2023 could prove to be a volatile year for the Federal Communications Commission (FCC) as it wrestles with a number of lawsuits concerning its Universal Service Fund (USF) program. Should federal circuit courts rule the USF is unconstitutional, it would harm the households relying on USF subsidies and potentially the future of the Affordable Connectivity Program (ACP), according to New Street Research.
In short, the USF framework is at risk of imploding, NSR’s Blair Levin told Fierce. The firm’s latest note to investors pointed out if one or more of the courts declares the USF illegal and subsequently suspends the program, it would bring about “immediate damage” to the institutions and low-income families depending on those funds. Meaning the FCC will no longer be able to raise money to address USF purposes, said Levin. The USF currently supports four key programs serving different vulnerable market segments: the Connect America Fund, Lifeline, Schools and Libraries (E-Rate), and Rural Health Care.
There are currently lawsuits challenging USF’s constitutionality pending in the U.S. Court of Appeals’ 5th, 6th and 11th Circuits. NSR expects the 5th Circuit to issue its decision before the summer, while the other courts are expected to hear their cases within the next few months.
Without the USF, states would have more leeway in mandating affordable internet pricing. Levin explained some states might require ISPs to offer broadband plans at a certain price point – a court case in New York is currently deliberating this question – but other states might not enforce such a requirement.
And in that case, the FCC might urge ISPs not to cut anyone off from service but without saying how long they must remain connected, Levin went on to say. Such a move would be similar to what the agency did at the onset of the pandemic.
“From an investor perspective, I don’t know if there are any winners in this scenario,” he said. “The question is, who are the losers, how long they lose and how deep are the losses. But the big point I would make is, there will be massive confusion for some period of time.”
The lawsuits would be much more problematic if it weren’t for the federal funding opportunities made available through the Infrastructure Investment and Jobs Act, Levin added. Historically, the USF has appropriated roughly $5 billion per year to facilitate rural broadband deployment. That annual number is “now being dwarfed by huge numbers of federal dollars to solve the capital expenditure problem” of accomplishing that goal.
Even so, the pending 5th Circuit lawsuit is still concerning because the USF funds a number of programs “that are effectively operating expense programs,” including the Lifeline program and E-Rate. Furthermore, Levin said he sees “no signs the FCC is preparing for the possibility of a loss.”
Say the FCC wins all three lawsuits, which Levin said is possible if the plaintiffs give up. There’s still the likelihood that the $14.2 billion Affordable Connectivity Program (ACP) will run out of funding sometime in mid-2024. While nobody knows for certain when that will happen as FCC hasn’t disclosed any information on that, Levin noted “the more people [the FCC] signs up [for the ACP], the sooner it’ll run out of money.” As of January 9, nearly 15.6 million households were enrolled in the ACP, an increase from 9.2 million in January 2022.
Should that happen, Levin thinks it’s unlikely Congress will keep the ACP going, despite the current bipartisan support for the program, due to rhetoric surrounding the debt ceiling.
“When the ACP runs out of money, there will be a Democrat in the White House,” he said. “And I don’t believe it is likely the Republicans in the House will just say ‘it’s a great program we really want everyone on, we should fund it.’”
Another concern is the primary funding mechanism for the USF. The FCC has historically funded the program by taxing “a small portion of the communications network revenues,” Levin explained, and that on its own is a complicated process. Moreover, the traditional telephone subscriber base is shrinking, so the remaining consumers have to pay more in USF contributions.
The FCC has deliberated on what to do with the USF for at least the past year, as the agency in December 2021 issued a Notice of Inquiry regarding the program. Many of the public comments submitted suggested other parties, such as “Big Tech” or broadband providers, contribute to USF.
Last summer, the FCC published a report with a number of recommendations to improve USF, including doubling down on interagency coordination to prevent funding duplication. But Levin said as far as he knows, the FCC “has not done any of those.”
“It’s not for me to say we should charge broadband providers or we should charge big tech companies. You would think that would be a proceeding the FCC would be doing,” he said. “The fact that they’re not doing that suggests to me that the risks are actually increased for investors.”