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

Earlier today, the FCC proposed another slight decrease in the quarterly USF contribution factor. The combination of the lowest demand projection in two years plus the lowest interstate revenue ever has resulted in a proposed 15.1% contribution factor for the third quarter of 2013. This represents a slight decline from the 15.5% factor for the second quarter 2013 which was a similarly slight decrease from the 16.1% contribution factor for first quarter 2013.

The decline in the third quarter 2013 contribution factor resulted from record low projected quarterly USF revenues of $16.1 billion which were offset by low anticipated USF demand of $2.09 billion.

The declines in USF demand may come to an end as the Commission considers reforms to the USF’s Schools and Libraries program (often referred to as the “E-Rate” program). As we pointed out in an earlier post, President Obama recently called for reforms to the E-Rate program to increase access to high speed connectivity in schools and libraries. If implemented, these reforms could lead to increased demand for USF support which, in turn, could increase the USF contribution factor. FCC Commissioner Rosenworcel stated yesterday that a proceeding to consider reforms to the E-Rate program would be started this fall.

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In a speech yesterday, President Obama proposed to reform the federal Universal Service Fund's Schools and Libraries program (commonly referred to as the "E-rate" program.  He directed the FCC to implement a program under the E-rate fund to bring high speed connectivity to 99 percent of the nation's students within five years.  The President targeted a minimum of 100 Mbps, with a goal of 1 Gbps, available to each school and library.

The bulk of the money for this reform likely would come from other savings in the USF program.  If implemented, this proposal means that the USF program will not shrink -- and USF contribution rates likely will stay around their current 15-17% range -- but the share of the pie devoted to E-rate will increase.

This reform is needed in part because the E-rate program is pressing against its current cap.  For the second year in a row, the FCC authorized USAC to use undisbursed funds from previous years to supplement current funding (a so-called "carry forward").  With this approval, the FY 13 E-rate program will have enough funding to meet expected Priority 1 demand (telecom and internet access services).  It is not clear whether there will be enough money left over to fund Priority 2 services (internal connections and maintenance).

Obama's announcement was met with immediate pledges of support from Acting FCC Chair Mignon Clyburn and from FCC Commissioner Jessica Rosenworcel.  Obama's proposal is similar to the "E-rate 2.0" proposal that Commissioner Jessica Rosenworcel proposed a few months ago.  Commissioner Rosenworcel will be a key player in moving the proposal forward. 

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Josh Guyan contributed to this post.

The FCC’s November 18, 2011 USF/ICC Transformation Order established the Connect America Fund (CAF) and provided for two phases of funding for expanding broadband coverage to unserved locations. The Commission allocated $300 million for CAF Phase I support that was offered to price cap local exchange carriers (LECs) to deploy broadband to locations unserved by fixed, terrestrial Internet access with speeds at a minimum of 768 kbps downstream and 200 kbps upstream. In July 2012 the price cap LECs accepted only $115 million of the $300 million allocated. On May 22, the FCC released an order offering the price cap LECs another $300 million for 2013, as well as the $185 million that was left on the table last year. Carrier elections are due within 75 days of the order, or by August 5, 2013. There are, however, a few key differences in this year’s proposal:

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With the e-rate program pressing against its cap in funding, the FCC seems to be clamping down on its competitive bidding procedures.  For the fifth time this month, the FCC's Wireline Competition Bureau denied a school's e-rate appeal because it failed to comply with the competitive bidding procedures.

In this case, the applicant, Fall River School District, evaluated bids using criteria that weighed price equally to another factor, "knowledge of infrastructure" (both factors were weighed 25% in the bid evaluation).  This violates the FCC's rule, which requires that price be given more weight than any other single factor.  Thus, the Bureau denied the school district's appeal.

Significantly, the Bureau also refused to grant a waiver to the school district.  Unlike in other cases, where the FCC concluded that the school had selected the lowest cost provider, the Bureau concluded here that it could not be sure that the vendor was the lowest cost provider.  It also found that there was no way to tell whether, if the school district had properly given price the greatest weight, the outcome of its bid evaluations would have been the same.  Therefore, the Bureau denied the appeal and the waiver request.

Finally, it is notable that the Bureau acted with unusual speed in resolving this appeal.  Whereas many appeals take years to resolve, this appeal was filed only on February 28 of this year.  Perhaps the Bureau acted quickly to emphasize the importance of complying with the competitive bidding procedures.

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David Darwin co-authored this post.

In the final days of the Genachowski era, the FCC’s Wireline Competition Bureau continued to press forward to implement and refine the Connect America Fund (“CAF”).  Late yesterday, the Bureau released a number of order and notices on various parts of the CAF that will affect both Tier 2 and Tier 3 local exchange carriers (“LECs”) and their support.

