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Wireless Funds Can Be Used to Subsidized Broadband, Court Rules

In the most recent case regarding Universal Service, the D.C. Circuit Court ruled this month that USF contributions originating from wireless carriers can go into funds that support wireline broadband--a potentially significant precedent in the area of cross-subsidization.

The issue before the court involved the redirection of contributions collected from wireless customers under the High-Cost Universal Service Support Program, which subsidizes costly broadband access to residents of rural and geographically isolated regions of the U.S. Rural wireless carriers, in particular, brought suit to prevent funds generated from their customers from being directed to other service providers offering broadband in rural and other high-cost areas. The wireless carriers naturally would prefer that those high cost dollars be reallocated right back where they came from--supporting (often) non-broadband wireless infrastructure.

The case arose from Verizon Wireless's wave of 2010 wireless acquisitions, including those of Alltel, Clearwire and a portion of Sprint Nextel. Particularly with its purchase of Clearwire, Verizon Wireless had agreed to waive its right to receive Universal Service support as a condition of the merger. Thus, the Rural Cellular Association argued that any Universal Service funds that would have gone to Verizon Wireless and/or its acquisitions--which now were being waived as a condition of the merger--should be put back into a general pool of funds raised by the USF assessment (and not accessible to the broadband providers), used to offset the high cost of providing such services in rural and high cost areas.

But more critical than this specific situation was the underlying principle: Whether funds raised "on the back" of one technology (in this case wireless) can be used to offset the high cost of deployment of another technology (broadband).

Such cross subsidies involving state and federal regulators were created in the Communications Act of 1934. At that time, both the FCC and state telephone regulators designed an implicit plan of cross-subsidies by setting rates in rural areas below cost and setting rates in urban areas above cost. This arrangement worked until the newer, more truly competitive environment created by the Telecom Act of 1996 made this model unsustainable.

The Telecom Act of 1996 created a new model: Congress directed the FCC to replace the prior system of implicit subsidies with explicit ones, euphemistically referred to as "specific, predictable, and sufficient...mechanisms to preserve and advance universal service.” 47 U.S.C. § 254(b)(5)." In order to fund the new explicit subsidies, Congress required "every telecommunications carrier that provides interstate telecommunication services" to "contribute, on an equitable and nondiscriminatory basis" to those mechanisms [47 U.S.C. § 254(d)]--and thus, the USF line item on the phone bill was born. As most end users are aware, this line item can add as much as 25% to a telecom bill, because in addition to the quarterly amount determined by the Universal Service Administrative Company (USAC), amounts collected as USF funds are subject to the additional insult of sales tax.

The next section of the Telecom Act of 1996 (Section 254(e)) stipulates that universal service support (meaning the funds raised by that previously mentioned line item) may be disbursed only to an "eligible telecommunications carrier." So the this most recent case centered on how the phrase "eligible telecommunications carrier" should be defined.

A lot of money is at stake. Once designated as an "eligible telecommunications carrier" by either the FCC or a state regulator, incumbent local exchange carriers (ILECs) as well as new market entrants may receive universal service support. According to the court's decision, the amount of this support increased from $2.6 billion in 2001 to $4.3 billion in 2007. No wonder those concerned went to court!!

The bottom line is that the court defined "eligible telecommunications carrier" such that funds raised from one technology can be allocated to support another when all other appropriate criteria are met.

The case was Rural Cellular Association and Universal Service for America Coalition v. Federal Communications Commission, No. 11-1094 (see

As an important final note, funds raised through the Universal Service mechanism have historically been used to support four separate initiatives, of which the "high cost" portion is only one. The other three are Schools and Libraries, Lifeline and Rural Health Care. With the advent of the Connect America and Mobility Funds, which are part of the new Universal Service plan, these existing categories are on the verge of morphing into new forms, but for the purpose of the current case, it's important to understand the context of the High Cost funding process.