MPLS hits the universal service big time

Do you pay a universal service surcharge when you buy a carrier data service? The history of whether you do or not has been as strange as it gets. And it's about to take another turn.

The bottom line right now is that MPLS services are coming fully under the surcharge regime as a result of a key FCC move. That's going to raise costs for many users, but it also provides a new opportunity for users to really understand surcharges and how to plan for them.

To grasp enterprise data services' relationship to the universal service issue, and what's going on now with MPLS, it's best to keep two things in mind. The first is that big changes in what users pay seem to come when generational changes in technology become mainstream in the marketplace, not when the technology itself changes.

The governing rule has always been that provision of an interstate "telecommunications" or "basic" service is one on which carriers must pay into the universal service fund, and the provision of an "enhanced" or "information" service is one on which they don't. So, is MPLS a basic or enhanced service? Years ago, the same question was asked about frame relay. Somehow -- magically -- frame relay was considered an enhanced service until the mid to late 1990s, when it was ruled a basic service.

Did frame relay itself change? No. What changed is that frame relay became heavily used. Not to include it under universal service would have significantly lowered the amount of funds available for the various purposes of the universal service subsidy. So, after about 1997, frame relay became a basic service on which users could expect to pay an extra 10% or so.

That's what's happening to MPLS now. A recent FCC release instructs carriers to include their MPLS revenues in the 2008 USF filing they must make on April 1. It wasn't clear before whether they had to include MPLS, and most didn't. Owing more as a result, carriers are going to want to recover the money from their customers.

And that brings me to the second thing to remember. Despite the millions, or tens of millions, of dollars that your enterprise may have paid out in USF surcharges over the years, the surcharge has never been federally mandated on you, as a business user. The government doesn't make you liable for AT&T or Verizon's quarterly USF expense, no matter how much the carriers lead you to think that's the case. But you have to pay it if your contract with the carrier or its Service Guide states that you pay the fee.

But does it really have to be that way? Here's where things get a little interesting. Before the FCC's latest move, carriers had been taking different approaches to including some form of USF charge on their MPLS invoices. Those carriers that had already imposed a USF pass-through for MPLS had not necessarily applied it to all of their MPLS services. For example, some imposed it on access charges but not port charges.

And the truth is, there have sometimes been "seams" into which customers have been able to place themselves in order to pay less in USF charges on data services. Right before MPLS became popular, many of the nation's big companies were buying not pure frame relay, but a service called FRASI -- Frame to ATM Service Interworking. AT&T in particular tended not to charge a USF pass-through on FRASI customers, more or less officially reasoning that since one end of each connection was ATM -- which, unlike frame relay, was never ruled a "basic service" -- it would not impose the charge. But the larger reason was that AT&T wanted to win big frame/ATM deals vs. rivals by charging less money, and that was a good thing.

So surcharges can ultimately be a deal question. If you're not in the process of doing a deal, and you are an MPLS customer, the (harsh) reality is that your costs are probably going up soon, because your carrier will be paying more and will want to get it back from you. If you are doing a competitive deal, there is now a greater premium than ever on getting hard answers in your RFP as to what surcharges each bidder passes along on what services and why -- not least because the USF surcharge itself is also going up to 11.3% of applicable revenues on April 1.

We've reached the same critical-mass "break point" on MPLS now that we reached on frame relay in the late 1990s -- when the government feels a previously uncertain service must be counted in the carrier revenues to keep their universal service cash flow going. And while that means that customer costs in general will be up as well, for you specifically as a seeker of competitive offers, that also means that surcharges -- just like other rate elements such as access, ports, and class-of-service packages -- need to be compared straight up in new bids.