The Universal Service Fund: A Tug of War over Reform and What It Means for Us Today

by Latoya Livingston on October 17, 2011

Part II – There is a Major Need to Revamp the High Cost Fund

This article continues our series on USF Reform. It will continue to discuss the ideas and problems discussed during MMTC’s September policy meeting.

What if I told you of a government program where your company could apply for a government loan, usually at 3 percent interest, with a government guarantee to not only pay you for the money that you spent providing your service, but also to pay you a 10 percent profit?

What if I also told you that you were able to incur as many charges as you deemed reasonable and necessary with the knowledge that you would be reimbursed by the government?

What if you got all this with little to no government oversight on the reasonableness of those charges, because the government is relying on studies that you and your industry mates have conducted on the cost of providing said service?

Many, like myself, would be extremely troubled by this scenario. Unfortunately, this is the way that some rural telephone service carriers are operating: They borrow from the Department of Agriculture to get a rural carrier contract, build out their service at a cost that they determine, and are reimbursed for their costs along with a 10 percent return.

This scenario is prevalent when the government determines that rural carrier companies can be considered rate of return carriers. I am not insinuating that these companies are actively engaging in any fraudulent activities, but I am advocating more involvement by the FCC and the Universal Service Administrative Company, the manager of the fund, to supervise these types of agreements.

Who Benefits from the High Cost Fund?

While the High Cost Fund can be beneficial to millions of people who would otherwise not have access to broadband, there is the question of whom the program actually benefits. Are they poor rural farmers trying to scrape by, or are they millionaires living on a secluded ranch?

Everyone deserves access to telephone (and broadband) service, but if it costs $17,000 to connect one rural home, doesn’t it matter if that rural home belongs to a millionaire who could have paid to receive the service? If that was the case, wouldn’t it be more efficient to spend that $17,000 on connecting a school in a poor area to broadband and teaching technology skills to annual cycles of hundreds of kids?

And what of the numerous unconnected communities on Native American tribal lands or even the entire island of Puerto Rico, that by U.S. law is supposed to have comparable services to the States, but has yet to receive broadband? Everyone, from rural to urban areas, needs and deserves access; the FCC has a responsibility to ensure that this occurs in a more equitable and morally sound manner.

Takeaways from MMTC’s Public Forum on USF Reform

While the High Cost Fund is needed to ensure that rural networks don’t deteriorate and fall apart, it is imperative that the government takes a more proactive and supervisory role in ensuring that our tax dollars are spent efficiently and effectively.

The panel at MMTC’s forum contributed a few suggestions:

- The FCC must cut the fat and the waste from the program, ensuring that there are accountability measures in place.
- The program should be based on need – how much an individual homeowner can contribute to receiving telephone and broadband services.
- There is a strong need for compliance reporting.
- State involvement and federal regulatory oversight by the FCC are key.
- Government and industry should work together to create state and/or location specific cost models to increase efficiency.
- The FCC needs to implement a new cost structure for rural carriers – a move away from rate of return for most, if not all, carriers.

To aid in these suggestions coming into fruition, the FCC should conduct its own cost studies. It must also move away from policies that allow incumbents to have right of first refusal and move toward more competitive bidding.

  • Latoya Livingston

    Latoya Livingston is a Washington, D.C.-based attorney with years of experience working in the public and private sector. Attorney Livingston joins MMTC after performing pro bono work for the organization last year.

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  • Anonymous

    This is a clear description of the inefficiencies the USF has, and this post shows that these funds may garner a bigger bang for the buck if they were directed to the neediest of Americans; the underserved who otherwise would not have a chance of getting broadband at all.

  • Ally Bendar

    This is a great breakdown of USF and its inefficiencies.  Thanks.

  • Anonymous

    I’d be really interested in your opinion on the other four central services at the core of the USF. I understand why the high cost fund is important especially because of the inefficiencies (which you’ve laid out very well). I would be interested in hearing whether there are as many problems with the administration of lifeline and the rural health care services (these are two of the other core services of the USF.)

  • 4bascoo

    Another wonderful article Ms L.  Morally sound! I like that. Thanks for letting the cat out of the bag. If it were not for writers like you, people like me would need a white cane to move around in respect to these matters.

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