United States: FCC Opens New Inquiry Into The Universal Service Fund

The federal universal service program embodies the national policy goal of affordable telephone service for all Americans. A regulatory "universal service fund" was first established in 1983 to help keep telephone rates affordable in high cost areas of the United States. Between 1983 and 1996, the fund, administered by the FCC, subsidized basic telephone service provided by incumbent local exchange carriers to low income consumers and high-cost areas.

The Telecommunications Act of 1996 (1996 Act) greatly expanded the scope of the federal universal service program to include subsidies for new services and new classes of beneficiaries. Congress directed the FCC and the states to devise methods to ensure that "[c]onsumers in all regions of the Nation … have access to telecommunications and information services … at rates that are reasonably comparable to rates charged for similar services in urban areas." The 1996 Act defines universal service as "an evolving level of telecommunications services that the [FCC] shall establish … taking into account advances in telecommunications and information technologies and services." Congress required the FCC to adopt rules implementing the 1996 Act after accepting recommendations from a Federal-State Joint Board that Congress required to be created.

The 1996 Act also mandates that those entities who ultimately provide the subsidized services and receive USF moneys make payments into the Fund. All providers of telecommunications services must make "equitable and non-discriminatory" contributions to the preservation and advancement of universal service. Under the FCC’s rules implementing the 1996 Act, contributions are assessed based on carriers’ end-user telecommunications revenues. The current rate (which changes quarterly) is 10.2 percent of a carrier’s interstate and international revenues. The FCC allows – but does not require – contributors to pass their contribution costs on to their customers in the form of billed charges, sometimes referred to in customer bills as the Federal Universal Service Fee or Universal Connectivity Fee.

The Schools and Libraries mechanism, commonly referred to as E-rate, which distributes $2.25 billion annually to service providers to support the discounted purchase of certain telecommunications services and Internet access by eligible schools and libraries.

The High Cost support mechanism, which distributed $3.4 billion in fiscal year 2004 to telecommunications carriers to support their provision of service to high cost areas;

The Low Income mechanism, which provided approximately $800 million in fiscal year 2004 to eligible telecommunications carriers ("ETCs") to compensate them for discounting low income consumers’ monthly telephone bills.

The Rural Health Care mechanism, which provided approximately $18 million in fiscal 2003 (but is authorized to distribute up to $400 million annually), to carriers to support the discounted purchase of certain telecommunications service by rural health care providers. NPRM Seeks Comments on Two Areas

The NPRM requests comments on two primary areas, management and administration of the USF; and oversight of the USF. The FCC says it is interested in rule changes that can be applied, to the greatest extent possible, consistently across all of these four programs.

(1) Fund Administrator. In 1998, the FCC designated the Universal Service Administrative Company (USAC) as the entity responsible, subject to the FCC’s rules, decisions, and oversight, for administering, on a neutral and impartial basis, the universal service mechanisms, including billing contributors, collecting contributions, disbursing universal service support funds, and recovering improperly disbursed funds. Current FCC rules prohibit USAC from making policy, interpreting unclear provisions of law, or interpreting Congressional intent, and permit USAC to advocate before the FCC only on administrative matters. USAC is a not-for-profit corporation whose board of directors consists of telecommunications and information service providers, state telecom regulators, consumer advocates, low-income consumers, and representatives of educational institutions and libraries. The activities of USAC have been subject to ongoing criticism, including, most recently, in a February 2005 report by the Government Accountability Office titled Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate Program.

The FCC seeks comment on various matters related to USAC’s performance, including:

whether USAC and its board of directors have administered the USF in an efficient, effective, and competitively neutral manner (the NPRM notes that the FCC failed to conduct a planned review of USAC’s performance in 1999);

whether the USAC board should be required to implement ethical standards and procedures for addressing conflicts of interest and handling confidential information, and whether the board should be permitted to hold non-public meetings with the FCC;

whether the FCC should codify certain USAC administrative procedures (the FCC directed USAC to file a comprehensive list of its administrative procedures within 60 days of publication of the NPRM in the Federal Register, to allow interested parties to comment on those procedures);

whether USAC should be replaced with another type of structure or entity, (including whether the FCC should conduct a competitive procurement) and, if so, how the transition should be handled; and

whether USAC should apply the policies and procedures embodied in the Federal Acquisition Regulation (FAR), which governs the contractual acquisition of supplies and services used by the federal government. (2) Performance Measures

The FCC seeks comment on establishing three types of performance measures used by the federal Office of Management and Budget – outcome measures, which describe the intended result from carrying out a program or activity; output measures, which describe the level of activity, such as applications processed or number of stakeholders served by a program; and efficiency measures, which capture a program’s ability to perform its function and achieve its intended results relative to the resources expended – for each of the four USF support mechanisms as well as for administration of the Fund. OMB already has directed the FCC to compile performance measures for the E-rate and High Cost programs in order to comply with OMB requirements.

The FCC also seeks comment on ways of measuring how cost-effectively USAC conducts its operations.

