A coalition of undersea cable operators including Southern Cross Cable and Pipe Networks is lobbying the US Federal Communications Commission against proposals which could see an American universal service levy currently set at 15.7% of revenues applied to their cable operations.

They have warned that the levy would slash their thin operating margins or force them to pass on the costs to existing customers.

The coalition, which also includes Level 3-owned Global Crossing and French Polynesia’s OPT, says the FCC is currently seeking to reform outdated universal service rules which exempt international services, mainly to counter avoidance of the levy by American calling card providers.

But the proposed reform would capture international undersea cable operators in the FCC’s ambit, effectively leading to Australian, New Zealand and other international internet users contributing to American universal service funds. Likeliest to be hardest hit would be new cables such as the proposed Pacific Fibre link: older cables such as Southern Cross have recovered their build costs.

The coalition of cable operators has retained respected Washington DC law firm Wilshire & Grannis and its leading international telecom partner Kent Bressie to represent its views to the FCC. In comments filed with the FCC and released late last week, the firm warns that the FCC’s actions would contravene previous legal findings on the issue as well as place the United States in violation of its World Trade Organisation commitments.

“Elimination of the international-only exemption … would eliminate operating margins for international undersea cable operators, which have, at best, a limited ability to recover their costs by passing Universal Service Fund assessments through to customers, particularly for those located outside the United States. Operating margins on many routes are already razor thin, and unsuccessful recovery of USF contribution costs from even a minority of customers could turn certain international undersea cables into loss-making enterprises,” the filing warns.

“Customers outside the United States consistently object that “domestic assessments” such as regulatory fees and USF contributions cannot and should not be passed through to such customers, but instead absorbed into the operator’s administrative overhead. This is particularly true when such charges come due long after the economic basis of the long-term capacity purchase is negotiated. Attempts to pass through such charges create tensions in the operator-customer relationship, and operators must expend significant personnel resources to persuade customers to accept and pay such charges, typically with little success,” the filing continues.

Wilshire & Grannis says that most IRUs and other bandwidth lease agreements do not provide the ability for operators to automatically pass on government-imposed fees, particularly given that over the past 15 years it has been repeatedly affirmed by the FCC and the Supreme Court that international-only provider are exempt from such levies. “Renegotiation of these agreements would be a major undertaking, as the operator would be seeking to alter fundamentally the economic terms of long-term arrangements that were intended to secure the supply of capacity at a known price,” the filing says, contrasting this with the intended target of the reform—calling card companies—who can simply raise their retail charges to absorb the cost.

The firm also warns that other countries may react with reciprocal actions. “If other countries were to make similar assessments on the same revenue streams for international services, such assessments could quickly equal the total revenues for an undersea cable system. For example, Level 3’s South American Crossing system lands in five countries (Brazil, Argentina, Chile, Panama, and Peru) in addition to the United States. Southern Cross lands in three countries (Australia, Fiji, and New Zealand) in addition to the United States. As capacity is often sold on an end-to-end or ring-configuration basis, such services would arguably fall within the regulatory jurisdictions of each of these countries. There is simply no way for international undersea cable operators to support multiple universal service assessments for services provided far beyond any one country’s territory.”

The expanded levy could also potentially damage America’s standing as the world’s central Internet hub. “[The] proposals could deter new cable landings in the United States and even encourage operators to land in other countries, particularly Canada. These proposals, if adopted, could also encourage Internet content providers including online video providers to shift content creation and storage outside the United States particularly as they are typically treated as end-users for USF assessment purposes, perhaps abetted by the spectacular growth of content delivery networks. Such outcomes would harm the telecommunications, Internet, and entertainment sectors of the U.S. economy, not to mention national security.” The filing notes that Canada’s universal service levy, at 0.66% of revenues, is considerably less onerous than the 15.7% currently charged in the US.

Sources close to the process suggest that the FCC had not anticipated the impact on undersea cable operators when it drafted the proposed USF revisions.

Combined with the highly negative effect the proposal would have on the US’ position as the world’s Internet hub, CommsDay understands that the cable operators are confident they can persuade the FCC to retain the exemption on international services. But conversely, there is an “insatiable” demand for universal service funds and the FCC may elect to press on with widening the base of contributing firms. Submarine cables landing in the US have previously been subject to international bearer charges so the idea of taxing foreign infrastructure that terminates in the US is not unprecedented.

Grahame Lynch