USF Battle Heats Up at FCC, While FTC Extends "Red Flag" Rule Start Date to May

Recently I wrote in this space about the FCC’s scheduled Election Day meeting to consider a major revision to the “intercarrier compensation” scheme. That revision would dramatically rewrite the rules for telephone company interexchange “access charges,” as well as “reciprocal compensation” for the exchange of local traffic. Included in the plan to reduce access fees at both the interstate and intrastate level, the FCC plan also would make substantial revisions in the way that small and rural ILECs receive payments from the Universal Service Fund to make up for lost access revenue. While that intercarrier compensation effort continues to move forward, changing the way in which USF funds are distributed, the FCC now also seems poised for a November 4 overhaul of the universal service collection mechanism. Interest in this proposal extends far beyond telecom carriers.

FCC Chairman Martin has long favored a “numbers based” universal service assessment approach to replace the existing reliance on a percentage of retail, end user, interstate and international telecommunications revenue. A few weeks ago it seemed as though such a plan might be on the agenda on November 4 along with the intercarrier compensation reform item. However, some difficult issues arose when considering ways in which to apply a numbers based system to larger scale business services that do not make much use of numbers.

In order to be ready in time for the Nov. 4 meeting (since it is generally expected that not much significant will be done by any federal agency between Nov. 4 and Jan. 21), a move was made to sidestep the tough issues by adopting a hybrid approach to USF. Under this plan, residential users would be transitioned to a numbers based system and business users would remain under the current system, or one very much like it. This plan seems to have evoked a rare, unanimous reaction in the telecom industry – nobody likes it.

Apparently hoping to head off such a hybrid plan, AT&T and Verizon jointly filed a letter with the FCC on October 20 proposing a method to apply a numbers based plan to all customers, residential and business alike. This plan would have the following elements. First, all telephone numbers would be assessed $0.85 per month; this would cover residential, business and wireless customers identically. Second, each business customer would also pay $5.00 per month for each “connection” operating at speeds up to 64 kbps, and $35 per month for each “connection” operating at speeds higher than 64 kbps. As is currently the case, all such charges would be assessed on the carriers but permissively passed through to their customers.

The AT&T/Verizon plan has generated opposition of its own. On October 22, CompTel, the competitive carrier trade association, wrote the FCC asking the agency to reject the new AT&T/Verizon proposal. CompTel argues that the plan is neither equitable nor non-discriminatory in its effect, and thus is in violation of the Telecom Act. To illustrate its position, CompTel states that a small business telecom user paying $155 per month for a DS1 today would pay $17.67 (11.4%) in USF fees under the current system. Under the AT&T/Verizon plan, this customer would pay $35 for its connection fee even before paying for the number assessment and the newly increased Subscriber Line Charges. Thus, this small business user’s USF fees would more than double. Similarly, a small business user subscribing to a 1.5 Mbps SDSL line at $69.95 per month today would pay $7.97 in USF fees; under the AT&T/Verizon plan, this customer would pay $35, almost quadruple the current amount.

Based on these and other examples, CompTel argues that the AT&T/Verizon plan is not consistent with the Telecom Act’s requirements and should be rejected. It contends that increasing charges to small businesses, especially of this magnitude, is ill timed in light of the difficult economic conditions now being experienced. Given the short time between now and Nov. 4, CompTel advocates abandoning reform of the universal service contribution scheme at this time. Rather than adopting a final Order on Nov. 4, CompTel suggests a Further Notice of Proposed Rulemaking to elicit public comment on the AT&T/Verizon plan and any others that may be proposed.

FTC Extends “Red Flag” Rule Implementation

In June this column discussed the new FTC “Red Flag” rules which require businesses to guard against identity theft. The rules apply to “covered accounts,” which are essentially any service sold by means of a post-paid or credit-card-on-file account. Any business using such accounts must comply with the FTC regulations. Those regs mandate creation of a system of “red flags” to identify when identity theft might be occurring, implementation of a plan to monitor for those red flags, and a plan for action if any of the red flags are triggered. These company plans were required to be in place by Nov. 1 and must be approved by the Board of Directors.

The FTC has now revised this Nov. 1 deadline and moved it back six months to May 1, 2009. This action was taken after the FTC discovered that there is widespread confusion and uncertainty about what accounts or companies are covered by the regulations. By then, the FTC expects to have conducted additional “education and outreach” to inform businesses about the rules. IP

Danny E. Adams currently serves as managing partner of Kelley Drye & Warren’s Tysons Corner office and is a member of the firm’s Executive Committee. He is a member of the bar in Virginia, District of Columbia and Arizona. He can be reached at DAdams@kelleydrye.com.