Providers of Voice over Internet Protocol services now have yet another regulatory concern as the Federal Communications Commission recently expanded the federal Universal Service Fund reporting and contribution obligations to cover “interconnected VoIP” providers. Affected VoIP carriers must submit the next quarterly report for USF contributors, due on Aug. 1, 2006, and, they must file certain information to register with the FCC (News - Alert) before Aug. 1.

The USF is a complex program by which telecommunications carriers, and other parties offering telecommunications services, contribute a percentage of their telecommunications revenues to subsidize certain services, such as basic phone service in rural or other high-cost geographic areas and Internet access in schools and libraries. The “contribution rate” currently is 10.7 percent of interstate revenues. While this article provides a very brief overview of the process with which VoIP providers will need to comply by August 1, it is by no means a comprehensive guide to USF compliance.

VoIP service providers have very little time to get up to speed with the FCC’s USF regulations. There are a variety of issues that VoIPs will need to address in short order to comply with the FCC’s recent decision:

Service providers will need to determine whether their service is what the FCC calls an “interconnected VoIP” that will be subject to USF payment obligations. The FCC interprets “interconnected VoIP” broadly, to include any VoIP service offering that is “capable” of making or receiving two-way calls over the public telephone network, whether the customer actually does so or not. Desktop software companies and other Internet service providers may need to carefully consider whether their products are covered under the FCC’s definition; in some cases, they might be better off disabling any VoIP capabilities.

VoIP providers will need to identify “interstate revenue” for USF reporting purposes. The FCC’s VoIP/USF Order raises several problems, including the need to identify whether traffic is interstate, intrastate or international. The FCC recognized that, although many VoIP service offerings are largely interstate or international, providers may not be able to determine how much of their revenue is actually interstate. Based on the percentage of interstate revenue reported by long distance carriers, the FCC adopted a “safe harbor” of 64.9 percent for VoIP providers; that is, the FCC will not investigate the provider’s assumption if it reports that 64.9 percent of its revenues are interstate. The FCC will also allow a VoIP provider to determine its interstate revenues through the use of a traffic study, but, since the particular study to be used will need to be pre-approved by the FCC, as a practical matter this option will not be available for the August 1st filing. VoIP providers who wish to use traffic studies can use the safe harbor while the FCC considers their traffic studies.

VoIP providers will need to distinguish between “telecommunications” and “information” services. Another problem related to revenue reporting involves segregating “phone” revenue from other VoIP services revenues, when all services are typically marketed as a bundled package. Most VoIP services include a number of features that would normally be excluded from the USF contribution base (such as voice mail, certain calling features, etc.). The USF rules do have “safe harbors” for separating “telecommunications” revenue from “information service” and equipment revenue derived from the same bundled service offering, but, they are not helpful to companies that have probably never priced each service or product in the “bundle” separately. VoIPs may now have to itemize their bills if they want to legitimately minimize USF contributions.

State/Federal Jurisdictional Issues

Unless and until a VoIP provider can verify that its telecommunications revenues are 100 percent interstate or international, it might have to face the sort of state public utility commission regulation that the FCC recently preempted in Minnesota and New York. Although not regulated as telecom carriers, under the FCC’s Order, VoIP providers may be forced to contribute to state USF funds. Whether the FCC intended to or not, its ruling may have put VoIP providers into a situation similar to that faced by wireless carriers: the states technically cannot “certificate” them or regulate their rates, but will nonetheless impose registration and reporting requirements and assess substantial fees under the state USF regime.

Eligibility Issues

For now, even if a VoIP provider can provide all of the services that a USF-supported telephone carrier can, it will be paying into the USF without any likelihood of getting any payments from the USF-supported programs (with limited possible exceptions, such as some subsidies from the Schools & Libraries Fund, for which they would have been eligible in any case). While the FCC continues to put off deciding whether or not a VoIP is a telecommunications carrier, VoIP providers face more common carrier-like regulatory burdens each year (CALEA, E911, and now USF), with none of the benefits of common carrier status under Title II of the Communications Act, such as limitations of liability, federal statutes of limitations, interconnection rights, and the ability to be designated an “eligible telecommunications carrier” entitled to USF subsidies.

Reporting Requirements

The USF has several filing requirements that VoIP providers previously did not have to make, and, the deadlines are fast approaching. These are lock-step filing deadlines; one shouldn't anticipate the FCC making any extensions or exceptions, given its professed concern about the financial viability of the USF program. Moreover, unlike the telecommunications carriers that have been subject to the USF since its inception, VoIP providers will not receive the benefit of the so-called “de minimis exemption,” under which parties whose annual contributions to the USF would be less than $10,000 generally do not have to file USF worksheets. No matter what its annual revenues may be, every interconnected VoIP provider must submit the quarterly reporting form on or before Aug., 2006 (even if that provider ultimately isn’t required to contribute to the USF). Additionally, de minimis status for VoIP providers in 2006 will be determined solely based upon whether they would be required to contribute $2,500 or more in the fourth quarter of this year. Consequently, a provider with a growing business anticipating a strong fourth quarter, but whose overall 2006 revenues might have fallen below the de miminis threshold, may nonetheless be required to start making USF contributions later this year.

VoIP service providers need to get busy due to the numerous filing obligations required by the FCC’s Order. Contributors to the federal USF are required to make five filings each year. In addition to an annual filing, all USF contributors must file once each quarter, reporting the gross amounts billed in the previous quarter, and projections of the revenues they expect to bill, as well as the revenues they expect to collect, in the next calendar quarter.  Additionally, because VoIP providers filing for the first time will need to register to receive a “filer ID” in advance of the quarterly filing, they are actually facing their first deadline before the August 1 report is due.

In light of the tight deadlines established by the FCC, VoIP providers should not wait to begin familiarizing themselves with the FCC's USF filing obligations.

Authors Note:
Frederick M. Joyce is chair of the Communications group at law firm Venable LLP in Washington. His telecommunications work includes domestic and international regulations and treaties, public and private financial transactions, appellate and civil litigation matters, and state/federal telecommunications legislation, with a particular emphasis on wireless communications and new technologies such as VoIP and Broadband over Power Line. He can be reached at (202) 344-4653 or [email protected].

Christine McLaughlin, Of Counsel at Venable, focuses on telecommunications and information technology transactions, as well as regulatory matters, including policy, licensing and compliance. Ms. McLaughlin has represented a wide variety of telecommunications clients, including wireless carriers, broadcasters, equipment manufacturers, and large institutional users of information technologies. She can be reached at (202) 344-4679 or [email protected].