Roughly six months after making comprehensive reforms to the distribution side of the universal service fund (USF), the Federal Communications Commission is now considering changes to how USF contributions are assessed and recovered.[1] With the release of a Further Notice of Proposed Rulemaking (FNPRM), the FCC has asked for stakeholder input on whether the existing USF contributions system should be modified or whether it should be replaced with an entirely new system. The FCC wants responses, input, proposals, and detailed data from all USF stakeholders, including contributors, potential contributors, individual consumers, business consumers, consumer advocacy groups, and state and Tribal governments. Comment deadlines will be announced after the FNPRM is published in the Federal Register.

As many experts have said, if the FCC makes changes to the way USF support is distributed, it must also update the contributions part of the equation. By issuing the FNPRM, the FCC is at least starting the conversation. The forthcoming debate – who will pay into the USF and how – will be very contentious. The FNPRM will set off many battles within the communications industry as some providers that have never been required to contribute to the USF could now be called on to do so. Right? Since the USF now supports the deployment of broadband services, revenue from broadband services should help support this effort. Right? Anyway, every communications provider will either weigh in on the FCC’s proposals or follow the proceeding closely because whatever new rules are ultimately adopted could cause some providers to pay more, pay less, or change the way they report and recover their USF contributions.

Background Information on Universal Service Fund Contributions

Pursuant to Section 254(d) of the Communications Act of 1934, as amended, every telecommunications carrier that provides interstate telecommunications services must contribute to the USF.[2]  Section 254(d) also gives the FCC discretion to exempt contributors whose contributions would be de minimis,[3] and grants the FCC permissive authority to require “[a]ny other provider of interstate telecommunications…to contribute to the preservation and advancement of universal service if the public interest so requires.”[4]  In an example of the use of this permissive authority, in 2006 the FCC issued an order requiring interconnected VoIP providers to contribute to the federal universal service fund.[5]  The scope of the Commission’s permissive authority will be a hot topic as contributions reform moves forward.

Under the current rules, carriers’ contributions are assessed as a percentage of their interstate and international end-user telecommunications revenues.[6]  However, the telecommunications marketplace has changed exponentially since the adoption of the current rules when wireline voice accounted for a vast majority in the revenue base.  For example there has been a dramatic increase in the use of mobile services, many consumers have switched to VoIP, and cable companies have entered the voice market.  The industry changes have given rise to uncertainty, inefficiency, and market distortions—problems which are shown in the inability to identify revenues that should be included in the contribution base, a steady decline in the overall contribution base, and as of late, a universal service contribution factor that has consistently hovered around record high numbers. 

What Services / Who Should Contribute To Universal Service

The FCC is seeking comment on clarifying or modifying its rules on what services and service providers must contribute to the USF.  The FCC admits that this question is “at the core of much of the uncertainty and competitive distortions that plague the system today.”  Generally, the FCC wants to know what services and providers should be required to contribute to universal service.  And, the FCC wants comments on the question of who should contribute, even if commenters advocate for an alternative assessment methodology to the current revenues-based approach.  Specifically, the FCC asks for comment on the following:

• What is the scope of the FCC’s permissive authority under section 254(d)?  What factors should the FCC consider in deciding whether the public interest warrants exercising its permissive authority?

• Should the FCC use its permissive authority, and/or other tools, such as forbearance, to address outstanding contribution issues?  Should the FCC use its permissive authority, and/or other tools, such as forbearance, to clarify or modify on a service-by-service basis whether particular services or providers are required to contribute to the Fund?

• Should the FCC adopt a more general definition of contributing interstate telecommunications providers that could be more future-proof as the marketplace continues to evolve?

• will various contribution methods affect contribution obligations among different industry segments and impact contributions among different categories of end users?

• Should the FCC exercise permissive authority to require contributions from providers of enterprise communications services that include interstate telecommunications; text messaging; one-way VoIP; and broadband Internet access services?

Assessing Contributions – Revenues-Based System

Once the FCC determines the threshold question of who should contribute, it must determine how USF contributions should be assessed.  Currently, contributions are assessed via a revenue-based system.  The FCC has asked whether it should keep the current revenues-based contributions system, and has requested comment on how the current system can be reformed to provide greater clarity to contributors, thereby promoting efficiency, fairness, and sustainability.  Comment is requested on the following topics:

• What are the pros and cons of retaining a revenues-based system?  What are the benefits or disadvantages of retaining a revenues-based system for a transitional or indefinite period?

