FCC Seen Facing Test of Power In Altering Phone Subsidy Fund Financing

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Who Pays?

The basic question now before the FCC is whether internet service providers and even internet companies, like Google and Facebook, should have to contribute to the new universal service pool. It stands to be another chapter in the FCC's long battle to bring broadband internet service more squarely under its jurisdiction.

The Federal Communications Commission could be heading toward a legal confrontation over the right to assess fees to subsidize the high costs of providing broadband internet service to the tens of millions of Americans who currently lack high-speed connections, according to experts who monitor the agency.

Last October, the FCC put through a major restructuring plan to convert a roughly $4.5 billion-a-year telephone-subsidy fund into a new broadband fund, but left unsettled the question of financing: Who will pay into the new fund, and how much?

Since 1997, the FCC, with Congress's approval, has required telecommunications companies to contribute a percentage of their long-distance revenues to the Universal Service Fund to help pay for installing phone lines and delivering telephone service in areas where there are simply not enough subscribers to guarantee them a profit. The money is largely passed on to consumers in the form of monthly surcharges. Although successful at meeting its original goal, the fund was perceived as out of date and inadequate for pushing America's digital expansion.

The FCC acted to change that, but the basic question now before the agency is whether internet service providers and even internet companies, like Google and Facebook, should have to contribute to the new universal service pool.

It stands to be another chapter in the FCC's long battle to bring broadband internet service more squarely under its jurisdiction.

Information or Telecommunications?

Under the Communications Act, the commission has limited authority over “information services,” which broadband is now classified as, but has vast powers to regulate “telecommunications services.”

“The FCC is treading on thin statutory ice,” Rep. Lee Terry (R-Neb.), the vice chairman of the House Energy and Commerce Communications and Technology Subcommittee and a leader on Universal Service Fund issues, told BNA in an interview.


“The FCC is treading on thin statutory ice.”
Rep. Lee Terry (R-Neb.)

To avoid overstepping its authority, Terry said the FCC should be guided by one clear principle: assess “voice providers.” He cited a provision in a bill he authored with former House Communications and Technology Subcommittee Chairman Rick Boucher (D) which called for expanding the base of contributors to include any company “using telephone numbers of internet protocol addresses or their functional equivalents,” or “offering internet-based telephone service,” such as companies like Vonage.

While drawing up his legislation with Boucher, Terry noted that he had spoken with two FCC chairmen about whether the agency needed legislation to alter the fund's financing, and both had requested help from Congress.

“It was very unclear to them if they had legislative authority,” Terry said. “The current FCC chairman [Julius Genachowski] is now working from an assumption that they have the authority and don't need Congress.”

In the wake of the Supreme Court's ruling on the Patient Protection and Affordable Care Act, in which the court decided on a 5-4 vote that the health care law's mandate for individuals to buy insurance is in effect a constitutional tax on Americans who do not have health insurance, even the slightest overreach by the FCC could be perceived as just that--a new tax on broadband--even though no Universal Service Fund dollars would be deposited into the General Treasury.

“It doesn't matter how you write it--whether it's a contribution to a fund or a civil penalty,” Terry said, speaking generally about the high court's decision. “I think everything's a tax now. I do think it's changed--how Congress writes bills now, with these types of mandatory contributions or civil penalties, they will all be deemed a tax.”

However, any such action could bring about swift legal challenges by those emboldened by the high court's rejection in the health care ruling of a more expansive view of the commerce clause.

“If the FCC goes further than just 'voice' and what we would think as a traditional 'telecommunications' service, then that would definitely be a tax, because the agency would be assessing companies outside the scope of its legislative authority,” he said.

Everything Under Consideration.

According to people with knowledge of the FCC chairman's thinking, the agency will continue to consider all possible contributors to the new fund, including companies that may be classified as “information services” providers.

In an interview with BNA, Republican FCC Commissioner Robert McDowell said the agency should be careful not to overstep congressional authority.

Section 254(b)(2) of the act makes clear that “access to advanced telecommunications and information services should be provided in all regions of the nation,” while section (b)(3) states that “consumers in all regions of the nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.”

“Congress set all this up in 1996. We clearly have the authority to assess telecommunications services, or something in that realm, for the purposes of supporting the Universal Service Fund,” McDowell told BNA.

Under Section 254(b)(4), he pointed out, “all providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service.”

