FCC: VoIP Providers Can be Required to Support State Universal Service Fund: Where is New York?

There’s an important case pending in the federal Eighth Circuit Court of Appeals (Vonage Holdings Corp. v. Nebraska Public Service Commission (No. 08-1764)) regarding the ability of Nebraska to require interconnected Voice over Internet Protocol (VoIP) providers to contribute to its state Universal Service Fund. VoIP providers interconnect their system to the public switched telephone network, thus enabling their customers to call anyone else and the world being able to call any of the VoIP provider’s customers.

A federal District Court issued a preliminary injunction preventing Nebraska’s Public Service Commission from requiring a VoIP provider, Vonage, to contribute to the state’s universal service program. The lower court held that the FCC pre-empted states from imposing such fees on VoIP providers, but in its amicus brief to the Court of Appeals, the FCC stated otherwise.

VoIP regulation is a web of inter-related, and often conflicting, rules and orders, which only gets murkier when one extends the examination to the ability of states to oversee VoIP. It gets even more complicated when one considers that “interconnected VoIP” encompasses everything from a nomadic service like Vonage to fixed services like those offered by the cable television companies. While the FCC has had a generic “IP-Enabled Services” proceeding open and pending since 2004, in the ensuing years, several issues have been clarified. For example, interconnected VoIP providers must now provide E-911 access, participate in wiretapping under the Communications Assistance for Law Enforcement Act, and contribute to the federal Universal Service Fund (“USF”).

In extending USF obligations to all interconnected VoIP providers, the FCC specifically addressed the difficulty that nomadic interconnected VoIP providers have in distinguishing between interstate and intrastate calls. As a result, the FCC referenced in its brief that it created a “safe harbor” under which a company such as Vonage may presume that 64.9 percent of its revenues arise from its interstate operations. Such companies are also free to conduct a traffic study to estimate the percentage of revenues derived from interstate traffic and use that percentage to calculate the contribution amount. VoIP providers that are able to track the jurisdiction of their calls may instead calculate their federal contribution amounts using actual revenue allocations.

Since the Telecom Act permits states to adopt regulations that are not inconsistent with the FCC’s rules in order to “to preserve and advance universal service,” the FCC wrote in its brief that the Nebraska PSC was correct in determining that interconnected VoIP providers can be required to contribute to its state USF and can calculate their intrastate revenues using the same formula options provided by the FCC. Accordingly, the FCC argued that by subjecting Vonage’s intrastate revenues to a state USF in no way frustrates the FCC subjecting Vonage’s interstate revenues to the federal USF.

New York, unlike Nebraska, currently has no state USF. New York does have a “Targeted Accessibility Fund,” to which wireline carriers (not wireless or VoIP) contribute. TAF was created in response to New York PSC orders regarding the collection of state universal services surcharges and their distribution. Currently TAF is used to support offerings such as Lifeline assistance to low income customers, and the relay service for the deaf.

However, contributions to TAF are declining at an accelerating pace due to intermodal migration (from landline telephones to to wireless and VoIP). In the not-too-distant future it may become impossible for the TAF fund to be supported only by the current contributors, increasing their charges while allowing the VoIP and wireless providers to escape contribution to state public purpose functions.

The time has come for the New York State Public Service Commission to catch up with Nebraska and other states that are adjusting their universal and consumer protection policies to take into account customer migration to VoIP and wireless phone services. The PSC should end its timid approach, and instead take swift action to reverse the dwindling assistance provided to low income telephone customers (more than 400,000 low income customers have lost Lifeline assistance worth scores of millions of dollars in recent years), and to support this by add inginterconnected VoIP providers and wireless companies to the roster of entities which support relay service, Lifeline and other universal service objectives.

Lou Manuta