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The Universal Service Fund (USF) was created by the United States Federal Communications Commission (FCC) in 1997 to meet Congressional universal service goals as mandated by the Telecommunications Act of 1996. The 1996 Act states that all providers of telecommunications services should contribute to federal universal service in some equitable and nondiscriminatory manner; there should be specific, predictable, and sufficient Federal and State mechanisms to preserve and advance universal service; all schools, classrooms, health care providers, and libraries should, generally, have access to advanced telecommunications services; and finally, that the Federal-State Joint Board and the FCC should determine those other principles that, consistent with the 1996 Act, are necessary to protect the public interest. Recent quarterly USF fees can be found at Contribution Factor & Quarterly Filings - Universal Service Fund (USF) Management Support. As of the first quarter of 2013, the USF fee, equals 16.1 percent of a telecom company's interstate end-user revenues. As of the second quarter of 2013, the USF fee is 15.5 percent.
Universal Service charges should not be confused with what are sometimes referred to in telephone company bills as "Federal Subscriber Line" charges, which are not taxes or charges by the federal government or other levels of government. The FCC states that "Local telephone companies recover some of the costs of telephone lines connected to your home or business through this monthly charge on your local telephone bill. Sometimes called the federal subscriber line charge, this fee is regulated and capped by the FCC. While this "fee" is not officially a "tax", it is mandated by the FCC to be paid every month by carriers who wish to conduct interstate business. Most carriers opt to pass this fee/tax onto the consumer The money received from the subscriber line charge goes directly to local telephone companies." This, "in effect, subsidizes [with money from smaller users] the much reduced access rates paid by the largest long distance users’, who are generally big businesses."
In contrast, the typically much lower USF fees collected by phone companies in principle represent the same funds passed on to the Federal Communications Commission (FCC) which notes "This line item (USF) appears when a company chooses to recover its USF contributions directly from its customers by billing them this charge. The FCC does not require this charge to be passed on to customers. Each company makes a business decision about whether and how to assess charges to recover its Universal Service costs.
On October 27, 2011, the FCC approved a six-year transfer process that would transition money from the Universal Service Fund High-Cost Program to a new $4.5 billion a year Connect America Fund for broadband Internet expansion, effectively putting an end to the USF High-Cost Fund by 2018.
By 1913, AT&T had favored status from U.S. government, allowing it to operate in a noncompetitive economic environment in exchange for subjection to price and quality service regulation. The government asserted that a monopolistic telephone industry would best serve the goal of creating a “universal” network with compatible technology country wide for telephone consumers. Regulators emphasized limits on profits, enforcing “reasonable” prices for service, setting levels of depreciation and investment for new technology and equipment, dependability and “universality” of service. “Universal” was originally used by AT&T to mean, “interconnection to other networks, not service to all customers”. After years of regulation, the term came to include infrastructural development of telephony and service to everyone at a reasonable price.
The Communications Act of 1934 includes in its preamble a reference to universal service. It calls for “rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges” to “all the people of the United States.” Communications Act of 1934 - Title I, Sec. 1 [47 U.S.C. 151] The code was amended by the Telecommunications Act in 1996 to include, “without discrimination on the basis of race, color, religion, national origin, or sex…” To comply, AT&T began increasing the price of long distance service to pay for universal service. The act also established the FCC to oversee all non-governmental broadcasting, interstate communications, as well as international communication which originate or terminate in the United States.
There was a push for deregulating the telecommunications industry in the 1980s. Under President Ronald Reagan, the FCC shifted its focus from “social equity to an economic efficiency objective,” which it claimed was a primary purpose of the Communications Act of 1934. After AT&T was split up in 1984, universal service was still “supported by a system of above-cost access charges paid to local exchange companies.” Increased competition and universal service were later legislatively addressed and codified with the Telecommunications Act of 1996.
The Telecommunications Act of 1996 was the first major rewrite of the Communications Act of 1934. The act addresses new challenges and opportunities of the digital information age, with the goal of promoting an economic environment conducive for the growth of new information technology. It also further developed the meaning and implementation of universal service. The act calls for the creation of a joint federal-state board to make recommendations to the FCC on defining federal universal services and set time tables. The act also set out some immediate priorities of universal service. These include quality and reasonably priced services, access to advanced telecommunication services, access for rural, low-income and high-cost regions, equitable and nondiscriminatory service, specific and predictable price structure, access of advanced telecommunication services for schools and health care and libraries (Sec. 254(b)(1)-(7)). The act provided ability in the constantly changing telecommunication environment to periodically revisit and adjust universal service, while setting core principles (Sec. 254(c)). The 1996 act also “mandated the creation of the universal service fund (USF) into which all telecommunications providers are required to contribute a percentage of their interstate and international end-user telecommunications revenues”.
