Cybertelecom Federal Internet Law & Policy An Educational Project

Universal Service: VoIP

"Since 2006, interconnected VoIP service providers have been required to report their annual interstate end-user telecommunications revenue information on FCC Form 499-A for purposes of the USF contribution requirements. In the 2006 Interim Contribution Methodology Order , the Commission recognized that some interconnected VoIP service providers may have difficulty complying with this reporting requirement because they did not have the ability to identify which customer calls are interstate. The Commission determined that the closest analogue to interconnected VoIP service was "wireline toll service," which "similarly offers interstate, intrastate toll, and international services." Consequently, the Commission set an interim safe harbor for interconnected VoIP services at 64.9 percent of their annual telecommunications revenues, representing the average percentage of telecommunications revenues that wireline toll providers had reported to the Commission as interstate telecommunications revenues. The Commission held, however, that if the safe harbor percentage overstates an interconnected VoIP service provider's actual interstate revenues, the provider may instead contribute to the USF on the basis of actual revenue allocations or by conducting a traffic study. [21st Century NPRM 2011 para 8]

Regulations

• 47 U.S.C. §§ 151, 152, 153, 154(i)
• 47 CFR §§ 54.5, 54.706, 54.708, 54.712

Proceedings

• Universal Service Contribution Methodology; Petition of Nebraska Public Service Commission and Kansas Corporation Commission for Declaratory Ruling or, in the Alternative, Adoption of Rule Declaring that State Universal Service Funds May Assess Nomadic VoIP Intrastate Revenues, WC Docket No. 06-122, Declaratory Ruling, 25 FCC Rcd 15651 (2010).

Universal Service NPRMDkt 06-122

68. Second, we seek comment on the USF obligations we have established in this Order for interconnected VoIP providers. We encourage commenters to describe possible ways in which our new requirements for interconnected VoIP providers could be improved. Given the interim nature of this Order, we welcome suggestions for a permanent approach to USF contributions from interconnected VoIP providers.

69. In particular, we seek comment on whether to eliminate or change the interim safe harbor we establish in the Order for providers of interconnected VoIP service. We ask commenters to address whether a safe harbor continues to be appropriate for providers of interconnected VoIP service. Can providers of interconnected VoIP service identify the amount of actual interstate and international, as opposed to intrastate, telecommunications they provide? If so, should we require that these providers report based on actual data? If not, is 64.9 percent the most appropriate level, or should we adjust the interim interconnected VoIP safe harbor?220 We ask that commenters advocating a change to the safe harbor explain the basis of their proposed revised safe harbor and how the safe harbor should be calculated.

70. New Docket. In this Notice, we open a new docket – WC Docket No. 06-122. All filings made in response to this Notice and those addressing the Commission’s universal service contribution methodology rules generally, should be filed in WC Docket No. 06-122.. . .

Universal Service Reform

Report and Order & Notice of Proposed Rulemaking Released on FCC Updates Approach for Assessing Contributions to the Federal Universal Service Fund., FCC 7/5/2006

Universal Service Contribution Methodology, WC Docket No. 06-122; CC Docket Nos. 96-45, 98-171, 90-571, 92-237; NSD File No. L-00-72; CC Docket Nos. 99-200, 95-116, 98-170; WC Docket No. 04-36, Report and Order and Notice of Proposed Rulemaking, 21 FCC Rcd 7518, 7538–43, paras. 38–49 (2006) (2006 Interim Contribution Methodology Order), aff’d in part, vacated in part, Vonage Holdings Corp. v. FCC, 489 F.3d 1232, 1244 (D.C. Cir. 2007)

The Commission expands the base of USF contributions by extending universal service contribution obligations to providers of interconnected voice over Internet Protocol, or VoIP, service. For interconnected VoIP providers [connected to the public telephone network - see the VoIP 911 proceeding which used the same concept], the Commission establishes a safe harbor percentage of interstate revenue at 64.9 percent of total VoIP service revenue. Interconnected VoIP providers also may calculate their interstate revenues based on their actual revenues or by using traffic studies. - FCC Updates Approach For Assessing Contributions To The Federal Universal Service Fund, FCC Press Release June 21, 2006

