Fifth Circuit: False Claims for USF Funds Are Not Subject to False Claims Act Suits

Court holds that USF funds, administered by a private corporation, are not “federal funds” within meaning of False Claims Act.

One weapon in the government’s anti-fraud arsenal – the False Claims Act – will no longer be available to the Feds in their efforts to combat bogus claims made to the Universal Service Fund (USF) if a recent decision out of the U.S. Court of Appeals for the Fifth Circuit sticks.

The USF, of course, is the multi-billion dollar cash reservoir used to subsidize a variety of programs designed to assure that all Americans have affordable access to essential telecommunications services. Created by Congress in 1996 (but having roots dating back to 1934), the USF is funded by mandatory contributions from telecom carriers, who in turn pass the charges along to their customers. If you haven’t heard of it, take a look at your phone bill, which has a surcharge of more than 15% to cover your share of your carrier’s mandatory contribution to the USF. Since pretty much every phone bill every month to every customer everywhere includes that line item, the cash coming into the USF is not chickenfeed. (Illustrative examples: Annual USF disbursements exceeded $8.5 billion in 2012; earlier this month the Commission expanded the funds available to the Education Rate (E-rate) component of USF – which supports communications technology (e.g., Wi-fi) in schools and libraries – to more than $3 billion annually for the next two years.)

The USF is administered by the Universal Service Administrative Company (USAC), a non-profit corporation established to oversee the day-to-day operation of the USF. Contributions go directly to the USAC, which then distributes them back out to service providers in furtherance of USF programs.

When so much money is doled out anywhere, you can pretty much count on people trying to get their hands on more than they’re entitled to.

And sure enough, there has historically been no shortage of fraudulent claims presented for USF disbursements. In response, the Commission has brought many enforcement actions and levied large forfeitures. It recently established a “strike force” to step up efforts root out USF-related fraud.

But the FCC isn’t the only possible enforcement agency. The Department of Justice can sue suspected wrong-doers, and even if DoJ declines that opportunity, private citizens can bring “qui tam” actions on the government’s behalf.  (“Qui tam” is a bit of Latin legalese which describes a lawsuit brought by a private individual to enforce a government claim. The benefit to the individual: she or he gets a piece of any recovery.) That’s what happened in Texas last year.

In 2013, a project manager for a telecom company filed a lawsuit under the federal False Claims Act (FCA), 31 U.S.C. §3729. He accused a number of telecom companies of tampering with mandatory equipment procurement procedures (which require competitive bidding), “gold plating” equipment provided to schools, and substituting E-Rate-ineligible equipment for eligible equipment. The complainant said that the alleged bad guys were in effect lying to the government and, thus, making a false claim for government funds, i.e., E-rate payments.

The targeted defendants (who included, among others, Cisco) moved to dismiss the complaint, arguing that there was no legitimate FCA claim, because the FCA applies only to claims made for federal funds, and the USF is not comprised of federal funds. That argument didn’t get any traction with the trial court, so the defendants appealed to the Fifth Circuit.

Yup, the Court of Appeals said, funds administered by the USAC – i.e., USF funds – are not federal funds, so no claim arising from alleged E-rate fraud may be made under the FCA. As the Court saw it, the USAC is a private entity, even if it was created to administer a government program. And the fact that the FCC directs the USF programs for which disbursements are made by the USAC doesn’t matter. None of the USF contributions made by the carriers go into the U.S. Treasury; rather, those contributions are paid directly to the USAC, which then distributes the funds directly to eligible claimants. In other words, the money never passes through U.S. government hands. Since the U.S. Treasury doesn’t fund USAC, and the Federal government isn’t on the hook for any of USAC’s obligations, the U.S. government suffers no loss as a result of E-Rate fraud and thus “does not have a financial stake” in such losses. To sustain an FCA claim, the Court said, the Federal government must have financial exposure to losses arising from the alleged fraud.

For an FCC that just established a “strike force” to attack USF fraud, this decision is not good news. The FCC’s own ability to directly attack fraud may not be impaired, but beyond that the government’s remedies are now limited. The Commission can levy forfeitures and bar vendors from further participation in USF programs, but the threat of prosecution under the FCA – an alternative that provided a nice deterrent to the mix – now appears to be off the table.

We don’t know yet whether the government plans to pursue this issue further. It could seek rehearing (or rehearing en banc) in the Fifth Circuit, or it could even take the case to the Supreme Court. It might also try similar litigation in other federal circuits, looking for contrary decisions that might increase the likelihood of Supreme Court review. Perhaps legislative relief could be sought. The Justice Department may also have a thing or two to say, since the decision likely has implications for other federal grant programs. We’ll have to wait and see what happens.

Form 499-A Instructions: Comment Sought (Again) on Proposed Changes

The latest version of the FCC’s clarification on reseller certification language recommended for use by wholesale telecommunications providers is now available for comment.

The FCC’s Wireline Competition Bureau is seeking comment on another round of proposed changes to the Form 499-A and Form 499-Q instructions. The latest proposals contain (among a few other things) what many hope will be the final version of the “reseller certification” language for use starting next year. (Reseller certifications are what wholesale telecommunications providers rely on to ascertain applicable Universal Service Fund (USF) contribution obligations.)

Our regular readers will recall that the Commission’s “Wholesaler-Reseller Clarification Order” from nearly a year ago promised clarification to the reseller certification language in the upcoming Form 499-A instructions.  As we observed last March, that clarification was missing from the instructions released earlier this year. Then in August we reported that a group of wholesale telecommunications providers had offered suggested revisions to the reseller certification language and other aspects of the FCC Form 499-A instructions.

(If you need to refresh your recollection of the information in our previous posts, now would be a good time to go back through them again. That background will be helpful for what follows.)

After considering the suggested revisions (and the comments filed in response to them), the FCC seems finally to be settling in on a new set of (proposed) instructions and reseller certification language for use starting in 2014. The much awaited clarification language proposed in the new instructions largely reflects the suggestions of the wholesale telecommunications providers. Notably, the proposed language does not require service specific certifications (i.e., certifying that 100% of a service is being incorporated for resale as USF assessable telecommunications) as contemplated by the Bureau’s original proposal last year. Rather, wholesale providers will be able to obtain certification in a number of ways – including on an “entity-level” or “account-level” (among others) – as long as a portion of the services sold by a wholesale provider is being resold as USF assessable telecommunications.

The new reseller certification language also incorporates another potentially significant change not originally included in any of the prior proposals. In response to the proposals of the wholesale providers, another telecommunications provider also suggested language to accommodate the fact that wholesale telecommunications providers often offer services to other wholesalers. Indeed, there could be many wholesalers in the chain before service is ultimately provided to a “reseller” that is serving an end-user consumer. Previous iterations of the reseller certification language contemplated only that a wholesale provider’s immediate customers would be the ones offering services to end-users (and thus with the obligation to contribute directly to the USF program). The new proposal contemplates the possibility “that another entity in the downstream chain of resellers directly contributes to the federal universal service support mechanisms on the assessable portion of revenues from offerings that incorporate the purchased services.” This is likely a welcome addition for many middle-of-the-service-chain wholesale providers who have, in the past, had problems obtaining certifications from (and providing certifications to) other wholesale-resellers using the previously approved language.

If you have specific thoughts or comments on the proposed changes, the Public Notice sets a comment deadline of November 27, 2013. Apparently, the Bureau is not providing any opportunity for reply comments. We expect that the Bureau will be trying to issue the final, approved version of these instructions before the end of the year because wholesalers must implement the new reseller certification language at the beginning of 2014.

[SIDE NOTE: The Bureau is also proposing some less polite non-substantive changes to the Form 499-A instructions.  Previous iterations of the instructions politely requested Form 499 filers to comply with certain requirements, such as “Please provide an original officer signature…” The word “please” has been completely stricken from the instructions in the latest proposal. Should we be offended?]

Form 499-A Instructions: The Industry Suggests an Alternative

The FCC seeks comment on proposed changes to the Form 499-A instructions submitted by a group of wholesale carriers.

The Commission is on a constant crusade to ensure that all telecommunications providers who are supposed to be contributing to the Universal Service Fund (USF) are in fact doing so . . . and doing so in the proper amounts. Last month the FCC received some help from the private sector in the form of a letter – filed jointly by eight wholesale telecommunications providers (including Verizon, AT&T, Sprint, CenturyLink and XO Communications) – offering suggested revisions to the “reseller certification” language, and other aspects, of FCC Form 499-A. 

And now the Wireline Competition Bureau (WCB) has solicited input on the proposal.

The USF, of course, is a program which supports several federal, telecom-related, subsidy programs. It is funded through mandatory “contributions” – the guv’mint prefers that you don’t call it a tax, even if it looks like one – from telecommunications providers based on their “end-user” revenues. (More below on what constitutes an “end-user”.) The providers traditionally don’t dip into their own pockets to make the payment; instead, they simply pass the cost along to their customers in a separate line item charge. Still, providers want to be sure that they aren’t overpaying, while the Commission wants to make sure that all are paying their fair share.

Which brings us to Form 499-A.

That’s the elaborate financial form in which providers report their revenues in considerable detail. As noted above, USF contributions are based on revenues from “end-users” – so knowing precisely what an “end-user” is is a necessary first step to completing the form accurately. Unfortunately, determining which customers are “end-users” is not always easy. Even the WCB and the Universal Service Administrative Company (USAC), the office that administers the USF, had problems on that score. Those problems led them to ask the FCC to clarify certain points, which in turn led the FCC to issue a “Wholesaler-Reseller Clarification Order” (Clarification Order) last year. 

The Clarification Order, however, didn’t deliver on the promise of its name. Instead, the Clarification Order expressly instructed the WCB to propose and seek public comment on revisions to wholesaler-reseller guidance contained in the 499-A instructions including, specifically, new sample language for use on “reseller certifications”. (Such sample certification language is of particular importance because the FCC considers it part of the “safe harbor” procedures for obtaining valid reseller certifications.) WCB duly proposed some language and asked for public comment, but since then no new sample language has been formally adopted.

What’s the fuss about reseller certifications, you ask? Good question, but you may be sorry you asked.

Since USF contributions are based on revenues from end-users, it’s essential to be able to keep careful track of where a provider’s revenues are coming from and whether the source of the revenues is an “end-user” or not. As it turns out, that’s not as easy a question as it might seem.

Some companies purchase telecommunications, incorporate those telecommunications into their own service offerings, and then provide those service offerings to others. These companies are often referred to as “resellers.” Make sense?

Companies that provide telecommunications to resellers are often referred to as “wholesalers.” A reseller can also be a wholesaler if it is providing services to other resellers. A reseller would not be considered a wholesaler if it’s providing services only to end-users. Still following along?

A reseller is (usually) not considered an end-user. Since companies are obligated to contribute to USF only on services provided to end-users, wholesalers that provide services only to resellers are off the hook (usually). Good to be a wholesaler, right?

But wait… there’s more.

Sometimes, a reseller who should be contributing to the USF program doesn’t do so for any of a number of reasons, not all of them valid.  When that happens – regardless of the reseller’s reason for not contributing – the FCC requires that wholesalers treat (or re-classify) that reseller as an end-user for USF reporting and contribution purposes. In other words, a wholesaler is on the hook for USF contributions on revenue derived from services the wholesaler provides to non-contributing resellers.

But how is a wholesaler supposed to know whether any reseller it’s dealing with happens to be a “non-contributor” – that is, whether the wholesaler must treat any resellers as “end-users” for USF purposes? 

Can you say “reseller certification”?

The FCC requires that wholesalers obtain these certifications from resellers at least annually. Among other things, the reseller certification is supposed to reflect whether a reseller is actually reporting its own end-user revenue and making direct contributions to the USF program on that revenue. If a reseller legitimately certifies that it has properly taken care of its USF contribution responsibilities (which can usually be verified through the FCC’s website/database), then the wholesaler won’t be responsible for USF contributions generated from services provided to that reseller.

For many years now, the industry has operated under a presumption that, if a reseller is contributing directly to the USF program, a wholesaler will not be responsible for USF contributions on any services provided to that reseller. But in the Clarification Order, the FCC held that wholesalers must verify that resellers are contributing to the USF program on essentially a service-by-service level.

That wouldn’t be too difficult in some weird Alternate Universe where resellers invariably incorporate 100% of a telecommunications input (purchased from a wholesaler) to provide only either (1) a service that will be subject to USF contributions, or (2) a service that is not subject to USF whatsoever. But here on the Real Planet Earth, companies are likely to incorporate a single telecommunications input into a variety of product and service offerings, not all of which are necessarily subject to USF contributions.  That makes the verification expected by the FCC vastly more difficult.

In response to the Clarification Order, the WCB’s original proposals for revising the 499-A instructions (see page 24) contemplated, in part, that resellers should certify the exact percentage of a wholesale telecommunications input on which resellers were actually making USF contributions. Presumably, wholesalers would then be responsible for USF contributions on the remainder if the percentage was under 100%.

Needless to say, the industry was not pleased with this proposal, or many of the WCB’s other proposed changes to the reseller certification portion of the 499-A instructions. The recent proposal submitted by the eight industry participants (each with significant wholesale operations) constructively attempts to simplify the certification process (as much as possible, anyway). The industry proposal contains, among other things, modified “sample reseller certification language” to be included in the 499-A instructions. Wholesalers are not obligated to use the sample language contained in the 499-A instructions, but doing so offers a safe-harbor presumption of reasonableness for ensuring that resellers are indeed contributing to the USF program on purchased services. (Of course, that’s also contingent on a reseller being able to attest under penalty of perjury that the sample certification language is true and accurate with respect to its operations.)

Will the WCB ultimately adopt the proposed language for the next iteration of the 499-A instructions? We can’t say for certain. What is clear, though, is that the previous “safe-harbor” reseller certification language is only good until the end of this year. So whatever changes are in store will likely (and hopefully) happen soon, or wholesalers will be left without certainty on how to ensure compliance with USF contribution requirements.

If you have specific thoughts or comments on the proposed changes, the Public Notice sets a comment deadline of September 6, 2013, and a reply comment deadline of September 13.

FCC Form 499-A: Updated and Ready to File by April 1

The newly revised FCC Form 499-A and its accompanying instructions are now available, but some expected revisions on wholesaler-reseller USF exemption guidance are conspicuously absent.

It’s March! Spring is right around the corner, the excitement of college hoops is in the air, and you only have a few weeks left to come up with a clever April Fools’ Day prank to play on your coworkers. (If you’re short on novel – and safe – ideas, here’s a classic.) As if that’s not enough excitement, telecommunications providers get to experience the fun of preparing the annual FCC Form 499-A filing due by April 1. 

The FCC has released its annual update of the Form 499-A, including changes to the Form’s accompanying instructions. All joking aside, there really are some interesting aspects to this year’s new 499-A – including some anticipated “guidance” that is conspicuously absent. We’ll discuss that more after we cover some of the 499-A basics.

When to file? 499-A filings are due by April 1. If you’ve filed the 499-A before, you know it’s a process that has undoubtedly contributed to the madness in March. It’s as fun as filing your taxes but with virtually no possibility of getting a deadline extension. So don’t be a fool, and don’t miss the April 1 due date – the potential penalties are no joking matter.

Who has to file? With very few exceptions, telecommunications providers of all kinds must file the 499-A. This includes, for example, providers of wireless and wireline telephony, interconnected and non-interconnected VoIP service, audio bridging service, prepaid calling cards, and satellite services. A common misconception is that the 499-A and other FCC requirements don’t apply to non-voice/data services or to companies that simply buy and resell the services of other carriers. Don’t be fooled (there’s that word again): the definition of telecommunications is quite broad (basically, any transmission of information could fit) and the 499-A’s applicability is vast.

(REMINDER: The FCC’s new accessibility-related recordkeeping certification is also due by April 1. If you’re required to file the FCC Form 499-A, you’ll most likely need to also file this new certification. Sorry, not joking here, either.)

Where and how to file? You can still file the 499-A the old-fashioned way, on paper. Filings are submitted to the Universal Service Administrative Company (USAC), not directly to the FCC. If you’re a veteran filer (i.e., you’ve filed a Form 499 by paper before), you can even submit the 499-A online via the USAC website. To file online, you’ll need a computer and a company officer with an email address.

What to file? Filers must report revenue from the prior calendar year (the upcoming filing will report 2012 revenue). Of course, revenue must be reported on the 499-A in a very special – and by “special” we mean “complex” – way. You can’t just copy and paste from your tax returns or financial statements. Revenue has to be reported by categories of service and sources of revenue (i.e., whether it’s derived from end-users or other providers, such as resellers). Revenue must also be allocated on the 499-A to intrastate, interstate and international jurisdiction. There are rules for how to do all this, some of which are described in the instructions which accompany the Form 499-A. Other nuances of completing the 499-A may necessitate consulting the FCC’s regulations or the numerous orders on federal Universal Service Fund (USF) reporting and contribution compliance.

Why file? It’s all about the money! The FCC wants to know how much money is generated from telecommunications. More significantly, the 499-A is used to calculate contributions owed by telecommunications providers to various federal programs. These programs include the USF, Telecommunications Relay Services (TRS) Fund, North American Numbering Plan (NANP) Fund, Local number Portability (LNP) Fund, and the FCC’s Interstate Telecommunications Service Provider (ITSP) Regulatory Fees. Since money is involved, it’s important to report and allocate revenue properly on the 499-A. If you report revenue incorrectly, it could lead to over-contributions or under-contributions to the various federal programs. Under-contributing sounds great (right?), except it could also lead to those pesky penalties we mentioned earlier. If you’re required to file but don’t (even if you claim you didn’t know about the requirement), you will also be subject to – guess what – potential penalties.

What’s so interesting about the 499-A this year?

For starters, this year marks the first time that the FCC has released an updated Form 499-A after letting the public have an opportunity to provide feedback on proposed revisions to the Form and its instructions. If you’ve ever tried to complete the Form 499-A, or any form for that matter (just ask some Canadian Senators), this makes great sense (unlike many of the forms/instructions themselves). What better way to make a form better than to solicit input from those who will be completing it?

According to the Wireline Competition Bureau (WCB) last year, getting public feedback on the proposed revisions would serve “to promote clarity, transparency and predictability.” Again, that makes great sense! So why, then, is this the first time the WCB has sought public comment on proposed revisions to the 499-A form/instructions?

