Rural Broadband Jeopardized by USF Legal Threats

Episode ID S3E01
January 25, 2024

The Universal Service Fund, an FCC program that ensures connectivity in rural America, is being challenged in U.S. federal circuit court. The outcome could be disruptive for rural telecom operators who rely on USF support. In this episode of All Day Digital, the former executive director of the FCC’s National Broadband Plan, Blair Levin, explains the situation and urges rural communities to be informed.


Blair Levin: If the Fifth Circuit rules on the big question by saying that the FCC does not have power, then the next question is when does that ruling go into effect? Because, remember, we'll have at least two and maybe three circuits saying, that's fine, keep doing it. I think the Fifth Circuit will stay their own opinion, by which I mean they won't force the FCC to stop collecting the money. But if I'm wrong, it's a really big problem to stop collecting money anywhere.

Jeff Johnston: That was Blair Levin, senior fellow at Brookings Metro and former executive director of the National Broadband Plan and chief of staff to FCC chairman Reed Hundt, about where things stand with constitutionality of the Universal Service Fund, currently being challenged in court.

Hi, I’m Jeff Johnston and welcome to the All Day Digital podcast, where we talk to industry executives and thought leaders to get their perspective on a wide range of factors shaping the communications industry. This podcast is brought to you by CoBank’s Knowledge Exchange group.

The constitutionality of how the FCC collects and distributes money for telecom support purposes is being challenged in court by conservative nonprofit group, Consumer Research. The outcome of this case ranges from status quo to potentially significant and disruptive issues for rural telecom operators who rely on USF support.

Blair is one the most knowledgeable and experienced telecom policy experts in the country, so I was thrilled when he agreed to share his thoughts on where things currently stand and what to expect should the courts rule in favor of the plaintiff.

So, without any further ado, pitter patter let’s see what Blair has to say.

Blair, welcome to the podcast today. It's an absolute pleasure to have you here, thanks for being on.

Levin: Thank you very much. It's a pleasure to be here.

Johnston: Wonderful. I'm super excited to talk about the USF program with you today. It's I think a very relevant topic in what's going on right now in the courts. Has potential pretty significant implications to a lot of rural operators so we're obviously very interested in that. Again, really excited to have you here to talk about this very timely topic. But before we get into some of the specifics around what's happening in the courts today and what that could potentially mean, perhaps you can just give our listeners just a very high-level overview of the USF program.

Levin: The Universal Service Program has its roots deep into the history of telecommunications. That is to say, when you go back to the early days of AT&T, the first antitrust case between AT&T and the Justice Department was settled when AT&T agreed to connect every other phone company. The idea really was that you would have everybody get service. Everyone in the United States would get service and that was absolutely part of the deal. It was done in the early years by having a lot of business. We really just had one big phone company and then a lot of small ones. It was really done by a bunch of subsidies where urban people would subsidize rural class because it's more expensive to serve in rural areas. Businesses would subsidize consumers and long-distance users would subsidize local users. It was done through regulation at the state level and at the federal level but not done in a very explicit manner. The '96 act comes around and the fundamental ideas we're going to have a lot more competition but we still need the principle of universal service. That is to say, we want networks everywhere. We want everybody to be on them and to have the ability to use them.

The Universal Service Program, as it's designed by the FCC pursuant to the rules that Congress gave it, was designed to raise funds in a similar way to subsidize largely rural people.

It was often thought of as there are three big programs, the biggest is what used to be called the High-Cost Fund. It was completely serving rural America where you're subsidizing those telephone providers who serve areas where the costs are higher because your longer distances and spreading the cost among fewer people.

The second program is the Low-Income Program started under the Reagan administration but again, reiterated after the '96 act called the Lifeline Program to make sure everybody can have access to the network for 911 or whatever. Then the third one which was added in '96 was the so-called E-rate Program to make sure that there were certain critical institutions we wanted to be connected to the then very young internet, particularly schools, libraries, healthcare facilities and that's the essence of the E-rate Program.

There's always a question of who do you tax and what do you tax and all these things. These issues come up all the time. I might note that in 2010, the FCC, or I should say the team that wrote the National Broadband Plan, which I was executive director of, suggested that universal service should now be reoriented away from voice and toward broadband.

That raises a whole bunch of other issues and things like that. But it's fundamentally a similar notion which is we want networks everywhere, we want everyone on them, and we want to improve the way we deliver essential facilities. The central services I mean over the network. The voice network by itself couldn't deliver healthcare, education, certain public safety uses, broadband can, so that's where we are today.

