Telecom Law Monitor : Washington D.C. Telecom Lawyer & Attorney : Kelley Drye & Warren Law Firm : New York, Chicago, Connecticut, New Jersey, Brussels

Last week, we posted an entry about the tough stance the FCC's Wireline Competition Bureau is taking on late-filed Universal Service Forms submitted by contributors.  One of the parties whose USF appeal was denied, Airband Communications, has filed an application for review of the Bureau decision.  The Commission yesterday asked for comment on the request.   Comments are due September 30 and October 15. 

The FCC's quick action is unusual in one sense:  the deadline for petitions for reconsideration or applications for review of the Denial Order is not until September 14.  Other parties to the same order may file additional petitions on the same issue.

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In stark contrast to the Bureau's more liberal waiver policy for recipients of Universal Service Funds, the Wireline Competition Bureau recently released orders affirming a tough stance for contributors who miss USF filing deadlines.  In the Waiver Order, the Bureau granted two waviers of the deadline to file 499-A revisions.  In the Denial Order, the Bureau denied ten requests for similar waivers.  The difference?  In the Waiver Order, the Bureau found "special circumstances" -- complex revisions undertaken after a merger and late-filing due to the 9/11 terrorist attacks.  By contrast, in the Denial Order, the Bureau characterized the reasons for late-filing as "simple negligence."

The Bureau's stance is summarized with this quote from the Denial Order:

We reaffirm the importance of filing revisions to FCC Forms 499 promptly and within the windows established by the Commission's rules and requirements.  In order for USAC to process the thousands of forms it receives each year and for contributors to know that their contributions will not dramatically change each year on account of late-filed revisions, filers must comply with the deadlines we have established for filing and revising FCC Forms 499.

As a public service, we remind readers:  Corrections to the quarterly estimates (499-Q) are due within 45 days of the due date.  Revisions that reduce USF liability for a year (499-A) are due within one year of the April 1 499-A filing date.

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We have a classic "man bites dog" story for you today:  The FCC announced that its contribution factor for the fund that supports the Telecommunications Relay Service -- a telecom assistance service for persons with hearing or speech disabilities -- is decreasing by nearly 50%.  Whereas last year's TRS contribution factor was 1.1% of telecom revenues, the 2010-11 factor is only 0.585% of telecom revenues.

However, this rate was lowered in part by a one-time application of a refund from the 2009-10 fund.  Carriers can expect a slight increase in July 2011, after the one-time refund is exhausted.

The new rate is effective as of July 1.  Carriers subject to the TRS fund (basically, any entity that files a FCC Form 499) should see the lower rate on their next invoice from the TRS administrator.

Kelley Drye's client advisory on the TRS reduction is available here.

The FCC order setting the TRS contribution factor is available here.

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Following on the heels of AT&T and Verizon's announcements, prepaid card provider Allcom Telink Corporation informed the FCC that it, too, would no longer report for universal service purposes the face value of the prepaid cards that it sells.    In a June 11 letter to the FCC, Allcom stated that it "likewise intends to cease contributing on the basis of its non-contributing resellers' revenues (or our best estimate of those revenues) for this year and future years."  In other words, Allcom will only report the revenue that it receives when selling the cards for distribution, not their ultimate face value.  Given that prepaid cards often are sold to distributors at 35-40% below the face value, these actions could significantly reduce the amount of USF paid for prepaid calling card sales.

Allcom cited to the AT&T and Verizon letters and to USAC's August 2009 request for clarification from the FCC.  Allcom then explained:

It is Allcom's preference that the Commission issue an order or guidance resolving this matter.  Given the reality of the prepaid calling card market, however, Allcom now has little choice.  To avoid an untenable competitive disadvantage in 2010 and future years, absent intervening Commission action, like AT&T and Verizon, we also intend to contribute only on the prepaid calling card revenue Allcom actually receives, not the ultimate retail sale price of those prepaid calling cards that Allcom sells to non-contributing resellers.

For good measure, Allcom also expressed support of a numbers-based USF contribution methodology.

Undoubtedly, Allcom is not the only prepaid card provider that has followed AT&T and Verizon's lead in reporting prepaid card revenues.  We expect most other providers to report revenues in this way pending FCC action on the USAC request.

