Universal Service Fund

We attended the Audit Committee meeting at USAC’s quarterly business meeting this morning.  While much of the discussion concerned internal controls USAC has in place to oversee its functions, the business update portion of the meeting gave us a snapshot into contributor and beneficiary audit activity at USAC.  The presentation gave us some insight into a likely increased amount of activity over the next few months.

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As summer begins to wind down, the FCC will begin considering whether to revise or eliminate decade-old regulations, including certain rules related to the Universal Service Fund (“USF”), equipment authorization procedures, and disabilities access. The FCC kicked off its review with a Public Notice under the Regulatory Flexibility Act, which requires federal agencies to reexamine regulations within 10 years of their adoption to assess the continued need for the rules, the rules’ complexity, and whether the rules overlap or conflict with other federal regulations. The purpose of the review is to ensure that older, unnecessary rules do not remain on the books, lowering the compliance burden for smaller businesses. Although the FCC rarely eliminates a rule outright as part of this review, the comments received can help the agency identify improvements for future rulemakings or flag potential compliance issues.

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Echoing concerns raised by other parts of the federal government over the past several years, the FCC, at its open meeting on April 17, 2018, adopted a Notice of Proposed Rulemaking (“NPRM”) to consider a rule which would prohibit Universal Service Fund (“USF”) support from being used “to purchase or obtain any equipment or services produced or provided by a company posing a national security threat to the integrity of communications networks or the communications supply chain.”  The NPRM seeks comment on issues such as how such a rule can be implemented and enforced, what types of equipment and services should be covered, and how manufacturers covered by the rule are to be identified and made known to USF recipients.  Although this is only the start of the proceeding, the FCC’s action could have a broad-reaching impact for some communications equipment manufacturers and create potential liabilities for entities participating in any of the federal USF programs.  All companies purchasing equipment from certain countries – principally China and Russia – may be affected, even if they don’t receive federal USF money.

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At its last open meeting in 2017, the five FCC Commissioners unanimously voted to adopt a Notice of Proposed Rulemaking (NPRM) and Order regarding the Commission’s Rural Health Care (RHC) Program, a 20-year old initiative aimed at improving rural health care provider access to first telecommunications services and later an array of communications services, including Internet access, dark fiber, and business data services.  This item is part of FCC Chairman Ajit Pai’s overall initiative to close the “digital divide,” and proposes to increase the $400 million spending cap for the first time since 1997.  The NPRM also proposes to change how the FCC handles demand beyond the cap, from general proration to prioritization based on rurality or remoteness.  As such, all interested stakeholders should carefully monitor and consider participating in the rulemaking process.  Comments will be due 30 days after publication of the item in the Federal Register (which usually takes a few weeks) and reply comments will be due 60 days after publication.

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On September 12, 2017, the Federal Communications Commission’s (Commission) Office of the Managing Director (OMD) released a Public Notice proposing a universal service fund (USF) contribution factor of 18.8% for fourth quarter 2017.  This proposed contribution factor would be the highest rate since the USF program’s inception and likely reflects the impact of the declining USF contribution base.
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Below is Kelley Drye’s preview of the items under consideration at the Federal Communication Commission’s (FCC’s or Commission’s) upcoming monthly Open Meeting, to be held on August 3, 2017. Consistent with the trend since he took over the Commission, Chairman Ajit Pai continues to schedule a large number of items.  Indeed, for the seventh month in a row, the Commission has six or more items on its agenda.  This month, the agenda consists of eight items and has several items taking concrete steps to resolve proceedings or important questions presented to the Commission.  The areas covered skew heavily toward broadband deployment, with a CAF Phase II item, a Mobility Fund item and several spectrum items.  In addition, the Commission again has enforcement items on the agenda:  one (unidentified) item on the regular agenda and a one-item consent agenda involving an additional (unidentified) enforcement action.

The most significant agenda items are summarized below. Note: these brief summaries are based on draft items, which may differ from the final items released following the Open Meeting.  Please check with Kelley Drye after the meeting for more information on the items below.


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In orders issued last week, the Federal Communications Commission (Commission) continues what appears to be a trend of resolving long-pending universal service fund (USF) contribution issues.  The Orders, released May 23, 2017 and May 24, 2017 by the Commission’s Wireline Competition Bureau (Bureau), ruled on petitions filed by, respectively, Morris Communications, Inc. (Morris) and Stratos Government Services, Inc. (Stratos).  The Morris Decision provided a Morris a partial victory with the Bureau denying Morris’ request to reverse a Universal Service Administrative Company (USAC) decision regarding unpaid USF contributions but granting Morris’ request that associated late payment fees be recalculated.  The Stratos Decision clarified that the USF contribution exemption for entities that provide service exclusively to public safety and government entities does not apply to subcontractors providing such services.  These and other recent decisions may signal – at least for USF contribution-related issues – a Commission focus on clearing out the backlog of long-pending petitions.
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Federal Communications Commission (FCC or Commission) Chairman Ajit Pai sent a letter this week to Chris Henderson, CEO of the Universal Service Administrative Company (USAC) expressing concern about flaws in USAC’s administration of the E-Rate Productivity Center (EPC), the online application and account portal. In the letter, Chairman Pai noted his support for E-Rate as

At the February 2017 Open Meeting, the Federal Communications Commission (Commission) approved an Order finalizing bidding rules for the upcoming Connect America Fund (CAF) Phase II auction where service providers will compete for up to $1.98 billion in financial support in areas where the incumbent provider declined cost-model funding. This Order is the next stage in an ongoing effort by the Commission to revise aspects of the high cost program of the universal service fund (USF) to encourage the extension of voice and broadband communications services to rural and high cost areas of the country. As of this writing, the Commission has yet to release the text of the order.

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On January 26, 2017, in its first action under the leadership of Chairman Ajit Pai, the Federal Communications Commission (FCC or the Commission) voted to allow the State Of NY to award up to $170 million in Connect America Fund (CAF) fuding to expand broadband access in unserved, rural portions of New York State.  These