FCC Order Confirms and Clarifies Application of “10% Rule” and Jurisdictionalization of Private Line Revenue for USF Purposes

On Friday, October 9th, the Federal Communications Commission (FCC) upheld existing rules governing when private telecommunications lines must contribute to the federal Universal Service Fund (USF). Mixed use private phone lines will continue to be assessed for USF contribution under the so-called “10% Rule” first established in 1989 and most recently affirmed by the FCC’s Private Line Order (“the Order”) of March 30, 2017. Two telecommunications providers, XO Communications Services, Inc. (XO) and TDS Metrocom, LLC (TDS), had challenged the validity of the Order as applied to their services.

The USF provides support funding for high-cost and low-income telecommunications customers, and is administered by the Universal Service Administrative Company (USAC) which collects fees from all telecommunications companies providing interstate services. The assessments are derived from income reported on FCC Form 499, which telecommunications providers are required to file annually. “Mixed-use special access lines” (“private lines”) which carry both interstate and intrastate traffic pose a challenge to the assessment system. Since 1989, the FCC has assessed private lines whose traffic consists of more than 10% interstate calls – hence the 10% Rule.

XO and TDS disputed the validity 10% Rule as well as the USAC’s use of the Private Line Order as a basis for assessing private lines. The companies argued that the rule had been implemented in violation of the Administrative Procedures Act and created unfair burdens. The FCC was unpersuaded, and declined to find a presumption of applicability or to create a presumption of inapplicability of the rule. Form 499 income statements, and “not merely the physical endpoints of the circuit” or certification by the provider, will continue to govern USF assessment of private lines.

On review, the FCC rejected these challenges, ensuring that private lines which derive more than ten percent of their income from interstate traffic will be assessed as interstate lines. However, finding that USAC auditors had failed to clearly communicate certain obligations, the FCC granted the contribution waiver requested by TDS and remanded XO’s assessment to the USAC for further review.

The FCC continues to bear down on USF contributors as the shortfall between USF payouts and assessments grows each year. As the contribution rate rises, so too do penalties for telecommunications providers who do not adequately complete required disclosures and pay assessed fees. For more information on USF compliance, and keeping your business abreast of changing FCC regulations, please contact Jonathan S. Marashlian at jsm@commlawgroup.com or 703-714-1313.

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