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Do you need another sign that the universal service fund needs reform?  Today, the FCC announced another significant change in the quarter USF contribution factor.  This time, the factor will decrease by nearly two percentage points, to 13.6% for the third quarter of 2010.  The last four contribution factors have been (in order):  12.3%, 14.1%, 15.3% and now 13.6%.  In other words, for three quarters in a row, the USF fund has seen a change of at least 1.2 percentage points up or down from the previous quarter's factor.  

This volatility results from the structure of the contribution mechanism itself.  At its core, the USF contribution factor is a simple calculation:  quarterly USF distributions divided by quarterly projected revenues.  The 3Q contribution factor declined primarily because projected revenues were nearly $1 billion higher than the 2Q projections.  With a larger denominator (and a numerator that was roughly the same), the contribution factor declined.  Of course, if 4Q projections decline, we could see the USF contribution factor reverse course again and rise once again.  Stay tuned and hold on for the ride.

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The FCC took a flurry of actions at yesterday's monthly open meeting.  Fulfilling this blog's role as your resource for news and helpful links, below is your guide to yesterday's actions.

Wireless Market Report:  The  Commission adopted its 14th Annual Report on the state of the wireless market.  Among other things, this report was controversial because it refused to make an "effective competition" judgment on the wireless market.  The report also expands coverage beyond CMRS to address the broader mobile marketplace. 

Number Porting:  The Commission released a Report and Order shortening the time interval for "simple" ports.  This action will particularly affect wireline-to-wireless ports, and might accelerate the trend of "cut the cord" conversions.

Pole Attachments:  The Commission made a number of changes to its rules governing the rights of cable and competitive telecommunications providers to hang facilities on utility poles.  The order also proposes a number of changes to the pole attachment complaint rules.

Universal Service:  The Commission issued a Notice of Proposed Rulemaking to modify its "e-rate" rules, which support discounts for schools and libraries for internet access and other services. 

Broadband Spectrum:  The Commission adopted rules to make available another 25 MHz of spectrum for mobile braodband use. 

REMINDER:  For more information on many of these topics, peruse our links on the right hand side of this page. 

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If you were planning to disregard a Form 499-A instruction, would you report yourself to the FCC?  That is exactly what AT&T and Verizon have now done with regard to their reporting of prepaid card revenues.  Both AT&T and Verizon have told the FCC that retroactive to January 1, 2010, they will report the revenues actually received from selling prepaid cards to distributors or other carriers, rather than the face value of the cards.  Since prepaid cards often are sold into the distribution chain at a 30-40% discount off the face value, this move will significantly reduce AT&T and Verizon's USF obligations from the sale of prepaid calling cards.

Click the link for more background on the change.

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On May 6, 2010, the FCC issued a Notice of Apparent Liability to NTS Communications, Inc. for failure to pay universal service contributions.  The NAL is the second large fine for failure to pay USF proposed in a little over a month.

The NAL follows the Commissions prior practice of assessing USF fines at $20,000 per month for failures to pay USF invoices and $10,000 per month for partial payments of USF invoices.  Both fines are subject to an upward adjustment equal to one-half of the amount of USF that was unpaid. 

For example, in the NTS case, the Commission concludes that NTS failed to pay two invoices ($40,000 total), made only partial payments on twelve occasions ($120,000) and assessed an upward adjustment of $124,250 representing approximately one-half of the highest amount of unpaid USF.

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The Wireline Competition Bureau of the FCC has overruled a USAC finding that an internet services provider should pay universal service fund assessments on T-1s that the company uses to provide internet access and voice services.  The order is available here.  In U.S. TelePacific Corp. the Universal Service Adminstrative Company concluded that revenues received by TelePacific Corp from its sale of internet access services, sometimes coupled with voice service, should be subject to assessment for universal service fund contributions.  According to the Bureau, USAC had reached its finding "solely because the facilities (T-1 lines) ... are typically used for basic transmission service."  The Bureau reversed this conclusion, stating that even though TelePacific was utilizing T-1 lines it "is not required to make contribution based on revenues from sales of [internet access] service." 

