Comment Sought On USAC Requests For USF Policy


On August 19th and August 21, 2009, the Universal Service Administrative Company (“USAC”) filed letters with the Federal Communications Commission (“FCC” or “Commission”) requesting guidance on several policy issues related to the universal service high-cost support mechanism and Universal Service Fund (“USF”) contribution methodology. On September 28th, the Commission issued a public notice seeking comments on USAC‘s letters. Comments are due by October 28, 2009, and reply comments are due on November 12, 2009.

In its first letter, USAC identified six points requiring clarification relating generally to revenue reporting and classification obligations. First, USAC requested guidance on revenue reporting obligations for prepaid calling card providers. SAC asked that the FCC develop an alternative method to “face value” reporting for providers who either do not know the face value of the cards sold or whose cards are measured in units of time rather than dollars. Further, USAC asked the Commission to determine when prepaid calling card revenue should be reported in cases where the carrier is unable to determine when a card is sold to an end-user.

Second, USAC sought guidance concerning the proper categorization of ATM/Frame Relay services, namely whether such services qualify as “information services. ”Third, USAC requested that the Commission clarify whether revenues received from Virtual Private Network (“VPN”) and Dedicated Internet Protocol (“IP”) services are properly reported as “non-telecommunications revenue.” USAC noted that some carries report VPN service revenues as related to circuit charges and flat fee charges and inquired as to whether this practice is proper. Further, USAC suggested that although some carriers have classified revenue received from Dedicated IP as non-telecommunications revenue, the service is similar to Private Line/Frame Relay and should thus be reported in a similar manner.

Fourth, USAC inquired whether remedial actions should be initiated against carriers that fail to retain documents related to the Commission‘s High Cost Program for the requisite period under FCC rules. USAC suggested that carriers should be required to comply with current audit requirements even if they were not in effect for the time period being audited. Fifth, USAC asked whether income taxes on shareholders‘ equity in S-Corporation carriers should be included in the carriers‘ revenue and recoverable through USF. Finally, USAC sought guidance on the implementation period for two company-specific High Cost Program caps for AT&T and Alltel. Specifically, USAC asked whether it should implement the company-specific orders for the time period prior to adoption of an industry-wide cap.

In USAC‘s second letter, it requested clarification as to whether the Commission‘s rules require Eligible Telecommunications Carriers (“ETCs”) that receive USF support to separately advertise the availability of certain services. Under the FCC‘s rules, ETCs must advertise and provide certain services, including local usage and access to emergency and operator services, among others, in order to be eligible for USF support benefits. USAC asked the Commission whether the rules demand that each of the services be enumerated in ETCs‘ advertisements, or whether, as some ETCs suggest, they may advertise only “local phone service” because the public understands the service to include these enumerated services.

Client Advisory

The Commission‘s response to USAC‘s letters will likely substantially impact the contribution obligations of telecommunications service and Voice over Internet Protocol (“VoIP”) service providers alike. Commission interpretation of face value reporting and revenue recognition holds significance for all prepaid calling card providers and has been addressed in several petitions and comments pending before the Commission. Should the Commission reject USAC‘s face value reporting requirement, prepaid providers may see a serious reduction in their contribution obligations. However, if the FCC upholds face value reporting, carriers will be required to continue to report revenues received from the sale of prepaid cards at face value.

Likewise, clarifications relating to ATM/Frame Relay revenue could potentially yield important consequences for providers offering these services, especially for Competitive Local Exchange Carriers (“CLECs”) and VoIP service providers. If the FCC conclusively classifies the service as an information service, it escapes Commission jurisdiction entirely. However, resellers of such services could nevertheless face indirect USF contributions in the form of pass-throughs by their underlying carriers. Alternatively, should the FCC deem the service a telecommunications service, providers may no longer rely upon the argument that the service falls outside of the Commission‘s jurisdiction.

Finally, the Commission‘s response to USAC‘s request for clarification regarding proper classification of VPN and Dedicated IP could have implications for all service providers. As with ATM/Frame Relay services, classification of Dedicated IP as non-telecommunications could substantially decrease VoIP providers‘ direct contribution liability, and reclassification of VPN likewise could impact providers‘ future USF responsibilities.

Clients are advised to monitor this proceeding and to submit relevant comments and reply comments. Clients interested in filing comments or who have other questions about this advisory should contact Jonathan S. Marashlian at or (703) 714-1313.

In addition, the Ad Hoc Coalition of International Telecommunications Companies has filed petitions before the FCC raising similar issues. For more information clients can also visit the Coalition‘s website at

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