The fundamental principle of universal service remains the same. Let me just close by one thing, what the National Broadband Plan in 2010 said basically, I can summarize 400 pages just this way: Networks everywhere, everybody on, improve how we deliver services using broadband. No one to my knowledge really disagreed with it but it, was not a priority until March of 2020. There was something that happened in March of 2020. And as I often said, it turned out that COVID was a much better evangelist for universal broadband than the executive director of the National Broadband Plan, meaning me.

I think it was when COVID hit that everybody realized, "Oh my God, we really do need networks everywhere and everybody on and we need to improve how we deliver these essential services."

Johnston: One does what one can. Right? [laughs]

Clearly, it's a very important mechanism to ensuring connectivity and service to high-cost areas and really, and correct me if I'm wrong, Blair, but in a lot of cases without USF support, operators in sparsely populated rural communities simply wouldn't be able to offer service because the economics just wouldn't pencil out. You'd just be bleeding cash every month. Is that a fair statement?

Levin: That's right. It's normal infrastructure economics where you have high capital costs, low incremental costs. You have the high capital cost of building the network. Once you've built the network, the incremental cost of serving is very low. If it takes $10 million to build a network and you're only serving 10 families, pretty difficult to make the economics work. Congress has, on a number of occasions, whether it be with electricity or water and sewer, said, "We want everybody connected to this now essential service." It's not a gift to rural America, but this is a very clear subsidy to rural America paid for by taxpayers in the rest of America.

Johnston:  That's a good point. Great background. A great segue into what I wanted to spend most of the time with you today on, which is where things stand today with the program and specifically where things stand in the courts because I understand it there's been some challenges made by Consumer Research, that has challenged the constitutionality of how the USF program is currently structured through the FCC.

There's some uncertainty around how this all could play out. Then as we just mentioned, it's a critical mechanism to ensuring connectivity in rural America where the economics don't pencil out. Maybe you could just bring us up to speed on the litigation that's going on right now.

Levin: Consumers Research, which is, as far as I can tell, a very well-funded outfit that represents the ideological views of its funders who I don't know, but are generally anti-regulation. The lawyers who are very, very fine and able lawyers, they're very good, have argued that the way the FCC collects money and distributes it and uses an administrative corporation called Universal Service Administrative Corporation, all of those are unconstitutional at some level.

They represent an illegal or an unconstitutional delegation of power from Congress to the FCC and that Congress should be making these decisions. They filed in four circuits. They lost in the 11th Circuit. They lost in the Sixth Circuit and those are very conservative circuits. They will argue the case in the DC circuit, which is a more liberal circuit, later this week as we're recording. I believe they're probably going to lose, but the argument hasn't occurred and we will see. Then in the Fifth Circuit, they lost with the three-judge panel.

Then they appealed for a rehearing in what's called “en banc,” which means all of the judges of the circuit rule on it. In order to go en banc, you have to get a majority of the judges to agree to hear it, and that means that there's a majority of the judges in the Fifth Circuit who believe there is some merit to the case. They may not rule for the plaintiffs or the petitioners, but they believe there's some merit, otherwise they wouldn't have taken it up. That argument occurred in the fall. It is my view that you can't tell everything by the oral argument, but based on the oral argument, the FCC is going to lose in one of two ways.

They're either going to lose on a small point, which is the relationship between the FCC and this Universal Service Administrative Corporation called USAC. In which case, the FCC can relatively easily fix it based on what the court says. Or they're going to lose on a big thing, which is to say the FCC should not be allowed to collect money the way they're collecting it, and that may cause a dramatic restructuring.

This is in the context in which the need for universal service reform is very large anyway. Even if there wasn't a court challenge, there would be a need to reform it. There are two fundamental reasons why. One is, as Congress recognized, in light of what it was doing with the infrastructure bill, the need for universal service has changed.

The second problem is the fundamental economics are flawed, which is it's funded by attacks on a shrinking revenue fund whereas as we switch from voice to broadband, the needs go up. If you have a shrinking revenue base and a growing need for funds, you got a big problem.

I'm obviously being critical of a Democratic-led FCC. I would be more critical of the previous FCC led by a Republican where the so-called contribution factor, which is the assessment rate on the funds that can be taxed or assessed, I should say, that doubled in the four years that he was there. He never talked about it. He never wanted to do anything about it. He basically just said, "I'm going to kick that can down the road. That's up to my successor." The only time he talked about it was in January of 2021 in his goodbye speech. He said, "Yes, we probably should do something about that." There has been a lack of leadership under the last two FCC chairs, which I believe is very problematic. Even if you didn't have a litigation, you would have those fundamental economic challenges.

