WASHINGTON. D.C. – The Department of Agriculture’s Rural Utilities Service’s (RUS) continuing practice of underwriting new broadband loans based on the expectation of existing – and even increasing – high-cost Universal Service Fund (USF) subsidies rewards inefficient spending and conflicts with meaningful reform of the universal service system by the Federal Communications Commission (FCC), a new study says.   The study, which was commissioned by the National Cable & Telecommunications Association (NCTA) and prepared by Jeffrey Eisenach of Navigant Economics of Washington, D.C., recommends that RUS should temporarily suspend new loans to recipients of USF funds and stop leveraging USF support to qualify applicants for RUS loans.

The FCC is nearing completion of efforts to reform the USF regime that are intended to address some of the inefficiencies in the high-cost support program and ensure that subsidies are targeted in the most cost-effective manner.   The study demonstrates that these long overdue reforms should not be deferred or diluted out of a concern that reform would adversely affect RUS loan programs.

The study concludes that RUS’ current practice of leveraging USF subsidies is flawed and one result is that RUS loans are increasing the inefficient incentives inherent in USF.  For instance, in the most recent round of RUS funding, the study shows that RUS is essentially relying on the expected increase of USF subsidies to pay down 78 cents of every dollar borrowed from the RUS program.

“By tying RUS loans directly to USF support, RUS effectively creates a vicious circle:  The more a firm invests in inefficient infrastructure, the more it gets in USF support; the more it gets in USF support, the more it can qualify for in RUS loans; the more it can qualify for in RUS loans, the more it can invest; and, the more it invests, the more it gets in USF support,” the study says.

In light of the potential for significant changes to the USF program, the study finds that, “The only reasonable assumption for the RUS to make at this stage is that USF revenues can no longer be counted upon to service future loans, whose maturities stretch two decades or more into the future.” 

The study recommends that after the FCC concludes its USF reform proceeding and new rules are in place, Congress and RUS can reassess whether a loan program continues to be needed and if so, how that program can be better coordinated with the USF program to eliminate the problems inherent in the current RUS regime.

The study also finds that the FCC should not delay USF reform based on concerns about the effect on the RUS loan portfolio.  The study identifies a variety of factors that are likely to reduce the immediate consequences for RUS borrowers.  In particular, with a reasonable transition period, existing loan recipients should be able to adjust to any cuts that do eventually occur.

“The RUS broadband loan program has been troubled throughout its history, with independent auditors repeatedly criticizing the agency’s failure to target funding to areas without pre-existing broadband services,” the study says.  “RUS loans also exacerbate the underlying inefficiencies in the USF program, effectively rewarding companies that make excessive investments in unnecessary infrastructure.  With USF reform now nearing the finish line, it is likely that the flawed criteria that have heretofore allowed RUS borrowers to fund uneconomic loans with increased subsidies from the FCC will soon be reformed.”

The complete study can be viewed here.