FCC Details New Rules for VoIP Providers to Contribute to Universal Service Fund

This week the FCC released the details of its decision to require “interconnected VoIP service providers” to contribute to the Universal Service Fund (“USF”). In what the FCC is calling an interim measure intended to shore up a diminishing revenue pool, the VoIP USF Order sets forth the rules for VoIP service providers to begin making contributions to the USF. As we previously reported, the decision also increases the contribution “safe harbor” for wireless companies to 37.1 percent.

Declining to make wholesale changes to the current system, the FCC decided instead to retain “essential elements” of the current USF contribution system. Thus, contributions will continue to be assessed on interstate and international end user telecommunications revenue. As a result of these changes, “interconnected VoIP” providers must now begin to undertake two essential functions to comply with the USF contribution rules. First, providers must report to the FCC on a quarterly and annual basis projected revenue derived from the provision of end user international and interstate service. Second, providers must contribute to the USF in amount equal to approximately 10% of such revenues. Additional details concerning the implementation of these new rules are set forth below.

I. Legal and policy implications

To support its decision to impose USF contribution obligations on VoIP providers the FCC relies upon the legal authority in Section 254(d) of the Communications Act. That provision authorizes the FCC to impose contribution obligations on providers of telecommunications services, as well as any provider of “interstate telecommunications.” Thus, the statute distinguishes between providers of “telecommunications service” and those entities that utilize and provide simply “telecommunications” (not a service) as an input to, or component of, an information service.

Relying upon this provision of the Act the FCC finds that interconnected VoIP providers are “providers of interstate telecommunications” because they provide for the transmission of information, either by self-provisioning or through arrangements with third parties, between points specified by the user. VoIP companies provide this transmission capability to their own end users by obtaining interconnection and access to the PSTN either through third parties, or by self-provisioning such arrangements. It is this transmission function that the FCC classifies as “telecommunications” for these purposes. That telecommunications is, in turn, used as an essential input to, or component of, the VoIP service that the end user obtains. The FCC therefore concludes that providing a transmission function as a component of a VoIP service constitutes the provision of telecommunications, but not a telecommunications service.

In addition to the specific statutory authority under Section 254(d) the FCC concludes that it also has ancillary jurisdiction under Title I of the Communications Act to impose these obligations on VoIP service providers. The import of the FCC’s legal reasoning is that these new obligations are established despite the fact that the FCC specifically does not classify VoIP service as a “telecommunications service” under Title II of the Act. As a result, this decision should not serve as a basis for pole owners or state regulators to argue that VoIP is now classified as a telecommunications service under Title II.

II. Implementation issues and considerations

Because VoIP providers will need to undertake several significant steps in the coming months to comply with the terms of the VoIP USF Order we outline key considerations below.

What portion of VoIP revenue is subject to USF contributions?

VoIP providers must report to the FCC gross interstate and international end-user telecommunications revenue. Recognizing that many providers may not be able to segregate interstate and international from intrastate revenues the FCC allows VoIP providers to use one of three methods to determine what revenue is affected.

1. Safe harbor – Providers can use a “safe harbor” presumption that 64.9 percent of total revenue derived from VoIP service is attributable to interstate and international telecommunications, and therefore subject to USF contribution.

2. Traffic studies – Alternatively, VoIP providers can undertake a traffic study to demonstrate that less than 64.9 percent of revenue is derived from interstate and international telecommunications. However, any traffic study must be approved by the FCC before a provider can rely on the study.

3. Actual revenues – The FCC acknowledges that providers may be unable to determine how much revenue is derived from telecommunications that is interstate as opposed to intrastate (and thus not subject to USF contributions). Nonetheless, to the extent that providers obtain that capability in the future the FCC will allow providers to calculate revenues based upon actual percentage of interstate calls. The FCC found, however, that doing so may undermine a provider’s ability to rely on the preemptive effect of earlier FCC rulings that preclude state regulation of these services.

Accounting for bundled service offerings

VoIP entities that bundle services with customer equipment and/or enhanced services can segregate revenues derived from those nontelecommunications equipment and service through the use of other “safe harbor” rules established by the FCC.

Double recovery issues

Telecommunications carriers that provide interconnection and other services to VoIP providers currently report and contribute to USF on revenue derived from those services. While implicitly acknowledging that such carriers will no longer be required to pay on such revenue, the FCC nevertheless requires those carriers to continue reporting and paying on such revenue until the end of the year. The FCC acknowledges that this will result in a double recovery but defends its decision to impose such obligations as necessary to ensure ongoing administration of the system.

Reporting requirements

In addition to the contribution obligations the FCC’s USF Order also imposes significant reporting requirements on VoIP providers. Specifically, such providers must file quarterly reports (FCC Form 499-Q) beginning Aug. 1, 2006; file annual reports (FCC Form 499-A) beginning April 1, 2007; and, register with the FCC to facilitate enforcement by obtaining an FCC registration number before Aug. 1, 2006.

Pass thru to end users

VoIP providers can recover part or all of their USF contributions from their customers, but they are prohibited from marking up USF line-item amounts above relevant contribution factor.

III. Conclusion

The reporting and payment obligations imposed by this Order will be new to many VoIP providers. Davis Wright Tremaine counsels wireline and wireless service providers on the annual and quarterly reporting and payment obligations under the current USF scheme and can assist the VoIP providers that must now comply with these obligations. Please contact us to discuss how to ensure your company’s compliance with these new obligations.