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Nebraska Becomes the Latest State to Implement a “Connections-Based” USF Contribution Mechanism

In a move that may signify the early stages of an eventual transition away from a purely “Revenue-Based” Universal Service Fund contribution system (where contributions are calculated based on revenue types and amounts) and towards a “Connections-Based” (or hybrid) system, the Nebraska Public Service Commission (“Nebraska Commission”) recently completed the implementation of a hybrid revenue & connections-based system.  This follows on the heels of two other states, Utah and New Mexico, which also adopted similar contribution models for telcos and VoIP service providers subject to their jurisdiction.

On April 1st, 2019, the revisions to the Nebraska Commission’s USF contribution mechanism took effect.[1] Under the new rules, residential telecommunications services are assessed on a per-connection basis, while business telecommunications services will continue to be assessed based on revenue.[2] The first remittance deadline under the new system is May 15th, 2019 for monthly filers, and June 15th, 2019 for quarterly filers.

Rather than resolving the complexities associated with the purely revenue-based contribution system adhered to by the Federal Communications Commission (FCC) and nearly all other state utility commissions, the hybrid approach adopted by Nebraska (as well as Utah and New Mexico) only seem to add yet another layer of complexity to the USF contribution process by creating a distinction between the treatment of residential and business customers.  That said, service providers must be careful what they wish for when it comes to abandoning the revenue-based system for what, on the surface, appears to be the simpler connections-based contribution model.  There is a good reason why state utility commissions are only extending the connections model to residential customers at this time — because a connections based system could result in material increases to the amount business customers pay into the funds, if the definition of what constitutes a connection isn’t well-conceived.  Imagine paying $1.00, $2.00 or potentially more every month for each telephone number assigned to a business customer account, with no questions asked and no opportunity to reduce exposing revenue to contributions through lawful compliance optimization methods?  

But there is another issue raised by the Nebraska Commission’s order — federal preemption.  The imposition of a connections-based assessment on nomadic Interconnected VoIP service providers is likely preempted by the FCC’s Universal Service Contribution Methodology Declaratory Ruling.[3]

Thus, by taking the action it has, the Nebraska Commission may well be intentionally testing the FCC’s willingness to enforce federal preemption in the hopes of creating an environment wherein the FCC might consider fundamental alterations to the revenue-based contribution system that has been in effect since the USF program’s infancy in 1998.  

On December 19th, 2017, the Nebraska Commission opened a proceeding suo motu to continue the process of its USF contribution reform.[4] This proceeding is an outgrowth of a prior proceeding, where Nebraska determined that the best way to ensure the viability of the Nebraska Universal Service Fund (NUSF) was to move to a connections based contribution mechanism.[5] Specifically, the Nebraska Commission sought comment on rate design for a connections-based contribution mechanism, the proper data sources to identify connections, and challenges of implementing such a mechanism.[6]

A number of commenters suggested that the Nebraska Commission adopt a hybrid assessment mechanism where residential services are assessed on a per-connection basis, and business services are assessed on a revenue basis.[7] The Nebraska Commission believes such a mechanism would “eliminate some of the complex issues raised relative to the counting of business connections and ensure all telecommunications providers appropriately continue to contribute to universal service even where service is not offered through a dedicated per line connection basis to an end user.”[8] Phasing in a per-connection mechanism, the Nebraska Commission reasoned, would allow for stabilization of funds in the residential market, while studying how best to implement such a mechanism for business services.[9] The Nebraska Commission specifically noted that this new assessment mechanic would apply to VoIP services, specifically, Over-the-Top VoIP and Interconnected VoIP.[10]

Notably absent from the Nebraska Commission’s order adopting the per-connection mechanism was any discussion of the FCC’s 2010 Nebraska Kansas Declaratory Ruling. This ruling found that state universal service fund contributions from Nomadic VoIP services were not federally preempted if they were consistent with the Commission’s contribution rules for VoIP providers.[11] The Commission gives VoIP providers three options to calculate contributions on the basis of revenue: “(1) use a safe harbor under which 64.9 percent of their revenues are deemed to be jurisdictionally interstate (and therefore not intrastate); (2) conduct a traffic study to allocate revenues by jurisdiction; or (3) develop a means of accurately classifying interconnected VoIP communications between federal and state jurisdictions.”[12] While this ruling does not expressly preempt per-connection mechanisms, the ruling only discusses revenue based mechanisms when discussing mechanisms that would not be pre-empted.[13] Nebraska’s new assessment mechanism for residential services is not based on provider revenue, and is therefore likely to be preempted as a result (if challenged by a residential I-VoIP service provider operating in Nebraska, of course).

As alluded to earlier in the article, the adoption of a per-connection assessment method reflects a growing trend among state regulatory agencies. New Mexico and Utah have both recently adopted similar contribution mechanisms. One possible explanation for why states are adopting rules that are clearly preempted by federal regulation is a desire to for the FCC’s hand on USF contribution system reform. This could come either in the form of litigation, or by creating a patchwork of conflicting state laws that justifies stronger federal preemption (in this case preempting to allow for per-connection assessment mechanisms).

If you require assistance complying with the FCC and/or State Utility Commission compliance requirements applicable to your company or seek further guidance on the matter addressed in this advisory, please contact Jonathan S. Marashlian at jsm@commlawgroup.com.

End Notes:

[1] NUSF Adjustment Order

[2] NUSF-1111/PI-211, 24.

[3] Universal Service contribution Methodology, Declaratory Ruling, 25 FCC Rcd 15651 (2010) (Nebraska-Kansas Ruling).

[4] NUSF-1111/PI-211, 2

[5] Id.

[6] Id. at 3-4.

[7] Id. at 24.

[8] Id. at 24-25. In a previous order, the PSC found that they had proper authority to adopt a hybrid mechanism.

[9] Id. at 25.

[10] Id. at 28, note 207. The PSC notes that it intends to treat Over-the-top and interconnected VoIP services the same. While the order does not use the terms “fixed” or “nomadic” regarding VoIP services, however, it is apparent from the Order that both will be subject to the per-connection mechanism.

[11] Nebraska Kansas Ruling at para. 1.

[12] Id. at para. 17.

[13] Id.

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