Following the Telecommunications Act of 1996 and the subsequent creation of the Universal Service Fund, the FCC designated the Universal Service Administrative Company (USAC) to manage the contribution of revenue to and distribution of funding from the Universal Service Fund. USAC is an independent corporation whose purpose is to impartially distribute funds from the USF in a manner that will best meet the goals of universal service set by the Telecommunications Act of 1996.
The USAC receives contributions from all companies providing interstate and international telephone and Voice over Internet Protocol (VoIP) service. Contributors send payments based on projected quarterly earnings. This revenue is deposited into a central fund, from which the USAC distributes money to the four central services at the core of the USF: High Cost, Low Income, Schools and Libraries, and Rural Health Care.
USAC reports quarterly revenue projections detailing what contributions are expected and detailing what actions are taken in the expansion and bolstering of universal service. While the USAC cannot act without Congressional approval, it can make recommendations. USAC recommendations have resulted in expanding telecommunication resources, particularly broadband Internet and mobile access to schools and libraries, and recognizing Voice over Internet Protocol (VoIP) as a form of interstate and international communication, which requires those companies providing VoIP services to contribute to the USF.
While the creation of the Universal Service Fund was specifically geared towards making telephone communications readily available to everyone, the speed with which the digital age emerged quickly made it clear that the internet was to be the next great form of communication. As technology advanced and more and more information and services became available in online formats, the concept of the Digital Divide emerged and those lobbying for universal service began to consider the inclusion of online access as a necessary component.
As the Internet's significance and presence became increasingly pronounced, a draft proposal of the Telecommunications Act of 2005 was the subject of hearings in Congress. The proposal outlined a significant restructuring of the Telecommunications Act of 1996, ultimately the House of Representatives passed a bill, the Communications Opportunity, Promotion, and Enhancement Act of 2006 (COPE - H.R.5252.RS, S.2686). The bill was sent from the House to the Senate, where subsequent readings left it awaiting a legislative action. Under the proposed restructuring of the Telecommunications Act of 1996, greater emphasis on the wide availability of broadband and mobile access would be considered. Additionally, consideration of revenue contribution to the Universal Service Fund would be radically revised, given that the creation of obligatory broadband and mobile communication access would require a wide range of broadband, mobile, and Voice over Internet Protocol (VoIP) service providers to contribute a portion of their revenue to the fund. Lastly, the Act urged an FCC consideration of the universal service structure. The bill was not passed.
Some members of Congress have spoken out in favor of increased contribution to the USF from alternate sources. Former Congressman Rick Boucher (D-VA) stated at hearings that with new technologies and business models decreasing the reliance on long distance telephone communications revenues that have traditionally supported the USF, it is now time to consider a restructuring of the USF funding system to one that incorporates broadband Internet access as a necessary service. The rationale is that the electronic market, specifically e-commerce and e-communication, are quickly becoming popular and even vital resources to which not all individuals have access. By providing this access through the USF, the next step in providing universal connections for the whole of the public would be realized. Should this reform go through, revenue from a larger range of companies could be drawn upon in order to fill the fund, allowing for greater services and technologies to be expanded to areas and individuals that lack them.
Reform has corporate support from major telecommunication companies, including Verizon and AT&T. In March 2009, senior executives from Verizon Communications met with the House Subcommittee on Communications, Technology, and the Internet, providing recommendations for how best to proceed, bringing broadband and mobile communication access to rural and unserved areas. Citing reform to the Universal Service Fund as a means "to better serve rural America," Verizon recommended that a limit be set on the size of USF's high-cost fund; competitive bidding wars be employed to determine which company expand service to unserved areas; structure a "wire-center approach" model to replace statewide cost averaging; restructure how contributions to the USF are determined; and impose a deadline on the FCC for completion of their reform of inter-carrier compensation.
In October 2011 the FCC formally proposed a "Connect America Fund" to address these and other concerns.
The major goals of Universal Service as mandated by the 1996 Act are as follows:
The Telecommunications Act of 1996 states that all providers of telecommunications services should contribute to the federal universal service in a fair and nondiscriminatory manner; there should be specific, predictable, and sufficient Federal and State mechanisms to preserve and advance universal service; all schools, classrooms, health care providers, and libraries should have access to advanced telecommunications services; and lastly, that the Federal-State Joint Board and the Commission should determine those other principles that, consistent with the 1996 Act, are necessary to protect the public interest.
