Industry Insights

Local Service Rate Floor, ARCs & SLCs

May 2017
Author:  Jamie Becker

Jamie Becker

Senior Managing Consultant

Consulting

1120 S. 101st Street, Suite 410
Omaha, NE 68124-1088

Omaha
402.392.1040

Local Service Rate Floor

The Federal Communications Commission (FCC) released the tentative agenda for the May 18, 2017, Open Meeting. The tentative agenda includes a Notice of Proposed Rulemaking (NPRM) and order that would freeze the local service rate floor at the current $18 level. The NPRM proposes to eliminate the local service rate floor rule altogether.

Unfortunately, this action places Legacy rate-of-return (ROR) companies in a difficult position. In many states, customers must be notified 30 days prior to any rate increases. The upcoming local service rate floor increase to $20 is effective June 1, 2017. To avoid Universal Service Fund (USF) reductions, Legacy ROR companies in states with a 30-day notice requirement needed to have sent the notice by May 1, 2017. In some states, local service rate increase notifications already have been sent or local service rate increases already have been made.

Model adopting companies aren’t required to raise rates to the local service rate floor or face dollar-for-dollar reductions in USF; however, many Model adopting companies appear to be electing to raise local service rates to keep rates consistent with the local service rate floor. Model adopting companies have the option of waiting until after the Open Meeting to decide whether to increase local rates.

Access Recovery Charge Rates

There has been a good deal of confusion around Access Recovery Charge (ARC) rates. The National Exchange Carrier Association (NECA) has clarified some of its positions on the ARC rate.

NECA will calculate the residential and single-line business ARC rates for the tariff filing effective July 1, 2017, based on the January 1, 2017, local service rates of companies. Using the January 1, 2017, rates rather than the June 1, 2017, rates may push a company’s total local service charges above the $30 local service rate floor temporarily until July 1, 2018, when the ARC rate is recalculated based on January 1, 2018, local service rates. NECA has discussed this issue with the FCC, and it indicated this is an effect some companies may face.

Some Legacy ROR and Model adopting companies are considering raising local service rates above the $20 local service rate floor on or before January 1, 2018, to reduce or eliminate the residential ARC rate. Due to the same timing issues discussed above, the ARC wouldn’t be reduced or eliminated from NECA’s tariff until the July 1, 2018, effective tariff filing. After July 1, 2018, companies would no longer report the imputed residential ARC revenues to NECA and USAC and would accordingly see an increase in Connect America Fund Intercarrier Compensation Recovery (CAF ICC) support.

Unfortunately, the USF fund relies on the Federal Universal Service Charge (FUSC) to help fund the payments Legacy ROR and Model adopting companies receive. If a significant number of companies pursue residential rate increases to eliminate the ARC, the contribution factor on the remaining rates and charges subject to FUSC will increase. This could result in unintended consequences from the FCC, such as lowering USF available to Legacy ROR and/or Model adopting companies.

Tariffed ARC charges aren’t required to be billed to end-user customers. NECA has issued the following guidance for companies electing not to bill the ARC to end-user customers:

  • If a company elects not to bill a tariffed ARC rate, it must still impute the ARC revenues and report them for settlement and/or CAF ICC support purposes.
  • A company should not assess the FUSC to an end-user customer if the ARC isn’t billed, nor should a company impute FUSC related to the ARC.
    • NECA does caution that USAC retains authority over whether the FUSC on an unbilled ARC should be imputed and is unsure how USAC would treat FUSC on a tariffed ARC rate that wasn’t billed to an end-user customer.
  • NECA will allow companies whose total residential local rates exceed the local service rate floor to tariff a rate less than the calculated rate to bring the total local service rates down to local service rate floor.
    • ARC revenues would still need to be imputed for CAF ICC and settlement reporting purposes.

Subscriber Line Charges

Subscriber line charges (SLC) also aren’t required to be passed on to end-user customers. SLCs for Model adopting companies have moved from common line revenues to bill and keep revenues. Model adopting companies also may elect to roll the SLC rates into local rates. This approach eliminates the FUSC assessed and paid by end-user customers on the SLC rates; however, in most states, local service rates are subject to state sales taxes, local sales taxes and the federal excise tax.

End-user customers in most states would see a modest reduction in the surcharges and/or taxes if SLCs were rolled up into local rates.

Unfortunately, the USF relies on the FUSCs to help fund the payments Legacy ROR and Model adopting companies receive. If a significant number of Model adopting companies pursue rolling the SLC into the local service rates, it’s likely the contribution factor on the remaining rates and charges subject to FUSC will increase. This could result in unintended consequences from the FCC, such as lowering USF available to Legacy ROR and/or Model adopting companies.

If you have any questions about local service rates, ARC rates or SLC rates or need assistance determining what rates to charge, contact your BKD advisor.

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