10th Circuit Affirms Blanca Telephone Company Must Pay Back $6.7 Million In Overpaid USF To FCC

March 15, 2021 – The U.S. Court of Appeals for the Tenth Circuit has issued an order affirming the FCC’s decision to collect universal service fund (USF) overpayments made to Blanca Telephone Company through administrative offsets.[1]

The Tenth Circuit “conclude[d] the FCC’s debt collection was not barred by any statute of limitations, Blanca was apprised of the relevant law and afforded adequate opportunity to respond to the FCC’s decision, and the FCC was not arbitrary and capricious in its justifications for the debt collection.”

First, the Court denied Blanca’s statute of limitations argument. The key part is the Court’s holding that “the FCC’s action is most properly characterized as debt collection, not punishment.” This means the FCC was required to comply with the Debt Collection Improvement Act – 31 U.S.C. §§ 3711–17 – which “authorizes agencies to collect debts owed to the United States and contains no limitations period preventing the FCC’s debt collection.”

Second, the Court found no due process violation, concluding Blanca “had adequate notice that it could not receive USF funding for providing cellular services,” and moreover, “in identifying the rules violated and starting the debt collection process, the FCC provided all the process required by statutes and the Constitution.”

Finally, the Court said the FCC’s decisions were “reasoned and reasonable,” not arbitrary and capricious.

The FCC can now continue to move forward with getting the overpaid USF back by withholding  or reducing future USF payments to Blanca – administrative offset (a/k/a clawback).

Summary Of Blanca v. FCC - What Happened?

Following a lengthy audit investigation of Blanca’s accounting practices and USF records, the FCC directed Blanca to return $6,748,280 in improperly paid universal service support for 2005 - 2010.[2] So what happened? Between 2005 - 2013, Blanca, a rate-of-return ILEC, reported costs and revenues of providing fixed local exchange service in its Colorado study area to the National Exchange Carrier Association (NECA) and the Universal Service Administrative Company (USAC). During that time, Blanca improperly included costs, loops, and revenues associated with providing commercial mobile radio service (CMRS). This is a problem because CMRS is a non-regulated service. Blanca’s high-cost USF support is based on the costs of providing regulated service – rate-regulated telephone service.

As an ILEC Blanca has a landline network, but was also in cellular business. Blanca made a huge mistake during the period of time the USF overpayments were made because Blanca did not allocate expenses between landline and cellular services, its regulated and non-regulated services. This is a huge no-no.

ILECs like Blanca report data on costs and revenue to NECA, and they do this all the time. NECA uses the data for the NECA pooling process and to help USAC determine USF payments. NECA files joint interstate access tariffs for its ILEC members, all of which charges the same access rate regardless of actual costs. NECA then looks at the member’s reported access revenues and costs. NECA then distributes revenue among the ILEC members from a “pool” on the basis of members’ actual costs of service. For USF payments, NECA collects ILEC data, analyzes it, prepares it, and sends it to USAC. The data is used to determine ILECs various USF amounts, as well as any USF caps and pro-rata reductions that may be required. Of course, this process applies to ILECs still on the legacy rate-of-return system.

Most data used by NECA, and the data at issue in the Blanca case, comes from cost studies which show the services an ILEC provides, and the revenues attributable to each service. ILECs must differentiate between expenses related to regulated and unregulated services in their accounting. When a cost involves both regulated and nonregulated activities, an ILEC must allocate the costs attributable to each. Blanca was apparently not doing this. It just lumped everything together. I won’t go into Blanca’s arguments, of which the primary one was Blanca’s characterization of its mobile cellular service as Basic Exchange Telephone Relay Service (BETRS), which is fixed wireless voice service (wireless local loop).

Blanca of course challenged the FCC’s decision. In March 2020, the FCC dismissed Blanca’s Second Petition and Second Petition Supplement which sought reconsideration of the FCC’s decision and emergency relief from any withholding of universal service support payments otherwise payable to Blanca.[3]

Blanca then made a last-ditch effort to overturn the FCC’s decision at the Tenth Circuit. In its petition for review, Blanca challenged the FCC’s demand letter and subsequent orders, ultimately claiming the FCC’s decision should be set aside for three reasons: (1) it was barred by the relevant statute of limitations, (2) it violated due process, and (3) it was arbitrary and capricious.

The Tenth Circuit disagreed, and affirmed the FCC’s decision, concluding “the FCC’s debt collection was not barred by any statute of limitations, Blanca was apprised of the relevant law and afforded adequate opportunity to respond to the FCC’s decision, and the FCC was not arbitrary and capricious in its justifications for the debt collection.”

What Are The Take-Aways?

The main legal take away is the debt collection language. When the FCC can show its action is debt collection, not punishment, the Debt Collection Improvement Act controls, and limitations periods will not get in the way. This is important for cases involving USF payments, where even the simplest disputes take years to decide.

There are many other practical take-aways from the Court’s decision and Blanca’s actions. First, ILECs, don’t do your own cost studies unless you are fully qualified. It’s unclear how Blanca’s cost studies and data were assembled during the time period at issue, but after the investigation was started, Blanca hired a large accounting firm to help get to the bottom of things. Increasing expenses to farm out some of your most important accounting issues can save money in the long run, and provide peace of mind. Second, this type of issue can still arise today. Many ILECs are still subject to rate-of-return regulation, and will be until the FCC forces them on to a cost model. These ILECs still perform cost studies; they still separate costs to reg and non-reg; and they still allocate expenses. Mistakes could result in non-reg expenses being recovered as regulated costs. Third, the FCC and USAC are always on the hunt for fraud, waste, and abuse, and will make an example out of anyone not in compliance. Everyone will be audited at some point. Fourth, if an ILEC is overpaid, the FCC will claw back that money.

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[1] Blanca Telephone Company v. FCC, Case Nos. 20-9510 and 20-9524, Order, Petition For Review From The Federal Communications Commission (Nos. FCC 17-162 and FCC 20-28), (10th Cir. 2021) (Publ. Mar. 15, 2021), https://docs.fcc.gov/public/attachments/DOC-370802A1.pdf.

[2] Blanca Telephone Company Seeking Relief from the June 22, 2016 Letter Issued by the Office of the Managing Director Demanding Repayment of a Universal Service Fund Debt Pursuant to the Debt Collection Improvement Act, CC Docket 96-45, Memorandum Opinion And Order And Order On Reconsideration, FCC 17-162 (Dec. 8, 2017), https://docs.fcc.gov/public/attachments/FCC-17-162A1.pdf.

[3] Blanca Telephone Company Seeking Relief from the June 22, 2016 Letter Issued by the Office of the Managing Director Demanding Repayment of a Universal Service Fund Debt Pursuant to the Debt Collection Improvement Act, CC Docket 96-45, Second Order On Reconsideration And Order, FCC 20-28 (Mar. 5, 2020), https://docs.fcc.gov/public/attachments/FCC-20-28A1.pdf.