Big Change in USF

The FCC is pondering a decision that could affect millions of consumers and businesses in rural America. That decision could be positive or negative, depending upon what your priorities are – the phone or the Internet.

A backward glance in time reveals that the telephone, in its earliest stage, was considered to be a novelty. Years later, it became a luxury for those who could afford it and had access to phone lines strung in more populated areas of the US. When the telephone’s value and subsequent need became recognized, Uncle Sam intervened to make sure that phones and phone lines were accessible to American citizens.

However, the problem for decades in providing phone service in low population areas has been the cost of expanding the phone networks to reach everyone, with profitability simply unattainable for the rural phone companies. To solve this problem, in 1996 the FCC created the Universal Service Fund (USF), which mandated that all US phone companies contribute to USF in order to subsidize those rural areas without phone service. This also helped to level the playing field among phone companies competing for the new nationwide telecom opportunities. Since then, hundreds of rural phone companies, along with their consumer and business customers, have benefited. Last year alone, over $8 billion in USF was spent on rural phone projects.

Internet broadband has experienced a similar progression, evolving from novelty to luxury to necessity. While Internet broadband is available today to the vast majority of Americans in populated areas, it’s still nonexistent in thousands of small towns. ISP’s have encountered the same financial hurdles in building their broadband networks as the phone companies experienced, where return on investment is elusive due to the limited subscriber opportunity. Consequently, an estimated 20 million Americans are still without access to Internet broadband.

So Uncle Sam, once again, is on the verge of taking a giant step to support rural areas. The FCC is now considering passing landmark legislation that will redirect those same USF funds to support the construction of data networks in rural areas. The assumption is that the need for rural phone line subsidies has been fulfilled, and now resources need to be directed to providing high speed Internet access.

In addition, the new legislation, if passed, would have more stringent regulation going forward, because the USF, from day one, has been loosely managed and, in many cases, abused, with virtually no boundaries on project costs. One widely publicized example is in the state of Washington where the phone lines of less than two dozen residents in one rural community have been subsidized to the tune of $20,000 per year from the USF.

However, this potentially huge shift in policy (and money) has many rural areas very concerned, as the very phone funds which have supported them for years may now be redirected. According to the New York Times, “The reallocation of money — and the promise it will be spent more carefully — unsettles many small and medium-size firms in rural areas that rely on the flow of subsidies. The proposed rules would also change the interconnection fees paid to companies, another concern to the rural telecommunications companies that count on the fees for a big chunk of revenue.” (NYT, “New Rules for Technology,” Feb. 23, 2011).

This proposed legislation in USF seems to be needed and therefore justifiable. Also, it’s supported by some of the largest telecom carriers in the US. But it will need to be scrutinized and both sides of the coin weighed accordingly. We don’t want it to rob Peter to pay Paul.