Um, because the Commission told it to, in the so-called Wholesaler-Reseller Clarification Order (we’ll just call it the Clarification Order for short). Basically, nobody had told the WCB it had to seek feedback on revisions to prior 499-A forms and instructions, so previously it hadn’t bothered to. But “to promote clarity, transparency and predictability” sounds better than “we’re doing this now because we were told we had to.”

As its nickname suggests, the Clarification Order focuses mainly on revenue reporting issues – questions dealing with services provided by wholesalers (a/k/a underlying carriers or carrier’s carriers) to reseller carriers. The 499-A’s instructions supposedly contain “guidance” on the parameters and processes wholesalers should utilize to determine whether revenue should be reported as exempt from or subject to USF contributions. But those instructions have historically left filers (and USAC – the entity responsible for administering the USF program) unclear on how to make the determination in a manner which would satisfy the FCC. (Properly determining revenue reporting for USF purposes is pretty important, especially since the rate at which USF contributions are calculated has been as high as 17.9% in the past year!)

Accordingly, the Clarification Order attempted to clarify the process. Among the particulars up for clarification: the “reseller certifications” (a/k/a USF exemption certificates, verifications of USF contributor status, among other things) used by the telecommunications industry to help determine ultimate responsibility for USF contributions and how to report revenue on the Forms 499. The Clarification Order expressly instructed the WCB to propose and seek public comment on revisions to wholesaler-reseller guidance contained in the 499-A instructions including, specifically, new sample language for use on reseller certifications. (The new sample certification language is of particular importance because the FCC considers it part of the “safe harbor” procedures for obtaining valid reseller certifications.) Since the WCB had to obtain feedback on these revisions anyway, it opened the floor to comments on all of the proposed changes.

Now we turn back to the changes on this year’s Form 499-A and accompanying instructions.  Guess what’s missing? That’s right, the sample reseller certification language which formed the bulk of the WCB’s proposed revisions to the wholesaler-reseller guidance portion of the 499-A instructions somehow didn’t make the cut. Instead, the new instructions essentially say that wholesalers/resellers can rely upon suggested reseller certification language contained in last year’s 499-A instructions, at least until the end of 2013. What should filers do after the end of this year? No word. Why did the guidance get cut? No word. 

So much for clarity, transparency and predictability.

We have a couple theories.

First, it’s possible the WCB simply ran out of time to evaluate all the thoughtful feedback provided by the public. After all, considering this was the first time public feedback had to be incorporated into the revision process, the WCB was on a fairly tight schedule. The comment deadline was January 11, providing the WCB a little over a month-and-a-half to consider the feedback and incorporate it (or at least any worthy elements of it) into the final revised 499-A and instructions by early March. (Of course, this still means that filers are left with less than a month to digest the final changes, implement modifications to reporting methodology, and prepare the 499-A to be filed by April 1 to avoid – say it with us – potential penalties.) The time constraints would’ve been even greater if certain revisions necessitated Office of Management and Budget approval pursuant to the Paperwork Reduction Act.

Another theory is that the WCB did not include the proposed revisions because soon the guidance provided in the Clarification Order may not be any good. In addition to the feedback in response to the 499-A revisions, a couple of parties of have also filed petitions for reconsideration (see here, and here) of the Clarification Order. It’s possible these petitions could result in further modifications to wholesaler-reseller USF obligations, prompting the WCB to wait. 

Then there’s also the idea, perhaps a little far-fetched, that the proposed revisions would be completely irrelevant because the FCC will soon reform the entire USF contribution program as a result of a proceeding (re)initiated last year.

Whatever the actual reason may be, you’ll have to wait a little longer before getting absolute (is that possible?) clarity, transparency and predictability on the wholesaler-reseller USF issues in question.

In the meantime, take a look at the WCB’s Public Notice summarizing the final changes to this year’s 499-A and instructions. There are no April Fools’ jokes in the Public Notice, but there are some other changes that should be reviewed by those who need to file the Form 499-A by April 1.

USF Contribution Reform Underway (Again)

Facing steady declines in contributions under the existing system, the FCC is trying – for the third time – to come up with a successful Plan B. Here’s hoping that three’s the charm. 

As we have reported, the Commission recently overhauled the way it doles out the Universal Service Fund (USF), a fund that last year exceeded $8 billion. Now the Commission has turned its attention to the all-important question of how it should be rounding up the cash to be doled out. In a Further Notice of Proposed Rulemaking (FNPRM), the FCC is exploring a number of potentially significant changes to the USF contributions process. 

Historically, the USF has been funded through contributions from common carriers and certain other telecommunications providers. While 2,900 (or so) telecommunications providers currently chip in to the USF, nearly 75% of USF contributions come from five companies: AT&T, CenturyLink, Sprint Nextel, T-Mobile, and Verizon.  But these contributors don’t pay out of their own pocket, as they routinely recover their USF contribution costs from their customers, usually through a line item for USF pass-through charges which is included on each consumer’s monthly bill. Since the bill for USF is thus ultimately footed in large measure by Joe and Loretta Average-Phone-User, USF funding is an important consumer issue.

The Commission is under considerable pressure to expand the universe of USF contributors or otherwise pump up contributions. That pressure arises from decreasing contributions and increasing USF demands.

When the Commission first implemented USF contributions pursuant to the Telecommunications Act of 1996, it chose to assess contributions based on the contributor’s end-user revenues, i.e., revenues received from retail customers or from other, non-contributing, carriers.  But that approach has proven problematic, thanks to a steady decline in end-user wireline toll revenue (i.e., long-distance voice revenue) for the last 10 years or more. (The decline is attributable in part to reduced long-distance rates stemming from intercarrier compensation reform over the last decade.) Since end-user wireline toll revenue comprised the largest share of the contribution base, the result has been a commensurately steady decline in contributions.

Meanwhile, as the contribution base shrank, demand for universal service support increased, from $4.5 billion in 2000 to $8.1 billion in 2011. The result: a skyrocketing quarterly contribution factor (the percent of revenues that contributors must fork over to the USF), peaking recently at a whopping 17.4% of a customer’s phone bill. (By comparison, that factor was under 6% in 1999.)

The growth of the contribution factor is widely seen as unsustainable. It’s also harmful to competition, since certain classes of communications services must pay this “tax” (which they in turn pass through to their customers), while other services – such as broadband Internet access providers – are not subject to it at all.

What’s the FCC to do?

The Commission has looked at this funding problem a number of times in the last decade. Through proceedings in 2001-2002 and 2008 the FCC sought to develop alternatives to the current revenues-based contribution system. Those efforts foundered when industry players could not agree on solutions. The Commission took interim steps to ensure the viability of the USF by increasing the contributions from wireless carriers and extending contribution obligations to providers of interconnected VoIP services. The Commission has also sought comment (but never acted) on suggestions that providers of the most significant new communications technology – broadband Internet access service – should contribute to the Fund. 

Now, facing an increasingly unsustainable situation, and with the weight of historical failures on its back, the Commission is again seeking solutions to the USF funding problem. Among the proposals on the table in the FNPRM: bringing broadband Internet access providers into the contributor pool and assessing providers on a per-connection rather than a percentage-of-revenues basis. In particular, the Commission seeks comments on a number of core issues, including:

Who should contribute and for what service? The Commission revisits the perennial question of whether broadband Internet access providers should contribute to the USF. Other lucky contenders for new contributor status are “one-way” VoIP services that either originate or terminate on the public switched telephone network (e.g., Skype Out), text messaging services, and dedicated enterprise high-speed data connections. The FCC also asks whether this would be an opportune time to adopt an all-purpose, “future proof” general definition for contributing providers, or whether new services should continue to be brought into the USF fold on an ad hoc, service-by-service basis. If a general definition is adopted, should non-facilities-based providers (e.g., resellers and ISPs that ride on another provider’s facilities) be exempt? To broaden the Fund’s contribution base even further, should the FCC declare that intrastate services are assessable, and does it have the authority to do so? How should assessable services be treated if they are bundled with non-assessable services? What about getting rid of some exemptions? The FCC seeks comment on eliminating the current exemptions for international-only and limited international revenues as well as the systems integrator exemption. How would extending contribution obligations to international-only providers comport with the FCC’s statutory authority to assess “providers of interstate communications”?

How should contributions be assessed? What methodology should be used to determine contribution amounts?  As an alternative to the current revenues-based system, should assessment be based on the number of customer “connections” to the network? Some parties have argued that such an approach is more stable and predictable, and ultimately less administratively complicated, than a revenues-based approach. If adopted, should the per-connection assessment vary based on tiers of speed or capacity? One common proposal would be to assess providers $1 per residential connection, with the assessment for multi-line business connections calculated to meet the remaining needs of the Fund. Alternatively, should assessment be based on the amount of phone numbers under control of a service provider? How would a numbers-based approach deal with provided services that are not associated with telephone numbers? Should a provider be assessed for numbers that it controls but does not use to provide service? The FCC also seeks comments on multiple proposals for a “hybrid” system involving assessment of both numbers and connections.

The above only summarizes some of the more prominent complicated issues that have to be addressed in reforming the USF contribution system. It is no surprise that the Commission failed in its last two attempts to implement broad reform.   Many parties believe that the Commission must get the job done this time. If so, we hope that the third time is a charm – although in the eyes of many, any optimism about possible success this time around brings to mind the description of remarriage often attributed to Samuel Johnson: the triumph of hope over experience.

Comments are due in this proceeding by July 9, 2012, with reply comments due by August 6. Let us know if you need more information.

FCC Query: How Much Free Internet Does it Take to Get Consumers Hooked?

The Universal Service Fund (USF) – it’s not just for telephone service anymore.

For more than a decade, the Universal Service Fund (USF) has subsidized (1) telephone lines in places where there isn’t enough of a business case for phone companies to build and operate them, and (2) monthly telephone service for people who couldn’t afford it. 

That’s not good enough anymore, according to the FCC. 

As the Commission sees it, high-speed Internet – broadband – is a necessity, not a luxury. Accordingly, the FCC is looking to re-direct some USF funds to support broadband. Most likely, this will take the form of a monthly discount on broadband for low-income households.

In moving broadband way up on the list of life’s essentials, the Commission may be getting ahead of many consumers. Affordability is undoubtedly one factor in broadband adoption, but there may also be a number of people who just don’t think it’s that important, or not worth the hassle, or too much of a privacy risk, or any number of other concerns. To change their minds, the FCC has decided to use a ploy familiar to the criminal element: it’s going to test how much free or discounted Internet Joe Consumer needs to get hooked on broadband.  As with any pusher, the FCC’s apparent hope is that eventually the consumer will become addicted and willing to cough up the full price.

Accordingly, in February, the Commission announced (in its overhaul of the USF Lifeline program) that it would be setting up a Pilot Program “to test how the Lifeline program could be structured to promote the adoption and retention of broadband services by low-income households”. And now, with a public notice released April 30, 2012, the Wireline Competition Bureau has followed up on that plan. The Bureau is making $25 million available to eligible telecommunications carriers (ETCs) to carry out “field experiments” on customers.

The experiments will test various factors in encouraging broadband adoption: primarily what discount dollar amount would be most effective, whether it should be a single discount or monthly (and if monthly, how long it should last), and how speed, usage limits, and consumer outreach might affect adoption.

Applications to participate in the Pilot Program are due on or before July 2, 2012. Would-be participants who are not already ETCs must be designated before the application deadline. Participants will likely be selected during the third quarter of 2012. The Pilot Program is anticipated to last about 18 months: three months of provider back office implementation, 12 months of subsidized service, and three months of finalizing and reporting data. For more information, there is a Pilot Program webinar available on the FCC’s website.

Here’s how the program is supposed to work:

Experiment design.  Did you enjoy participating in your high school science fair? Then this program will be right up your alley. ETCs seeking to participate in the Pilot Program must design and submit a project along the lines of a scientific field experiment, including a detailed description of the experimental design and the variables to be tested. As mentioned above, the focus is on learning which discount plans are most effective in promoting broadband adoption and retention, but speeds, usage limits, and the effect of consumer outreach are also of interest. The experimental design should randomize variations on broadband service offerings (e.g., geographic randomization).

Individual applicants are not required to incorporate an extensive number of potential variations of broadband service into their projects; rather, the FCC will create a “portfolio” of projects by selecting multiple projects to test a range of variations in diverse geographic areas (e.g. rural, urban, Tribal). The Bureau encourages ETCs to partner with field experiment experts and third-party organizations working to increase broadband adoption, such as academic researchers, social research organizations, contract-research firms, or non-profit organizations. ETCs are also encouraged to work collaboratively with each other, sharing administrative costs where possible.

Preference. Preference will be given to:

  • Projects that include partnerships with non-ETCs that already have existing adoption programs in place to provide digital literacy (such projects may also include a control group that does not receive digital literacy training).
  • ŸProjects that also test, with appropriate control groups, whether access to equipment can influence adoption.
  • ŸProjects that indicate that their proposed projects promote entrepreneurship and small business, including those businesses that may be socially and economically disadvantaged.
  • ŸProjects that demonstrate ability to execute the proposal (in terms of funding and expert and third-party qualifications).
  • ŸProjects that demonstrate the value of the data to be collected in credibly addressing questions of interest.

The Bureau will also take into account the aggregate funding amount requested for each pilot project. In addition, it will select at least one pilot project directed at providing support on Tribal lands.

Costs and obligations. Participants in the Pilot Program will have the following minimum obligations during the program period (in addition to conducting the project):

  • ŸParticipants must use the funds they receive from USAC to subsidize the discounted services they provide to low-income consumers under the Pilot Program. In other words, if a carrier knocks $10 off a customer’s phone bill, it will be reimbursed $10. Other project-related expenses, however, such as the costs of developing the project design, will not be reimbursed.
  • ŸWhat program would be complete without reporting? In this case, participants must submit two types of forms. First, they must submit monthly reimbursement forms to USAC (similar to Lifeline reimbursement) for (1) any monthly discount of broadband service, (2) any applicable discount amount for voice telephony service if the broadband subscriber is also getting Lifeline support, and (3) any non-recurring fees for broadband provided to subscribers under the pilot project.  Second, participants must submit subscriber data on a “Low Income Broadband Pilot Program Reporting Form” to be collected directly by the ETC and submitted to USAC. Alternatively, at the participant’s request on its application, USAC will solicit this information directly from subscribers using an online survey. In either case, ETCs must obtain consent from their subscribers to provide this information before enrolling them in the program. This information will be collected at least twice: once when the subscriber first initiates service and again near the end of the project. The “anonymized” form will call for disclosure of income, age, ethnicity, family size, and details regarding subscriber usage.
  • ŸSubscribers should all be enrolled within nine months of the start of the trial period, unless applicants make an upfront case as to why their project should have different timelines.
  • ŸParticipants are “strongly encouraged” to file a final report sharing additional information with the Commission about lessons learned from the project, including cost on a per-subscriber basis of converting consumers to broadband. A representative may be asked to present such information at a Commission event.

 The Public Notice lists a number of specific items of information that must be submitted with each application that are not itemized here. Feel free to contact us with any questions.

USF/ICC Update: Changes in Carrier Reporting Requirements Effective May 8, 2012

In its sprawling Report and Order and Further Notice of Proposed Rulemaking on the Universal Service Fund (USF) and Intercarrier Compensation, released last November, the Commission adopted (among a lot of other things) a number of changes to the various reporting requirements. Those requirements affected certain carriers, including competitive eligible telecommunications carriers (ETCs) and incumbent local exchange carriers. (Last December we described how many, but not all, of the extensive changes would affect wireless providers.)

Because many of the modified reporting requirements involved “information collections” subject to the Paperwork Reduction Act, they could not take effect right away. Rather, they had to be reviewed and approved by the Office of Management and Budget. That process has now been completed, according to a notice published in the Federal Register. As a result, a number of the rule changes adopted last fall have now become effective or applicable as of May 8, 2012.

The rules that have become effective are: Sections 54.312(b)(3); 54.313(b); 54.313(h); 54.314; and 54.320(b). The rules that have become applicable are: Sections 54.305(f); 54.307(b) and (c); and 54.313 (a)(1)-(a)(6).

Additionally, the Federal Register notice provides official notification to ETCs and other unspecified stakeholders that information required to be filed pursuant to Section 54.313(a)(2)-(6) and (h) must be filed by July 2, 2012.  Section 54.313 sets out the annual reporting requirements for high cost recipients.

Phase I Mobility Fund Reverse Auction Rules Set

$300 million to be available for areas with poor broadband access

Following up on the landmark USF Order last fall in which it first adopted a plan to distribute Universal Service Fund money for broadband build-outs, the FCC has released a Public Notice setting out the basic ground rules for the “reverse auction” by which the money will be distributed. The Notice fills in some important gaps in how the whole process is supposed to work.  

As we have previously reported, the FCC is proceeding for the first time with an unusual reverse auction under which rights will be determined by the party which bids the lowest amount for the area in question.   In this case, carriers will be bidding to provide service to relatively high cost parts of the country provided they receive certain subsidies.   The company asking for the lowest subsidy to do the job will get the money and the attendant service obligation. Many of the key features of this auction remain subject to petitions for reconsideration, but the Wireless Bureau is nevertheless plunging forward to set the ground rules on the assumption that the auction will proceed largely as laid out in last fall’s USF Order.

In addition to the usual provisos, warnings, disclaimers, and notices that accompany every FCC auction, the Public Notice alerts us to the following:

  • The short form deadline for applications is July 11, 2012. This is curiously far in advance of the scheduled September 27 auction date.
  • The auction will be a single round, single bid, sealed auction. The bid you make on September 27 is your only bid and it cannot be withdrawn once your bid is final.
  • Bidders (other than Indian tribes) must have their high cost ETC designations in hand when they file their short forms. It is not good enough to have a pending application on that date.
  • ETCs which only have Lifeline authority are not eligible to participate.
  • The FCC has now identified as best it can the areas that are underserved and therefore eligible for build-out funds. Bidders will bid on census tracts identified by the FCC. The winning bidder will be the one which bids the lowest amount to serve the road-miles within that census block. A winner must commit to serving at least 75% of the road-miles. This simplifies the determination of the winner since bidders are bidding against each other for the same defined areas.
  • The FCC will begin awarding money starting with the lowest bids per census block and keep going till it is out of the $300 million.
  • Winning bidders must submit their entire network design, construction schedule and budget when they submit the “long form” applications ten business days after the winners are announced. Winning bidders will have a very busy couple of weeks to pull that information together.
  • Winning bidders must also at the same time put up a letter of credit from a bank guaranteeing their performance of their commitments. Again, this is not much time to get such a letter together.   To further complicate matters, the winning bidder must submit a legal opinion indicating that the letter of credit is free from bankruptcy claims if the bidder goes belly up without meeting its commitments.   The high cost of obtaining what is effectively insurance will have to be built into the bid amount.
  • A winning bidder which fails to qualify when it files its long form application will be subject to a penalty equal to 5% of its winning bid.
  • Finally, winning bidders must also certify that they can offer service in the areas they have won without the need for further federal funding. This effectively disqualifies them from the Phase II Mobility Funding that is supposed to support service to high cost areas. This seemingly counterproductive element of the Commission’s plan is currently under reconsideration.

