A federal appeals court on Friday upheld an FCC ruling that Vonage (News - Alert) and other VoIP providers must pay into the Universal Service Fund, a government slush fund used to subsidize telephone and broadband services to rural areas, public institutions and poor neighborhoods.

Vonage had challenged the FCC (News - Alert) ruling - enacted a year ago - that it and other VoIP providers must pay a percentage of their long distance phone charges into the USF. Specifically, it challenged the FCC’s formula for determining the percentage VoIP providers must pay into the fund. As per the formula, VoIP providers must pay a higher percentage of their long distance revenues, compared to traditional phone and wireless carriers, into the fund.

Vonage claimed that the FCC had overstepped its authority and had overestimated how much VoIP providers should pay. The United States Court of Appeals for the District of Columbia Circuit ruled that not only was the FCC within its authority to require VoIP providers to pay into the fund, but also that the formula used is appropriate.

An attorney for Vonage argued that VoIP providers operate more like wireless carriers, in terms of the amount of long distance traffic they carry, and that therefore they should have the option of paying the same “safe harbor” percentage of their revenues as wireless carriers. However, the three judge panel determined that Vonage had failed to precisely demonstrate how VoIP carriers are similar to wireless carriers - and that therefore it did not have a case for overturning the FCC’s formula.

The appeals court did, however, overturn two sections of the FCC’s ruling which also created disparity in terms of how VoIP providers are treated compared to traditional and wireless carriers. Specifically, the panel ruled that the FCC couldn’t force VoIP providers alone to get “pre-approval” for the accuracy of so-called “traffic studies,” which carriers use to determine the amount long-distance phone traffic they carry for the purpose of determining how much they owe to the USF, just because it suspected the studies were inaccurate. It also ruled that the FCC couldn’t force VoIP carriers to pay into the USF twice - both independently and to the wholesale telephone companies whose lines they lease - for the first two quarters that the rules kicked in.

“We are pleased that the court vacated portions of the FCC’s USF order that treated VoIP providers in an inequitable manner, as that was our goal: fair and equitable treatment for all VoIP providers under this interim USF funding regime,” Vonage spokeswoman Brooke Schulz said in a statement.

Joining Vonage in the complaint was the VON coalition, a trade group representing the VoIP industry, and the Computer & Communications Industry Association, a Washington-based lobby group.

The USF, which now stands at more than $7.3 billion, has fallen under scrutiny in recent years due to perceptions that it is being misused - and there is now discussion in both Congress and the FCC that the fund needs to be completely overhauled. Created by the FCC in 1997 to help meet the goals of the Telecommunications Act of 1996, the general goal of the fund is to bring advanced telecommunications services to rural areas and poor neighborhoods, as well as to schools, libraries and other public/quasi-public institutions, at affordable rates. Some have argued that the fund’s existence has the unintended effect of giving certain carriers a competitive advantage over others, as well as thwarting progress in the arena of broadband access. Recently, several Iowa-based carriers have started using USF subsidies to provide free long distance calling, resulting in increased complaints that the fund does not really work in a fair and equitable manner.

Although Vonage and other VoIP providers have asserted that the FCC’s formula for determining how much they should pay into the fund isn’t equitable, they have not argued in court that they should be completely exempt from paying into it.

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Patrick Barnard is Assignment Editor for TMCnet and a columnist covering the telecom industry. To see more of his articles, please visit Patrick Barnard’s columnist page.