September 2006

FCC Increases “Universal Service” Contribution Obligations for Wireless Carriers and Creates Such Obligations for Voice Internet Providers

Holland & Knight Newsletter
Peter M. Connolly

This year, pursuant to a little known federal program, approximately $7 billion in subsidies will be paid to telephone companies and wireless carriers providing service to schools and libraries, rural health care providers, “high cost” areas and low income recipients. This program, called the federal Universal Service Fund (USF), is administered by the Universal Service Administrative Company, and its rules and policies are set by the Federal Communications Commission (FCC or Commission). The USF program is funded by contributions made by all telecommunications carriers who are free to pass those costs on to their customers. Such costs are usually reflected on telephone and wireless bills as a “universal service” payment. Carriers are required to pay into the USF a percentage, which changes quarterly, of their interstate and international revenues. At present, that percentage is approximately 10.5 percent.

Safe Harbor Percentage Increased

On June 27, 2006, the FCC released an order that makes important changes in the USF program. The FCC has increased the payments that many wireless carriers will have to make to the USF. The FCC has done so by increasing the “safe harbor” percentage that carriers may assume constitutes the interstate and international percentage of their overall telecommunications revenues. Beginning in 1998, the FCC stated that wireless carriers not wishing to measure their “actual” interstate/international revenues could assume that 15 percent of their overall revenues were interstate and international in nature. In 2002, the FCC increased this percentage to 28.5 percent and in the recent order, the FCC increased the percentage to 37.1 percent. The FCC’s basis for adopting the 37.1 percent safe harbor percentage was a “traffic study” by Tracfone that purported to measure the interstate/international revenue percentages of six other carriers, including Verizon Wireless, whose percentage it estimated to be 37.1 percent. Verizon Wireless, for the record, has stated its actual interstate/international percentage is lower than 28.5 percent, the current safe harbor. However, the FCC has determined that even 37.1 percent is a low estimate, based on its own estimates of wireless interstate/international revenues and that if carriers do not accept that percentage, the FCC would simply impose a higher safe harbor percentage or abolish the safe harbor requirement altogether. Carriers, however, remain free to measure their actual interstate/international revenue percentage and use that percentage in their payments. Carriers are also free to conduct a statistically valid traffic study of their revenues to determine the appropriate percentage. However, for carriers employing the safe harbor, this will mean higher USF payments and higher reimbursement costs for customers.

VOIP Must Contribute to the USF

Equally important, the FCC has, for the first time, required providers of voice-over-Internet protocol (VOIP) services, which are interconnected with the public switched telephone network (PSTN), to contribute to the federal USF under the existing contribution methodology, i.e., based on their interstate/international revenues. The FCC did so despite the fact that it has not yet decided whether VOIP services are “telecommunications” services or “information” services under the Communications Act. Information services, such as Internet access, are not subject to USF contribution requirements. Employing calculated ambiguity, the FCC found that interconnected VOIP providers are “providers of interstate telecommunications,” if not “telecommunications services,” and also that the Commission had other “permissive authority” to require VOIP providers to contribute to the USF. In order to be required to make such contributions, the FCC stated that VOIP providers must provide real time, two-way voice communications; must require a broadband connection from the user’s location; require IP compatible customer premises equipment; and must permit users to receive calls from and terminate calls to the PSTN.

With respect to contributions for VOIP services, the FCC has also established an interim “safe harbor” of 64.9 percent for the assumed percentage of VOIP interstate-international revenues. The FCC noted that many VOIP providers have argued that their services are inherently interstate or that it is impossible to separate interstate from intrastate revenues. The Commission found that setting the safe harbor at 64.9 percent, a high percentage, was reasonable pending the completion of a rulemaking proceeding in which the FCC is seeking comment on whether to increase or eliminate all safe harbors, thus relying on “actual” percentages or switching the jurisdictional basis of USF contributions to the number of telephone numbers a carrier serves.

VOIP providers will also be free to calculate their “actual” percentage of interstate and international revenues. However, it is unlikely many VOIP providers will do so because it would undercut the rationale for a prior preemption order in which the FCC had asserted jurisdiction over VOIP because of its inherently interstate character. If carriers know the “intrastate” portion of their revenues, they would arguably become subject to state regulation of the services generating those revenues. VOIP providers also may conduct traffic studies to determine their interstate percentages. However, the FCC must approve any such studies prior to their results being used. The FCC has still not required wireless carriers to submit their traffic studies for prior approval though it may do so in the future.

FCC Seeking Safe Harbor Comments

In a separate notice of proposed rulemaking attached to the FCC’s order, the Commission has sought comment on (1) whether to eliminate or raise the interim wireless safe harbor and (2) the means by which wireless carriers must determine their actual interstate percentages, if the FCC abolishes the safe harbor. The FCC has also sought comment on (1) whether wireless carriers should be permitted to continue to use traffic studies to determine their interstate/international revenue percentages and (2) the correct method of determining whether wireless calls are interstate in nature.

If the FCC decides to retain the wireless safe harbor percentage, it seeks comments on whether the safe harbor should be further increased and how to determine the safe harbor percentage to better reflect market conditions on an on-going basis.

With respect to the ongoing VOIP USF obligation, the FCC has asked commenters whether to eliminate or change the interim safe harbor established for VOIP providers and concerning whether VOIP providers can identify their actual interstate/international as opposed to intrastate telecommunications they provide.

Finally, the FCC is also considering whether to change the basis of USF contributions from revenues to some other basis, such as telephone numbers used or some measurement of “connections” to the PSTN. A change from the current revenue based system for USF contributions to any new system would result in complex implementation problems for all carriers.

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