Johnston: I just want to go back to where we stand in the Fifth Circuit right now. You mentioned two potential outcomes in your opinion. One seems somewhat innocuous, I guess with, I would love to get a little bit of detail between USAC and the FCC and then of course, something far more problematic if in fact this is deemed unconstitutional and it gets kicked back to Congress.

How does the Chevron deference doctrine, is that playing a role in this as well in terms of the FCC's ability to interpret not real clear statutes which I think this falls into? Does that play a role in this and what's happening in the Fifth Circuit right now?

Levin: As a lawyer, I don't think Chevron will play a role in whatever the Fifth Circuit decides. I think the Fifth Circuit, in their minds, has already disregarded Chevron anyway. [chuckles] Just for your listeners, the Chevron doctrine was a case involving the EPA under Ronald Reagan which was then led by Neil Gorsuch's mother and the Natural Resources Defense Council came in and said, "EPA interpreted what Congress said incorrectly because they were too lenient." The court said, "Oh, actually, we should give deference to the experts at the EPA." This was a conservative court giving deference to a conservative EPA.

What has happened is that the conservatives have decided, no, we don't want to give deference because there are too many agencies that might have liberal leanings. Now we want to not give those experts such deference and we want to give the power to the courts. What they're saying is, no, we want to return the power to Congress. I'm sorry. Some arguments are made in good faith, like the Consumer Research argument, I think it's being made in good faith. I disagree with it but I think it's made in good faith. The argument that we want to return power to Congress, I really don't believe is being made in good faith. I think it's ludicrous.

Congress always had the power. If they choose not to exercise it, it's because they chose not to exercise it. I don't believe it will affect this case. This is really more about delegation, intelligible principles, some other things. They're all part of a piece, and the piece is for the last 40 years, businesses largely affected by environmental regulation, but not just, have wanted to limit the power of the federal government to do anything. Know that if you limit the power of agencies and you put it in the hands of the Congress, actually nothing happens.

Johnston: Right. Especially more so now than ever, right? Let's just play this out a little bit. Let's assume scenario two would be that the Fifth Circuit deems USF in its current form as unconstitutional. What happens next? Do you see this going to the Supreme Court? Do you think they would hear this?

Levin: If the Fifth Circuit rules on the big question by saying that the FCC does not have power, then the next question is, when does that ruling go into effect? Because remember, we'll have at least two and maybe three circuits saying, "That's fine, keep doing it." I think the Fifth Circuit will stay their own opinion, by which I mean, they won't force the FCC to stop collecting money. But if I'm wrong, it's a really big problem. Do you stop collecting money anywhere? Do you stop it in the Fifth Circuit? Do you just screw the states of Texas and Oklahoma in terms of USF? I think it gets stayed pending a Supreme Court. This is a classic case for the Supreme Court to take up because there'll be a split in the circuits.

I think the Supreme Court will take it. The problem, however, is that there is a group at the Supreme Court, particularly Gorsuch, Alito, and Thomas, who are very sympathetic to eliminating the power of federal government agencies. This is not a great case for them. This is a bad case for them. Why? Number one, industry actually is in favor of the program. When you look at it, and other people have documented it, the Roberts Court is just-- if it's business against government, business wins. But if you have business and government on the same side against this theoretical lawyerly argument, it's tougher. The court may not really want to take it in that way, but I think they probably will. They'll probably be forced to.

Johnston: There's a lot going on. I'd love to maybe just shift a little bit back to the report that Congress asked the FCC to do. Did they not talk at all about contribution reform then? Because you often hear about there's bipartisan support to look at big tech as a potential source of USF funding, considering they're making a lot of money off the internet, but they don't pay into the USF fund. That is an alternative to what we currently have today. Any thoughts on that? I think there's been some legislation proposed to that effect if I'm not mistaken.

Levin: The report did talk about the need for contribution reform. It didn't do any analysis. It just said, "Some people have said this, some people have said that." Great. [chuckles]

Again, a “gentleman’s C” is about the best one could do. There has been legislation towards that goal. Brendan Carr, a Republican commissioner, has been absolutely adamant that the tech guy should be taxed. I don't have a strong point of view on that. The most famous thing ever said about taxes at least in my opinion, was said by the head of the tax committee in the Senate, Russell Long, who said, the basic philosophy of tax legislation is don't tax you, don't tax me, tax the fellow behind the tree. In other words, everybody's in favor of taxing somebody else.

