article

Recovering the Controversial Costs of Universal Service

Posted: 06/1998

Recovering the Controversial Costs of Universal Service

By Thomas K. Crowe, Esq.

In May 1997, when the Federal Communications Commission (FCC) adopted its controversial
universal service ruling, few service providers comprehended the effect the program would
have on their businesses. Today, all service providers with even minimal interstate
traffic must pay approximately 3.9 percent of all their interstate and international
end-user billed revenues to support the FCC universal service program. This means a
company that bills only $5 million per year to end users for international and interstate
services is required to make a monthly payment of more than $16,000 to the Universal
Service Fund (USF). The only consolation offered service providers paying into the USF is
that virtually all of their competitors also are paying into the fund. Yet, providers can
secure a competitive advantage by decreasing their contribution obligations and passing
along the remaining cost to consumers.

The universal service program is administered by the Universal Service Administrative
Company (USAC), a non-profit corporation operating under the aegis of the National
Exchange Carrier Association (NECA). NECA is an association of telephone companies which,
among other things, administers various FCC universal service programs. USAC was created
to temporarily administer universal service support mechanisms for high-cost areas and
low-income consumers, as well as billing, collection and disbursement functions for the
Schools and Libraries Program, administered by the Schools and Libraries Corp. (SLC) and
the Rural Health Care Program, administered by the Rural Health Care Corp. (RHCC). Both
the SLC and RHCC also operate under the auspices of NECA.

Under the universal service program, all service providers which provide even minimal
interstate services must contribute to the USF. Such providers must file universal service
worksheets with USAC twice yearly, on March 31 and Sept. 1. USF contributions are based on
combined intrastate, interstate and international gross revenues. Gross revenues consist
of total revenues billed to customers with no allowances for uncollectables, out-of-period
adjustments or international settlement payments.

Prepaid calling card providers must contribute based on the face-value of prepaid cards
without reductions for discounts provided to retail establishments. Resellers may not
deduct payments made to underlying providers for use of facilities from their contribution
base. Callback providers must contribute based on interstate and international end-user
billed revenues, including revenues derived from services that originate in foreign points
and terminate in the United States. According to the FCC’s recent report to Congress
regarding universal service, even certain Internet service providers (ISPs) may be
required to contribute in the near future.

In our experience, it is not uncommon for a service provider to inadvertently overpay
USF assessments due to the confusing nature of the universal service worksheet. According
to the FCC’s rules, certain revenues should be excluded from a service provider’s
contribution base, including revenues derived from:

  • Providing services to resellers (which make direct payments to USAC);
  • Foreign services which originate and terminate in foreign points;
  • International settlement receipts;
  • Carrier billing and collection;
  • The sale, lease, maintenance or insurance of customer premises equipment;
  • Published directory and non-telecommunications services; and
  • Information or enhanced services.

Taxes and surcharges collected and remitted to government bodies also are excluded from
providers’ universal service contribution bases. Thus, it is important to ensure that all
allowable USF exclusions are incorporated into the worksheet.

Service providers also can defray the burden of the USF program by passing along USF
costs to end users. To do this, international, interstate and/or intrastate tariffs can be
amended to reflect a USF surcharge to pass through the charges. However, because the FCC
has voiced concern over how the new charge is described on customer bills, service
providers should carefully phrase language identifying the universal service charge on
statements. The FCC has made clear that describing the charge as a "federally
mandated surcharge," or one which the FCC requires carriers to impose, is misleading.

Service providers also may add a reasonable administrative fee onto the passed-through
USF surcharge to recover the costs of collecting and paying the contributions. The FCC
allows the inclusion of an administrative fee as long as it is related to actual
administrative costs and not unreasonably high.

An alternative way to recoup USF payments is through a rate increase, although this is
not the most cost-efficient approach. Because taxes collected by providers are excluded
from providers’ contribution bases, separately collecting such charges will allow service
providers to not contribute based on those revenues. Stated differently, if providers
raise rates to recover the costs associated with the program, such providers would be
taxed on the money collected to pay for the universal service charge.

An often-overlooked way to recover contributions paid to the fund is to participate in
the USF distributions. Money from the USF is used to compensate providers that offer
supported services to eligible entities. The first step for all providers is to obtain a
service provider identification number (SPIN) from USAC. Additionally, providers will be
required to submit a service provider information request form to confirm each providers’
SPIN assignment. As soon as these forms become available, USAC will post them on its
website at http://www.neca.org/funds/spa.htm
 

However, only service providers that have been designated "eligible" by the
appropriate state commission or the FCC may participate in the universal service
high-cost/low-income and the health care programs. To be designated "eligible,"
a carrier must provide each of the following services:

  • Voice-grade access to the public switched network;
  • Local usage;
  • Dual-tone multifrequency (DTMF) signaling or its functional equivalent;
  • Single-party service or its functional equivalent;
  • Access to emergency services;
  • Access to operator services;
  • Access to interexchange service;
  • Access to directory assistance; and
  • Toll limitation for qualifying low-income consumers.

