are met to the greatest extent possible.
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Contents
Introduction...................................................................................................................................... 1
RUS Broadband and Telecommunications Programs...................................................................... 1
Issues and Criticism of RUS Broadband Programs................................................................... 3
Definition of “Rural”........................................................................................................... 3
Existing Providers ............................................................................................................... 4
Loans vs. Grants.................................................................................................................. 5
Universal Service............................................................................................................................. 6
The Universal Service Concept: Background............................................................................ 6
The Federal Universal Service Fund—A Fund in Transition .................................................... 7
High Cost Program.............................................................................................................. 8
Low Income Program........................................................................................................ 12
Schools and Libraries (E-Rate) Program........................................................................... 13
Rural Health Care Program ............................................................................................... 14
Policy Issues ............................................................................................................................ 14
How Is Success Defined?.................................................................................................. 16
Who Should Pay?.............................................................................................................. 16
Rural-Rural Divide............................................................................................................ 17
Financial Health of Rate-of-Return Carriers ..................................................................... 18
RUS and USF: Different Approaches, Shared Goals..................................................................... 18
Role of Congress............................................................................................................................ 19
Tables
Table 1. RUS Broadband and Telecommunications Programs ........................................................ 2
Table 2. USF Programs and Funding............................................................................................. 15
Contacts
Author Contact Information........................................................................................................... 20
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Rural Broadband: The Roles of the Rural Utilities Service and the Universal Service Fund
Introduction
Broadband deployment is increasingly seen as providing a path towards increased regional
economic development and, in the long term, creating jobs.1 According to the 2010 National
Broadband Plan,2 the lack of adequate broadband infrastructure is most pressing in rural America,
where the costs of serving large geographical areas, coupled with low population densities, often
reduce economic incentives for telecommunications providers to invest in and maintain
broadband service. Historically, the federal government has provided assistance to rural
telecommunications providers, helping them obtain capital to invest in rural telecommunications
infrastructure and to maintain an adequate return on their investment. The National Broadband
Plan estimated that $24 billion of further federal investment is necessary to bring all of rural
America up to an adequate level of broadband service.3
Currently, there are two ongoing federal vehicles which direct money to fund broadband in rural
areas: the broadband and telecommunications programs at the Rural Utilities Service (RUS) of
the U.S. Department of Agriculture and the Universal Service Fund (USF) programs under the
Federal Communications Commission (FCC). While both the RUS and USF programs share
some of the same goals (e.g., improving broadband availability and adoption in rural areas), the
two programs differ in their funding mechanism, scope, and emphasis.
The 112th Congress is assessing how best to shape the evolution of both the RUS and USF
broadband programs. The statute that authorizes the RUS broadband loan program may be
amended by the 2012 farm bill. Meanwhile, the FCC is considering significant reforms of the
USF, and Congress is currently maintaining an oversight role with respect to those reforms. In the
current climate of budget deficit reduction, Congress is examining the different pieces of federal
investment in broadband and determining how they can best fit together in order to reach the goal
of most efficiently and effectively deploying broadband in rural America.
RUS Broadband and Telecommunications Programs
The RUS has a portfolio of telecommunications and broadband programs offering loans, loan
guarantees, grants, and loan/grant combinations.4 As seen in Table 1, some programs are
relatively recent, while others have been operating for over 60 years. Some are specifically and
exclusively designed to support broadband infrastructure deployment (e.g., Rural Broadband
Loans, Community Connect grants, Broadband Initiatives Program),5 while others (e.g.,
1 Federal Communications Commission, Connecting America: The National Broadband Plan, March 17, 2010, p. 291.
Also see Crandall, Robert, William Lehr, and Robert Litan, The Effects of Broadband Deployment on Output and
Employment: A Cross-sectional Analysis of U.S. Data, June 2007, 20 pp; and Gillett, Sharon E., Massachusetts Institute
of Technology, Measuring Broadband’s Economic Impact, report prepared for the Economic Development
Administration, U.S. Department of Commerce, February 28, 2006 p. 4.
2 A copy of this plan is available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-296935A1.pdf.
3 Federal Communications Commission, Connecting America: The National Broadband Plan, March 17, 2010, p. 136.
4 For more information on RUS broadband programs, see CRS Report RL33816, Broadband Loan and Grant
Programs in the USDA’s Rural Utilities Service, by Lennard G. Kruger.
5 The Broadband Initiatives Program (BIP) was established by P.L. 111-5, the American Recovery and Reinvestment
Act (ARRA). Although funded BIP projects are ongoing, all awards were announced as of September 30, 2010, and no
new funding is available through the BIP program. The ARRA also funded the Broadband Technology Opportunities
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Telecommunications Infrastructure Loans) have historically supported infrastructure for
telephone voice service, but have now evolved into support for broadband-capable service
provided by traditional telephone borrowers.6 Additionally, other programs (e.g., Distance
Learning and Telemedicine, Delta Health Services grants) support specific broadband-based
applications.
Table 1. RUS Broadband and Telecommunications Programs
Type of
Funding
Initial
Program
Assistance
(FY2012)
Year
Eligible Service Area
Rural Broadband Access
loans and loan
$6 million subsidy
2000 any area not within a city or
Loan and Loan Guarantee
guarantees
supporting an
town with population
Program
estimated $212
exceeding 20,000 or an
million loan level
urbanized area adjacent to a
city greater than 50,000
Community Connect
grants
$10.372 million
2002 single community with
Grant Program
population less than 20,000,
no existing broadband service
Broadband Initiatives
grants, loans, and
$3.5 billion (ARRA
2009 any area not within a city or
Program (ARRA)
loan/grant
stimulus funding
town with population
combinations
awarded in
exceeding 20,000 or an
FY2010)
urbanized area adjacent to a
city greater than 50,000
Telecommunications
loans and loan
$690 million (loan
1949 any area not within
Infrastructure Loan
guarantees
level)
boundaries of any city, village,
Program
or borough with population
exceeding 5,000
Distance Learning and
grants, loans, and
$21 million
1994 any area not within
Telemedicine Program
loan/grant
(grants)
boundaries of any city, village,
combinations
or borough with population
exceeding 20,000
Delta Health Care
grants
$3 million
2010 any Delta region area not
Services Grant Program
within a city or town with
population exceeding 50,000
or an urbanized area adjacent
to a city greater than 50,000
Source: Rural Utilities Service, http://www.rurdev.usda.gov/RUSTelecomPrograms.html.
(...continued)
Program (BTOP) at the National Telecommunications and Information Administration (NTIA) of the Department of
Commerce (DOC).
6 Since 1995, the Rural Telephone Loan and Loan Guarantee program has required that all telephone facilities receiving
financing must be capable of providing broadband service at a rate of at least 1 megabyte per second.
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Issues and Criticism of RUS Broadband Programs
There are several issues and criticisms that typically surface during congressional consideration
(whether oversight, funding, or reauthorization) of the RUS telecommunications and broadband
programs.