Text of Order:

34. We require providers of “interconnected VoIP services,” as defined by the Commission, [47 C.F.R. § 9.3. See VoIP 911 Order, 20 FCC Rcd at 10257-58, para. 24; see also CALEA First Report and Order, 20 FCC Rcd at 15008, para. 39] to contribute to the federal USF under the existing contribution methodology on an interim basis. As described above, the number of VoIP subscribers in the United States has grown significantly in recent years, and we expect that trend to continue. At the same time, the USF contribution base has been shrinking, and the contribution factor has risen considerably as a result. We therefore find that extending USF contribution obligations to providers of interconnected VoIP services is necessary at this time in order to respond to these growing pressures on the stability and sustainability of the Fund.

35. The Commission has not yet classified interconnected VoIP services as “telecommunications services” or “information services” under the definitions of the Act. [See IP-Enabled Services Notice, 19 FCC Rcd at 4893-94, paras. 43-44.] Again here, we do not classify these services. To the extent interconnected VoIP services are telecommunications services, they are of course subject to the mandatory contribution requirement of section 254(d). Absent our final decision classifying interconnected VoIP services, we analyze the issues addressed in this Order under our permissive authority pursuant to section 254(d) and our Title I ancillary jurisdiction. Specifically, we find that interconnected VoIP providers are “providers of interstate telecommunications” under section 254(d), and we assert the Commission’s permissive authority to require interconnected VoIP providers “to contribute to the preservation and advancement of universal service” because “the public interest so requires.” We also exercise our ancillary jurisdiction to extend contribution obligations to interconnected VoIP providers. We note that both Vonage and the VON Coalition have stated on the record in this proceeding their belief that interconnected VoIP providers should be required to contribute to the Fund, apparently conceding that the Commission has the authority to impose such a requirement. Finally, we address implementation issues related to our requirement that interconnected VoIP providers contribute to the USF.

36. We extend universal service obligations to providers of interconnected VoIP services, as previously defined by the Commission. The Commission has defined “interconnected VoIP services” as those VoIP services that: (1) enable real-time, two-way voice communications; (2) require a broadband connection from the user’s location; (3) require IP-compatible customer premises equipment; and (4) permit users to receive calls from and terminate calls to the PSTN. [VoIP 911 Order, 20 FCC Rcd at 10257-58, para. 24.] We emphasize that interconnected VoIP service offers the capability for users to receive calls from and terminate calls to the PSTN; the obligations we establish apply to all VoIP communications made using an interconnected VoIP service, even those that do not involve the PSTN. Furthermore, these obligations apply regardless of how the interconnected VoIP provider facilitates access to and from the PSTN, whether directly or by making arrangements with a third party. Finally, we recognize that the definition of interconnected VoIP services may need to expand as new VoIP services increasingly substitute for traditional phone service. [VoIP 911 Order, 20 FCC Rcd 10245, 10277, para. 58.]

3. Implementation

50. In this section, we address implementation issues related to our requirement that interconnected VoIP providers contribute to the USF. Because we are expanding the base of contributors, certain entities that in the past have not been required to report interstate and international revenues will now be required to do so. For that reason, we provide a brief overview of our reporting requirements. This Order does not fully explain all of the Commission’s requirements. Interconnected VoIP providers that are new to the USF procedures should familiarize themselves with the Commission’s USF rules and with FCC Forms 499-A and 499-Q Telecommunications Reporting Worksheets and the accompanying instructions.172

51. Identifying Revenues for Reporting Purposes. Most interconnected VoIP providers offer packages of services to consumers for a single price that include telecommunications, as discussed above,173 along with CPE and/or features that may be information services. To the extent that an interconnected VoIP provider has chosen to structure its offerings in this manner, it may use the safe harbors established in the CPE Bundling Order to determine the appropriate amount of telecommunications revenues to be reported (as distinguished from revenue derived from ontelecommunications).174 Interconnected VoIP service providers are not obligated to use either of the safe harbors in the CPE Bundling Order, but we emphasize that other allocation methods may not be considered reasonable and will be evaluated on a case-by-case basis in an audit context.175

52. Interconnected VoIP providers must report and contribute to the USF on all their interstate and international end-user telecommunications revenues. To fulfill this obligation, interconnected VoIP providers have three options: (1) they may use the interim safe harbor established in this Order; (2) they may report based on their actual interstate telecommunications revenues; or (3) they may rely on traffic studies, subject to the conditions described below.

