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How USF Reform Might Affect Colleges and Universities: Some Early Appraisal

For many decades, telephone users served by commercial providers—including campuses—have paid surcharges on their interstate and international long-distance calls. The revenue collected by this “tax,” which was authorized by the Federal Communications Commission (FCC), goes into the Universal Service Fund (USF), which has subsidized rural telephone service and certain other equity-enhancing or socially beneficial services, recently including rural broadband Internet. The FCC appears poised to change how USF contributions are collected. A revised USF formula might be very bad, very good, or perhaps inconsequential for colleges and universities. Effective advocacy requires that we understand how different metrics might affect higher education.

Greg Haledjian commented on the upcoming USF changes in an earlier post, and this is an issue we will continue to track in the EDUCAUSE Policy group. In a forthcoming ECAR Research Bulletin, I analyze data from a recent sample survey of colleges and universities. In this post, I'll highlight some of what that analysis suggests, and once the FCC posts its request for comments, we’ll make sure the word gets out to you.

Universal Service Fund

The FCC, which oversees the USF, lacks statutory authority to include intrastate calls, and perhaps to tax "information services." This is the principal reason that the current USF mechanism focuses on long-distance calls that cross state lines. The current system also does not extend directly to users within private networks, such as those within campuses that operate their own private branch exchanges (PBXes) or other internal telephone systems. Rather, USF fees are levied on the commercial entities that provide interstate and international long-distance, and those entities “pass through” some or all of those levies to the customers they bill directly.

USF Contribution Base & Rate, 2002-2012

The USF is expected to disburse about $8.5 billion in 2012. Each quarter the FCC estimates how much will be spent on long-distance calling subject to USF, and uses that estimate to set the USF contribution rate for the following quarter. Phone companies pay into USF based on that rate, and then pass that expense on to end users such as individual households or organizations that operate their own internal networks.

Here's the problem: people aren't making as many long-distance calls as they once did, or are making them under rate plans not "taxed" by USF. Over a decade, the USF "base," which is approximately the total collected by phone companies for itemized interstate and international long-distance calls, shrank from $19.2-billion in fall 2002 to $16.4-billion in the spring of 2012. Partly for this reason, the USF "tax" rate more than doubled over the same period, from 7.3% to 17.4%. (These figures come from the FCC's quarterly "Public Notices on Proposed Contribution Factors.") Long-distance providers pass their USF "tax" on to consumers inconsistently with the underlying rate: for example, the USF fee listed on my home AT&T landline long-distance bill is 9.6% of my itemized long-distance charge.

The growth of the "tax" and the inconsistent "pass-through" of USF contributions to end users lead most observers to conclude that the current basing of USF fees on long-distance phone calls is unsustainable. This is why USF contributions likely will move to a metric other than long-distance calls.

Campus Networking and Telephony

The median research university in the sample enrolls almost 30,000 students and has almost 10,000 employees, of whom about 2,000 are faculty. The median liberal-arts college enrolls only about 2,500 students, and its 800+ employees include about 230 faculty; for the diverse group of large and medium-sized campuses the medians are about 8,500 students, 1,100 employees, and 350 faculty.

Mean annual spending on external telephony, external broadband connectivity, and cellular services together is about $2.3-million at research universities, while liberal-arts colleges spend $261k and the medium/large group spends $736k. (These figures reflect off-campus connectivity only, excluding the cost of campuses' internal telephone systems and data networks.)

The composition of external telecommunications spending varies across the groups. Research universities spend almost as much on cell phones as they do on regular telephone connections to the outside world, and more on each of those than on off-campus network connections. Selective liberal-arts colleges spend a much higher fraction on broadband and much less on cellphones; for the third category spending splits more evenly among the three networking types.

Composition of Campus Spending on External Communications

In part this is because proportionally more of a research university's campus population is faculty and staff rather than students. The former usually get institutional landline and even cell phones, but students usually do not. Moreover, telephony costs vary more than networking with staff size, since the former involve various "metered" charges (lines and calls, for example) whereas the latter are based largely on capacity. Whatever the explanation, that spending patterns vary across institutional types is important in evaluating potential USF formulas.

USF Contributions

The USF contribution rate at the time of the survey (first quarter of 2012) was 17.9%. This is the percentage that "[a]ll telecommunications service providers and certain other providers of telecommunications must contribute to the federal USF based on … their interstate and international end-user telecommunications revenues." The contribution requirement falls on "telecommunications service providers," which are the "direct contributors" into the fund. 