Definition of “Rural”
The rural nature of an area or community served by grant and loan projects is a key characteristic
of RUS telecommunications programs. One of the primary strategic goals of the USDA is to
“assist rural communities to create prosperity so they are self-sustaining, repopulating, and
economically thriving.”7 While many rural telecommunications providers already have deployed
broadband networks, studies, surveys, and data collections continue to show that broadband
access, on average, is less adequate in rural areas than it is in suburban or urban communities.8
The comparatively lower population density of rural areas is likely the major reason why
broadband is less deployed than in more highly populated suburban and urban areas. Particularly
for wireline broadband technologies—such as cable modem and DSL9—the greater the
geographical distances among customers, the larger the cost to serve those customers. Thus, there
is often less incentive for companies to invest in broadband in rural areas than, for example, in an
urban area where there is more demand (more customers with perhaps higher incomes) and less
cost to wire the market area.
Given the RUS emphasis on “rural” broadband, the issue becomes: what level of “rurality” is
necessary for an area to be eligible for RUS broadband grants or loans? Within the RUS
telecommunications portfolio, there is no standard definition of “rural,” with programs such as
the Rural Broadband Access Loan and Loan Guarantee program defining eligible rural areas as
populations less than 20,000 (plus areas not in an urbanized area adjacent to a city of not more
than 50,000), while the Telecommunications Infrastructure Loan program defines eligible areas as
populations of 5,000 or less (extremely rural areas). Among all the RUS telecommunications
programs, the different definitions of eligible service areas (which correspond to definitions of
rurality) are presented in Table 1.
Shifting definitions of “rural” have generated controversy. For example, during the first round of
BIP awards, a separate category called “remote areas” was created, defined as an unserved rural
area at least 50 miles from the limits of a non-rural area. For last mile projects,10 only remote
7 USDA Strategic Plan FY2010-2015, p. 1, available at http://www.ocfo.usda.gov/usdasp/sp2010/sp2010.pdf.
8 See for example: Federal Communications Commission, Seventh Broadband Deployment Report, FCC 11-78,
released May 20, 2011, p. 2, 4, available at http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db0520/FCC-
11-78A1.pdf; U.S. Department of Commerce, National Telecommunications and Information Administration, Digital
Nation: Expanding Internet Usage, February 2011, p. 16, available at http://www.ntia.doc.gov/reports/2011/
NTIA_Internet_Use_Report_February_2011.pdf; NTIA, National Broadband Map, Broadband Statistics Report:
Broadband Availability in Urban vs. Rural Areas, p. 7, available at http://www.broadbandmap.gov/download/reports/
national-broadband-map-broadband-availability-in-rural-vs-urban-areas.pdf; and Smith, Aaron, Pew Internet &
American Life Project, Home Broadband 2010, August 11, 2010, p. 8, available at http://www.pewinternet.org/~/
media//Files/Reports/2010/Home%20broadband%202010.pdf.
9 Broadband over legacy copper wire deployed by the telephone companies.
10 Last mile project means any infrastructure project the predominant purpose of which is to provide broadband service
to end users or end-user devices.
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areas were eligible for BIP grants (as opposed to loans or grant/loan combinations). The remote
area category was eliminated in the second round, due to criticism from many Members of
Congress who argued that the remote rural definition excluded many areas of the country
(primarily in the eastern half of the United States).
The definition of “rural” has also generated much controversy over the Rural Broadband Loan
and Loan Guarantee program, particularly as Congress continues to refine the program through
periodic consideration of the farm bill.11 Over the life of the broadband loan program, the
definition of a rural area eligible for the program has been changed three separate times by
Congress.12 Ultimately, the definition of what constitutes a rural community is always a difficult
issue for congressional policymakers in determining how to target rural communities for
broadband assistance. On the one hand, the narrower the definition the greater the possibility that
deserving communities may be excluded. On the other hand, the broader the definition used, the
greater the possibility that communities not typically considered “rural” or “underserved” may be
eligible for financial assistance.
During the 112th Congress, consideration of the 2012 farm bill—which would amend the statute
authorizing the rural broadband loan and loan guarantee program—may explicitly address the
rural definition issue. For example, the Senate version of the farm bill (the Agriculture Reform,
Food, and Jobs Act of 2012), approved on April 26, 2012, by the Committee on Agriculture,
Nutrition, and Forestry, would adopt a uniform definition of “rural area” for all USDA rural
development programs, including the broadband program. Under the Senate committee bill, a
rural area would be defined as any area that is not a city or town with a population greater than
50,000, and that is not an urbanized area contiguous and adjacent to a city or town with a
population over 50,000. Because the current definition of a rural area eligible for broadband loans
is towns with populations under 20,000, this new definition would increase the number of larger
communities eligible for broadband assistance.
Existing Providers
Because rural and sparsely populated areas typically offer providers less financial incentive to
build broadband networks, it is generally the case that the more rural the area, the fewer the likely
number of existing broadband providers. By contrast, urban and suburban areas are more likely to
have a greater number of existing broadband providers offering service.
One of the ongoing concerns expressed by some Members of Congress is the extent to which
RUS grants and loans have been awarded to projects serving areas that already have existing
providers offering broadband service.13 The issue of providing federal funding to areas and
communities with existing providers is controversial, and has been previously raised with respect
11 See U.S. Department of Agriculture, Office of Inspector General, Southwest Region, Audit Report: Rural Utilities
Service Broadband Grant and Loan Programs, Audit Report 09601-4-Te, September 2005; and U.S. Department of
Agriculture, Office of Inspector General, Southwest Region, Audit Report Rural Utilities Service Broadband Loan and
Loan Guarantee Program, Report No. 09601-8-Te, March 2009.
12 Farm Security and Rural Investment Act (P.L. 107-171), FY2004 Consolidated Appropriations Act (P.L. 108-199),
and Food, Conservation, and Energy Act of 2008 (P.L. 110-246). For a discussion of rural definition issues in the Rural
Broadband Access Loan and Loan Guarantee program, see CRS Report RL33816, Broadband Loan and Grant
Programs in the USDA’s Rural Utilities Service, by Lennard G. Kruger.
13 Grant Gross, “US Lawmakers Question Use of Broadband Stimulus Funds,” PC World, March 4, 2010.
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to the RUS Rural Broadband Access Loan and Loan Guarantee Program14 and the Broadband
Initiatives Program.15 Broadband awards to areas with preexisting service—that is, areas where
existing companies already provide some level of broadband—have sparked controversy because
award recipients might compete to some extent with other companies already providing
broadband service. On the one hand, one could argue that the federal government should not be
subsidizing competitors for broadband service, particularly in sparsely populated rural markets
which may be able only to support one provider. Furthermore, providing grants and loans for
projects serving communities with preexisting broadband service may divert assistance from
unserved areas that are most in need.