Notably, the Bureau did not decide an ancillary question raised in the proceeding -- whether TelePacific should have contributed indirectly to the federal universal service fund on T1 wholesale inputs purchased from incumbent LECs.  Instead, the FCC instructed TelePacific to take two further actions within 60 days.  First, it requested a "detailed explanation of the methodology by which TelePacific apportions revenues derived from its sale to end users of voice telephony...and how it reports such revenues" on its USF forms.  TelePacific represented in the inquiry that it allocates its revenue among the services it sells and pays into the universal service fund on the amounts attributed to voice services.  Second, TelePacific was told to "provide USAC with the names and contact information of its wholesale providers of transmission services within 60 days .., so that USAC can assure that all contributions to universal service are promptly paid."   In a footnote, the Order explains that TelePacific may have erroneously certified itself as a resale carrier to its wholesale vendors which, in turn, "may have impacted the amount of revenues that TelePacific's wholesale provider reported."

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On April 21, 2010, the FCC issued a Notice regarding proposed universal service reforms. The document is 28 pages long plus some lengthy appendices.  The Notice itself is divided into a Notice of Inquiry section discussing steps to implement the Connect America Fund proposed in the National Broadband Plan, and a Notice of Proposed Rulemaking addressing specific ideas about reducing amounts currently committed to the High Cost Support portion of the USF program. The High Cost Support aspect of USF consumes about half the total of $8 billion now spent on universal service support each year.  The procedural difference between the NOI and the NPRM portions is this: a Notice of Inquiry generally cannot be followed by the adoption of rules without first issuing a follow-on Notice of Proposed Rulemaking. Thus, an NOI tends to be more ethereal and not focused on near term action. The NPRM portion, on the other hand, can result in rules to be adopted at any time after the expiration of the public comment period.  The FCC itself described the Notice as "the first in a series of proceedings to implement" the National Broadband Plan.   

Public comments on the Notices are due 60 days from publication in the Federal Register, and Reply comments are due 30 days later.

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Thursday, April 8, 2010, the FCC released its Broadband Action Agenda describing the purpose and timing of more than 60 rulemakings and other actions the agency plans to conduct in order to implement its recently issued National Broadband Plan.  The FCC News Release can be found here and the more detailed, 10 page Agenda is here.  In addition, the Commission issued a one page chart of its proposed action items showing the actions that it hopes to initiate, with each such action listed by the quarter of the year in which it is expected to occur.

Among topics primarily covered by this blog, a few items stand out.  In connection with the Universal Service Fund, reform of USF distribution is scheduled for 2Q 2010 (it is on the April 21 Meeting agenda, actually), but contribution reform is not scheduled to begin until the end of the year.  Access charges, VoIP and other intercarrier compensation issues are given a 4Q 2010 start date.  CLEC interconnection rights with rural ILECs are slated to be "clarified" in 3Q 2010.  Pole attachment reforms -- which presumably will include the formal complaint process improvements we described in a previous post -- are slated for 2Q 2010. 

Continue reading for more detail on the agenda.

REMINDER:  These and other broadband plan documents can be accessed using our Resource Center on the right hand column of this page.

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Today, the FCC released its proposed Universal Service contribution factor for the second quarter of 2010.  As predicted, it is 15.3% The new rate will go into effect starting April 1, 2010. 

 

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The Universal Service Contribution factor has been increasing recently, but could it top 15%?  That is the prediction of Billy Jack Gregg, an analyst who studies the USF fund.  If it does, the cries for USF reform should grow even louder, just at the time that the FCC is announcing USF support for broadband in its National Broadband Plan.  Perhaps even -- or especially -- end users will object to being assessed what amounts to a 15% tax on their telecommunications purchases.  (Disclaimer:  technically, the USF is not a "tax"). 

This prediction stems from a routine filing made by the Universal Service Administrative Company (USAC).  USAC is required to submit to the FCC a quarterly estimate of the revenues and obligations of the Federal Universal Service Fund.  USAC submitted its most recent projection on March 2, 2010.  Billy Jack Gregg of Universal Consulting, who regularly analyzes USF issues, predicts based on this report that the 2Q 2010 USF contribution factor will be 15.3%, yet another new high.  Mr. Gregg has kindly agreed to allow us to post his projections here.  His chart of the USF contribution factor over time graphically displays the staggering increases in the fund the past 10 years. 

The FCC will not release its proposed USF factor for another week or so.  But history suggests that Mr. Gregg's projections will be pretty close.  This also may be a good time to remind contributors that any revisions to your 2Q 2010 499Q are due by March 18.  After that date, you will be assessed USF on the revenues you have projected, at the applicable USF contribution factor for the quarter.