In addition, an eligible carrier must offer the above-listed services either using its
own facilities–or in combination with another carrier’s facilities–and the carrier must
advertise the availability of such services and the charges using a media of general
distribution.

Competitive local exchange carriers (CLECs) can petition for eligibility status to
actively participate in universal service support programs. In fact, the FCC recently held
that universal service support is "portable" such that if an eligible CLEC wins
a customer from an incumbent LEC (ILEC), the CLEC will receive the support for that
customer that previously was paid to the ILEC.

Portable support programs include local switching support (which supports local
switching costs), high-cost loop support (which supports local loop costs) and long-term
support (which reduces the local loop cost for high-cost LECs). In addition, eligible
CLECs may participate in the Lifeline and Linkup Programs, which provide support for
low-income consumers. Lastly, eligible CLECs may receive disbursements from the Rural
Health Care Program, which provides funding to eliminate differences between urban and
rural prices for telecommunications services (up to a T1). Service providers participate
by actively bidding on contracts posted by health care providers on the RHCC’s website at http://www.neca.org/funds/rhccmain.htm
 

Through these universal service programs, the FCC has given CLECs opportunities that
previously were only available to ILECs, enabling CLECs to compete directly with ILECs for
FCC disbursements by offering supported services to low-income/high-cost and heath care
consumers.

All service providers may participate in the Schools and Libraries Program, which
provides discounts of between 20 percent to 90 percent to eligible schools and libraries
for telecommunications services. Supported services include plain old telephone service
(POTS) lines, integrated services digital network (ISDN) services, private lines, pagers,
Internet access, e-mail and more. Internal connections also are supported by the program,
including installation, maintenance and equipment costs for internal wiring, routers,
hubs, network file servers and wireless local area networks (LANs).

Service providers participate in the program by searching posted requests for services
on the SLC’s website at http://www.slcfund.org/service.asp,
and contacting the school and/or library directly with their bid. When the school or
library accepts a bid, it must sign a contract with a service provider and submit an
application for funding to the SLC. Once funding has been allocated, the school or library
will pay the non-discounted portion of the contract directly to the carrier and USAC will
reimburse the carrier for the discounted portion, either in the form of deductions from
future contribution payments or by making direct payments to the carrier.

Service providers should note that the FCC does not require providers to bid on
applications posted on SLC or RHCC websites. However, if a school, library or rural health
care provider does not receive any bids on posted service requests, it may request any
service provider to render such services at the discounted levels. All providers are
required by law to honor such requests.

Pressure is clearly growing in Washington to reform or, at a minimum, repair the
universal service program. Service providers are complaining about the level of their
required contributions. ILECs are complaining that too many other service providers will
be eligible for disbursements. Rural states are complaining that they are not getting
enough high-cost support funding. More than 65 parties are involved in the appeal of the
FCC’s Universal Service Order before the U.S. Court of Appeals for the 5th Circuit. In
fact, that court’s ruling could completely overturn or substantially recast the program. A
ruling in that case is not expected until later this year or sometime in 1999.

Congress also is closely reviewing the FCC’s implementation of the universal service
program, and legislation to modify it has already been introduced in the Senate. The
General Accounting Office recently found that the FCC did not have the authority to create
the SLC or RHCC.

FCC Commissioner Furchtgott-Roth has become notorious for his persistent and caustic
attacks on the universal service program. In fact, the commissioner has dissented from
every universal service decision issued by the FCC since he assumed office. Recently, in
his dissent to the FCC’s report to Congress, Furchtgott-Roth has stated that the current
universal service program constitutes an illegal tax and violates numerous provisions of
the Telecom Act.

As the FCC itself acknowledged in its report to Congress, the universal service program
will be reformed in the near future. As such, service providers should monitor
developments carefully to ensure their interests are considered if and when changes are
made to the program. Although difficult to imagine, alterations to the program may not
necessarily lead to lower contribution levels.

Thomas K. Crowe is a Washington-based attorney specializing in communications legal
and regulatory matters. In addition to serving as regulatory counsel for the Society of
Telecommunications Consultants, his firm represents numerous service providers, including
resellers, with respect to universal service issues. He was assisted in preparing this
article by Elizabeth Holowinski, an associate with his firm, and may be reached at (202)
973-2890.

FCC SERVICE PROVIDER FILING/FEE REQUIREMENTS

The information below summarizes FCC filing requirements and regulatory
assessments generally applicable to service providers. Interest on late payments and/or
other penalties typically apply to companies either not filing or underpaying. Data in the
chart represents the best information available as of April 20, 1998 and may have changed
since this date.