On the other hand, many suburban and urban areas currently receive the benefits of competition
among broadband providers—competition which can potentially drive down prices while
improving service and performance. It is therefore appropriate, others have argued, that rural
areas also receive the benefits of competition, which in some areas may not be possible without
federal financial assistance. It is also argued that it may not be economically feasible for
applicants to serve sparsely populated unserved communities unless they are permitted to also
serve more lucrative areas which may already have existing providers.
The existing provider issue is expected to be examined during congressional consideration of the
2012 farm bill. The 2008 farm bill (which is the current statute in force) set specific restrictions
on the broadband loan eligibility of project areas with existing providers. However, RUS did not
issue a rule reflecting those changes until March 2011. Organizations representing the cable
industry have argued that existing provider restrictions should be strengthened to focus the loan
program more exclusively on unserved areas with no existing providers. By contrast,
organizations representing rural telecommunications providers (primarily the traditional rural
telephone companies) counter that no changes should be made to the existing provider
restrictions, given that RUS has had limited opportunity to award new loans under the new 2008
farm bill rules. The Senate Committee-approved version of the 2012 farm bill did not change the
existing provider restrictions currently in statute. In the House, a hearing held on April 25, 2012,
by the House Subcommittee on Rural Development, Research, Biotechnology, and Foreign
Agriculture, Committee on Agriculture, debated whether or not the rural broadband loan program
should be modified to prohibit loans to projects serving areas with incumbent broadband service
providers.16
Loans vs. Grants
The ARRA broadband stimulus program—which is no longer offering awards—offered grants,
loans, and grant/loan combinations. The Rural Broadband Access Loan and Loan Guarantee
Program does not offer grants. Not surprisingly, those seeking federal broadband assistance
typically prefer grants, given that loans must be paid back with interest. On the other hand, from a
federal budgetary perspective, loans are more attractive than grants, not only because loans are
paid back, but because loan programs are subsidized by a much smaller appropriation (called a
14 See CRS Report RL33816, Broadband Loan and Grant Programs in the USDA’s Rural Utilities Service, by Lennard
G. Kruger.
15 See CRS Report R41775, Background and Issues for Congressional Oversight of ARRA Broadband Awards, by
Lennard G. Kruger.
16 Hearing testimony is available at http://agriculture.house.gov/hearings/hearingDetails.aspx?NewsID=1567.
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loan subsidy).17 Thus, for example, the Rural Broadband Access Loan and Loan Guarantee
Program was appropriated a loan subsidy of $6 million in FY2012, which is estimated to support
a loan level of approximately $169 million. The Telecommunications Infrastructure Loan
program, which has been issuing loans since 1949, was set at a loan level of $690 million for
FY2011, yet required no loan subsidy or appropriation.
The issue of loans versus grants has become part of the debate over the 2012 farm bill and the
reauthorization of the Rural Broadband Access Loan and Loan Guarantee Program. The Senate
Committee on Agriculture, Nutrition, and Forestry, in its markup of the 2012 farm bill, would add
a new grant program to the rural broadband program, and would raise the authorization level from
$25 million to $50 million per year. The Senate Committee-approved bill does not specify how
much of the authorization is targeted to grants versus loans. Given that financing loans costs the
federal government significantly less than financing grants, the proportion of grants to loans
would likely be of interest to the Appropriations Committees, which remain under pressure to
reduce overall federal discretionary spending. In recent years, the Appropriations Committees in
the House and Senate have approved lower levels for the RUS broadband loan program than the
authorization level.
Universal Service
The Universal Service Concept: Background
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.”18 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. For
example, profits from more densely populated, lower cost urbanized areas helped to subsidize
wiring and operation costs for the less populous, higher cost rural areas.
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 U.S.C., 1996 act) codified the long-standing
commitment by U.S. policymakers to ensure universal service in the provision of
telecommunications services (§254), and the FCC established a universal service fund (USF or
Fund) to meet the objectives and principles contained in the act. The 1996 act enumerated
17 For a discussion of the budgetary treatment of federal loan programs, see CRS Report RL30346, Federal Credit
Reform: Implementation of the Changed Budgetary Treatment of Direct Loans and Loan Guarantees, by James M.
Bickley.
18 Communications Act of 1934, as amended, Title I §1[47 U.S.C. 151].
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specific universal service principles including that “access to advanced telecommunications and
information services should be provided to all regions of the Nation” (§254 [b] [2]) and
“consumers in all regions of the Nation, including low-income consumers and those in rural,
insular, and high cost areas, should have access to telecommunications and information services,
including interexchange services and advanced telecommunications and information services, that
are reasonably comparable to those services provided in urban areas and that are available at rates
that are reasonably comparable to rates charged for similar services in urban areas” (§254 [b] [3]).
The concept of universal service was also expanded 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 (§254[b][6] and
254[h]).
One of the major policy debates surrounding universal service in the last decade was whether
access to advanced telecommunications services (i.e., broadband) should be incorporated into
universal service objectives. With the growing importance and acceptance of broadband and
Internet access, gaps in access to such services, particularly in rural areas, generated concern. A
growing number of policymakers felt that the USF should play a role in helping to alleviate this
availability gap. They pointed to the provisions, cited above, contained in the Universal Service
section of the 1996 act to support their position. However, with the exception of funding for
schools and libraries and rural health care providers, the USF was not designed to directly support
broadband.
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.”19 This plan, Connecting America: The
National Broadband Plan, submitted to Congress on March 16, 2010, called for the USF to play a
major role in achieving this goal.
The Federal Universal Service Fund—A Fund in Transition
The federal Universal Service Fund (USF or Fund) was established in 1997 to meet the specific
objectives and principles contained in the 1996 act. The USF is administered by the Universal
Service Administrative Company (USAC), an independent not-for-profit organization, under the
direction of the FCC. The FCC, through the USF, provides universal service support through a
number of direct mechanisms that target both providers of and subscribers to telecommunications
services.20 The USF was designed to provide subsidies for voice telecommunications services for
eligible high-cost (typically rural or insular) telecommunications carriers (High Cost Program)
and economically needy individuals (Low Income Program); access for telecommunications
services and broadband access for schools and libraries (Schools and Libraries Program); and
access to telecommunications, advanced telecommunications, and information services for public
and non-profit rural health care providers (Rural Health Care Program). The USF disbursed $8.1
billion in 2011 with all 50 states, the District of Columbia, and all territories receiving some
benefit.21
19 American Recovery and Reinvestment Act of 2009, P.L. 111-5, §6001 (k)(2)(D).
20 Many states participate in or have programs that mirror FCC universal service mechanisms to help promote universal
service goals within their individual states.