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As of COB yesterday, 3070 unique CPNI submissions were made in the FCC's annual CPNI certification docket.  That number is almost the same as the 3,107 CPNI filers in 2009.  However, it still is about 500 fewer than the number of active USF filers, according to USAC's most recent report, and is over 3,000 entities fewer than USAC has in its filer database.  It looks like the FCC's Enforcement Bureau will still have some work to do to track down potential CPNI violators.

For those who failed to file the certificiations, be warned that last year, the FCC released an Omnibus CPNI NAL proposing to fine over 600 carriers $20,000 each for failing to file the required annual certification or for filing a non-compliant certification.  This year, the fine has increased to $25,000, at least according to two NALs released late last week (available here and here).  No, this is not an inflationary increase.  Instead, the Bureau reasoned that carriers were on notice of the requirement and had failed to file in past years as well.  Therefore, the action this year was more culpable and deserving of a higher fine.

If you didn't file your 2010 CPNI certification, you should do so soon.

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Kelley Drye will host a free webinar, on March 9, 2010 at 12:00 PM - 1:00 PM EST.  The webinar will discuss the most recent USF developments that could threaten your company’s bottom line today. Our speakers will offer expert analysis and practical take-aways based on front line experience in ongoing audits and appeals, and years of providing compliance and enforcement advice in this area. 

Click here for additional details and registration.

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UPDATED -- FORM 499 RELEASED

The FCC's Wireline Competition Bureau announced the new FCC Form 499A today.  This form, which must be used to file the April 1 annual revenue report, includes several potentially significant changes.  Audio bridging providers (conference service providers) and those close to the de minimis threshold are most affected.

As of COB yesterday, only the announcement was available.  The 499A itself will be released today and I will update this post when it is available.   UPDATE:  The new Form 499A is available here.

Follow the jump for a discussion of the changes.

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Continuing its recent custom, the FCC quickly sought comment on two Universal Service Appeals.  The issues involved in these appeals include classification of information services, classification of reseller revenues and identification of subscriber line charge (SLC) revenues.  Carriers offering similar services take note.

Telepacific Appeal and Request for Stay.  In this appeal, Telepacific seeks reversal of USAC's classification of an integrated T-1 service as telecommunications.  Telepacific contends that its service is an information service based on the FCC's 2005 Wireline Broadband Internet Access Order. Telepacific also seeks a stay of the instruction that it refile a Form 499-A consistent with USAC's decision.  Comments are due January 29; replies February 3. 

USF filers should note that this appeal did not result from a USAC audit.  Instead, Telepacific attempted to revise its 499-A form, and USAC raised questions about the revision.  Ultimately, USAC disagreed with the classification reflected in the revision and rejected the filing.   In my view, USAC's rejection is procedurally improper.  All Form 499-As are certified by an officer of the company under penalty of perjury.  USAC should be obligated to accept and process a revision properly certified by an officer. 

Grande Communications.  In this appeal, Grande challenges three conclusions made in an audit of its 2004, 2005 and 2006 revenues.  First, Grande challenges USAC presumption that Grande assessed an interstate Subscriber Line Charge (SLC).  Second, Grande challenges USAC's classification of a wireline broadband Internet access service as telecommunications for a portion of the audit period.  Finally, Grande challenges USAC's reclassification of Grande reseller revenues, including at least one instance where USAC is seeking to collect USF from Grande and Grande's reseller customer simultaneously. 

Comments on the Grande appeal are due February 18.  Replies are due March 5.

Full Disclosure:  Kelley Drye represents Grande in its appeal. 

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Yesterday, the DC Circuit held oral argument on Comcast's appeal of the FCC's ruling that Comcast ilegally blocked P2P traffic in its broadband Internet service.  By all accounts, the argument went poorly for the FCC.  If the FCC indeed loses the case, it could have implications for enforcement of federal Universal Service Fund (USF) contribution obligations too. 

Some of the best summaries appear in MultiChannel News, The Blog of the Legal Times and Enterprise Networking Planet.  The argument went so poorly that FCC Chairman Julius Genachowski issued what amounts to a "vote of confidence" for the enforcement order.  And we know how well those things work out for NFL coaches.

It appears that the FCC might lose because the court feels the FCC lacks authority over broadband Internet service providers. That would have a significant impact on the FCC's activities, particularly with the Commission on the verge of adopting (and then implementing) a National Broadband Plan.

