March 14, 2019

Kelley Drye Commentary

Welcome to the premier issue of the Kelley Drye Communications Group’s newest publication, the USF Tracker.  The Federal Universal Service Fund (FUSF) is a sprawling $8 billion per year set of programs that affect significant sectors of the communications industry – and a contributions system that affects all service providers and telecommunications end users.  Our goal with the USF Tracker is to give you a concise overview of the essential happenings in each program and the Fund overall.
 
This issue covers the first two months of 2019.  During this time period, the FCC has been occupied with necessary adjustments to the supported programs, most notably moving forward with Phase II support under the High Cost fund and continuing the Category Two budget for the E-rate program.  The Mobility Fund has been put on hold pending the outcome of the investigation. In Lifeline, the FCC suffered a major setback in its attempt to narrow the Low Income program, casting in doubt whether it can move forward with its proposals to cut resellers from the program.  In Rural Healthcare, the FCC has increased the annual budget by indexing it to inflation.  Meanwhile, a 20% USF contribution factor set a “new normal” that doesn’t appear likely to prompt a resolution in the intractable problem of declining USF contribution revenues.  Contribution reform remains a far-off goal.  Finally, USF audits, investigations and enforcement continue at their high pace, with each fund having a turn under the enforcement microscope in the past year.  Allegations of “waste, fraud and abuse” are not the exclusive domain of any of the four programs.
 

Recent News

Schools and Libraries (E-Rate)

  • FCC released a Noticed of Proposed Rulemaking and Order that proposes elimination of the amortization requirement and also waives the requirement for the duration of the rulemaking period. The amortization rule requires schools and libraries to recover upfront, non-recurring charges of $500,000 or more over a three year period instead of as a single up-front reimbursement. This rule previously had been waived through FY19.
  • Schools and libraries in areas of Northern California affected by wildfires that occurred in October 2017 were granted temporary reprieve from compliance with certain E-Rate rules and deadlines.  Affected entities have 90 days from the issuance of the Order to file requests for review or waiver of USAC or FCC decisions; FCC Form 486 (receipt of service confirmation and children’s internet protection act form); Form 472 (billed entity applicant reimbursement); and Form 474 (service provider invoice).
  • Commissioner O’Rielly sent a letter to the USAC CEO raising concerns about the use of USF monies to overbuild existing networks, highlighting the case of certain school districts forming regional consortia to seek E-Rate funds to build fiber wide area networks to serve areas that are reported to already have fiber network access. In the letter, he is seeking additional information about the scope of the overbuilding risk due to this sort of consortia proposal for special construction projects.
  • The FCC Wireline Competition Bureau (“WCB”) announced the inflation-adjusted E-Rate program funding cap is $4,151,395,402 for funding year 2019.


Rural Health Care

  • On February 15, 2019, WCB issued guidance to assist eligible health care providers participating in the RHC Telecom Program as they prepare FY2019 applications. The guidance addresses (1) how to calculate the acceptable rate for telecommunications services; (2) the process telecom providers should use in determining the current rural rate; and (3) how to not run afoul of the program rules.
  • WCB announced the Rural Healthcare Program funding cap is $593,782,000 for funding year 2019.


Lifeline

  • D.C. Circuit issued a decision in NaLA v. FCC, vacating the 2017 Tribal Lifeline Order and remanding the matter to the Commission for a new rulemaking proceeding. The court found the FCC failed to sufficiently explain the rationale for limiting the Tribal subsidy to only facilities-based providers; did not give proper consideration to the impact on affordability or access to service for affected consumers; and did not provide adequate time for comment.
  • The soft launch of the National Verifier was rolled out to the following additional states and territories in February and March: Alaska, American Samoa, Delaware, D.C., Indiana, Kentucky, Maine, Michigan, the Northern Mariana Islands, Rhode Island, and the U.S. Virgin Islands. During the soft launch, ETCs can enroll applicants using the National Verifier or continue to use existing eligibility processes to enroll subscribers. In addition, USAC will begin reverification of existing Lifeline subscribers in these areas.
  • Additionally, so far in the first quarter of 2019, the National Verifier has fully launched in the following states: Hawaii, Idaho, New Hampshire, North Dakota, South Dakota, Guam, Missouri, North Carolina, Pennsylvania, and Tennessee. Consumers in these states will be able to apply for Lifeline directly through the National Verifier portal.
  • The Lifeline income-based eligibility guidelines have been revised to account for the 2019 changes to the federal poverty guidelines. Service providers have until March 7, 2019 to update their forms and systems accordingly.


