As discussed in a recent firm advisory, in mid-August the Universal Service Administrative Company (“USAC”) filed two letters with the Federal Communications Commission (“FCC” or “Commission”) requesting guidance on several policy issues related to the universal service high-cost support mechanism and Universal Service Fund (“USF”) contribution methodology. USAC asked the FCC to develop an alternative method to “face value” reporting for prepaid calling card (“PPCC”) providers who either do not know the face value of the cards sold or whose cards are measured in units of time rather than dollars. Further, USAC asked the Commission to determine when PPCC revenue should be reported in cases where the carrier is unable to determine when a card is sold to an end-user. On September 28th, the Commission issued a Public Notice seeking comments on USAC‘s letters. Comments were due by October 28, 2009, and reply comments are due on November 12, 2009.
On October 26th, the Ad Hoc Coalition of International Telecommunications Companies (“Coalition”) filed brief comments in the proceeding. The Coalition referenced its previously filed Petitions and Comments (available at www.telecomcoalition.com). Further, in the event the FCC determines USAC‘s “face value” instructions are invalid, the Coalition asked the FCC to establish procedures which will ensure contributors, who may have been unlawfully required to contribute more than their equitable share, can obtain refunds or credits –of not merely USF contributions, but of payments to other FCC programs as well.
Several other industry participants filed comments in response to USAC‘s letters. Summaries of these comments are provided below:
(1) Comments of NetworkIP
Many of NetworkIP‘s comments echo concerns raised by the Coalition in its pending petitions and comments submitted to the FCC. First, the company argued that USAC‘s Instructions to Form 499-A (“Instructions”), announcing that all PPCC revenues are treated as end-user revenues, violate FCC rules because the Instructions always subject PPCC revenues to USF contribution obligations even when the revenues do not derive from end-users. NetworkIP noted that requiring all providers in the distribution chain to contribute invites the double-payment problem the FCC has sought to avoid.
Second, NetworkIP argued that face value reporting conflicts with FCC rules because it obligates PPCC distributors to report uncollected revenues. No other filer must report uncollectibles, and thus the requirement is discriminatory. Third, NetworkIP found that USAC exceeded its authority by attempting to reach revenue earned by distributors and retailers which are not “telecommunications services” providers and therefore not subject to the FCC or USAC‘s authority. Fourth, NetworkIP observed that USAC‘s face value reporting Instruction is impossible to implement because some cards have no “face value.” Finally, NetworkIP argued that USAC‘s Instructions do not have the force of rules because they were not adopted pursuant to the notice and comment requirements of the Administrative Procedures Act (“APA”). The company asked the FCC to respond to USAC‘s letters by clarifying that USAC‘s Instructions with regard to PPCC face value and end-user revenues are invalid and initiating a rulemaking proceeding to establish equitable rules for PPCC revenue reporting.
(2) Comments of AT&T, Inc. (“AT&T”)
On a macro level, AT&T requested a complete overhaul of the USF system, urging the Commission to adopt a numbers-based contribution regime. With regard to PPCC reporting, AT&T warned that establishing the face value of minute-based PPCCs is impossible. Because the original selling carrier cannot determine the final sale price, only wholesale carriers should be required to report and contribute to the USF.
Further, AT&T asked the Commission to direct USAC to authorize PPCC providers to report PPCC revenues as earned in accordance with GAAP rather than when end-users purchase cards because the latter method requires burdensome data collection efforts, including maintaining separate books and records for GAAP and USF reporting purposes. Finally, AT&T asked the Commission to initiate a rulemaking proceeding culminating in the adoption of revised Form 499-A Instructions more suitable to the prepaid market.
(3) Comments of Verizon & Verizon Wireless, Inc. (“Verizon”)
Verizon suggested that where a PPCC provider knows the price an end-user paid to purchase its card, it should report that amount to USAC. Verizon requested that, where that price is unknown, the Commission set a standard for PPCC providers to estimate revenue received from the sale of the card. This is particularly needed to estimate revenues associated with PPCCs sold through third-party distributors. Verizon asked that the Commission treat the estimate standards as a safe harbor for PPCC revenue reporting.
(4) STi Prepaid, LLC (“STi Prepaid”)
STi Prepaid argued that USAC‘s Instructions requiring face value reporting do not accurately reflect revenues actually received. It offered examples of cards sold at wholesale, at retail and recharges issued directly to end-users to demonstrate the distinctions between revenues received from each type of sale. STi Prepaid agreed with the Coalition, noting that face value reporting requires PPCC providers to report more than they actually collect in revenues, contrary to the FCC‘s rules. Like the Coalition, STi Prepaid commented that USAC‘s face value reporting Instruction distorts the meaning of end-user, failing to account for the various links in the PPCC distribution chain.
In further agreement with the Coalition, STi Prepaid argued that the face value reporting requirement violates GAAP principles, thus requiring carriers to report revenues in two different ways for purposes of GAAP and USF reporting. Further, STi Prepaid found this requirement inconsistent with basic tax law which only requires reporting of income (ie. revenues) actually earned. Like the Coalition, STi Prepaid suggested that the Commission modify USAC‘s Instructions to require reporting only of revenues actually received or allow PPCC providers to deduct uncollected revenues. Finally, STi Prepaid likewise noted that face value is discriminatory because it results in higher USF fees imposed upon PPCC providers than other carriers in violation of FCC rules.
The Commission‘s response to USAC‘s letters is likely to have a substantial impact on the contribution obligations of PPCC providers. Should the Commission reject USAC‘s face value reporting requirement, prepaid providers may be entitled to refunds and will certainly see reductions in their contribution obligations prospectively.
Clients are advised to monitor this proceeding and to get involved. There is still ample time to file Reply Comments. Clients interested in joining the Coalition, filing Reply Comments through the Coalition, or who simply want guidance on filing Reply Comments themselves should contact Jonathan Marashlian at: firstname.lastname@example.org or 703-714-1313.