The Prepaid Press - September 15, 2008 - (Page 18)

CALLING CARDS September 15 · 2008 - 18 USAC’s “Carrier’s Carrier” Rule Comes Under Attack By Jonathan Marashlian and fairness to contributors is for the FCC to uphold USAC’s verification and vicarious liability requirements. Millions of dollars are at stake for IDT and GX, but there’s potentially even more at stake for wholesale carriers that did strictly comply with USAC’s instructions. According to a USAC audit, during the past five years, IDT has classified the vast majority of its revenue as wholesale, thereby allowing it to avoid several years of regulatory fee payments. In its 2007 SEC Annual Report, IDT stated that USAC’s re-classification of its wholesale services as end-user revenue would impose approximately $60 million in combined regulatory fees. For its part, GX estimates in its petition that revenue re-classification in accordance with USAC’s audit directives would render it responsible for over ten times the amount it has contributed to the USF thus far. If the “carrier’s carrier” rule is found to be invalid, IDT and GX would be excused from contributing on the reclassified revenue; moreover, similarly-situated wholesale carriers could be entitled to refunds of past contributions and fees. While it is unlikely that the FCC, itself, will allow wholesalers to completely abrogate their contribution obligations (because doing so would invalidate and reverse millions of contribution dollars that are desperately needed to support the already underfunded USF program), both IDT and GX would have the opportunity to appeal adverse FCC rulings to the District of Columbia Court of Appeals (DC Circuit) where favorable rulings are possible. As such, both of the pending petitions for review should be evaluated and monitored by all operators in the prepaid calling industry. state that only “end user” revenue shall be used as the basis for determining a carrier’s USF contributions. Finally, IDT maintains that it is a wholesaler by definition because it sells its products to other carriers and VoIP providers. IDT alleges that USAC’s imposition of vicarious contribution obligations for its resellers’ failure to contribute to the USF is an improper shift of these duties to IDT, which does not sell to “end users.” Compliance with the Federal Communications Commission’s Universal Service Fund rules can easily increase a telecommunications company’s cost of doing business by 3% to 13%. These enormous costs have driven carriers who are subject to the FCC’s USF regulatory regime to carefully scrutinize the rules and regulations governing the reporting of revenue which result in the imposition of FCC compliance costs. Revenue reporting requirements are generally to be found in the instructions to FCC Form 499-A. One of these “rules” – the so-called “carrier’s carrier” rule -- is garnering a great deal of attention these days, both by the industry and the FCC thanks to petitions for Review filed with the FCC by IDT Corporation and Global Crossing Bandwidth, Inc. (GX). At their core, both petitions challenge Universal Service Administrative Corporation’s (USAC) imposition of vicarious contribution responsibilities on wholesale carriers who failed The IDT and GX petitions shine a bright spotlight on the telecom industry’s uncertainty regarding over the application and consequences of non-compliance with the “carrier’s carrier.” to verify the USF contribution status of their reseller customers. IDT’s petition goes a step further by seeking an FCC ruling that all sales to any entity which does not, itself, consume the services purchased, constitutes a “wholesale” sale, the revenue from which is exempt from USF and other FCC fees. A favorable outcome could save IDT as much as $60 million in unpaid regulatory fees and, invariably, would impact all other companies engaged in the prepaid industry. Background The FCC requires all interstate communications carriers to contribute a portion of interstate and international end-user revenues to fund Universal Service and support other programs, such as the Telecommunications Relay Services fund. USAC is a private non-profit organization that administers the USF. In order to avoid duplicative USF contributions on wholesale and enduser revenue, USAC crafted what’s now known as the “carrier’s carrier” rule. This rule exempts wholesale revenue from a carrier’s contribution base, thus ensuring contributions are based solely on end-user revenues. However, to invoke the protection of this wholesale revenue exemption, carriers must verify that their reseller customers are contributing directly; failing to do so can result in USAC’s imposition of vicarious liability. In other words, unverified wholesale revenue can, and will, be reclassified by USAC as end-user revenue, thereby subjecting an otherwise exempt wholesale carrier to liability for the unpaid contributions of its reseller customers. These “verification” and “vicarious liability” provisions first appeared in USAC’s instructions to the 2004 Form 499-A, but are nowhere to be found in the FCC’s regulations. In their petitions, IDT and GX contend the “carrier’s carrier” rule places unfair regulatory obligations on wholesale providers because the rule contradicts the FCC’s stated goal that providers of “end-user” services should shoulder the contribution load. Both argue that USAC’s carrier’s carrier rule unduly burdens wholesale carriers with the responsibility of ensuring that their customers are in full compliance with USF obligations. IDT also disputes USAC’s classification of all prepaid calling card revenues as enduser. Both contend that USAC’s instructions are at odds with the actual, published FCC regulations and are therefore invalid. Not all wholesale providers, however, agree with IDT and GX’s arguments, most notably, AT&T, which filed comments rebutting IDT’s petition. AT&T argues that IDT would earn a windfall by circumventing the reseller customer verification requirement of the carrier’s carrier rule. AT&T maintains that the only way to secure a balance between sufficient USF funding IDT Petition IDT’s petition stems from a series of USAC audits of the company’s Form 499 reporting for the 2003 to 2007 timeframe. On April 30, 2008, USAC issued an Audit Report concluding that IDT’s method of reporting revenue from unaffiliated distributors, retailers and resellers as wholesale revenue did not conform to the Form 499-A instructions. USAC determined that the majority of IDT’s revenue should have been reported as end-user revenue because the instructions mandate that all “revenues from pre-paid calling cards provided either to customers, distributors, or to retail establishments” are contribution eligible. On June 30, 2008, IDT filed its petition, wherein it argues that USAC’s audit conclusion was invalid for the following reasons: 1. The relied upon instructions were not subject to notice and comment procedures as required by the Administrative Procedures Act (APA); 2. The instructions conflict with existing FCC rules; and 3. IDT is a wholesaler by definition. IDT’s first argument attacks the validity of the carrier’s carrier rule, as embodied in the Form 499-A instructions relied upon by USAC in its audits. IDT argues that the “verification” and “vicarious liability” provisions of the current iteration of the carrier’s carrier rule are substantive rules created unilaterally by USAC and in violation of the APA. IDT contends that, for this reason alone, the carrier’s carrier rule is invalid, unlawful, and unenforceable since only the FCC can promulgate substantive rules and only after it has complied with the APA. If the FCC (or a reviewing court, the DC Circuit or Supreme Court) agrees that the Form 499-A “instructions” violate the APA, then neither the FCC nor USAC can force IDT to reclassify its wholesale revenue as end-user, thereby resulting in at least $60 million in saved contributions for IDT since 2002. Even if the instructions are deemed interpretive rules, rather than substantive, IDT argues that the instructions are still invalid because they contradict existing FCC rules which clearly Global Crossing petition IDT is not the only carrier to raise concerns regarding USAC’s treatment of reseller revenue with the FCC. On June 22, 2007, GX appealed USAC’s imposition of contribution requirements on the revenue generated through GX’s sales to other carriers. In its petition, GX identifies its primary customers as interexchange carriers, as well as information and enhanced service providers. Similar to IDT’s petition, GX sought review of USAC’s methodology of categorizing wholesale revenue as “end user” revenue if GX did not obtain formal verification of its customer’s contribution status. GX asserts that USAC lacks the authority to seek recovery from wholesale carriers for contributions actually owed by reseller customers. In support of its argument, GX cites FCC precedent and regulations that establish (with limited exceptions) that resellers, not their underlying wholesale carriers, are responsible for USF contributions. Further, GX notes that FCC regulations do not provide for enforcement action against underlying carriers for a reseller’s failure to make USF contributions – a stark contrast to USAC’s Form 499 instructions which impose “vicarious” liability. In addition, GX states that USAC’s reclassification of its wholesale revenue as end user revenue was based on a misinterpretation of the instructions USAC crafted. The instructions provide that (i) underlying carriers must determine that the reseller “reasonably would be expected to contribute to support universal service” and (ii) “filers will be responsible for any additional universal service that result if its customers must be reclassified as an end user.” GX asserts that USAC erroneously concluded that a customer’s failure to make USF contributions proved that GX could not reasonably have expected the customer to make the payments even before it had evidence t