While the prospect of free government money is usually attractive, the significant strings which the FCC has attached to this process make the decision to bid on the awards a difficult one. Potential bidders should consider all of the risks as well as the rewards of participating in this program.

Some, Maybe All, Remaining Effective Dates in Lifeline Reform Set

Last month we reported that effective dates for some, but not all, of the rules revised as part of the Commission’s reform of its Lifeline program had been set. It looks like the effective dates of the rest have now also been set, although the Commission’s own Federal Register notices concerning those dates leave at least some room for doubt.

The Lifeline reforms were adopted back in February. In a Federal Register notice published in March, the Commission announced that Sections 54.411, 54.412, 54.413 and 54.414 were to take effect April 1, 2012 and Section 54.409 will take effect June 1. No problem there. But it then said that Sections 54.202(a), 54.401(c), 54.403, 54.407, 54.410, 54.416, 54.417, 54.420 and 54.222 wouldn’t kick in until after the Office of Management and Budget (OMB) had given them the Paperwork Reduction Act once-over.

According to the latest Federal Register notice, OMB has completed its review and given its thumbs up. So the FCC has announced that Sections 54.202(a), 54.401(d), 54.403, 54.405(c), 54.407, 54.416, 54.417, 54.420(b), and 54.422 have become effective as of May 1, 2012, while Section 54.410(a)-(f) will take effect June 1, 2012.

Careful readers will note a couple of minor discrepancies between the March notice and the most recent. Where the March notice referred to Section 54.401(c), the April notice refers to Section 54.401(d). Also, the April notice indicates that Section 405(c) is among the sections taking effect on May 1. But that particular section wasn’t among those listed in the March notice. And, in the most recent notice, the Commission mentions, pretty much in passing and without explanation, that it has also removed certain provisions (in particular, the temporary address confirmation and recertification requirements set forth in Section 54.410(g), the chunk of Section 54.405(e)(4) relating to temporary address de-enrollment, and the biennial audit requirements of Section 54.420(a)).  It's not clear what that means. The rules have, after all, been formally adopted by the Commission and are therefore technically in the books, but if OMB hasn't signed off on them (which appears to be the case), they can't become effective.  So they'll presumably just be dead wood in the rule book, at least for the time being.   

These discrepancies, though, may be relatively minor, particularly given the enormity of the changes the Commission is making to the overall Lifeline program. Look for the Commission to tie up any loose ends eventually.

One final observation.  While the standard OMB approval extends for three years, this OMB approval is for a paltry six months.  That means the FCC will be back knocking on OMB's door before you know it.  Interestingly, the FCC asked OMB to act on this particular request on an emergency basis.  What was the emergency?  According to the FCC:  “The Commission has set a budget target to eliminate $200 million in waste in 2012, which is dependent on certain rules going into effect as soon as possible.” Ah, a self-created emergency. We can't wait to see what they come up with in six months.

Lifeline Reform Update: FCC Invites Comments on Recons

Got something more to say about the FCC’s Lifeline reform? You’re in luck, because at least one more chance to share your thoughts with the Commission is here – as long as those thoughts have something to do with any of the petitions for reconsideration filed with respect to the Lifeline reform order released back in February.

According to a notice in the Federal Register, a total of eight reconsideration petitions were filed. The publication of that Register notice sets the deadlines for oppositions and replies to the petitions. If you want to oppose any of the petitions, you’ve got until May 7, 2012. Replies are now due by May 15.

In the underlying order, the Commission adopted various reforms to reduce Lifeline fraud, waste and abuse, and otherwise overhaul the Lifeline program. Read the full order here – or if you’re not up for 231 pages of fine print bureaucratese, followed by another 100+ pages of appendices – you can read more about it in our post from last month.

If you would prefer to read only the petitions for reconsideration, you can find them at the links below:

USTelecom

TracFone Wireless

T-Mobile USA, Inc.

Sprint Nextel

General Communication, Inc.

Nexus Communications, Inc.

American Public Communications Council, Inc.

District of Columbia Public Service Commission

Telecom Companies Take Note: Your Form 499-A Deadline Is Less than a Month Away

It’s that time of year again – all telecoms and VoIP providers must file their annual Form 499-A by April 2.

That “other” April deadline is right around the corner: all telecommunications carriers are required to file FCC Form 499-A by April 2, 2012. If you’re an intrastate, interstate or international provider of telecommunications in the U.S., this probably means YOU (but check below for the short list of exemptions).

 Form 499-A is used to true up the carrier’s Universal Service Fund contributions reported during the previous year. The revenues reported on the form will also be used to calculate upcoming 2012 contributions to the Telecommunications Relay Service, the North American Numbering Plan, and the Local Number Portability Fund.  (For 2012, the proposed “contribution factor” – i.e., percentage of revenues that must be paid – will be a whopping 17.9 percent, up from 15.3 percent in the last quarter of 2011. Ultimately, these contributions come from consumers, who are assessed a surcharge as a percentage of their phone bill.)

The new 2012 form was released on March 5, giving carriers less than a month to get on file. It’s mostly the same as last year, except that now non-interconnecting VoIP providers must file to fulfill their new obligation to contribute to the Telecommunications Relay Service Fund. (That new obligation comes courtesy of the Twenty-First Century Communications and Video Accessibility Act of 2010.)

A reporting company’s initial 499-A filing must be paper and ink; after that, carriers can file online through USAC’s website.

Before starting to fill out the form, a reporting company will need to pull together some financial information – i.e.,billed revenues for 2011, broken down into various categories. There is a safe harbor percentage available for entities that have difficulty separating their telecommunications versus bundled non-telecoms revenues. There is also a safe harbor for cell and VoIP providers to use in breaking out their interstate versus intrastate revenues.

Additionally, carriers with a lot of international revenue should take note of the “limited interstate revenues exemption” (LIRE). That allows companies whose interstate revenues are 12% or less than their international revenues to exclude international revenues in their “contribution base” (the amount upon which their contribution is assessed). Don’t look for this exemption in the Form 499-A instructions; it’s buried in a worksheet in an appendix.

If you’re not sure whether you’re a telecommunications carrier or not, you probably are. The category of mandatory 499-A filers is broad, including resellers, non-common carriers and VoIP providers. However, there are limited exemptions for:

  • De minimis providers – whose contribution would be less than $10,000 (available only for exclusively non-common carriers);
  • Government and public safety entities, or carriers who provide services exclusively to the government;
  • Broadcasters;
  • Non-profit schools and libraries;
  • Non-profit health care providers; and
  • Systems integrators and self-providers whose telecoms revenues are less than five percent of the systems integration revenues.

If you have any doubts about whether you’re required to file, you’d best get them resolved sooner rather than later. Failure to file can be expensive. Last year, we reported that the FCC reminded one carrier of its obligations by doling out a $600,000 fine. While we haven’t yet seen any similar forfeitures this year, it’s not hard to run up a big tab quickly. Do the math: $50,000 for each “failure to file,” plus one and a half times the total unpaid amount, plus an extra $100,000 if you also failed to register as a contributor. And you still have to pay the amount in arrears.  For lateness that doesn’t extend long enough to trigger the FCC forfeiture process, USAC still assesses a $100 per month late fee plus 3.5% of the filer’s monthly obligations.

And just because you make the April 2 deadline, don’t think you can kick back and relax: the quarterly Form 499-Q deadline is May 1.

Update: Comment Deadlines, Some Effective Dates in Lifeline Rulemaking Set

The Commission’s magnum opus setting out new rules for the Lifeline program – and proposing more new rules for that program – has been published in the Federal Register. (Click here for the portion containing the proposed rules; click here for the portion containing the new rules that have already been adopted.)

This publication establishes the deadlines for comments and reply comments relative to the proposed rules. If you would like to submit comments, you have until April 2, 2012; reply comments are due by May 1.

The Federal Register publication also establishes the effective dates of some (but not all) of the adopted rules. Get a pencil and paper out – you may need to take notes. Sections 54.411, 54.412, 54.413 and 54.414 will take effect April 1, 2012. Section 54.409 will take effect June 1, 2012. What about Sections 54.202(a), 54.401(c), 54.403, 54.407, 54.410, 54.416, 54.417 54.420 and 54.222? They all involve “information collections” and thus must first be blessed by the Office of Management and Budget thanks to our old friend, the Paperwork Reduction Act before they can take effect.

FCC Tightens up Lifeline Program

Looking to rein in fraud, waste, and abuse in the federal Lifeline program, the FCC has pulled out almost every bureaucratic tool in the box.

As we all know, the federal Lifeline program, overseen by the FCC, provides subsidized phone service to low-income households. In 2010, the Government Accountability Office released a report revealing a significant lack of direction and control within the Lifeline program. In response, the FCC has now adopted comprehensive measures to combat fraud, waste, and abuse in the program. By doing so, it hopes to trim “up to” $200 million from the Lifeline program this year and $2 billion over the next three years.

The FCC’s Report and Order and Further Notice of Proposed Rulemaking (R&O/FNPRM) spans 231 pages (and another 100 pages or so of appendices). Eligible telecommunications carriers (ETCs) will want to familiarize themselves with the many specific requirements detailed in the R&O/FNPRM in order to assure compliance. The following provides an introductory overview of the highlights of the FCC’s action. (Important note: this post does not address (a) Lifeline issues specific to Tribal lands or (b) state-conducted eligibility review.)

The R&O/FNPRM focuses on two main problem areas: (1) support for more than one person per household; and (2) support for ineligible consumers.

One per household.  The R&O/FNPRM codifies the policy that each household gets support for only one phone line, mobile or fixed. (The agency already clarified, back in June 2010, that an individual gets only one Lifeline-supported service.) A “household” is assumed to consist of everyone who lives as a single address (not a P.O. Box), unless the residents self-certify that they are financially independent from each other (for example, unrelated adult roommates). Commenters (including Commissioner Clyburn) have pointed out that this is increasingly out of sync with the way modern families use phones, but the Commission has rejected the extra cost of providing phones to multiple individuals within a single household. For customers who want to show that they are financially independent of their housemates, the FCC has directed the fund administrator, the Universal Service Administrative Company (USAC), to come up with a certification form within 30 days of the publication of the new rules in the Federal Register.

National eligibility standardsRight now, eligibility for Lifeline varies by state, although the FCC has developed certain “federal default” criteria applicable to the handful of states that have not claimed jurisdiction over Lifeline eligibility.  Based on those federal default criteria, the R&O/FNPRM establishes as uniform national eligibility criteria: (1) household income at or below 135 percent of the Federal Poverty Guidelines; or (2) participation in one of a number of federal assistance programs, such as Medicaid or Food Stamps. The idea is to give uniform opportunities to low income consumers nationwide, make compliance easier for carriers, and make auditing easier for USAC. States must recognize consumer eligibility under the federal rules, but can add other qualifying criteria, such as participation in a state program. 

Clear marketing.  When advertising Lifeline services, ETCs (carriers) must explain in clear, easily-understood language: that the offering is a Lifeline-supported service; that only eligible consumers can enroll; what documentation is necessary; and that the program is limited to one benefit (either wireline or wireless) per household. ETCs must also explain that Lifeline is a government benefit program, and false statements to obtain it may be punishable by fine, imprisonment, or being barred from the program.

Consumer certificationWhen enrolling a new Lifeline customer, carriers must obtain a signed (including electronically or by interactive voice response) certification form from the customer. The required certifications include, but are not limited to, confirmation that the customer: understands how the Lifeline program works; is the only person in their household getting service; is eligible for Lifeline; and will let their carrier know if anything changes (within 30 days). Other distinct certifications not itemized here must be included on this form, so carriers should review the requirements carefully.

Annual recertification.  In addition to the initial certification, carriers must recertify the continued eligibility of all of its customers by contacting them for confirmation. This is to be done by checking with an eligibility database, when available. If no such database is available (or if the database does not confirm eligibility), the carrier must contact the customer – in person, in writing, by phone, by text message, by email, or otherwise through the Internet – to confirm his/her continued eligibility. Previously, sampling could be used for this reconfirmation; that is no longer the case. No documentation is required at recertification. Again, there are a number of specific requirements regarding recertification in the order that carriers should review carefully (no, texting “BTW R U still eligible for Lifeline?” is not enough).

Duplicates database.  The R&O/FNPRM establishes a new, nationwide duplicates database that carriers must query before signing up a new Lifeline customer. If that query indicates that the prospective customer is already getting support, the carrier can’t enroll the customer until the customer de-enrolls from the other service. The database will facilitate the transfer of Lifeline benefits from one ETC to another and will keep track of when a query was made and what information was submitted in the query. It will also verify the subscriber’s identification (without which the ETC will not receive reimbursement).

Two sidenotes on the duplicates database: (1) States can opt out of the national duplicates database if they can show that they have established their own state duplicates process at least as robust as the national; and (2) USAC will conduct a “scrubbing” of duplicates once the database has been populated. USAC will notify subscribers if they are receiving duplicate support and help them select a single provider.

Eligibility database.  Lifeline consumers will no longer be able to simply self-certify their eligibility. Instead, the FCC will establish an eligibility database. The database will confirm – at least initially – enrollment in the three most common programs through which consumers qualify for Lifeline (i.e., Medicaid, food stamps, and SSI). Until the database is established (ideally by the end of 2013), ETCs will be required to review documentation from the consumer to verify eligibility. The Commission is still seeking comment on the eligibility database at a fairly high level, including:

  • How to encourage state eligibility databases to provide state-specific eligibility data, including potentially conditioning receipt of federal Lifeline funds on the implementation of a state eligibility database;
  • Whether to help pay for state eligibility databases;
  • What privacy issues are implicated;
  • Whether to implement a national eligibility database instead of or in addition to state databases; and
  • Whether the eligibility database should be integrated with the duplicates database.

Reporting subscriber data.  Carriers must populate the duplicates database by obtaining and reporting the following information about customers:

  • name;
  • address;
  • phone number;
  • date of birth;
  • last four digits of the social security number;
  • initial and de-enrollment dates;
  • the means through which the subscriber qualified for support (e.g., Medicare, income); and
  • the amount of Lifeline support received per month for each subscriber.

ETCs will have to provide an initial data dump of subscriber information within 60 days of notice that the database is capable of accepting data. Because many carriers may not be currently collecting all the information required by the database, they must collect such information from both new and existing subscribers (which can be done as part of the annual re-certification described below).

The carrier that gets customer data into the database first is entitled to reimbursement for that customer, regardless of which ETC the consumer signed up with first.

Disenrollment.  If a customer fails to respond to the annual recertification request, or if a carrier otherwise discovers duplicative support or lack of eligibility, the carrier must, after sending notification of impending service termination, disenroll the customer from Lifeline service. Likewise, prepaid ETCs cannot receive Lifeline support for customers who do not activate their service, or who do not use their phones for a consecutive 60-day period.

Carrier certificationCarriers must certify, annually, that they are in compliance with the Commission’s Lifeline rules when submitting FCC Forms 497 to USAC for reimbursement. As part of this certification, an officer must certify that the carrier has procedures in place to review consumers’ documentation of income- and program-based eligibility and that it has obtained valid certifications forms from each consumer.

AuditsNew Lifeline carriers will be audited within their first year of providing service. Carriers receiving more than $5 million in annual support will be audited biennially.

EnforcementViolators of the rules will be notified of the failure to comply and given 30 days to come into compliance. Penalties for violations include: suspension of payments; monetary forfeitures (up to $150,000 per violation or per day of a continuing violation); revocation of authorization to operate as a carrier; and/or revocation of ETC designation.  Also, funds obtained in violation of the rules are subject to recapture by the government.

The measures described above are addressed to fraud, waste and abuse. Beyond those, the Commission took measures to update and simplify the Lifeline system:

ReimbursementThe R&O/FNPRM replaces the tiered reimbursement system, which was based on incumbent subscriber line charges, with an interim flat rate of $9.25 (except on Tribal lands). Comment is sought on what would be an appropriate permanent flat rate. Reimbursement will also be based on actual subscriber counts, rather than projected subscriber counts. Starting July 1, 2012, to be paid by the end of the month, carriers will have to submit Form 497 by the eighth day of that month. Carriers may also file on a quarterly basis, with a single quarterly payment (rather than separate monthly payments).  Any new or revised Form 497s that may be necessary to reconcile records may be filed within a year of the original due date of the Form 497. 

Phasing out toll limitation support.  Back in the day, a frequent cause of phone service termination was customers’ inability to pay their long distance phone bills. To prevent this, the Commission required ETCs to provide a service that would automatically limit, or block, the amount of long distance charges a customer could receive in one month. Carriers were permitted to claim reimbursement from the FCC for the “incremental costs” of providing the blocking service. Nowadays, however, many service plans don’t distinguish between local and long distance calls, instead charging a set monthly fee for a certain number of minutes. This effectively creates a “toll limitation” service. And the recovery of “incremental costs” has apparently been subject to creative interpretation: carriers were claiming reimbursement for anywhere between $0 and $36 per Lifeline subscriber per month, and were not required to substantiate their claims. So, the R&O/FNPRM requires toll limitation in the future only for old-fashioned service plans that charge separately for long distance calls – capping reimbursement for “incremental costs” at $3/month in 2012, $2/month in 2013, and no reimbursement at all starting in 2014.

Eliminating Link UpAnother payout historically subject to abuse is the Link Up program, which reimburses carriers for half of their “customary charge” of initiating service, up to $30. (It does not cover the cost of providing a mobile handset). Over time, many carriers’ “customary” service initiation charge migrated to $60, the number that would maximize the Link Up payout. In addition, many carriers were not charging the remaining $30 to their customers. Also, some carriers imposed the initiation charge only on Lifeline customers and not on “regular” customers.  In essence, carriers were simply collecting $30 each time they signed up a Lifeline customer. In response, the Commission is eliminating Link Up altogether, except for Tribal areas. Although the offending practices have been largely associated with wireless competitive carriers, the Link Up phase-out applies to wireline carriers as well.

