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Universal Service - Satellite Service Providers and the FCC Funding Mandates
by Maury J. Mechanick, Counsel, White & Case LLP

This article provides an overview of the critical funding mandates imposed on telecommunications service providers in the sky, as well as on the ground. These funding mandates include the Universal Service Fund (USF), the Telecommunications Relay Services Fund (TRS Fund), the Local Number Portability Administration (LNPA), and the administration of the North American Numbering Plan (NANP).

Historically Speaking

The concept that all Americans should have access to affordable telecommunications services, commonly known as “universal service,” traces its origins to the “Communications Act of 1934.” Congress proclaimed as a matter of general policy that “all people of the United States” shall have access to a “rapid, efficient, Nation-wide communications service with adequate facilities at reasonable charges.”

Funding, however, took the form of an internal cross-subsidy imbedded in AT&T’s relative pricing structure for local and long distance services with higher long distance charges basically subsidizing lower local telephone rates, including service to low income households and high cost areas. The breakup of the Bell System in the early 1980s meant this approach was no longer sustainable. Such necessitated a new strategy in order to preserve the commitment to universal service.

That was initially accomplished through the access charge, which established that long distance carriers would compensate local exchange carriers for interconnection with their networks. With the passage of the “Telecommunications Act of 1996,” the scope of the universal service commitment was significantly expanded to include support mechanisms for rural health care providers and eligible schools and libraries, in addition to low-income households and high cost areas. Moreover, the range of companies expected to contribute to support this program was also expanded to include all telecommunications carriers and providers of telecommunications services.

This expanded legislative mandate ultimately gave rise to the establishment of the USF. The USF assumed its present form in 1999 when the FCC consolidated responsibility for overseeing the various universal service support mechanisms in the Universal Service Administrative Company (USAC), a private not-for-profit organization, which today administers the USF under the auspices of the FCC.

Currently, all telecommunications companies that provide service between states must pay a percentage – or contribution factor – of their interstate end-user revenues to the USF. Companies providing a mix of domestic and international services also must contribute to the USF. The contribution factor is adjusted quarterly, and is increased or decreased, depending on the needs of the USF.

The TRS Fund, which actually predates the USF, is an outgrowth of the “Americans With Disabilities Act of 1990,” which directed the FCC to ensure that telecommunications relay services are available to hearing-impaired and speech-impaired individuals throughout the United States. In a series of decisions in the early 1990s, the FCC identified the services that telecommunications carriers must provide to the hearing and speech impaired, adopted a shared funding mechanism to enable carriers to recover the costs of providing such services, and established the TRS Fund, which is administered by the National Exchange Carrier Association (NECA). The FCC has required all carriers providing interstate telecommunications services to contribute to the TRS Fund based on their interstate end-user telecommunications revenues, including the interstate portion of services such as satellite and international services.

Satellite Industry Applicability

Determining the extent to which satellite service providers are required to contribute to these funding mechanisms has proven to be somewhat more complicated than it might seem at first blush. In the case of the USF, the FCC has been quite emphatic in its view that the USF contribution obligation generally applies to the satellite industry, as evidenced by its unequivocal declaration in a 1997 decision stating that “satellite providers that provide interstate telecommunications services or interstate telecommunications to others for a fee must contribute to universal service.” However, the FCC then went on to state that, in response to an issue raised by PanAmSat and some other parties, the leasing of bare transponder capacity to others did not constitute the provision of telecommunications services because it did not involve the transmission of information. Therefore, entities that simply engage in the leasing of bare transponder capacity (i.e., satellite operators) are not subject to the obligation to contribute to the USF, whereas those companies that are involved in the transmission of signals to satellites (i.e., ground segment operators engaging in uplinking activities) are subject to the obligation to contribute to the USF.

In a separate decision in 2003 involving an appeal by COMSAT, this reasoning and distinction were expressly extended to the TRS Fund, as well. And while no comparable determinations have been made regarding the remaining two funding mandates (NANP and LNPA), the procedures that the FCC now has in place leave no doubt that satellite service providers would be subject to those contribution obligations as well. The practical effect of this is that the term “satellite service providers,” for purposes of these funding mandates, would appear to apply just to ground segment (uplinking) providers, and not to space segment providers.