(3) Program Management. The FCC seeks comment on ways to improve the management, administration, and oversight of the USF programs, including billing, collection and disbursement. Specific topics on which comment is requested include, for the E-rate program, competitive bidding and the role of service providers and consultants; for the High Cost program, participation criteria, as well as data collection requirements for carriers seeking support; and for the Low Income program, the process for participating, including the frequency and type of information carriers are required to submit in order to participate. For all four mechanisms, the FCC seeks comment on the application process.

The FCC also seeks comment on whether to adopt a single uniform system for disbursing all USF moneys, whether to establish deadlines or performance targets to ensure that beneficiaries receive support in a timely manner, and whether to streamline or clarify the contributions process by which the USF is funded.

(1) Audits. The NPRM notes that, since 1997, the Fund has distributed a total of $31 billion. Of this amount, $7.6 million has been recovered for rule violations; an additional $4.5 million is subject to pending appeals, and $19.5 million is under review. Although the FCC apparently concludes that the small amount recovered (0.67 percent of funds disbursed) indicates massive compliance by program participants, the FCC also seeks comment on greatly expanding the use of audits as a mean of ensuring compliance.

The FCC’s Office of Inspector General (OIG), which has determined that the universal service program is a federal program and that oversight of the program is the responsibility of the OIG, has noted numerous deficiencies in existing audit programs. Audits and ongoing investigations by the Antitrust Division of the Department of Justice have revealed substantial problems with the Fund, and have resulted in numerous criminal convictions across the country for bid rigging and fraud. Congress has held a series of oversight hearings assessing the scope of waste, fraud and abuse in the program. The OIG previously reported that it designed a nationwide audit program, but that continuing obstacles, including the issue of whether the USF constitutes "public money," and a lack of resources, have hampered its ability to implement such a program and made federal law enforcement officials reluctant to devote resources to investigating and prosecuting E-rate program matters. Although the NPRM does not directly discuss these obstacles, they must be addressed as part of a comprehensive USF audit program.

The NPRM seeks comment on whether to adopt a targeted audit requirement to ensure program integrity and to detect and deter waste, fraud and abuse; whether to mandate independent audits of some or all USF contributors; and whether some or all recipients of USF moneys should be required to obtain an annual independent audit evaluating compliance with the statute and FCC rules and, if so, how such audits should be funded, the scope and methodology of such audits, whether the auditor should evaluate compliance with FCC rules and USAC procedures in order to determine potential noncompliance, and the impact of such an audit program on audited entities.

(2) Document Retention. Current FCC rules generally require E-rate applicants and service providers to retain pertinent records for five years; failure to comply may warrant recovery of USF moneys previously disbursed. The FCC seeks comment on whether to adopt comparable rules for the High Cost, Low Income, and Rural Health Care support mechanisms.

(3) Administrative Limitations Period. Current rules applicable only to the E-rate program require that any inquiries to determine whether or not a statutory or rule violation exists must be initiated and completed within five years after delivery of service for a specific funding year. The FCC seeks comment on whether it should establish a comparable administrative limitations period for the High Cost, Low Income, and Rural Health Care programs.

(4) Recovery of Funds. The FCC seeks comment on a variety of issues related to recovering disbursed funds, including whether to establish specific rules to address instances in which a USF beneficiary may not have used moneys in accordance with program rules, and whether, consistent with current E-rate program rules, amounts disbursed from the High Cost, Low Income, and Rural Health Care support mechanisms in violation of the Communications Act or FCC rules must be recovered in full.

(5) Deterrence of Waste, Fraud, and Abuse. The FCC’s efforts to date to detect and remedy waste, fraud, and abuse in the USF program have focused almost exclusively on the E-rate program. In the NPRM, the FCC tentatively concludes that it should establish more aggressive sanctions and disclosures for all four support mechanisms. The FCC seeks comment on ways to deter waste, fraud, and abuse in the High Cost, Low Income, and Rural Health Care programs, including adopting reporting requirements or performance goals for Fund beneficiaries, what types of sanctions it should use, and which violations should be subject to sanctions. Among the various issues on which comment is sought:

whether to adopt a rule specifically prohibiting recipients of USF moneys from using funds in a wasteful, fraudulent, or abusive manner;

whether to adopt a cap on the amount of E-rate funding an applicant may request;

whether to modify the E-rate competitive bidding rules (for example, by requiring at least three bids);

whether to adopt rules for the purpose of ensuring that USF moneys are used efficiently and not for "gold plating" services or equipment, and whether the FCC should establish maximum prices for particular prices or equipment;

whether to adopt rules or guidelines authorizing USAC to stop payments or processing applications as a result of suspected program violations, whether the FCC should inform schools and libraries when an E-rate contractor is under investigation, and whether contractors should be required to waive any right to confidentiality they may have during an investigation;

whether to revise the current debarment rule for the E-rate program, and whether to adopt a debarment rule for the High Cost, Low Income, and Rural Health Care programs;

alternatives to debarment, fines, and fund recovery for certain types of violations (for example, reducing an E-rate beneficiary’s discount level for a limited number of years as a sanction for repeated violations); and

whether the FCC should create a list of best and worst practices to assist USF participants and reduce fraud. This publication is intended to provide clients with information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.