Support for VoIP.  The R&O/FNPRM incorporates the Connect America Fund order’s “voice telephony” definition of supported service into the Lifeline rules, making IP-enabled VoIP an expressly supported service. Of course, VoIP is increasingly the norm as carriers move from circuit-switched to IP networks.

Support for bundled service plans.  The R&O/FNPRM provides support for voice telephony service even if it’s bundled with broadband, contains optional calling features, or is part of a family shared calling plan. Historically, the FCC’s rules have been silent on this issue, and not all states permit reimbursement for such bundled plans. The new rules do not require carriers to apply Lifeline to any bundled service, although the Commission seeks comment on such a requirement.

The R&O/FNPRM also establishes a Broadband Adoption Pilot Program to assess how Lifeline can best be used to increase broadband adoption among Lifeline-eligible consumers. The Wireline Competition Bureau will solicit applications from ETCs to participate in the Pilot Program. The Bureau will then test various amounts and durations of subsidies, geographic areas, and types of networks/technologies through a number of diverse projects. Carriers who are interested in participating but are not yet designated as ETCs should get their ETC designation applications in ASAP.

The R&O/FNPRM also cleans up some aspects of the ETC designation process for Lifeline-only carriers by:

  • formalizing the Commission’s practice of forbearing, for Lifeline-only wireless resellers, from requiring that an ETC have its own facilities. (That practice dates back to the 2005 TracFone order.) This forbearance is subject to certain conditions. The Commission did not address the status of Lifeline-only facilities-based carriers, who may need forbearance from the requirement that their service area completely overlap rural phone company service areas. (Wireless services are generally authorized by county boundaries, while rural phone company service areas are drawn by blindfolded three-year-olds, so they hardly ever match up).
  • confirming that carriers can’t get around the TracFone conditions by providing a component service – such as operator, directory, or toll limitation service – over their own switch and then claiming to be “facilities-based.” This is because the new definition of “supported service” is “voice telephony service” as a whole – not its individual components.
  • eliminating the requirement that Lifeline-only applicants submit a five-year network improvement plan.
  • adding a requirement that Lifeline-only ETCs demonstrate technical and financial capacity to provide the supported service, among other showings.

Lastly, the NPRM portion of the R&O/FNPRM seeks comment on additional issues, including:

  • whether universal service support should be used for digital literacy training;
  • whether Lifeline support should be limited to ETCs that provide Lifeline service directly to subscribers (rather than wholesale), precluding the flow-through of Lifeline support to resellers;
  • whether the Women, Infants, and Children (WIC) program and homeless veterans should be added to the Lifeline eligibility criteria;
  • whether the record-keeping requirement for consumer eligibility should be extended to ten years to cover litigation under the False Claims Act.

Comments in response to the NPRM will be due 30 days after publication in the Federal Register; reply comments within 60 days. Check back here for updates.

FCC To Proceed With Mobility Phase I Auction

FCC plunges ahead despite pending appeals and reconsideration petitions

The FCC has released a Public Notice announcing proposed ground rules for its planned “reverse auction”  to award $300 million in funding for mobile service to under-served parts of the country.    In a reverse auction, bidders vie to accept the lowest payment from the FCC to provide a slate of designated services by a certain date. The Commission is inviting comments on its proposed approach, but interested parties will have to act fast (as will the Commission): the auction is tentatively scheduled for September 17, 2012, but there is a lot of work to be done before the auction can actually take place. 

No one can say the FCC isn’t moving quickly on this auction – perhaps too quickly. It issued this public notice only a month after the new Mobility Phase I process became effective as part of the watershed USF/ICC reform order adopted last fall. The problem is that petitions for reconsideration were filed in December challenging the timing and structure of the proposed auction. Until those are resolved, the FCC can hardly proceed too far with the auction.  

At the same time, the source of the funds to be distributed in the auction remains up in the air. Long-time observers of this space will recall that the FCC in 2010 took the unusual step of “re-purposing” some $500 million dollars that has been designated under the USF program for CETCs.   (When Verizon and Sprint agreed to forgo USF payments that would have been due to them over the next five years, the FCC decided to put that money into a rainy day fund for broadband build-out rather than distributing it to the remaining CETCs.) That highly unusual and suspect action remains under review by the U.S. Court of Appeals for the D.C. Circuit. Depending on the outcome of that case, there may not be any money to hand out. 

Curiously, the FCC failed to alert folks interested in the auction that the auction and the money are both still very much up in the air.

Assuming that the auction proceeds in something like its present form, however, the FCC’s notice sheds some light on what is likely to be in store.

First, the FCC auction website depicts on a county by county basis the areas where road miles are unserved by 3G or better service. While this map is subject to further refinement based on input from the public, it at least provides a preliminary basis for prospective applicants to identify areas that are eligible for build-out funding.  

 As the Commission reminds interested parties, reverse auction bidders must both (a) be eligible telecommunications carriers (ETCs) and (b) have rights to spectrum in the areas they bid on, so if they don’t have that status now, they need to move quickly on those fronts. The map alerts prospective bidders as to whether this is even something they should be interested in pursuing.

For the auction itself, the FCC proposes to have only a single round. Unlike all other FCC auctions, here participants would have one chance to make one bid, and that’s it.   This encourages parties to make their solitary offer the best one they can reasonably live with. The identities of bidders will also be kept secret (presumably except to the extent necessary to implement the anti-collusion rules). Since there is only one round, though, the secrecy rule is essentially meaningless.

The biggest question mark for the FCC is how to aggregate eligible areas for bidding. This problem has been a perennial one for auctions that cover applicant-defined geographic areas: how do you compare bids from people who are bidding on different areas? The FCC proposes bidder-defined aggregations, predefined aggregations, and a variant of the first option where bidder-defined aggregations can nevertheless be awarded in subsets. The FCC seeks other options as well. 

The bottom line is that any method must allocate the money within the cap of $300 million that the FCC says will be available for this Fund.   This cap indirectly undercuts the FCC’s assertion that no maximum bids are being set; you can bid as high as you want, but if there is insufficient money in the pool to pay you, you aren’t going to win. It remains unclear how the FCC will decide winners if, as it expects, the total bids exceed the cap.

Lastly, the FCC proposes that lucky winners who default on the performance of their obligations after winning the auction not only must pay back the money received from the FCC in full, but must also pay a 10% performance penalty.   The lucky winner’s ability to meet these penalties must be guaranteed by a letter of credit – a feature which has been challenged on reconsideration.

Interested parties have until February 24, 2012 to get their comments in and until March 9 to file replies.

FCC's USF/ICC Order: How It Affects Wireless Providers

A semi-brief overview, from the wireless perspective, of the massive order overhauling the Universal Service Fund and Intercarrier Compensation system

The FCC released its historic 751-page Report and Order and Further Notice of Proposed Rulemaking on the Universal Service Fund (USF) and Intercarrier Compensation on November 18, providing a sumptuous repast for the communications industry to feast on over the Thanksgiving holiday.   It took many readers a few weeks to fully digest the vast smorgasbord of items resolved by the Commission in this one proceeding.   But having pushed ourselves away from the table at last, we can now comment on particulars of the Order that most affect wireless providers.   The Order also very radically affects the rules governing intercarrier compensation and USF for wireline service, but we are reporting on those developments separately out of compassion for our readers.

Definition of Supported Services. The first big step taken by the Commission was to bring broadband within the universe of services supported under the USF umbrella. The FCC chose not to simply define broadband as a supported service, but instead to expand its definition of supported “voice telephony” to include VoIP. At the same time, the FCC is requiring supported voice telephony providers to provide broadband.  

This awkward dance permits the Commission to continue ducking the issue of whether broadband should be re-classified as a “telecom” service regulated under the common carrier regime of the Communications Act or an “information” service regulated only under the FCC’s ancillary jurisdiction. But this dance creates problems of its own.

Because USF support is expressly targeted at “telecommunications services,” the FCC jeopardizes its whole scheme for supporting broadband. For example, the FCC relies on Section 706 of the Act as a source of authority to support broadband through the USF. That section directs the Commission to accelerate the deployment of advanced telecommunications capabilities regardless of whether they are strictly “telecom” services. However, the Commission then imposes on non-telecom service broadband providers the same requirements that apply to regular eligible telecommunications carriers (ETCs) who of course are telecom service providers. 

One of the requirements so imposed is that an ETC must provide stand-alone voice telephony throughout its “designated service area,” yet many non-telecom broadband providers will not have designated service areas. Similarly, many broadband providers simply offer a broadband data pipe and do not care what particular applications (such as a VoIP application) their customers use over the pipe. Although it would make sense for such service providers to qualify for USF support, the Commission’s scheme would exclude them.

Required service levelsUSF fixed service recipients must provide broadband at speeds of 4 Mbps downstream and 1 Mbps up. This represents a great leap upward in the minimum speed expected of a broadband provider. Latency of less than 100 milliseconds is expected and, while monthly capacity requirements are not specified, the FCC expects wireless broadband providers to offer capacity limits consistent with those offered in urban areas. 

Build-out areas and “unsubsidized competitors”. USF support will be offered for the build-out of areas now unserved by an unsubsidized competitor.  The definition of an “unsubsidized competitor” is critical here because there are many areas where mobile wireless providers offer service and landline providers do not. This would prevent landline providers from receiving build-out support in those areas. The Commission protected local exchange carriers (LECs), however, by defining an “unsubsidized competitor” as a “facilities-based provider of residential fixed voice and broadband services.” Fixed voice and broadband service is defined as service to end users primarily at fixed endpoints using stationary equipment. This limitation to fixed services is curious since so many people these days are now cutting the cord not only for voice service but for data service as well.

Broadband service to end users primarily using mobile stations would not qualify. However, the FCC did note that a mobile services provider could become an unsubsidized competitor by offering fixed service that guarantees that the speed, latency and capacity minima applicable to fixed providers will be met throughout the relevant area. 

Elimination of identical support rule. The FCC has done away with the identical support rule which subsidized multiple carriers in any given area. This action alone hacks several hundred million dollars in support away from competitive ETCs (CETCs) because they now no longer qualify for duplicate payments. 

Strangely, the FCC did not seem to even consider the possibility that a CETC, whether wired or wireless, should be the surviving single recipient of the funding instead of the LEC.  It simply provided for a phase-out of support to existing non-LEC recipients by mid-2016. In addition to retaining their current subsidies (as revised to cut out certain support mechanisms), LECs also get the privilege of offering to be the sole provider of basic services in currently unserved areas in each part of a state where they provide service. That is, an existing LEC ETC may propose to provide the full panoply of supported services everywhere – but not less than everywhere – in the state where it is the designated LEC. 

If the LEC picks up that option, obviously no other carrier would be designated to provide fixed service in those areas. If no LEC picks up the challenge, then there will be unserved areas in each state where USF support will be offered by a reverse auction mechanism. Build-out in these currently unserved areas will be supported by a one-time distribution of up to $300 million to price cap LECs.

Mobility Fund (Phase I). The FCC is also offering a one-time build-out subsidy to mobile services providers via a Mobility Fund (Phase I). Under this program, up to $300 million will be distributed to companies willing to provide service to areas currently without 3G or better wireless service. (An additional $50 million is made available for build-out of unserved tribal areas.)  These funds are expected to be up for grabs by a reverse auction to be conducted in the third quarter of 2012. Several components of participating in this auction involve considerable lead time.

  • Identifying unserved areas. The FCC has promised to identify, prior to the auction, the areas that are actually currently unserved. This is a big improvement over the 2009 federal stimulus plan process where each individual applicant had to figure out for itself whether an area was unserved or not. In determining whether an area is unserved, the FCC will take into account commitments to provide service in an area (including stimulus fund-based commitments) made prior to the end of 2012. 

Unserved areas will be determined on a census block basis using road miles as the marker of mobile service. A tentative map of unserved areas will be posted prior to the auction, with the public given an opportunity to point out that areas have not been accurately characterized. A final map of unserved areas will be posted prior to the auction (typically a couple of months before), but that poses an obvious logistical problem: most interested parties will not have enough time to apply for ETC designation in those unserved areas.

  • Auction eligibility requirements. To participate in the auction, an entity must: (1) be an ETC; (2) have access to spectrum by ownership or lease; and (3) be financially qualified to provide service after the build out takes place. This raises a host of chicken and egg problems that the FCC does not seem to have adequately considered.  

First, in some states the ETC designation process can take years. By imposing this hurdle, the FCC is precluding perfectly capable and willing carriers from participation. 

Second, in many instances it may be impossible to serve as an ETC unless one is receiving USF support. One would be loathe to take on ETC responsibilities without knowing beforehand that the support money will be available, but the rules are set up backwards. The Commission alludes cryptically at one point in the Order to a “conditional” ETC designation where one could be designated as an ETC conditioned on receipt of USF support. This process would partly solve the problem, if both the FCC and the states will grant provisional ETC designations – something that is far from clear. In any case, interested parties should start thinking about applying for ETC designation now if they hope to participate in the auction.

Third, a prospective service provider whose viability depends on whether it will be receiving USF money might not be want to buy or lease the necessary spectrum without that assurance. Yet the Commission’s rules require that the spectrum be in hand. The sole break here is that the spectrum acquisition or lease may be conditioned on receipt of Phase I USF support.    

And fourth, the auction participant must not only certify that it is financially capable of providing service in the area after the build-out is complete, but also secure its obligation by posting a letter of credit in favor of the FCC. This unusual arrangement might preclude all but very financially well-heeled companies from being able to participate.

  • Obligations of winners.   Winners in the reverse auction will have to provide either 3G service (200kbps down/50 kbps up) or 4G service. The service provided must be measured by drive tests and reported to the FCC. Winners must also: allow collocation at reasonable rates on towers constructed with USF money; allow voice and data roaming; and charge rates comparable to urban rates.   Winning bidders who fail to meet their build-out obligation will default on their Line of Credit to the FCC and be required to repay all monies received under the program.
  • Auction procedures. Most of the details of the reverse auction have been left to the FCC’s auction staff to hash out, but the FCC did express a preference for a single-round sealed bid auction, as distinct from its normal multiple round bid process. This would obviously require bidders to make their single best bid at the outset with no opportunity to drop the bid lower in reaction to other bids.

Mobility Fund (Phase II). In addition to the one-time Phase I funding opportunity, the FCC plans a Phase II program providing funds to cover on-going costs of providing mobile service to areas requiring subsidies. $500 million has been allocated for this purpose, of which up to $100 million is prioritized for tribal needs.   This money will be awarded by a reverse auction process similar to that used for Phase II.  

The specifics of which areas – unserved? underserved? high cost? – will qualify for such subsidies are not yet clearly defined. In particular, if Phase II support is limited to unserved areas, that would seem to preclude recipients of Phase I build-out funding from qualifying for Phase II operations funding, particularly since they would have been required as a Phase I condition to attest that they have the financial wherewithal to operate without such support. Phase II will be fleshed out by the further rulemaking portion of the FCC action.

Intercarrier compensation (wireless issues only).   The second major subject area of the FCC’s order is intercarrier compensation, a field which spans all exchange of traffic between carriers and, now, some non-carriers. Because of the sweeping extent of the changes regarding intercarrier compensation, we will limit this discussion to items particular affecting wireless interests.

The FCC’s Order here is a genuine and fundamental sea change in the way traffic exchanges have been handled for generations.   Specifically, the FCC has adopted as its root principle that “bill-and-keep” should be the basis for exchanges. This principle – that each carrier should charge its own customers for service provided to them and not be compensated by other carriers that interconnect with it – represents a repudiation of the previously prevailing concept that the calling party is the party who benefits by a communication. Instead, the FCC now recognizes that both the called and calling party benefit by connection to the network and that each party should bear its own costs for participating. 

This radical reform at one swoop would erase a myriad of complex payment structures that have governed intercarrier relationships for years. To minimize the trauma of this upheaval, the FCC has provided a six-to-ten year transition period for LECs who have depended on these intrinsic subsidies. The ultimate effect of this reform should be positive for wireless carriers, since various access charges will be reduced or eliminated over time.  To be sure, the FCC did confirm that non-access traffic exchanged between wireless carriers and LECs (typically intraMTA traffic) is to be exchanged on the basis of interconnection agreements between the parties. But with bill-and-keep as the default payment model, non-LECs have a significant leg up in such negotiations. A few other points to be aware of:

  • The Commission did not immediately impose the bill-and-keep regime on originating access charges, though it capped those charges and signaled that intends to move in that direction.
  • The Commission intends its bill-and-keep principle to apply to both intrastate and interstate communications, but the Commission’s authority to impose this rule on intrastate communications is questionable. This issue will certainly be hashed out in the appeals that have already been filed in court.
  • Reciprocal compensation rates between CMRS carriers must be consistent with the rate model adopted for price cap carriers.
  • The FCC decided to treat all VoIP-to-PSTN traffic similarly, regardless of whether it is fully interconnected on a two-way basis. Such VoIP traffic is subject, in the case of toll traffic, to the same rates applicable to non-VoIP traffic, and in the case of other traffic, to reciprocal compensation agreements. This reform is intended to eliminate the widely decried disparity in treatment between VoIP and non-VoIP traffic. Here again the Commission’s refusal to denominate VoIP traffic as telecommunications could undercut its regulatory effort.

We have gone on at greater length here than is our wont, but only because the scope of the FCC’s order is so vast. We expect to be providing further guidance on some of the elements of the USF/ICC Order in the weeks ahead. 

In the meantime, interested parties should be aware that, since FCC’s magnum opus was published in the Federal Register on November 29, the date for seeking reconsideration of any part of the FCC’s action is December 29. Comments on the rate represcription, Connect America Fund, ETC, and auction refinement elements of the Further Notice of Proposed Rulemaking are due by January 18, 2012, and reply comments by February 17. Comments on the intercarrier compensation portion of the rulemaking are due by February 24. with replies by March 30.  

Judicial appeals are due no later than January 30.  Anyone thinking about taking the new rules to court should be aware that a number of other parties have already headed down that path – and, thanks to the U.S. Judicial Panel on Multi-District Litigation, it has been decided that the U.S. Court of Appeals for the Tenth Circuit, headquartered in Denver, will be the court to hear all such appeals in a consolidated proceeding.

