February 12, 2019 – The American Cable Association (ACA) has asked the FCC to modify its universal service fund (USF) contributions rules. The request was made in comments filed in response to the FCC’s 2018 Biennial Review of Telecommunications Regulations.[1] ACA claims the FCC’s rules governing USF contributions are implemented in such a manner that is unfair to smaller communications providers, such as ACA’s members.

ACA proposes three revisions the FCC can make right now to address the unfairness in the USF contributions rules. This blog article will cover the proposal put forth by ACA concerning how interconnected VoIP providers determine how much of their revenue can be counted toward their USF contribution obligation. ACA wants the FCC to revise downward the VoIP contributions safe harbor so that it more reasonably approximates the actual percentage of VoIP revenues derived from interstate and international services.

If what ACA is proposing is adopted, it would make a significant reduction to the VoIP safe harbor. More importantly, it would have a negative impact on the overall sustainability of the USF. First, some quick background.

Interconnected VoIP providers, like other communications service providers, contribute to the USF based on end user revenue attributable to interstate (and international) telecommunications services. To determine how much revenue comes from interstate services, VoIP providers rely on a safe harbor of 64.9% put in place (on an interim basis) by the FCC in 2006.[2] So, for whatever amount of revenue a VoIP provider winds up with for any relevant reporting period, 64.9% comes from interstate services.

The FCC based the VoIP safe harbor on interstate revenue reported by wireline long distance providers because at the time, the FCC considered VoIP to be “much like wireline toll service.”

When the VoIP safe harbor was adopted, the FCC considered VoIP to be “much like wireline toll service,” so the FCC based the VoIP safe harbor on interstate revenue reported by wireline long distance providers. ACA argues in its comments that the similarity does not exist today. Interconnected VoIP service is used for both local and long-distance calling, but is no longer used primarily as a substitute for wireline toll service. In fact, ACA explains, VoIP is the dominant home phone service today. ACA says the VoIP safe harbor should reflect providers’ actual traffic. According to ACA, “evidence suggests” that the safe harbor should be set at one-third the current value. Yikes!

So here’s what ACA is asking. ACA wants the FCC to revise downward the VoIP safe harbor to the average percentage reported in the 2012 USF Contributions FNPRM – 22.1 percent. Alternatively, ACA argues that at a minimum, the FCC should lower the interconnected VoIP safe harbor to 37.1 percent to achieve parity with the mobile wireless safe harbor.

Here’s the knee jerk reaction: this revision would decimate the universal service fund. OK, maybe that’s hyperbole. Nevertheless, if the FCC adopts ACA’s proposed revision, it would shrink the amount of total USF assessable revenue significantly. This would cause a massive spike in the USF contribution factor, and further strain the USF. There probably would be other repercussions.

Here’s the more reasonable reaction: ACA is probably right that the 64.9% safe harbor does not accurately reflect VoIP traffic in 2019. But should it be set at 22.1 percent? I don’t know. That value was based on 2012 data. And not all VoIP providers submitted traffic studies, so the 22.1 percent is based on a sample of total providers. Maybe the FCC could require every VoIP provider to conduct a traffic study and file it with the FCC for the purpose of setting a new safe harbor...

Anyway, without a doubt, the FCC won’t adopt ACA’s proposal to revise the safe harbor, not in this proceeding. But, ACA’s comments puts some more pressure on the FCC with respect to USF contributions. The comments add fuel to the fire burning around the growing USF contribution problem which will have to be addressed at some point. Let’s not forget too that ACA’s safe harbor proposal will garner support from VoIP providers that are not ACA members.

Rather than continue predicting how this fits into the broader question of USF contributions reform, let’s take a closer look at ACA’s comments, starting with some background on the biennial review and the rules governing USF contributions.