21 2011 USAC Annual Report, p.39. Available at http://www.usac.org/about/governance/annual-reports/2011/
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The FCC, in an October 2011 decision, adopted an order (USF Order, or Order) that calls for the
USF to be transformed, in stages, over a multi-year period, from a mechanism to support voice
telephone service to one that supports the deployment, adoption, and utilization of both fixed and
mobile broadband. More specifically, the High Cost Program is to be phased out and a new fund,
the Connect America Fund (CAF), which includes the targeted Mobility Fund and new Remote
Areas Fund, is to be created to replace it; and the Low Income, Schools and Libraries, and Rural
Health Care programs are to be modified and given wider responsibilities.22
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 other high-cost areas, are able to obtain funds to help offset the higher-
than-average costs of providing telephone service. This mechanism, which has always been the
largest USF program based on disbursements, has been particularly important to rural America,
where the lack of subscriber density leads to significantly higher costs. The goal of the USF
Order is to restructure and transition the High Cost Program from one that primarily supports
voice communications to one that supports a broadband platform that enables multiple
applications, including voice. Although some carriers that received high-cost funding over the
years have used high-cost funds to deploy broadband capable infrastructure, there was no
requirement that recipients of high-cost funding provide any households in their service areas
with broadband.
The Order requires that the High Cost Program be phased out and replaced in stages, to directly
support high-capacity broadband networks (fixed and mobile) through a newly created Connect
America Fund which includes the targeted components Mobility Fund and Remote Areas Fund.
The “identical support rule” is phased out. For the first time universal service support provided to
carriers serving high-cost areas (which is defined to include all current high-cost support
mechanisms as well as the Connect America Fund) is subject to a budget; the budget is frozen at
2011 levels at $4.5 billion (plus administrative costs) per year for the next six years (2012-2017),
subject to FCC review.23
Connect America Fund
The Order created the Connect America Fund to support the provision of affordable voice and
broadband services, both fixed and mobile, of at least 4 Mbps actual download speed and 1 Mbps
actual upload speed. The CAF will eventually replace all the existing support mechanisms in the
High Cost Program for eligible carriers. The path to this transition differs depending on whether a
provider is a price cap carrier (i.e., a company whose interstate rates are subject to the price cap
(...continued)
index.html.
22 In the Matter of Connect America Fund, et al., WC Docket No. 10-90 et al., Report and Order and Further Notice of
Proposed Rulemaking, FCC 11-161, adopted October 27, 2011, and released November 18, 2011. Available at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf.
23 In the Matter of Connect America Fund, et. al., WC Docket No. 10-90 et al.
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form of regulation) or a rate-of-return carrier (a company whose interstate rates are subject to
rate-of-return regulation).24
Price Cap Carriers. Price cap incumbent local exchange carriers,25 which tend to be the large and
mid-sized carriers, will transition to the CAF in two phases. Under Phase I, which commenced on
January 1, 2012, legacy high-cost funding is frozen at December 31, 2011, levels (estimated at no
more than $ 1.8 billion annually) for price cap carriers and is required to be used to achieve
universal availability of both voice and broadband. Frozen high-cost support will equal the
amount of support each carrier received in 2011 in a given study area (i.e., the defined geographic
service area of an incumbent local exchange carrier’s telephone operations). An additional $300
million in one-time “incremental support” to stimulate broadband deployment in unserved areas
is also established. This Phase I incremental support will be made available to those price-cap
carriers that choose to deploy fixed broadband to areas not currently served, or targeted to be
served, by a fixed broadband provider within their service territory. Access to Phase I incremental
support is dependent on meeting specific criteria and build-out requirements, and is offered to
jump-start the deployment of broadband to unserved areas within price-cap carrier service areas.
Any price-cap carrier electing to receive Phase I incremental support will receive $775 in
incremental support for each unserved location it provides broadband with actual speeds of at
least 4 Mbps actual download speed and 1 Mbps of actual upload speed.26 Once the funds are
accepted, carriers must meet deployment schedules to no fewer than two-thirds of the required
locations within two years and complete all deployments within three years.
Under CAF Phase II Price Cap, which is anticipated to begin on January 1, 2013, annual funds
(estimated at no more than $1.8 billion annually) will be distributed through an FCC-developed
cost model and through competitive bidding (e.g., reverse auctions)27 for a five-year period
ending year-end 2017. CAF support will be available only in areas where a federal subsidy is
needed to ensure the build-out and continued operation of broadband networks. By the end of the
third year, carriers that accept support must offer broadband speeds of at least 4 Mbps download
speed and 1Mbps of upload speed. In addition, usage capacity must be reasonably comparable to
urban residential terrestrial fixed broadband to at least 85% of their high-cost locations and to all
supported locations by the end of the fifth year (2017). The incumbent carrier is given the right of
first refusal, for five years, to receive the model-derived support, after which a shift to
competitive bidding will be implemented. If an incumbent carrier declines Phase II funding the
FCC will implement a competitive bidding process once the model and process are adopted,
which is anticipated to be completed in December 2012 with distributions to commence in 2013.
24 For a more detailed explanation of price cap carrier and rate-of-return carrier see footnotes 25 and 28, below.
25 Price-cap carriers are incumbent exchange carriers that may only raise interstate rates based on a formula, defined by
the FCC, that caps the price level that can be charged to subscribers. Rate-of-return companies that are affiliated with
holding companies for which the majority of access lines are regulated under price caps will, for the purposes of CAF
Phase I, be treated as price-cap carriers.
26 The FCC will calculate how much incremental support a carrier is eligible to receive, and the carrier may choose to
accept all, some, or none of that support. For example, if a carrier is projected to receive $7,750,000 and it accepts the
full amount, it will be required to deploy broadband to at least 10,000 unserved locations within its service territory; if
it accepts half ($3,875,000) it will be required to deploy broadband to 5,000 locations. Unused incremental support may
be used by the FCC, pursuant to its statutory authority, to advance broadband objectives. (USF Order para.138)
27 Under a reverse auction the provider that submits the lowest bid, all else equal, to serve a designated geographic area
would be awarded the funds.
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Rate-of-Return Carriers. Rate-of-return carriers,28 which tend to be smaller carriers that solely
provide service in rural areas, will continue to receive support, with some modifications, from
current support mechanisms pending full transition to the CAF (through 2017). During this
transition, rate-of-return carriers’ legacy high-cost support is frozen at December 31, 2011, levels
(estimated at no more than $2 billion annually). Unlike in the case of price-cap carriers, no
additional “incremental support” is provided specifically targeted for broadband deployment in
unserved areas. Modifications are made to the operations of the High Cost Program, as they
impact rate-of-return carriers, during this transition period to improve “the efficiency and
effectiveness” of USF support.29 For example, the Order phases out support over three years in
study areas that overlap completely with an unsubsidized fixed, terrestrial broadband/voice
competitor, and gradually phases down over three years (commencing July 1, 2012) per-line
support to a cap of $250/per month ($3,000 annually).
