The FCC has released its further notice of proposed rulemaking (“FNPRM”) to consider potentially dramatic changes to its rules for assessing universal service fund (“USF”) contributions. Today, the FCC imposes a 17% universal service fund (“USF”) fee on all interstate telecommunications services revenues. The FCC is considering assessing USF contributions on residential and commercial broadband Internet access services, enterprise communications services (such as dedicated IP and virtual private network services), one-way Voice over Internet Protocol (“VoIP”), and text messaging. The FCC is also considering changing its rules regarding services offered in bundles, such as “triple play” voice-video-data packages, that could result in the imposition of USF fees on the entire bundle. The FNPRM also seeks comment on calculating USF fees on a per connection or per telephone number basis (rather than the current revenues-based system); revamping the way wholesale revenues are assessed; and other administrative reforms.

The FNPRM includes the following main lines of inquiry:

  • Whether to impose USF contributions on broadband Internet access, one-way VoIP, text messaging and enterprise communications services;
  • Whether it should significantly alter rules applicable to bundled offerings, including asking whether USF contributions should be assessed on the full price of a bundle that includes non-assessable services;
  • Whether USF fees should be assessed on a per connection or per number basis, rather than the current revenues-based system; and
  • Whether USF fees should continue to be assessed on wholesale revenues but utilize a value-added approach.

Other reforms being considered include: eliminating exemptions for international revenues; reforming the reporting and contribution obligations of wholesale providers; less frequent changes to the USF contribution factor (assessment rate), which is now revised each quarter; and imposing restrictions on line items on customer invoices to recover USF contributions.

The FNPRM seeks to expand the contribution base with the idea that a lower percentage assessment, applied to a larger base, would generate the revenues needed to support existing Universal Service programs. The USF contribution factor is calculated based upon projected expenditures, and would decline if the revenue base were increased by rule changes. The danger, of course, is that if a wider contribution base is established, even if initially with a lower percentage assessment, over time the FCC will increase Universal Service expenditures, leading to upward pressure on the contribution rate and an overall increase in the burden on service providers and their customers.

Potential Assessment of Broadband and Other Services

The FCC is considering imposing USF fees on a wide range of services, including broadband Internet access services (both residential and commercial); enterprise communications services, such virtual private networks; one-way VoIP services; and text messaging. The proposal to tax broadband services should generate particular attention. Some parties believe that broadband should be assessed as the FCC begins to subsidize broadband services in high-cost areas and potentially, for low income consumers. However, increasing the cost of broadband will deter broadband adoption just as the FCC has made broadband adoption one of its most important goals.

Currently, information services such as broadband Internet access are exempt from USF fees; only telecommunications services and interconnected VoIP services are assessed. The underlying statute, however, allows the FCC to impose USF fees not only on providers of telecommunications “services,” but also on providers of “telecommunications” – a distinction that matters in the context of Internet access, because the FCC has previously found that Internet access services include an integrated telecommunications component. It now seeks comment on whether that component is a sufficient basis to vastly expand the base of services subject to USF contributions. Similarly, the FCC’s proposal to assess a broader range of enterprise services sidesteps the question of whether such services are information services. Historically, carriers have contributed on revenues from ATM and frame relay services, but there have been disputes, confusion, and uncertainty regarding the application of the contribution requirement to Ethernet, high-capacity special access data services, dedicated IP, virtual private network (VPN), WAN, and MPLS services when those services are offered in a way that appears to make them information services and therefore not subject to USF contribution.

The FCC also seeks comment on imposing USF fees on text messaging and one-way VoIP services (as compared to two-way VoIP services such as those offered by cable operators). Each of these expansions of USF would affect millions of consumers. The FCC notes that a prior FCC Order and the recent Twenty-First Century Communications and Video Accessibility Act of 2010 have both previously imposed regulatory obligations on one-way VoIP.

Shift from Current Revenues-Based Assessment?

Currently, telecommunications carriers and interconnected VoIP service providers report their revenues to the FCC, with certain of those revenues assessed USF fees. The rules governing which revenues are assessed and which are exempt have become very complicated, and in certain instances, may result in different contribution obligations for entities providing very similar or even the same service.

As an alternative, the FCC seeks comment on the possibility of changing to a system of assessments based upon the number of telephone numbers or “connections” provided by the service provider. Five years ago, NCTA, CTIA, AT&T, Verizon and other parties advocated a system in which carriers would contribute approximately $1 for each working telephone number assigned to customers, rather than based on revenues. A “numbers-based” approach was appealing for its simplicity because it would eliminate the need to conduct complicated jurisdictional allocation analyses, or determine whether the service is a telecommunications or information service. However, the FCC seeks comment on whether exceptions to a simple per-number plan should be created for family wireless plans with multiple numbers; numbers assigned to data cards, e-readers, and tablets; telematics providers (i.e., OnStar); free services (i.e., Google Voice); stand-alone voice mail; one-way service providers; paging services; alarm companies; or any other exceptions. The FCC also seeks comment on how predictable and reliable a numbers-bases system could be for the long-run.

