Last month, the Federal Communications Commission’s (“FCC” or “Commission”) Wireline Competition Bureau (“WCB”) issued an Order clarifying that “the nature of the traffic carried on a private line […] is the primary determinant of the proper jurisdictional assignment of the line and associated revenues.” WCB also determined the ten percent rule does not create a presumption that mixed-use private line revenues are intrastate.
The ten percent rule governs the jurisdictionalization of mixed-use private and WATS lines. For lines that carry exclusively intrastate traffic or carry ten percent or less interstate traffic, the ten percent rule classifies the line as intrastate, exempting revenue from the line from federal USF contributions among other FCC regulatory burdens. On the other hand, if a line carries more than ten percent interstate traffic, the line is classified as interstate, and its revenue becomes subject to federal contribution and regulatory obligations. Historically, carriers have obtained customer certifications to establish that a line carried more than ten percent interstate traffic.
At issue in the recent WCB Order was whether the absence of a customer certification resulted in classification of a line as intrastate and, if not, on what basis classification of a line’s traffic should be made. Six carriers appealing USAC reclassification of private line revenue as interstate revenue argued that USAC overstepped its authority by reclassifying the private line revenue based on the absence of customer certifications or other information from the carriers indicating that the lines in questions fell below the ten percent threshold for interstate traffic. The carriers argued that the ten percent rule created a presumption that private line revenue was intrastate in the absence of a certification that the line is interstate. The carriers also argued that USAC’s reclassification of revenue created the opposite presumption, namely that private line revenue is interstate absent a showing it is not.
In rejecting the carriers’ arguments, WCB held that the ten percent rule creates no presumption regarding the jurisdictional classification of a mixed-use private line; rather, the nature of the traffic carried over the line drives the determination according to WCB. “[C]arriers and their customers must make a good faith effort to assign a mixed-use private line to the appropriate jurisdiction because no default presumption of interstate or intrastate jurisdiction exists.” In other words, a carrier cannot simply presume a mixed-use private lines falls under the ten percent threshold.
Ostensibly, WCB did not create a presumption that mixed-use private lines are interstate. In practice, however, WCB’s decision effectively creates such a presumption, at least when a carrier is before USAC or the FCC. Because a carrier has the burden of demonstrating the nature of the traffic on its mixed-use lines, a regulatory agency’s desired classification (presumably interstate for USAC or the FCC) will be the default finding unless the carrier can produce evidence to support its preferred classification.
That said, WCB acknowledged the continued relevance of customer certifications in jurisdictional assignment of revenues. WCB ordered USAC auditors to carefully consider all documentation supporting a carrier’s chosen allocation of revenue, and WCB said a “carrier may rely on customer certifications or equivalent acknowledgements (such as terms in contracts) regarding the jurisdictional nature of its traffic.” A carrier should ensure that its customers understand that the nature of the traffic over a private line, note merely the physical endpoints of the line, determines the jurisdictional classification. However, WCB noted that a customer need not perform a detailed traffic study to support its certification and verification of a customer’s certification is “‘only require[d] when customer representations involved appear questionable.’”
While the WBC Order clarified that the nature of traffic over a line dictates its classification, the takeaway from the decision for carriers should be that appropriate documentation of a line’s classification is key. Despite the Commission’s removal of some PIU certification requirements in recent years and the potential for the FCC to further relax reporting requirements under Chairman Pai, a carrier that relies on the ten percent rule should continue to collect customer certifications regardless of the percentage of interstate traffic a private line carries. A carrier should also keep other types of documentation, such as information about the technical ability of a line to carry interstate traffic, that may support the carrier’s classification of a private line. Finally, a carrier should retain such documentation for at least five years from the date of a contribution.
If you have any questions about the ten percent rule or your company’s classification of its private line revenue for USF contribution purposes, please contact Michael P. Donahue at firstname.lastname@example.org.