• How should revenues from bundled service offerings be apportioned?  Should the three revenue apportion methods created by the CPE Bundling Order[7] be modified?

• To the extent the FCC exercises permissive authority over services that provide interstate telecommunications, what revenues should be assessed?  For example, should the FCC require contributions on the full retail revenues of an information service that provides interstate telecommunications?  Should the FCC assess only the telecommunications (transmission) component, and if so, what portion of the integrated service revenues should be associated with the transmission component?

• How can the FCC simplify the allocation of interstate and intrastate revenues for USF contributions and reporting purposes?  Should the FCC modify or eliminate the requirement that carriers are assessed USF contributions on interstate and international revenues?  Should the regulatory jurisdiction over a service determine whether that service contributes to universal service?  Should the FCC require contributions on all revenue derived from services that are delivered over a public network?  The FCC notes that many of the services that have developed and flourished since the 1996 Act, such as wireless, interconnected VoIP service, text messaging, and flat-rate long-distance services, do not distinguish between inter- and intrastate communications from the consumer’s perspective.

• How should contributions be reformed for wholesalers and those that purchase services from wholesalers?  Should the FCC eliminate the current exemption from contribution obligations for wholesalers?  Should the FCC assess “value-added” revenues rather than “end-user” revenues?  Under such an approach, a wholesaler would contribute on its wholesale revenues, and a reseller of those services would contribute based on its retail mark-up.  Could a value-added system be developed for a connections-based or numbers-based contribution system?

• How should the contribution rules be reformed for prepaid calling card providers?  Should prepaid calling card providers be required to report and contribute on all end-user revenues?  If so, who should be deemed the end user—the entity to which the provider directly sells the prepaid service (agent, distributor, or retailer) or the actual individual that uses the card?

• How should the FCC assess USF contributions for providers whose revenues are exclusively or predominantly international?  Should the FCC eliminate or modify the limited international revenues exemption (LIRE) for providers that offer predominantly international service? The LIRE exempts international revenues from reporting and contribution where a provider’s interstate revenue is less than 12 percent of its combined interstate and international revenue; is designed to ensure that no contributor’s universal service obligation exceeds its total interstate revenues; and allows a qualifying contributor to exclude its international telecommunications revenues from its contribution base.[8]

• Should the FCC reform the de minimis exemption?[9]  Should the FCC modify the de minimis exemption to base the threshold on a provider’s assessable revenues rather than on the amount of its contributions?

Assessing Contributions – Connections-Based System

The Communications Act does not require contributions to be based on revenues.  The FCC has explored moving to a connections-based contributions methodology in the past, and is again seeking comment on doing so.  “Under a connections-based system, providers would be assessed based on the number of connections to a communications network provided to customers. Providers would contribute a set amount per connection, regardless of the revenues derived from that connection.”[10]  Those that support moving to a connections-based method point out that, as of late, the number of connections has been more stable than interstate revenues and therefore connections-based assessment may provide a more predictable and sufficient funding source for universal service.  Under a connections-based method, carriers will not be required to distinguish between telecommunications and non-telecommunications services or separate revenue between intrastate and interstate jurisdictions.  The FCC has requested comment on a connections-based method and would like commenters to provide supporting analysis and facts for assertions of costs or benefits.  Comment is requested on the following general issues related to a connections-based method:

• How would an assessable connection be defined?  Should the FCC use a facilities-based definition, which would focus on the physical facility – either wired line or wireless channel – that is provided by the contributor?  For example, a physical line to a residential home would be assessed as one “assessable connection” even if it provided multiple assessable services to the customer.  Should the FCC use a service-based definition which would focus on the service or services that are delivered over the communications facility?  For example, if a customer purchases two services that are assessable and that are delivered over the same facility, the provider would be assessed for two connections.  Should the definition of connection be limited to connections provided to end users?  How should end users be defined?

• The FCC is seeking comment and data on trends in connections in order to project the number of connections that exist today and in the future.

• If a connections-based method is adopted, should assessments be based tiers?  How should the FCC define any such tiers?  Should tiers be based upon speed, capacity, or the total volume of data that can be sent and/or received over the connection by the end user over a period of time?  How would tiers be updated?

• If a connections-based method is adopted, should there be a reduced assessment for services that have limited functionality?  Should special consideration be given to other services?  Should machine-to-machine connections be assessed, and if so, how?