In the past, some parties have argued that the FCC should not rely wholly on telephone numbers for USF assessment because it would not assess special access or data circuits that did not have numbers assigned to them. These concerns gave rise to proposals to assess “connections” instead of numbers. The FCC thus seeks comment on an alternative approach that would assess a fixed amount per connection (including broadband connections), regardless of the revenues derived from that connection. It is unlikely, however, that the FCC would choose a methodology that imposed the same contribution on a high-capacity commercial fiber service and on no-frills basic residential telephone line or a low-capacity alarm circuit. The FCC therefore seeks comment on creating different tiers of connections that would be assessed differently. However, line-drawing based on connection speeds would almost certainly result in regulations that would quickly become outdated. For example, just a few years ago, the FCC seriously considered assessing a flat $35 USF monthly contribution on “connections” over a certain speed that would now include many DOCSIS 3.0 residential cable modem services, on the theory that such speeds were then associated with much more expensive commercial services. A tiered connections-based approach could also be problematic if there were large jumps in contribution between adjacent connection speeds, which would create disincentives for consumers and service providers to increase the speed of existing services.

The FCC also seeks comment on various hybrid approaches, such as using telephone numbers for residential customers but connections for commercial customers, or assessing some types of connections in addition to telephone numbers. And under any of these approaches, the FCC is seeking comment on how often reports should be required and how often the rate should be recalculated. The FCC also asks whether it should continue to require revenue reporting for other fee programs (TRS fees, etc.) even if it switches USF to an alternative, which would mean carriers would potentially have double the reporting requirements (revenues and number of connections/telephone numbers).

Potential Changes to Bundling Rules, Jurisdictional Allocations, Wholesale Revenues

Today, when a provider offers a bundle of services, some subject to USF fees and some not, the provider has considerable discretion regarding how to allocate the overall revenues from the bundle to assessable versus non-assessable categories. The FCC seeks comment on whether it should significantly reduce that discretion. For example, the FCC is considering revising its current “safe harbor” rules, which provide a presumption of reasonableness if a specified allocation methodology is followed. Under one possible revision, any discounts offered on the service bundle would be applied to the non-assessable portion of the bundle. Another possible revision is to simply require the provider to pay on the entire bundled offering, even if the services provided in the bundle were not all individually subject to USF fees. These changes would have significant impact on providers of bundled services.

The FCC is also considering imposing USF fees on intrastate revenues, despite a 1999 U.S. Court of Appeals decision that held it lacks authority to do so. The FNPRM notes, however, that the Federal-State Joint Board on Universal Service issues believes that the earlier court decision was wrongly decided. Such a ruling would have a dramatic effect, for example, on VoIP providers that currently rely on traffic studies to show that one-quarter or less of their VoIP revenues are interstate and, therefore, subject to USF fees. Similarly, customers of point-to-point Ethernet today often certify that usage is primarily intrastate, so that the provider pays no USF fees. As an alternative on this point, the FCC asks if it should set fixed interstate allocations for particular services, such as 20% for VoIP, so that all providers would be subject to the same allocation percentage.

Today, wholesale revenues are exempt from USF fees, as long as the wholesale carrier’s customer certifies that it pays USF fees on its revenues. The FNRPM seeks comment on shifting to a value-added approach under which each provider in the service supply chain would pay USF fees on the value that it adds to the service sold to the next provider in the chain. The FCC notes that this would eliminate the need for wholesale entities to document the contribution practices of their customers, but it would, of course, create new burdens on wholesalers to determine and contribute on the new value added amounts. In a simple resale context where the wholesaler’s customer simply re-brands the wholesaler’s service, that may not be overly complex, but many resold services are used as inputs to entirely different types of finished services, that may also be bundled with non-assessable services, making the calculation of added “value” difficult. In lieu of shifting to a value-added system, the FCC has asked how it may improve the language of and administration of reseller exemption certificates.

The FNPRM also seeks comment on: modifying the de minimis exemption rule so that contribution obligations would be based on a fixed revenue threshold or a modified formula tied to the current USF factor; eliminating the exemption for international-only providers; eliminating the LIRE exemption (limited interstate revenues exemption); and changes to assessment of prepaid calling card revenues.

