FCC Remands Two Important USF Contribution Rule Matters to USAC

This past week, the Federal Communications Commission’s (“FCC”) Wireline Competition Bureau (“WCB”) remanded two requests for review of 2008 and 2009 Universal Service Administrative Company (“USAC”) audit decisions to USAC to address wholesale-resale issues.  This decision comes nearly eight years after the original appeal made by the now defunct McLeodUSA Telecommunications Services, Inc. (“McLeodUSA”), and almost six years after the appeal made by Grande Communications Networks, LLC (“Grande”). 

The FCC also reversed USAC’s erroneous reclassification of revenue McLeodUSA derived from sales of DSL Internet access services as Universal Service Fund (“USF”) assessable end-user telecommunications.  The WCB further directed USAC to “adjust McLeodUSA’s invoices with respect to its end-user DSL Internet access revenues, to reverse any associated interest, fees, and penalties, and to issue a refund as appropriate.”

The Original Appeals

The McLeodUSA and Grande appeals, filed in 2007 and 2009 respectively, challenged USAC’s reclassification of “wholesale” revenue as end-user revenue. 

Specifically, the appeals disputed USAC’s strict standards for classifying revenue as wholesale, and USAC’s failure to accept “other reliable proof” to meet the “reasonable expectation standard,” reflected in the FCC’s rules and required to report telecommunications revenues as wholesale in Block 3 of the Form 499-A.  Grande also contested USAC’s “double collection” in certain cases, citing one case where USAC was auditing Grande, and found a customer to be an end-user (meaning that Grande must contribute on revenues from the customer) and in a separate audit of that customer found it to be a carrier, itself required to contribute, such that USAC was attempting to double collect on the same revenue stream.

Likewise, McLeodUSA highlighted USAC’s over-emphasis on reseller certifications, and failure to acknowledge facts.  McLeodUSA charged USAC with arbitrarily reclassifying the revenue of 553 carrier customers as end users, including a well-known incumbent carrier.  USAC even failed to accept McLeodUSA’s reliance on the FCC database, a mechanism recommended for verification in the then-applicable Form 499-A instructions.

Unfortunately the Public Notice provides little insight into the WCB’s rationale for remanding the wholesale-resale issues to USAC and reversing the USAC decision regarding McLeod’s DSL Internet access revenues.  However, the Notice suggests that the WCB may be making its way through the back-log of pending appeals of USAC decisions.  Moreover, it demonstrates the importance the FCC, or at least the WCB, places on wholesale-resale issues. 

Current Rules

Wholesale-resale issues have since been clarified by the FCC in a 2012 Order.  For instance, the FCC makes clear that carriers can demonstrate “reasonable expectation” either by obtaining a safe harbor certification from a customer confirming its status as a retailer or by providing “other reliable proof” on a case by case basis to demonstrate the “reasonable expectation that its customer is a reseller.  The FCC confirmed last year that the standard of proof here is the preponderance of the evidence test.

Double collection is not permitted under the actual contribution rule.  If a customer actually contributed to the universal service fund based on revenues from offerings that incorporate the services of the wholesale service provider, then the wholesaler is not obligated to contribute even without demonstrating any reasonable expectation.  The standard for proving actual contribution is similarly the preponderance of the evidence test.

If you have any questions about compliance with USF contribution obligations, or to prepare for a potential USAC audit, please contact the attorney assigned to your account or Jonathan S. Marashlian at jsm@commlawgroup.com or 703-714-1313.

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