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Introduction.   In a recent entry, we noted that the FCC had released a Further Notice of Proposed Rulemaking (“Further Notice”), requesting comment on proposals to revise the manner in which it assesses telecommunications carriers (Wireline and Wireless) for Universal Service Fund (“USF”) contributions.  This entry provides a more in-depth look at these proposals; principally, how, if adopted, the proposals could impact enterprise customers.

The FCC has outlined extensive changes to the current, “end-user revenue” approach for determining USF contribution obligations, focusing on currently excluded services and revenue streams.  The Further Notice also proposes two alternative approaches as potential replacements.

What’s at Stake.  The annual revenue requirement for the FCC’s Universal Service Program lies between $8 Billion to $9 Billion.  During the first six months of 2012, the USF contribution factor exceeded 17% of Wireline carriers’ end-user revenues on carriers’ interexchange (interstate and international) services.  For the 3rd quarter, the contribution factor is just below 16%.  USF assessable revenues of Wireless carriers range between 20% to 37.1% of total services charges, excluding texting and data charges.  Reportedly, most Wireless carriers rely on traffic studies to establish what percentage of their traffic is jurisdictionally interstate, rather than rely on 37.1% “safe harbor” set by the FCC.

Carriers recover their USF contributions through surcharges added to customers’ monthly bills.  Depending on the proposals ultimately adopted, business customers could find themselves paying substantially more in USF surcharges.

Why Reform the USF Contribution Rules?  The base of USF assessable revenues is dwindling largely due to the migration to high speed Internet access services (Wireline and Wireless) and IP-based services such as MPLS.  These services are either information services or  do not fall clearly within the statutory definitions of “telecommunications services” or “telecommunications.”  Exclusions and exemptions apply to other revenue streams and/or services.  In addition, the FCC appears to be looking to resolve multiple issues raised in long pending appeals of Universal Service Administrative Company (“USAC”) contribution decisions.

Possible Modifications to the End-User Revenue Approach.  The most significant proposal is to classify the revenues on high speed dedicated Internet access services (residential and business; Wireless and Wireline) and text messaging as USF-assessable; either in their entirety or assessing a set percentage of these revenues.  The FCC also appears intent on clarifying whether MPLS offerings should be subject to USF assessments.

One problematic proposed change to the current rules calls for telecommunications carriers to pay USF contributions on all revenues earned from services (telecommunications services, information services, managed services, data center, web conferencing, web hosting, cloud computing, firewall services, etc.) and CPE included in bundled offerings, unless the carrier demonstrates that the assessable services are priced “consistent with the  price it charges for standalone equivalent services or products with any discounts from bundling assumed to be discounts on non-assessable revenues.”  The proposal assumes incorrectly that standard price lists exist for interexchange services which are no longer tariffed and the rates for which are subject to substantial negotiation.

Alternative Approaches.  The FCC also requests comment on two alternatives: (1) a connections-based approach which places all services in a defined number of tiers based on the capacity (bandwidth or data rate) of the circuits or ports, generally referred to as “connections;” and (2) a numbers-based approach which would impose a fixed, monthly charge assessed on the telephone numbers (principally numbers assigned to or in-use by) the carrier’s customers.

AT&T and Verizon have supported a numbers-based approach for several years, and other carriers and stakeholders are expected to support this approach.  One argument raised against a numbers-based approach is that high capacity services provided to businesses, high speed Internet access services (business, residential or Wireless) and newer offerings such as Skype do not require the use of telephone numbers.  On the other hand, a numbers-based approach would be easier for the carriers to implement and maintain, tracks the transition of voice services from POTS to VoIP and Wireless, and should result in a more predictable and sustainable pool of assessable revenues.

Next Steps.  As anticipated, virtually every major carrier, other services providers, trade associations, user groups and other stakeholders filed Comments in response to the Further Notice on July 9, 2012.  Reply Comments are due in early August, although this date may be extended.  We will provide an update after we review those filings.