FCC Opens New Inquiry Into The Universal Service Fund

Originally published 20 July 2005

The Federal Communications Commission recently opened a new round of public comment on the management, administration, and oversight of the Universal Service Fund (USF or the Fund), the multi-billion dollar federal subsidy program that has been the subject of substantial controversy and numerous investigations into waste, fraud, abuse, and mismanagement.

New rules under consideration could serve to clarify the functions of the Fund’s administrator and make it more accountable. However, these changes also have the potential to substantially increase costs for Fund contributors and beneficiaries.

The FCC is seeking comment on a wide range of issues related to what the FCC terms the "mechanics" of the USF, with a particular emphasis on the processes by which moneys are requested by and distributed to eligible recipients. The FCC has emphasized that the proceeding is not intended to evaluate the underlying USF policy considerations, which are being addressed by Congress and in other FCC proceedings.

The new rules have the potential to increase the financial burden for anyone who contributes, directly or indirectly, to the Fund, and to increase operational and compliance costs Fund contributors and beneficiaries alike. Congress and law enforcement officials have been extremely critical of the USF, and we expect this proceeding will result in substantial changes to the program. Congress has held several oversight hearings on USF, and investigations by the Department of Justice have led to numerous criminal convictions involving bid rigging and fraud in just one of the four programs that make up the USF. Because the FCC’s new proceeding will affect the entire USF, and because all providers of telecommunications services must make "equitable and non-discriminatory" contributions to the preservation and advancement of universal service, this issue is particularly important for such companies, who should strategize now in preparation for the comment period.

Comments on the FCC’s Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking ("NPRM")¹ will be due October 18, 2005, and reply comments will be due December 19, 2005. We will provide updates with additional important information about this proceeding.

Below is a brief overview of the USF, followed by a summary of the key topics on which the FCC has requested comment.

The federal universal service program embodies the national policy goal of affordable telephone service for all Americans. A regulatory "universal service fund" was first established in 1983 to help keep telephone rates affordable in high cost areas of the United States. Between 1983 and 1996, the fund, administered by the FCC, subsidized basic telephone service provided by incumbent local exchange carriers to low income consumers and high-cost areas.

The Telecommunications Act of 1996 (1996 Act) greatly expanded the scope of the federal universal service program to include subsidies for new services and new classes of beneficiaries. Congress directed the FCC and the states to devise methods to ensure that "[c]onsumers in all regions of the Nation … have access to telecommunications and information services … at rates that are reasonably comparable to rates charged for similar services in urban areas." The 1996 Act defines universal service as "an evolving level of telecommunications services that the [FCC] shall establish … taking into account advances in telecommunications and information technologies and services." Congress required the FCC to adopt rules implementing the 1996 Act after accepting recommendations from a Federal-State Joint Board that Congress required to be created.

The 1996 Act also mandates that those entities who ultimately provide the subsidized services and receive USF moneys make payments into the Fund. All providers of telecommunications services must make "equitable and non-discriminatory" contributions to the preservation and advancement of universal service. Under the FCC’s rules implementing the 1996 Act, contributions are assessed based on carriers’ end-user telecommunications revenues. The current rate (which changes quarterly) is 10.2 percent of a carrier’s interstate and international revenues. The FCC allows – but does not require – contributors to pass their contribution costs on to their customers in the form of billed charges, sometimes referred to in customer bills as the Federal Universal Service Fee or Universal Connectivity Fee.

The USF is made up of four separate components:

• The Schools and Libraries mechanism, commonly referred to as E-rate, which distributes $2.25 billion annually to service providers to support the discounted purchase of certain telecommunications services and Internet access by eligible schools and libraries.
• The High Cost support mechanism, which distributed $3.4 billion in fiscal year 2004 to telecommunications carriers to support their provision of service to high cost areas;
• The Low Income mechanism, which provided approximately $800 million in fiscal year 2004 to eligible telecommunications carriers ("ETCs") to compensate them for discounting low income consumers’ monthly telephone bills.
• The Rural Health Care mechanism, which provided approximately $18 million in fiscal 2003 (but is authorized to distribute up to $400 million annually), to carriers to support the discounted purchase of certain telecommunications service by rural health care providers.

NPRM Seeks Comments on Two Areas

The NPRM requests comments on two primary areas, management and administration of the USF; and oversight of the USF. The FCC says it is interested in rule changes that can be applied, to the greatest extent possible, consistently across all of these four programs.

(1) Fund Administrator. In 1998, the FCC designated the Universal Service Administrative Company (USAC) as the entity responsible, subject to the FCC’s rules, decisions, and oversight, for administering, on a neutral and impartial basis, the universal service mechanisms, including billing contributors, collecting contributions, disbursing universal service support funds, and recovering improperly disbursed funds. Current FCC rules prohibit USAC from making policy, interpreting unclear provisions of law, or interpreting Congressional intent, and permit USAC to advocate before the FCC only on administrative matters. USAC is a not-for-profit corporation whose board of directors consists of telecommunications and information service providers, state telecom regulators, consumer advocates, low-income consumers, and representatives of educational institutions and libraries. The activities of USAC have been subject to ongoing criticism, including, most recently, in a February 2005 report by the Government Accountability Office titled Greater Involvement Needed by FCC in the Management and Oversight of the E-Rate Program.

The FCC seeks comment on various matters related to USAC’s performance, including:

• whether new or revised rules are needed to clarify USAC’s functions;
• whether USAC and its board of directors have administered the USF in an efficient, effective, and competitively neutral manner (the NPRM notes that the FCC failed to conduct a planned review of USAC’s performance in 1999);
• whether the USAC board should be required to implement ethical standards and procedures for addressing conflicts of interest and handling confidential information, and whether the board should be permitted to hold non-public meetings with the FCC;
• whether the FCC should codify certain USAC administrative procedures (the FCC directed USAC to file a comprehensive list of its administrative procedures within 60 days of publication of the NPRM in the Federal Register, to allow interested parties to comment on those procedures);
• whether USAC should be replaced with another type of structure or entity, (including whether the FCC should conduct a competitive procurement) and, if so, how the transition should be handled; and
• whether USAC should apply the policies and procedures embodied in the Federal Acquisition Regulation (FAR), which governs the contractual acquisition of supplies and services used by the federal government.

(2) Performance Measures

The FCC seeks comment on establishing three types of performance measures used by the federal Office of Management and Budget – outcome measures, which describe the intended result from carrying out a program or activity; output measures, which describe the level of activity, such as applications processed or number of stakeholders served by a program; and efficiency measures, which capture a program’s ability to perform its function and achieve its intended results relative to the resources expended – for each of the four USF support mechanisms as well as for administration of the Fund. OMB already has directed the FCC to compile performance measures for the E-rate and High Cost programs in order to comply with OMB requirements.

The FCC also seeks comment on ways of measuring how cost-effectively USAC conducts its operations.

(3) Program Management. The FCC seeks comment on ways to improve the management, administration, and oversight of the USF programs, including billing, collection and disbursement. Specific topics on which comment is requested include, for the E-rate program, competitive bidding and the role of service providers and consultants; for the High Cost program, participation criteria, as well as data collection requirements for carriers seeking support; and for the Low Income program, the process for participating, including the frequency and type of information carriers are required to submit in order to participate. For all four mechanisms, the FCC seeks comment on the application process.

The FCC also seeks comment on whether to adopt a single uniform system for disbursing all USF moneys, whether to establish deadlines or performance targets to ensure that beneficiaries receive support in a timely manner, and whether to streamline or clarify the contributions process by which the USF is funded.

(1) Audits. The NPRM notes that, since 1997, the Fund has distributed a total of $31 billion. Of this amount, $7.6 million has been recovered for rule violations; an additional $4.5 million is subject to pending appeals, and $19.5 million is under review. Although the FCC apparently concludes that the small amount recovered (0.67 percent of funds disbursed) indicates massive compliance by program participants, the FCC also seeks comment on greatly expanding the use of audits as a mean of ensuring compliance.

The FCC’s Office of Inspector General (OIG), which has determined that the universal service program is a federal program and that oversight of the program is the responsibility of the OIG, has noted numerous deficiencies in existing audit programs. Audits and ongoing investigations by the Antitrust Division of the Department of Justice have revealed substantial problems with the Fund, and have resulted in numerous criminal convictions across the country for bid rigging and fraud. Congress has held a series of oversight hearings assessing the scope of waste, fraud and abuse in the program. The OIG previously reported that it designed a nationwide audit program, but that continuing obstacles, including the issue of whether the USF constitutes "public money," and a lack of resources, have hampered its ability to implement such a program and made federal law enforcement officials reluctant to devote resources to investigating and prosecuting E-rate program matters. Although the NPRM does not directly discuss these obstacles, they must be addressed as part of a comprehensive USF audit program.

The NPRM seeks comment on whether to adopt a targeted audit requirement to ensure program integrity and to detect and deter waste, fraud and abuse; whether to mandate independent audits of some or all USF contributors; and whether some or all recipients of USF moneys should be required to obtain an annual independent audit evaluating compliance with the statute and FCC rules and, if so, how such audits should be funded, the scope and methodology of such audits, whether the auditor should evaluate compliance with FCC rules and USAC procedures in order to determine potential noncompliance, and the impact of such an audit program on audited entities.

(2) Document Retention. Current FCC rules generally require E-rate applicants and service providers to retain pertinent records for five years; failure to comply may warrant recovery of USF moneys previously disbursed. The FCC seeks comment on whether to adopt comparable rules for the High Cost, Low Income, and Rural Health Care support mechanisms.

(3) Administrative Limitations Period. Current rules applicable only to the E-rate program require that any inquiries to determine whether or not a statutory or rule violation exists must be initiated and completed within five years after delivery of service for a specific funding year. The FCC seeks comment on whether it should establish a comparable administrative limitations period for the High Cost, Low Income, and Rural Health Care programs.

(4) Recovery of Funds. The FCC seeks comment on a variety of issues related to recovering disbursed funds, including whether to establish specific rules to address instances in which a USF beneficiary may not have used moneys in accordance with program rules, and whether, consistent with current E-rate program rules, amounts disbursed from the High Cost, Low Income, and Rural Health Care support mechanisms in violation of the Communications Act or FCC rules must be recovered in full.

(5) Deterrence of Waste, Fraud, and Abuse. The FCC’s efforts to date to detect and remedy waste, fraud, and abuse in the USF program have focused almost exclusively on the E-rate program. In the NPRM, the FCC tentatively concludes that it should establish more aggressive sanctions and disclosures for all four support mechanisms. The FCC seeks comment on ways to deter waste, fraud, and abuse in the High Cost, Low Income, and Rural Health Care programs, including adopting reporting requirements or performance goals for Fund beneficiaries, what types of sanctions it should use, and which violations should be subject to sanctions. Among the various issues on which comment is sought:

• whether to adopt a rule specifically prohibiting recipients of USF moneys from using funds in a wasteful, fraudulent, or abusive manner;
• whether to adopt a cap on the amount of E-rate funding an applicant may request;
• whether to modify the E-rate competitive bidding rules (for example, by requiring at least three bids);
• whether to adopt rules for the purpose of ensuring that USF moneys are used efficiently and not for "gold plating" services or equipment, and whether the FCC should establish maximum prices for particular prices or equipment;
• whether to adopt rules or guidelines authorizing USAC to stop payments or processing applications as a result of suspected program violations, whether the FCC should inform schools and libraries when an E-rate contractor is under investigation, and whether contractors should be required to waive any right to confidentiality they may have during an investigation;
• whether to revise the current debarment rule for the E-rate program, and whether to adopt a debarment rule for the High Cost, Low Income, and Rural Health Care programs;
• alternatives to debarment, fines, and fund recovery for certain types of violations (for example, reducing an E-rate beneficiary’s discount level for a limited number of years as a sanction for repeated violations); and
• whether the FCC should create a list of best and worst practices to assist USF participants and reduce fraud.

This publication is intended to provide clients with information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.

This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.