At the risk of stating the obvious, the broadband industry is on the verge of substantial changes. Like a chain of dominos, changes at the helm of the Department of Commerce and the National Telecommunications and Information Association (NTIA), coupled with Congressional efforts, foretell changes to the Broadband Equity, Access, and Deployment (BEAD) program.
While BEAD, a $42.5 billion COVID-era initiative to connect all remaining unserved locations in the U.S. to high-speed internet, is a relatively new broadband funding program, the Universal Service Fund (USF), which has existed in its current form for nearly three decades, is also facing an existential crisis.
This spring, the Supreme Court concluded oral arguments about whether the USF is constitutional. While many legal experts seem to be cautiously optimistic that the Court will uphold USF’s legality, the program’s financial stability remains in need of Congressional action.
BEAD and USF are different subsidy programs created decades apart. Yet, some stakeholders are advocating for a marriage of sorts, arguing that USF is necessary to pay for ongoing operational expenses for BEAD-funded network deployments. While these advocates would inextricably link the two programs as necessary for broadband networks in rural America, there are many reasons to object to this union. Additionally, alternatives to this type of arrangement exist and are already being considered in some states.
A tenuous history for USF
To understand the precarious nature of such a partnership, it’s worth reviewing how the USF arrived at this point. Prior to launching the USF with the passage of the 1996 Telecom Act, support for rural telephone company operations came through an arcane system of internal subsidies that AT&T administered before courts split up the company in 1984.
Congress established the USF in the 1996 Telecom Act, Section 254, to fund support for four programs: high-cost support for rural telecom companies, service to rural health clinics, service to rural schools and libraries (aka the E-Rate program), and the Lifeline program, which provides a discount to low-income households. Over the years, the USF’s support payments have transitioned from support for voice networks to broadband networks.
To fund the USF, Congress authorized the FCC to develop a “contribution factor.” The contribution factor is essentially a tax collected on revenues from interstate and international voice calling. The tax rate is developed every quarter by dividing the total amount needed for the four programs by its “contribution base,” which is the revenues generated from legacy interstate and international calling.
As detailed in quarterly FCC reports, continuing the USF in its current form to support its current recipients poses a challenge. The contribution base, USF’s revenue source, has plummeted since the program’s inception, as traditional forms of interstate and international calling are an artifact of the late 20th century. As it is, the tax rate has gone from under 6% to over 36% – a six-fold increase in 25 years, with no abatement in its rise.
At the same time, the contribution sources will continue to drop and eventually reach their extinction. Thankfully, total USF disbursements have only doubled in the past 25 years and have remained below the contribution base amounts. Otherwise, the tax rate would be even higher.
Using USF for BEAD over the long Term will break an already burdened USF
Arguing that USF must be used to support long-term operations and maintenance of infrastructure built through BEAD is akin to inviting more people to a wedding reception where keeping the punch bowl full is already a challenge. BEAD was developed for one-time funding infusions intended to help internet service providers (ISPs) make the economic case for deployment in unserved areas where they would not otherwise receive a return on investment. USF itself was never meant to be the return on investment. It simply cannot substitute for an ISP’s lackluster balance sheet or failure to develop a sustainable business plan.
Obviously, any increase in program-specific disbursements, such as allowing more providers with financially questionable BEAD-funded networks to tap into the High-Cost program will only drag down an already burdened system. Continuing the same funding method while accepting new networks to subsidize isn’t a solution that the future should be based upon. Something needs to give.
Given the changes at NTIA and Congressional concerns expressed in the recently introduced Speed for BEAD Act, a retooling of program requirements is expected. Along those lines, NTIA should require state broadband offices to explicitly examine whether a BEAD applicant requires USF support for sustainability at any time. State broadband offices should reject a BEAD subgrantee that explicitly or implicitly states an intent to rely on USF (through a diligent review of the project’s financials and pressure testing the viability) for BEAD-funded projects. If a state’s broadband office doesn’t credibly execute what is essentially a fiduciary responsibility to taxpayers, NTIA should reject an awardee and withhold approval of a state’s Final Proposal; it’s as simple as that.
Frankly, why should BEAD dollars be used to build infrastructure whose financial stability requires an additional and permanent subsidy from the overburdened USF?
Alternatives to USF-sustained BEAD projects
Alternative solutions exist for locations where a sustainable broadband business plan doesn’t exist without ongoing subsidies. Deploying the most cost-effective technologies for a given area, including a mix of wireline, fixed wireless, and LEO systems that can be self-sustaining, advances the public interest more than requiring perpetual subsidies from a financially challenged USF.
Are there shortcomings to either fixed wireless or, particularly, LEO-based service compared to wireline connections? Yes. But should that really be a criticism when fixed wireless or LEO-based satellites offer functional, more cost-effective options without requiring ongoing subsidy support through USF to operate? No.
The other alternatives are worse: either not providing service to certain unserved locations at all because ubiquitous fiber connectivity isn’t sustainable, or, alternatively, expanding reliance on a teetering USF to service providers whose business cases would never be funded by a bank or any other credible financial institution.
Last autumn, on a road trip across the western U.S., I met the owner of a long-established trading post on the Navajo Reservation in the remote Four Corners area of Arizona. During our conversation, he told me how satellite service has improved all aspects of his business. He mentioned that the service wasn’t as good as his fiber-based service in Phoenix, but given the trading post’s location, it was a huge improvement and was good enough.
Sometimes, circumstances won’t allow the “best” or the “perfect”. But that doesn’t mean that substantial improvements can’t be made with the funding we have. The improvements, however, must be able to stand on their own long after they are built.
Mark Vasconi served as the Director of Washington's state broadband office from 2022-2023 and as Director of Regulatory Services at the Washington Utilities & Transportation Commission from 2010-2022.
Op-eds from industry experts, analysts or our editorial staff are opinion pieces that do not represent the opinions of Fierce Network.