Policy Documents

Federal and State Universal Service Programs and Challenges to Funding

United States General Accounting Office –
February 1, 2002

Title 1 of the Communications Act of 1934 sets forth the nation’s telecommunications policy, including making communication services available “so far as possible, to all the people of the United States.” Early efforts by FCC, state regulators, and industry to promote universal service generally began in the 1950s.1 At that time, increasing amounts of the costs associated with providing local telephone service were recovered from rates for long distance services. This had the effect of lowering local telephone rates and raising long distance rates, which was intended to make basic local telephone service more affordable. Because American Telephone and Telegraph Company (AT&T) provided both nationwide long distance service and local telephone service to approximately 80 percent of the nation’s telephone subscribers, universal service was largely promoted by shifting costs between different customers and services.

Following the divestiture of AT&T’s local telephone companies in 1984,2 FCC made several changes to universal service policy. First, the costs associated with local telephone service could no longer be shifted internally within AT&T. FCC therefore implemented federal access charges—fees that long distance companies pay to local telephone companies to originate and terminate long distance telephone calls over the local telephone network. Access charges were intended to not only recover the cost of originating and terminating long distance telephone calls over the local telephone network, but also to subsidize local telephone service. Second, FCC initiated several federal programs that targeted support to low-income customers to bring the rates for basic telephone service within their reach. At this time, federal universal service programs were for the most part funded through charges imposed on long distance companies.

Twelve years after divestiture, the Congress made significant changes to universal service policy through the Telecommunications Act of 1996. First, the 1996 act provided explicit statutory support for federal universal service policy. Second, the 1996 act extended the scope of federal universal service—beyond the traditional focus on low-income consumers and consumers in rural and high-cost areas—to include eligible schools, libraries, and rural health care providers. Third, the 1996 act altered the federal mechanism for funding universal service. Every telecommunications carrier providing interstate telecommunications services was required to contribute to federal universal service, unless exempted by FCC; and their contributions were to be equitable, nondiscriminatory, and explicit. In addition, FCC was authorized to require any other providers of interstate telecommunications to contribute if the public interest so requires. Contributions from both sources are deposited into the federal Universal Service Fund, from which disbursements are made for the various federal universal service programs.

Both the federal and state governments implement universal service programs. This dual federal-state implementation of universal service arises from sections 2(b) and 254 of the Communications Act of 1934.3 At the federal level, FCC has issued numerous orders to implement the universal service reforms enunciated in the 1996 act. The Universal Service Administrative Company (USAC)4 administers, on behalf of FCC, the day-to-day operations of federal universal service programs, although FCC retains responsibility for overseeing the operations of the programs and ensuring compliance with its rules. At the state level, public utility commissions generally regulate local telephone rates and rates for intrastate long distance services. Additionally, these commissions implement many universal service programs initiated at the state level.