Compliance Procedures

Companies that are subject to these funding mandates are required to file various reports with the FCC disclosing specified financial information. These filings form the basis by which each administrative body overseeing the mandates determines the amount owed in support of that mandate.

While, at one time, each of the four funding mandates had separate filing requirements in place, the FCC substantially revised and simplified the filing process in 1999, such that today all four mandates are covered by a single form, known as the Telecommunications Reporting Worksheet, FCC Form 499. There are actually two versions of this form. One, which is to be filed annually on April 1 of each year, is referred to as FCC Form 499-A. The other, which is to be filed on a quarterly basis on February 1, May 1, August 1, and November 1 of each year, is referred to as FCC Form 499-Q).

Form 499-A is a detailed report in which all revenues derived from the provision of telecommunications services must be reported. All gross revenues for all sources, including non-regulated and non-telecommunications services, must be reported from which revenues arising from interstate and international services are broken out. This report (as well the quarterly reports) is filed with the Form 499 Data Collection
Agent in Washington, D.C. They are then responsible for sharing the information with the separate administrators for all of the funding mandates. Each administrator submits an invoice as appropriate for the contribution owed. Companies, therefore, need not submit payment until they receive an invoice.

The obligation to file Form 499, with very limited exceptions, applies to any company that is an intrastate, interstate, or international provider of telecommunications in the United States. Governments, broadcasters, schools, and libraries, system integrators that derive less than five percent of their system integration revenues from the resale of telecommunications, and entities that provide services only to themselves, are exempt from this filing. Inasmuch as most companies are subject to the USF contribution obligation, they are required to file both the quarterly and annual reports. In some instances in which a company may be subject to the funding mandates other than USF but not USF itself, those companies are only required to file the annual report.

There are two instances where an entity may be exempt from the obligation to contribute to the USF: if the amount of the company’s annual contribution to the USF would be less than $10,000; and if the company does not provide any domestic U.S. services but only international services. In both cases, however, the company would still file the annual form but would be exempt from filing the quarterly forms.
There are some additional details to note with respect to a firm’s contribution obligations and they can be obtained at the World Teleport Website within the organization’s full report, which may be ordered at : http://www.worldteleport.org/storelistitem.cfm?itemnumber=10

Funding Mandates Are Forms of Expression

The funding mandates affect a significant number of U.S. satellite services providers, and particularly the teleport operator community. The obligation to contribute and, more importantly perhaps, the timely submission of the appropriate forms (both annual and quarterly when necessary) must be taken very seriously.

Moreover, these submissions require that careful attention be paid to the particulars of the forms, and appropriate professional expertise in the preparation of these forms is highly recommended. Finally, this article has been intended as a general overview of the various contribution obligations associated with the funding mandates discussed above; it is not intended as definitive legal advice as to scope or applicability of any specific filing or funding obligation. In the event of specific questions, companies are encouraged to consult with outside legal advisors.

Maury J. Mechanick has more than 20 years experience in the field of international telecommunications. His practice focuses on representing public and private sector clients in the satellite and telecommunications fields in transactional and regulatory matters in the United States and abroad.

As a senior executive with COMSAT Corporation, and later Lockheed Martin Global Telecommunications, Mr. Mechanick led U.S. efforts resulting in the privatization of the INTELSAT and Inmarsat intergovernmental satellite organizations and the creation of New Skies Satellites, NV, as an INTELSAT spin-off company. Mr. Mechanick served as the U.S. Governor to INTELSAT from 1995 to 2001 and as Chairman of the INTELSAT Board of Governors during the pivotal year leading up to that organization’s privatization. This transaction constituted one of the most complex public/private sector transformations ever undertaken, requiring the agreement of 145 governments and more than 200 telecom operators around the world. Mr. Mechanick has, most recently, served as the President and Chairman of the Society of Satellite Professionals International.

This article is excerpted, with permission, from The World Teleport Association’s Universal Service Satellite Service Companies and FCC Funding Mandates whitepaper.

Article photos courtesy of:
Boeing Satellite Systems
Andrew Corporation
Skyport Global Communications