The Communications Act of 1934 first established the concept of making affordable basic telephone service available to everyone everywhere within a nation, state, or other governmental jurisdiction. This concept led to the formation of a fund known as the Universal Service Fund (USF), which was finally codified in the Telecommunications Act of 1996. In some cases, the concept has been widened to include other telecommunications-information services, mainly Internet access.
Before the Telecommunications Act of 1996, the Universal Service Fund (USF) operated as a mechanism by which interstate long distance carriers were assessed to subsidize telephone service to low-income households and high-cost areas in order to ensure that all the people in the United States have access to rapid, efficient, nationwide communications service with sufficient facilities at realistic charges.
The Telecommunications Act of 1996 expanded the traditional definition of universal service — affordable, nationwide telephone service — to include other services, such as rural health care providers and eligible schools and libraries.
The FCC was established by the Communications Act of 1934 and is charged with regulating interstate and international communications by radio, television, wire, satellite and cable. Today the FCC's jurisdiction covers the 50 states, the District of Columbia, and U.S. possessions.
The Universal Service Fund (USF) is one fund with four programs.
This support ensures that consumers in all regions of the nation have access to and pay rates for telecommunications services that are reasonably comparable to those in urban areas. The High Cost Program is by far the largest and most complex of the four programs. The net goal of the program is to keep telephone service affordable for customers in areas where, absent the subsidy, telephone service would be dramatically more expensive than the national average. The complex system of fees, surcharges and subsidies supports telephone companies in rural and remote areas.
This support program provides discounts that make basic, local telephone service affordable for millions of low-income consumers. The Low-Income section of the Universal Service Fund is broken down into two programs: Link-Up America and Lifeline.
Link-Up America assists consumers with the installation costs of phone service. Link-Up program pays up to $30 of the telephone service installation fees, and provides up to $200 of one year, interest-free loans for any additional installation costs.
Lifeline Assistance provides discounts on basic monthly service at the primary residence for qualified telephone subscribers. These discounts can be up to $10.00 per month, depending on the location. Along with these programs, subscribers living on tribal lands may qualify for additional discounts. Residents of Native American Indian and Alaska Native tribal communities may qualify for enhanced Lifeline assistance (up to an additional $25.00) and expanded Link-Up support (up to an additional $70.00). Eligibility varies from state to state. States with their own programs may have their own eligibility guidelines. For states that rely solely on the federal Lifeline and Link-Up program eligibility criteria, subscribers must either have an income that is at or below 135% of the federal Poverty Guidelines, or participate in other assistance programs. On January 31, 2012, the Federal Communications Commission approved an order changing parts of the Universal Service Fund (USF) known as the "Lifeline Program" to reduce fraud and abuse. In April 2013 a hearing was held before the Subcommittee on Communications and Technology of the Committee on Energy and Commerce, U.S. House of Representatives, to explore issues relating to whether the program should be eliminated or placed under a budget cap, and if not, whether a freeze should be put in place until the reform measures currently underway are completed.
This program provides subsidies for “tele-health and tele-medicine,” typically a combination of video-conferencing infrastructure and high speed Internet access, to enable doctors and patients in rural hospitals to access specialists in distant cities at affordable rates. Rural Health Care Support Mechanism allows rural health care providers to pay rates for telecommunications services similar to those of their urban counterparts, making telehealth services affordable.
This program, also known as E-Rate, provides subsidies for Internet access, telecommunications services, internal infrastructure and basic maintenance of internal connections to schools and libraries. The subsidies pay a percentage of costs based on need, with rural and low-income schools receiving the greatest subsidy. This support goes to service providers that provide discounts from 20% to 90% based on the level of poverty and the urban/rural status of the population served. Eligible schools, school districts, and libraries may apply individually or as part of a consortium, and must provide the hardware and software elements that are necessary to utilize the connectivity.
In the past, only long distance companies made contributions to support the federal Universal Service Fund. In 1996, the United States Congress passed the Telecommunications Act that expanded the types of companies contributing to the Universal Service Fund.
Currently, all telecommunications companies that provide service between states, including long distance companies, local telephone companies, wireless telephone companies, paging companies, and payphone providers, are required to contribute to the federal Universal Service Fund. Carriers providing international services also must contribute to the Universal Service Fund. Since an FCC order released in June 2006, providers of VoIP services are obligated to contribute as well.
Telecommunications companies pay contributions into one central fund. The USAC makes payments from this central fund to support the four Universal Service Fund programs. The FCC does not require companies to charge their customers for these contributions - this funding decision is left up to the individual companies.