A more narrow ground also could have significant impact on Universal Service.  One argument made by Comcast was that the FCC Order is unlawful because the Commission was enforcing a 2005 Policy Statement, not an actual law.  The FCC can enforce obligations that are legally binding -- statutes, properly adopted rules and lawful FCC orders.  But a policy statement is not itself enforceable.  Its enforceability depends on the underlying legal obligations that the Commission is interpreting.  If the only "authority" relied upon is the Policy Statement, the FCC would lose.

The Policy Statement is a shortcut to the harder task of adopting specific and enforceable obligations, typically through rulemaking.  The FCC is taking a similar shortcut with its Universal Service rules.  In a series of FCC Orders, the Commission has created a federal USF and established rules for who must contribute to the Fund and on what revenues.  Each year, the FCC releases an FCC Form 499A for contributors to report their revenues for assessment purposes.  The 499A comes with 30+ pages of instructions.  The instructions purport to mandate a variety of actions by contributors, and they are frequently modified without any change in the underlying FCC rules or orders. 

The problem is that USAC acts as if the instructions are binding rules.  It is increasingly becoming more aggressive in audits and enforcement actions, relying on specific instructions that never were subject to notice and comment rulemaking, were not adopted by the FCC and could not be appealed.  If the FCC loses the Comcast case because the Policy Statement is not enforceable, it will have to return to enforcing actual law.  Hopefully, such an outcome will reign in USAC's reliance on non-binding instructions, too.  If so, it will not be a moment too soon.

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Tucked inside a semi-annual report released over the holidays, the FCC's Inspector General revealed that its most recent round of audits of the Universal Service Fund included, for the first time, an effort to identify entities that failed to contribute to the fund.  The IG contracted with an independent accounting firm to compare state PUC listings of active telecom companies with the USAC 499 filer database. 

This led to 50 letters sent in September 2009 to companies that had not filed a 499-A.  Of these 50 targets, 23 had responded by the end of the reporting period (Sept. 30).  The other group -- slightly more than half -- had not yet responded to the IG's letter.  However, this sample was taken from only six states. The IG estimates that as many as 1,000 non-filing companies may exist in 32 states. 

Although the IG lacks enforcement power, potential targets of the IG effort should be cautious.  The IG likely will refer non-filers to the FCC's Enforcement Bureau, where they could be subject to substantial penalties after an Enforcement Bureau investigation.  For example, in January 2009, the FCC proposed a fine against a small provider that filed four months late in the year that it slightly surpassed the de minimis threshold for contributions.  The FCC's proposed fine was $672,000, even though the highest amount of USF owed was alleged to be $22,000.  

With respect to its contributor audits, the IG reports that 12 audits conducted in 2009 are close to resolution.  According to the IG, three of the audits conclude that a wholesale carrier overstated reseller revenues.  This has been a frequent subject of USF appeals, leading to one FCC decision in August 2009 (now subject to an application for review) and a half dozen other appeals pending before the FCC.   It appears that more are on the way.

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Although advertised as a "policy framework" for the National Broadband Plan, Wednesday's presentation to the FCC looks more like a  "to do" list for Chairman Genachowski's 2010 agenda.  A number of suggestions will be very controversial, including ensuring "productive" use of spectrum (especially TV broadcast spectrum), spurring competition for TV set-top boxes, and measuring "advertised vs. actual" broadband speeds.  Most relevant to this blog's focus are the reforms of USF and the FCC Formal Complaint Process.  

USF Reform.  Staff emphasized that USF should be refocused to support broadband, and suggested a 5-10 year transition.  Increases in broadband support would come with "trade-offs", primarily in the form of cuts in high cost support, but with all funding programs being reformed.  The long-discussed Lifeline support for broadband services may be growing legs.  Finally, "sustainability" would be the driving force for reforming the USF contribution base (no doubt, spurred by concerns over the new 14% USF factor next quarter).

FCC Formal Complaints.  A number of enforcement reforms were discussed to promote infrastructure deployment.  In particular, the Staff urged "timely and predictable" dispute resolution by the FCC's Enforcement Bureau of pole attachment requests and development of a uniform rental rate to replace a rate that varies by the type of provider attaching to the pole.  FCC mandates to decrease the "make-ready" work a pole owner performs and to impose deadlines for current attachers to perform "make-ready" work may be on the horizon too. 