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The Prepaid Press - September 15, 2008 ISOs Hold Key to Growth in Prepaid Industry Contents From the Publisher: The Show Goes On Regulatory Rundown: Early Fall Regulatory Beat 5 Minutes With Brian Rudolph, Co-owner, Krush Communications TPPEXPO’08 Spotlight Dateline Expo: Prepaid Wireless Update 2008 Wireless in Brief MetroPCS Available at Best Buy Western Capital Resources Inc. to Acquire PQH, Inc. TracFone Launches SafeLink Wireless Prepaid Wireless Roundup CIT Secures Financing for Prepaid Wireless Company MetroPCS Premiers Loopt Social-Mapping Services Virgin Mobile USA Reports Financial Results Dateline Expo: Prepaid Calling Card Update 2008 Inc. 5000 Recognizes Viscom International USAC’s “Carrier’s Carrier” Rule Comes Under Attack NetIQ Extends VoIP Management to Microsoft Office Transverse Launches OSS/BSS Open Source Platform Calling Cards in Brief Dateline Expo: Prepaid and Alternative Payments Update 2008 NETELLER and TransSend to Offer Cards Payments in Brief U.S. Treasury Introducing Direct Express Debit Card Visa Launches New Mobile Payment Services SCX Global Acquired by Rev Worldwide Metavante Selected by Corporate Network eCom ACE and NetSpend Launch March of Dimes Card AccuPOS Announces AccuCount Software Springbok Offers Private Label Prepaid Cards Prepaid 101: ATMs and Prepaid NACS Releases State of the Industry Report PaySpot to Distribute Futura Cards Hypercom Lands Element Payment Services Retail Focus in Brief Our Advertisers Contact Us

The Prepaid Press - September 15, 2008

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