Dear Jonathan:

I am a prepaid calling card provider and have been filing Form 499s for the past several years.  Each year the instructions and the Form itself seem to become more and more complicated and burdensome to comply with.  I’ve been hearing for years that the FCC was considering changing the way carriers make contributions to the Universal Service Fund – something simpler and easier to comply with, a so-called “numbers-based” system.  Where do things stand on the numbers-based proposal? And how would prepaid calling card providers be affected if the FCC were to adopt such a system?

Frustrated and Wanting Change

 



Dear Frustrated and Wanting Change:

“Change.” We have all been hearing a lot of talk about “change” this election year.  As it turns out, cries for change are reverberating in the halls of the FCC too.  In fact, providers of all types and sizes are fighting for change in the current Universal Service Fund’s (USF) contribution methodology.  The FCC finally shows signs of responding to the cries for change, which may be an indication that the time for serious reform to the USF system is near. 

As you know, the current system is revenue-based, imposing a contribution cost on telecommunications companies based on a predetermined percentage of their retail revenue (and, in certain circumstances, on wholesale revenue depending on a company’s compliance with the “Carrier’s Carrier Rule” (Please see my article in last month’s issue, “USAC’s ‘Carrier’s Carrier Rule Under Attack, p.18).  This percentage, the contribution factor, varies quarterly according to USAC fund projections. For years, providers have opposed the complex, confusing and frequently unfair revenue-based scheme. 

Several years ago, FCC Chairman Martin proposed a numbers-based approach to determining USF contributions.  While the reform measure gained early support among dominant carriers, it was also met with fierce opposition, particularly by groups representing low interstate usage constituents (such as elderly and low-income consumers) as well as consumers with a large number of assigned telephone numbers (such as Universities and public institutions).  Partly due to this sharply divided response to the numbers-based proposal, Universal Service Fund reform seemingly took a back seat to other priorities.  It would appear the FCC has once again turned its focus on USF reform and, in particular, consideration of the numbers-based proposal, as evidenced by recent ex parte meetings jointly coordinated by AT&T and Verizon Wireless. 

Together, AT&T and Verizon met with key FCC staffers to urge adoption of a system where USF contribution obligations are based on the number of telephone numbers a carrier provides to its customers (a numbers based approach).  In an ex parte filing, AT&T and Verizon submitted a proposal that claims this approach will create a more stable charge (estimating a $1.00 charge, per telephone number, with biannual variances) that will result in a more sustainable fund.  Arguably, this approach will decrease the administrative costs associated with USF management by reducing auditing and invoicing, and will shift the contribution burden from residential to business customers.

The joint AT&T-Verizon proposal resurrected Chairman Martin’s number-based approach and launched the current campaign for USF reform.  The FCC answered the calls for change by recently inviting comments from the public to address the ongoing problems with the current USF contribution methodology.

Several proponents of the numbers-based system formed the “USF by the Numbers Coalition” to support it adoption (the “Numbers Coalition”).  The Numbers Coalition echoes the sentiments of AT&T and Verizon and agrees that a revenue-based system is no longer sustainable in today’s marketplace.  Specifically, the Numbers Coalition argues that the hybrid nature of bundled services, comprising both telecommunications and information services, makes it increasingly difficult for carriers to allocate revenue between the two service types.  They also highlight the arbitrariness of today’s scheme where charges are imposed on interstate consumers while intrastate and information services customers avoid any charge.  Like AT&T and Verizon, the Numbers Coalition focuses on the ease of administration afforded by a numbers-based system, as well as the benefits to consumers, such as predictability and stability.

However, as with just about everything that happens in Washington, D.C. these days, the numbers-based system faces fierce opposition from another group, the Keep Universal Service Fair Coalition (“Fair USF Coalition”).  This group contends the numbers-based approach would harm consumers, specifically no or low-volume long-distance customers, and would place a disproportionate burden on the elderly and low-income consumers, particularly minority, rural and elderly customers.  As an alternative reform measure, the Fair USF Coalition suggests expanding the USF contribution base by requiring VoIP providers to contribute and increasing the overall contribution factor.  Public and private universities also argue that a numbers-based method would cause them an undue and disproportionate burden by raising their USF contribution base by over 1,000 times the current levels.  This would necessitate drastic cost-cutting measures that, in turn, could result in reductions in Internet and phone access for students, or higher tuition costs.



Specific Impact on Prepaid Industry

How are prepaid providers weighing in on the debate?  As usual, the prepaid industry’s voice has been silent, with the notable exception of IDT.  Yet even IDT hasn’t offered substantive comments in nearly three years.  When IDT did voice its perspective, it advocated a shift to a pure numbers-based system, noting its simplicity and fairness. 