Wide disagreement over the nature and administration of the USF exists in telecommunications policy circles. Such disagreements fragment traditional partisan alliances in the United States Congress. In January 2007, Senator Ted Stevens (R-AK) sponsored a bill (the Universal Service for Americans Act) that would increase universal service tax base to include broadband ISPs and VoIP providers, in order to fund broadband deployment in rural and low-income regions of the country. This bill was referred to committee, but as no further action was taken on it by the 110th Congress, the bill never became law. Since then the only congressional action has been H.R. 176, introduced by Congressman Bob Latta (R-OH) on February 13, 2009, which states that, “in order to continue aggressive growth in our Nation's telecommunications and technology industries, the United States Government should 'Get Out of the Way and Stay Out of the Way'.” It is currently in committee.
Fears continue to abound about what such subsidies mean, and how it will affect telecommunications in the long run. Discussions continue over whether or not the USF should be used to provide services such as broadband internet access. Groups like the Keep USF Fair Coalition and the Ad Hoc Coalition of International Telecommunications Companies work to educate about such controversies, in addition to taking action when they feel that the FCC and Congress are overstepping their bounds.
Debate over the Universal Service Fund has consistently involved the scope of the funding, which technology types and companies should fund the program, which groups should be eligible for benefits, and the need to clean up waste and fraud in the program. In 2011, the FCC made material changes in the USF program, largely benefiting the largest traditional telephone companies in the country, which now have double the access to funding that they had before those changes. Smaller traditional and wireless carriers were given reduced access to support going forward, which means that unless the FCC makes future changes, the country will depend in large measure on two carriers to carry out broadband deployment and ongoing operations in rural areas in the future, and in some very rural areas of the country, service may diminish.
Many of the services covered by the USF are related to traditional telephone technology. There is a rising concern that some of the more recent developments in telecommunications are just as important to the consumer as these older technologies. For example, consumers' subscriptions to traditional telephone services have fallen while their subscription rate to wireless services have been rising consistently. Yet many cellular companies are likely to receive less funding under the new rules, which may reduce consumers' access to wireless services in areas of the country that have low populations. Similarly, a question currently debated is whether access to broadband internet should be supported by the USF and if so, how best to fulfill such a large mandate without damaging the stability of the fund. The Telecommunications Act of 1996 states that "advanced services" should be accessible to all Americans [Section 254(b)(3)]. One question is whether the providers of internet access should contribute to the fund like other companies that provide access to telecommunications, if such providers also want to draw from the fund.
The rapidly changing interstate and international telecommunications markets can quickly and unpredictably bring about changes in USF funding levels. Dorothy Attwood of the FCC Wireline Competition Bureau stated, “One striking development that we’ve witnessed in the interstate marketplace is the steady decline of interstate revenues. Although traditional long-distance revenues grew consistently between 1984 and 1997, they’re now in a period of steady decline”. She pointed out that competition in the interstate long-distance market, wireless substitution, and bundling of service packages that blur traditional service categories are all reducing revenues that serve to finance the USF. Service providers simply transferred the cost to customers in the form of a long-distance surcharges to make up for reduced revenue. While the expenditures of the USF have increased since its inception, in part due to expansion of support paid to competitive providers, the revenues on which contributions are made -- interstate and international telecommunications revenues -- have become increasingly more difficult for contributors to identify as a result of evolution of services offered. Overall revenues reported by telecommunications companies have steadily increased, if information service revenues are included. However, the revenues for these services are no longer subject to contribution. Proposals have been made to increase the number of sources from which universal service fund is collected. This could include expanding contributions to include intrastate telephone services (calls within single states), voice over IP (computer-to-computer calls), and information services such as broadband, and increasing contribution requirements from wireless communication providers.
In the interest of reducing waste, limited support to a monopoly universal service provider for each territory has been considered. Wireless technology is increasingly favored by consumers, and can cover a single territory often for less than landline technology. However, wireless has traditionally been a competitive industry, which has resulted in a variety of innovative services for consumers, but means that supporting wireless companies requires a complex understanding of how to allocate funding on a shared basis, in order to avoid injury to the positive forces of competition. Congress enacted significant laws, enforced by the Department of Justice, ensuring curbs on laissez faire economics for the good of the population after antitrust abuses of prior centuries.
The issue of waste and fraud, as with many government programs, has been addressed as well. Gilroy stated, "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". Improved auditing of particularly the E-rate program has been addressed.
On July 22, 2010, the Universal Service Reform Act of 2010 was introduced by Representatives Boucher (D-Va) and Terry (R-NE). The measure is intended to improve and modernize the USF by reining in the size of the fund and promoting broadband deployment.
Reform finally arrived on October 27, 2011, when the FCC approved a six-year transfer process that would transition money from the Universal Service Fund to a new $4.5 billion a year Connect America Fund that will support the expansion of broadband services to areas that don't have broadband access yet.