State PUCs Experimenting with Alternatives to Revenue-Based USF Funding Mechanism; Differences in Federal and State Methods Resulting in Confusion and Compliance Complexities

The Federal Universal Service Fund (“FUSF”) as well as the vast majority of state universal service programs currently require contributions from service providers based upon revenue derived from “assessable” telecommunications and VoIP services. With a steadily decreasing pool of assessable revenue coupled with an ever-increasing contribution factor (above 30% in recent quarters), the Federal Communications Commission (“FCC”) has been considering a shift to an alternative method since at least 2012.  Specifically in 2012, the FCC released a Further Notice of Proposed Rulemaking (“FNPRM”) seeking comments on various approaches to establish a more sustainable FUSF funding base, including a numbers and/or connections-based approach, among other proposals.  The FCC has not adopted an alternative system, continuing to rely on the original revenue-based collection method, which is well-entrenched and has consistently proven to be difficult to replace.

In the meantime, confronted by the loss of contribution eligible revenue under their own revenue-based systems (which mirror the FCC model), and frustrated by the FCC’s inability to act, many state Public Utility Commissions (“PUCs”) are exploring alternatives to their current revenue-based systems for contributions to their state universal service programs.  Some states have already adopted alternative methods, whereas others, such as Ohio and California, are currently considering such a shift. 

To date, at least Maine, Maryland, Nebraska, New Mexico and Utah have adopted numbers/connections-based USF contribution regimes. There was very little opposition to the changes in these “smallish” states, and therefore the shift from a revenue-based system to something different in each of these states proceeded without much fanfare.  However, when the state of California opened a proceeding to consider alternative methods of funding its “Public Purpose Programs” (more commonly known as the “California Combined Surcharge“), the industry began to take notice.   

California’s proposed shift has been met with resistance from providers seeking to avoid all of the complications and potential increased expense resulting from the abandonment of a revenue-based contribution system to an alternative (either “numbers” or “connections” based) model.  For example, commenters in the proceeding have noted that the adoption of an alternative model in some, but not every state, will create an immense and costly compliance challenge for service providers who must implement divergent compliance protocols and methods for various states (not to mention having to maintain compliance under two distinct models at the federal & state levels). 

In addition, it has been noted that a shift to an alternative model has the potential to vastly impact providers’ contribution obligations.  For example, in a revenue-based contribution regime, carriers contribute to state funding mechanisms exclusively on intrastate revenues.  So, whereas a carrier with very low intrastate revenue would face small contribution obligations, such carriers could experience a massive increase in their liability in a state that adopts an alternative model that has a fixed and uniform “per number” or “per connection” surcharge.  Because nearly all service providers pass these costs onto their customers, the shift from revenue-based to an alternative model has a very high and very real potential to significantly impact consumer costs. Some commenters have objected to the proposed  rule change in California have pointed out that a per number or per connection surcharge would disproportionately impact less affluent customers.

Clients should monitor developments and consider the potential impact on their current and future state USF contribution obligations.  Clients with questions may contact Jackie Neff at jrn@commlawgroup.com or (703) 714-1314.

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