Brendan, who's a very smart guy, is very much in that tradition that he doesn't want to tax the companies that he regulates. He wants to tax somebody else. Okay, fine. Look, the argument that the tech companies made a lot of money on the internet, so they should pay to connect the internet to everybody is not crazy.

I would just note that everybody made money on the internet. In other words, the economy is stronger. There's all kinds of things we can do. God knows that if the internet were not what it was when we hit COVID, we would've had an economic collapse similar to the Depression. Not everybody, lots of people had to still show up for work, but a very significant portion of the economy was able to do their work from home. Look, I wish they had started a proceeding on it. I wish the tech guys had been allowed to weigh in. I'd like to see a serious debate.

One of the things that always cracks me up is people will ask me these certain things and they're like, "What should we do about this?" I go, "I don't know." They go, "Wait a minute. Didn't you do the National Broadband Plan?" I said, "One of the things about the plan was we actually gathered the data before we made recommendations."

Johnston: What a novel idea.

Levin: No one’s gathered the data here, I don't really know. I just know that if in your district you have a lot of telephone companies and you don't have tech companies, it's pretty simple to say, "Let's tax the tech companies." But that's not really a policy argument. That's totally a political argument. That's a possibility. If I were the tech guys, I'd be a little bit worried about it.

Johnston: Look, we've covered a lot. This has been fantastic, but before we wrap it up, I just want to give you an opportunity to share any closing thoughts or if there's questions I didn't ask that you think are important to cover, would love to hear your thoughts on that.

Levin: Let me close this way. Look, I know CoBank is, if not the most important lender, a major source of funding and financial assistance to rural telephone companies. The fact that we have really good broadband reaching as many people as we do, particularly where it's economically difficult, is a real tribute to your bank and the work that you do. I do want to honor that. I will simply say that I hope that the rural phone companies take these issues seriously and not symbolically. Why do I say that? In 2011, I was invited to debate the leadership of the Rural Phone Trade Association.

Just before the debate started, a member of Congress, this was in Dallas, and he was a congressman, a Republican got up and just gave this rant against all regulation. He said, "We need to deregulate, deregulate, deregulate. We need to deregulate the industry." He got a standing ovation. I got up and I said, "Look, I've spent more of my time on Wall Street than in government so I know a little bit about your economics. If you deregulate the industry, none of you will be here next year, because y'all will be in bankruptcy court. Now, let's debate what we did on the broadband plan."

What I was struck by then was the symbolism, that they were applauding things symbolically. Look, getting connected everywhere is incredibly important, and it was important in 2010, it was important in 1932. It's important now, and by the way, it's going to be much more important in five years. Why? Artificial intelligence. Because so much of what we do will be delivered over the networks that you finance, and other rural phone companies build, and I want to honor them for that. If we continue to engage in this world, there's only two sides, regulation versus deregulation, and the solution is always deregulation. That's just dumb. That is a recipe for disaster.

I guess my plea is, these are important issues. I hope people study them seriously. I certainly don't have all the answers. I don't think anybody in Washington does, or anyone else. It would be nice to return to an era as we did in '96, by the way. Very serious people on both sides, trying to seriously grapple with very dramatic changes, and do it in a way that the American public, the American economy, and all people have greater opportunities. That would be my closing message.

Johnston: Well said. I'm an optimist by nature, and that sounds like a great state to be in. I truly hope we will get there and get past these issues. Because as you mentioned before, COVID has taught us how incredibly vulnerable those living in rural America are, and were without connectivity. As you point, I agree with you 100%, come artificial intelligence, that's just going to be yet another major reminder to those living in rural America who don't have connectivity that they need it and need it fast, so I'm with you on that one.

Well Blair, thank you, this was fantastic. I really, really appreciate you making time today. Thank you.

Levin: Thank you.

Johnston: A special thanks goes out to Blair for being on the podcast today.

Clearly this is a very important case for those relying on USF. A ruling in favor of Consumer Research will create more questions than answers, and put many rural operators in a precarious position. But as Blair mentioned, we also have this pretty big outstanding issue of contribution reform that must be addressed as well. The current structure seems unsustainable and given how critical the USF program is to rural America, it’s important for Congress to make the necessary statutory changes to ensure its continued success.

Hey thanks for joining me today and watch out for the next episode of the All Day Digital podcast.

Disclaimer: The information provided in this podcast is not intended to be investment, tax, or legal advice and should not be relied upon by listeners for such purposes. The information contained in this podcast has been compiled from what CoBank regards as reliable sources. However, CoBank does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this podcast. In no event will CoBank be liable for any decision made or actions taken by any person or persons relying on the information contained in this podcast.

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