FCC Issues Behemoth USF Order

759-page tome hits the streets, with surprisingly brief comment periods

Call me Ishmael! 

That’s how the Commission might have opened its leviathan Report and Order and Further Notice of Proposed Rulemaking (R&O/FNPRM) in the proceeding to overhaul the Universal Service Fund.  Weighing in at a hefty 489 pages – with an additional 16 appendices and four separate Commissioners’ statements bringing the total package to a whopping 759 pages – the document is physically daunting.  And to be perfectly honest, we haven’t read it yet.  But we plan to, and we expect to get a summary of it posted as soon as possible.

However, in a time-honored Washington tradition, the Commission unleashed the R&O/FNPRM at about 6:00 p.m. on a Friday evening.  That would be the Friday before Thanksgiving.  So the prospects for getting a post up in the next couple of days are limited. 

But we have previously reported on an “executive summary” released by the Commission last month, describing the outlines of the ambitious R&O/FNPRM, so interested readers may use that as a sort of Cliff’s Notes intro to the full version for the time being.  And anyone interested in participating in the proposed rulemaking portion of the proceeding better get reading.  Comments on some aspects of the FNPRM are currently due to be filed by January 18, 2012, with replies by February 17.  Comments on other aspects aren’t due until February 24, with replies by March 30.  With Thanksgiving and the year-end holidays fast approaching, those deadlines will arrive sooner than you know it.

Check back here for updates and further information.

FCC Launches Historic Reform of USF and Intercarrier Compensation Regimes

After one of the most hotly and intensely lobbied proceedings in its history, the FCC has adopted a framework by which to (a) reform and re-purpose the distribution of billions of dollars in Universal Service Fund (USF) money and (b) revise the financial arrangements governing the exchange of traffic between all categories of carriers. The stakes in this game are huge, because the FCC’s action upsets, albeit gradually, a generation of expectations about who receives and who pays for hundreds of billions of dollars in telecommunications services -- and how they pay for it. The sweep of the FCC’s action is so broad that there is something almost every industry player will love and something they will hate just as much.

At this writing, the FCC has not yet issued its magnum opus, a tome likely to reach Moby Dick-like proportions. The FCC’s action included both a Report and Order (R&O) adopting many new rules that will go into effect after publication in the Federal Register, and a Further Notice of Proposed Rulemaking (FNPRM) seeking comment on some important loose ends left hanging by the Report and Order.   A myriad of the details of the plan will be known only when the full text of the R&O is released; in the meantime, however, the FCC has released a brief Executive Summary outlining the most important provisions of the new regime. These include:

  • Redistribution of USF funds.   Acting more like Congress than an administrative agency, the FCC is re-purposing what we have known as the USF. Till now, the USF was a vehicle used to subsidize voice service in high cost areas and to low income consumers which was funded by contributions from customers. The FCC has re-dubbed this $4.5 billion pool of cash as the Connect America Fund, with the mission of assuring universal reasonably priced services that include both voice and broadband, with broadband now at least as important as voice, if not more so.   The Commission attacks the problem of excessive growth in the Fund by capping it at 2011 levels for six years. Although Christmas and Hannukah are still months away, the FCC plans to dole out: $300 million in one-time grants to price cap carriers to subsidize broadband build-out in areas unserved by any unsubsidized carrier; $300 million in one-time grants to wireless carriers to provide mobile broadband in unserved areas; and $50 million in funding for mobile service to tribal lands. All of these build-outs, we are earnestly told, are going to be subject to strict deadlines and quality control. The Mobility Fund will in addition get $500 million per year in on-going support, including $100 million for tribal areas. Another $100 million will go for annual support for the most remote, high cost areas. A hundred million here, a hundred million there. . . .
  • Price cap carrier reform. Price cap carriers will have their current high cost support frozen; support levels will be reduced where price cap companies charge artificially low rates; a forward-looking cost model will be generated to establish reasonable levels of high cost support going forward; and price cap carriers will be encouraged to make a state-wide commitment to provide affordable broadband service in most of their high cost service areas in a state.
  • Rate of return carrier reform. The FCC will require rate of return carriers, like price cap carriers, to deliver broadband at actual speeds of 4 Mbps down and 1 Mbps up if they expect to continue receiving subsidies. The FCC will gradually eliminate numerous programs of existing high cost support that allegedly have encouraged inefficiency, gold-plating and redundant services.   The FCC will look at reducing the current 11.25% rate of return which these carriers enjoy, while observing that they will take a second hit through reduced current intercarrier compensation revenues.
  • Identical support rule.   As expected, the FCC is eliminating the identical support rule via a gradual five-year phase-out.
  • Snuffing traffic pumping and phantom traffic.   The FCC blocks these two abuses by requiring: (a) LECs to lower their access tariffs in circumstances where it is clear that traffic pumping is going on (presumed if inbound traffic is three times or more the outbound traffic, or there is revenue sharing with a customer); and (b) all carriers and interconnected VoIP providers to include calling party number info in the signaling stream.
  • Fundamental Intercarrier Compensation reform. Here the FCC acted very boldly by adopting a bill-and-keep framework for exchange of all traffic with LECs. This dramatic step will significantly simplify intercarrier relations, though some will raise questions because costs differ among carriers. Since this new policy can be imposed only on interstate traffic, it will be up to the states to follow the FCC’s lead on this for intrastate traffic – or not. The FCC will effect a multi-year transition by first capping ICC rates, then bringing interstate and intrastate terminating end office rates into parity, then going to bill-and-keep after six years (for price cap carriers) and nine years (for rate of return carriers). These generous transition periods should ease the blow considerably for the carriers involved.
  • New recovery mechanism. Having eliminated some forms of subsidy to carriers, the FCC now establishes a new one. It will permit carriers to charge an ARC (Access Recovery Charge) not to exceed $1.20 -$1.80 for consumers (not including revenue recovered by existing SLC charges) and $12.20 for multi-line businesses (including the existing SLC). These charges are to be phased out over time and not applied to Lifeline customers.
  • VoIP and CMRS traffic. Toll VoIP to PSTN traffic will be treated like non-VoIP traffic, and non-toll traffic will be handled on a reciprocal compensation basis, ending claims by some VoIP carriers that they are not obligated to pay carriers who deliver their traffic to end users.   CMRS-LEC traffic will be handled on a bill-and-keep basis.

We have been critical over the years of the Genachowski Commission’s failings, but in this instance we have to credit it with finally taking on a many-headed monster that had defied regulatory reform for years, even though everyone agreed reform was needed.   There will still be plenty of argument and a spate of appeals before any of this is finally settled, but the FCC has at last set a firm course for USF and ICC reform and gotten the ship underway.

Extreme Makeover - USF: Looking At Lifeline/Link Up

Sweeping NPRM proposes changes in implementation in low income programs, possible integration of broadband

As part of its ongoing effort to modernize (and rationalize) the various elements of the Universal Service Fund (USF), the FCC has now turned its attention to Lifeline and Link Up. These two programs make up USF’s Low Income component, which seeks to make telecommunications accessible to those with low incomes.  In a 98-page Notice of Proposed Rulemaking (NPRM) released March 4, the FCC has set out a number of proposals for possibly significant changes to its current approach. Many of those proposals implement recommendations from the Federal-State Joint Board on Universal Service (which we reported on here last fall), the Government Accountability Office, and the National Broadband Plan.

To get a better feel for the nature and extent of the proposed changes, it may be useful first to get a sense of the way the Lifeline and Link Up programs work.

The goal of the programs is to insure that “quality telecommunications services” are available to low-income customers at “reasonable and affordable” rates. To that end, the government does not reimburse the low-income customers directly; rather, it reimburses eligible telecommunications carriers (ETCs) who provide service to low-income customers. The ETCs submit quarterly forms reflecting the extent of low income support they have provided. In 2010, the cost of the Lifeline/Link Up programs was $1.3 billion (roughly five times its 2007 size) – in other words, there’s a serious pot of cash to dip into.

There is no uniform, nation-wide set of standards and procedures by which ETCs identify eligible “low-income” customers. Standards and procedures vary among the various states. In many instances, verifying documentation is not required. The potential for innocent error or less innocent fraud is not insubstantial.

The focal points of the FCC’s Lifeline/Link Up reform efforts described in the NPRM are:

  • eliminating fraud, waste and abuse;
  • capping the Low Income Fund;
  • improving program administration; and
  • modernizing Lifeline and Link Up (including reimbursement for broadband, of course).

Out of the hundreds of discrete issues teed up for comment, we have selected a few highlights below.

Fraud, waste and abuse. The FCC is confident that it can reduce fraud, waste, and abuse in the Lifeline and Link Up programs. (It’s so confident, in fact, that it’s already planning a broadband adoption pilot program on which it can spend the money it’s going to save.  See below for more details). To do that, it proposes to eliminate a number of problem areas in the way the programs are implemented. For example, the following would be axed by the Commission:

  • Link Up (activation) reimbursement for carriers that do not routinely impose activation charges on all customers within a state;
  • Duplicate discounts going to the same household (under the rules, each household may only receive one telephone line, either wireline or wireless). To prevent duplication, the FCC proposes to require carriers to obtain a certification from consumers that there is only one Lifeline service per address;
  • Self-certifying for eligibility by consumers (instead, the FCC proposes to require carriers to demand documentation);
  • Inadequate verification sampling (the FCC may require larger sample groups or a census of all customers if an initial sample group reveals too many ineligible customers);
  • Reimbursement for services unused for 60 days (a particular concern for prepaid services);
  • Complete – as opposed to pro rata – reimbursement for subscribers who enroll or disconnect during the month; and
  • Toll limitation service reimbursement (obsolete and susceptible to over-reimbursement).

To ensure that eligible telecommunications carriers (ETCs) providing Lifeline are on board with these goals, the FCC proposes a “more rigorous” approach – including more, and more expanded, audits – to the management of the program.

Capping the Low Income Fund. The NPRM seeks comment on various issues relating to capping the size of the Low Income Fund, for example at the 2010 disbursement level.  It recognizes that the Fund already has an ultimate cap in the sense that only a defined population of eligible households may participate, and support is limited to $10 per month per household.

Program administration. The NRPM suggests various ways to improve program administration, such as: 

  • Adopting a one-per-residence (i.e., U.S. Postal Service address) eligibility rule;
  • Clarifying the eligibility rules for residents of Tribal lands  and proposing eligibility through participation in federal Tribal low income programs;
  • Imposing federal baseline eligibility criteria, including perhaps raising the cutoff from 135% of the Federal Poverty Guidelines to 150%;
  • Coordinating enrollment with other social service assistance programs;
  • Developing a national database to prevent duplicate claims and verify eligibility (anyone who has worked with the FCC’s CORES database will likely be amused at the idea of the FCC creating a database intended to eliminate duplication); and
  • Imposing mandatory outreach requirements.

Broadband.  In keeping with its conviction that broadband service should be universally available, the FCC also proposes to extend the Lifeline program to include broadband. It seeks comment on whether a Lifeline discount should be available for any plan that includes a local voice component, including bundled voice and broadband.  It queries further whether broadband itself should be eligible for Lifeline support (note that this is a separate query from whether broadband should be a required supported service) – and, if so, how can broadband costs be integrated into the program in a way that minimizes (if not avoids) additional waste, fraud or inefficiencies?

Demonstrating that even imaginary money can burn a real hole in a governmental pocket, the FCC already has plans for how to spend the cash that it will save. Of course, any actual savings will require, first, that the proposals be adopted and implemented and, second, that those proposals in fact be effective. Apparently taking for granted that all those pieces will fall happily into place, the Commission has its heart set on indulging its compulsion to pocket funds to feed its broadband habit: it plans to set aside its savings to create a pilot broadband program. The pilot program will test different approaches to providing support for broadband to low-income consumers across different geographic areas and demographics. In particular, the Commission is looking to test how much of a factor hardware is in broadband adoption.

Of particular interest to Lifeline carriers. Carriers considering the daunting prospect of applying for Lifeline-only ETC designation through the forbearance process will be cheered that the FCC is considering doing away with the own-facilities and rural areas redefinition requirements. These requirements are designed to prevent cream-skimming in a High Cost context and don’t make sense in a Low Income-only situation. The Commission is considering codifying the conditions that it has been applying to forbearance grants instead. Even more radical, but strangely sensible, is the Commission’s apparent interest in AT&T’s proposal to allow any carrier to provide Lifeline discounts at a flat rate.

However, the Commission somewhat grimly notes that the fact that “numerous carriers are seeking designation as Lifeline-only ETCs . . . suggests that the current structure of the program may present an attractive business opportunity for firms that employ different business models than traditional wireline carriers.” To prevent funds going to carriers rather consumers, the FCC seeks comment on whether there is a more appropriate reimbursement framework than the current four-tier system based on an ILEC’s subscriber line charge. Furthermore, to protect Low Income consumers from receiving less-than-adequate service, the FCC asks if there should be minimum service requirements for prepaid ETCs (or for other carriers), such as a minimum number of monthly minutes.

The design and implementation of modified Lifeline/Link Up programs present problems of immense complexity for the Commission. Besides the enormity of the project – the raw numbers of eligible customers, the multiple mechanisms for determining eligibility, the detailed auditing process already in place – the Commission must also deal with the concept of grafting a new service (broadband) onto the system. Additionally, the underlying business of delivering telecommunications services is itself developing rapidly, creating new and different business models that may or may not be easily integrated into the Commission’s approach either now or in the future. The preferences of the consuming public also come into play. And don’t forget that we’re talking about a pool of funds that already exceeds one billion dollars, a tempting target for less-than-honest entities.

The scope of the NPRM suggests that the Commission recognizes the daunting nature of the challenge it is undertaking. Whether – and if so, when – the Commission will ever be able to claim that it has met that challenge remains to be seen. But at least the FCC has made the first move in its quest.

The NPRM was published in the Federal Register on March 23. Comments on the proposals in the NPRM are currently due to be submitted by April 21, 2011; reply comments on Sections IV, V (Subsection A) and VII (Subsections B and D) are due by May10, 2011. Reply comments on the remaining sections are due by May 25, 2011.

A Look At The FCC's Proposed Overhaul Of USF And Intercarrier Compensation Regimes

Weighing in at 228 pages (not including an extra 61 pages of appendices and separate Commissioners’ statements), the NPRM illustrates the complexity of the problems facing the Commission.

A journey of a thousand miles begins with a single step. As reported here, last month the FCC began its own long, long march to the Promised Land of USF/ICC reform by issuing a massive 289-page tome that promises to revisit, reassess, restructure and revitalize virtually every aspect of universal service support and intercarrier compensation as we know it.  

The task is a daunting one. Perhaps for that reason, the Commission has been putting it off for more than a decade, tweaking this or that and putting out small brushfires as they’ve arisen, but never tackling the fundamental reform that virtually everyone agrees is desperately needed.   Complicating the task is the fact that USF reform and ICC reform are inextricably related – you can’t reform one without reforming the other.   So the FCC has correctly chosen to attack the two behemoths – each of which has proven remarkably impervious to reform – in a single charge.   This multiplies the complexity and size of the proceeding exponentially, but is the intellectually honest way to approach the matter.

In truth, just reading the Notice of Proposed Rulemaking (whose formal, if somewhat redundant, title is “Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking”) (NPRM) was a major undertaking. The document inquires into literally scores of existing policy issues, from questions as fundamental as the FCC’s jurisdiction to regulate VoIP to details as granular as benchmark rate levels. So far-reaching is the inquiry that we estimate that more than a thousand distinct questions or issues were posed for industry input.  Recognizing the logistical problem of arranging the myriad number of meetings necessary to garner the expected input from all parties, the Commission has taken the unusual step of establishing formal procedures for scheduling meetings with the staff.

On the other hand, the Commission has somewhat unrealistically allocated only 45 days for initial comments on the majority of the NPRM and 35 days thereafter for replies.  (Note: a separate abbreviated comment period was established for the part of the NPRM addressing pressing abuses of the existing system such as traffic pumping and phantom traffic.)  As we have previously reported, preliminary comment deadlines have already been established: April 18 for comments on all but Section XV; May 23 for reply comments.  Given the breadth of the inquiry and the years it took to bring this NPRM to term, the comment period strikes us as a bit stingy.   The FCC supposedly has this on a fast track, but there are simply too many moving parts in this vast proceeding for everyone to get their two cents worth in in this timeframe. Expect these dates to be extended

In approaching the reform effort, the Commission will be guided by four prinicples: (i) modernization of the USF and ICC for broadband, (ii) fiscal responsibility, (iii) accountability, and (iv) market-driven policies.   Turning these noble principles into concrete regulations is the hard part. As we’ve indicated, the scope of the proceeding is too all-encompassing to permit detailed treatment of every aspect of it here, but the highlights are outlined below.  

Short Term/Long Term Solutions: Recognizing that billions of dollars have been invested in, and depend on, the existing regulatory regime, the FCC proposes to adopt remedial measures for the most obvious abuses and inefficiencies in the short term, while putting in place long term permanent reforms that come into play gradually over a period of years. While it is understandable that the Commission might not want to upset settled investment expectations (particularly of ILECs), the Commission demonstrated precious little solicitude to CLECs in 2008 when it abruptly capped their access to USF funds in a single stroke, leaving them well short of the support presumptively necessary to meet their ETC obligations. Be that as it may, the FCC contemplates comfortable “glidepaths” and phased transitions to ease the pain of companies accustomed to feeding at the USF and ICC troughs.

Short Term Universal Service Solutions.  In the short term, the FCC proposes to:

  • circumscribe or eliminate several high-cost support programs which may have outlived or outspent their usefulness, including high-cost loop support, local switching support, interstate common line support, and interstate access support. The FCC asserts that these programs as currently structured reward inefficiency and actually discourage movement to more advanced technologies. 
  • not only develop benchmarks for capital and operating expenses fundable under the high-cost programs, but also cap the amount of support per line that can be received by any one carrier at $250. (There are horror stories of carriers receiving as much as $2,000 per month per line in support!) 
  • change its procedures to encourage rational consolidation of service areas eligible for support in order to reflect operational efficiencies rather than USF gaming.
  • eliminate the identical support rule. This rule, which somewhat nonsensically ascribes the same high-cost reimbursement to a CLEC as to the ILEC in the same market, has been long due for change.
  • stimulate broadband build-out by a one-time disbursement (between $500 million and one billion dollars) based on a reverse auction. The funds recipient in each area would be the carrier willing to build broadband facilities in unserved parts of the country at the lowest cost. Broadband service under this proposal could be provided by either wireline or wireless technology or even by satellite (on an ancillary basis) if that proved most efficient for remote areas. This program is apparently a complement to the Mobility Fund proposed last year to disburse $500 million via a reverse auction to construct mobile broadband facilities in needy areas.