The FCC’s Biennial Review of Telecommunications Regulations

The Communications Act requires the FCC, every even-numbered year, to review all regulations that apply to the operations or activities of any provider of telecommunications service, and determine whether any such regulation is no longer necessary in the public interest as the result of meaningful economic competition between providers of such service.[3] The FCC must “repeal or modify any regulation it determines to be no longer necessary in the public interest.”[4]

In December 2018, the various FCC Bureaus and Offices released a Public Notice seeking comment to identify any FCC rules that should be modified or repealed as part of the 2018 biennial review.[5] The Wireline Competition Bureau sought comment on amending Part 54 of the FCC’s rules – the section dealing with the universal service fund. Within that part is Section §54.706, the USF contributions rules.

USF Contributions – The Communications Act & The FCC’s Rules

Pursuant to Section 254(d) of the Communications Act, every telecommunications carrier that provides interstate telecommunications services must contribute to the USF.[6]  Section 254(d) also gives the FCC discretion to exempt contributors whose contributions would be de minimis, 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.”[7] In 2006, the FCC used this permissive authority to require interconnected VoIP providers to contribute to the USF.[8]

Under the FCC’s current rules, USF contributions are assessed as a percentage of interstate and international end-user telecommunications revenues. As of 2012, the last time the FCC significantly considering revising its USF contributions rules, about 2,900 telecommunications providers contributed to the USF. At that time, roughly 3,100 providers qualified for the de minimis exemption, and nearly three-quarters of USF contributions came from the following five companies: AT&T Inc., CenturyLink, Inc., Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Communications, Inc.[9]

It’s important to remember that current USF contributions rules were put in place when traditional wireline voice service produced a vast majority of the revenue base. Since then, 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. As ACA mentions in its comments, interconnected VoIP is the dominant residential fixed-line telephone service.[10] The point here is that the FCC’s rules governing USF contributions have not kept up with the fundamental changes to the telecommunications marketplace over the last 15 to 20 years.

ACA’s 2018 Biennial Review Comments – Revise The USF Contributions Rules For VoIP

In its comments, ACA asks the FCC to modify its USF contributions rules because they are implemented in such a manner that is unfair to smaller communications providers. ACA proposes three revisions the FCC can make now to address the unfairness. The first proposed revision involves the de minimis exemption. The other two proposed revisions concern how interconnected VoIP providers determine how much of their revenue can be counted toward their USF contribution obligation. Let’s take a look at them in order.

Revise downward the VoIP contributions safe harbor so that it more reasonably approximates the actual percentage of VoIP revenues derived from interstate and international services.

As mentioned earlier, communications providers contribute to the USF based on end user revenue attributable to interstate telecommunications services. This means providers must calculate how much of their revenue comes from interstate services. For certain providers, such as interconnected VoIP providers (and mobile wireless providers), it is difficult to separate their traffic between the intrastate and interstate jurisdictions. Meaning, they don’t easily know how much of their revenue is attributable to either jurisdiction. To get the answer, they can undertake a traffic study or they can simply rely on the safe harbor for their service.

In 2006, the FCC established an interstate revenue safe harbor of 64.9% for interconnected VoIP providers. So, for whatever amount of revenue a VoIP provider winds up with for any relevant reporting period, 64.9% comes from interstate services. This was simple regulatory line drawing by the FCC. At the time, the percentage of interstate revenues reported by wireline toll providers was 64.9 percent. Since the FCC thought VoIP was “much like wireline toll service,” it based the VoIP safe harbor on interstate revenue reported by wireline long distance providers.

As ACA explains in its comments, the FCC reasoned, at the time, that VoIP services are often marketed as a substitute for wireline toll services, and that, accordingly, it would be reasonable to expect the two kinds of services to have comparable mixes of intrastate, interstate, and international traffic.[11] ACA argues that is not the case anymore. ACA argues that VoIP is no longer a substitute for wireline toll service. Interconnected VoIP is the dominant phone service today – people use it not just for long distance, but for their local calls as well. Currently, ACA claims, there is no reason to expect that the two services – VoIP and wireline long distance – have comparable traffic mixes. In other words, the 64.9% interstate safe harbor should be reduced.

