FCC USF Fines   The FCC recently proposed to levy forfeiture penalties totaling over $3.5 million against various telecommunications providers which failed to remit Universal Service Fund (USF) contributions and other FCC regulatory assessments. The FCC’s July 25, 2005 and August 12, 2005 enforcement actions signal a heightened resolve to penalize telecommunications providers which fail to pay USF and other assessments. The FCC issued five notices of apparent liability (NALs) to several interstate telecommunications providers based on, among other things, either failure to pay USF contributions or pay such contributions on a timely basis. In addition to proposing forfeitures for failure to pay USF, the agency also proposed forfeitures for failure to: a) pay regulatory fees; b) register with the FCC; c) submit Telecommunications Reporting Worksheets (i.e., FCC Form 499-A and 499-Q); d) pay Telecommunications Relay Service (TRS) fund contributions; and e) pay contributions to the North American Numbering Plan Administration (NANPA). Background Section 254(d) of the Communications Act of 1934 (the Act) requires the FCC to collect USF contributions from all telecommunications providers offering interstate telecommunications services. The funds collected are used to support telecommunications services in rural and high cost areas as well as the rural health care and schools and libraries (E-rate) programs. The FCC has appointed an administrator of the USF to perform this collection and distribution function, the Universal Service Administrative Company (USAC). Providers of interstate telecommunications services are required to complete and submit FCC Form 499-A to both register with the FCC (in order to begin offering interstate service) and provide annual revenue information to USAC for purposes of determining USF contributions. In addition, providers are required to complete and submit interim reports on a quarterly basis by means of an FCC Form 499-Q. Providers are allowed to recover USF contributions from their end-user customers. In a February 23, 2005 Order and Notice of Proposed Rulemaking, the FCC made clear in addressing the appropriate regulatory regime for AT&T’s “enhanced” prepaid cards, that prepaid calling card providers, to the extent their cards are used to make interstate calls, are covered and required to contribute under the USF program. In that decision, the FCC ruled that AT&T had unlawfully avoided paying over $500 million in USF contributions and intrastate access charges. While none of the recent NALs issued by the FCC involved prepaid calling card providers, the AT&T ruling underscores the FCC’s view that prepaid providers are required to remit USF contributions and other regulatory assessments. Penalties for Failure to Make USF Contributions Authorized and maximum forfeitures under the Act were adjusted as of September 7, 2004. The Act authorizes, for violations occurring before that date, forfeitures of up to $120,000 per violation or each day of continuing violation, with a statutory maximum of $1.2 million. For violations occurring after September 7, 2004, the Act authorizes forfeitures of up to $130,000 for each violation or each day of continuing violation, with a statutory maximum of $1.325 million. While there is no base forfeiture established in the FCC’s Rules for failure to make USF contributions, the FCC has developed a formula that it now uses consistently to assess these penalties. If the FCC initiates enforcement proceedings against a provider, it can only impose penalties for violations that occurred within one year of the NAL. However, the agency can consider conduct prior to that time for purposes of assessing the total forfeiture amount, including the upward adjustment in the base forfeiture. The FCC will impose a base forfeiture of $20,000 for each month in which the provider has failed to make the required contribution. The base forfeiture is then subject to an upward adjustment of one-half of the provider’s unpaid contributions. This formula was applied in each of the five NALs recently issued by the FCC. In addition to monetary forfeitures, providers failing to make USF contributions can be subject to more serious enforcement actions. Continuing violations can result in higher monetary forfeitures (as authorized by the Act), holds on or dismissal of pending applications before the FCC, or possible revocation of operating authority. Recent FCC Notices of Apparent Liability The NALs released on July 25, 2005 and August 12, 2005 signal the FCC’s increased enforcement resolve with respect to unpaid USF contributions. Of the approximately $3.5 million total assessed for violations of the Act and FCC Rules, the FCC assessed more than $2.6 million in back payments and penalties (among five providers) for failure to make USF contributions during the previous year. The providers each exhibited a history of either failing to make ! ! any contributions or timely contributions, a fact relied upon in setting the ultimate forfeiture amounts. Instead of summarizing each of the five NALs, the following addresses the more common deficiency patterns and how they were treated by the FCC in several of the NALs. Lump Sum Late Payments: Simply paying off outstanding contributions in response to an FCC letter of inquiry (LOI) will not release a provider from liability for penalties based on failure to make USF payments, including the upward adjustment. As an example, the NAL issued to InPhonic, Inc. (InPhonic) (a provider of mobile virtual network operator service, wireless information services, and activation and data services) assessed a forfeiture of $598,626 for failure to make USF contributions for seven out of the previous twelve months (recall that the FCC can only impose forfeitures for the year preceding the NAL). This penalty was issued even though InPhonic made a payment of over $800,000 for USF contributions it owed from 2002 to 2004 in response to an FCC LOI. InPhonic was still subject to an upward adjustment penalty of one-half of the amount it paid for outstanding contributions, even though it had remitted a lump sum late payment. The penalties were imposed despite such late payment because InPhonic had failed to make USF contributions to USAC for a period of over two years after the company began offering interstate service (recall that the FCC can consider conduct prior to the previous year for purposes of determining the appropriate total forfeiture amount). Partial Payments: Partial payment will result in a penalty of $10,000 for each month of partial payment as well as the upward adjustment of one-half of the violator’s unpaid contributions. As an example, OCMC, Inc. (OCMC) (a provider of operator and interexchange carrier services) was assessed a forfeiture of $1.133 million for failure to make USF contributions for nine months in the previous year. However, it made partial payments for seven of those months. The FCC imposed a $10,000 base forfeiture for each month in which OCMC made partial USF contributions to USAC. The upward adjustment formula remained the same, one-half the unpaid contributions. This assessment was made because OCMC had made irregular and unsatisfactory payments to the USF for several years (again recall that the FCC can consider behavior prior to the previous year for purposes of the total forfeiture). The FCC found particularly egregious those months in which OCMC made partial contributions that were not only insufficient to pay off its balance, but insufficient even to cover the company’s current monthly charges. Failure to Register and Provide Revenue Information: Perhaps the most egregious violations, as determined by the FCC, are failure to register with the FCC and failure to provide revenue information to USAC (by filing FCC Forms 499-A and 499-Q), which both include separate forfeitures, but also can increase forfeitures for failure to pay USF contributions. Failure to register and failure to provide revenue information is so egregious because it makes implementation of several FCC programs, including USF, TRS, and NANPA, more difficult or impossible and hampers efficient FCC enforcement of its Rules. As an example, Teletronics, Inc. (Teletronics) (a long distance reseller) was assessed a forfeiture of $100,000 for failure to register with the FCC, $250,000 for failure to file annual FCC Form 499-A and quarterly FCC Form 499-Q, and $308,000 for failure to make USF contributions for the previous twelve months. Because the company had failed to even register or provide any revenue information, in order to calculate the upward adjustment, the FCC had to use revenue information obtained during its investigation to estimate the amount of its outstanding contributions owed since it began operations. Therefore, failure to register will not only subject a provider to a separate forfeiture penalty, but will also likely lead to higher USF penalties because, in order to assess the USF violation penalty, the FCC must estimate revenue information to determine USF liabilities. Conclusion Telecommunications providers of all types should closely examine their USF and federal regulatory fee compliance status in light of the FCC’s increasing determination to impose heavy fines and penalties against non-compliant companies. September 2005 Back