First, to implement the CAF Phase II program in price cap LEC service areas, the Commission ordered the establishment of a process for determining eligible areas for Phase II support. After examining the National Broadband Map to determine whether census blocks are unserved and determining whether unsubsidized competitive providers in served blocks are offering both voice and broadband services, the Commission will put together a list of those census blocks it concludes lack unsubsidized providers and that are, therefore, potentially eligible for support. Such designations would then be open to challenges by both price cap LECs and unsubsidized competitors.

Additionally, the Commission issued a notice seeking comment on two potential frameworks to provide rate-of-return (Tier 3) carriers with additional incentives to more efficiently deploy broadband services. The first approach comes in response to rate-of-return carriers petitioning the Commission to make universal service fund support available to support broadband lines, including where consumers choose not to purchase voice service. To that end, the Commission seeks comment on a proposal by the rural carrier associations regarding changes to the existing framework to make those funds available for standalone broadband-service network infrastructure.

The second possible framework on which the Commission seeks comment would facilitate rate-of-return carriers’ voluntary participation in CAF Phase II, which sets defined support amounts for a defined period of time with specific service deployment requirements and which may prove advantageous for some rate-of-return carriers. Recognizing that rate-of-return carriers already have the option of voluntary conversion to price cap regulation, the Commission seeks comment on what steps it could take to further these conversions and on others issues that may arise in the provision of Phase II support to those carriers.

And, finally, following its questioning in the original CAF Order whether the authorized rate of return for CAF participants should be lower than the current 11.25 percent, the Commission issued a staff report on the proper rate-of-return for LECs participating in CAF programs, concluding that the rate should fall between 8.06 and 8.72 percent. The Commission also issued an accompanying notice seeking comment on that report’s analysis and recommendations.

You can expect the Bureau to continue to press forward on implementing the CAF, even with the Chairman exiting. In fact, we believe a new Phase I order for price cap LECs will be released very soon – possibly today.

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Shortly after I posted an entry noting the FCC's denial of e-rate appeals for competitive bidding violations, the Wireline Competition Bureau issued another decision along the same lines.  In this case, however, the focus was on the conduct of the service provider during the bidding process. 

This case involves a Missouri service provider, Synergetics Diversified Computer Services.  The Bureau found that Synergetics assisted the school in submitting the request for services (Form 470), including the fact that the Form 470 was submitted from the service provider's IP address.  While limited service provider assistance is permitted after a contract is signed (in submitting the Form 471), service providers are not permitted to assist a school in drafting or submitting its Form 470, which starts the competitive bidding process.  In a caution that all service providers should heed, the Bureau declared that

any direct involvement by the service provider in the preparation and submission of the FCC Form 470, even clerical or data entry assistance, is a violation of the Commission’s competitive bidding rules

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Earlier this month, the FCC's Wireline Competition Bureau denied three appeals by school districts seeking funding under the Schools and Libraries Program of the Universal Service Fund.  In all three decisions, the Bureau found that the school had failed to follow the Commission's competitive bidding rules for such requests, and therefore, the USAC had properly denied funding of the request.

The decisions highlight three elements of the competitive bidding rules:  (1) that the selection of vendors be based on the bid process itself, (2) that all information be disclosed to all potential bidders and (3) that price be the primary factor in selecting vendors. 

Collectively, the cases serve as a reminder to schools and service providers alike that the bid process must be fair and open in order to receive funding from the program.  Both school districts and service providers need to be vigilant to avoid inadvertent violations of the e-rate program's competitive bidding rules.

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Earlier this month, we told you about the FCC's change of heart regarding "free" equipment bundled with e-rate eligible services.  The FCC's proposed rule change was published in the Federal Register today, establishing the comment dates for the proceeding.  Comments on the proposal are due May 23, 2013, with reply comments due June 7.

Service providers offering bundled services and school systems purchasing bundled services are affected by the rule change.  If adopted, the FCC's rule would require schools and libraries to perform a cost allocation for all bundled service packages, including mobile service plans that offer free or discounted handsets with a service contract.

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In 2010, the FCC revised its rules for the Schools and Libraries Program of the federal Universal Service Fund (commonly known as the "e-rate" program).  One of the principal changes to the rules was the adoption of rules prohibiting e-rate recipients from receiving gifts from service providers.  The FCC has clarified its gift rules twice, but has had other clarification requests pending for some time.  Yesterday, the FCC issued a public notice addressing an aspect of its rules that has caused the most confusion -- when and how a service provider may provide free or discounted equipment bundled with eligible services without cost allocation of the ineligible portion.

Significantly, the public notice proposes to reverse course from the guidance provided in December 2010 that permitted, at least, cell phone contracts that include a free or discounted phone for customers signing a service contract.  Instead, under the proposal set forth in the public notice, service providers would be required to conduct a cost allocation in all instances where equipment is bundled with eligible services.  If adopted, the rule would end the "free cell phone" exemption from the cost allocation rules.

