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BA Telecom Appeals USAC Interpretation of FCC’s Definition of “Affiliate” as Applied to the International Revenue Exemption (LIRE) from USF Contributions

On September 27, 2019, BA Telecom, through its counsel (The CommLaw Group) filed a Request for Review (Appeal) of USAC’s interpretations of the FCC’s “Affiliate Rule” in the context of the “Limited International Revenue Exemption” (LIRE).  Under USAC’s interpretation and application of the “rules” to BA Telecom, the international long distance carrier’s universal service fund (USF) contribution obligation jumped more than 100% from prior periods due to USAC’s elimination of its LIRE exemption by including the interstate telecommunications revenue earned by its affiliates, also 499 Filers, and reported independently by those affiliates in their FCC Form 499s.  BA Telecom contends that USAC interpretation and application of the so-called “LIRE Affiliate Rule” is beyond USAC’s authority, violates statute and judicial precedent, and results in absurd and unworkable implications that defy common sense, both generally and most acutely where companies are affiliated with other 499 Filers in a passive, limited and remote manner.

The FCC requires nearly all telecommunications companies to directly contribute to the USF unless they qualify for one of a handful of very narrow and limited exemptions (NOTE: even companies exempted from “direct” contributions are likely contributing “indirectly” to suppliers on telecom inputs through application of the FCC’s USF Exemption rules).  One of the rare exemptions from both direct and indirect USF contributions applies to 499 Filers whose telecommunications revenue is predominantly international (a 499 Filer whose interstate revenue is less than 12% of its combined international and interstate revenue is fully exempted from contributing on its international revenue). 

For example, if Company ABC’s international/interstate revenue mix is $1,000,000 international and $100,000 interstate, the company’s USF contribution at a 25% rate would only be $25,000, since its international revenue is not considered in the calculation.  However, if Company ABC’s revenue mix is $1,000,000 international and $200,000 interstate, its USF contribution would skyrocket to $300,000!

This is known in the industry as the “Limited International Revenue Exemption” or LIRE.   

LIRE derives from an FCC decision in response to the ruling of the U.S. Court of Appeals for the Fifth Circuit in the so-called “TOPUC” case in 1999.  In TOPUC, the Fifth Circuit found that requiring international carriers to contribute more to the USF than they could generate in interstate end-user revenues violated the “equitable” and “non-discriminatory” mandates of Section 254(d) of the Communications Act.  In response to TOPUC, the FCC created LIRE, codified at 47 C.F.R. § 54.706(c), which provides that, in calculating percentages of interstate and international revenue for purposes of LIRE, the calculation “shall include all of that entity’s affiliated providers of interstate and international telecommunications and telecommunications services.” 

In its Appeal, BA Telecom contends that the rule, 47 C.F.R. § 54.706(c), was intended to capture only the revenue of non-filing affiliates (i.e., affiliates that provide telecommunications services but are not required to file Forms 499, such as de minimis providers, broadcast and self-providers/systems integrators).  USAC, however, has interpreted Section 54.706(c) to require inclusion of the revenues of ALL of a Filer’s affiliates (non-filers and independent filers alike) to evaluate LIRE qualification (the FCC defines “affiliate” as an entity with 10% or more common ownership or control).  In doing so, USAC disqualified BA Telecom from LIRE eligibility by including the interstate revenue reported by two of its affiliates, both 499 Filers.  Upon its loss of LIRE, USAC issued invoices to BA Telecom in amounts that exceeded, by a factor of 10 times or greater, the USF contributions BA Telecom had historically paid on its interstate revenue.  The USF contributions USAC now seeks to collect from BA Telecom far exceed the company’s total interstate revenue, in violation of the TOPUC precedent.   

USAC conducts its calculations (tallying up all international and interstate revenue reported by affiliated 499 Filers) and reaches determinations whether any single entity within an affiliate group should be disqualified from LIRE through its E-File System (again, affiliate means any entity sharing 10% or greater ownership or control, even passive, with another entity).  USAC reviews Form 499 submissions and searches for companies that identify a common parent/holding company in Line 106 of the Form 499-A/Line 105 of the Form 499-Q in order to identify “affiliates.”  USAC then treats all entities identifying a common parent/holding company as affiliates and combines their revenues “behind the curtain” for purposes of determining whether any individual affiliate qualifies for LIRE.  As a result, while an individual 499 Filer may be LIRE-eligible on a stand-alone basis (or when revenues from “affiliated non-499 Filers” are considered), the same company may lose its LIRE qualification when revenues from other affiliated filers are combined with its revenues by USAC.

The net effect of USAC’s interpretation and application of the LIRE Affiliate Rule to companies like BA Telecom diminishes the availability of the LIRE exemption, thus exposing larger swaths of international telecommunications revenue to USF contributions.  The loss of LIRE eligibility of a single affiliated entity could result in material financial harm to the affiliate and its related companies.

In its Appeal, BA Telecom contends that USAC’s interpretation and application of the LIRE Affiliate Rule is:

  • Ultra vires and beyond its authority;
  • Contrary to the TOPUC precedent, which led to the creation of the LIRE, and thus a violation of law; and
  • Leads to the absurd, impractical and unworkable outcome whereby any telecommunications company sharing 10% or greater ownership or control interests in another telecommunications company (even through passive investment) would be required to coordinate in the filing of confidential financial information with a government agent.

The following hypothetical example highlights the absurdity of USAC’s interpretation and application of the FCC’s rule: 

Imagine Warren Buffet’s Berkshire Hathaway holds a passive 10% or greater ownership interest in the following Form 499 Filers, AT&T, Comcast and Verizon, and –hypothetically– one of these companies (Verizon), standing alone, is LIRE eligible.  Pursuant to the affiliate disclosure requirement in Line 106 (499-A) and Line 105 (499-Q), all three of these 499 Filers would be required to disclose their affiliation with one another.  And because of the disclosed affiliation, USAC would disqualify Verizon from LIRE eligibility as a consequence of USAC’s behind the curtain calculations that added AT&T’s and Comcast’s interstate revenue to Verizon’s, thus pushing the total combined interstate and international revenue of the “affiliated group” of 499 Filers above the 12% interstate LIRE threshold.  For Verizon to be aware of, plan for, and avoid the economic consequences of losing its LIRE eligibility through USAC’s application of its absurd interpretation of the FCC’s rule, it would need to coordinate and share confidential and commercially sensitive financial information with its direct competitors, AT&T and Comcast, and otherwise coordinate the preparation of the respective companies’ Form 499 filings, all because of Warren Buffet’s passive 10% or greater investment in all three 499 filing carriers.

Though an extreme example, the above hypothetical nonetheless highlights the absurdity, and therefore the unlawful consequences of USAC’s interpretation and application of the FCC’s definition of “affiliate” in the context of the LIRE exemption.  BA Telecom’s Appeal seeks reversal of USAC’s decision to disqualify it from LIRE eligibility merely because it is affiliated with other 499 Filers.

The FCC has not yet posted a Public Notice soliciting Comments on BA Telecom’s Appeal.  We will monitor developments for clients or other parties interested in filing Comments in the proceeding.  In the meantime, should your company have any concerns regarding the implications of USAC’s fatally flawed interpretation and application of the FCC’s rules on your business (due, perhaps, to concerns regarding undisclosed affiliations with other 499 Filers), please contact Jonathan S. Marashlian at jsm@commlawgroup.com or 703-714-1313.     

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