The European Union is debating how to finance upgrades to its Internet infrastructure. Historic continental telecom operators are demanding that the biggest bandwidth users—streaming services and cloud companies—pay a surcharge for the costs of building and operating their networks. In their opinion, data-hungry companies consume a disproportionate share of Internet traffic and should pay extra for it. 

A main argument is, “look, the US already practices such a surcharge – it’s called the Universal Service Fund.’’

That’s false. 

In this three-part series, CEPA Senior Fellow Fiona Alexander, a former senior official at the US Department of Commerce, explains what the Universal Service Fund does – help underserved communities – and what it does not do – subsidize telephone company balance sheets.

Unlike European telephone operators which are requesting direct payments from large tech companies, US telephone companies finance the US fund themselves, with an independent body spending the money raised on connecting low-income and hard-to-reach customers, as well as connecting schools, libraries, and rural health care facilities.

A European Internet connectivity tax, in contrast, would go directly to the telephone companies, without necessarily enhancing connectivity and improving service to European consumers.

This first article examines the US Fund’s history.

Although the first American telephone line, switchboard, and exchange was completed in 1878, telephony took a long time to spread. The 1900 US census reported 76,212,168 American citizens – and only 600,000 telephones. Less than 1% of the US population was connected.

Several companies ran competing networks – and calls could not connect between them. Almost all telephones were in cities. Over the years, American Telegraph and Telephone Company (AT&T) absorbed most of these local rivals to allow connections between different networks. It focused investments on the lucrative urban centers and long-distance markets. Rural America was left unconnected.

In 1934, the Communications Act judged telecommunications to be a form of interstate commerce, giving the federal government the power to supervise the industry. A new Federal Communication Commission (FCC) was charged with regulating radio, broadcast, and telephone communications.  The Act stipulated that communications service must be available “nation-wide” and “with adequate facilities at reasonable charges.”

The universal service concept was born. Postal carriers provided the inspiration for this universal service requirement. Despite the cost to deliver mail to rural, remote areas, the government made it a political priority to ensure that postal service should cost roughly the same in the countryside or city.

Before 1934, the US government focused on interoperability between phone systems. After the Communications Act came into force, the focus turned to expanding coverage. The Act required industry to make their services universally available, regardless of geography, and for a reasonable price.

The FCC received new powers to achieve these goals. It took funds from dominant long-distance telecommunications carriers and gave them to the local telephone companies. The system was called ‘intercarrier compensation.’

The infrastructure funding proved successful. Telephone service spread. By 1960, 80% of US households had a telephone. By 1980, 93% were connected.  

In 1982, the government ended AT&T’s national monopoly on long-distance phone lines. Regional companies, known as “Baby Bells,” emerged, subject to competition and regulated local markets. The Baby Bells raised local calling rates, while AT&T’s long-distance rates fell due to increased competition from new long-distance carriers such as MCI. Although the FCC ordered Baby Bells to allow access to their networks, long-distance carriers had to pay for this access by subsidizing their local connections.

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In 1996, the US Congress passed a significant revamp of the Communications Act. It allowed local Baby Bells to compete in the long-distance market while forcing them to open their local markets. The goal was to spur additional competition.

Rural customers were not overlooked. To ensure that they continued to receive service, the 1996 legislation reformed the Universal Service Fund. The FCC set fees that telecom carriers would pay based on a percentage of revenue from interstate and international phone calls. A non-profit called the Universal Service Administrative Company collected the funds and administered the FCC programs.

Importantly, and in contrast to the ideas floated today in Europe, the funds collected in the US were distributed in a system set up by the FCC and not directly into the accounts of the telephone companies.  

Instead of only subsidizing rural telecommunications, as had occurred before 1996, the FCC expanded the scope of its universal connectivity goal to include increased connectivity in public buildings such as schools and libraries. Additional programs focused on helping low-income subscribers, including those in tribal lands, pay their telephone bills.

The world of telecommunications was about to undergo a fundamental revolution. Mobile phone technology required the construction of wireless cellular networks. The invention of the Internet created a new class of network infrastructure, with corresponding Internet Service Providers.

How would the US fund this new generation of connectivity?

Fiona M. Alexander is a Non-resident Senior Fellow with the Digital Innovation Initiative at the Center for European Policy Analysis (CEPA). She is a Distinguished Policy Strategist in Residence at American University. For close to 20 years, Fiona served at the National Telecommunications and Information Administration (NTIA) in the US Department of Commerce.

Alexander Wirth contributed research.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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