High Cost

  • On December 7, 2018, the FCC announced an investigation into whether one or more major wireless carriers submitted incorrect coverage maps in connection with the Mobility Fund Phase II reverse auction process. The FCC suspended the next step in the challenge process, pending the outcome of the investigation.
  • FCC issues Order, on January 3, 2019, extending the timeframe for the collection of speed test data for the Mobility Fund Phase II challenge process by 90 days. Speed test data will be accepted for time periods up to the close of the challenge window on November 26, 2018.
  • On February 15, 2019, the FCC adopts a Report and Order that phases down traditional support methods for voice services to make greater funding available for voice and broadband services. Specifically, the Order establishes a framework to transition from Connect America Fund (CAF) Phase I frozen support in areas where support is now awarded pursuant to the CAF Phase II auction.
  • FCC announced that it is ready to authorize CAF Phase II auction support for winning bidders subject to the receipt of applicants’ letters of credit and Bankruptcy Code opinion letter(s) from their legal counsel.



USF Appeals Tracker

Kelley Drye’s Communications group prepares a comprehensive summary of pending appeals and guidance requests before the FCC relating to USF contributions issues.  Due to the number of appeals and the FCC’s routine disposition of them, appeals relating to the imposition of late filing fees and petitions seeking waivers of the quarterly Form 499 revision deadlines are not included in this summary. Currently, 10 USF contribution appeals are pending before the FCC.

This list covers appeals filed on or after January 1, 2016.  Pending appeals filed before January 2016 are not included.
 
Number of Appeals Pending New Appeals Filed Contribution Questions Pending
 10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
  • Private line services (10%) rule
  • Systems integrator exemption
  • Use of safe harbors/traffic studies
  • Jurisdiction (international calls)
  • Wholesale/resale classification
  • Private carriage


1.  Gtek Computers and Wireless, LLC.  Primary issues:  Systems integrator exemption.
 
  • Request for Review and Contingent Request for Waiver (filed Sept. 16, 2016).
    Renewed Request for Review and Contingent Request for Waiver (filed Feb. 22, 2019).
  • Gtek seeks to review USAC’s denial of its appeal to cancel the sanctions, interest, and penalties imposed for its failure to file a Form 499-A for 2010-2015. Gtek argues that the levying of sanctions was improper and erroneous because Gtek is a systems integrator that derives less than five percent of its revenue from the resale of telecommunications. Thus, Gtek asserts, it is qualified for the systems integrator exemption and is not required to file a Form 499-A.  Alternatively, Gtek requests a waiver in light of its reliance on the Form 499-A instructions, the FCC’s longstanding systems integrator exemption policy, and the fact that the sanctions would surpass the revenue Gtek derived from providing interconnected VoIP service.
  • In 2019, Gtek renewed its request for cancellation of sanctions. Gtek argues that it is a systems integrator that receives less than five percent of its revenue from reselling telecommunications, and is therefore exempt from filing Forms 499-A according to the form instructions. Gtek contends USAC is trying to limit the systems integrator exemption to a subclass that offers ‘legacy’-type telecommunications—a definition that Gtek contends is unsupported by any prior Commission statements or by the language in Form 499. Gtek thus asks the Commission to rule on its 2016 appeal, reverse the USAC denial, and cancel the sanctions.