Colleges and universities, rather than the individual student, faculty, and staff users of campus phones, are the "end users" under USF methodology. It thus is campuses, rather than individuals, that pay USF "pass-through" charges on campus telephone bills. How USF fees are listed on phone bills apparently varies with different vendors. Moreover, vendors appear to use different formulas to calculate how much of USF contribution they collect from customers. Providers may pass along no more than what they pay into USF, but some pass along none or part of the USF contribution. The same is true for other organizations that have their own internal telephone and/or network facilities. (If students are billed directly by outside carriers for phone service, which is increasingly the case as campuses outsource dormitories or certain dormitory services, then students are billed for and pay USF fees directly.)

Not surprisingly, given the inconsistency and inaccessibility of USF rates, the USF "pass-through" charges campuses report vary both from the FCC-specified contribution rate and among institutions. Many institutions report no USF charges—which is plausible if all or most of the interstate calls are covered by some kind of blanket plan. (Equally likely, it might have been hard for them to find USF fees on bills.) About half the institutions in each category report USF fees that are 6-12% of their long-distance charges (which is about the same as my AT&T long-distance bill). Only a few report higher percentages.

Alternative Metrics

Some potential technical criteria for choosing a new USF contribution mechanism are that it

  • depend on metrics readily accessible to those who collect it,
  • robustly accommodate likely technological progress, and
  • resist manipulation, gaming, and subterfuge by end users.

Whether the new contribution mechanism should shift the USF burden from one group to another is a policy choice rather than a technical criterion. In any case, a new contribution should cause such shifts only if they serve the public interest.

The current mechanism based on long-distance calls clearly is failing the second test. Business and technology changes ranging from calling plans to Skype to IP-trunked VoIP have detached long-distance calling from long-distance charges, and other communications mechanisms—email and texting, for example—have replaced calls entirely. Using attributes internal to a household or organization, such as internal network capacity or scope, would fail the first test. Using active telephone numbers as the base, as was favored by a previous FCC Chairman some years ago, would fail the second and third tests: an end user with a large number of assigned phone numbers, such as a university, can easily replace them with a drastically smaller number of trunks and an automated "if you know your party's extension … otherwise spell your party's name" system that forwards calls to internal extensions. (Of course, this "gaming" would yield potential benefits to others, since it would release blocks of phone numbers for reassignment.)

Evaluating Alternatives

Consider the alternative favored by the past FCC Chairman: setting USF contributions as a fixed amount per telephone number per month. That proposal called for a USF contribution of $1 per month per telephone number; today a rate of $1.64 would hold the typical household harmless—that is, keep its USF fees at their current level (I’ve somewhat arbitrarily used my own household as benchmark, since our one landline, cable Internet, and two cellphones are reasonably typical).

If the $1.64/number/month rate were to apply to higher education, the typical research university (which has over 20,000 phone numbers) would pay over $400,000 in USF fees, compared to about $24,000 today—a 20-fold increase. The increase would be proportionally larger for selective liberal-arts colleges, and almost as much for large and medium-sized campuses.

From higher education's perspective, using phone-number counts to set USF contributions is a terrible proposal. It would be comparably terrible for any other organization with many telephone numbers. In fact, using phone numbers even penalizes small organizations, whose USF contributions would double. It's just a bad idea. To illustrate an equally problematic option with the opposite effect, consider basing USF fees simply on how many physical network links a household or organization has. My typical household has four: telephone landline, cable broadband, and two Internet-enabled cellphones. A USF contribution rate of $1.23 per month per network link would hold my household harmless.

Unlike the phone-numbers proposal, charging the same per link regardless of its capacity would benefit higher education and other large single-campus organizations. The average research university would pay $48/year based on its 3.3 physical links, and the other two higher-education categories would pay even less. Even a small entity such as EDUCAUSE's Colorado office would pay slightly less.

Under this obviously and infeasibly simplistic plan, overall USF collections from households would have to increase dramatically to compensate for reduced contributions from large organizations, one of many reasons simply counting links is as bad an idea as counting phone numbers. A hybrid approach based on links, but scaling the per-link cost to capacity (that is, for example, charging more for 100Mbps links than 1Mbps links), could mitigate this problem, but if carried to an extreme it could become a charge on link capacity, which would shift costs in the other direction, from households to large organizations, and so become a bad idea itself. The Devil (or God) is in the details.

Looking to the Future

No formula can both treat all institutions and households exactly as the current formula treats them. Indeed, it may make sense for the revised formula to increase contributions from some users. Whatever the redistribution, it must be transparent, serve the public good, and result from open discussion and comment among those affected by it. Moreover, although simplicity is an obvious desideratum, it will prove elusive.

Assessing the overall redistributive effect of proposed USF changes requires data on all major categories of payors, not just on a few categories within higher education, households, and small organizations. With such data, estimates such as those from our higher-education survey could help deliberations give USF a firm financial foundation for the future.