Due to the
increased “safe harbor”, the USF R&O will result in increased contributions for wireless providers,
including Mobile Virtual Network Operators (“MVNOs”). It also extends
USF contribution requirements for the first time to “interconnected VoIP providers”, establishes a 64.9% safe
harbor and requires such providers to submit an FCC Form 499-Q and 499-A registration on or before August 1, 2006.
Wireless Safe Harbor
Wireless providers
(including MVNOs) are already required to contribute to USF by filing annual FCC Forms 499-A and quarterly FCC Forms 499-Q. However, due to the administrative difficulties associated with allocating interstate
versus in-state calling by wireless customers, existing FCC rules have permitted wireless companies to assume that only 28.5%
of their telecommunications revenues are interstate. This is known as the wireless
“safe harbor.” Pursuant to the USF R&O, the wireless “safe
harbor” will increase to 37.1% starting with the FCC Form 499-Q due on August 1, 2006.
This means that a wireless provider electing to use the “safe harbor”, such as an MVNO, would contribute
approximately 4% of its total revenues (37.1% times the applicable contribution factor for the quarter) to USF as interstate
revenue.
The FCC set the
37.1% “safe harbor” by taking the highest percentage of interstate and international usage by a wireless company
according to a traffic study conducted by TNS Telecoms for TracFone Wireless. The
FCC indicated that it could have set the “safe harbor” at a higher level by assuming the upward trend in wireless
revenues would continue and setting the percentage higher to avoid having to reset the “safe harbor” in another
few years.
If a wireless provider
chooses not to use the “safe harbor” it can contribute to USF based on actual revenues or use a traffic study
to estimate revenues. Pursuant to the USF R&O, if the wireless provider
chooses to use a traffic study, it must submit the study to the FCC and the Universal Service Administrative Company (“USAC”)
for review. The traffic study used for a particular quarter must be submitted
by the deadline for that quarter’s FCC Form 499-Q.
USF and Interconnected VoIP
The USF R&O
requires, for the first time, providers of “interconnected VoIP service” to contribute to USF and to submit an
annual FCC Form 499-A and four FCC Forms 499-Q per year. “Interconnected
VoIP services” are those VoIP services that: 1) enable real-time, two-way voice communications; 2) require a broadband
connection; 3) require IP-compatible customer equipment; and 4) permit subscribers to receive calls from and initiate calls
over the public switched telephone network. Without determining whether VoIP
services are “telecommunications service” or “information services”, the FCC concluded that “interconnected
VoIP providers” are “providers of interstate telecommunications” for purposes of the universal service requirements
of the Telecommunications Act of 1996 and that the “public interest” requires that they contribute to USF.
Like wireless providers,
“interconnected VoIP providers” can contribute by 1) using a “safe harbor” (set at 64.9%), 2) using
actual revenues or 3) using a traffic study to estimate interstate revenues. The
FCC set the VoIP “safe harbor” at 64.9% because it determined that “interconnected VoIP service” is
predominantly used for interstate and international calling, like wireline toll service.
The percentage of interstate revenues reported to the FCC by wireline toll providers is 64.9%, so the FCC established
the same percentage as a “safe harbor” for “interconnected VoIP providers.”
In addition, those
“interconnected VoIP providers” that offer customers a bundled package of services that includes equipment and
enhanced services may have difficulty allocating revenues from “interconnected VoIP services” as opposed to the
equipment and enhanced services. In such circumstances, the FCC has determined
that “interconnected VoIP providers” may use the two “safe harbors” from the FCC ‘s 2001 CPE
Bundling Order. Pursuant to the CPE Bundling Order methodology, such
“interconnected VoIP providers” can elect to either: 1) report revenues from bundled “interconnected VoIP
services” and equipment/enhanced services based on the unbundled service offering prices, with no discount allocated
to the “interconnected VoIP services”; or 2) treat all revenue from the bundled services as “interconnected
VoIP service” revenue for purposes of USF. For example, if an “interconnected
VoIP provider” provides a bundled service offering combining voice mail (an enhanced service offering that is $6 on
a stand-alone basis) and “interconnected VoIP service” ($20 on a stand-alone basis) for a bundled price of $22,
the “interconnected VoIP provider” has two options. It can either
report $20 in “interconnected VoIP service” revenue (allocating no part of the $4 discount to the “interconnected
VoIP service”) or report the $22 bundled price (by electing to treat all bundled revenues as “interconnected VoIP
service” revenues).