To back up its claim, ACA cites to data in the FCC’s 2012 USF Contributions FNPRM compiled from traffic studies filed by interconnected VoIP providers. The traffic study data shows that the average percentage for interstate/international VoIP traffic is 22.1 percent, with the median study reporting 14.7 percent interstate/international.[12] This is significantly lower than the current 64.9 percent safe harbor for interconnected VoIP. In light of this, ACA argues, interconnected VoIP providers are contributing to the USF “on the basis of a safe harbor that bears no resemblance to their actual traffic.” This puts interconnected VoIP providers at a competitive disadvantage relative to other providers in the following ways:

• larger wireline operators report USF contributions based on reasonable estimates of actual revenues

• interconnected VoIP customers overpay universal service fees

• mobile wireless providers contribute to the USF based on a much lower safe harbor of 37.1 percent

You get the picture. So what exactly does ACA think should happen? ACA wants the FCC to revise downward the VoIP safe harbor to the average percentage reported in 2012 by the FCC– 22.1 percent. Alternatively, ACA argues that at a minimum, the FCC should lower the interconnected VoIP safe harbor to 37.1 percent to achieve parity with the mobile wireless safe harbor. I think the alternative – VoIP safe harbor parity with the mobile wireless safe harbor – could get traction. That being said, ACA has a second alternative – make it easier for VoIP providers to rely on traffic studies when determining their USF-assessable interstate revenue.

Streamline traffic study filing requirements for smaller operators that use these studies to allocate jurisdictional percentages of VoIP revenues.

As mentioned earlier, communications providers contribute to the USF based on end user revenue attributable to interstate telecommunications services. To determine this amount, VoIP providers have two options: undertake a traffic study or rely on the safe harbor.

If an interconnected VoIP provider uses a traffic study, it must submit a traffic study with each quarterly Form 499-Q. That’s four times a year. Traffic studies take time and cost money. They are particularly burdensome to smaller providers.

ACA would like the FCC to allow smaller VoIP providers to rely on a single, annual traffic study. Specifically, ACA proposes the FCC allow smaller providers to rely on the prior year’s annual traffic study as the basis for the revenue estimates a provider includes in each of its Form 499-Qs the following year. ACA argues that filing a single annual traffic study, rather than four quarterly studies, will still promote accurate reporting of revenues.

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***** Footnotes *****

[1] Comments Of The American Cable Association, 2018 Biennial Review of Telecommunications Regulations, WC Docket No. 18-378 (filed Feb. 8, 2019).

[2] See Universal Service Contribution Methodology et al., WC Docket No. 06-122 et al., Report and Order and Notice of Proposed Rulemaking, FCC 06-94, 21 FCC Rcd 7518, 7540, ¶53 (2006) (2006 Contribution Methodology Order).

[3] 47 U.S.C. § 161(a).

[4] 47 U.S.C. § 161(b).

[5] FCC Bureaus and Offices Seek Public Comment in 2018 Biennial Review of Telecommunications Regulations, WC Docket No. 18-378 et al., Public Notice, DA 18-1260 (Dec. 17, 2018).

[6] 47 U.S.C. § 254(d).

[7] Id.

[8] The FCC concluded “that interconnected VoIP providers are ‘providers of interstate telecommunications’ under section 254(d), and...assert[ed] the Commission’s permissive authority to require interconnected VoIP providers ‘to contribute to the preservation and advancement of universal service’ because ‘the public interest so requires.’” 2006 Contribution Methodology Order at ¶35.

[9] 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, ¶9 (Apr. 30, 2012) (2012 USF Contributions FNPRM).

[10] ACA Comments at p. 7 (citing Communications Marketplace Report et al., GN Docket No. 18-231 et al., Report, FCC 18-181 ¶ 205).

[11] See ACA Comments at p. 7 (citing 2006 Contribution Methodology Order at ¶53).

[12] See 2012 USF Contributions FNPRM at ¶125.