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New Universal Mandate

Washington— Cable operators that provide voice-over-Internet Protocol phone service will be required for the first time to pay into the federal program that helps maintain affordable phone service in rural America, called the Universal Service Fund, the Federal Communications Commission decided last Wednesday.

Many cable companies with VoIP service have been voluntarily paying into the $6.5 billion fund, which also finances Internet connections to schools and libraries. But as a result of the FCC ruling, cable contributions will be mandatory and the amount owed could be higher than current levels.

HARD ASSUMPTIONS

The FCC ruled that cable VoIP providers are to assume that 64.9% of their revenue is subject to USF assessment, which is based on interstate and international calling revenue. The amount owed to the fund is to equal 10.5% of eligible revenue, and may be passed on to subscribers.

Generally, cable VoIP providers, such as Time Warner Cable, contribute to the fund the same way as wireless-phone carriers by assuming that interstate revenue is 28.5% of total VoIP revenue.

Under the FCC’s ruling, cable operators could end up paying about 6.8% of total VoIP revenue into the USF, according to Jessica Zufolo, an analyst with Medley Global Advisors.

Cable-modem revenue is exempt from the fund.

Cable operators may pay less than 6.8% if calculations of their actual interstate and international revenue or traffic studies yield lower results than reliance on the agency’s percentage proxies. Traffic studies may rely on data sampling.

“We appreciate the flexibility the [FCC] has provided for companies to conduct traffic studies to determine the amount of their revenues subject to USF assessment,” Dan Brenner, senior vice president of law and regulatory policy at the National Cable & Telecommunications Association, said in a prepared statement.

Relying on the 64.9% “safe harbor” rule, as the FCC calls it, Time Warner Cable would need to collect about $2.72 per month for the USF on a $40 bill, compared to about $1.20 under the system the company had been using voluntarily.

Thomas Navin, chief of the FCC Wireline Competition Bureau, declined to estimate the impact of the new USF rules on monthly VoIP bills.

VoIP providers need to supply the FCC with revenue estimates in August and will receive USF bills later in the year, Navin said.

A cable company that offered video, Internet access and VoIP in a flat-fee bundle can’t escape USF payments by declaring that the VoIP portion of the bundle was effectively given away and wasn’t a source of revenue, Navin said.

Skype Ltd.’s computer-to-computer VoIP service is exempt from USF, as is the company’s new service that allows consumers to make free calls from a computer to any wireless or landline phone in North America until the end of the year, Navin said.

The FCC opted to extend USF mandates to interconnected VoIP providers and to raise wireless-carrier contribution levels to shore up funding for the program.

In August, digital subscriber line providers no longer need to make USF payments, costing the USF an estimated $500 million in 2007 alone, Zufolo said.

FCC chairman Kevin Martin called the FCC’s latest USF moves an interim step.

Martin supports moving from a revenue-based model to one in which money is collected based on working telephone numbers — a controversial proposal with low-volume phone customers. The NCTA supports a numbers-based collection system.

'TECH-NEUTRAL’ ALTERNATIVE

“I think [the numbers-based system] is one that I’ve advocated publicly for quite some time as being one that I think would be a more stable means of collecting universal service and would be one that would be technology-neutral,” Martin told reporters after the vote at FCC headquarters.

FCC Commissioner Robert McDowell joined the agency June 1, giving Martin a 3-2 GOP majority for the first time since taking command in March 2005. Martin would not predict when he would implement the numbers-based USF plan.

“I don’t know the exact time frame for it. But I think what we did today was an important interim step to continue to stabilize the fund and give us an opportunity to continue to debate until there is a majority ready to move forward,” he added.

In a client note, Stifel Nicolas analysts Blair Levin, David Kaut, and Rebecca Arbogast warned that the FCC might not adopt a new USF collection system anytime soon.

“We note that the last 'interim’ rules were adopted in 2002 and are now three-and-a-half years old,” the analysts said.