“Interconnected
VoIP providers” that choose to report actual interstate revenues for USF purposes should beware that the FCC has indicated
that such providers would possess the capability to track the jurisdictional confines of customer calls and would no longer
qualify for the preemptive effects of the Vonage Order. Such a VoIP provider
would therefore be subject to state regulation. The FCC preempted state regulation
of Vonage in the Vonage Order because it was impossible for the company to separate its traffic (interstate versus
intrastate) on a jurisdictional basis. Therefore, if an “interconnected
VoIP provider” were able to separate interstate revenues from intrastate for purposes of USF, it would be able to do
the same for purposes of state regulation.
“Interconnected
VoIP providers” are also permitted to report interstate revenues based on a traffic study estimate. However, to do so, “interconnected VoIP providers” must first submit the proposed traffic study
to the FCC for approval.
The USF R&O
requires that “interconnected VoIP providers” file FCC Forms 499-Q, starting with the August 1, 2006 form, reporting
revenue for the second quarter of 2006 and projecting revenue for the fourth quarter.
Such providers are also required to submit annual FCC Forms 499-A, starting with the April 1, 2007 form, and an FCC
Form 499-A registration (including a designated agent for service of process). The
FCC Form 499-A registration should be submitted before or concurrent with the August 1, 2006 FCC Form 499-Q. Wholesale carriers supplying telecommunications services to “interconnected VoIP services”
must continue to include the revenues derived from those services in their contribution bases for two quarters after the effective
date of the USF R&O. This will likely result in both the wholesale
provider and the “interconnected VoIP provider” contributing to USF on the same transmission and facilities, which
the FCC recognizes.
Requirement for Interim Change
USF is a federal
fund which collects a percentage of most providers’ interstate and international telecommunications revenues to subsidize
communications services for rural and low income areas, as well as for schools, hospitals and libraries (also known as the
E-rate program). The current contribution factor is 10.5%, down 0.4% from last
quarter. USAC determines the amount needed for disbursements, considers the assessable
revenues and then sets the contribution factor to meet those requirements. Therefore,
if assessable revenues decline or remain stagnant and the size of the fund’s required disbursements increases, the contribution
factor must be increased.
While the size
of USF disbursements has increased from $4.4 billion in 2000 to $5.7 billion in 2004 to $6.5 billion in 2005, the assessable
revenue base has declined from $79 billion in 2000 to $74.7 billion in 2004. This
has put upward pressure on the contribution factor, which increased from 5.7% in first quarter of 2000 to 8.9% in the fourth
quarter of 2004 to 10.5% in the current quarter (third quarter 2006). The
decline in assessable revenue is due to the decline in long distance service revenues from $192 million in 2000 to $177 million
in 2004. During the same time period, wireless service revenues have increased
from $70 billion to $122 billion. While the FCC does not have information regarding
the revenues of “interconnected VoIP providers,” the subscriber levels for such providers have increased from
150,000 in 2003 to 1.2 million in 2004 to 4.2 million in 2005. Therefore, the
FCC has increased the wireless “safe harbor” and extended USF contribution requirements to “interconnected
VoIP providers” to increase the assessable revenue base.
Notice of Proposed Rulemaking
The FCC also seeks
comment on several issues in the Notice of Proposed Rulemaking (“NPRM”) included with the USF R&O. Specifically, the FCC seeks comment on: 1) whether to eliminate or raise the wireless
interim “safe harbor”; 2) whether wireless providers can, or should be able to, determine their actual interstate
and international end-user revenues; 3) how to determine the “safe harbor” percentage to better reflect market
conditions on an ongoing basis, such as periodic adjustments to reflect revenue trends; 4) whether to reconsider the USF obligation
imposed on “interconnected VoIP providers” and 5) whether “interconnected VoIP providers” can identify
the amount of interstate and international (as opposed to intrastate) services they provide.
In addition, Appendices C and D to the USF R&O are proposed revised FCC Forms 499-A (with instructions)
and 499-Q (with instructions).
A copy of the text
of the USF R&O can be accessed at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-06-94A1.pdf.
Please feel free
to contact us if you have any questions or we can be of any assistance to you.
July 2006
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