Rate-of-return carriers that continue to receive legacy support or begin accepting CAF support are
given more flexibility than price-cap carriers when deploying broadband. Rate-of-return carriers
are required to offer actual broadband service of at least 4 Mbps download speed and 1 Mbps of
upload speed, with usage capacity reasonably comparable to urban residential terrestrial fixed
broadband, but only upon their customers’ reasonable request and within a reasonable
amount of time. Furthermore, rate-of-return carriers are not, at this time, subject to specific
build-out requirements or increased speed requirements and will not necessarily be required to
build out and serve the most expensive locations within their service territories. Many of the
details and mechanics of how the transition of rate-of-return carriers from legacy high-cost
support to the CAF have yet to be determined. These details will be announced pending the
completion of an extensive Further Notice of Proposed Rulemaking issued as part of the USF
Order.30
Mobility Fund
The CAF Mobility Fund (MF) is a new fund created within the Connect America Fund to provide
targeted funding to wireless providers, to support the deployment of 4G (fourth generation)
wireless networks. Recipients of funds will be subject to public interest obligations. Phase I will
provide $300 million in one-time support to provide wireless broadband in unserved areas
(excluding areas already targeted for support) and will be awarded through a reverse auction. The
auction is anticipated to occur September 27, 2012, with disbursements commencing in 2013.31
Winners will be required to deploy 4G service within three years, or 3G service within two years.
A separate and complementary one-time Tribal Mobility Fund Phase I is also established to award
up to $50 million in additional funds to Tribal Lands.
28 Rate-of-return carriers are incumbent local exchange carriers that are allowed to earn a specific percentage of net
profit (rate-of-return), currently set at 11.25 %, on their interstate services. The FCC sets the rate and defines the rate
base upon which the carrier is allowed to earn a return.
29 USF Order para. 194.
30 USF Order para. 1031.
31 This auction has been designated as Auction 901. For details on the procedures, terms, and conditions governing this
auction and the post-auction application process, see Mobility Fund Phase I Auction Scheduled for September 27, 2012
Notice and Filing Requirements and Other Procedures for Auction 901, AU Docket No. 12-25, available at
http://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db0502/DA-12-641A1.pdf.
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Phase II of the Mobility Fund will provide up to $500 million per year in ongoing support to
expand and sustain mobile voice and broadband services in areas where service would not be
available absent federal support. Funding of $100 million per year, within the $500 million
budget, will be set aside for ongoing support for Tribal Lands. Specifics on structure, eligible
areas, and distribution mechanism for the permanent Phase II Mobility Fund will be determined
in 2012, with implementation scheduled for 2013.
Remote Areas Fund
The Order creates a new CAF Remote Areas Fund to provide support in the most remote high-
cost areas representing less than 1% of households. The budget for this Fund is set at a minimum
of $100 million per year. While open to all technologies, it is anticipated that alternative
technology platforms, such as satellite and unlicensed wireless services, will be among the major
providers participating in this Fund. Implementation is anticipated in 2013.
Identical Support Rule
The identical support rule requires that competitive eligible telecommunications carriers
(CETCs), typically (but not exclusively) wireless carriers, be given the same per-line level of
high-cost support as incumbent local telecommunications carriers, typically wireline carriers,
serving the same area. This rule, although not designed specifically to support mobility, in 2010
distributed an estimated $1.2 billion of high-cost support, largely to wireless carriers providing
mobile services in areas that may already have such services. New support mechanisms, adopted
in the USF Order (CAF Mobility Fund), are designed specifically for mobility to better target
unserved areas and, according to the FCC, make the identical support rule no longer necessary or
in the public interest.32 Therefore, effective January 1, 2012, the rule was eliminated. For those
carriers currently receiving such support, funding levels are frozen at year-end 2011 levels (or an
amount equal to $3,000 times the number of lines reported as of year-end 2011, whichever is
lower) for six months and then phased out. This phase-out will occur, with some limited
exceptions, in 20% yearly intervals over a five-year period commencing on July 1, 2012; all
identical cost support will be eliminated as of July 1, 2016. Wireless carriers will have access to
support from the Mobility Fund as well as this phased-down legacy support. The phase-down of
identical support funding will stop if the Mobility Fund Phase II and Mobility Fund Phase II for
Tribal Lands are not operational by June 30, 2014.
Waiver Process
The Order establishes a waiver process to be used by any carrier that can clearly demonstrate that,
absent exemption from some or all of the reforms, its funding level would put consumers at risk
of losing voice service, where there is no terrestrial alternative. Consideration will also be given
to whether specific reforms would result in default on existing loans and/or insolvency. This
process entails the provision of detailed financial and market-specific data submitted for a
rigorous case-by-case review. Waivers are not anticipated to be granted routinely. The Order also
provides for prioritized review of waiver requests filed by providers serving Tribal Lands and
insular areas (e.g., Alaska, island territories), and requires that review of such petitions be
completed within 45 days.
32 USF Order at para. 502.
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Rural Broadband: The Roles of the Rural Utilities Service and the Universal Service Fund
Low Income Program
In the mid-1980s, FCC universal service policies were expanded to target low-income
subscribers. Two income-based programs, Lifeline and Link Up, were established to assist
economically needy individuals. The Link Up program, established in 1987, assists eligible low-
income subscribers to pay the costs associated with the initiation of telephone service, and the
Lifeline program, established in 1984, assists eligible low-income subscribers to pay the recurring
monthly service charges incurred by telephone subscribers.33 Discounts are eligible for one
connection, either wired or wireless, per household. The expansion of the USF to directly target
low-income individuals is of particular significance to those in rural areas, as the nonmetro
poverty rate as a percentage of nonmetro population is growing. According to the United States
Department of Agriculture (USDA), the nonmetro poverty rate grew by 1.5 percentage points
from 15.1% in 2008 to 16.6 % in 2009, representing an increase from 7.3 million to 7.9 million in
poverty.34
An FCC-conducted broadband consumer survey found that 36% of non-adopters of broadband
cited a financial reason as the main reason they do not have broadband service at home.35 To
address this barrier, the FCC adopted an order36 on January 31, 2012, to modify the goals and
operations of the Low Income Program. The Link Up program is eliminated on non-Tribal Lands,
but the role of the Lifeline Program is expanded to increase broadband adoption levels for low-
income households; a $9.25 flat per-line monthly reimbursement rate is established on an interim
basis; and safeguards to combat waste, fraud, and abuse are also established.37 Actions pertinent
to broadband include those which modernize the Lifeline Program as a vehicle to ensure the
availability of broadband for all low-income Americans. This is to be achieved by allowing
Lifeline support for bundled service plans that combine voice and broadband and establishing a
Broadband Adoption Pilot Program to explore how to best use the Lifeline Program to increase
broadband adoption among Lifeline eligible subscribers.38 Funding for the Pilot Program,
estimated at up to $25 million, will come from savings resulting from Low Income Program
reforms; a final budget for the newly designed Lifeline Program will be determined in 2013.
