On August 17, 2009, the Federal Communications Commission (“FCC” or “Commission”) released an Order denying Global Crossing Bandwidth, Inc.‘s (“GX”) request for a review of results of a February 15, 2007 audit by the Universal Service Administrative Company (“USAC”). In its audit report, USAC had found that GX incorrectly reported revenue as non-assessable reseller revenue, as opposed to end user revenue upon which Universal Service Fund (“USF”) contributions should have been assessed. The Commission Order denying GX‘s request for a review of the audit is quite confusing, seemingly internally inconsistent, and unlikely to provide carriers with clear guidance regarding their future reporting obligations.
By way of background, it should be noted that the FCC requires wholesalers, like GX, to have documented procedures to ensure that the revenue they report as reseller revenue is in fact derived from entities that reasonably would be expected to contribute to the USF themselves. This requirement, known as the “Carrier‘s Carrier Rule,” has existed since the inception of the post-Telecommunications Act of 1996 USF revenue reporting worksheet – although several modifications have been made to the 499-A instructions altering the compliance threshold for wholesale providers. Under the “Carrier‘s Carrier Rule,” if USAC determines that a carrier has failed to demonstrate a reasonable expectation that its customers were contributing to the USF, it reclassifies the carrier‘s non-assessable revenue as end-user revenue, and the carrier is then responsible for any additional USF assessments that result.
In the audit report mentioned above, USAC found, in relevant part, that GX reported as reseller revenues certain revenues from customers that did not in fact contribute to the universal service fund in 2004. Furthermore, USAC found that the evidence GX presented (e.g., out-of-date reseller certifications, contract provisions, company website information and product descriptions) did not sufficiently support GX‘s argument that had a reasonable expectation that its customers would contribute directly to the USF as resellers. Based on this finding, USAC recommended that GX report as end-user revenue the revenue from those customers that did not contribute to the USF and re-file its 2005 FCC Form 499-A.
In its appeal of USAC‘s decision, GX first argued that USAC arrogated to itself the role of determining whether GX or its customers are responsible for contributing to the USF. The Commission rejected this argument and maintained that, pursuant to its rules, USF contributions are to be calculated and filed in accordance with the FCC Form 499-A instructions, and USAC has the authority to verify any information reported on the FCC Form 499-A. The FCC found that USAC had simply relied upon the guidance in its 2005 FCC Form 499-A instructions in determining that GX had not properly classified the revenue at issue as reseller revenue, and it affirmed USAC‘s finding that GX did not demonstrate that it had a reasonable expectation that its customers were contributing resellers.
GX also argued that USAC‘s assessment of contributions on revenue GX reported as reseller revenue violates federal law, because USAC exceeded its authority by creating a new rule and doing so without the required notice and comment period. However, the FCC summarily rejected this argument and simply stated that USAC‘s reclassification of GX‘s revenues was consistent with the Commission‘s existing rules and “not tantamount to adopting a new rule.”
GX further noted that the Commission has never specified the criteria for wholesale carriers to establish that their customers are resellers arguing that the reseller certification requirement is not binding and has not been subject to a notice and comment process. The FCC agreed that the 2005 FCC Form 499-A instructions did not mandate how wholesale carriers were to substantiate the status of their customers as resellers. However, the FCC reasoned that USAC did not rely solely on the Commission‘s instructions but also considered the evidence provided by GX which it found be insufficient to support a reasonable expectation of USF contribution from GX‘s customers. The FCC then ruled that USAC had not treated the Commission‘s instructions as a binding rule and that it did not exceed its authority by “verifying the accuracy of GX‘s submissions.”
Similarly, GX argued that USAC misapplied the 2005 FCC Form 499-A Instructions to the facts of its specific case. Believing that it had a reasonable expectation that its customers would contribute to the universal service fund, GX maintained that the 2005 FCC Form 499-A Instructions permitted it to rely on evidence other those explicitly listed on the form. The FCC once again acknowledged that GX was correct in that a wholesale carrier may establish a reasonable expectation through methods other than those listed in the FCC Form 499-A instructions. However, the Commission went on to rule that GX had failed to do so and affirmed USAC‘s finding that GX did not demonstrate that it had a reasonable expectation that its customers were resellers that had directly contributed to the universal service fund.
CLIENT ADVISORY
Clients who are affected by the Carrier‘s Carrier Rule and who have questions regarding how this decision will affect their reporting obligations should contact Jonathan Marashlian at jsm@commlawgroup.com or 703-714-1313.
