The word is out, and if you're hearing it here for the first time, I apologize: The federal universal service surcharge for the first quarter of 2010 will be 14.1% of applicable interstate (including access) and international charges. Man oh man!

And I've noticed an interesting phenomenon. The FCC announced the new percentage rate in this announcement last Friday, but as of today, this announcement appears nowhere on the list of FCC "Headlines" on the FCC's home page. Yet somehow, FCC announcements from the same day about panelists for "a workshop on Speech, Democracy and the Open Internet" and a speech by one of the FCC commissioners about Guglielmo Marconi (you know, the guy who won a Nobel Prize 100 years ago for basically inventing the radio) are right there on the home page! And it took until today for the FCC to add the announcement to its required spot at its special URL for contribution factor notices.

Maybe the whole thing is too embarrassing? A levy of 5% feels like a tax. Something running 10% is the kind of surcharge we in telecom are used to. But edging toward 15%? Deep down, all parties know this is out of whack.

I encourage anyone looking for a constructive deep dive and how to provide input on the what-to-do from a public policy standpoint to check out LB3's regulatory advice and advocacy practice. They've been flagging this issue forever. In the meantime, be aware that this breaking point is being reached by an all-too-foreseeable crossing of lines between mild but steady declines in the carrier-reported revenues for basic telecommunications services and marked increases in carrier demands for the universal service funds.

In particular, the wireless carriers (who are no slouches when it comes to taxes and fees) have really ramped up their demands on the "High-Cost" program -- you know, the part of universal service that's mostly thought of as helping independent telcos to reach far-flung subscribers in less densely populated areas of the country.

It's not like the FCC hasn't been doing anything about this. They've now capped how much the wireless carriers can get, in a decision recently upheld by the federal appeals court in Washington, D.C. But these stopgap measures only illustrate how much fundamental USF reform is needed, something the FCC and all parties to the regulatory world have to know.

With every surcharge shock, we at TC2 redouble our reminder that the higher these fees and passalongs go, the more impact you get by gauging them them in a competitive framework. Part of what we know is going on is that the large U.S. carriers, few though they may be, at any given moment do feel some reluctance to actually levy the passalong on freshly won major data networking business. That's particularly true now with MPLS ports and CoS packages, even if the FCC has gotten hip to MPLS's revenue impact on the carriers.

So any time you have either:

-- a service for which the carrier won't assess USF vs. a service for which it will, or

-- the same service competitively bid to multiple carriers who make different commitments to passing along or not passing along the surcharge (provided you've specifically asked)

then you have a dollar difference that's every bit as significant as the rate element pricing itself. And the higher the USF (or other) surcharge on the carriers' revenue goes, the bigger the impact of this passalong vs. no-passalong commitment on you.

There's more to come, including what may be more impetus for universal service reform as the surcharge factor looks more and more ridiculous. The FCC may not make it easy to find about this on their online front door, but we're happy to shout about this issue in all its ramifications for as long as it takes.

The issue of universal service surcharges on MPLS services seems to be in a holding mode. The major carriers don't appear to have made the decision to generally pass along to customers the current 12.3% contribution factor (for the fourth quarter of 2009) on their interstate MPLS revenues.

That's despite a somewhat more explicit signal from the Federal Communications Commission earlier this year on the USF's applicability to MPLS as a basic telecommunications service, in the form of an instruction that added MPLS as an example of a reportable service on a key form submitted by the carriers to the FCC.

But that doesn't mean that you shouldn't be taking any action about it. For starters, remember the basic contracting principle that if you want to control your destiny on an unsettled issue, you have to address it explicitly in your contract.

That's because interstate telecommunications, while not tariffed, is still under a "Service Guide" regime under which carriers post language about all kinds of issues on their websites. As a result, if you say nothing in your contract about something that becomes relevant halfway through your term, the carriers have the right to default to their Service Guide language and apply it directly to you.

So seeking an explicit waiver of USF passthroughs on the specific MPLS service you buy (such as AT&T's AVPN or Verizon's Private IP) for the period of your contract is the only way to make sure you won't be slapped with the surcharge either now or sometime during your term. And now, as it happens, a recent move by Sprint has upped the ante on this issue.

Along with the other carriers, Sprint does not yet appear to be passing along the USF contribution factor generally to its MPLS customers. But, in Sprint's standard contract form, they've slipped in a key statement discovered by LB3's regulatory attorneys. The statement reads as follows (with emphasis in italics added):

"If the Federal Communications Commission requires Sprint to contribute to the Universal Service Fund based on interstate revenues derived from services that Sprint in good faith has treated as exempt, including but not limited to, information services, Sprint will invoice Customer the CUSC for such Services beginning on the date established by the FCC as the date such Services became subject to USF contributions."

The service in question here -- the one that Sprint "in good faith" treated as exempt from USF consideration -- is clearly MPLS. And this statement apparently allows Sprint not only to start charging USF on MPLS when it determines it can get away with it competitively, but to back-charge customers based on when it considers the FCC to have (basically) mandated it. Clearly that could be the period of time when the FCC began noting MPLS as an example of a basic telecommunications service, and thus could include all of this year.

So even if you can't get a contractual promise never to charge USF on MPLS in the future, it looks like it's important to get agreement that the carrier will not apply it retroactively. The issue is not going to remain in this holding mode forever. It's an item that should remain near the top of your list for discussion.

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.

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.