33 Support is not given directly to the subscriber but to their designated telecommunications service provider, who in
turn charges these subscribers lower rates, or in the case of some wireless options, no charge for a the basic package.
34 Rural America At A Glance, 2011 Edition. United States Department of Agriculture, Economic Research Service.
Economic Information Bulletin Number 85, September 2011. Available at http://www.ers.usda.gov/Publications/
EIB85/EIB85.pdf.
35 NBP, Chapter 9, Adoption and Utilization, 9.1, Understanding Broadband Adoption.
36 Lifeline and Link Up Reform and Modernization, Advancing Broadband Availability Through Digital Literacy
Training (Final rule). Federal Register, Vol. 77, No. 42. March 2, 2012, p. 12952. Also see Lifeline and Link Up
Reform and Modernization, Advancing Broadband Availability Through Digital Literacy Training (Proposed rule).
Federal Register, Vol. 77, No. 42. March 2, 2012, p. 12784.
37 These actions include creating a National Lifeline Accountability Database to prevent eligible subscribers from
receiving duplicative Lifeline-supported services, creating eligibility databases, and eliminating Link Up support except
for recipients on tribal lands.
38 Applications must be submitted to the FCC on or before July 2, 2012, with projects anticipated being selected during
the third quarter of 2012. Selection criteria and additional details are contained in Public Notice DA 12-683 Wireline
Competition Bureau Announces Application Procedures and Deadline for Applications to Participate in the Broadband
Adoption Lifeline Pilot Program, released April 30, 2012, available at http://transition.fcc.gov/Daily_Releases/
Daily_Business/2012/db0430/DA-12-683A1.pdf.
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Schools and Libraries (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. The E-Rate Program supports connectivity, and funding
is available under four categories of services: telecommunications and dedicated services; internal
connections (e.g., wiring, routers, and servers); Internet access; and basic maintenance of internal
connections, with the first category receiving funding priority. The applicant is responsible for
providing additional resources such as end-user equipment (e.g., computers, telephones),
software, and training. Under this program, which became effective January 1, 1998, eligible
schools and libraries receive discounts ranging from 20% to 90% for eligible services depending
on the poverty level of the school’s (or school district’s) population and its location in a high-cost
telecommunications area (urban/rural status).39 Eligible schools, school districts, and libraries
may apply on an individual or a consortium basis. The FCC established a yearly ceiling, or cap,
of $2.25 billion, adjusted for inflation prospectively, beginning with funding year 2010, for this
program.40 Since its inception this program has been over-subscribed, leaving requests by
otherwise qualified applicants unfulfilled.
Areas that do not have ready access to broadband are likely to depend on anchor institutions, such
as schools and libraries, to meet growing broadband needs. The FCC has acknowledged the
importance of anchor institutions in achieving broadband access goals, and has taken steps to
upgrade the E-Rate Program by, among other actions, permitting schools to allow community use
of E-Rate funded services outside of school hours; supporting eligible services to the residential
portion of schools that serve students in special circumstances (e.g., schools on tribal lands); and
committing $9 million to a pilot program, “Learning On-The-Go,” to support off-campus
connectivity in 20 schools and libraries, for K-12 students and library patrons, for portable
(wireless) learning devices outside of regular school or library hours.41
39 The primary measure for determining support discounts is the percentage of students eligible for free or reduced
lunches under the National School Lunch Program. However, calculation of the proper discount is also dependent on
location. Every school or library in the United States is located in a rural or an urban area based on Metropolitan
Statistical Area (MSA) data. Applicants in rural areas are given an advantage when calculating the percentage discount.
40 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.
41 In the Matter of Schools and Libraries Universal Service Support Mechanism; A National Broadband Plan for Our
Future. Available at http://hraunfoss.fcc.gov/edocs-public/attachmatch/FCC-10-175A1.pdf.
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Rural Broadband: The Roles of the Rural Utilities Service and the Universal Service Fund
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.42 Like 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 (e.g., transmission of data,
images, or interactive video) necessary for the provision of health care to either qualified
individual health care providers or consortia. Health care providers can use funding to save on
service they already have, to upgrade current services, or to install new services. Equipment
charges are not eligible for support. The telecommunications program was established in 1997 to
ensure that rural health care providers pay no more than their urban counterparts for their
telecommunications needs when providing health care services. The Internet access program,
which was established in 2003, provides a 50% discount on the cost of monthly Internet access in
states that are entirely rural43 and a 25% discount for all other rural health care providers. Only
the monthly charge for access is eligible for support. These two programs are collectively known
as the “Primary Program.”
The FCC, in 2007, established a “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. The Pilot Program funds up to 85% of the eligible costs of broadband
infrastructure deployment of telehealth networks that connect rural and urban health care
providers within a state or region. The Pilot is closed to new projects.
Policy Issues
Table 2, below, provides a summary of the restructured USF program. The decision by the FCC
to incorporate broadband and mobility mandates into the universal service concept, and the
subsequent restructuring of the USF to accommodate this decision, will have a major impact on
consumers and providers of telecommunications and broadband services. As the United States
moves towards this transition, numerous policy issues and concerns have surfaced. Included
among the issues confronting policy makers are how to define success; who should pay to support
this mandate; how the nation should address the rural/rural divide; and how the nation should
42 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.
43 An “entirely rural” state is a state in which every county meets the FCC’s definition of rural. In reality no state meets
the “entirely rural” definition, but the U.S. Virgin Islands, Guam, American Samoa, and Commonwealth of Northern
Mariana Islands do.
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ensure that these changes do not negatively impact the financial health of, in particular, small,
rural carriers that are significantly dependent on USF subsidies.
Table 2. USF Programs and Funding
Program/Fund Eligible
Entity Funding
Low Income Program (Lifeline)a
low income subscribers
N/Ab
Broadband Adoption Pilot
eligible telecommunications carriers
up to $25 million
Schools and Libraries Program (E-
schools and libraries
$2.25 billion (annual y)c
Rate)
Pilot Program (Learning- On-
students/library patrons
$9 million
The-Go)
Rural Health Care Program
rural public/nonprofit health care
$400 million (annual y)d
(Primary)
providers
Pilot Program
rural public/nonprofit health care
$418 millione
providers
CAFf Mobility Fund
eligible wireless providers
Phase I
$300 million
Phase I Tribal Mobility Fund
$50 million
Phase II
$500 million (annual y)g
CAF – Price Cap
Phase I (Price-Cap) Incremental
price cap carriers
$300 million
Phase II (Price-Cap)
price cap carriers/competitors
$1.8 billion (annual y)h
CAF – Rate of Return
rate-of-return carriers
$2.0 billion (annual y)i
CAF Remote Areas Fund
eligible service providers
$100 million (annual y)
CAF Legacy High Cost Fund
incumbent and competitive eligible
$3.6 billion (approximate for 2012
telecommunications carriers
only)
Source: Data compiled by CRS based on FCC/USAC documents.