• What would be the extent of the burden placed upon carriers in order to implement a connections-based system?  What new data collection and reporting requirements would be required?

Assessing Contributions – Using Phone Numbers

Under a numbers-based contribution system, providers would be assessed contributions based on their count of North American Numbering Plan phone numbers.  Providers would be assessed monthly, per phone number.  The monthly assessment would be calculated using a formula based on the USF demand requirement and the relevant count of numbers.  A numbers-based method could enhance the specificity and predictability of contributions by “eliminating the need to distinguish between information and telecommunications revenues, or interstate and intrastate revenues.”[11]  However, a numbers-based method could reduce contributions from certain industry segments and increase them for others.  The FCC is seeking comment on all issues related to adopting a numbers-based contribution method, including:

• Which numbers should be assessed under a numbers-based contribution methodology?  Should the FCC adopt any of the existing definitions of numbers for purposes of defining an “assessable number” for USF contributions?  Should numbers used for intermittent or cyclical purposes be excluded or included?  How would numbers that have been assigned but not put to use or that are non-working be treated?  How would a numbers-based method treat numbers used for routing purposes and toll-free numbers?  What numbers would be excluded?

• As communications services migrate to IP, is there a danger that using a numbers-based contributions methodology could result in further decline to the contributions base?  The FCC is seeking general comment and data on the count of numbers that would be assessable under a numbers-based USF contribution system.

• Should the FCC adopt a hybrid numbers-connections based method?  For example, under one approach, consumer numbers would be assessed on a numbers-based method, and business lines would be assessed on a connections-based method.  Under another hybrid approach, providers would be assessed a flat fee for each assessable telephone number and services not associated with a telephone number would be assessed using a connections-based method.  Would a hybrid system create competitive distortions?  How would a hybrid system account for recent industry developments and the continuing evolution of telecommunications technology?

• What would be the extent of the burden placed upon carriers in order to implement a numbers-based system? 

Administrative Issues – More Clarity And Transparency For USF Contributions

Notwithstanding the contribution system that is ultimately adopted, the FCC is seeking comment on improving the administration of USF contributions.  The FCC is seeking comment on potential rule changes that could be implemented to provide greater transparency and clarity regarding contribution obligations, reduce costs associated with administering the contribution system, and improve the operation and administration of the contributions system.[12]  Comment is requested on the following issues:

• What process should be used to update the Telecommunications Reporting Worksheets (FCC Forms 499-A and 499-Q)?  Should the FCC solicit public comment prior to adopting revisions?  Should the FCC adopt a rule specifying that the worksheets and instructions constitute binding agency requirements?

• If the FCC continues a revenues-based system or alternative system that will use a contribution factor, how often should the FCC make adjustments to the contribution factor?  Should it be adjusted quarterly or annually and why?  How would prior period adjustments be made?

• Should the FCC codify an official “pay-and-dispute” policy?  A pay-and-dispute policy requires contributors that wish to challenge an invoice to keep their accounts current while disputing the amounts billed in order to avoid late fees, interest, and penalties.[13]

• How can the universal service administrative company improve accountability and oversight?  Should the FCC establish performance goals?  What steps can be taken to ensure industry-wide compliance with USF contributions rules?

• How can the FCC encourage and facilitate electronic filing of forms?  Should the FCC adopt a filing fee for contributors that choose to submit the Telecommunications Reporting Worksheets by paper rather than electronically?

Recovering USF Contributions From End Users

Generally, providers that contribute to the USF recover the costs from their subscribers.  The FCC has requested comment on issues relating to providers’ recovery of universal service contributions from their customers.[14]

• How can the FCC improve transparency relating to the amount of universal service contribution charges that are passed through by carriers to their customers?  Customer bills often include a line item for USF, but do not indicate the USF contribution factor used to determine such line item, or the portion of the bill to which the contribution factor was applied.  Should the FCC limit the flexibility currently afforded contributors in the recovery of universal service obligations?  Should the FCC adopt a rule that contributors must identify on the consumer bill the portion of the bill that is subject to assessment?

• Should the FCC require carriers to disclose at the time of initial service subscription the amount of USF charges?  Should such a rule apply broadly to all customers, or be limited to mass market customers?

• How can the FCC ensure contributions are made by contributors that become insolvent/declare bankruptcy?   Should the FCC require contributors that recover their contribution obligation from end-users to segregate those end-user payments in dedicated trust accounts for the sole benefit of the USF?

