The Universal Service Fund (USF) spends about $8 billion a year on four broad programs plus administrative expenses: High Cost Support, Low Income Support (Lifeline), Rural Health Care, and Schools and Libraries Program (ERate). Since 1995, when the USF was established, the U.S. has spent more than $150 billion in universal service subsidies. 1 However, ample research has demonstrated that the program is inefficient, ineffective, and funded by a regressive tax mechanism.
Evaluate Rigorously
First, the FCC must require ongoing, independent, evaluation of the subsidy programs. The GAO and other government watchdogs have called for the agency to better define objectives and to determine whether the program is meeting those objectives in a cost-effective manner. 2
Part of this approach to evaluation could be to prioritize a research agenda within the FCC’s Office of Economics and Analytics to fully evaluate USF. The research agenda would design experiments to evaluate USF outcomes and recommend changes based on the results of those experiments.
Impose Budget Cap, Eliminate Budget Floor
Second, the FCC or Congress should impose a budget cap on the USF. A budget cap would help create incentives for the government to favor spending money efficiently and, in turn, increase incentives for recipients to improve efficiency. The FCC considered and rejected this idea in 2019.
Under the current rules, the Connect America Fund perversely has a budget floor, rather than a ceiling. When the High Cost Fund was changed in 2011 to allow it to subsidize broadband in addition to voice, the FCC ordered the Universal Service Administrative Company (USAC) to “forecast total high-cost universal service demand as no less than $1.125 billion, i.e., one quarter of the annual high-cost budget.” This order requires the FCC to collect at least $4.5 billion per year regardless of how much USAC determines the program needs.
To reiterate, under the FCC’s current rules, the Universal Service Fund is required to collect no less than $4.5 billion from ratepayers regardless of how much it expects to spend. It is possible that another program exists that requires the government to tax more than subsidy recipients request, but we don’t know of one.
Use Reverse Auctions
Third, subsidies should be distributed by reverse auction. Reverse auctions are an effective way to allocate subsidies for broadband deployment because they can help ensure that subsidies are awarded to the providers that can offer the most cost-effective solutions. 3 This has been demonstrated time and again, despite the controversy regarding the Rural Development Opportunities Fund (RDOF) auction that has led to a backlash against reverse auctions.
The RDOF auction worked well. The problems in the outcome, such as disqualifications and questions about ability to follow through with promises, had to do with eligibility criteria. The criteria the FCC used to determine who was eligible to bid could have been applied to any distribution method, whether a reverse auction or grant review. Any method that could not identify and eliminate entities that would later be deemed incapable of providing service within a reasonable time frame would have had similarly problematic outcomes.
In addition, Reverse Auctions can be used to limit the annual expenses of ongoing subsidies. The IIJA and other recent legislation set aside more than $45 billion to be awarded for broadband buildout across the country. Such an extensive amount of money to build networks holds the promise of eliminating any ongoing need for high cost support because the networks should be supported to the extent necessary to operate solely on monthly fees from subscribers (including subsidy money allocated to low-income subscribers).
Question Ballooning Administrative Expenses
Operating a program entails expenses. However, the Universal Service Administrative Company (USAC), which administers the USF programs, has grown significantly. In the year 2000, USAC’s administrative expenses were about $43 million. In 2022, they had increased to almost $330 million. As a result, the USF now spends more than half as much on administrative expenses as it does on Rural Health Care ($500 million) and Lifeline ($610 million). As a point of comparison, the FCC’s entire budget in 2022 was only slightly higher at about $390 million.
Because USF can increase in perpetuity without the discipline of cost control or budget optimization, USAC has little incentive to economize on its overhead costs. The number of contractors receiving over $1 million in fees from USAC grows year over year, yet USAC data and outcomes remain understudied.4
Guard Against Future USF Expansion Resulting From BEAD and Other Subsidy Programs
NTIA will soon distribute more than $42 billion to the states via the BEAD program, adding to the $10 billion from the Treasury’s Capital Projects Fund and money from other COVID relief programs. By definition, those funds should subsidize infrastructure in areas where it was not economical to build.
Some of the networks funded may not have enough revenues to continue operating after the initial broadband funds. If that happens, the operators of those networks are likely to seek support from the Universal Service Fund. In that scenario, the new buildout subsidies would generate even more subsidies in the future. Because the money comes from a federal program, the states themselves have no particular incentive to guard against this outcome when choosing which projects to fund.
Congress, the NTIA, and the FCC should consider ways of minimizing this possibility. As discussed above, using reverse auctions to distribute funds could help.
Conclusion
The USF and USAC need reform to improve its efficiency, accountability, and effectiveness. The proposals put forth by various researchers and commentators provide different solutions, but they all share the goal of making the USF more effective and efficient and socially responsible. By adopting these proposals, the FCC can ensure that the USF serves the needs of all Americans, especially those in underserved communities who are most in need of broadband access. Using reverse auctions as a way to allocate subsidies for broadband deployment is one step that the FCC can take to improve the efficiency and effectiveness of the USF.
Rosston is Director of the Public Policy program at Stanford University and the Gordon Cain Senior Fellow at the Stanford Institute for Economic Policy Research.
Wallsten is president of the Technology Policy Institute.
Footnotes
1 This total is in nominal dollars. The real total, expressed in 2023 dollars, is higher.
2 GAO, "FCC Should Enhance Performance Goals and Measures for Its Program to Support Broadband Service in High-Cost Areas," Report to the Chairman, Committee on Energy and Commerce, House of Representatives, Oct. 2020, https://www.gao.gov/assets/720/710167.pdf CRS Report, Universal Service Fund: Background and Options for Reform, RL33979, June 30, 2011, https://fas.org/sgp/crs/misc/RL33979.pdf; CRS Report, Rural Broadband: The Roles of the Rural Utilities Service and the Universal Service Fund, R42524, June 25, 2013, https://crsreports.congress.gov/product/pdf/R/R42524
3 Gregory L. Rosston and Scott Wallsten, “How Not to Waste $45 Billion in Broadband Subsidies,” Aug. 7, 2021, https://thehill.com/opinion/finance/566772-how-not-to-waste-45-billion-in-broadband-subsidies. 16 Scott Wallsten, “Reverse Auctions and Universal Telecommunications Service: Lessons from Global Experience,” Federal Communications Law Journal 61, no. 2 (Mar. 2009).
4 USAC 2022 Annual Report, USAC Contractors Receiving Greater than $1 Million, p. 18, https://www.usac.org/wp-content/uploads/about/documents/annual-reports/2022/USAC_2022_Annual_Report.pdf.
