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:

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:

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.