USTelecom Confronts Festering Problems with USF Contributions

Comprehensive Reform Encouraged, Some Solutions Offered in Letter to FCC

USTelecom’s vice president of policy David Cohen filed a letter to the FCC on March 28, 2012 outlining extensive problems with the current USF contributions methodology and recommending several near-term administrative reforms to clean up the system. USTelecom argues that the current system is “rife with outdated methods and procedures that create waste, inefficiency and destabilizing competitive discrepancies.” USTelecom does not believe that the problems will be fixed simply by broadening the contributions base—rather; the FCC should immediately consider some housekeeping and clarification measures for the underlying contributions rules and procedures.

USTelecom identifies three categories of pervasive problems with the current system. First, the service classifications are not reflective of the actual marketplace: “With the rapid introduction of…new broadband IP-based services into the market, the dividing line between telecommunications services on one hand, and information services on the other, is becoming increasingly blurred.” The FCC has failed to keep the USF contributions methodology on track with market momentum, which USTelecom believes has slowed down the deployment of IP services. Second, USTelecom believes that jurisdictional distinctions like state boundaries “are simply irrelevant to how consumers select and buy communications services.” Lastly, the resale/wholesale distinction is “burdensome and ineffective;” and “turns wholesale providers into enforcement agents of the Commission, requiring them to collect certifications from reseller customers attesting to USF contributions.

Taken together, the result of these foundational cracks in the contributions system creates “significant competitive inequities” and regulatory uncertainty. For example, USTelecom explains that “the current system only captures contributions from a few among many providers that offer competing voice services, which unfairly penalizes traditional voice providers (and ultimately their customers) and artificially skews the market.” Google Voice, Skype, and Magic Jack are called out for not contributing to USF directly, despite the fact that they compete directly with contributors and use contributors’ networks.

As for solutions to bring USF contributions in line with the market, USTelecom focuses primarily on administrative fixes and acknowledges that comprehensive reform is likely to take a long time. USTelecom encourages the FCC to move forward with a contributions reform proceeding, and suggests that the FCC abide by several guiding principles including stability and predictability; competitive neutrality; equitable and minimal consumer burden; and administrative efficiency—these principles are not unlike the FCC’s laudable and often-mentioned principles for USF and ICC reform.

USTelecom’s recommended immediate administrative reforms include:

• A notice and comment on Form 499 instructional changes
• Amnesty for good faith interpretations of Form 499 instructions
• Symmetric contribution liability and refund periods, like a repeal of the one-year deadline to re-file Form 499A amendments
• Reduced volatility in the contributions factor—specifically, adopt an annual factor instead of a quarterly factor
• A rulemaking to address changes in the reseller exemption process
• Reassessment of reporting safe harbors
• Realistic prepaid calling reporting requirements

USTelecom asserts that “the current problems with USF contributions will continue to fester, plaguing competition, facilitating waste, and driving inefficiency” if the FCC does not act expeditiously to reform the system. Indeed, the contributions side of the USF cosmos is clearly flawed and will have negative impacts on the distributions side despite all of the FCC’s hard work to establish the Connect America Fund and fundamentally alter how telephony and broadband services are supported. As FCC Commissioner Robert McDowell said at the NTCA Legislative and Policy Conference last week, fixing USF “is like fixing a watch, each part touches all the others, so you have to fix them it all at the same time.”