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The FCC recently announced revisions to its debt collection process for those carriers that are delinquent in contributing to the FCC’s Universal Service Fund (“USF”), Telecommunications Relay Services Fund (“TRS”) and North American Numbering Plan Fund (“NANP”) (collectively the “Funds”). Under the new procedures, the Fund administrators will forward delinquent accounts directly to the United States Department of Treasury (“Treasury”) for collection (where a 28% collection fee is added), rather than forwarding them to the FCC first. In addition, the FCC will no longer send delinquency notices to contributors for these types of debts.

These revisions could have a significant impact on telecommunications providers, who now may receive only a single notice before an outstanding debt is transferred to Treasury for collection. Contributors will have to exercise greater diligence to ensure that they receive notices of delinquent obligations to the Funds and do not mistakenly incur collection fees.
 

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I don't expect this to go anywhere, but this request is too interesting to ignore any longer.  On May 25, 2012, a library in Caroline County, Virginia petitioned the FCC to declare that Vonage is a "common carrier" under Title II of the Communications Act and to compel Vonage to register as a provider under the federal e-rate program.  The library seeks this in order to collect e-rate discounts of $1,000, "not an insubstantial amount for a small library." At its core, however, this is another example of the uncertainty created by the FCC's long-standing refusal to classify interconnected VoIP services.

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Last week, the FCC issued a Notice of Apparent Liability against a telecom carrier for failing to pay Universal Service Fund (USF) contributions.  This aspect of the NAL underscores the FCC’s continued emphasis on USF enforcement, but is, in and of itself, not uncommon in FCC enforcement.  The NAL proposes fines of slightly more than $1.5 million for failing to pay USF (including an upward adjustment of $500,000 representing one-half of the highest outstanding amount owed), plus $160,000 in proposed fines for related violations involving the filing of 499-Qs and failure to pay NANPA, LNP and FCC regulatory fees.

In a significant departure from prior practice, however, the FCC proposes not only to hold the carrier liable for the violations, but also to extend liability to the carrier’s sole owner, an individual. The Commission asserts that it may “pierce the corporate veil” in this instance and hold the individual liable for the forfeitures proposed against the carrier.  The NAL asserts that it is appropriate to pierce the corporate veil if (1) there is a common identity of officers, directors or shareholders, (2) there is common control between entities, and (3) it is necessary to preserve the integrity of the Communications Act and to prevent the entities from defeating the purpose of statutory provisions.

This is the first time the FCC has asserted veil-piercing in a forfeiture proceeding, and the first time it has proposed to apply it to an individual. The two prior cases cited by the FCC, for example, involved (a) calculation of the statute of limitations based on an informal complaint that identified a closely-related and similarly named sister company and (b) the exercise of the FCC’s spectrum allocation authority.  Neither case involved proposed forfeitures or FCC enforcement.  If it is successful, the FCC’s action would represent a significant expansion of its forfeiture authority.  Moreover, if the claim holds, virtually any wholly-owned entity could be subject to veil piercing in the enforcement context.
 

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 After two quarters of near-18 percent contribution factors, the Universal Service Fund's quarterly contribution factor is declining again.  For the third quarter of 2012, the USF contribution factor will decline to 15.7%.  This two percent decline again demonstrates the volatility of the contribution factor.  The change is due primarily to a $300 million increase in reportable revenues and a significant decline in Lifeline expenditures (presumably due to the Lifeline Reform Order).  

But, as Commissioner Pai points out, a 15% USF contribution factor is hardly good news.  The drumbeat is sounding for USF reform.  We hope the current FNPRM will lead to a reduction in USF costs for carriers and their end users.

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As it does every year, the FCC released its update to the annual Form 499-A.  The Form 499-A is used to report revenues for purposes of the federal Universal Service Fund and also for calculating associated revenue-based contribution obligations such as TRS, NANP, LNP and FCC Regulatory Fees.  The Public Notice describes changes to the form, primarily to implement the new requirement that non-interconnected VoIP providers contribute to the TRS fund.  (Non-interconnected VoIP providers were required to register with USAC for this purpose by December 31, 2011.)

The 2012 Form 499-A has been posted on USAC's website.  Go to "universal service links" in our Resource Center on the right-hand side of this page for the USAC Forms page.

REMINDER:  Kelley Drye will discuss these changes, important developments in USF audits and other topics at our 3rd Annual USF Update Webinar next week.  This is our most popular webinar of the year.  Please register today. 

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This post was drafted by Chip Yorkgitis and Josh Guyan.

On Friday, February 3, 2012, the FCC's Wireline Competition Bureau and Wireless Telecommunications Bureau jointly released an order revising and clarifying certain aspects of the sweeping universal service and intercarrier compensation reform order adopted last November. The clarifications address the rates applicable to VoIP-PSTN traffic, access stimulation and the CETC phase-down of high-cost support, among other things. 

The clarification order will be effective thirty days after it is published in the Federal Register, which is likely to occur quickly. However, as a practical matter, the clarifications are effective immediately in light of the rules being clarified already having taken effect.

For more information, see Kelley Drye's Advisory on the clarification order.

