USF Safe Harbor Rate is Costing Carriers Money

Posted by John Sarkis on Aug 10, 2021 11:19:32 AM
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It's no question that the Universal Service Fund (USF) has proven it's value in creating an all-inclusive broadband network. However, the rising costs of USF fees have caused many industry professionals to call for a change in how service providers contribute to the fund. 

In our regulatory work, we're often shocked at how many providers don’t know that there are ways to cut their overall USF contribution to be a fraction of what it is now. 

To give a brief overview of the USF, it’s split between four separate funds;

  • Low-income Lifeline fund
  • Rural Healthcare fund (RHC)
  • E-Rate: For Schools and Libraries
  • High-cost fund

The money for these funds comes from a tax placed on every communication provider’s interstate and international end-user revenues. Service providers often pass these costs on to consumers in their monthly phone bills.  At one time most of the money went toward voice services, but over the years, more and more of it has gone towards High-Cost broadband programs like the Connect America Fund and RDOF. 

This tax is based on the provider's Yearly Revenue, along with two other things;

  • Contribution Factor, a percentage that changes quarterly, and is increased or decreased depending on the needs of the Universal Service programs - and in 2021 has continued to reach new highs.
  • Percent of Interstate Usage (PIU), or the percentage of calls that originated and terminated in different states, or internationally. 

The Safe Harbor Rate

When carriers file their 499A, they have the opportunity to declare whether or not they want to calculate their actual Percent of Interstate Usage or use the FCC’s Safe Harbor rate. Safe Harbor is a standard, assumed number (64.9% for VoIP, 37.1% for Wireless) used by companies that don't have the resources or know-how to calculate their actual PIU. 

Why It Matters

Use Case 1: Wireless and VoIP

For this example, let's assume you’re a VoIP provider with a yearly revenue of $20 Million. It’s time to file your 499A, and you opt to use the safe harbor rate. Your contribution to the Universal Service Fund for the third quarter will be calculated with the following formula;

Yearly Revenue (x) PIU (x) Contribution Factor

Take a look at the following example based on realistic numbers:

Yearly Revenue $20,000,000

(Multiplied by) Percent of Interstate Usage .649 (Safe Harbor 64.9%)

(Multiplied by) Contribution Factor .318 (31.8%)

Total Contribution: $4,127,640

In our experience, most provider’s actual percent of interstate usage is nowhere near the PIU of 64.9%. If we had to estimate the average PIU we see, it would be around 35%. 

Let’s do that example again with your hypothetical actual PIU of 35%. 

Yearly Revenue $20,000,000

(Multiplied by) Percent of Interstate Usage .35 (Actual PIU 35%)

(Multiplied by) Contribution Factor .318 (31.8%)

Total Contribution: $2,226,000

Carriers that rely on the Safe Harbor face a competitive disadvantage to the extent that other carriers’ reliance on traffic studies or actual interstate revenues leads to a lower contribution percentage, meaning that those carriers pay less money into the USF and attempt to recover fewer dollars from their customers.

The increased Safe Harbor can also strain carriers’ revenues to the extent that they are unable, as a practical matter, to pass the higher contributions through to their customers.

Use Case 2: De Minimis

Some carriers fall under a certain threshold for interstate and international traffic that makes them De Minimis.  In 2020, filers that reported less than $52,318.66 of combined interstate and international revenues in their Form 499-A were considered de minimis. These filers do not have to contribute to the universal service fund. 

If these smaller providers use the safe harbor rate, there’s a much higher chance that their percent of interstate or international revenue will be over the de minimis threshold, while their actual percentage is likely much lower in reality. 

Traffic Studies are essential to these smaller providers to validate that they are de minimis.

Looking Forward

With a skyrocketing Contribution Factor and controversies around the high USF fees imposed on providers and their customers, hopefully there is some kind of USF reform on the way. Until then it’s in the service provider's best interest to investigate how much they could be saving by calculating their actual Percent of Interstate Usage, rather than use the outdated Safe Harbor rate. 

ATS’ Percent of Interstate Usage study consists of statistical analysis with a confidence level of 95% and a margin of error of no more than 1% as is required by the FCC. In the 15 years that we’ve been doing Traffic Studies, every single study we’ve done resulted in a lower PIU than the Safe Harbor rate, with 100% acceptance by the FCC. 

Topics: USF, Regulatory, Cost Savings, FCC