In a June 30th Order, the FCC adopted a 2.289% TRS Contribution Fee Factor (“TRS Fee Factor”) covering the 2017-2018 funding year.  The 2.289% TRS Fee Factor marks a significant (nearly a full half percent) year-over-year increase from the prior TRS Fee Factor of 1.862%.  For reasons explained below, new TRS Fee Factor may end up requiring some service providers to pay a portion of their upcoming TRS Invoices “out of pocket,” as the near half-percent increase could render your carrier’s 2016-2017 Regulatory Cost Recovery Fee surcharge to be woefully inadequate to cover actual regulatory compliance costs.

How is Your Company’s TRS Contribution Calculated?  And How Might the Increased TRS Fee Factor Result in “Out of Pocket” Losses?

The TRS Fund (as well as the other Title II programs, Local Number Portability (LNP) and North American Numbering Plan (NANP)) are funded “prospectively” based on contribution amounts calculated on your company’s prior year revenue, as reported in the annual FCC Form 499-A.  In other words, whereas the money coming into the TRS Fund is “this year’s money,” the amount each carrier is required to pay is based on “last year’s revenue.”  And because many carriers recover their TRS Fund costs through a Regulatory Cost Recovery Fee surcharge applied to then current monthly invoice amounts, it is highly likely many service providers will find themselves sustaining “out of pocket” losses in order to pay for 2017-2018 TRS invoices.

For example:

• Rolka Loube, the TRS Administrator, determines its July 1, 2017 through June 30, 2018 funding needs in Spring of 2017 (after Form 499-As are filed by the industry, and after it gains insight into the total revenue base available to support funding);
• Rolka Loube then determines (and the FCC approves) a TRS Fee Factor that will be sufficient to cover the TRS Funds 2017-2018 needs by applying the proposed TRS Fee Factor to the total TRS funding revenue base;
• Telecom Carriers and I-VoIP service providers frequently recover their anticipated TRS Fund contribution obligations throughout the course of the “revenue year” through a Regulatory Cost Recovery Fee or similar surcharge;
• These Cost Recovery Fee surcharges recoup a variety of regulatory costs that may not otherwise be recoverable through other mechanisms;
• Hence, if Carrier ABC charged a 2.5% Cost Recovery Fee throughout 2016, expecting the TRS Fee Factor to be below 2% (which would be a reasonable estimate based on prior annual increases to the TRS Fee Factor), then Carrier ABC will likely end up sustaining an “out of pocket” loss when it tallies up:
  • The amount it is required to pay the 2017-2018 TRS Fund invoices (calculated at 2.289%) plus
  • Other FCC Title II program fees (since the LNP and NANP contribution fee factors are also likely to increase, as compared to last year’s) plus
  • Any other “regulatory costs” Carrier ABC factors into its retail Cost Recovery Fee percentage, such as the cost of personnel, outside advisors (lawyers/consultants), other state or federal programs, etc.).

Because the determination of an appropriate Cost Recovery Fee surcharge amount is based on numerous factors unique to each service provider, it is important to evaluate whether and the extent to which the proposed 2.289% TRS Fee Factor will impact your company’s bottom line.  It is also important to keep in mind the likely increases to the LNP and NANP programs, which will be announced in the near future and which are also determined in a manner similar to the TRS Fund.

Can Your Company Reduce or Avoid its Exposure to TRS Fund Contributions (and other Title II fees) Calculated at the New, Materially Higher Rate?

Possibly.  If your company operated as a “Private Carrier” or it derived revenue from private carriage services in 2016, but did not report as a private service provider or did not exclude private carriage revenue from Title II fees, then there is an opportunity to minimize or entirely avoid the Title II fees soon to be invoiced by Rolka Loube, Neustar and Welch & Company.

As our firm has detailed in numerous advisories and articles in recent months, only “Common Carriers” are required to contribute to Title II programs, which include the TRS Fund, as well as the LNP and NANP.  “Private Carriers,” on the other hand, are exempt from Title II regulations and avoid the contribution/support obligations to the aforementioned programs.  But it isn’t just Private Carriers that are exempt.  “Private Carriage” services (and revenue derived therefrom) are exempt, even when provided by a Common Carrier.

How Can Your Company Protect Itself Against Future Material and Unexpected Increases in TRS and Other Title II Fees?

Due, in part, to the FCC’s recent Business Data Services Order, there is a significant likelihood that the “Common Carrier” telecommunications service revenue base will significantly decline in future years, as the telecom industry awakens to the “Private Carrier” revenue classification opportunity.  As Common Carrier revenue decreases, the Title II Fee Factors must materially increase in order to cover future funding obligations (as explained in the example above).

Increased FCC regulatory compliance costs associated with the TRS Fund and other Title II programs should be factored into the determination of your Company’s Regulatory Cost Recovery Fee surcharge amount.  If your Company is unable to capitalize on the “Private Carrier” classification opportunity described above and in our firm’s articles and advisories, then you are on clear and imminent notice that your company may experience a material shortfall in revenue recovered through your current surcharge when 2018 rolls around and the 2018-2019 TRS Fee Factor is announced.  But be forewarned, all Common Carriers must engage in reasonable practices, and therefore your Company cannot increase its Regulatory Cost Recovery Fee surcharge in an unreasonable and unsupported manner.  Therefore, we advise all impacted clients to consult with experienced counsel before implementing any material changes to their Regulatory Cost Recovery Fee surcharge practices.

If you are interested in examining your company’s eligibility to take advantage of the private carriage exemption or otherwise require assistance evaluating, planning for, and potentially softening the impact of increased TRS and Title II Fee Factors on your company, please contact Jonathan Marashlian at (703) 714-1313, or jsm@commlawgroup.com.

DISCLAIMERS: This Advisory has been prepared for informational purposes only. It is not for the purpose of providing legal advice and does not create an attorney-client relationship between Marashlian & Donahue, PLLC and you. You should not act upon the information set forth herein without seeking experienced counsel.  This Advisory may be considered Attorney Advertising in certain jurisdictions. The determination of the need for legal services and the choice of lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise.