USF Contribution Factor Is Expected to Leap, but Reform Could Prove Difficult

The projected contribution factor would be the highest ever for the USF, analyst Billy Jack Gregg noted Saturday in an email. “USF revenue projections are due out at the beginning of next month, at which time it will be possible to accurately calculate the assessment factor” for Q4, he added.

Projected USF demand is $2.253 billion, $139.6 million more than Q3, an increase of 6.6%, Gregg said. The increase is driven mainly by rising demand for the high-cost fund of $126.1 million, he said. Smaller increases in the rural health and schools and libraries programs “are partially offset by a small decrease” in Lifeline.

It's expected that “rates will continue to reach record highs,” said Christopher Ali, professor of telecommunications at Penn State University. “We will almost certainly see a new round of calls for USF reform with these numbers,” he told us. “Whether it will provide the groundswell for actual legislative reform on USF, I am not convinced.”

USF reform is “unlikely in the near term,” New Street’s Blair Levin said in an email. FCC Chairman Brendan Carr, “who has outstanding political antennae, has basically said nothing about USF reform,” he said. “That is odd because it is the largest program the FCC operates.”

Levin noted that as a minority commissioner, Carr spoke repeatedly about USF, writing editorials urging Congress to change the law to allow the FCC to assess tech. Carr “could be very effective lobbying Congress to do so if he so chooses,” Levin said. His silence, “and focus on other issues, suggests to me that he is likely adopting the strategy [of past chairs] of kicking the can down the road.”

Kristian Stout, innovation policy director for the International Center for Law & Economics, said “every new bit of news on USF points toward only greater pressure to reform the system.” But what will happen and when is “anyone’s guess, as there are so many other political footballs in play."

Free State Foundation President Randolph May said in an email that he used to think “there might be some threshold at which the USF fee might provoke a consumer backlash that would provide an impetus for reforming the broken universal service regime,” but it seems as though consumers don’t even notice the USF fee line item on their bills or don’t understand what it is.

Since the contribution factor is a “regressive tax that adversely impacts lower-income consumers disproportionately,” May said, he would think consumer groups would press for change. “Right now, the existing USF regime is characterized by various rent-seeking interests, with substantial financial stakes in the current system.” He isn’t optimistic Congress “will adopt meaningful reform any time soon -- but it should," he added.

Evan Swarztrauber, principal at CorePoint Strategies and a former aide to Carr, said the ever-increasing contribution factor “will continue to spur interest for reform in Congress, both on the distribution and contribution sides of the equation.” As huge tech companies spend tens of billions of dollars to develop AI, “Congress should look at cloud services as part of a forward-looking mechanism to ease the burden on consumers while ensuring the companies that benefit most from USF are contributing to the program's mission.”

Boston College law professor Daniel Lyons said Monday in an American Enterprise Institute blog post that he remains “convinced that the simplest and most elegant solution to contribution reform is simply to fund universal service through appropriations, placing it as a line item in the federal budget like most other assistance programs.” That “would bring much-needed transparency to the program, allowing more direct congressional oversight of a program that has often been criticized for fraud, waste, and abuse, and would eliminate the current regressive surcharge regime.”

The recently relaunched congressional USF revamp working group should consider a more “comprehensive reform” package beyond contribution change, Lyons said. A 2023 proposal from Senate Commerce Committee Chairman Ted Cruz, R-Texas, for Congress to overhaul individual USF programs, including Lifeline, “is well taken,” given that Congress created the current iteration in 1996, he added. “For over 25 years, the [FCC] has steadily pounded square pegs into round holes, trying to modify this 1990s framework to fit modern needs. The time is long overdue for Congress to overhaul” it.

The factor doesn’t always increase. Most recently, it declined slightly from Q2 to Q3 of this year. In 2023, it fell from 32.6% in Q1 to less than 30% the following two quarters.