2.  Sprint Spectrum, L.P. Primary issues:  Jurisdictional classifications (prepaid cards), use of safe harbors.
 
  • Request for Review of a Decision of the Universal Service Administrator (filed December 14, 2018).
  • In its request, Sprint asks that the Wireline Competition Bureau reverse USAC’s conclusion that Sprint’s reported allocations for bundles of telecom and non telecom services were unreasonable, and to reverse USAC’s decision to reject Sprint’s traffic studies.  In connection with its prepaid card services, Sprint reported USF revenues as a bundled offering, using an allocation method it considered reasonable.  USAC had begun an audit in September 2016 of Sprint’s 2016 Form 499-A filing.  In the audit, USAC concluded that Sprint did not adequately support its allocation method and instead applied the USF safe harbor of treating 100 percent of the bundled revenues as telecommunications.  Additionally, USAC rejected Sprint’s traffic studies to determine the jurisdiction of its prepaid services.  Sprint appealed. 
  • In the request for review, Sprint poses two questions: first, whether USAC erred when, in assessing the allocation of revenue for one prepaid bundled offering, it applied the 100 percent telecommunications safe harbor method due to an alleged failure to retain documentation of the allocation used; and second, whether USAC erred when it retroactively created and enforced new rules regarding the sufficiency of jurisdictional documentation, of which Sprint had no notice. Sprint contends that its allocation method was reasonable, that USAC did not have a valid basis to reject the method, and that USAC applied the safe harbor method allegedly as a penalty for the failure to retain documentation of the allocation.  Sprint further contends that USAC acted unlawfully in retroactively concluding that Sprint’s traffic studies (which were filed regularly) were insufficient to justify the carrier’s reported revenue.

3.  SLIC Network Solutions, Inc.  Primary issues: Form 499-A deadline
 
  • Request for Review and Consolidated Action (filed April 6, 2018).
  • SLIC requests that the FCC review and reverse the decision by USAC to reject SLIC’s Forms 499-A submitted for 2014, 2015, and 2016, and that the Commission vacate the requirement that any revised Form 499-A that would yield decreased contributions be submitted by March 31 of year after the original filing due date (i.e., the one-year downward revision deadline). As a result of an error, SLIC’s non-assessable revenues were incorrectly reported to USAC as assessable revenues for the years 2008 through 2016. When SLIC tried to submit revised Forms 499-A and recover its overpayments, USAC rejected the filings as untimely, citing the One-Year Deadline Order. Because that order is still subject to petition for reconsideration and applications for review, SLIC has submitted this request for review.

4.  Altice USA, Inc.  Primary issues: Jurisdictional classifications (private line)
 
  • Request for Review of Decision of the Universal Service Administrator (filed February 2, 2018).
  • Altice seeks reversal of USAC’s reclassification of revenues from certain geographically intrastate private line services as interstate in an audit of Lightpath NJ, an Altice subsidiary. In the January 2017 audit, USAC interpreted the FCC’s “Ten Percent Rule” to establish that geographically intrastate private lines are presumptively interstate, and to require carriers and their customers to furnish evidence establishing the appropriate jurisdictional allocation for private line revenue. Altice contends that this application of the Rule was incorrect and violated the prohibition against USAC’s resolving ambiguities in the Commission’s rules. USAC denied Altice’s appeal of the audit, and, in doing so, retroactively relied on the Wireline Competition Bureau’s Private Line Order, which offered a substantively new interpretation of the Rule for determining the jurisdictional nature of revenues associated with private line service, and created new burdens of proof and evidentiary standards for carriers. Thus, Altice requests that the Commission direct USAC to 1) reverse its audit finding and 2) not retroactively apply the Private Line Order.

5.  XO Communications Services, LLC.  Primary issues: Jurisdictional classifications (private line)
 
  • Application for Review of Decision of the Wireline Competition Bureau (filed May 1, 2017).
  • XO Communications Services (XOCS) asks that the Commission review the Wireline Competition Bureau’s order denying several requests for review, including one by XOCS. In an audit, USAC rejected XOCS’s intrastate classification of physical intrastate circuits because XOCS could not produce evidence that the traffic was not interstate. USAC operated on the presumption that an intrastate circuit was nonetheless interstate unless XOCS could prove that the circuit’s traffic was no more than 10% interstate. In response, XOCS filed a request for review, which the Bureau denied in the 2017 Private Line Order.  XOCS seeks review of the Bureau’s decision because, XOCS argues, it is in conflict with case precedent and Commission policy.  XOCS contends that the Bureau misapplied the Commission decisions establishing the Ten Percent Rule and also that the Bureau, in effect, created new standards that could not be applied retroactively.  

