FCC Seeks Comments on Network IP Appeal of USAC Audit Decision; Outcome May Materially Impact Prepaid Calling Card and Other


On August 10, 2009, the Federal Communications Commission (“FCC” or “Commission”) issued a Public Notice requesting comments on Network Enhanced Telecom, LLP‘s (“NetworkIP”) request for review of certain Universal Service Administrative Company (“USAC”) audit findings. In particular, NetworkIP asks the FCC reverse a USAC finding that revenues from NetworkIP‘s software service platform should be treated as “prepaid card revenues” for purposes of universal service contribution requirements. To the contrary, NetworkIP asserts that revenues from its service platform were properly reported as reseller telecommunications revenues and that USAC‘s decision to reclassify its services as prepaid card revenues was not only erroneous, but also beyond the scope of its authority.

NetworkIP argues that its platform offering has none of the characteristics of prepaid card service, as defined by the Commission’s rules, because it is not sold on a prepaid basis and is not a finished retail product. NetworkIP further points out that its customers (who are in fact prepaid card providers) control the price of the cards, the number of minutes on the cards and the rate at which value and minutes are decremented, and assign the cards’ personal identification numbers (“PINs”). Moreover, NetworkIP maintains that it had a reasonable expectation that its customers were contributors, because it had adequate reseller certification procedures in place.

With regards to the validity of USAC‘s decision, NetworkIP argues that USAC exceeded its authority in concluding that NetworkIP’s platform service offering was equivalent to prepaid card service. The Commission’s rules specifically preclude USAC from interpreting unclear rules or statutes. However, the Commission has never addressed this issue, and USAC‘s actions clearly required considerable “interpretation.”

NetworkIP adds that even if the Commission somehow concludes that NetworkIP’s platform offering constitutes prepaid card service, as defined in USAC‘s Instructions, NetworkIP cannot be required to report such revenue as end-user revenue, or to report it at the face value of the cards, because any instructions that so require are invalid. These Instructions directly conflict with statutory provisions that limit the Commission‘s authority to collect contributions to telecommunications revenues and require that contributions be assessed on an equitable and non-discriminatory basis. The effect of treating all prepaid calling card revenue as end-user revenue is to substantially increase resale providers‘ Universal Service Fund (“USF”) liability.USAC‘s ruling requires resale providers to report revenues that they never actually collect as USF eligible revenue. This reporting methodology results in the imposition of higher USF rates on prepaid calling card providers than upon other carriers. Thus, it violates Congress‘ statutory prohibition on the discriminatory application of USF obligations by the Commission.

NetworkIP‘s concerns echo those voiced by the Ad Hoc Coalition of International Telecommunications Companies (“Coalition”) in its “Petition for Declaratory Ruling” filed with the FCC on February 12, 2009. The Coalition is comprised primarily of, but not limited to, prepaid and pre-subscribed international long distance service providers. These providers voluntarily and anonymously joined forces in an effort to remedy certain discriminatory and inequitable issues associated with USAC‘s administration of the FCC‘s USF contribution requirements. In addition to the above-mentioned petition, the Coalition is currently considering filing additional petitions to seek review of a variety of other USF administration issues that are particularly burdensome and which unfairly impact providers of prepaid telecommunications service.


Clients are encouraged to monitor this proceeding (FCC Docket No. WC 06-122) and submit relevant comments and reply comments. Comments responding to the Public Notice are due on September 9, 2009. Reply Comments are due on September 24, 2009.

Clients wishing to file comments with the FCC regarding USAC‘s decision in this matter or who would like additional information regarding the Coalition should contact Jonathan Marashlian at jsm@commlawgroup.comor 703-714-1313.

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