The FCC press release and Staff's presentation are available here and here.  The FCC will adopt the National Broadband Plan by February 17, 2010.

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The FCC today announced its proposed Universal Service Fund contribution factor for the upcoming quarter, 1Q 2010.  The factor will rise almost two percent, to a new record high of 14.1% of end user telecommunications revenues.  As it did earlier this year when the factor first exceeded 12%, the FCC declined to raise the threshold on the "88-12" rule for international carriers.  Instead, the FCC repeated its statement that it will give a waiver to any carrier who demonstrates that (1) its revenue is less than 14% interstate AND (2) its resulting USF contribution is more than its interstate revenue.

The public notice states that the factor will take effect automatically unless the FCC releases an order modifying the rate.  In the 12+ years of the USF, however, the FCC has never changed the proposed factor, and I don't expect to see a change this time either.  Effective January 1, telecommunications providers will be assessing USF contributions at 14.1% of end user telecom revenues.

It's hard to believe that so many people were up in arms about a federal excise tax of 3% yet the USF factor continues to rise without any real change in the fund.   Clearly, the current USF is unsustainable.  It is looking more likely than not that 2010 will finally be the year that the Fund sees significant reform. 

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As we do regularly in this blog, we preview significant items to be presented at the FCC's upcoming monthly meeting.  This month it is easy, because the FCC's agenda includes only one item: an update on the development of the National Broadband Plan. 

At the December 16th meeting, the FCC staff will present an update on the status of the National Broadband Plan, and particularly, on the "policy framework" for the Plan.  With the National Broadband Plan due to be adopted by February 17, 2010, this update likely will include the first disclosure of the major components of the plan.  Word is that the Plan will recommend ways to re-focus the federal Universal Service Fund to support broadband connections, and may include suggestions for phasing out some existing USF support in order to replace it with broadband support. 

In addition, the update may discuss proposals to examine TV broadcast spectrum as a possible source of mobile broadband service.  The possibility of authorizing broadcasters to use or lease spectrum for this purpose, or, even more radically, to reallocate broadcast spectrum to other licensees, has been floated by wireless interests in the past few months.  While certain FCC personnel have indicated a willingness to investigate this possibility, the views of the Commissioners -- the ones whose votes count -- are unclear.  We will be watching the FCC meeting with anticipation.

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In the last month, AT&T sent another round of demand letters to prepaid card providers seeking access charges on prepaid card calls. AT&T sent the first round of such letters in the fall of 2008. Now, we are seeing signs that a second group of targets has received similar letters. In all of these letters, AT&T targets prepaid calling card providers who make available local telephone numbers as an alternative to 1-800 access numbers. In this scenario, the prepaid provider typically purchases local DID numbers from a CLEC, and resells this local service along with its prepaid card service. The arrangement is similar to "foreign exchange" service in that it provides a distant entity with a "local" presence, accessible by dialing a local number, instead of requiring customers to dial long distance. AT&T contends that the use is subject to its access tariffs, and has threatened lawsuits against prepaid providers that do not cease and desist from the practice.

AT&T's first round of letters prompted a dust-up in the FCC's pending intercarrier compensation docket.  More recently, Cinco Telecom, which received one of AT&T's second round of letters, asked the FCC for clarification in the face of AT&T's threats. This request was followed by a letter from One Communications, supporting the need for clarification. On June 15, 2009 AT&T filed a response to the Cinco Telecom Corp. letter. The response submitted by AT&T denounces any need for clarification, stating that the request is "unfounded because the Commission’s order is quite clear." But AT&T ignores the pending petition for reconsideration in the docket that asks for the very relief AT&T claims is clear. And AT&T still does not explain how its tariff enables it to bill a prepaid provider for traffic when the prepaid card provider does not subscribe to any AT&T service.

The letter is significant because AT&T opens a new front against prepaid card providers -- the payment of USF. Prepaid calling card providers, like other providers of telecommunications services, must contribute directly to the federal USF based on their interstate and international telecommunications revenues. In the letter, AT&T complains that by using local dialed numbers, prepaid card providers receive an intrastate service instead of an interstate service, thereby reducing the interstate revenues available to the USF. Tellingly, AT&T copies Enforcement Bureau staff, in a clear attempt to bring additional investigations upon prepaid card providers.