53. As we recognized in the Vonage Order, it is difficult for some interconnected VoIP providers to separate their traffic on a jurisdictional basis.176 Indeed, many of these VoIP providers have advocated to us in other proceedings that their services are “inherently interstate.”177 Consistent with this advocacy and based on the conclusions in the Vonage Order,178 we find that it would be reasonable for us to treat the interconnected VoIP traffic as 100% interstate for USF purposes. Indeed, in another context where providers were unable to separate their interstate telecommunications revenues from other revenues, the Commission found a safe harbor of 100 percent to be reasonable.179 Nevertheless, we establish a safe harbor that is lower than 100 percent as a convenient alternative for interconnected VoIP providers. Our safe harbor is necessarily the product of line drawing.180 In adopting a safe harbor we consider what would be an appropriate analogue. One industry report has estimated that 83.8 percent of VoIP traffic in 2004 was either long distance or international and only 16.2 percent was local.181 Thus, it appears that VoIP traffic is predominantly long distance or international. As such, it is much like wireline toll service which similarly offers interstate, intrastate toll, and international services. In fact, as stated in paragraph 55 below, VoIP services are often marketed as a substitute for wireline toll service.182 The percentage of interstate revenues reported to the Commission by wireline toll providers is 64.9 percent. We therefore find that establishing a safe harbor of 64.9 percent is reasonable for purposes of this interim action.183

54. Moreover, we believe that setting the safe harbor at 64.9 percent is reasonable pending the completion of the attached NPRM where we seek comment on whether to change or eliminate all of the safe harbors.184 To set the safe harbor lower would permit providers that actually provide more interstate service to escape universal service contribution obligations for some of their interstate traffic, thus undermining our actions to preserve and advance the goals of universal service. Furthermore, to the extent the safe harbor percentage is higher than some providers’ actual interstate use, providers may instead contribute to the fund based on actual revenue allocations or by conducting a traffic study, as described below. We encourage interconnected VoIP providers to explore these more precise avenues for determining the jurisdictional nature of their revenues.185

55. We do not believe that the percentage used as the wireless safe harbor would serve as a reasonable safe harbor for interconnected VoIP.186 Indeed, the record reflects that interconnected VoIP service is often marketed as an economical way to make interstate and international calls, as a lower-cost substitute for wireline toll service.187 For purposes of a safe harbor, it is reasonable to account for the many customers who purchase these services to place a high volume of interstate and international calls, and benefit from the pricing plans the providers offer for such services. We believe that these characteristics differentiate it from wireless service. Accordingly, we find that the interconnected VoIP safe harbor should be substantially higher than the wireless safe harbor in order to properly capture interstate revenues.

56. While, as stated above, interconnected VoIP providers may report their actual interstate telecommunications revenues, we recognize that some interconnected VoIP providers do not currently have the ability to identify whether customer calls are interstate and therefore subject to the section 254(d) contribution requirement. Indeed, a fundamental premise of our decision to preempt Minnesota’s regulations in the Vonage Order was that it was impossible to determine whether calls by Vonage’s customers stay within or cross state boundaries.188 Therefore, an interconnected VoIP provider may rely on traffic studies or the safe harbor described above in calculating its federal universal service contributions. Alternatively, to the extent that an interconnected VoIP provider develops the capability to track the jurisdictional confines of customer calls, it may calculate its universal service contributions based on its actual percentage of interstate calls.189 Under this alternative, however, we note that an interconnected VoIP provider with the capability to track the jurisdictional confines of customer calls would no longer qualify for the preemptive effects of our Vonage Order and would be subject to state regulation. This is because the central rationale justifying preemption set forth in the Vonage Order would no longer be applicable to such an interconnected VoIP provider.