Long Term Universal Service Solutions. The Commission’s long term vision for USF involves phasing out all of the existing support mechanisms entirely and replacing them with the Connect America Fund (CAF), a mechanism for supporting broadband in areas of the country where broadband is not economically sustainable without such support. Voice service would simply be a component of the larger broadband service. Support under the CAF regime would be determined in one of two ways.  

Under Plan A, there would be a reverse auction in which any carrier using any technology (wireline, wireless or satellite) could bid on the right to provide broadband (or voice only) service in given regions. A single low bidder would receive the funding and have the obligation to provide supported basic services. The Commission envisions satellite service as being a part of the mix since some areas are so remote as to be most economically servable only by satellite, while other areas are more conducive to terrestrial coverage. The most efficient plan would incorporate both technologies to reach everyone at the lowest overall price. The reverse bidding process should ensure that the level of support provided is directly related to the actual costs associated with providing service without the need for bureaucratic review of cost components to determine if the costs are justified or reasonable. This plan has immediate appeal since on its face it ensures that the basic telecom service needed by people in high-cost areas is delivered at the lowest price without redundancy.

No doubt to mollify ILECs concerned about the possible loss of support through such a process, the Commission also floated Plan B. Under this option, current carriers of last resort would have a right of first refusal to take on the obligation of providing broadband/voice service throughout their area.   While this would ensure that such carriers (invariably ILECs) continue to receive not just some but all of the subsidies available for their areas, it would also require the Commission to establish and administer a detailed cost recovery model and continuing oversight to preclude padding of expenses. In a highly competitive carrier environment, such cost recovery models seem antiquated. Moreover, this option seems like a step backward to what was essentially the monopoly subsidization system that existed prior to the introduction of competition into the USF scheme. So it’s hard to see this as a meaningful reform in any sense.  

Finally, the Commission mentions a third option for rate of return carriers only: maintaining the current system but capping elements such as ICLS in order to incentivize the carriers to reduce costs. It is unclear why this is even part of the long term reform vision since a reform like this could be imposed on rate of return carriers in the near term to good effect.

Short Term ICC Reform.  The FCC’s immediate reform of the Intercarrier Compensation regime would deal with what are recurring abuses of the system. The current regulatory scheme creates opportunities for arbitrage that have resulted in unnatural schemes of a different nature – phantom traffic, access stimulation, traffic pumping. When millions of dollars are to be had by simply structuring a phone call in one way rather than another, the human capacity for innovation and ingenuity is marvelous indeed.  The Commission proposes to forestall the access stimulation device by requiring rate of return carriers who enter into “revenue sharing” arrangements such as chat lines to modify their tariffs to account for the new traffic.  Competitive carriers would have to benchmark their rates to the largest ILEC in the state, thus ensuring a more normal rate. The problem of phantom traffic (traffic which is passed on to a connecting carrier without sufficient information to identify the party to be billed) would be addressed by requiring all calls, including VoIP calls, to carry the necessary identifying info.  

Long Term ICC Reform. The deeper problem of how to handle VoIP traffic (which now sometimes goes unbilled) is part of the FCC’s long-term solution. Clearly all traffic will eventually be IP and the current regulatory distinction between IP traffic and circuit-switched traffic will have to be erased. For more than a decade, the FCC has danced around the issue of whether VoIP should constitute a telecom service or an information service – a distinction that has enormous consequences for the regulatory treatment which it gets. The FCC has so far handled the problem by using its non-Title II authority (i.e., sources of jurisdiction not based on telecommunications carrier status) to make VoIP carriers comply with many of the same obligations as regular carriers.  This evasion of the issue continues, with the Commission concocting new ways of regulating broadband or IP traffic without actually denominating such traffic as telecommunications. 

Ultimately, this dance will have to come to an end. In the context of this overall reform effort, the Commission should certainly have teed up the issue for resolution. Its failure to do so (the Commission devotes a single paragraph out of 703 paragraphs to this fundamental question) unfortunately casts a shadow on all of its other more specific proposals to rationalize the treatment of VoIP traffic by treating such traffic the same as circuit-switched traffic.  Until the Commission bites the bullet and reclassifies VoIP, VoIP can’t be treated exactly the same as other traffic since it falls into a different regulatory peg hole.

Long term ICC reform also presents other fundamental jurisdictional problems, the foremost being the historical division of regulatory authority between interstate and intrastate traffic.   Those distinctions (which made sense back in 1934) make no sense at all today.   Without a single nationwide regulatory framework, possibilities for arbitrage and discriminatory intrastate rates continue. The FCC struggles with this problem by proposing different hooks on which it can hang a pre-emptive hat (such as its plenary authority over CMRS rates), but it also suggests ways in which it can induce states to toe the federal line by moving up subsidies or other means. Ultimately, this division of regulatory authority is an obstacle to a consistent nationwide regulatory framework that requires a fundamental change in the Act; in the meantime, the Commission can only do what its limited authority allows.

If it can find the jurisdictional ground to stand on, the FCC proposes to reduce access charges across the board by getting away from per minute charges. It could do so by simply mandating a bill-and-keep approach (where neither connecting carrier charges the other) or flat-rate connection not based on volume. It could also, either on an interim basis or permanently, establish rate benchmarks which would keep the size of access charges within reasonable bounds while also permitting carriers’ costs to be recovered. Shortfalls arising in high-cost areas would be dealt with through explicit subsidies from the CAF rather than through invisible overcharges for access.  

Given the combination of jurisdictional hurdles and billions of dollars that will move from one company’s pocket to another’s as a result of ICC reform, the likelihood of paralysis on this issue is high. Yet it is here that reform is most needed because the current market for telecommunications traffic is artificially distorted by the feudal system that still prevails.

We expect to be providing more targeted thoughts on some of the Commission’s specific proposals in the weeks ahead. In the meantime, interested parties are encouraged to weigh in at the Commission to make it aware of particular problems and abuses and to suggest possible alternatives.

Caveat Carriers: Telecom Report Form 499-A Is Due April 1

FCC pillories telecom provider with $600K+ fine as the Form 499-A deadline draws near. Coincidence? We suspect not. 

With less-than-subtle timing, the FCC has fined ADMA Telecom, Inc., a Florida telecommunications company, more than HALF A MILLION DOLLARS for Universal Service Fund (USF)-related violations.  The message is clear: telecom companies that ignore the FCC’s paperwork requirements run the risk of hefty financial penalties. So get out your calculator, look through your books,  and get those 499-A’s on file by April 1, 2011.

As we all know, Congress has long required the FCC to establish and oversee a number of programs aimed at assuring the provision of telecommunication services to all Americans. Those programs are for the most part funded by consumers, through telecom providers. The FCC has developed an extensive set of reporting requirements so that it can keep track of all providers and determine how much each of them owes to the various programs. (Those programs include the USF, the Telecommunications Relay Service (TRS), and the North American Numbering Plan (NANP).)

The reporting requirements include an initial registration (to let the FCC know that the telecom provider has started providing telecom services) and then annual (and, in most cases, quarterly) worksheets – either Form 499-A or 499-Q – from which USF contributions are calculated. These filing chores apply to most telecommunications carriers, including resellers and interconnected VoIP providers.  Limited exceptions include government-only providers, broadcasters, certain non-profits, and systems integrators that derive less that 5% revenue from telecoms resale. Carriers owing less than $10,000 are considered de minimis and do not have to contribute, but still must file the form and pay any TRS and NANP contributions.

Since these programs involve billions of dollars, the Commission has an obvious incentive in riding close herd on the players, to make sure that everybody pays what they owe. And it has an equally obvious incentive to make examples of those who come up short. 

ADMA, for example.

Each USF-related violation carries its own forfeiture amount.  The Commission concluded that ADMA had failed to register itself for several years, had been late in filing its worksheets, and didn’t make its required USF/TRS/NANP contributions for significant periods.   Here’s the dollar breakdown of ADMA’s forfeiture:

  • Failure to register: $100,000
  • Late/Missing Form 499’s: $150,000 ($50,000 each)
  • Failure to contribute to USF: $211,835
  • Failure to contribute to TRS: $80,706
  • Failure to contribute to NANP: $20,000

The FCC also slapped on $100,000 for operating without an international section 214 authorization, bringing the grand total up to $662,541.

Notice that the fines for stiffing the USF and TRS look a bit strange – they’re not the nice round numbers you’d expect to see. That’s because for these types of fines, the FCC starts with a base figure (for example, $20,000 per month for no USF payment) and then adds half the total unpaid amount to the forfeiture.  Oh, and by the way, this does not decrease the amount due: the carrier still has to pay all the contributions in arrears.

As noted above, the deadline for the next Form 499-A is right around the corner – April 1, 2011. While the timing of the ADMA fine may just be coincidental, we suspect it wasn’t. What better way to encourage timely filing than to make an expensive example of an untimely filer on the eve of the deadline?

So don’t delay. Carriers who have already registered can submit the form online through the Universal Service Administrative Company (USAC)’s website.

Update: Comment Deadlines Set In USF/ICC Rulemaking

Last month we reported on the FCC’s adoption of a “Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking” (NPRM/FNPRM) kicking off a proceeding which looks to overhaul, from top to bottom, both the Universal Service Fund and the Intercarrier Compensation system.  The NPRM/FNPRM has now been published in the Federal Register, which sets the deadlines for comments and reply comments.  Get out your pencils and papers -- there are more deadlines than usual (probably because of the vast scope of the proceeding). 

If you want to comment on Section XV ("Reducing Inefficiencies and Waste by Curbing Arbitrage Opportunities"), you have until April 1, 2011 to file comments and April 18, 2011 to file replies.  [Note: Section XV comprises Paragraphs 603-677 of the original NPRM/FNPRM.  The summary of the NPRM/FNPRM as it appears in the Federal Register does not contain the full text of the NPRM/FNPRM and does not include the same paragraph numbering or section labeling as the original.]

Comments on the remaining sections are due no later than April 18, 2011; reply comments are due no later than May 23, 2011.  There's also a separate comment date for State Members of the Federal-State Joint Board on Universal Service -- that would be May 2, 2011.  And finally, if you'd like to offer the FCC comments on the information collection aspects of the proposal (in connection with the Paperwork Reduction Act), you have until May 2, 2011.

Next Candidates For Extreme Make-Overs: USF And ICC

FCC proposes major overhaul of Universal Service Fund, Inter-Carrier Compensation Systems

Perhaps inspired by the protesters in Egypt demanding the end to an outdated, bloated, aging, inefficient, and economically unsustainable regime, the FCC has finally taken up the task of systemic reform of the Universal Service Fund (USF) and Inter-Carrier Compensation (ICC).    These two mechanisms – one a product of the 1996 Telecom Act and the other a result of the break-up of the Bell System back in the ‘80s – allocate billions of dollars in telecommunications charges and revenues among carriers.   As with many grand failures, these systems were well intended. They were designed to compensate carriers fairly for routing traffic to and from each other, while also providing transparent subsidies to carriers who provide service in “high cost” areas.

Virtually everyone agrees that the systems do not accomplish their intended purposes either fairly or efficiently. But because there are so many parties that benefit one way or another – to the tune of billions of dollars – from the existing system, the FCC has been paralyzed for over a decade in its efforts to effect meaningful reform.   Now, flying the pennant of the National Broadband Plan (NBP) in which reform of these mechanisms was called for, the FCC has launched a top- to- bottom overhaul of the two systems.   The Commission’s original NBP action agenda called for these reforms to be initiated by the fourth quarter of 2010, but in the glacial scheme of action in Washington, a three-month delay counts as on-time. 

The full text of the catchily-titled “Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking” has just been released. It weighs in at a hefty 289 pages – which explains why we haven’t sifted through it in detail yet. (We plan to do so shortly and will report on our findings, of course.)

But from what we have read already, the outlines of the proposal look very promising.

  • The current system permits redundancy by funding multiple providers of basic service when one provider would be enough. The reform would eventually eliminate that problem by designating, based on reverse auctions, a single recipient of the USF support in any particular geographic area. That process should encourage providers to ask for the least amount of support they need to actually provide the required services.
  • The current subsidy system does not establish incentives for some providers to operate efficiently.  The reform will impose limits on reimbursement to address that problem.
  • There will be a measured transition to the new scheme to avoid disruption of current structures. Expect major battles over how long the transition will be, since subsidy recipients will have to have the subsidies pried from their fingers.
  • The Universal Service Fund will be re-dubbed the Connect America Fund in keeping with its new role in achieving the universal availability of broadband. This will require defining broadband for the first time as a supported service and repurposing current funding mechanisms toward broadband rather than plain old voice.
  • Several of the different USF support programs will be consolidated or eliminated to reduce overlap.
  • The ICC scheme will be revised to eliminate incentives for carriers to game the system by artificial arbitrage arrangements such as traffic pumping and phantom traffic.
  • The new ICC regime will recognize IP-based telecommunications as the wave of the future and the system will recognize such traffic while eliminating artificial incentives to maintain legacy networks.
  • The interplay between state and federal regulation of ICC will have to be rationalized. Some federal pre-emption of the field may be called for where permitted by the Communications Act.
  • Workshops will be held to get input from the public on the issues.  (Workshops are for some reason beloved by the Democrats on the Commission, though to us they often seem like an extremely inefficient way to gather data.)

Make no mistake: the task ahead is truly herculean (and here we’re thinking in particular of the Augean Stables). All of the entrenched interests which have so far barricaded themselves against change will be stacking their sandbags and summoning legions of lobbyists to their aid. But at least the battle is now joined.

Effectively Ineffective Effective Date?

FCC either grabs or misses relinquished USF monies

As we reported here a few weeks ago, on December 30 the FCC adopted an Order that permits it to re-purpose the monies that are relinquished by carriers who are no longer ETCs in particular states. From the text of the Order, we thought the Commission wanted to make the Order “effective” as of December 30. Now we’re not so sure.

The back-story here starts in 2008. Under the Interim Cap Order adopted in May of that year, the FCC temporarily “froze” the amount of funds available for distribution to CETCs (including wireless carriers) at then-existing levels. The FCC emphasized at that time that the pool of funds would not change depending on the number of ETCs who were dipping into it – the FCC seems only to have been thinking about increases in the numbers of participants since it designated a lot of new ETCs at the same time as the Interim Cap Order, thus immediately reducing the pro rata funding available to participating ETCs.

In 2008, however, Sprint and Verizon both committed to relinquish their USF funds in certain states as a condition of getting mergers approved.   One would have thought that these funds would then have been available for re-distribution to the remaining ETCs since the amount of funding was to remain fixed. This would have relieved at least a portion of the hit that CETCs took when the combination of the cap and new ETC designations reduced their support well below authorized levels.

Instead, in response to a petition by Corr Wireless (full disclosure: Fletcher Heald represented Corr) complaining that the funds were not being correctly distributed, the FCC decided to just keep the money itself as a rainy day broadband fund. Presumably recognizing the legal infirmity of expropriating these funds in contravention of its own rules, the FCC quickly initiated a rulemaking proceeding which would authorize it to lawfully re-purpose such relinquished funds in the future.   The rulemaking was pushed through hastily, and on December 30, 2010, to no one’s surprise, the Commission adopted the Order. 

The Order included an odd proviso. Typically, FCC rulemaking decisions (like the vast majority of federal administrative actions) become effective 30 days after the new rule is published in the Federal Register. New rules can in rare cases be made effective earlier, but the agency must justify this extraordinary timing by showing that there is good cause for it. Here the FCC simply noted that Sprint had filed notices of its intent to relinquish its ETC designations in several states effective December 31, 2010, and unless the FCC got this new rule into place before December 31, those monies would have gone back into the pool for re-distribution.

Huh? When the earlier Verizon and Sprint monies were relinquished, the FCC had no qualms about stuffing the money into its own pocket, so why couldn’t it have done the same thing with the newly available Sprint money? Perhaps the FCC was candidly acknowledging that its earlier action was legally shaky. 

Unfortunately, the new action simply confuses things further.

First, the FCC's “good cause” showing for accelerating the effective date – that it wanted to prevent CETCs from getting funds that would otherwise be due to them under the rules – would hardly seem to qualify as a basis for deviating from the requirements of the Administrative Procedures Act. Second, although the Order released on December 30 expressly states that it is effective upon release, when the order was published in the Federal Register on January 27, the effective date was given as . . . January 27.   So if the Commission was trying to get things into effect before December 31, 2010, it seems to have stepped on its own foot. 

Finally, although Sprint had requested its relinquishment of ETC status to be effective as of December 31, 2010, the Wireline Competition Bureau waited until January 14, 2011 to approve that request, effective on that same day. If the Bureau could simply delay the effective date of relinquishment by delaying approval of Sprint's request, why did the Commission need to act hastily on December 30? And as long as it was delaying Sprint’s request anyway, why didn’t it just wait to approve relinquishment until 30 days after the December 30 Order had appeared in the Federal Register? That would have removed at least a couple of the legal challenges that are otherwise certain to be filed to this unusual legerdemain involving several hundred million dollars.

So is the Sprint money available for re-distribution to CETCs or not?   You make the call.

Update: Commission Sets Hooks Into USF Windfall

FCC acts quickly to facilitate re-purposing of USF payments left behind by Verizon Wireless and Sprint-Nextel

Last September we reported that the FCC had proposed to grab hold of certain Universal Support Fund (USF) moneys that would no longer be distributed to competitive eligible communications carriers (ETCs) when Verizon Wireless and Sprint-Nextel gave up their ETC status in certain markets (in fulfillment of conditions placed on approvals of their mergers).  And as we reported in October, the expectation is that the relinquished funds will be used for a new mobility broadband support fund.

The FCC has quickly adopted its proposal and made it effective immediately, to take advantage of anticipated relinquishment of ETC status in several markets by Sprint-Nextel on December 31, 2010.

Each state has a cap on ETC support from USF.  Historically, when a carrier gave up support, for whatever reason, the cap stayed unchanged.  With the same number of dollars available in the state, but fewer supported carriers, the remaining ETCs claimed the right to an increase in their own payments.  But the FCC had other ideas, seeing an opportunity to fund part of its planned mobile broadband support program.  It proposed not to allow the remaining ETCs to get any of the relinquished funds.