6.  TDS Metrocom, LLC.  Primary issues: Jurisdictional classifications (private line)
 
  • Application for Review or Clarification, or in the Alternative, Request for Waiver (filed May 1, 2017).
  • TDS filed an application for review of the Wireline Competition Bureau’s 2017 Private Line Order regarding application of the Ten Percent Rule for allocating jurisdictionally mixed intrastate private lines.  In its application, TDS contests USAC audit findings related to the amount of interstate traffic carried by private lines. In 2012 USAC notified TDS of its intention to conduct an audit of the company’s Form 2011 Form 499-A filing. In response, TDS provided a list of private lines documenting the end points, showing that all but one had intrastate end points. TDS also furnished end user certifications collected during and after the audit period from certain 2010 private line customers. However, because TDS did not demonstrate that 10% or less of the traffic carried over its remaining end user private lines was interstate, USAC required TDS to make USF contributions on all remaining revenue reported in line 406 of Form 499-A. TDS filed a request for review of the audit report, requesting that the Commission reverse USAC’s finding, which the Wireline Competition Bureau denied four years later. The Bureau instead remanded the audit to USAC to consider additional documentation. TDS Metrocom thus filed an application for review of the Bureau’s order, arguing that it violates FCC precedent, is based on mistakes in fact, and violates the APA.

7.  Eureka Broadband Corporation. Primary issues: Reseller revenues
 
  • Application for Review (filed Feb. 10, 2017).
  • Eureka submits its application for review of the Commission’s decision to remand to USAC Eureka’s 2007 petition for reconsideration. In 2003, Eureka responded to a USAC investigation concerning missing contributions owed by Eureka, for which Eureka had been billed for USF contributions by its underlying carrier, MCI, and which MCI was supposed to remit to USAC. During its 2003 investigation, Eureka contends, USAC did not try to confirm if MCI had remitted these charges to the Fund. Instead, in 2004, USAC chose to assess upon Eureka those same charges. Thus, in 2007, Eureka filed a petition for review, which the Wireline Competition Bureau denied. Eureka shortly thereafter filed its petition for reconsideration.
  • In response, after nine years, the Bureau remanded the issue to USAC for further consideration. Therefore, in this application, Eureka contends that the Bureau violated the APA and the Commission’s Rules by refusing to promptly act on Eureka’s earlier petitions; rendering an arbitrary and capricious decision in conflict with the directive that USF contributions are due only once with respect to any revenue stream; announcing a drastic policy change in its memorandum opinion and order, and applying that policy retroactively against Eureka; and reaching an erroneous finding as to whether the Fund had already been fully compensated USF contributions on the revenue in question.

8.  Locus Telecommunications, LLC.  Primary issues: Private carrier revenues
 
  • Petition for Declaratory Rulings Relative to the Treatment of Private Carriage Revenues (filed Nov. 22, 2016).
  • Locus seeks declaratory rulings to clarify carriers’ rights relative to the treatment of private carriage revenues under federal law. Specifically, Locus requests rulings that revenues derived from private carriage offerings are exempted from non-USF Title II fees and North American Numbering Plan administration fees; that USAC’s policy of sharing Form 499-A revenue data with Title II Program administrators is unlawful; and that carriers must be afforded the opportunity for redress—both retroactively and prospectively—for these Title II fees calculated on private carriage revenues.

9.  Locus Telecommunications, LLC.  Primary issues: Private carrier revenues 
 
  • Request for Review of Decisions of the Title II Program Administrators (filed Nov. 2, 2016).
  • Locus seeks review of the decisions of Rolka Loube (TRS Fund Administrator) and Neustar (administrator of the LNP funding mechanism) for assessing revenues from both common carriage offerings and private carriage offerings. Locus argues that the Form 499-A is deficient for failing to provide carriers a means to segregate private carriage revenues from common carriage revenues. Locus therefore asks that the Commission instruct the Title II Program Administrators to recognize its private carrier status and to reissue invoices as requested; direct USAC to withhold private carriage revenues from data shared with the Program Administrators; order USAC to discontinue its policy of relying on the “primary” service identified in Line 805 of Form 499-A; and provide relief as appropriate.