Court Rules VoIP Providers Must Pay USF Fees

Vonage appeal of 2006 FCC decision rejected by federal appeals court.

By Roy Mark | Posted Jun 1, 2007
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Internet telephone companies like Vonage must contribute to the Universal Service Fund (USF), a federal appeals court ruled Friday afternoon. If VoIP providers follow the lead of local, long-distance and wireless services that already pay into the USF, the costs will be passed on to consumers.

The decision is limited to VoIP providers that interconnect with the public switched telephone network (PSTN). The USF subsidizes phone service in under-served and rural areas. Through the E-rate fund, the USF also subsidizes Internet connections in schools and libraries.

After the Federal Communications Commission (FCC) ruled last year VoIP providers were obligated to pay USF fees, Vonage challenged the decision. The Holmdel, N.J.-based company claimed the FCC exceeded its authority in the ruling, in addition to overestimating how much VoIP providers should pay.

"We conclude that the commission has statutory authority to require VoIP providers to make USF contributions," the U.S. Court of Appeals for the District of Columbia wrote in its opinion.

As for the amount VoIP providers must pay, Vonage challenged the formula used by the FCC. Traditional telephone companies pay 11.7 percent of their long distance revenue into the fund. But since Internet calls can't be broken into local and long distance categories, the FCC set a "safe harbor" estimate of 64.9 percent for VoIP providers.

The FCC analogized the VoIP safe harbor with wireless companies, which pay 37.1 percent of their long distance revenues into the USF.

"Because VoIP's functionality and customer profile differ from those of other technologies, reasoning by analogy in this way invites some inevitable imprecision," the court ruled. "We agree with Vonage that this difference in capabilities renders the VoIP/wireline toll service analogy imperfect. Perfection, however, is not what the law requires."

Brooke Schulz, senior vice president for corporate communications at Vonage, insisted in a statement that Vonage supports expanding USF contributions to VoIP carriers. "Our case simply challenged the funding methodology, not the underlying concept of USF," Schulz said.

Last year, Medley Global Advisors estimated the FCC decision would add approximately $1.30 a month to each VoIP subscriber's bill.

"I am pleased that the court has affirmed the commission's action, which ensures that USF contribution obligations are administered in a competitively and technologically neutral manner on all phone providers, including interconnected Voice over Internet Protocol (VoIP) providers," FCC Chairman Kevin Martin said in a statement.

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