FCC Imposes USF Obligations on VoIP, with More Sweeping Reform Contemplated

Little about Wed.’s actions was a surprise, since details leaked out weeks before (CD May 31 p1). The telecom sector is scrutinizing new Comr. McDowell’s statements on USF reform. Some seem him as a key 3rd vote, along with Comr. Tate, that Chmn. Martin will need to move to a numbers-based approach he has long advocated.

Chmn. Martin told reporters after the meeting he plans to circulate an order further reforming USF, but Wed.’s action as “an important interim step,” he said. “It is important for the Commission to more fully move to a technology-neutral means of assessing universal service,” Martin said: “I don’t know the exact timeframe. Commissioner McDowell has just arrived. I know he talked today… about wanting to have comprehensive reform. I'm not sure he’s had the opportunity to study all the things on the record.”

McDowell, at his first FCC meeting, made clear he views the FCC order as temporary. “The system is in dire need of comprehensive reform,” he said: “Today’s action is simply an interim measure that will help bridge the gap between a deteriorating status quo and a fairer and more sustainable system.”

“It largely depends on McDowell. He’s an unknown quantity,” said a source who follows regulatory issues: “Martin needs McDowell to move forward on numbers. Presumably, McDowell will form an opinion on that, either yea or nay, within the first 6 months.” But a 2nd source said he questions how serious Martin is about more sweeping reform. The source noted that the wireless safe harbor was approved as an interim measure almost a decade ago. “You have to ask how interim is interim,” the source said.

Commission officials aren’t saying how the change will alter USF revenue flow or whether that flow will stanch losses from an Aug. FCC order reclassifying broadband Internet access services as an information service.

The FCC has no solid data on which to make decisions, Comr. Adelstein said: “This order makes no definitive findings about what level of contributions will be recovered through these changes… This order also does not attempt to analyze the extent of the Commission’s decision last August on the overall revenues available for universal service purposes.”

The Wireline Bureau furnished Commission members with revenue estimates, but those numbers haven’t been made public, Bureau Chief David Navin said. The commissioners got only very rough data, not thoroughly explained by the bureau, which asked that they be kept secret, FCC sources said. “The big elephant in the room is whether or not USF is going to go up or whether it’s going down once DSL contributions get removed,” a source said: “There’s reason to believe that the fund size is going to go down, but we don’t have any hard numbers.”

By putting more social obligations on VoIP operators, the FCC effectively renders irrelevant the information service-telecom service distinction irrelevant, Deloitte & Touche’s Carol Mattey, a former deputy Wireline Bureau chief, said: “This is yet another example of the FCC extending regulatory obligations to VoIP providers. They still haven’t decided whether VoIP is a telecom service or an information service, but over the course of last year they've imposed 911 and CALEA obligations and now they're extending universal service [obligations]. It’s making the classification issue increasingly irrelevant.”

The FCC remains illogical in its approach to extending USF obligations to VoIP, Jonathan Askin, Pulver.com gen. counsel, said: “The voice application riding on the broadband network is being asked to be the application subject to paying into the fund. The FCC is imposing an outdated, economically irrational charge based on an arbitrary assessment of revenues on applications such as VoIP that run over the transmission layer, while freeing the transmission layer of its universal service contributions… By attempting to impose the revenue-based USF assessment on the application rather than the underlying transmission, the FCC would be moving away from a stable and predictable funding source towards attempting to quantify and assess the rapidly changing applications that ride over the transmission facilities.”

“The interim USF rules are expected to be replaced at some point by a more permanent solution to firm up the industry contribution base,” analyst firm Stifel, Nicolaus said: “We note that the last ‘interim’ rules were adopted in 2002 and are now 3- years old.”

Since VoIP no longer will come under the federal excise tax, the net effect will be only “slightly higher” customer bills, Vonage said. “Vonage is assessing which method of contribution will be most beneficial for its customers,” it said.

NCTA said the FCC should have used the order to extend universal service obligations to all broadband providers -- cable, wireless, wireline, electric, and satellite. USTelecom called the order a “good interim step by the Commission as it begins to reform comprehensively the nation’s intercarrier compensation regime.”