The Federal Communications Commission relies, in part, upon what's called the Universal Service Fund (USF) to subsidize the deployment of high-speed Internet network infrastructure in rural and other high-cost areas where private investment is more difficult to justify. The USF subsidy program, funded by mandatory surcharges added to all consumer bills, was created at a time when communications policy efforts focused primarily on promoting competition in local voice service. As reform-minded FCC Commissioner Michael O'Rielly recently pointed out in a blog post, one outdated statutory requirement in particular now impedes the development of a more ubiquitous broadband deployment and efforts to close the urban-rural digital divide. 

Specifically, the Communications Act requirement that a broadband Internet service provider (ISP) be designated as an Eligible Telecommunications Carrier (ETC) in order to receive universal service funding discourages the participation of many non-carrier broadband providers such as cable operators, fiber and wireless-based ISPs, and satellite operators, that can reliably connect Americans to the Internet. Congress, by adopting legislation, or the FCC, by exercising its unique authority to forbear applying statutory requirements, should eliminate the ETC requirement in order to maximize the efficient distribution of USF funds.

Back when Ma Bell had a monopoly on local telephone service, the subsidization of service to high-cost areas was accomplished through hidden cross-subsidies, rather than made explicit: all telephone subscribers paid roughly the same amount, and the local Bell Companies themselves reallocated excess revenues generated in population-dense areas to less dense areas where service was more expensive to provide. A major goal of the Telecommunications Act of 1996, however, was to encourage competition in local voice service. As part of that effort, subsidies were made explicit. A portion of all consumers' payments were allocated to the USF, and those funds were made available to carriers willing to serve high-cost areas.

Local telephony is an intrastate "telecommunications service" over which state public utility commissions (PUCs) traditionally have exercised authority. Thus, at the time the Telecomm Act of 1996 was adopted, it made some sense that they would be given, by Section 254(e) of the Communications Act, the power to determine, through the Eligible Telecommunications Carrier designation process, which common carriers were legally, technically, and financially qualified to receive USF dollars.

High-speed Internet access, on the other hand, is classified as an interstate "information service." The FCC exercises exclusive authority over such offerings and imposes minimal regulation. When distributing USF money to facilitate broadband facility construction, the FCC also implements eligibility requirements and other measures to ensure that those funds go only to qualified recipients. The procedures recently adopted by the FCC for its upcoming Rural Digital Opportunity Fund (RDOF) reverse auction, which will distribute subsidy funds to rural areas, demonstrate this. Consequently, application of the ETC certification requirement no longer provides any clear benefit.

Application of the ETC requirement reduces consumer welfare because ISPs not presently subject to common carrier regulation must choose between accepting ETC certification, thus subjecting themselves to state PUC regulatory authority, or remaining free from state PUC common carrier regulation. Many ISPs rationally conclude that the burdens associated with the latter do not justify the former. In his June 18, 2020 blog post, "Removing Unnecessary Barriers and Maximizing Competition in USF Auctions," FCC Commissioner O'Rielly helpfully catalogs a number of ways in which the ETC requirement "serves as a major obstacle for many companies in practice." These include onerous and time-consuming application processes; additional regulations, operational requirements, and costs; future uncertainty; and the threat of expensive litigation. The result is that otherwise qualified broadband providers don't participate in FCC reverse auctions to distribute USF subsidies. This necessarily leads to less efficient use of finite funds and reduced overall broadband buildout.

As Free State Foundation Senior Fellow Andrew Long described in greater detail recently in "The ETC Requirement for Accessing Broadband Funds Should Be Eliminated," the ongoing COVID-19 public-health crisis has highlighted the importance of broadband as a key enabling platform for day-to-day virtual life. This should provide an impetus for eliminating the legacy ETC designation as a requirement for receiving broadband-specific USF funding.

The FCC could eliminate the ETC designation requirement in the context of disbursing USF funding support by exercising its Section 10 authority to forbear applying the statutory requirement. The agency is capable of adopting appropriate service requirements – including the obligation to provide local voice service – and safeguards to prevent waste, fraud, and abuse.

Another possibility is enacting legislation, such as the "Expanding Opportunities for Broadband Deployment Act" that North Carolina Representative G.K. Butterfield introduced on June 11, 2020, or the "Rural Broadband Deployment Act" unveiled on July 2 by a bipartisan group of members of the U.S. Senate and U.S. House of Representatives.

Regardless of the path chosen, jettisoning the Eligible Telecommunications Carrier requirement, at least for purposes of determining eligibility to participate in FCC reverse auctions to distribute Universal Service Fund subsidies, would facilitate more widespread broadband deployment in rural America.