Posted by Barlow Keener

The American Reinvestment and Recovery Act ("ARRA”) appropriated $7.2 billion for various broadband projects.  The primary goals of the ARRA broadband provisions are 1) to increase broadband penetration for the unserved, both rural and urban, 2) to increase broadband adoption for the “underserved,” and 3) to deliver new jobs.   The USDA’s RUS (Rural Utility Service), under the direction of FCC Commissioner Adelstein, will deliver $2.5 billion to mostly rural areas.  In tandem with the delivery of the Recovery Act funding for broadband, the FCC has been mandated by the 2008 Farm Bill to develop a comprehensive national broadband plan.  It is due in early 2010.   On March 10, 2009, the FCC released an order seeking comments (Docket GN 09-29) for the broadband plan which were due on March 25, 2009.  

One proposal included in comments filed by OPSACTO (Organization for the Promotion and Advancement of Small Telecommunications Companies) could dramatically increase broadband funding and potentially double the $7.2 billion ARRA subsidy amount for broadband.  OPSACTO proposes that the FCC levy USF fees on “facility-based broadband” services.  Currently, broadband is considered a non-telecommunications, information service and not subject to the 11.6% USF fee.  OPASCTO’s comment reasoned that:

[R]equiring all facilities-based broadband Internet access providers to contribute to the USF would secure the [USF] Fund’s long-term viability while also allowing for accountable, prudent growth in the High-Cost program. Assessing all facilities-based broadband Internet access providers would establish a much larger contribution base than exists today, and one that would experience rapid growth for some time to come.

OPASCTO also recommends that the FCC add broadband to the list of services for which it’s members may use USF subsidies.   Currently, USF subsidies are restricted to ensuring that telecommunication services, with a focus on voice telecommunications but not broadband, are “universally” or “ubiquitously” available to all rural customers no matter the cost.  OPASCTO additionally recommends lifting the cap on the high cost loop support formula to allow the 520 rural OPASCTO ILECs to receive the maximum government subsidies necessary to provide broadband universally to their unserved rural customers.  

In some respects the OPASCTO recommendations make good sense in light of the Obama administration’s goal of delivering broadband to every home as a way to deliver the jobs and education that are becoming available in ever increasing models  using broadband.  JetBlue’s distributed at home call center is a good example.  In 10 short years, we have moved beyond the goal of delivering voice to every home to the goal of ubiquitous broadband.   USF is focused on ensuring ubiquitous telecommunications services which now is only half the need.  The concept of delivering broadband to every home is being analogized to President Eisenhower’s boosting the economy by building the U.S. interstate highway system.  Whether true or not, the general political consensus is that broadband will create a “multiplier” for the underlying investment.  See Paul Budde’s article about the U.S. and Australia’s broadband initiatives and studies supporting the economic multiplier effect.   So, there is some rationale for imposing USF fees on broadband in order to reach the broadband goal. 

According to one estimate, 63% of the U.S. homes, or 73 million, will have broadband by the end of 2009.    That means that approximately 40+ million homes do not have broadband today.    Doing some back of the envelope math, if USF at today’s 11.6% rate is imposed on “facilities-based broadband providers” as recommended by OPASTCO, the government would raise approximately $6 billion in additional funds every year from U.S. homes and businesses.  This is based on the assumption that the average broadband bill is $60 for businesses and homes.  $6 billion in additional USF fees is just about equal to the total Recovery Act allocated for broadband.   Also, the cost of Internet for every business and home would increase in price by 11.6%.  While the USF is a fee and not a tax, it would still be an additional sales tax from the view of the taxpayer.    It could be a political stretch to impose yet an additional fee on an economy already stretching to recover.  Certainly the Republicans would not support such a subsidy as only three members of the Senate and none from the House voted for the ARRA.  Many Democrats may feel the same and the FCC Chairman would not want to be explaining to a Congressional hearing that the FCC had imposed “tax” on broadband without Congressional backing.  This is especially true when the service providers are already receiving $7.2 billion in Recovery Act subsidies from taxpayer money to fund broadband penetration and use.  

There is good merit to opening up the USF subsidies and using them to fund ubiquitous broadband.  Making broadband affordable and meaningful (– can it be used to make a living or deliver an education at home? -) for lower income populations in all geographies, as well as for rural unserved populations, should be a goal of the funding. 

Another positive point that can be deduced from OPASTCO’s filing is that there should be sufficient RUS funding to ensure that all of OPASTCO members’ unserved broadband customers receive broadband service.  OPASTCO members deliver broadband to 88% of their customers “on average.”  Using the “on average” number, around 3 million OPASTCO customers receive broadband leaving 500,000 without broadband which is 1% of the total 40 million unserved homes.   Dividing $2.5 billion of RUS funding by 500,000 customers, and assuming no leveraged using loans or equity, represents around $5000 per unserved OPSACTO customer.   Of course, OPASTCO members will not receive 100% of the RUS funding, but it should be assumed that a large portion of the RUS funding will go OPASTCO’s  members.   $5000 is more than the $4000-$3000 estimated cost of delivering FTTH to rural customers according  to NERA.  

The question is, should USF fees be imposed on broadband Internet service?  What do you think?