We are now entering the August doldrums, a time when both the FCC and Congress take their annual vacations and we are blessedly free of the almost constant political bickering that has come to dominate this industry.  With no significant orders expected this month on important ongoing issues such as net neutrality, special access or the transition to an Internet Protocol (IP) network, the Commission has time to reflect on its next actions and it gives us time to discuss some less visible issues that do not get the attention they deserve.

One of those issues continues to be the controversial area of carrier universal service contributions.  Almost every day, the Commission releases an order fining one or more companies for failing to contribute their fair share to the fund. There especially continues to be confusion regarding the universal service obligations of wholesale carriers for the services they resell.  This week, the Commission issued an Order significantly altering the evidentiary requirements wholesale carriers must meet to demonstrate that they are meeting their obligations. First some background:        

On November 5, 2012, the FCC issued an Order in Docket 06-122 that was designed to clarify how the universal service rules apply to wholesale providers and their customers.   Wholesale carriers generally do not contribute to the universal service fund for the services that include the wholesale service (typically called carrier’s carrier revenues), but may be required to contribute on revenues earned from sales to customers that do not contribute to the Fund (end user revenues).  The Order was issued at the request of the Universal Service Administrative Company (USAC) which had been dealing with constant disputes regarding which company, the wholesaler or its customer, must contribute to the fund.  In response, the Order stated:

•  The Commission affirms that a “reseller” is an entity that (1) incorporates purchased telecommunications services into its own service offerings; and (2) can reasonably be expected to contribute to the Fund based on revenues from those offerings.  In order to classify revenues from wholesale as being a carrier’s carrier revenues (and thus exempt from contributions), the wholesale provider must either have “affirmative knowledge “ or a “reasonable expectation” that the customer is itself  contributing to the Fund on revenues derived from those purchased wholesale services.

•  The Commission clarifies that a wholesale provider may demonstrate a “reasonable expectation” by complying with the guidance provided in the FCC Form 499-A instructions or demonstrating that it has other reliable proof.  Specifically, if a carrier complies with all instructions in Form 499-A, it will have a “safe harbor” and will be deemed to have satisfied the reasonable expectation requirement.  If a carrier chooses not to take advantage of the safe harbor, USAC should consider all evidence the carriers submits as potential reliable proof.  While this evidence should be considered, it is not dispositive. The final decision is made by USAC.

•  The Commission clarifies that the standard of evidence for establishing a “reasonable expectation” based on “other reliable proof”, and in establishing proof of actual payment, is the “clear and convincing evidence” standard.

The Order was challenged in a Petition for Clarification or Partial Reconsideration filed by XO on December 5, 2012. In its Petition, XO sought reconsideration of the Wholesaler-Reseller Clarification Order’s use of the clear and convincing evidence standard to: (1) evaluate whether “other reliable proof” establishes that a wholesaler had a reasonable expectation; and (2) establish that the customer actually contributed.  XO argued that the proper standard of evidence in administrative proceedings is the “preponderance of the evidence” standard, not the clear and convincing evidence standard.

In an Order on Reconsideration released on July 25, 2014, the Commission granted XO’s request:

•  After further examination, we reconsider the appropriate standard of evidence required in the circumstances articulated in the Wholesaler-Reseller Clarification Order.  Absent statutory requirements to the contrary or factors warranting a heightened standard, the Commission generally applies the “preponderance of the evidence” standard in informal agency adjudications…Thus, for a wholesaler to demonstrate via “other reliable proof” that it had a reasonable expectation that its customers would contribute on the revenues associated with the services at issue, it must meet the preponderance of the evidence standard.

Now you may be asking yourself why the change in the required evidentiary standard is important. The answer is simple. The Commission has now made it much easier for wholesale providers who did not contribute to the fund and are challenged by USAC to demonstrate that they had a reasonable expectation that their wholesale customers were contributing and thus, they should not be penalized. That is because the “preponderance of evidence” standard is much easier to meet than the “clear and convincing” evidence standard.

The preponderance of the evidence is the standard required in most civil cases. The standard is met if the proposition is more likely to be true than not true. Effectively, the standard is satisfied if there is greater than 50 percent chance that the proposition is true. 

The clear and convincing evidence standard, however, demands a higher level of burden of persuasion than the preponderance of the evidence. Clear and convincing proof means that the evidence presented by a party during the trial must be highly and substantially more probable to be true than not and the judge of fact (USAC) must have a firm belief or conviction in its factuality

With this new standard, hopefully there will be fewer industry USF contribution disputes for USAC to confront and the Commission will have more of its time freed up to deal with the global telecom issues all of us will be facing this fall. 

By Andrew Regitsky, President, Regitsky & Associates