By way of background, the federal District Court for the District of Nebraska had blocked the Nebraska Public Service Commission’s (“NPSC”) ability to require nomadic interconnected VoIP providers to collect and remit a surcharge for the state’s USF. On the appeal to the Eighth Circuit, the FCC submitted an amicus brief arguing that the FCC has not pre-empted the states from assessing state USF fees on VoIP providers. The FCC wrote:
The fundamental error in the district court’s preemption analysis is that it fails to consider the critical question of whether preemption is necessary to prevent the state regulation at issue from frustrating a valid federal policy objective. It is not enough to simply conclude that it is impossible to separate the interstate and intrastate aspects of the service – that is a necessary, but not a sufficient, finding to support preemption. A finding that state regulation would conflict with federal regulatory policies is also required. In the Vonage Preemption Order, the FCC found that Minnesota’s entry and tariff regulations of Vonage’s service conflicted with the FCC’s deregulatory policies applicable to the interstate component of Vonage’s service. The FCC did not address, let alone preempt, the state-level universal service obligations of interconnected VoIP providers, which the FCC has distinguished from traditional “economic regulation.” In contrast to the Vonage Preemption Order, the NPSC USF Order does not present a conflict with the FCC’s rules or policies. Rather, the NPSC’s decision to require interconnected VoIP providers to contribute to the state’s universal service fund, and the contribution rules that the NPSC established to implement its decision, are fully consonant with the FCC’s rules and policies and are contemplated by §254(f) of the [Telecommunications] Act. Thus, in these specific circumstances, the rationale of the Vonage Preemption Order provides no basis to conclude that the FCC has preempted Nebraska’s state universal-service contribution requirement. (internal citations omitted)The FCC went on to argue that a state requiring VoIP providers to contribute to the state's USF fund does not frustrate federal policy and actually promotes the federal policy: “Vonage benefits from the state’s universal-service program because its customers in Nebraska (and elsewhere) undoubtedly value the ability to place calls to and receive calls from those in Nebraska who continue to rely on the PSTN [Public Switched Telephone Network] for their telephony services.” For example, programs like Lifeline and Linkup that help low-income afford to maintain phone service should be supported by all users, no matter which type of telphone service they use.
Further, the FCC argued that the federal USF is supported by contributions from interstate revenues, while the state USF would be supported through intrastate revenues: “If an interconnected VoIP provider relies on the FCC’s safe-harbor and presumes that 64.9 percent of its revenues flow from its interstate operations, under the NPSC USF Order it may use the equivalent presumption that 35.1 percent of its revenues are intrastate in nature. . . . [T]here is no possibility that an interconnected VoIP provider will be forced to pay into Nebraska’s universal-service fund on the basis of the same revenues that the provider uses to calculate its federal universal-service contribution.” Thus, the FCC proclaimed, “the NPSC USF Order is not ‘inconsistent with the Commission’s rules to preserve and advance universal service.’”
Unfortunately, the Eighth Circuit decision affirmed the District Court’s determinations without mentioning the FCC’s brief at all. The Court specifically addressed only state USF obligations of nomadic VoIP providers and found that it would be impossible to have companies like Vonage comply with the state USF requirements because Vonage's nomadic interconnected VoIP service cannot be separated into interstate and intrastate usage. And, the Court continued, even if it were possible to distinguish between intrastate and interstate nomadic VoIP traffic, such a determination must only be made by the FCC.
Of course, these holdings ignore the 64.9 percent interstate/35.1 percent intrastate safe-harbor standard created by the FCC to allocate the state/federal jurisdictional revenues.
On the positive side, the decision only applies to those states within the Eighth Circuit (Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) and it does not include fixed VoIP providers. It is most certainly going to be appealed to the United States Supreme Court.
The New York PSC considered the proper regulatory framework for Vonage back in 2004 and determined that a "light" regulatory approach was best. For example, Vonage was required to obtain a state Certificate of Public Convenience and Necessity and to offer 911 connectivity, as does every other competitive provider in the state. Vonage sued, and the PSC decision was stayed by the U.S. District Court for the Southern District of New York, following Vonage’s request for a preliminary injunction. The case has not proceeded.
Today, both nomadic and fixed VoIP providers have become vibrant competitors in New York. The cable companies, primarily Time Warner Cable and Cablevision, are the second and third largest local telephone service providers in the state. However, for every customer they migrate from the incumbent, the state loses regulatory assessment fees (which are used to run the Public Service Commission), gross receipts taxes, and Targeted Accessibility Fund (“TAF”) assessments. TAF is New York’s version of a state Universal Service Fund and supports Lifeline discount telephone service, 911 connectivity, and the relay service for the deaf. Contributions to TAF are dwindling due to migration of customers to unassessed cable telephone or other VoIP service, and the situation has reached the point where consideration of assessing VoIP providers has become not just a question of fairness, but one of necessity.
While the Eighth Circuit decision surely will be invoked by some VoIP industry opponents of state regulatory assessments for universal service functions, the determination has no binding legal force in New York. As the FCC argued in its brief, all providers and their customers benefit when every resident can make and receive calls. The fact that a different technology may be used by VoIP is not a valid means to draw a distinction. People pick up their telephone and dial a series of numbers to place a call – that’s what matters. If a carrier can keep track of which calls remain in the state and which travel into other states, actual calling data is permitted to be used. However, the safe-harbor standard developed by the FCC is usable in all other incidents.
The collection of state USF funds complements the collection of federal USF funds and does not “frustrate” federal policy.
New York has an opportunity to join other states – including Missouri and Nebraska in the Eighth Circuit and New Mexico and Kansas in doing the right thing – assess TAF payments on VoIP providers now, and revitalize the sagging New York Lifeline assistance program.
Lou Manuta
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