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Back in November, we told you that the FCC was considering an order on reconsideration in the 2008 audio bridging classification appeal brought by InterCall, Inc.  It took over two months, but the FCC last week issued an order denying in full the petitions for reconsideration of the Classification Order.

The petitions were brought by two free conferencing providers, who argued that the FCC had misinterpreted the nature of audio bridging service (or at least their audio bridging services).  In the reconsideration order, the FCC denies the petitions.  While we had hoped that the reconsideration order would provide additional explanation of the rationale for classifying audio bridging as telecommunications, except for a discussion of bundled services, the order does not provide further guidance on the classification of bridging services.  As a result, audio conferencing providers will be left with the existing uncertainty for the foreseeable future when making classification decisions.   

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 As we warned over a week ago, the USF contribution factor is rising to a new record high of 17.9%.  The Commission made it official late today, releasing this Public Notice announcing the new contribution factor for the first quarter of 2012.  The nearly 18 percent factor is by far the highest contribution factor in the history of the universal service fund.

One aspect of the new factor deserves special mention.  For years, the FCC has employed a Limited Interstate Revenue Exemption (LIRE) for calculation of the contribution obligations of carriers with significant international revenues.  This rule, also known as the "88/12" rule, provides that if a carrier's interstate revenue is less than 12% of its total interstate + international revenue, then the carrier pays USF only on its interstate revenue (and no USF on its international revenue).  The rule was put in place in response to a court decision that found that USF assessments which exceed a carrier's gross domestic revenue are unlawful.  

The current LIRE threshold is set at 12% of total revenues.  Every quarter in which the USF contribution factor exceeded this 12% threshold, the FCC has included an invitation to carriers to petition for waiver of the LIRE threshold if their contributions would exceed their gross domestic revenues.   No carrier has yet taken the Commission up on this invitation.  However, with the spread between the LIRE and the USF contribution factor now nearly 6%, we expect that there may be a few carriers whose percentage of interstate revenue falls between the LIRE threshold and the USF contribution factor.  If so, we invite those carriers to contact us to discuss filing a petition for waiver with the FCC.

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This is starting to sound like a broken record.  Once again, the USF contribution factor is poised to make a big jump upward to a new record high.  Once again, we wonder here whether this will finally be the time that the FCC moves forward to reform the contribution side of the USF.  With the volatility and high rates, one must wonder whether the current mechanism can satisfy the requirement that the USF fund be "specific, predictable and sufficient."

Here's the bad news:  according to a prominent USF analyst, the FCC will soon announce a first quarter 2012 contribution factor of 17.9%.  This is an increase of over 2.5% from the current factor and by far is the highest that the USF rate has ever been. 

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This morning, the FCC's November 18, 2011 High-Cost USF and Intercarrier Reform Compensation Order was published in the Federal Register triggering an effective date of December 29, 2011 for all parts of the Order and rule changes adopted therein, except for the information collection requirements contained in some of the rules adopted.   Those information collection requirements will not become effective until approved by the Office of Management and Budget.  A subsequent Federal Publication will be made announcing the effective dates of those sections.  A copy of today's Federal Register publication is available here.

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Late yesterday, the FCC released the text of its USF Reform and Intercarrier Compensation Reform Order, which it adopted on October 27.  The FCC's rules, among other things, transition terminating access charges to zero, apply access to VoIP-PSTN traffic, adopt rules addressing access stimulation (prevalent in free conferencing, for example), and tackling the problem of phantom traffic.  

The order is 759 pages long, with over 2,500 footnotes and 84 pages of rules.  As we warned, the impact of these rules on individual business plans is highly fact-specific.  We encourage you to contact your advisor to learn more. 

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For audio conferencing providers, "round two" of the FCC's regulation has begun.  (Round one was 2008's Audio Bridging Classification Order, which applied direct USF contributions to the audio conferencing industry).  On November 3rd, the Wireline Competition Bureau denied a Universal Service Fund appeal concerning "IP audio conferencing services."  At the same time, the Commission announced it is close to deciding the appeals of the 2008 classification order.

Both developments signal that the inclusion of conferencing in USF is here to stay.  In the appeal, the FCC agreed that USF obligations apply to "IP in the middle" audio conferencing, and denied the conferencing provider's request to apply USF prospectively.  In the upcoming reconsideration order, we don't know what the decision will say, but I would be surprised if it does not uphold the 2008 classification. 

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Today the FCC announced the proposed universal service contribution factor for the fourth quarter of 2011.  Based in large part on recently revised projections showing an increase in low income demand (largely due to prepaid wireless phones), the proposed contribution factor will rise nearly 1%, to 15.3%. 

This marks the third quarter ever, but the second quarter this year, in which the USF contribution factor exceeded 15%.  Although the USF factor is not fluctuating as much as it did last year, the fact that it has hovered around 15% all year continues to create significant compliance, litigation and reporting issues for telecommunications carriers.  Carriers should closely review their methodologies for reporting USF revenues on the Form 499-A and for recovering USF contributions from end users.  At a 15% contribution factor, the costs of over or under reporting USF make the effort worthwhile.