Form/Report Date Due Companies That Need To File/Pay Contribution  Factor Notes
Form 496 NANPA Funding Worksheet March 12 All telecom carriers providing telecommunications service
in the United States and between the United States and foreign points.
Varies Annually (.000022 in 1998) Assessments are based on gross interstate, international
and intrastate revenues less any payments made to other telecom carriers for
telecommunications facilities and services used to provide telecommunications services.
The minimum contribution is $100 per year. Complete worksheet and send it to the North
American Numbering Plan Administration Billing and Collection Agent (NBANC)
Section 43.82 International Circuit Status Report March 31 Telecom carriers, including resellers (Section 63.15(b)),
that provided international telecommunications services on owned or leased circuits in
previous calendar year.
N/A Report must include status of international circuits used
during prior calendar year. Carriers should consult the manual for Filing Section 43.82
Circuit Status Data, found on the FCC International Bureau’s website, for more details.
Form 457 Universal Service Worksheet March 31 and Sept. 1 Telecom carriers, including resellers, which provided any
interstate telecommunications services during reporting period. Carriers below a threshold
need not file. Unlike Form 431 (see below), private carriers and shared tenant service
providers must file.
Varies Quarterly (For Q2 1998: 3.4% of
interstate/international revenues; 76% of intrastate/interstate and international
revenues)
Assessments are based on intrastate, interstate and
international revenues. Revenues from services provided to resellers that file Form 457s
are excluded. Worksheets are filed twice a year, March 31, covering prior calendar year
and Sept. 1, covering first six months. No fee is due when the worksheet is submitted.
Carriers are billed later on a monthly basis by the fund administrator.
Section 43.21 Annual Report April 1 Telecom carriers, including resellers, with gross annual
operating revenues in excess of the indexed revenue threshold (IRT), adjusted annually for
inflation.
N/A Mail letter providing prior year total operating revenues
and gross telecommunications plant to the FCC Industry Analysis Division, Mail Stop 1600F,
Washington, DC 20554.
Payphone Compensation First Quarter of 1998 Telecom carriers owning or leasing switching equipment and
to whom completed dial-around calls from public payphones are routed.
$0.284 per completed call, or at rate agreed upon by
contract
Telecom carriers are billed by payphone service providers
(PSPs) for dial around compensation. Absent an alternative agreed upon amount, the default
rate of $0.284 applies until Oct. 6, 1999. After this time, the local coin rate minus
$0.066 applies. Telecom carriers are required to pay compensation even if PSPs do not
supply coding digits (27, 70, 29) to identify dial-around calls. Telecom carriers
permitted to pay "per phone" compensation where coding digits not supplied.
Facets of the program are still being fashioned by the FCC.
Form 431 TRS Fund Worksheet April 26 Telecom carriers and resellers which billed for interstate
services in previous year. Covers pay telephone services.
Varies Annually (.00039 in 1998) Worksheet to be filed with NECA, the TRS Fund
Administrator. Contributions are based on interstate/international telecommunications
revenues for previous calendar year.
Section 43.61 International Telecommunications Traffic
Report
July 31 Telecom carriers and resellers that provided
telecommunications services between the United States and foreign points during the
previous calendar year.
N/A Report must include traffic and revenue data for each and
every international service. Carriers should consult the Manual for Filing Section 43.61
International Traffic Data, which can be found on the FCC-State Link website.
Form 159 Regulatory Fees Set Annually (Sept. 15-19 in 1997) Virtually all licensed service providers, including
interstate telecom carriers (IXC, resale, LEC, CLEC, operator service providers, payphone
operators, etc.), telecom carriers providing licensed international services, wireless
service licensees (SMR, cellular, paging), and broadcast licensees (commercial AM & FM
radio, commercial TV, translator/ booster licensees, etc.). Governments and non-profit
organizations are exempt from paying annual regulatory fees. Such entities must make a
one-time filing with the FCC of their non-profit status.
Varies Annually (1998 contributionsnot yet set) The fees are based on the amount of revenue reported on a
company’s TRS Worksheet, minus costs paid to underlying carriers. Interstate telecom
carriers are assessed per revenue dollar (for 1997, assessment was $0.00116). Assessments
for licensed international services vary based on the particular facilities involved.
Wireless licensees are assessed per telephone number or unit served. Broadcast licensees
are assessed based on the class of station and population served. Failure to file the
forms by the due date may result in a 25% late filing penalty.
Section 214 Application Prior to Provision of International Service Telecom carriers that plan to provide any international
telecommunications services.
N/A Submission of the application to the FCC requires a $745
filing fee. Application must be accompanied by an FCC Form 159. The Section 214
authorization is usually issued 35 days after the application is placed on public notice.
Once the application is granted, an international tariff (see below) must be filed prior
to commencement of service.
FCC International Tariff Prior to Provision of International Service Telecom carriers that plan to provide any international
telecommunications services.
N/A Submission of the tariff to the FCC requires a filing fee
of $600. Tariff must be accompanied by an FCC Form 159. The tariff reflects the company’s
rates along with the terms and conditions of international service. The tariff takes
effect on one day’s notice.
FCC Domestic, Interstate Tariff Prior to Provision of Domestic Service Telecom carriers that plan to provide any domestic
telecommunications services.
N/A Submission of the tariff to the FCC requires a filing fee
of $600. Tariff must be accompanied by an FCC Form 159. The tariff reflects the company’s
rates along with the terms and conditions of domestic service. The tariff takes effect on
one day’s notice. The domestic tariff filing requirement is currently being reviewed by
the U.S. Court of Appeals.

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