IDT also brought to light the inequities facing prepaid providers due to the FCC’s current “face-value rule.”  Today, USF contributions are based on the retail or face value of prepaid cards or services, even if the service was sold at a discount.  Thus, the prepaid provider often contributes a substantially greater amount to the USF than its non-prepaid competitors.  This inequity is due to USAC’s latest determination that all prepaid revenue qualifies as end-user revenue and is therefore subject to USF contribution.

Like the Numbers Coalition, IDT argues that a numbers-based method would result in more stability for providers.  We all have seen USAC’s inconsistencies in its administration of the fund and have watched the FCC’s position flip-flop as to which providers it chooses to regulate and which providers are required to contribute to the fund.  Numbers-based proponents, like IDT, believe this approach will offer a more constant contribution rate and will bring an end to the FCC’s constant revision of the contribution rate.

Reading between the lines, however, what becomes apparent in IDT’s support of a strict numbers-based approach is the wishful thinking that the FCC would be so naïve as to adopt a system that assesses prepaid providers a single, fixed-monthly per-number surcharge on each local access or toll-free access number used by the prepaid provider, regardless of how many PINs or calling cards are printed with the unique telephone number.  Certainly, a naïve FCC would greatly benefit the prepaid industry because paying a $1.00 per month surcharge on a toll-free number that is printed on the back of one thousand, $5.00 face value calling cards is much better than paying 11% on the $5,000 face value of those same cards.  That’s the difference between a $12 annual USF contribution under such a numbers-based approach and $550 under the current revenue-based regime – a difference the FCC is unlikely to ignore, especially if there are no restrictions on the total number of cards on which a single toll-free number is printed.  You’ll see the absurdity of the wishful idea when you consider the potential savings of a prepaid provider printing a batch of 20,000, $10.00 cards with one local or toll-free access number printed on the back. The USF contribution remains $12 under a strict numbers-based system, but mushrooms to $22,000 under the current system (20,000 x $10 x 0.11 = $22,000)!  I wouldn’t hold my breath and bite my tongue hoping the FCC doesn’t catch on to that one!

Indeed, there remains a third USF contribution reform proposal that has been tossed about at the FCC. Some might call it a “compromise”, something we haven’t seen much of coming out of Washington, D.C.  This would be the hybrid contribution model, whereby the FCC would apply the numbers-based approach to certain types of telecommunications services and the revenue-based approach would be applied to any service not qualifying for the numbers-based assessment.  This compromise hybrid model was recently advocated in an ex parte filing by Qwest.  Although Qwest – being more concerned with the exemption of special access services from the AT&T/Verizon proposal – did not address whether prepaid calling card services should be subject to either the numbers or revenue-based approach, the mere fact that a revenue-based system remains squarely before the FCC for its consideration should be an alarming call to action for the prepaid calling card industry. 

For over a decade, the prepaid calling card industry has suffered under the current revenue-based system, which as pointed out by IDT, has been exacerbated by the discriminatory application of USF fees to the cards’ “Face Value.”  Even more so, the industry has suffered from the fact that the Telecommunications Relay Services (“TRS”) Fund and Annual FCC Regulatory Fees are also calculated under such a revenue-based approach.  As a legal practitioner, I can attest to the struggles many prepaid calling card clients have encountered over the years.  And while the industry has never been short on complaints about the current contribution system, if more in the industry don’t come forward and present the FCC with specific, alternative proposals to the hybrid approach, there may be another ten years of complaining ahead of us. 

The industry truly has two options at this critical juncture in the FCC’s consideration of USF contribution reform proposals: Either sit silent and idle, hoping against hope that the FCC blindly adopts the strict numbers-based approach advocated by IDT, or step forward, speak up, and present the FCC with a fair and easily administered alternative.  The alternative to wishful thinking is most likely to be only a slightly altered version of the same revenue-based system that’s caused a million headaches over the years.

More than ever before, the FCC seems to be open to “change” and appears poised to enact comprehensive USF reform. Hopefully, this reform will address the inequities faced by prepaid providers today.  Until the FCC does act and adopt meaningful changes to the contribution methodology, the current revenue-based system remains in place and you must continue to comply with the existing rules and reporting requirements. 

Good Luck and Success in the Industry.



Jonathan S. Marashlian is a partner at Helein & Marashlian, LLC, The CommLaw Group, a Washington, D.C.-area law firm specializing in federal and state telecommunications and technology matters. He can be reached at jsm@commlawgroup.com.