REMINDER: You can track the official USF contribution factor through the links in our Resource Center. Go to "Universal Service Links" on the right hand side of the page.

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Last September, the FCC adopted new rules governing gifts received by applicants for disbursements under the FCC's Schools and Libraries program of the Universal Service Fund (known as the "e-rate" program).  Although the FCC clarified its rules once already, application of the new rules is proving to be very difficult.  For the second time, the Universal Service Fund administrator (USAC) is seeking guidance from the FCC regarding how to apply the rules.

The guidance request appears to result from USAC's review of Funding Year 2011 e-rate applications.  Judging from the scope of the questions asked, a large number of e-rate applications may be affected by the guidance request.  In addition, although the FCC clarified that the e-rate gift rules did not apply before January 3, 2011, several requests implicate issues that are raised in pending appeals of prior funding year decisions.  The FCC's decision, therefore, likely will have broad implications for e-rate applications, past and future.

The FCC did not seek comment on the guidance request back in December, and it is not clear whether it will seek public comment in this instance.  Given that funding decisions typically are issued around this time, it is likely the FCC will act quickly on the request.

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Once again, USAC and the federal Universal Service Fund are driving fundamental classification questions regarding telecom services.  In the latest example, USAC has requested the FCC's guidance on how to treat text messaging services for universal service purposes.  Several parties have tried before to have the FCC opine on the classification of text messaging services, with no luck so far.  Only time will tell whether USAC's request will spur FCC action where others have failed.

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Last week brought new actions in three of the FCC's most common enforcement areas:  Failure to pay USF contributions, "robocall" telemarketing violations and "junk fax" solicitations.  One action also is an example of anti-spoofing enforcement by the Commission.  The Commission's actions are briefly described below.

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A broad coalition of telecommunications carriers is asking the FCC to initiate a rulemaking proceeding to determine the proper treatment of MPLS-based services for regulatory and Universal Service purposes.  The coalition, which includes Verizon, XO, Level 3, Qwest and four other carriers, are providers of services based on the Multi-Protocol Label Switching (MPLS) technology.  The carriers recently met with advisors to the FCC's Wireline Competition Bureau and urged the FCC to clarify prospectively the proper treatment of services based on this technology.

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Despite many high-profile forfeiture proceedings, significant outreach by the FCC and even a new app to facilitate filing, the level of CPNI certifications filed this year was on a par with 2010. 

Last year, we reported about 3,000 CPNI certifications filed during the filing window.  This year, 2,858 submissions were made through 3/2/11.  While many filers certified on behalf of multiple USF filers, this total still is about a thousand carriers below the number of active USF filers as identified in USAC's most recent contribution factor report and is well below the 6,700 filers in USAC's database. 

It appears that the FCC has achieved about as much compliance as it is going to receive from the universe of required filers.  Now, the question is whether it will pursue more $25,000 fines from the remaining (mostly small) entities that failed to file a certification. 

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On March 1, the FCC's Wireline Competition Bureau released its revised Form 499-A, the Telecommunications Reporting Worksheet.  This Worksheet must be used by telecommunications providers and interconnected VoIP providers to report annual 2010 revenues for USF, TRS, NANPA, LNP and FCC Regulatory Fee assessments.  The Form 499-A is due by April 1, 2011.

The 2011 Form 499-A Instructions mark the Bureau's first major revision to the Instructions since the FCC began using the Form 499-A in 2000.  The Bureau has substantially reorganized the Instructions and consolidated some of the discussions.  As a result, a comparison of this year's Instructions to the 2010 Instructions is not an easy task.  We will continue to review the Form and expect to discover any changes over the next few weeks.  Filers should consult their regulatory counsel prior to filing their 2011 Form, just to be sure.   

For the benefit of our readers, we post here the FCC Public Notice, the revised Form 499-A and the revised Instructions.  These forms also are available on the Universal Service Links page of our Resource Center.  For easy "two-click" access to these and other regulatory resources, bookmark our site. 

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The FCC's February 9, 2011 Universal Service Fund (USF) and Intercarrier Compensation (ICC) Reform NPRM was published in this morning's Federal Register (FR).  This is the triggering event for establishing the actual comment due dates set forth in the item.  Here are  the deadlines:

Comments on Section XV (ICC "Immediate Reform", including VoIP classification, phantom traffic and traffic stimulation): 30 days from FR publication / April 1

Reply Comments on Section XV (ICC "Immediate Reform", including VoIP classification, phantom traffic and traffic stimulation): 45 days from FR publication / April 18

Comments on all Sections other than XV: 45 days from FR publication / April 18

Comments of State Members of the Federal-State Joint Board on Universal Service: 59 days from FR publication / May 2

Reply Comments on all Sections other than XV: 80 days from FR publication / May 23

And the "ex parte" round is likely to rage all summer long....

