FCC’s FNPRM Proposes Two Alternatives for Defining Contributions Base

On April 27, 2012, the FCC approved a FNPRM to tackle the seemingly-impossible mission of reforming the Universal Service Fund contributions methodology—the FNPRM was subsequently released on May 1. There was a time in the not-so-distant past when USF distributions and ICC reform seemed impossible too, but the FCC did it anyway. Like the disbursement and ICC components, the FCC has been wrestling with USF contributions reform for the better part of a decade. A closer look at the FNPRM actually reveals that reforming the USF contributions methodology will rustle some of the age-old telecommunications industry semantic debates like “what is a telecommunications provider?” Needless to say, the FCC still has a bumpy and controversial journey ahead before the ultimate National Broadband Plan goal of wholly transforming every facet of the Universal Service Fund is completed.

The FNPRM asks some very poignant questions and seeks input about the telecommunications and broadband marketplace of today and the future. The FCC hopes to ultimately adopt a “future proof” contributions methodology, which is surely impossible but nevertheless an ambitious goal. The proposed reforms are broken into several categories: who should contribute to the fund; what methodology should be used to assess contributions; what administrative reforms will promote transparency and clarity; and how contributions should be recovered from consumers. The FCC lays the foundation for the reforms with three goals: efficiency, fairness, and sustainability. As the 182-page FNPRM contains an abundance of interesting and discussion-worthy issues, JSICA will break up our analysis based on the general reform categories. Up first, and likely the most controversial, is the question of who should contribute to the USF.

The FCC asserts that “The evolution in the communications ecosystem has led to a series of stresses on the contributions system.” Namely, it has become increasingly complex and the contributions base is rapidly shrinking as consumers “migrate to communications services that do not contribute to the Fund.” Faced with a shrinking contributions base, an $8b total USF budget, and a record-high contributions factor of 17.9%, the time is nigh to rethink the contributions methodology—especially the categories of providers who contribute to the fund. The FCC rightly acknowledges that, “The question of who should contribute is at the core of much of the uncertainty and competitive distortions that plague the system today.”  In the FNPRM, the FCC proposes two possible alternatives for reforming the contributions base, but seems open to considering other ideas from the industry.

The first alternative is for the FCC to use its “permissive authority, and/or other tools to clarify or modify on a service-by-service basis whether particular services or providers are required to contribute to the Fund.” The second is to adopt “a more general definition of contributing interstate telecommunications providers that could be more future proof as the marketplace continues to evolve.” The two alternatives appear to have distinct advantages, challenges, and disadvantages. Both options will surely incite some provocative legal debates regarding the definition of a “provider of interstate telecommunications service” as well as the FCC’s statutory authority to include or exclude certain services in the USF contributions base.

The first alternative, the “case-by-case” methodology, would essentially let the FCC “expand or clarify contribution obligations on a service-specific basis.” The FCC notes that it has used this approach in the past, but asks if it should be continued under the reformed system. The FCC broadly explains, “We seek comment on exercising our permissive authority to require contributions from providers of enterprise communications services that include interstate communications; text messaging; one-way VoIP; and broadband Internet access service. Each of these services has found a significant niche in today’s communications marketplace.” The FCC continues with market data and specific questions about the inclusion or exclusion of each of these categories of services. Of particular importance, the FCC asks if assessing contributions on broadband service would increase the price of broadband to the extent that the goals of the Connect America Fund are somehow negated.

The second approach would be much more expansive, and “would not require [the FCC] to resolve the statutory classification of specific services as information or telecommunications services in order to conclude that contributions should be assessed.” The language of the proposed rule is as follows: “Any interstate information service or interstate telecommunications is assessable if the provider also provides the transmission (wired or wireless), directly or indirectly through an affiliate, to end users.” Seems simple, right? Well, it’s not. As the lines between information, telecommunications, transmission, end-user, content, and so on become increasingly blurry, so may the ability to assess USF fees on such a generalized basis.

The FCC attempts to clarify that “the rule set forth above is intended to include entities that provide transmission capability to their users, whether through their own facilities or through incorporation of services purchased from others, but not to include entities that require their users to ‘bring their own’ transmission capability in order to use a service.” The FCC could avoid a dicey statutory classification fiasco, but it would still have to determine if the service is “interstate telecommunications.” The FCC provides several examples of how this rule could quickly become a regulatory quagmire when it comes to interpreting who is a “user” of telecommunications service, and what are the specific “points of transmission.” One example cited is that of an e-book provider who sells a device bundled with service coming from a separate wireless carrier. Is the end-user the customer who downloads a book over the wireless network, or the e-book/device purveyor? Is the e-bookseller “providing telecommunications,” or is the wireless carrier? Who contributes to USF? As you can see, these questions get rather esoteric.

Under the context of this second proposed rule, the FCC opens up a discussion on one category of services which is likely to incite a passionate debate in the comment cycle: machine-to-machine, or M2M connections. The FCC explains that M2M connections have grown rapidly in recent years, and it asks “would it be consistent with our statutory authority to exercise permissive authority over machine-to-machine connections, such as smart meters/smart grids, remote health monitoring, or remote home security systems?” The FCC further asks—and this one is a real head-spinner—“Should machine-to-machine connections be treated the same as connections between or among people?” The responses from the industry will surely be interesting.

As with the first option, the FCC asks if the second option could have adverse effects on the overall USF goal of bringing broadband to all Americans. The FCC specifically asks if the assessment of contribution obligations under the broader second alternative would “deter adoption” of broadband services, presumably by increasing the price. This kind of begs the response, “Well, did assessing universal service contributions on telephone service deter the adoption of telephone service?” One can anticipate that broadband service providers and other current non-contributors will likely argue that assessing contributions fees on their services will indeed deter adoption. However, the FCC notes in its discussion of text messaging that it will consider commenters’ financial stake in the position that they advocate, and commenters should come to the table equipped with data to back their claims.

Stay tuned for JSICA’s next installment on this topic, analyzing the assessment methodologies outlined in the FNPRM. Meanwhile, feel free to discuss your thoughts on how the contributions base should be reformed on JSICA’s LinkedIn USF Forum.