Radical Idea to Restructure USF Funding

[12/02/15 – Note: this article was published on August 18th, 2004. The original HTML is not working, so it has been reposted]

[Editor’s Note: Many thanks to Mr. David Irwin, Managing Partner, Irwin, Campbell & Tannenwald, PC and Director of the Institute for Communications Law Studies at the Catholic University Law School, for his insight and assistance with this article. His comments regarding the telco industry are always very valuable. Come to the IP @ Telecom 04 conference to hear him provide an overview of what is required from a regulatory standpoint for telcos to add video services.]

One potential solution to the USF conundrum would be to drop the distinction between Information and Telecommunications services and levy a fee on all services that provide voice communications. This sounds great, but is it possible? At the various conferences I have recently attended, experts have questioned whether the U.S. can regulate telephone services originating from outside its borders and whether it is even possible to identify voice traffic, given that these services may use encryption and other means to obfuscate the content.

I have heard from many, including FCC Chairman Michael Powell when he spoke at Supercomm, that the new IP networks are allowing services to be decoupled from the infrastructure. With IP, it is no longer necessary to have a network tuned to a specific application or service, as multiple services can ride on the same network. Many of these same experts have suggested that the Universal Service should be supporting infrastructure and not services.

[dropshadowbox align=”right” effect=”lifted-both” width=”auto” height=”” background_color=”#ffffff” border_width=”1″ border_color=”#dddddd” ]The TV Tax

The fee imposed by the British government is not on the service, but on the end point of the infrastructure. They have a staff of 1,200 people constantly monitoring and ensuring individuals are paying their yearly license fee. This staff also receives the names and addresses of individuals purchasing new televisions or PCs outfitted with tuner cards and they correlate that data with license fee information. For a humorous look at some of the excuses people use as to why they did not pay their television licences, please click here.[/dropshadowbox]So, my dream took me across the pond, to merry old England, and to their television experience for a possible answer. In England, there is a “Television Fee”. People pay a license fee of 121 pounds ($221, U.S.) and 40.5 pounds ($74, U.S.) per year (exchange rate) for color televisions and black and white televisions, respectively, for the privilege of watching television. This practice started in the 1920s with the advent of radio and has been a funding mechanism for the BBC ever since.

A variation on this idea could provide an interesting alternative for funding USF. That is, what if every single device sold, that had the potential to provide a communications function, were assessed a USF fee? Included in this would be any PCs or any device with a microprocessor (e.g. it could look like a toy, but it might upgradeable to an IP phone). To make definitions easier and to prevent arbitrage, it would probably be easier to define any products containing an electronic component as candidates for this fee.

This may sound ridiculous at first, but, as was pointed out to me by Kurt Scherf, Vice President of Research at Parks Associates, the European Union apparently has a blank media fee for CDs and DVDs to compensate artists hurt by illegal downloads. These fees have even extended to the recording equipment as well.

According to Jeff Joseph of the Consumer Electronics Association, the 2004 revenue for sales from manufacturers to dealers is estimated to be $101 Billion dollars. Add to that figure, revenues from business to business applications and from other industries that incorporate electronics in their products (how about the automobile industry) and the $5.5 Billion USF requirement becomes a very small percentage of the overall sales.

There are many questions about this approach, such as

  • Should the fee be imposed at the manufacturer, dealer or consumer level?
  • Would the fee be a straight percentage of revenue (if so, how would it account for those cases where a piece of consumer electronics is included for “free” as part of the cost of service)?
  • Would this be potentially more difficult for USAC to administrate and would it lead to increased USAC expenses, given the many players in the world of consumer and business electronics.
  • Would something like this be politically possible, even though, theoretically, there would be no increase in revenue generation?

Probing a bit on this last question, I asked former FCC staffer and prominent Washington Lawyer, Mr. David Irwin of Irwin, Campbell & Tannewald, P.C, whether a change like this could be affected by FCC order or whether it would require an act of Congress. Irwin indicated that, “Certainly the fee per “whatever” would require Congress to amend the Act. So would the definitional integration of Telecom and InfoServices.”

Many are predicting a rewrite of the Telecom Act in the 2006/2007 timeframe and changing the USF funding mechanism could conceivably be part of that rewrite. The biggest question is whether such a proposal could survive politically, as manufacturers would most likely fight this new fee as an unfair burden on their products.

Conclusion:

In theory, the approach suggested in this article for collecting USF funds could eliminate the regulatory arbitrage that exists today with VoIP service. It is a variation on a method that has worked in England for over 80 years for funding what they consider to be a public good, the BBC. The political viability of this approach becomes the 5.5 billion dollar question.

Please weigh in with your thoughts, comments, suggestions, dreams, nightmares, etc. on this topic.

To read part 1 of this article, an overview of USF, click here.

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