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Customer Proprietary Network Information Certifications

All telecommunications carriers and interconnected VoIP providers must file an annual report certifying their compliance with the Federal Communications Commission’s (FCC) rules regarding Customer Proprietary Network Information (CPNI). The report covers calendar year 2010 and must be filed with the FCC by March 1, 2011.

The FCC’s Enforcement Bureau recently released a FCC Enforcement Advisory addressing the importance of making timely and compliant filings and noting that filers now have the option of filing CPNI certifications via a new FCC web application, in addition to filing via ECFS, mail or by hand delivery.

Form 477: Local Competition and Broadband Report

The Local Competition and Broadband Report, containing data as of December 31, 2010, must be filed by March 1, 2011. The report requires the submission of information regarding broadband connections in individual states.

Who Must File:
(1) ILECs or CLECs that provide local exchange service to one or more end user customers;
(2) facilities-based providers of mobile telephony services that serve one or more mobile telephony subscribers;
(3) entities (including all commonly-owned or commonly-controlled affiliates) that are facilities-based providers of broadband (i.e., faster than 200 kbps, in at least one direction) connections (including both wired lines and wireless channels) to one or more end users in a state; and
(4) providers of interconnected VoIP services that provide interconnected VoIP service to one or more subscribers in a state.

Reporting Basis:
In addition to specific reporting requirements contained in the Form 477 Instructions, for all broadband technologies other than terrestrial mobile wireless, filers must report broadband subscribership information by Census Tract.

Filing Process:
The Form 477 Report must be submitted via an FCC web-based interface and filers will need to use their Federal Registration Number (FRN) and associated password to access the system.

REVISED Form 499-Q Quarterly Telecommunications Reporting Worksheet

Providers required to contribute to universal service support mechanisms must report their actual and projected end user and wholesale revenues for each calendar quarter by filing FCC Form 499Q on a quarterly basis. Filers making revisions to the February 1, 2011 Form 499-Q filing must submit the revisions to the Universal Service Administrative Company (USAC) no later than March 18, 2011.

REVISED Form 499-A Annual Telecommunications Reporting Worksheet

All providers of interstate telecommunications service and all common carriers are required to file FCC Form 499-A with USAC each year with limited exceptions. Filers making revisions to their previous year’s Form 499-A Telecommunications Reporting Worksheet filing which result in a decreased contribution must submit the revisions to USAC by March 31, 2011.
 

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Late yesterday, the FCC released its latest NPRM on high cost USF and ICC reform (see our 2/8 post).  The 289 page item, available here,  sets forth staggered comment dates triggered by federal register publication.  The first -- 30 days after Federal Register publication -- is for comments on intercarrier compensation for VoIP traffic, rules to address phantom traffic and rules to reduce access stimulation.  Reply comments are due 15 days after that.  Comments on the rest of it will be due on the same day (45 days after Federal Register publication).  State members of the Federal-State Joint Board on Universal Service get two extra weeks to file comments.  All reply comments on the remaining sections are due 80 days after federal register publication.

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The FCC earlier today adopted (but has not yet released) a substantial NPRM on universal service fund (USF) and intercarrier compensation (ICC) reform, signaling that the agency is ready (again) to engage anew in its decade long quest to reform these interrelated subsidy and compensation regimes that nearly all interested parties agree are unsustainable.

With roughly $4.5 billion/year in play on the high cost USF side and approximately $8 billion/year at stake on the ICC side, this is a proceeding in which many will want to weigh-in or at least track carefully. Yes, we realize that we said this 10 years ago and again back with the last swell of activity in 2008, but the timing and circumstances of today’s action, as well as the remarks of each Commissioner seem to suggest that odds of the agency taking concrete steps toward adopting meaningful reforms are higher now than they ever have been.

That said, it remains unlikely that the agency could adopt an order addressing comprehensive high cost USF and ICC reform before 4Q11. The process will be neither quick nor easy. And, as many will note, conspicuously absent from today’s NPRM are proposals for USF contribution reform. It seems strange that the fund is to be re-purposed to support broadband in advance of adopting a requirement that broadband providers contribute to the fund. Lifeline reform also gets punted to another day, but the agency promises it is working on getting to this soon. With the proposed USF Mobility Fund also on a separate track, it appears that the Commission has liberated itself from the notion that it must address all pieces of the puzzle at one time in one order.
 

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The following FCC forms are due on or before February 1, 2011:

Form 499-Q Quarterly Telecommunications Reporting Worksheet

Carriers required to contribute to universal service support mechanisms must report their actual and projected end user and wholesale revenues for each calendar quarter by Filing Form 499Q on a quarterly basis. The Form 499-Q filing reporting historical revenue for October 1 through December 31 of 2010 and projected revenues for April 1 through June 30 of 2011 is due to USAC by February 1, 2011.

Note: Revisions to this Form 499-Q filing must be filed within 45 days of the February 1, 2011 filing due date.