57. In lieu of using the interim safe harbor or reporting actual interstate telecommunications revenues, interconnected VoIP providers may rely on traffic studies, as noted above, and as CMRS carriers may do.190 The record indicates that traffic studies are a feasible option for providers of interconnected VoIP.191 However, before it can begin to base its USF contributions on a traffic study, an interconnected VoIP provider must submit its proposed traffic study to the Commission for approval. While prior Commission approval of traffic studies is not required for wireless carriers, we have nonetheless identified concerns in the wireless context with the use of traffic studies as a replacement for reporting actual revenues, and we now require wireless carriers to submit their traffic studies to the Commission and to USAC.192 If we were to allow interconnected VoIP providers to rely on unapproved traffic studies, we would risk extending the problems we have identified with the use of traffic studies by wireless carriers to a new technology, and possibly creating unforeseen problems as well. For these reasons, we find it appropriate to require prior Commission approval of any traffic study on which an interconnected VoIP provider proposes to rely.193 Until the Commission has approved an interconnected VoIP provider’s proposed traffic study, that provider may use the interim safe harbor. We may extend this treatment to wireless traffic studies in the future, but we decline to do so today. While there would be a benefit to parity of requirements between wireless and interconnected VoIP providers, a pre-approval requirement for wireless traffic studies would be disruptive to wireless contributors who, unlike interconnected VoIP providers, are already relying on the current regime.

58. We take one additional interim action here to ensure the health of the USF pending broader reform. As we stated earlier, we have not yet classified interconnected VoIP as either a telecommunications service or an information service. Because we have not yet made that classification, some interconnected VoIP providers may hold themselves out as telecommunications carriers, but others do not, considering themselves instead to be “end users.” Carriers that provide telecommunications service inputs to the latter group of interconnected VoIP providers therefore have been reporting the resulting revenues as end-user revenues and including them in their bases.194 Because we do not classify interconnected VoIP today, nor do we attempt to quantify the magnitude of USF contributions from carriers that supply wholesale inputs to interconnected VoIP providers, carriers supplying telecommunications services to interconnected VoIP providers who are not themselves carriers should continue to include the revenues derived therefrom in their own contribution bases for two full quarters after the effective date of this Order.195 Wholesale carriers may not exclude these revenues by invoking the “carrier’s carrier” rule during this interim period.196 To the extent required, we waive here Commission rule 54.706(b) for the duration of this requirement.197

59. We recognize that, by requiring on an interim basis that both the underlying carrier and the interconnected VoIP provider contribute based (in part) on the revenues derived from providing the underlying transmission, the Fund may receive contributions from telecommunications revenues associated with the same facilities two times. We emphasize that this is a temporary measure, and we do not take this step lightly. We are concerned, however, that if carriers are permitted to invoke the carrier’s carrier rule immediately to exclude revenues from interconnected VoIP providers, the result could be a net decrease in the Fund in the short term. Such a result would be inconsistent with our obligation to ensure a sufficient and sustainable Fund and to preserve and advance universal service.198 By continuing to require contributions from carriers supplying transmission facilities to interconnected VoIP providers for an additional two quarters, we eliminate any risk of decreasing the Fund while we implement contribution obligations for interconnected VoIP providers. Further, we find nothing in section 254 of the 1996 Act that prohibits this interim approach.

60. Reporting Requirements. Providers of interconnected VoIP services will follow the same basic USF reporting procedures as other providers of interstate and international telecommunications, using the same forms and filing instructions. Contributors to USF report historical gross-billed, projected gross-billed, and projected collected end-user interstate and international revenues quarterly on FCC Form 499-Q.199 Interconnected VoIP service providers will be required to file FCC Form 499-Q beginning on August 1, 2006.200 Contributors report gross-billed and actual collected end-user interstate and international revenues on FCC Form 499-A on April 1 of each year.201 Interconnected VoIP service providers will be required to file a completed FCC Form 499-A beginning on April 1, 2007.