McDowell is the longest-tenured FCC commissioner, having voted in 2006 to require providers of voice-over-internet protocol, or VoIP, service to contribute a percentage of their long-distance revenue to the Universal Service Fund if their calls pass through the public-switched telephone network. (That decision, though significant, did not subject providers using peer-to-peer technology, like Skype, to the same mandate. Those providers are now being cited as possible contributors.)

In 2008, McDowell had also lent his support to a Universal Service Fund reform proposal which would have replaced the current revenues-based contribution system with one based on assigned phone numbers.

“If we start from there, we're on safe legal ground,” McDowell said of a phone numbers-based approach. “I do throw up a yellow flag of caution regarding taxing internet services more broadly for this purpose of Universal Service Fund contributions. I think we need to be careful about doing that. There are other ways to fund the program, and it might not be a great idea to head down that road.”

Divided Industry Opinion.

The telecommunications industry still remains divided on the issue.

In comments filed with the FCC earlier this month, the Rural Telecommunications Group, an industry trade association representing small rural wireless carriers, said all broadband internet service providers (which would include Comcast Corp., Verizon Communications Inc., and AT&T Inc., among others) and “non-interconnected” VoIP services (which would include companies like Skype) should be required to pay into the fund. “Network beneficiaries” (which could, perhaps, include high-tech firms such as Netflix) should start contributing as well, the group said.

MetroPCS Communications Inc., the fifth largest wireless carrier in the United States, urged the FCC to “cast the widest possible net to reduce the burden on any individual service or customer.”

Comptel, an industry trade association representing competitive phone companies, said the agency must “expand the pool of services and providers that are subject to contribution so as to incorporate the new technologies and service offering that individuals and businesses use to communicate in today's world.”

Even OnStar LLC weighed in, raising fears of a proposed telephone numbers-based contribution scheme, which would be “particularly harmful,” OnStar said, given the company's “extremely low telecommunications usage compared to traditional telecommunications providers.”

“No matter what we do, it will be controversial,” McDowell said, “because someone's ox will be gored. But certainly, sticking with the status quo is not sustainable.”

'Ancillary Jurisdiction.'

To most people who follow the FCC, the question will come down to how firmly the agency will exercise “ancillary jurisdiction,” where express statutory jurisdiction is unclear.

Prior to 1997, when Congress codified the Universal Service Fund as part of the 1996 Telecommunications Act, the FCC relied on ancillary jurisdiction to assess a fee on telecommunications companies to subsidize the cost of providing phone service in rural areas. This was particularly necessary after the breakup of AT&T in 1982, when the “implicit subsidy” for rural America disappeared. For as long as AT&T maintained its monopoly in the United States, the company agreed to keep both long-distance rates and the rates charged in cities higher to, in a sense, help to pay itself for delivering affordable service to rural areas.

In the end, the courts agreed with the FCC's use of ancillary authority, as the agency has statutory authority over telecommunications services.

But as the FCC considers assessing services that fall into regulatory gray areas, the courts may not be so agreeable.


“You can only order providers to collect money for this specific purpose if you have jurisdiction over them. If we're talking about Facebook, what's the FCC's jurisdictional hook into Facebook?”
Harold Feld
Public Knowledge

“The FCC can only extract [USF contributions] money from companies they have authority over,” Harold Feld, legal director for Public Knowledge, a consumer advocacy group, told BNA. “You can only order providers to collect money for this specific purpose if you have jurisdiction over them. If we're talking about Facebook, what's the FCC's jurisdictional hook into Facebook? The FCC doesn't have any direct authority over Facebook. The FCC doesn't even have any direct authority over the providers of IP services to Facebook.”

In addressing what has proven to be the most difficult aspect of the fund to revamp, the FCC may be forced to interpret Section 254 as broadly as possible.

“I don't think any of the options the commission has before it are legal slam dunks,” noted one communications industry attorney, who spoke to BNA on the condition of anonymity. “I guess the FCC could say that anything that has telecommunications in it, even if it's an information service, could be assessed. But that is not easily done.”

Thus, without express authority from Congress, the FCC will be limited by the governing statute, which, for some observers, might result in imbalances.

“It seems so illogical to the point of ridiculousness to say that the Universal Service Fund money is going to fund broadband networks and the provision of broadband internet access services when providers of broadband internet access services do not contribute,” said a congressional source. “There must be parity.”

By Paul Barbagallo