What About Potential Impact To State USF Programs

Changes to federal USF contributions will affect state USF programs.  In one example of how the proposed reforms could affect state programs, the FCC is seeking comment on modifying the allocation of interstate and intrastate revenues for USF contributions and reporting purposes.  One modification would be to assess contributions on services that may be primarily interstates.  For instance, the FCC asks whether revenues from enterprise communications services, text messaging services, and broadband Internet access services (both fixed and mobile) should be reported as 100 percent interstate for USF contribution purposes.  But, the FCC also questions whether it should use an allocator lower than 100 percent interstate for contribution purposes, in order to preserve a revenue base that could be assessed for state universal service funds.  State public utility commissions will surely weigh in with a laundry list of concerns related to how the proposed reforms affect state USF programs or potentially trample on state authority.

Ugh, I Bet Someone Will Say “Don’t Tax The Internet”

The task of determining how to reform the system that determines how to pay for universal service will be difficult, and the proceeding could set off some contentious battles.  Aside from addressing whether the contribution system should use revenues, connections, or a hybrid approach, carriers will likely argue that since the Commission is reforming the high cost fund to primarily support the deployment of broadband, the contributions mechanism needs to be reformed in a way that reflects this purpose.  In other words, now that universal service supports broadband, many broadband providers that have not had to contribute in the past will now be tapped to do so. 

Broadband providers will argue that they are information service providers and not providers of interstate telecommunications service.  However, in the FNPRM, the Commission has hinted that it intends to impose contributions assessments on services with an interstate telecommunications component.  The FCC has asked and will undoubtedly receive comments addressing the extent the Communications Act does or does not limit the FCC’s ability to bring other industry players within the USF contributions umbrella using its permissive authority. 

Way back in 1997, the FCC exercised its permissive authority to subject to USF contribution requirements providers that offer telecommunications to others for a fee on a private contractual or private carriage basis.[15]  In its justification for making the private service providers contribute to the USF, the FCC specifically noted that the providers “have built their businesses or a part of their businesses on access to the PSTN,” and “[w]ithout the benefit of access to the PSTN, which is supported by universal service mechanisms, these providers would be unable to sell their services to others for a fee.”[16]  The idea that those who benefit from an ubiquitous broadband communications network should help support it has been a rallying cry for many smaller, rural carriers.  Considering USF support has been or will be used to build out broadband networks, these carriers will likely argue that it makes sense for the FCC to exercise its permissive authority to assess contribution payments from all those that benefit from an ubiquitous broadband network.

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[1] Universal Service Contributions Methodology, WC Docket No. 06-122, A National Broadband Plan for our Future, GN Docket No. 09-51, Further Notice of Proposed Rulemaking, FCC 12-46 (Apr. 30, 2012) (FNPRM). Comments are due 30 days, and reply comments are due 60 after publication of the FNPRM in the Federal Register.

[2] 47 U.S.C. § 254(d).  The first sentence of 254(d) is known as the mandatory contribution obligation.

[3] Id.; see also Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, ¶802 (1997) (Universal Service First Report and Order).

[4] 47 U.S.C. § 254(d).

[5] In re Universal Service Contribution Methodology, WC Docket No. 06-122, 21 FCC Rcd 7518 (2006), aff'd in part, vacated in part sub nom., Vonage Holdings Corp. v. FCC, 489 F.3d 1232 (D.C. Cir. 2007).

[6] About 2,900 telecommunications providers contribute to the USF. 3,100 providers that would otherwise be required to contribute qualify for the de minimis exemption, and nearly three-quarters of USF contributions come from the following five companies: AT&T Inc., CenturyLink, Inc., Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Communications, Inc.  FNPRM at ¶9.

[7] Policy and Rules Concerning the Interstate, Interexchange Marketplace et al., CC Docket Nos. 96-61, 98-183, Report and Order, 16 FCC Rcd 7418, FCC 01-98 (2001) (CPE Bundling Order).

[8] FNPRM at ¶196.

[9] The FCC’s rules exempt from contribution any telecommunications provider whose contribution to universal service in any given year is less than $10,000.  47 C.F.R. § 54.708.

[10] FNPRM at ¶220.

[11] Id. at ¶287.

[12] Id. at ¶342.

[13] Id. at ¶360.

[14] Id. at ¶¶387-410.

[15] See Universal Service First Report and Order at ¶ 795.

[16] Id. at 796.