61. Under Commission rules, a provider of interstate and international telecommunications whose annual universal service contribution is expected to be less than $10,000 is not required to contribute to the USF, or to file a Telecommunications Reporting Worksheet unless it is required to contribute to other support and cost recovery mechanisms.202 Interconnected VoIP providers that satisfy this de minimis exemption need not contribute to the Fund.203 We find, however, that it is appropriate to require all providers of interconnected VoIP services – including those that satisfy the de minimis exemption – to register with the Commission in order to facilitate our enforcement of the obligations the Commission has imposed in this Order on providers of interconnected VoIP services.204 In order to fulfill this reporting requirement, every interconnected VoIP provider that has not already registered with the Commission (and designated an agent for service of process) must complete and file an FCC Form 499-A with blocks 1, 2, and 6 completed.205 Providers should refer to the instructions on the revised FCC Form 499-A for additional details on how to complete this registration requirement. Interconnected VoIP providers will receive an FCC Registration Number (FRN) when they register with the Commission. Because providers must have an FRN in order to submit required USF filings, it is the responsibility of the interconnected VoIP provider to register with the Commission and obtain an FRN prior to the August 1, 2006 deadline for filing FCC Form 499-Q.

62. Finally, interconnected VoIP providers must comply with the Commission’s rules with respect to recovering USF contributions from their customers. Contributors may choose to recover part or all of their universal service contributions from their customers, but they are prohibited from marking up universal service line-item amounts above the relevant contribution factor.206

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FCC Initiates Proceeding to Reform Universal Service Fund Contribution System. References impact of IP Telephony.  The reference to IP telephony was only slight:

"3.     We believe that we may need to revisit the concepts underlying the existing contribution system, in light of current market trends, to ensure that providers of interstate telecommunications services continue to "contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service."  Since the Commission's initial implementation of section 254 of the Act in 1997, we have seen many significant developments in the interstate telecommunications marketplace.  We have witnessed the entry of new providers into the long distance market, including Regional Bell Operating Companies (RBOCs) that have received approval under section 271 of the Act to provide interstate telecommunications.  We also are seeing certain wireline interexchange carriers suffer declining revenues in light of growing competition.  Growth in the wireless telecommunications sector, as well as the advent of Internet Protocol (IP) telephony, has changed the dynamics of the interstate telecommunications market. Furthermore, many carriers are bundling services together in creative ways, such as offering flat-rate packages that include both interstate and intrastate telecommunications and non-telecommunications products and services.
. . . . .
"14.    Other trends in the telecommunications marketplace also may have implications for the existing contribution methodology.  Carriers increasingly are bundling interstate and intrastate services, as well as telecommunications and non-telecommunications services.  Bundling services in this way may affect carriers' ability to allocate interstate telecommunications services properly for contribution purposes.  In addition, the development of "voice over Internet" technology may have effects on the amount of total revenues reported under the current system.  Finally, there may be additional legal, technological and market developments that could significantly impact the manner in which universal service contributions should be made, many of which we cannot even foresee today."

Regulatory Proceeding

6/21/06 FCC Updates Approach for Assessing Contributions to the Federal Universal Service Fund.
News Release: Word | Acrobat
Martin Statement: Word | Acrobat
Copps Statement: Word | Acrobat
Adelstein Statement: Word | Acrobat
Tate Statement: Word | Acrobat
McDowell Statement: Word | Acrobat

Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Universal Service Obligations of Broadband Providers, CC Docket No. 02-33, Notice of Proposed Rulemaking, 17 FCC Rcd 3019 (2002) (Wireline Broadband NPRM)
http://apps.fcc.gov/ecfs/comment/view?id=5508335929

Released May 8, 2001 - Notice of Proposed Rulemaking Pending
Comments due June 25, 2001. 
Reply comments due July 9, 2001 
[ Text | Word97 | Acrobat ]

