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.