Link to paperAbstract:
In the FCC’s recent Future of the Universal Service Fund (USF) proceeding, one of the most extensively debated subjects in the record was the possibility of modernizing the USF contributions system. Among others, there were two broad proposals that were advanced – (1) expanding the contribution base to include revenues from broadband internet access service, and (2) broadening the USF contribution base to include entities including edge providers such as streaming video providers, digital advertising firms, and cloud services companies. We find that the most economically efficient option for reform is to expand the contribution base to include broadband internet access service revenues.
The USF is currently funded through fees collected from telecommunications providers. Funds are then used to subsidize the various programs under the USF, promoting universal connectivity. Even though the USF supports broadband through its disbursements, the contribution base for the USF is funded based on interstate and international telecommunications revenue. As the industry shifts towards internet-based communication, the contribution base for universal service has dramatically shrunk. Since 2012 the contribution base has declined more than 42%. Given this, in the past two decades the contribution factor (i.e., Projected USF Expenditures/Contribution Base) has more than tripled – from around 7% to over 29%. Without funding reform we predict it will be 44.0% in 2025 and 49.7% in 2027.
There are economic consequences from such large fees (currently at 29.2%) on such a narrow base (mostly voice revenues) as fees become more distortionary and burdensome on an inequitable subset of Americans who primarily rely on voice services. Expanding the contribution base to include broadband internet access service revenues will simultaneously lower the effective USF fee (to 3.7%) and broaden the base from which the funding comes (all uses of broadband), reducing market distortions in line with economic principles and the institutional history of USF. We also find, under plausible assumptions for service plan prices, that consumers will not face a significant price increase and many will likely achieve savings due to the decrease in contribution factor on voice service. In addition, to the extent any additional fees levied are passed onto downstream consumers, the burden will likely be borne relatively more by high-income consumers.
We also find that various other proposals to include certain edge providers would arbitrarily increase market distortions and are not in line with economic principles. In addition, these proposals also assert, without reliable evidence, that fees levied on edge providers will not be passed down to consumers. We find that economic principles and empirical trends in the industry suggest otherwise.
Open Zoom
