USF on MPLS: Don't let the carriers jump the gun on you

In case you haven't noticed, the federal universal service surcharge is now 12.9%. Think about that. Any interstate rate element that gets hit with the surcharge costs almost 13% more than it would otherwise. Conversely, any interstate rate element that doesn't get the surcharge costs correspondingly less. It's a big deal, and it's gotten bigger over time.

This being so, the prospect that carriers will begin charging USF on MPLS rate elements where they never have before is a major financial issue for business users. While always latent, this threat became much more tangible earlier this year when the FCC named MPLS as an example of a service whose revenues must be included in carrier reports on revenues directly subject to the surcharge.

I say "directly" for a reason. The carriers owe 12.9% of their reported interstate telecommunications revenue to universal service, period. Technically the number is a "contribution factor" that's established once a quarter and that's applied to the carrier's applicable revenues. But the USF surcharge that you pay is a pass-along from the carriers to you that nobody in the government actually mandates.

Often this is a distinction without any practical difference. At one extreme, interstate toll voice revenues on POTS lines invariably get the pass-along, as do (often counterintuitively to people new to the industry) dedicated access lines that sit within one state but are used principally to provide access to interstate services. At the other extreme, if a carrier provides you web hosting services, the value of the service never gets reported to the FCC by the carrier, because it's nothing like the kind of straight "telecommunications" (i.e., transport) service that USF applies to, so there's no extra cost for the carrier to pass along.

But sometimes there's a service where the distinction matters, and that's where we sit with MPLS. No carrier has to pass along a USF surcharge on MPLS ports and Class of Service rate elements. And the U.S. carriers, particularly AT&T and Verizon, are still battling for new business among new MPLS accounts (or defending their incumbent positions as customers leave legacy data services for MPLS). If either bids on an MPLS network with USF charged on ports and CoS packages, it runs the risk that its competitor won't do likewise, creating a material gap in the bids right off the bat.

And that, in fact, is our experience so far. Based on a number of proposals we've seen since the FCC flagged MPLS in its reporting instructions, it's clear that neither AT&T nor Verizon has made the decision to go ahead and actually charge USF on MPLS ports and CoS, although the associated interstate access lines used to reach the carriers' POPs do include the charge.

That's the good news, but things can get interesting once you get down to specific cases. Experienced telecom managers know that account teams have minds of their own, and sometimes they actually don't understand some of the more vexing issues in the industry.

So we've seen initial drafts of proposals that do include the surcharge on ports and CoS, only to have account managers come back and say they've made a mistake and resubmit them without the surcharge. Of course, they've only done so after we or our clients have said back to them, in effect, "Really?" It's not hard to imagine that some account managers think they read or heard that USF is now mandated on MPLS and acted accordingly, without realizing the adverse competitive implications of what they were doing.

So your task as an end-user on this issue is basically to be diligent. If, as a matter of policy, carriers are holding back on imposing USF on MPLS-specific elements, you don't want to be the chump who winds up paying it first.

Active communication and comprehension is key here, too. The regulatory attorneys at LB3 remind us that these types of issues tend to operate along a continuum rather than in black and white. Even before this year's FCC reporting change that explicitly mentioned MPLS revenues, nobody was stopping the carriers from determining that MPLS was the type of transport service that fits into the USF scheme, much as frame relay was determined to be in the late 1990s after a period of exclusion. Conversely, carriers sometimes made the competitive choice not to charge USF on those very frame relay ports and PVCs if they were linked to an ATM port on the other end via frame-to-ATM interworking.

Moreover, there there is an open proceeding at the FCC to further address the MPLS USF issue, which may change the status quo in the future, so end users should keep an eye on it. Verizon, in particular, has been issuing a standard statement in its bid responses saying that the whole matter is "under review by Verizon Business and other service providers" and that it will "notify customers" if it believes the charge needs to be imposed.

Don't get me wrong: The FCC's specific listing of MPLS as a surcharge-eligible service for the carriers' USF contributions already makes it more likely that USF pass-alongs on MPLS are coming. But there's no reason to let your carrier jump the gun on instituting this surcharge on you, especially in competitive bids, just because it's a complex issue and account teams may not know how to handle it. This is one case where staying on your toes and helping your carriers understand something about their own industry is very much to your advantage.