Only one thing is clear in this situation: AT&T and the prepaid card providers are far apart on this issue. We have not seen any evidence that AT&T has filed suit against a prepaid card provider, but that may just be a matter of time. Unless the FCC acts, of course. Stay tuned.

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A group of international prepaid card companies have petitioned the FCC for a rule change that will allow them to file their own FCC Form 499As to cover the universal service fund assessments on their traffic.  The companies contend that the current rule unfairly punishes them and causes them to overpay into the USF by millions of dollars.  Because they have virtually no U.S. domestic calling, the companies qualify for the FCC's "88-12" rule treatment; that rule instructs carriers with more than 88% of their traffic being international to pay USF only on their domestic U.S. revenues. But another FCC rule tells carriers with "de minimis" amounts of U.S. domestic traffic not to file the Form 499A at all, instead being treated as "end users" whose traffic is lumped into that of their underlying carrier and paid for by that carrier. A carrier is de minimis when its contribution to the USF would be less than $10,000.  The combination of these rules causes many international carriers to lack the ability to file their own Form 499A because they are de minimis, but when their traffic is lumped in with another carrier that does not qualify for 88-12 treatment, the international carrier is then charged USF on its full volume of traffic.  For example, a carrier with $9,920,000 in international revenue and $80,000 in domestic U.S. revenue would have a USF assessment of about $9,600 ($80,000 x 12% = $9,600).  That would make the carrier de minimis and require it to report its revenue to its underlying carrier rather than file its own Form 499A.  But in many cases that underlying carrier does not itself qualify for 88-12 treatment and thus must pay $1,200,000 on the $10,000,000 of revenue realized by its international wholesale customer.  This amount is then passed through to the wholesale customer.  As a result, the international company must pay $1.2 million to its vendor rather than $9,600 to the USF.  The Petition to the FCC asks the agency to allow international carriers in such circumstances to file an FCC Form 499A of their own and pay directly rather than through their underlying carrier.  The Petition has gone on public notice and comments may be found here.

 

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The U.S. Court of Appeals for the Eighth Circuit has ruled in favor of Vonage and rejected an attempt by the Nebraska PSC to claim regulatory authority over VoIP.  Vonage v. Nebraska PSC, 564 F. 3d 900 (8th Cir. 2009).  Specifically, Nebraska argued that the FCC's original ruling that VoIP is subject to exclusive federal jurisdiction was effectively modified by the FCC's subsequent creation of a "safe harbor" for payment of federal universal service payments by VoIP providers.  Nebraska argued that when the FCC created a presumption that VoIP calls are 64.5% interstate, and directed VoIP providers to make USF contributions on that basis, the inevitable corollary is that 35.5% of VoIP calls are intrastate.  On that basis, the Nebraska PSC sought to levy state universal service fees on 35.5% of Vonage's Nebraska calling.  The Court of Appeals rejected the Nebraska argument, finding that the FCC's preemption of all state regulation of nomadic VoIP was not modified or inconsistent with the FCC's creation of a 64.5% safe harbor for USF purposes.  It is noteworthy, however, that the court focused expressly on "nomadic" VoIP, leaving open the possibility of a different outcome for fixed VoIP services because the FCC's earlier preemption order is based on the nomadic nature of the service being considered in that instance. Nebraska has now petitioned the FCC to modify its order to allow for state assessment of USF on VoIP providers.

Click here to read the Kelley Drye Client Advisory.
 

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On February 25, the FCC released the 2009 Form 499-A and instructions.  All telecommunications carriers are required to report their 2008 revenues on this form to calculate universal service and other regulatory fund contribution obligations. As usual, the instructions contain a number of changes in the treatment of revenues for USF purposes, which are highlighted in a Public Notice issued by the Wireline Competition Bureau. (These changes, however are of dubious legality because they are not adopted by the FCC under notice and comment rulemaking). Most notable are the following:

• The instructions now explicitly instruct telecommunications carriers to report revenues from MPLS-based services as telecommunications services (i.e., subject to USF). The Bureau asserts that MPLS is merely “an updated technique” and a substitute for ATM transmission.
• The instructions add conference service providers (CSPs) to the list of entities that must file. The Bureau initially referred to conferencing services as “telecommunications services,” but quickly revised its notice to state that conferencing is merely “telecommunications.”

Telecommunications carriers must file their 499-A by April 1, 2009. April 1 also is the last day for carriers to revise their 2008 499-A (reporting 2007 revenues).

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