Fed Reg Notice

Other Proceedings

Impact of IP Telephony on Universal Service Programs: TD projects that by 2008, given current VoIP penetration rates, between $183 and $407 million in revenue will no longer be available to support California's five statutorily mandated universal service programs if the support for these programs continues to rely on surcharges placed on regulated revenues. These "public purpose" programs are the California High Cost Funds A and B, the Universal Lifeline Fund, the Deaf and Disabled Telecommunications Fund, and the California Teleconnect Fund for schools, libraries, rural health clinics and community-based organizations. Attached are TD's projections of the dollar impact of VoIP penetration on each of these programs. As the attachment shows, nearly half of the funding base needed to supported the state's mandated universal service programs may be lost if VoIP providers do not contribute program funds.
-- Order instituting investigation on the Commission's own motion to determine the extent to which the public utility telephone service known as Voice over Internet Protocol should be exempted from regulatory requirements, CA PUC February 11, 2004 http://www.cpuc.ca.gov/published/agenda_decision/33960.htm

In order to formulate an informed, consistent regulatory policy, the Commission would like to obtain information about VOIP activity in Michigan . The Commission, therefore, requests comments on VOIP activity in Michigan on the following topics that may be affected by both state and federal law:
...
e. Whether VOIP providers may participate in, and have access to, the federal Universal Service Fund (USF) to provide service to rural areas, hospitals, and schools; the ability of VOIP carriers to provide low-cost service similar to Lifeline and Link-up for low-income end users; and the need for VOIP end-users to contribute to the federal USF.
-- -- U-14073 - Commission's Own Motion (investigation of VOIP) - (MI PUC 3/16/2004 ) HTML | PDF

Should VoIP providers and their subscribers contribute to the Universal Service Fund that assists low income consumers, schools and libraries with obtaining affordable telephone services? If not, will migration of customers from traditional telephone services to VoIP providers either reduce the funds available for USF programs or increase the burden on non-VoIP customers? Should VoIP providers and their subscribers contribute to similar state-operated programs, such as New York's Targeted Accessibility Fund (which assists consumers with hearing and other physical disabilities)... Should VoIP providers contribute to state funds that support telephone regulatory agencies or pay state and local taxes on intrastate services provided to subscribers? How should jurisdictional allocation of VoIP services be identified and reported?
---In Re Vonage Holding Company Petition for a Declaratory Ruling Concerning the Order of the Minnesota PUC, WC Docket No. 03-211, Comments of the NY AG (Nov. 21, 2003)

Litigation

• Vonage v FCC No. 06-1276 DC Cir. June 1, 2007

Petitioners, providers of voice over internet protocol services (VoIP), challenge a Federal Communications Commission order requiring them to contribute to the Universal Service Fund (USF) . Specifically, they claim that, in requiring such contributions, the Commission exceeded its authority under the Telecommunications Act of 1996 and acted arbitrarily and capriciously by (1) analogizing VoIP to wireline toll service for the purposes of setting the presumptive percentage of VoIP revenues generated interstate or internationally, (2) requiring pre-approval for traffic studies submitted by VoIP providers but not for those submitted by wireless providers, and (3) suspending the "carrier's carrier rule" with respect to VoIP. We conclude that the Commission has statutory authority to require VoIP providers to make USF contributions and that it acted reasonably in analogizing VoIP to wireline toll service for purposes of setting the presumptive percentage of VoIP revenues generated interstate and internationally. But finding the Commission's explanation wanting as to the pre-approval of traffic studies and the suspension of the carrier's carrier rule, we vacate those portions of the Order.

• FCC Notice of Vonage Appeal July 21, 2006
• Court Says Vonage Needs To Throw Away Money Into Wasteful USF Program, Techdirt 6/5/2007

Legal Authority

• 47 U.S.C. § 254
• 47 C.F.R. Part 54

Links

• FCC Universal Service Homepage

News

• VoIP Providers must now pay USF funds, WISPA 11/12/2010
• VoIP Services Market Nears $50 Billion Mark, Circleid 4/8/2011
• How The FCC Killed VoIP, Internet Statistics 2/9/2011
• Pulver Howls About VoIP USF Order, IP Democracy 7/5/2006
• FCC Mulls Taxing VOIP Calls, PC World 6/2/2006
• VOIP, Cellphone Bills Could Rise for Subsidy, Wash Post 6/2/2006