The new rule confirms that whenever a carrier relinquishes its ETC status and so gives up its USF financial support, the cap in that state will be reduced by the same amount the relinquishing ETCs used to receive, meaning that there will be no additional dollars to distribute to remaining ETCs.

What is not clear is how the new rule will provide funding for a broadband mobility fund, because slush money is available only if the public has to keep contributing at the old rate.  If the state ETC caps are reduced, it seems that the amount to be charged to the public should also go down.  That is obviously not what the FCC has in mind.  Rather, the Commission wants to keep collecting the money from consumers and repurposing it for mobile broadband studies.

Just a couple of weeks ago, the FCC announced that the consumer contribution factor for the first quarter of 2011 will be a whopping – and record-busting –15.5%.  We anticipate a fair amount of grousing from the public over a figure that will raise total taxes and fees on nearly all telephone bills to the 20-25% range.  That pushback may get the FCC to think twice about how far it can boost telephone taxes before the public brings down the building walls.

Joint Board Weighs In On USF Lifeline, Link Up

But Board balks because big, basic broadband questions left unasked

Acting in response to a request by the Commission, the Federal-State Joint Board on Universal Service (Joint Board) has adopted a Recommended Decision concerning implementation of the Low Income component of the Universal Service Fund (USF).   Not stopping there, the Joint Board took the time to vent a bit about some broader issues about which the FCC didn’t ask it to comment.

(The Joint Board is composed of representatives from the FCC, state public utility commissions, and one consumer advocate. It was established in 1996 to provide recommendations on the implementation of the universal service provisions of the 1996 Telecommunications Act of 1996.)

Back in May 2010, the Commission asked the Joint Board to take a look at the Link Up and Lifeline components of the USF’s Low Income Program. The Link Up Program helps low income consumers defray the initial hook-up costs for telephone service; the Lifeline Program helps them defray the monthly costs of such service. Both programs are funded through the USF, which in turn is funded by telecom companies paying in a percentage of their interstate end-user revenues, which is in turn paid for by consumers. 

In its May Order, the Commission asked the Joint Board to address three particular administrative aspects of the Link Up/Lifeline Programs: eligibility (who should get the money), verification (how to make sure the money is in fact going to the right people), and outreach (telling people the money is available). 

In response, the Joint Board offered the following:

Eligibility. Eligibility requirements for the Link Up and Lifeline Programs are currently set either by (a) individual states that have their own mandatory Link Up/Lifeline programs or (b) the federal government. Federal eligibility is based on participation in certain means-tested programs (e.g., Medicaid, Food Stamps) or income at 135% of the federal poverty guideline (FPG) level. Because of the dual state/federal approach, eligibility can vary from state-to-state. The Commission asked the Joint Board to examine whether changes in the current eligibility arrangements might be in order in the interest of uniformity.

Without offering any specifics, the Joint Board suggested in response that the Commission might want to explore the establishment of uniform minimum eligibility requirements (both income and program-based) to apply to all states. Such uniformity might simplify some administrative aspects of the program and might increase program participation. However, the Joint Board cautioned that taking that approach might impose undue impact on the states, and it advised that uniformity be pursued only if that impact would not be unreasonable.

With respect to federal minimum income level, the Joint Board recommended that the FCC seek comment on raising that level from 135% of the FPG level (where it currently sits) to 150%.

The Commission also asked the Joint Board whether states should be required to adopt automatic enrollment programs. Such programs electronically link one or another state agency with the carrier, providing an interface that allows low-income individuals to automatically enroll in Lifeline/Link Up once they have enrolled in a qualifying public assistance program. Such systems are already in place in some, but not all, states. The Commission considered making such systems mandatory several years ago, but ultimately decided not to because of various burdens such a requirement might impose on states and carriers. But it held open the possibility of revisiting the issue down the line – and that time has now come.

In response, the Joint Board has again recommended that the FCC hold off on mandating automatic enrollment. The Joint Board believes the record needs to be more fully developed with respect to certain issues, such as the potential cost of implementation and any needed changes to state law. (While some commenters argued that the increased number of participants would increase fund size, the Joint Board pointed out that increased Lifeline and Link Up participation is a stated program goal.) The Joint Board did recommend that the FCC encourage automatic enrollment as a best practice for states. 

Verification. Currently, a variety of approaches – state, federal, or some combination of the two – are used across the nation to ensure that Lifeline recipients continue to meet eligibility requirements. While the verification methods are set by the government, they are implemented by carriers. The Joint Board has recommended that the FCC adopt a “floor” of minimum verification requirements, with carriers providing the data from their verification efforts to both federal (i.e., the FCC and the Universal Service Administrative Company) and state authorities. Those data would also be publicly available. The hope is to prevent and combat fraud, waste, and abuse in the Low Income programs. States would still be free to impose additional requirements if they wish. Again, the FCC will need to seek comments on what these minimum requirements will be and who will be responsible for carrying them out.

Given cost, agency coordination, and privacy concerns, the Joint Board recommended that the FCC seek further comment before implementing a national database for certification and verification of Lifeline consumers’ eligibility.

Outreach. The Joint Board observed that outreach and penetration remain a problem: in 2009, the nationwide Lifeline participation rate among eligible consumers was only 36%, and in some states less than 10%. “Lifeline participation rates have not significantly improved” since 2004, when the FCC last established outreach guidelines. Therefore, the Joint Board has recommended that the Commission establish specific mandatory outreach requirements for all participating carriers.  The FCC requirements would be a minimum, upon which states could impose additional outreach requirements.  As with the other areas addressed by the Joint Board, on this point the Joint Board recommended that the FCC seek comment on these mandatory outreach requirements, including potential measures such as requiring Lifeline and Link Up information on carrier’s home page, other media requirements, and use of multiple languages.

The Commission will doubtless be seeking comment on these and, probably, a host of related issues.  This is to be expected in view of the dramatic changes which have occurred in the telephone industry in just a few short years. But, as the Joint Board was quick to note, the Commission did not ask the Joint Board to consider a number of other issues that (in the view of the Joint Board, and probably many others) can and should be addressed now as well. The FCC, presumably with the advice of the Joint Board, may have to take the lead on USF reform as, with Boucher gone and the change in the House, Congress is unlikely to take action this year (As we previously reported, Representative Lee Terry (R-NE) does plan to reintroduce a USF reform bill next year.)  

The primary issue here is Broadband. The FCC did ask the Joint Board about applying Lifeline and Link Up to broadband – but only to the extent that it might relates to the narrower issues of eligibility, verification and outreach. That left open a broad range of Big Questions such as “the definition of the broadband services or functionalities to be supported, sources of funding, the funding and contribution rules, and the overall approach to using low-income support to achieve universal broadband service”.

The Commission’s failure to put such important questions on the table for Joint Board consideration provoked a testy response from the Joint Board, which rattled off the top of its head seven examples of big practical issues relating to broadband and USF that it was not asked. The Joint Board also reproached the Commission for recently extending Lifeline funding to prepaid wireless Lifeline-only carriers without advice or consultation from the Joint Board. As the Joint Board griped, “given the lack of a definition for the term ‘broadband’ as a supported service, and how such service would be calculated and distributed, it would be extremely difficult, if not impossible, to comply with even the Commission’s de minimis broadband-related requests that were included in the Referral Order.”

Comment Deadlines Set In Mobility Fund Rulemaking

Deadlines have been set for comments and reply comments in the proceeding aimed at devising a mechanism for distributing the “Mobility Fund” realized through the FCC’s re-direction of USF funds left on the table by Sprint and Verizon. We described the Notice of Proposed Rulemaking last week. Now the NPRM has been published in the Federal Register, which means that comments are due by December 16, 2010, and replies are due by January 18, 2011.

FCC Proposes Distribution Mechanism For USF Windfall

Proposal: Dole out up to $300 million through reverse auction to bring 3G to underserved areas

As we have reported, the FCC decided last month that, instead of re-distributing to CETC’s the $500 million or so in USF funds which Verizon and Sprint renounced as a condition of getting their mergers approved, it would keep the money in a rainy day fund to support broadband mobility. The FCC’s action in that regard was highly suspect on legal grounds (full disclosure: FHH represented the lead proponent of re-distribution of the money to CETCs). Nevertheless, the Commission initiated a rulemaking to try retroactively to justify its unprecedented action.   And now it has opened another rulemaking to determine where and how the so-called “Mobility Fund” will be distributed.  

This proceeding may be a classic case of pre-natal chicken enumeration, since the Commission’s original palming of the Verizon/Sprint funds remains very much in contest. A spate of petitions for reconsideration have been filed, and the matter is likely to go to the Court of Appeals if the FCC remains unmoved. That process could easily take two years, maybe longer.   So no matter what happens in the new rulemaking, Mobility Fund dollars are not going to be finding their way into anyone’s pockets soon, if ever.

That said, the Commission’s proposal for distributing the Mobility Fund is a solid step forward in tailoring the distribution of Universal Service Fund support to those precise areas that most need it without wasteful duplicative support payments. The FCC proposes to distribute $100-$300 million dollars from the Fund by conducting a reverse auction. Bidders would propose to offer 3G-level service in census tracts around the country that have been designated by the FCC as underserved.  The bidder who proposes to provide the service with the lowest amount of support from the Mobility Fund would be awarded the subsidy at that level. There would be only one recipient in each census tract. 

Some specifics from the Commission’s proposal:

  • Only Eligible Telecommunications Entities (ETC’s) or entities which have applied to be ETC’s could participate in the auction. Because this is a “mobility” project, participants would have to demonstrate that they have access to broadband spectrum (either owned or leased) in the areas where they propose to receive support. Before being awarded the grant, the proposed recipient would have to demonstrate its financial ability to construct the build-out necessary to deliver the 3G service.
  • Bidders would bid on a per unit basis and be compared against anybody else bidding for the same census tracts. For example, one bidder could bid to provide service with a subsidy of $50 per person over the underserved areas in the whole state of Nevada, while another bidder might propose to offer service to underserved areas of Washoe County for $55 per person. Someone else might propose service to underserved areas in all of the mountain states for $48 per person. The last bidder would get the nod in both the county and the state since he was the low bidder in census tracts where there was overlap with other bidders. This process nicely avoids the problem of trying to compare bids on differing geographic areas. The award would then be the winning bid ($48) times the number of people in the underserved census tracts covered by the bid.
  • Winning bidders will likely be required to demonstrate that they will provide the 3G service to a set percentage of the population by a set date (possibly two years), but the FCC seeks input on that. For this purpose, 3G-level service is deemed to be 200 kbps up and 768 kbps down while travelling at 70 MPH over 90% of the designated coverage area. The FCC considers these relatively slow rates to be comparable to HSPA and EV-DO. Both voice and data must be supported.
  • Interestingly, towers constructed with support money must be made available to competitors, and data roaming must be permitted at reasonable and non-discriminatory rates. These measures are designed to ensure that other carriers are not frozen out of the supported markets.
  • The actual money will be doled out in thirds – once right after your grant, once when you are 50% complete, and once when you are finished. Note that these funds are intended to be used for construction of infrastructure – not long-term support – so the award is a one-time thing.
  • As always, the FCC will require annual status reports and awardees will be subject to audits.

None of this is set in stone, since the FCC is just beginning the process and seems genuinely interested in getting input as to how to make this process work efficiently and effectively. Earlier efforts to use reverse auctions to award USF funds have always fallen flat, but because this effort leaves wireline LECs unaffected, it may stand a greater chance of success. We notice that in many ways the process mirrors last year’s stimulus money program which was designed to shovel out $7 billion to fund broadband in unserved and underserved areas. Surely the stimulus awards and the resulting build-outs should be taken into account in awarding these new funds. 

Despite the many uncertainties that still surround this Fund (and which may ultimately make it evaporate), this rulemaking merits the careful attention of low cost carriers who cannot otherwise make a business case for serving marginal areas.

Comments will be due 45 days after publication of the Notice of Proposed Rulemaking in the Federal Register; reply comments will be due 75 days after publication. Check back here for updates.

Comment Deadlines Set On Proposed Re-Direction Of USF Funds

Deadlines have been set for comments and replies on the Commission’s proposal to amend certain aspects of the Universal Service Fund. As we reported last week, the FCC is proposing “to facilitate efficient use of reclaimed excess high-cost support” in the Universal Service Fund by “reclaim[ing]” cash that Verizon Wireless and Sprint-Nextel left on the table back in 2008. The Notice of Proposed Rulemaking has now been published in the Federal Register, which in turn establishes the participation deadlines. Comments are due by October 7, 2010 (i.e., 21 days after Federal Register publication); reply comments are due by October 21, 2010 (i.e., 35 days after publication).

USF Bonanza Broadband-Bound?

FCC proposes to re-direct cash left behind by Verizon Wireless, Sprint-Nextel

If you managed to clear out of the office early for the Labor Day weekend, you may have been lucky enough to miss the release of the latest salvo in the FCC’s effort to reform the Universal Service Fund (USF). The Commission’s Order and Notice of Proposed Rulemaking (NPRM) hit the e-distribution system late on Friday afternoon, just as the local streets were clearing after an early rush hour and beach-bound traffic was slowing to a crawl.

The Commission’s new USF game plan involves the likely dedication of hundreds of millions of dollars to subsidize broadband in furtherance of the National Broadband Plan (NBP). (Many observers believe the NBP has replaced the Communications Act of 1934 as the FCC’s Prime Directive.) The cash would come from the existing USF pool of funds – although precisely how the Commission justifies its proposed approach may raise some eyebrows. Still, it seems that that approach may be a fait accompli: the Commission has allotted a mere 21 days for comments on its proposal (and another 14 days for replies).

The USF subsidizes affordable telecommunications services in certain circumstances. Each quarter the Universal Service Administrative Company (USAC), which oversees the USF, issues a projection of the support requirements for the various USF programs. USAC also collects quarterly revenue information from carriers and calculates anticipated revenues projections. From these data, the FCC derives a quarterly “contribution factor,” in the form of a percentage, from which carriers then determine how much they will owe to USF. The carriers then dutifully pass that burden along to their customers in a line item on their monthly bills.

The result is a $15 billion pool (more or less), collected from consumers by carriers and remitted to the USAC for distribution back out to carriers in furtherance of various USF programs.

One of those programs is the “high cost” program which ensures that consumers in all parts of the country have access to telecom services – and pay rates for those services – that are reasonably comparable to the services and rates available in urban areas. Subsidies are also available for low income consumers in both rural and urban areas,; the subsidies cover both hook-up and monthly charges. Estimated 2009 level of USF “high cost” support: $4.3 billion. Eligible Telecommunications Carriers ("ETCs") that can get USF distributions include incumbent local exchange carriers (referred to by the FCC as “ILECs”) and carriers who compete with them in offering local service, both wired and wireless (dubbed “competitive ETCs” or “CETCs”).

The FCC has two problems with the current system: (1) the support requirements (i.e., carriers and services entitled to USF funding) have ballooned in size, turning the line item surcharge on telephone bills into the equivalent of a rather nasty tax on consumers; and (2) USF subsidies tend to support 20th Century voice services, which the FCC thinks are old-and-in-the-way, as opposed to today’s-hot-and-happening 21st Century services like texting, tweeting, and on-the-go web browsing.

To address the nasty tax issue, the FCC put a lid on the total amount of support given to CETCs on a state-by-state basis in 2008. As a result, CETCs are limited in two ways. First, they can’t get more pay-out from the USF “high cost” program than the ILEC gets in the same service area. Second, as a group, they can’t collect more than the cap for their state – so that if more CETCs jump into the pool, the amount distributed to each CETC in the state is reduced to avoid exceeding the cap.

But what if a couple of CETCs were to get out of the pool? That’s when things get interesting.

In 2008, Verizon Wireless and Sprint-Nextel – both providing CETC wireless services even though their parent entities may also be wireline ILECs – needed FCC approval for big mergers. To help things along, both agreed to “surrender” their universal service support, giving it up in 20% increments over a five-year period ending in 2013. That is, they would gradually walk away from their share of the USF pool. And they were in the deep end of that pool: the FCC estimated their 2008 share to amount to about $530 million.

In 2009, it seemed to some carriers that they were being shorted by USAC in the funding they had expected to receive as high cost support. They asked, and sure enough, USAC acknowledged that it wasn’t actually redistributing the money that Verizon and Sprint had left on the table. 

Corr Wireless (an FHH client) promptly cried foul. It asked that the USF funds relinquished by Verizon and Sprint be redistributed to Corr and other CETCs, as the interim cap order required.   Corr pointed out that, in imposing the 2008 support cap, the Commission had indicated that the amount of the cap would remain unchanged regardless of the number of carriers making claims. With the departure of Verizon Wireless and Sprint from the pool, the money that otherwise would have gone to them should have been available to be divvied up among the remaining claimants. The basic premise of the cap was that the amount of funds remains constant but the percentage available to participants would go up or down as the number of participants increased or decreased. Once Corr got the ball rolling, a host of other wireless carriers joined in.

The FCC said no, that’s not going to happen. Even though the FCC acknowledged that the interim fund cap is a regulation that cannot be changed without a formal rulemaking proceeding, the Commission nevertheless held that USF payments will continue to be calculated as if Verizon and Sprint were still in the pool. The result, of course, is that as the universe of CTECs grows, the amounts available under the cap for each of them will continue to shrink. And, under the Commission’s proposal, any time in the future that a carrier exits the pool, we’ll just go ahead and pretend that they’re still there. Consumers will thus still have to pay the nasty tax as if the departing carriers were receiving support, but since those carriers are gone, they won’t really be receiving that support. Result:  the USF will have a bunch of money left over that it doesn’t have to dole out. 

Now here’s a surprise: The Commission has decided that that extra money should – and likely will – be placed in reserve for future broadband use.

The FCC is now proposing a permanent rule change that would allow excess USF funds to be reserved for all kinds of Good Things, like: enhancing broadband opportunities for children, teachers, schools, libraries; improving  rural health care by advancing telemedicine services in rural areas; supporting a Mobility Fund to improve 3G wireless broadband in states with the worst coverage; and “in the long term, directly support[ing] broadband Internet services for all Americans”. (By the way, the FCC says, we plan to propose this new Mobility Fund in a formal proceeding during the fourth quarter of 2010, so stay tuned.)