Form 502: North American Numbering Plan Numbering Resource Utilization/Forecast Report

Carriers that receive numbers from the North American Numbering Plan Administrator (“NANPA”), pooling administrator or other carriers must file the Form 502 to report numbering usage and forecast future numbering resource needs. Reports for the six month period ending December 31, 2010 are due to the NANPA by February 1, 2011. 

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As expected, late yesterday, the FCC announced that it would again attempt to tackle its "holy grail" of regulatory action:  reforming carrier-to-carrier compensation mechanisms and the high-cost program of the Universal Service Fund.  The FCC has placed a Notice of Proposed Rulemaking addressing both intercarrier compensation and USF reform on its agenda for February 8.  The combined NPRM furthers the National Broadband Plan's promise to refocus FCC policy to supporting broadband networks.

These two topics are at the core of what we cover in this blog.  The complicated mix of carrier-to-carrier compensation mechanisms, which make how a call is classified critical to determining its cost, has engendered significant litigation involving such issues as VoIP, prepaid calling cards, access charges, reciprocal compensation and many others.  Meanwhile, the funding and administration of the $7 billion per year Universal Service Fund is a constant source of audit issues, enforcement actions and rulemaking proposals.

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Yesterday, the FCC announced the appointment of six members to USAC's Board of Directors.  Don't expect much change in the way USAC operates, however:  five of the six members are current members of USAC's board.  The only new board member is Jose Manuel Jimenez of Cox Communications, who fills a vacant position reserved for cable operators.  

One position -- a board position reserved for interexchange carriers with more than $3 billion in annual revenues -- remains vacant.  See the FCC's public notice seeking nominations here. 

The six board members are listed below.  

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It did not take long for the FCC to respond to the flurry of questions being posted regarding the new E-rate rules adopted in the FCC's Sixth Report and Order in the Universal Service proceeding.  Yesterday, the FCC's Wireline Competition Bureau released both a Public Notice and an Order addressing many of the questions that had been posted.  E-rate applicants and service providers should review these documents carefully.  Most rules are applicable to Funding Year 2011 applications.

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On September 28, 2010, the FCC released a Sixth Report and Order revising its rules for disbursements from the Schools and Libraries Program of the Universal Service Fund (commonly referred to as the "e-rate" program).  The Universal Service Fund administrator, USAC, recently posted questions it has received in training sessions discussing the new rules.  In all, it forwarded 38 questions raised in the sessions, which are available here.  The questions primarily address how to apply the new dark fiber reimbursement rules and the rules prohibiting e-rate recipients from receiving gifts from service providers.

There is no word yet whether the FCC plans to put the questions out for comment.

12/15 UPDATE:  Several parties have submitted similar requests for clarification, primarily of the gift rules.  These letters make it more likely that the FCC will seek comment on the issue soon.

E-rate Management Professionals Association letter

Patton Boggs letter

State E-rate Coordinators Alliance letter

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One month ago, we reported on Universal Service demand levels that suggested a significant increase in the USF Contribution Factor.  Yesterday, the revenue figures came in low.  As a result, the 1Q 2011 contribution factor is predicted to be a record 15.5 percent.  This is even higher than the increase we expected last month.

As usual, our projections come courtesy of telecommunications consultant Billy Jack Gregg, of Universal Consulting.  The summary of Mr. Gregg's calculations is available here.  This will be the fourth quarter out of the last five where the USF factor changed (plus or minus) by at least 1.2 percentage points from the previous factor, raising the question whether the Fund meets the statute's "predictability" standard.

REMINDER:  You can track the official USF contribution factor through the links in our Resource Center.  Go to "Universal Service Links" on the right hand side of the page.

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As has been expected, the FCC late Friday released an order finding that states can require nomadic interconnected VoIP providers such as Vonage to pay state universal service fund contributions on a prospective basis provided that (1) the relevant state’s contribution rules are consistent with the FCC’s universal service contribution rules (i.e., states must allow a provider to treat as intrastate for state USF purposes the same revenues treated by the provider as intrastate under the FCC’s USF contribution rules), and (2) the state does not apply its contribution rules to intrastate VoIP revenues attributable to another state (i.e., no two states can impose USF assessments on the same intrastate revenues).

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As we have covered in this blog (see here and here), the Universal Service Fund contribution factor has bounced between 12 and 15 percent for the past year or so.  Yesterday, telecommunications consultant Billy Jack Gregg predicted that the USF factor is in for another significant increase -- to a near-record level of 14.7% for 1Q 2011.  This would be the fourth quarter out of the last five where the USF factor changed (plus or minus) by at least 1.2 percentage points from the previous factor.   This hardly seems to satisfy the "predictability" standard for the Fund. 

Mr. Gregg, of Universal Consulting, has kindly allowed us to post his calculations here.  He notes:

Assuming that the contribution base is the same as for the fourth quarter of 2010, the USF assessment factor for the first quarter 2011 will rise from 12.9% to 14.7%, the second highest assessment factor in history. USF revenue projections are due out in a month.

