To All Telecommunications and Marketing Clients -

On March 1, 2010, Level 3 Communications, LLC and several of its affiliates (collectively "Level 3") filed an application for review of a Wireline Competition Bureau ("Bureau") order, in which the Bureau upheld a decision of the Universal Service Administrative Company ("USAC") to assess late fees, interest, and penalties on Level 3 due to a dispute over the filing of Level 3's revised 2008 FCC Forms 499-A.  On March 11, 2010, the Federal Communications Commission ("FCC" or "Commission") issued a public notice seeking comments on Level 3's application for review. 

In April of 2008, Level 3 timely submitted its 2008 Form 499-A.  Thereafter, Level 3 discovered errors in its original submission and filed a revised 2008 Form 499-A that significantly reduced its Universal Service Fund ("USF") contribution liability.  USAC issued invoices to Level 3 in 2008 which reflected USF fees calculated according to Level 3's original 2008 Form 499-A.  Instead of strictly complying with USAC's "pay and dispute" policy, which requires USF contributors to timely remit all invoiced USF fees before seeking recovery for any disputed amount, Level 3 remitted reduced USF payments based upon its revised calculations. 

Although USAC ultimately issued credits based upon its annual true-up of Level 3's revenues, it nonetheless assessed interest and penalties for the company's failure to pay the full amount originally invoiced.  USAC relied upon its pay and dispute policy to justify its assessment of interest fees and penalties, because Level 3 failed to submit full payments for the invoices it received.  Level 3 requested review of USAC's decision to issue invoices based upon Level 3's original 2008 Form 499-A and USAC's refusal to consider the company's revisions on an expedited basis and waiver of the penalties and interest assessed by USAC.  On January 29, 2010, the Bureau issued an order denying Level 3's request.

In its application for review of the Bureau's Order, Level 3 argues, among other things, that the FCC should reverse the Order because it violates the Communications Act, FCC rules, and the Administrative Procedure Act ("APA").  Level 3 maintains that the Bureau's Order applies USAC's pay and dispute policy as if it were a formal Commission rule even though the Commission has never adopted the policy, let alone codified it in a rule.  Notably, any substantive rule adopted by a federal agency must comply with the APA.  The APA requires that the agencies follow prescribed procedures, including publishing notice of a proposed rule and providing time for interested parties to submit comments before a final rule is adopted and enforced.  A federal agency may only "establish binding policy through rulemaking procedures by which it promulgates substantive rules, or through adjudications which constitute binding precedents." 

In addition, Level 3 asserts that USAC lacks authority to adopt such policies.  The FCC's rules provide that USAC "may not make policy, interpret unclear provisions of the statute or rules, or interpret the intent of Congress."  Therefore, Level 3 argues, since USAC is forbidden from making policy, its pay and dispute requirements violate the Communications Act and FCC rules.  

Lastly, Level 3 notes that the Commission's rules provide that a debt is not considered delinquent "if the applicant has timely filed a challenge through an administrative appeal or contested judicial proceeding to the existence or amount of the non-tax delinquent debt owed the Commission."  Thus, according to Level 3, the Commission's rules exempt carriers from penalties while an appeal is pending.  In fact, refusal to impose interest penalties while an appeal is pending is a common policy that is followed by many other government agencies.  Furthermore, while some government agencies pay interest that has accrued on overpayments to the affected regulated entity, USAC does not pay interest on amounts refunded to carriers that have made overpayments.  Level 3 argues that because the Commission has not subjected USAC's pay and dispute policy to a formal notice and public comment rulemaking proceeding, the Commission has not had the opportunity to consider and evaluate the inequity of USAC's policy and whether it is consistent with the practice of most other federal agencies. 

Client Advisory

As Level 3's situation demonstrates, carriers waiting for USAC to issue a refund or the Bureau to act on an appeal face a very unreasonable choice, either (1) pay billed contributions that are inequitably higher than the amount due under Commission rules; or (2) incur significant interest and penalties.  This policy inflicts harm on carriers that over-report revenue, because, as even USAC admits, refunds can take up to 18 months.  As Level 3 noted, this issue has been raised in multiple appeals of USAC decisions and at least one application for review of a Bureau decision, but has not yet been addressed by the Commission. 

Clients who are concerned with the potential inequities involved with USAC's current pay and dispute policy should monitor these proceedings (WC Docket No. 06-122) as they unfold.  Comments are due by April 12, 2010, and reply comments are due on April 26, 2010.  Interested clients are encouraged to file comments in the aforementioned docket or to contact the firm to discuss.  Clients seeking additional information or guidance should contact Michael Donahue at mpd@commlawgroup.com or 703-714-1319.