Cable Operators Face Higher USF Charges as FCC Weighs VoIP Fees

Estimates are that MSOs could wind up boosting monthly bills for VoIP service $1.60 or more to cover extra regulatory fees. For instance, a typical Time Warner customer who pays about $40 a month for “Digital Phone” service reportedly could end up shelling out $2.83 a month for USF, far more than twice the $1.24 USF fee the same customer pays now.

As a result, cable operators could lose at least some of the price edge they enjoy over regional phone companies in the increasingly competitive telephony market. Or, to keep that edge, they may have to lower their base phone rates and absorb most or all of the impact of the USF fees.

Some industry analysts and observers fear a substantial impact. In a research note to clients late last month, for instance, Medley Global Advisors analyst Jessica Zufolo warned that “cable firms and independent VoIP firms, such as Vonage, will be hit the hardest since they are likely to lose retail pricing advantage by having to pass through additional USF costs to their customers.” Partly due to this retail pricing advantage, U.S. VoIP providers have signed up 6 million-plus subscribers in less than 3 years, including at least 4 million by cable operators.

Phone industry officials voiced great satisfaction over the pending FCC move. Like cable officials, they favor a USF financing system based on phone numbers or connections rather than revenues, but they argue cable phone players are overdue when it comes to shouldering their share of the USF load. “I think it'll provide a level playing field,” David Cohen, vp- policy for USTelecom, said: “All providers of voice services will be equally assessed to support the ubiquity of the network.”

But cable executives surprisingly don’t seem nearly as concerned about coming fee hikes as they were only weeks ago. That’s because FCC officials have assured them they'll be able to use traffic studies of actual call volume to justify lower USF fee assessments than projected, as wireless carriers often do today. “As long as we have the flexibility to do (traffic) studies, there should be limited competitive impact,” Rick Cimerman, vp- state govt. affairs, for the National Cable & Telecom Assn. (NCTA), said: “As of now, we understand that we have that flexibility and that’s the key thing… If not, we'll take it up with the FCC.”

Cimerman said most, if not all, cable VoIP providers already contribute voluntarily to the USF fund. Though phone industry executives hotly disagree, Cimerman said cable operators already charge their phone customers for USF fees. “So it’s not a big deal,” he said.

Vonage and other independent VoIP providers will be hit with the same USF assessments as cable telephony players. So cable operators shouldn’t lose competitive pricing ground to Vonage, still VoIP’s leading player with more than 1.6 million customers across N. America. The FCC proposal, designed as an interim measure by Chmn. Martin to sustain the Universal Service Fund while the Commission crafts a permanent funding plan based on phone numbers or connections, would extend monthly USF assessments to VoIP providers for the first time. VoIP operators have been exempt from such charges because the FCC didn’t classify VoIP as a telecom service. But a USF shortfall due to a pending loss of $350 million in fees from DSL providers apparently persuaded the FCC to overlook that distinction.

As circulated among the 5 commissioners, the agency’s proposed order would set an unexpectedly high 64.9% “safe harbor” for VoIP players. That means the FCC would assume that 64.9% of all VoIP calls are interstate and thus subject to USF charges, far more than the 28.5% of wireless calls now subject to such fees and or even the 37.1% wireless formula that’s been proposed. VoIP providers would pay the same percentage of monthly long-distance revenue in USF fees as other phone companies pay. This so-called USF “contribution factor” is 10.9%, although it’s set to dip to 10.5% for the 3rd quarter, down from a record high of 11.1% last spring.

Due to this proposed assessment formula, the average VoIP subscriber with a $25 monthly phone bill would pay about $1.75 per month in USF fees. As noted, the average VoIP customer with a $40 monthly phone bill would pay more than $2.80 a month. Cable operators will “have to play by the same rules,” Eric Einhorn, AT&T exec. dir.- federal regulatory, said: “From a regulatory perspective, it puts them on the same footing.”

Yet, while concerned about the proposed 64.9% safe harbor’s impact, cable officials expressed confidence they'll be able to cut their USF assessments with traffic studies. They believe they can prove long-distance calls make up far less of their VoIP calling volume than the formula assumes. “Doing traffic studies is not costless, but I don’t think it’s so much that it'll cause an increase in rates,” Cimerman said: “It ought to be a matter of a few pennies or so… So there may be no actual impact on the customer.”