Notes:
a. The Link Up Program is eliminated on non-tribal lands. Support for the Low Income Program is not given
directly to the subscriber but to their designated telecommunications service provider.
b. Funding level to be determined by the FCC.
c. Funding year is July 1-June 30 of the following year. E-Rate funding level is adjusted for inflation.
d. Funding year is July 1-June 30 of the following year.
e. Funding derived from equal instal ments from the Rural Health Care Program FY2007-FY2009 annual
funding budgets. The pilot is closed to new projects.
f.
The Connect America Fund (CAF) will ultimately replace al existing high cost support mechanisms.
g. Of this amount, $100 million per year will go to tribal areas.
h. This money is high cost support frozen at December 31, 2011, levels and is available for a five-year period
ending year-end 2017.
i.
This money is high cost support frozen at December 31, 2011, levels and is available for a five-year period
ending year-end 2017.
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How Is Success Defined?
The commitment made under USF reform to ensure universal availability of advanced broadband,
at rates that are reasonably comparable in all regions of the nation, is a major undertaking. How
policy makers determine if that goal has been successfully met, however, will depend, to a large
part, on how success is defined. Most consider the universal service mandate to provide voice
service to have been met, but the United States has never reached a 100% penetration rate.
According to the FCC, as of July 2011 (the most recent published data available), the telephone
subscribership penetration rate in the United States was 95.6%, and rates vary based on
characteristics such as location, age, and income. For example, penetration rates among states
ranged from a low of 91.4% to a high of 98.5%; households headed by a person under 25 years of
age had a penetration rate of 93.8% compared with at least 95.9% for those headed by a person
over 55; penetration rates for households in income categories below $20,000 were at, or below,
94.7%, while the rate in households in income categories over $75,000 was at least 98.9%.44
When it comes to broadband deployment, is anything under 100% an acceptable goal and, if so,
what would the appropriate rate be?
Even if at some point in time broadband is made available in all areas of the country, the question
of access versus adoption needs to be considered. According to the FCC’s NBP, broadband is
available in 95% of the nation but adoption rates are about 65%. This significant gap is explained
by three factors: cost, digital literacy barriers, and a perceived lack of relevance.45 The USF Order
has attempted to address this issue through reforms including those to the Low Income Program,
but the details of how this will be addressed are yet to be fully resolved.
Additional issues that policymakers may wish to monitor include those related to performance
metrics such as speed, capacity, and latency. Although the USF Order provides requirements for
such metrics, these needs will continue to evolve. Just as voice access standards evolved from, for
example, party line to single line service, society’s expectations with regard to broadband will
also evolve. Policymakers will face the task of assessing what the standard for access will be in
terms of performance metrics. What may be considered an acceptable level of service today may
be considered inadequate for future needs.
Who Should Pay?
The 1996 act requires that every telecommunications carrier that provides interstate
telecommunications services be responsible for universal service support (§254[d]) and that such
charges be made explicit (§254[e]).46 Therefore, the USF receives no federal monies but is funded
by mandatory contributions from telecommunications carriers providing interstate service.47
These contributions are based on a percentage of the interstate and international
telecommunications end-user revenues of telecommunications carriers and are called the
contribution factor. This contribution factor has grown significantly since its inception from
44 Telephone Subscribership in the United States (Data through July 2011). Released 2011. Federal Communications
Commission. Available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-311523A1.pdf.
45 Connecting America: The National Broadband Plan, Chapter 9, Adoption and Utilization, p. 168.
46 Section 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.
47 These companies include wireline telephone companies, wireless telephone companies, paging service providers, and
interconnected Voice over Internet Protocol (VoIP) providers.
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approximately 5.5% in 1998 to an all-time high of 17.9% in the first quarter of 2012.48 Increases
in demand for, and expansion of services covered by, the USF, as well as technological change
and decreases in the interstate and international revenue base, have all contributed to this upward
trend.
The FCC’s decision to include broadband and mobility in the universal service definition has
further highlighted the need to address how the funding mechanism should be modified to support
such a mandate. At issue is the uncertainty and costs associated with mandating nationwide
deployment of broadband as a universal service policy goal, and the impact that such a mandate
will have on an already strained funding mechanism. Some have expressed concern that given the
pressures currently facing the USF, and their impact on the contribution factor, a restructuring of
the funding mechanism should have been addressed prior to, or at least simultaneously with, the
expansion of the USF definition. Questions regarding who should contribute, how the mechanism
to assess such contributions should be designed, and whether the contribution base should be
expanded, are among the issues to be considered. The FCC, on April 27, 2012, adopted a further
notice of proposed rulemaking seeking comment on comprehensive reforms to address the USF
funding issue.49
Rural-Rural Divide
Rural America is subject to a “rural-rural divide” when it comes to the presence of broadband
infrastructure. Some parts of rural America have sophisticated high-level broadband access while
other parts have little to no broadband access. Disparity in access to broadband among rural areas
is known as the “rural-rural divide.” Price-cap companies, which are largely classified as non-
rural carriers, serve both urban and rural areas and in their rural service areas face issues, such as
remoteness and lack of density resulting in high costs, more commonly associated with rural
carriers. According to the FCC, more than 83% of the approximately 18 million Americans that
lack access to residential fixed broadband at or above the FCC’s broadband speed benchmark live
in areas served by price-cap carriers.50 In other rural areas, often served by rate-of-return carriers,
broadband is being deployed, often with the support of a combination of RUS loans and USF
support. To address this disparity the FCC, in its USF Order, established a one-time, $300 million
incremental support component in the Phase I CAF Fund for areas lacking broadband
infrastructure, solely for the use of price-cap carriers.
Concern has been expressed that providing for a CAF Phase I Fund for broadband deployment,
solely for the use of price-cap carriers, disadvantages rural areas lacking broadband infrastructure
that are served by the smaller, rural rate-of-return carriers. Some question why access to such
funding should be limited to price-cap carriers when other areas of the nation are facing the same,
or even more challenging, conditions to bring broadband to areas lacking access. If the ultimate
goal is to bring broadband to all unserved areas, they ask, why should this funding be based on
carrier classification rather than need?
48 Many assessed providers have chosen, but are not required, to recover USF contributions directly from their
subscribers and place a universal service charge on subscriber’s bills. This is legal and a common industry practice.
49 In the Matter of Universal Service Contribution Methodology, A National Broadband Plan For Our Future. available
at http://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db0430/Fcc-12-46A1.pdf.