Mr. Gregg attributes the increase primarily to projected USF demand of $2.212 billion -- the highest amount in history -- based on increases in the High Cost Fund and the Schools and Libraries Fund.

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The Government Accountability Office (GAO) recently released a study of the FCC's e-rate program controls.  The GAO study recommended that the FCC conduct a "robust risk assessment" of its e-rate program and revise the internal control structure of the program.  What caught our eye, however, was the commentary on USAC's e-rate beneficiary audits.

The GAO criticized USAC's beneficiary audits as lacking documented and approved policies and procedures.  As a result, "[USAC] management may not have the assurance that control activities are appropriate and properly applied."  It specifically criticized USAC for not using information gathered from the audits to assess and modify the e-rate program's internal controls.  As an example, the GAO noted that of 64 beneficiaries that were audited multiple times over a three year period, 56 percent of the beneficiaries (36 of 64) had the same audit finding in multiple years.

The full GAO report is available here.

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What:   FCC Form 499Q: Telecommunications Reporting Worksheet - Quarterly Filing for Universal Service Contributors.  Contributors must project 1Q telecommunications revenues for 2011 and report actual telecommunications revenues for 2Q 2010.

When:  Due on November 1, 2010

Who must file:  All carriers that are required to contribute to the maintenance of universal support mechanisms.  De minimis contributors (those with an annual contribution to the FCC's Universal Service Fund below $10,000) need not file a 499Q but must keep records demonstrating their de minimis status. 

See the KDW Client Advisory for more information.

REMINDER:  Revisions to the 499Q must be filed within 45 days of this deadline. 

REMINDER:  CMRS and interconnected VoIP providers that rely on traffic studies instead of the jurisdictional safe harbor must submit their studies quarterly.

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In a recent USF appeal, the FCC agreed with a prepaid card "platform provider" that each of its customers, not the platform provider, is the "carrier" for Universal Service purposes.  The FCC ruled, however, that the platform provider may owe USF on transport services it provided, unless it properly qualified the customers as resellers under the USF rules.  The case, Network Enhanced Telecom LLP, is discussed after the jump.

Prepaid card providers should take note.  This decision carries implications for all "carrier" responsibilities, including 214 authorizations, tariffing, CPNI obligations and responsibility for marketing claims, not just for USF contributions.

Wholesale carriers and resellers also should take note.  This represents the first time since Global Crossing that the FCC has addressed the obligations of wholesale carriers to qualify their resellers -- a persistent point of contention in USF auditing and reporting. 

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As we noted, the FCC is working its way through the 600+ proposed fines included in the Omnibus CPNI NAL.  Virtually every day, the Enforcement Bureau releases a handful of consent decrees resolving several proposed fines.  This one contained an unusual feature, and therefore, caught our eye.

On October 5, the Bureau settled two investigations of Global Information Technologies.  One investigation involved the failure to file a CPNI certification, for which GIT received a $20,000 proposed fine.  The other investigation involved whether GIT overcharged customers for the USF owed as a result of the services they received.  (FCC rules prohibit carriers from collecting more than the contribution factor times the end user's interstate telecom revenues). 

In this Consent Decree, GIT agrees to a $23,500 voluntary contribution to resolve the investigations. They get to pay it over 24 months (less than $1,000 per month).  In addition, however, GIT agreed to notify the customers it may have overcharged for USF contributions.  If GIT refunds the USF overcharges to any of the customers, it gets to deduct that amount from its voluntary contribution to the FCC.  In other words, GIT must pay its customers or the FCC, but not both.  In our experience, that is the first time the FCC has agreed to a provision like that.

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One of the hottest areas in enforcement and litigation is the Federal Universal Service Fund.  In fact, with USAC embarking on an expanded set of audits and investigations since August, USF disputes are about to multiply.  Therefore, news that the FCC is seeking nominations for Board members of USAC is important to this blog.

In a Public Notice yesterday, the FCC announced it is seeking nominations for seven positions on USAC's 19-member board of directors.  Two of the positions are vacant, the other five are for members whose terms are expiring.  The FCC is seeking nominations for these positions:

• Representative for cable operators (vacant)
• Representative for interexchange carriers (vacant)
• Representative for mobile providers
• Representative for supported schools
• Representative for supported libraries
• Representative for consumer advocates
• Representative for non-rural incumbent LECs

Nominations must be submitted by October 27. 

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AT&T has joined the ranks of petitioners seeking to overturn the Wireline Competition Bureau's tough stance on contributors' late-filed USF forms.  On September 13, AT&T joined Airband Communications in seeking Commission-level review of the Bureau's Denial Order. 

Note:  A third carrier, Airnex Communications, filed a petition for reconsideration of the Denial Order. 

AT&T asserts that the Denial Order is inconsistent with other orders granting waivers of Form 499 filing deadlines.  For good measure, AT&T also asks the FCC to act on its 5-1/2 year old petition to reverse the 1-year amendment deadline that it missed in this instance. 

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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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