the Federal Communications Commission (FCC) may have just effectively eliminated the final “gray” regulatory areas commonly used by prepaid providers who offer “enhanced” cards; menu-driven phone cards; use Voice over Internet Protocol (VoIP) to transport prepaid phone card traffic; or use IP or local access numbers to hinder, or avoid, carrier reconciliation of access charges for VoIP calls from prepaid cards. In its Report and Order on Docket WC 05-68, The Regulation of Prepaid phone card Services, the FCC squarely tackled all above issues as related to prepaid phone cards that utilize IP transport connection with their services, or that utilize other information service offerings in their phone cards to “bend” their regulatory definition from voice telephony services to information services.
New Order Impacts All Providers
The Order also sets forth an interim series of reporting requirements on all prepaid phone card providers for the directed purpose of clarifying Universal Service Fund contributions and Access Charge liability, and better enforcing of both. A full version of the FCC Report and Order is available at www.fcc.gov for download and review, and will also be available on The Prepaid Press web site. Similarly, a breakout of the major compliance issues and interpretations can be found in the sidebar included in this article.
While procedurally the new requirements do not go into effect until 90 days after publication in the FCC Record, providers in the prepaid phone card industry should be keenly aware of the new regulatory regimen of the FCC and the requirements expressly referenced to be enforced in the future. The regulatory playing field of prepaid calling has definitely shifted in this latest Order – whether this is for better or worse remains somewhat speculative.
What is not speculative is the Order itself. Released June 30, 2006, but effective June 1, 2006, the Report and Order is actually the latest series of orders enacted by the FCC in response to Declaratory Petitions from AT&T over regulatory definitions and fees arising from Phone-to-Phone IP Telephony Services (2002); and their “enhanced” prepaid phone card services (2003), now pending appeal in the U.S. Court of Appeals in the D.C District. This ongoing tug-of-war between the FCC and AT&T over regulatory fees has been highly publicized over the past few years, and reached public notoriety in February 2005 when the FCC levied multi-million(s) in fines against AT&T for failure to disclose and contribute to USF applicable to its “enhanced” prepaid phone cards.
The current Report and Order, however, is different as it extends beyond application to merely AT&T, and seems to be the FCC’s last “bit-of-housekeeping” on USF and Access Charge issues raised by AT&T concerning IP and the industry as a whole. (See the chronology of the procedural history of the Report and Order in for full details.)
Gray Areas Filled In
The question of prepaid calling and VoIP has been both poignant and elusive in recent years. Though the FCC maintains it has jurisdiction over the regulatory definition of VoIP services since 2004, until this Order, it has historically tended to forebear on specifics or applications. This has left room for informal interpretation by industry players and has created several commonly used “gray” area defenses that prepaid providers have informally fallen back upon in relation to reporting and payment of both USF and Access Charges.
They have been more tangibly seen in the industry in the selection of reporting categories of USF in the Form 499-A to report VoIP traffic on cards, as well as in use of local and IP access numbers to transport calls. Some industry players have even taken such interpretive defenses as far as to use them as a basis for non-reporting and non-contribution to both USF and Access Charges.
Such “gray” area interpretations and defenses have also hinged upon an unclear regulatory definition between VoIP and information services within the Telecom Act, FCC Regulations, and the courts. The question, however, is no longer elusive; the June 30th Report and Order now makes it clear: Prepaid phone cards utilizing IP transport and menu-driven prepaid phone cards are telecommunications services for the purposes of federal regulation and fees, and prepaid phone card providers are telecommunications carriers for purposes of regulatory compliance.
Protecting Inter/Intra Access Charges and USF Contributions
The opening of the Report & Order’s Introduction reads as a preamble as to the direction of things to come – the enforcement of regulatory fees:
[sic.] … we take steps necessary to protect the federal universal service program and promote stability in the market for prepaid phone cards. In particular, we will treat certain prepaid phone card service providers as telecommunications service providers. As such, these providers must pay intrastate access charges for inter-exchange calls that originate and terminate in the same state and interstate access charges on inter-exchange calls that originate and terminate in different states. They also must contribute to the federal Universal Service Fund (USF) based on their interstate revenues, subject to the limitations set forth below.