But a rulemaking proceeding is a prospective exercise. That is, whatever the results of the rulemaking may be, they would not ordinarily reach backward. What, then, to do about the excess funds that will pile up between now and then, funds which USAC would otherwise have to account for? No problem, says the Commission. We’ll waive the requirement that the USAC account for differences between its projections and its actual revenues. And we’ll also instruct the USAC to ignore any effect from the Verizon Wireless or Sprint-Nextel mergers in doing its calculations.

The FCC suggests the possibility that avoiding increasing support to ETCs remaining in the pool could facilitate a reduction in the nasty support tax; but with so many broadband ideas out there clamoring for support, it remains to be seen which will emerge as the ultimate victor: frugality, or watching-movies-on-the-bus-while-tweeting.

The deadlines for comments and replies won’t be set until the NPRM is published in the Federal Register. Check back here for updates.

H.R. 5828: USF Reform Proposed In House

Boucher bill boosts boatloads of big bucks for broadband build-out in boondocks

One more element has been added to the full-court governmental press aimed at extending broadband to as many people as possible: a bill recently introduced in the House would reform the 13-year-old, multi-billion dollar Universal Service Fund (USF). The proposal would (among other things) explicitly declare high-speed broadband to be a “universal service” and, therefore, eligible for subsidization from the USF – thus freeing up boatloads of big bucks for broadband build-out in the boondocks. Dubbed the “Universal Service Reform Act of 2010”, the bill is a bipartisan effort sponsored by Reps. Rick Boucher (D-VA) and Lee Terry (R-NE).

The USF was created by the 1996 Telecom Act, but its roots go deeper than that – back at least to 1934, when the FCC was born. The U.S. has sought to assure that every American has access to essential telecommunications services. Historically, such services have entailed mainly standard old telephone service. Putting the consumer’s money where the government’s mouth is, the 1996 Act provided for the establishment of a fund (the USF) to be used to subsidize the provision of affordable telecommunications services in certain circumstances. 

USF subsidies go to: (a) “high cost” areas, mainly rural and sparsely-populated in nature, where delivery of service could otherwise be prohibitively expensive; (b) low income consumers in need of basic local phone service; (c) rural health care providers for both telecom and Internet services; and (d) schools and libraries, to assure access to various telecommunications services. Subsidies for each of these groups are managed by separate divisions within the Universal Service Administrative Company, the non-profit corporation established to oversee the day-to-day operation of the USF. (The USF gets its funds from telecommunications providers, who in turn get the funds from their customers.)

The Boucher-Terry bill focuses primarily on the USF program for delivering telecom services to “high cost” areas.

The existing patchwork of USF “high cost” programs is in many ways irrational, overly complex, and inefficient. For example, eligibility for certain types of support is based on company size or regulatory classification rather than on the costs of serving the area. Furthermore, the USF now supports carriers generally on the basis of their actual costs of providing service, whether or not they or someone else could have done it for less. 

Although many aspects of USF are ripe for reform, its most egregious shortcoming, in the eyes of many, is clearly its failure keep up with technology – i.e., to fund broadband. (The current “high cost” program supports only voice service.) Significantly, in this post-Comcast regulatory environment, the Boucher-Terry bill would address that conundrum by giving the FCC express authority to direct USF funds to broadband services.

Would consumers have to pay more for the proposed changes? The bill mandates that any reforms will not “unreasonably” increase the contribution burden on consumers (i.e., the line item charge for USF that appears on your phone bill). To make this mandate mathematically possible, the bill would reduce support to certain carriers, expand the contribution base, and perform other feats of legislative legerdemain designed to balance the fund with the greatest of ease. Nonetheless, consumers may not feel entirely reassured by the guarantee that rate hikes will not be “unreasonable.”

The following is a recap of some of the bill’s key provisions.

Broadband service funding.  High-speed broadband service would be deemed a “supported service”. The catch here is that, in areas lacking high-speed broadband service, recipients of support from the “high cost” USF program would have tomake broadband service available within five years (either through their own facilities or through resale, including satellite resale). The bill would also allow the FCC to expand the universe of “supported services” down the line, so it won’t get stuck again as technology develops. 

Reduced funding for incumbent carriers in competitive areas. The FCC would be required to develop a mechanism for reducing support to incumbent local exchange carriers in areas where at least 75% of households are able to get voice and broadband service from an unsupported competitor.

Competitive bidding for mobile wireless carriers. In an area with three or more qualified mobile wireless carriers, the FCC would have to pick no more than two applicants, using a competitive bidding process similar to that for a government contract. Primary factors would be the amount of the bid and the proposed minimum broadband speeds, but the Commission could consider other things, like existing service area and proposed speed of build-out. Winning bidders would receive a flat-rate subsidy for up to 10 years. In areas with fewer than three mobile wireless carriers, support would continue at the per-line level in effect before enactment. Furthermore, overall high-cost support to mobile wireless providers would be capped at the pre-enactment level.

Wider contribution base. Any provider that “offers a network connection to the public”, including Internet service providers, VoIP providers, and cable companies, would have to ante up. The FCC would be required to devise a new contribution calculation methodology, which could be based on (a) revenues, (b) telephone numbers and IP addresses, or (c) a combination of the two. To broaden the base even further, intrastate revenues (which are excluded under the current system) would be included in the contribution base, along with international and interstate revenues.

A new “high cost” model. The FCC would have to develop a new model for distributing “high cost” support that would factor in the costs of providing both voice and broadband service. The new model would determine these costs on a study area and wire center basis. Current rate-of-return carriers, however, would continue to receive rate-of-return support. 

Intercarrier compensation. Intercarrier compensation reform (ICC) would be left to the FCC, which would have a year to complete an initial proceeding. To facilitate the FCC’s chore, the bill would extend the Commission’s ICC authority to intrastate traffic. 

Miscellaneous. In addition to the foregoing high profile item, the bill would also: strengthen auditing; prohibit “phantom traffic” and traffic pumping; address rural health care support; and eliminate the “parent trap” affecting support after the sale of an exchange; carve out an exemption from the Anti-Deficiency Act; prohibit the FCC both from adopting a primary line restriction and from reducing high-cost support to tribal lands unless in the public interest. 

Note for carriers interested in Lifeline-only designation. With respect to the “Lifeline” USF program – which focuses on service to low-income consumers, not “high cost” areas – the bill would codify the Commission’s TracFone line of forbearance cases by formally exempting Lifeline-only carriers (i.e., resellers) from the “own facilities” requirement of 47 U.S.C. §214(e)(1)(A). Boucher has also indicated a willingness to include Lifeline funding for broadband, which already been proposed by at least one other Representative.

Possible additions to the bill. Of course, we are at the very beginning of the legislative process which can drag on for a while, with plenty of opportunity (and incentive) for amendments along the way. For example, Boucher is apparently willing to work with Rep. Ed Markey (D-MA) on including his E-Rate proposals, such as broadband vouchers for students and supported access for community colleges and head start programs.  More amendments can be expected.

Meanwhile, the FCC is also trying to overhaul the USF on its own. Chairman Genachowski has reiterated the Commission’s commitment to do so. In connection with the National Broadband Plan unveiled with considerable fanfare earlier this year, the FCC adopted a Notice of Inquiry and Notice of Proposed Rulemaking (NPRM) aimed at jumpstarting that overhaul process at the Commission level. While the FCC’s authority, under the current Communications Act, to achieve its ambitious goal is far from clear, the Commission has at least one important cheerleader on Capitol Hill. In a recent letter to Genachowski, Sen. Jay Rockefeller (D-WV) – who happens to be the Chairman of the Senate Committee on Commerce, Science and Transportation – has urged the FCC to focus more on unserved areas than on “the size and regulatory classification of the carrier.” Rockefeller’s letter was in response to a mining disaster in West Virginia and makes no mention of the Boucher-Terry bill (which would retain rate-of-return regulation for current RoR carriers).

Will the bill pass? Boucher and Terry have been working on enacting USF reform for many years, but Boucher is optimistic about this bill’s chances of passing, perhaps even this year. His optimism is based at least in part on the fact that a wide cross-section of the communications industry – including AT&T and Verizon, ISPs, cable, satellite, and rural telcos – has expressed support for the bill. Many mobile wireless providers, however, have stopped short of fully endorsing the bill because of concerns about its proposed bidding procedure

Still, many players share Commissioner McDowell’s overall assessment of the current regime as “antiquated, arcane, inefficient, and just downright broken” and agree that the bill is a desirable first step toward comprehensive change. It proposes some long-overdue changes and attempts to balance various carriers’ interests, but leaves many contentious details to the FCC. We’ll keep you posted as the USF reform saga continues.

NBP Lift-Off!

FCC launches five – uh, make that six – NBP-related items in one day

If you thought the FCC might have been kidding around when it promised quick action on the National Broadband Plan (NBP) agenda items, the FCC is working hard to move you off that thought. In an impressive display of regulatory shock and awe, the FCC has put a substantial dent in its NBP to-do list by launching six separate proceedings covering five discrete subjects. The items include:

The six items top out at a total of just over 250 pages in all, so you might want to start reading now.  If you just want to get a quick sense of what each involves, you might want to check out the public notices which recap each: Universal Service Fund; Roaming Obligations; Survivability; Cyber Security Certification; and Set-top Boxes.

 Each of the six items invites comments and reply comments, but don’t get your calendars out yet. The comment deadlines won’t be set until the various notices are published in the Federal Register. And to make it even trickier to start planning your early summer get-away, the Commission appears to contemplate an oddly diverse set of deadlines. For example, comments and replies in response to the Set-top Box NOI will be due a scant 30 days and 45 days, respectively, after that notice makes it into the Federal Register.  By contrast, comments/replies in the Cyber Security Certification proceeding won’t be due until 60/120 days after publication. And in between you’ve got the Set-top Box NPRM and USF combo NOI/NPRM (60/90 days for each), and the Survivability NOI and Roaming NPRM (45/75 days for each).

With this barrage – or is it a salvo? – the Commission is clearly signaling its determination to move forward with the ambitious campaign mapped out in the NBP, despite the major questions which loom large in the wake of the FCC’s setback in the Comcast case.  And don’t get comfortable, because these are just the beginning.  The NBP envisions more than 60 proceedings in the months to come.  Stay tuned . . .

NBP, USF and Intercarrier Compensation: Altering The Course Of The Money Flow

NBP envisions overhaul of compensation/distribution schemes to fund $24 billion to close broadband “gap”

One of the problems which has vexed the FCC for more than a decade is how to adapt the Universal Service Fund (USF) and Inter-Carrier Compensation (ICC) regime to the world of the internet.  The USF and ICC were 20th Century constructs which patched up subsidy and traffic exchange problems arising from the AT&T break-up.  The need for reform in these areas has been stymied by the inability of policy-makers to resolve the competing, but more or less legitimate, demands of all the players.  The advent of broadband offers the FCC an opportunity to break the logjam in the context of a migration to all-digital, all-IP networks.

In this cause, The FCC’s ambitious National Broadband Plan (NBP) to facilitate universal access to broadband is inspiring, but as Rod Tidwell and Jerry McGuire (portrayed by Cuba Gooding, Jr. and Tom Cruise, respectively) famously insisted: “Show me the money!” The NBP asserts that it will cost $24 billion to close the “broadband availability gap” and provide the targeted level of affordable broadband service to currently unserved areas.

Where will this money come from?

The FCC proposes to transform and re-purpose the major source of funding currently used to facilitate the provision of telephony in unserved areas, i.e., the USF, into a new Connect America Fund (CAF) to facilitate provision of broadband services. And because, for historical reasons, the USF programs are deeply connected to the way that telecommunications carriers make payments to each other for carrying telephone traffic, the NBP also proposes revisions to the ICC system. With broad proposals to “comprehensively reform” the complex mechanisms through which billions of dollars per year are collected and disbursed, revisions to USF/ICC will be a hotly contested process that will raise some difficult questions.

Currently, three out of the four federal USF programs are not designed to support broadband services directly, though some carriers that receive USF use that funding to construct facilities that can be used for broadband as well as tradition voice services.  In addition, the largest of the USF programs, the High Cost Fund (HCF), supports only certain components of a network, such as wires and switching equipment, but not other components necessary for broadband. Thus, rather than “tweaking” the existing USF programs, the NBP proposes that the FCC pull $15 billion out of the HCF over the next decade and re-purpose that money into the CAF to facilitate (wireline) broadband development. 

In addition, the FCC would create a Mobility Fund to facilitate the development of broadband mobile wireless networks where the market would not otherwise support such development.  Lastly, between 2012 and 2020, the FCC would beginning phasing down and ultimately eliminating the HCF – first by eliminating payments to competing providers in certain areas (primarily cellular companies) and then by phasing out payments incumbent telcos for traditional voice services. After 2020, the only voice services eligible for federal support would be broadband voice services.    

As noted above, the NBP also proposes broad reform of the ICC system. This is because prior to the deconstruction of the Bell System in 1984, universal service was largely funded by a complex set of internal AT&T price and cost cross-subsidies, shifting costs from rural to urban users, from residential to business users, and from local to long distance users. After the break-up of the Bell System, those cross subsidies were replaced with direct payments between phone companies, with rural and smaller phone companies charging ICC rates designed to reduce the cost of providing service to their residential customers.  

When the Telecommunications Act of 1996 was enacted, it mandated that federal subsidies for universal service be funded explicitly, through USF. Nevertheless, the business structures of many telephone companies still rely heavily on the profits received from ICC, and to the extent their ICC declines, those companies would either have to receive more USF, or raise fees on customers. Thus, ICC still plays an important role in making service affordable for customers, a key universal service policy goal. Nevertheless, the NBP recognizes that due to changes in technology (reduced costs of switching and transport of digital data) and increased competition, the existing ICC regulatory structure does not function well and leads to destructive market and behavioral distortions. Indeed, notwithstanding the huge growth of VoIP, many parties claim that the current ICC regulatory regime does not provide for payment of ICC for carriage of VoIP traffic, leading to extensive litigation and under-recovery of ICC by incumbent carriers.

Accordingly, the NBP proposes a staged transition of ICC between 2012 and 2020.

Initially, intrastate per-minute compensation rates would be reduced to the typically lower interstate levels. Then, set per-minute ICC rates for origination or termination of traffic would be completely phased out, leaving companies to negotiate “reciprocal compensation” agreements, where in many cases, no money would be paid between companies in either direction. If enacted, this would radically transform the economics of the telecommunications business.  In a related matter, the NBP also appears to endorse FCC action to ensure “fair and reasonable” (read “reduced”) “special access” charges, which are paid to local exchange carriers by large end users, ISPs, and competing carriers, for dedicated high-capacity transport. 

A number of big questions are raised by the above proposals. Here are some of them:

  1. Section 254(e) of the Communications Act states that USF payments can be made only to “telecommunications” carriers, and other provisions of that Section suggest that funding is primarily for the purpose of facilitating provision of “telecommunications” services, though there is some mention of “information services”. At this time, the FCC has ruled that broadband Internet services are not classified as “telecommunications” services, and it has refused to rule on the regulatory classification of VoIP. Does the FCC need to get Congress to revise the Act in order to defund USF and repurpose that money for provision of “broadband” services through the CAF? A good argument can be made that there is no need for any such legislation, and the NBP does not suggest any such need. But the answer is not 100% certain, and this issue could get caught up in the debate over whether the FCC should reclassify broadband Internet as a “telecommunications” service to facilitate its attempts to promote an “open” Internet. Alternatively, will Congress step in and address the matter? 
  2. Does the FCC need legislation in order to set up the Mobility Fund?
  3. The NBP proposes that the CAF would support only one provider in any particular geographic area, and the use of “market-based” mechanisms (read “reverse” auctions) to determine the one recipient of support. While such approaches have been discussed for some time, they have not been enacted. Would such approaches survive an attack by proponents of funding multiple providers (primarily wireless carriers) and opponents of the auctioning of federal support (primarily wireline carriers)? 
  4. While the current ICC system is clearly dysfunctional, previous attempts by the FCC to enact the changes proposed here ground to a halt after years of FCC proceedings and industry negotiations, though a negotiated solution was apparently undercut by the actions of former FCC Chairman Kevin Martin. In the previous rounds of proceedings and negotiations, it was widely supposed that USF disbursement would increase in order to cover the reduction of ICC income by smaller carriers. Yet in the NBP, the FCC proposes not only to eliminate ICC per-minute payments, but also to reduce (and ultimately eliminate) the HCF at the same time. Is this approach wise or even workable? What can the FCC do at this time that would make this version of ICC reform more palatable to all major industry segments than it has been in the past? In addition, the NBP proposes to reduce the level of intrastate access charges, a matter that state commissions are likely to claim is in their sole jurisdiction. What, other than holding out “incentives” to carriers and state commissions, can the FCC do to address intrastate rates?

It is far too early to know how all of this will play out, but here are some potential winners and losers if USF/ICC reform proceeds as set out in the NBP:

Losers

Rural and small/mid-size telephone companies (and their customers) that do not or cannot move to all-broadband networks by 2020. ICC revenues get zeroed-out, as does the HCF. Will CAF provide sufficient funding for these companies to move to all-broadband networks, and to survive after that transition? Will revenues from providing multichannel video services make up the difference?

Winners:

AT&T and Verizon radically reduce their ICC payments and their contribution to the USF. Furthermore, they may receive more CAF funding than the USF funding that they currently receive.

Winners and/or Losers: 

Cellular Companies (including Verizon and AT&T) will lose some of their current funding if USF only funds one entity per area, and in order to obtain new USF funding, they may have to be the lowest bidder in an auction. But they will be the primary beneficiaries of the proposed Mobility Fund (though it is unclear how much funding this would provide, in what locations, and for how long). More important, they will likely benefit greatly from reduced “special access” payments. 

Internet Content, Application and Service Providers:   If the NBP accomplishes the proposed goals, ubiquitous high-speed broadband will likely greatly enhance the development and profitability of on-line providers. But there is also a possibility that some of these providers could be dragged into making large contributions to the USF and/or CAF funds. 

Wireline competitive local exchange carriers (CLECs) could greatly benefit from suggestions in the NBP regarding the unbundling of incumbent LEC broadband fiber facilities and reduction of special access charges. It is harder to see whether CLECs will win or lose in ICC reform.

Execution of the USF/ICC proposals will generate a large number of extensive and hard-fought battles at the FCC and perhaps in Congress. Put on your helmets.

[Blogmeister note: This is one in a series of posts describing the range of regulatory and societal areas in which the National Broadband Plan could, and likely will, affect us all. Click here to find other posts in this series.]