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A Plan of Action for VoIP USF Contributions

By William B. Wilhelm, Jr., Esq. & Jeffrey R. Strenkowski, Esq.

October 2006, Volume 9/ Number 10


In June, the FCC (News - Alert) expanded the Universal Service Fund (USF) contribution system to include �interconnected� VoIP providers. As a result, customers of these services will undoubtedly find that the federal surcharge will make its way on to monthly bills. Additionally, providers will face new costs associated with the collection and remittance of these surcharges. There are several ways for impacted VoIP providers to minimize these administrative costs, and thereby ensure they are not disproportionately disadvantaged in comparison with their wireline and wireless competitors.

By way of background, the USF system was designed to promote the availability of quality services at just, reasonable, and affordable rates; increased access to advanced telecommunications services; and advance the availability of these services to all consumers, including those in low income, rural, insular, and high-cost areas. Although the fund has many critics, USF contributions are intended to fund projects and services that meet these goals.

USF contributions have been required of traditional telecommunications carriers for some time. The recent VoIP USF order now mandates that Internet communications services directly contribute to the fund as well. The decision was predicated, in part, on the FCC�s deregulation of broadband DSL and cable modem services. As a result of those decisions, DSL and cable modem services will be exempt from contributions. Rather than face a shortfall as a result of these new exemptions � the FCC decided to impose contributions on interconnected VoIP customers.

While most VoIP providers define themselves as �information service providers� outside the purview of traditional telecommunications regulation, the fact that VoIP providers must contribute to USF is actually not a particularly controversial concept. Indeed, most interconnected VoIP providers have contributed to USF for years, albeit indirectly through their purchase of �telecommunications services� from underlying carriers. These carriers have assessed a USF surcharge on the services purchased by VoIP providers and assumed the obligation of collecting and remitting the fees based upon their interstate telecommunications revenues.

Under the new framework, covered VoIP providers must now directly submit quarterly reports to the USF administrator detailing certain revenues, which the administrator uses to compile quarterly USF invoices. To reduce administrative burdens the Commission created �safe harbors� that allow VoIP providers to use a Commission-created ratio as a proxy for the actual percentage of interstate revenues. As an alternative to using the safe-harbor, VoIP providers can use �traffic studies.� Both of these reporting methods serve as a proxy for reporting actual interstate revenue. While each of these reporting methods has drawbacks, they may be useful where actual traffic data is difficult or impossible to obtain � such as the case with nomadic VoIP services.

A number of providers and industry groups have voiced concern regarding the use of the safe harbor, since it requires that VoIP providers assume that 64.9 percent of their revenue is derived from interstate traffic. Many providers believe the 64.9 percent figure over-estimates their level of interstate traffic, especially given that many VoIP services are marketed as substitutes for local telephony. By way of comparison � wireless services that offer similar local and long-distance capabilities have a safe harbor of 37.1 percent.

To address this concern, the FCC has established a system to allow VoIP providers, like wireless carriers, to instead use traffic studies to estimate the interstate percentage of their traffic. Traffic studies use underlying carrier data to provide an overall estimate of traffic patterns for purposes of USF contributions. Unlike wireless carriers, however, VoIP providers may have a difficult time using this alternative since a provider must first submit the study to the FCC for prior approval. No other providers are subject to this prior approval requirement, moreover, as of yet, the FCC has not approved any studies. In addition, fixed cable VoIP has expressed concern regarding language in the order that suggests they may, in certain circumstances, not be subject to the preemptive effects of the FCC�s 2004 Vonage (News - Alert) Order. The Missouri Public Service Commission recently used this language to take steps to regulate Time Warner Cable�s fixed VoIP service as a service subject to state jurisdiction.

Because VoIP providers will now be contributing directly to USF, they will no longer be considered �end users� for USF purposes. Typically direct contributors are exempt from paying their underlying carriers, for to do so would result in �double taxation� and a double contribution to the fund. The VoIP USF order dispenses with this traditional methodology and, for the first time, now requires that customers that want to use VoIP must contribute twice, one time on the basis of the cost of the VoIP service, and a second based upon the cost of the underlying interstate telecommunications inputs used to provide the VoIP service. The FCC has indicated that this �double contribution� will last for two reporting quarters � perhaps longer. At least one provider has appealed the USF order in court due, in part, to this double tax on customers.

While the USF order raises many immediate questions for VoIP providers, it is no secret that the current Chairman of the FCC would prefer to adopt a numbers-based contribution mechanism. Others have proposed alternative frameworks. Urging the FCC and Congress to consider these frameworks may be the best path forward. While the courts may ultimately find the FCC order invalid, it could be years before such a determination is reached. In the near term, it may be more reasonable be consider being proactive and helping the Chairman in his efforts to implement new reforms. IT

William B. Wilhelm is a partner and Jeffrey R. Strenkowski is an associate at the global law firm of Bingham McCutchen LLP. For more information, please visit the firm online at The preceding represents the views of the authors only and does not necessarily represent the views of Bingham McCutchen LLP or its clients.

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