While enforcement of fees seems to be the prime mover of the new prepaid regimen, the issue may be somewhat overdue. Recent enforcement actions on public record over the past few years to collect back-owed USF contributions, or substantiate reporting gaps, have increased and show a history of long, hard, and costly processes for both the FCC and the prepaid industry when fought. This is not to mention any fines levied by the FCC. Contemporaneously, more and more prepaid providers are registered 499 reporters and are reporting USF liability, leaving fewer and fewer non-contributing prepaid IP phone card providers on the fringes. It seems that USF compliance has become more mainstream among serious players in the industry and is now perceived as a cost of business.
As for Access Charges, the reporting of CPN and/or PIU factors (as directed by the Order) may, in fact, create an extra layer of reporting and documentation. This may better identify Access Fee scoffers, as well as the carriers who serve them to the Enforcement Bureau. Similarly, the prohibition for carriers that serve prepaid phone card providers from passing the telephone number associated with the platform in the charge number (CN) parameter of the SS7 stream, and information regarding the phone card platform in the CN parameters in the SS7 stream when transported via VoIP, may alleviate the need for extended, or blanket, requests for information from prepaid providers in enforcement actions concerning access fees. In the end, time will best tell.
Corporate Officers Held Liable
One aspect of the Order’s CPN/PIU and USF reporting regimen that looms ominous is the certification by corporate officer requirement. Per the Order, on an a quarterly basis, every prepaid phone card provider must submit a certification, signed by an officer of the company under penalty of perjury, stating that it is in compliance with the reporting requirements of CPN/PIU factors. Similarly, each prepaid phone card provider also must certify the percentages of its total prepaid phone card service revenues (excluding revenue that is exempt under the military exemption) that are interstate and international and therefore subject to federal universal service assessments for the reporting period.
While clearly directed to resolving the access fee/USF thresholds of liability, the perjury certification by a corporate officer carries with it the potential to pierce corporate veils should fraudulent numbers be submitted. In many ways, this smacks the application of Federal Excise Tax (FET) liability to corporate owners where and when the company fails to pay.
Immediate Effect on Industry – Licensure, Compliance and Reporting
The immediate effect on the industry is clear. If you provide Interstate or International prepaid phone card services utilizing VoIP, through a menu-driven card, or offer those prepaid phone card services in combination with other information services, you are now a telecommunications carrier and must seek Section 214 Authority from the FCC, abide by FCC regulations, and contribute to applicable regulatory fees. In equal fashion, you must now report CPN/PIU compliance to underlying carriers on a quarterly basis and USF inter/intra revenues, and have a corporate officer certify the same under threat of perjury. These reporting requirements are in addition to all applicable 499-A and 499-Q filings, International Circuit Reports and International Revenue Reports due to the FCC.
States May Increase Regulation Also
Though not specifically mentioned, state regulation may also be stepped up because of the June 30, 2006 FCC Order. An example of this is potentially the State of Florida and its Public Service Commission. In 2004, the Florida legislature passed a VoIP Act that mandated forbearance of state regulation on VoIP technology in order to spur development of the technology within the state.
The language of the Act however, limited that forbearance until the FCC exercised jurisdiction and imposed regulation over VoIP. The Report and Final Order of WC Docket 05-68 by the FCC patently exerts over prepaid phone cards utilizing VoIP. Does this now mean that the Florida PSC may more aggressively move to require certification from prepaid phone card providers utilizing VoIP? Time will tell. However, with increased reporting of inter and intra state revenues on a quarterly basis to the FCC, public information and shared intergovernmental information may spur state utility commissions to better enforce existing requirements on prepaid providers and the carriers providing their services.
Since only a short time has elapsed since the release of the FCC’s Report & Order on the regulation of prepaid phone card services, forecasting as to application, compliance strategies and impact on the industry are largely speculative. However, key to making business and regulatory decisions in the next few months will be your own understanding of the new regimen, its history and its requirements. For this reason, obtaining as much information as possible should be the initial priority.
The Procedural History and Major Points accompanying this article should provide a point of venture for you in this process. As The Prepaid Press begins further dissection of the Order and its implications, more information will be readily available and a bigger picture of the lasting effect of this Order will be available. Likewise, an Internet Blog has been established to continue to disseminate information and elicit reaction, response and input as to strategies to meet the requirements and the regulatory changes expected to come. The blog, and other detailed information, can be found by going to The Prepaid Press website at www.prepaid-press.com, and clicking on the “New FCC Order Details” link.
Good Luck and Success in the Industry.
Edward A. Maldonado is a Founding Partner of the Maldonado Law Group. He is also a Partner in the Regnum Group, a regulatory consulting group serving the telecommunications, stored value and regulated business industries. He can be reached at 305.468.1645 or at firstname.lastname@example.org.