50 USF Order para. 21.
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Financial Health of Rate-of-Return Carriers
Smaller, rural, rate-of-return carriers are particularly dependent on USF subsidies,51 and have
expressed concern that the reforms that the USF Order will implement could place them under
financial hardship. Many RUS telecommunications and broadband borrowers (loan recipients)
receive high cost USF subsidies. In many cases, the subsidy received from USF helps provide the
revenue necessary to keep the loan viable. The Telecommunications Infrastructure Loan program
is highly dependent on high-cost USF revenues, with 99% (476 out of 480 borrowers) receiving
interstate high-cost USF support. This is not surprising, given that the RUS Telecommunications
Loans are available only to the most rural and high-cost areas (towns with populations less than
5,000). Regarding broadband loans, 60% of BIP (stimulus) borrowers draw from state or
interstate USF support mechanisms, while 10% of farm bill (Rural Broadband Access Loan and
Loan Guarantee Program) broadband borrowers receive interstate high-cost USF support.52 Thus,
to the extent that USF may be reformed, this could have an impact on the viability of RUS
telecommunications and broadband loans, and ultimately the overall financial health of the
carrier.
Although the FCC included a waiver process in its USF Order for those carriers that felt they
would be subject to significant economic stress, due to the reforms, many smaller carriers assert
that the waiver process is too burdensome and difficult and that the requirements for qualifying
for relief are too restrictive.
RUS and USF: Different Approaches, Shared Goals
The RUS broadband programs and the FCC’s Universal Service Fund (USF) share a common
goal: increasing broadband infrastructure deployment and applications in rural areas.53 However,
the way that each program addresses these goals is markedly different.
• RUS grants and loans are used as up-front capital to invest in broadband
infrastructure, whereas the USF provides ongoing subsidies to keep the operation
of telecommunications—and most recently broadband networks in high-cost
areas—economically viable for providers. These subsidies, in turn, enable
providers to invest in upgrading their telephone networks to make them
broadband-capable.
• Aside from the Distance Learning and Telemedicine (DLT) program, RUS
telecommunications programs address broadband infrastructure deployment,
which is intended to increase the availability of broadband in rural America. The
USF, while also addressing broadband availability (through the High Cost
Program and the Connect America Fund), also addresses end-user broadband
adoption through the Low Income Program.
51 According to the USF Order universal service revenues account for approximately 30% of the typical rate-of-return
carrier’s total revenues. USF Order para. 291.
52 Jessica Zufolo, Deputy Administrator, RUS, Overview of the RUS Telecommunications Loan and Grant Programs,
July 2011, Slide 7, available at http://www.narucmeetings.org/Presentations/Zufolo_7-2011.pdf.
53 In addition to broadband deployment the USF has a broader mandate. For example, both voice and most recently
broadband adoption for needs-based individuals (both urban and rural) is provided through the Low Income Program,
and the Schools and Libraries Program offers support to both urban and rural areas.
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• Regarding the health and education applications, the principal difference between
RUS programs (Distance Learning and Telemedicine) and the USF programs
(Schools and Libraries Program, Rural Health Care Program) is that RUS funds
end-user equipment, while USF funds connectivity. DLT grants serve as initial
capital assets for equipment, instructional programming, technical assistance, or
instruction for using eligible equipment (e.g., video conferencing equipment,
computers) that operate via telecommunications to rural end-users of
telemedicine and distance learning. DLT does not fund the telecommunications
that connects that equipment. By contrast, the USF Schools and Libraries
Program supports the conduit or pipeline for communications using
telecommunications services and/or the Internet, and includes four categories of
service: telecommunications services, Internet access, internal connections, and
basic maintenance of internal connections. Similarly, the Rural Health Care
Program provides discounts for rural non-profit health care providers by
providing connectivity.
• Finally, the RUS programs are funded through annual appropriations and are
subject to the annual congressional budget process. By contrast, USF is not
funded through annual appropriations, but is funded by mandatory contributions
from telecommunications carriers that provide interstate service.
Role of Congress
Congress is seeking ways to best leverage federal programs to ensure that the goals of the
National Broadband Plan—including universal broadband service by 2020—are met to the
greatest extent possible. With the September 30, 2010, conclusion of the American Recovery and
Reinvestment Act (P.L. 111-5) broadband grant and loan awards, the RUS broadband programs
and the USF programs remain the only ongoing federal vehicles to provide financial assistance
for rural broadband deployment.
With both programs currently at a pivotal point, an issue for the 112th Congress is how best to
shape those programs as they go forward. The statute authorizing the Rural Broadband Loan and
Loan Guarantee—Section 601 of the Rural Electrification Act of 1936—was significantly
modified in the 2008 farm bill, and may be addressed once more in the 2012 farm bill.54 Typically
a new farm bill is developed every five years, principally by the House Committee on Agriculture
and the Senate Committee on Agriculture, Nutrition, and Forestry. The Appropriations
Committees in the House and Senate both have a major role to play as well, as each considers
annual appropriations for the RUS broadband programs through the Agriculture, Rural
Development, Food and Drug Administration, and Related Agencies Appropriations Act.
Meanwhile, the USF is undergoing a major and unprecedented transition through a series of
reforms being implemented by the FCC. Given that it is early in the process, Congress has largely
adopted an oversight role and a “wait and see” posture with respect to the FCC’s USF reforms.55
While numerous Members have written letters to the FCC urging various modifications in the
54 For information on the latest farm bill broadband proposals, see CRS Report RL33816, Broadband Loan and Grant
Programs in the USDA’s Rural Utilities Service, by Lennard G. Kruger.
55 For example, see “Rep. Terry Considers Overhaul Bill To ‘Clean Up’ FCC’s 2011 USF Order.” Daily Report for
Executives, April 27, 2012.
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reform package, there has been no comprehensive legislation introduced into the 112th Congress
that addresses the FCC’s USF reforms. The House Energy and Commerce Committee and the
Senate Commerce, Science, and Transportation Committee continue to assess the impact of the
reforms, and the FCC’s progress in implementing those reforms. To the extent that various
constituencies and interest groups (whether it be small rate-of-return carriers, large price-cap
carriers, competitive providers, state utility regulators, or broadband providers and consumers)
feel they are disadvantaged by the reforms, and to the extent that programmatic inefficiencies or
waste, fraud, and abuse come to light (as they have in the past through GAO reports, for
example), Congress always has the prerogative in the future of formulating and considering
legislation that could modify those reforms by amending the 1934 Communications Act.
Given that the RUS and USF broadband programs share the goal of deploying broadband to rural
America, Congress may also wish to assess how these two programs can best fit together. Are
they effectively targeted towards providing broadband to the most unserved areas of the nation,
while at the same time minimizing adverse impacts on private incumbent providers? Are they the
most cost-effective way for Congress to fund rural broadband development? To what extent are
the two programs complementary, and to what extent do the two programs overlap? And finally,
how will changes made to the USF program affect the viability of broadband loans made under
the RUS programs?
Author Contact Information
Angele A. Gilroy
Lennard G. Kruger
Specialist in Telecommunications Policy
Specialist in Science and Technology Policy
agilroy@crs.loc.gov, 7-7778
lkruger@crs.loc.gov, 7-7070
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