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What’s Next for the Universal Service Fund?

By Josh Long

The rules governing the Universal Service Fund (USF) are in limbo. But we may see some new movement on this front starting this fall.

The FCC “is going to need to figure out a permanent fix,” and Congress may step in to revise Section 254 of the Telecommunications Act of 1996, the part of the law relating to the USF, says Bob Blau, vice president of executive and federal regulatory affairs with BellSouth Corp. Blau is not merely opining. One U.S. senator influencing telecom policy said he plans to introduce legislation in the fall.

“We need to do something to protect the longterm viability of this program,” says Sen. Conrad Burns (R-Mont.), chairman of the senate communications subcommittee. “The current revenue base needs to be broadened and we need to strengthen the overall program to reflect today’s changing telecommunications market,” says the senator, who noted plans to introduce legislation in the fall “for comprehensive reform of the Universal Service Fund.”

For the uninitiated, the USF is the giant pot of money used to expand telecommunications services to schools, libraries, rural areas and other regions where it is expensive to install telephone lines and related network gear to homes and businesses. The fund is under immense pressure as service providers morph into different beings, and revolutions in technology, such as the predominance of the Internet and wireless, bring into question what services should be universally available.

The FCC has initiated a multitude of federal proceedings to preserve the fund. Among the more notable cases is the proceeding tailored to determine the method by which carriers must contribute to the fund. Late last year, the federal regulator proposed companies contribute to the fund based on the number of network connections they manage.

The FCC says many parties favor a connection-based contribution method, but there are disagreements over the particulars. Case in point: If Qwest Communications International Inc. is providing local phone service to a family while AT&T Corp. is the chosen long-distance carrier, should both companies be responsible for contributing to the fund, or just Qwest?

In a May recommendation to the FCC, state members of the Federal-State Joint Board on Universal Service suggested basing contributions on revenue, including intrastate telecommunications revenue. “This will promote fairness and competitive neutrality, and will simplify the contribution process for consumers and carriers,” the state members, including Montana Public Service Commission Chairman Bob Rowe, wrote in the letter to the FCC.

FCC spokesman Michael Balmoris says the commission is expected to vote on the methodology proceeding in 2004.

To date, telephone companies have contributed to the fund based on interstate and international end user revenue, but the FCC says it is becoming increasingly difficult to distinguish interstate revenue as more consumers purchase local and long-distance communications packages.

Moreover, the amount of wireline interstate revenue companies collect is shrinking, prompting the FCC to increase the amount wireless carriers must contribute to the fund. The FCC increased the percentage of revenue wireless carriers must classify as interstate revenue from 15 percent to 28.5 percent.

The percentage of revenue dedicated to the USF from landline carriers has grown from 4 percent in 1996 to 9.5 percent in the third quarter, says Blau.

“The contribution factor has gone up… because in part the interstate and international revenue base has decreased,” says Lori Wright, associate counsel with MCI.

Yet the fund is still under duress as more companies seek to share the pot of money.

For example, wireless carriers are increasingly seeking so-called eligible telecommunications licenses (ETC), allowing them to acquire licenses in rural areas and draw money from the fund: a source of ire for companies such as the Bell operators and tribal-run telephone providers, who grouse they invested mountains of money to provide ubiquitous service in high-cost areas.

In November 2002, the FCC released an order requesting the Federal-State Joint Board on Universal Service review certain ETC rules. The public submitted comments to the joint board this year. Once the FCC receives the joint board recommendation, which is expected in the fall or winter, the commissioners will have one year to issue an order, says the FCC’s Balmoris.

In another proceeding that will impact the federal fund, the FCC is set to rule on whether to classify DSL as an information service. DSL today is classified as a telecommunications service. This is an important distinction because a company providing an information service, i.e., cable modem, is not required to contribute to the fund. In contrast, wholesale DSL revenue is subject to USF contributions.

The FCC is expected to vote on regulations this fall, although there are several outstanding proceedings that may impact the DSL decision.

Last year, the Universal Service Administration Co. (USAC), the agency designated by the FCC to administer the fund, collected about $5.27 billion from 2,174 service providers and dispersed approximately $5.3 billion. According to USAC, delinquent accounts receivable on USF obligations represented .24 percent of the total amount billed to carriers since 1998. The agency had a delinquent balance of approximately $56.3 million as of Dec. 31, 2002.

Although the delinquent balance is paltry compared to the bad debt telecom companies stuck their investors with over the last three years, USAC has announced plans to implement new collection procedures. The procedures were set to take effect in July. If a balance is 30 days past due and USAC is unable to resolve the matter, the agency will transfer the debt to the FCC for collection and enforcement. If the debt is not received 30 days after the FCC issues a request for payment, the regulator will transfer the debt to the U.S. Treasury, according to USAC.

THERE DOES NOT APPEAR TO BE A LID ON THIS TAX. AS MORE MONEY NEEDS TO BE SPENT, THEY RAISE THE TAX. WHO IS IN CHARGE OF THIS? I guess, I have been asleep at the switch.

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