Potential New Restrictions on Recovery from End Users

The final portion of the FNPRM addresses how carriers recover USF contributions from customers. First, the FCC seeks comment on ways to promote transparency in how carriers recover those contributions. Today, carriers have a great deal of flexibility regarding pass-through of USF assessments; the FCC asks if that should be retained, or if the FCC should impose more specific rules. One possibility floated by the FCC would require USF contributors to identify on a customer’s bill the portion of the bill that is subject to USF assessment. The FNPRM also explores whether carriers should be required to disclose, at the time of a customer’s initial subscription to a service, the portion of the rate for the service that is subject to USF assessment. The FCC seeks input on whether these proposed rules regarding transparency in customer billing, if adopted at all, should apply to all customers, or just so-called “mass market” customers. The FCC also raises an alternate approach that would prohibit carriers from including USF pass-through charges as a separate line item. Instead, under this approach, carriers would still be allowed to build the USF pass-through amounts into their overall rate structure, but would no longer be permitted to display those amounts on customer bills.

Finally, the FNPRM proposes to prohibit competitive eligible telecommunications carriers (“ETCs”) from recovering USF charges for Lifeline offerings from Lifeline subscribers, a restriction that currently only applies to incumbent ETCs. Today, Lifeline subsidies themselves – the payments that ETCs receive from the Universal Service program to support the provision of service to low-income consumers – are not subject to USF fees. Some ETCs, however, charge their end users amounts over and above the subsidy payments. Incumbent ETCs are not permitted to recover USF charges on the Lifeline-supported services (but they are permitted recover USF on services such as long-distance charges.) Extending this rule to competitive ETCs would create a more easily administered bright-line rule, but the FCC seeks comment on whether such an approach would be appropriate. In addition, the FNPRM asks how such a rule change would affect competitive ETCs, their service offerings, and low-income subscribers. It also asks whether Lifeline subscribers should be exempt from contribution requirements entirely, and does not appear to propose changing the current exemption for Lifeline subsidies themselves. On this point, however, concerned Lifeline providers should contact DWT for further guidance.

Improving Administration of the Fund

In addition to the possible substantive changes noted above, the FCC also seeks comment on several potential changes to the administration of the fund. The proposed administrative changes will be made if the FCC is persuaded that they will provide greater clarity and transparency regarding contribution obligations; reduce costs of administration; and improve operations. The FCC also asks whether each proposed change can, or should, be implemented on an accelerated timetable to achieve fund administration efficiencies right away, even while other substantive rule changes remain pending before the FCC. Several of the most significant proposed administrative changes are described below:

  • Updating the Telecommunications Reporting Worksheet

Each year the Wireline Competition Bureau releases an updated and revised version of the FCC’s Telecommunications Reporting Worksheet. The FCC seeks comments on proposed changes to this process, including a proposal to adopt a formal process by which the Bureau will issue a public notice and seek comment on proposed changes to the worksheet in advance of such changes. In so doing the FCC suggests that the timing of worksheet changes may be revised such that these changes are released prior to (rather than after) the relevant reporting period. Also, the FCC seeks comment on whether it should specify that contributors are required to comply with the instructions in the form, i.e., whether the form (and instructions) should be binding agency rules.

  • Revising the Frequency of Adjustments to the Contribution Factor

Currently, the FCC adjusts the contribution factor on a quarterly basis, in part to reflect the difference between actual and projected revenue requirements in a given quarter. The FCC seeks comment on whether an annual revision process would be more efficient. The FCC also seeks comment on other ways to reduce the volatility of contribution factor changes, including using longer average periods to account for prior period adjustments, or simply relying upon reserves to meet certain revenue shortfalls.

  • Adopting a “Pay-and-Dispute” Policy as a Formal Rule

In its role as the fund administrator, USAC has adopted a policy, known as “Pay-and-Dispute,” which requires contributors that challenge a USAC invoice to keep their accounts current while disputing the amounts billed by USAC. Although the Bureau has previously upheld this rule, it is not part of formal FCC rules. However, the FCC is now proposing to incorporate this policy into its formal rules. It seeks comments on the merits of this policy, and asks whether doing so creates the proper incentives for contributors to pay their invoices in a timely manner.

  • Miscellaneous Oversight and Accountability Proposals

The FCC is also proposing various rule changes that are intended to increase the agency’s oversight of entities subject to its contribution rules. In particular, the FCC proposes to require all telecommunications providers with Form 499-A reporting obligations (whether they are common carriers or not) to register within thirty days of commencing service, and deregister within thirty days of discontinuing service. Also, the FCC is considering requiring entities providing wholesale services to other carriers to check the registration status of their wholesale customers. The FCC also seeks comment on USAC’s current audit procedures, and ways to make that process more efficient.