CAUTION:  All information provided in this advisory and associated White Paper is “Informational Only” and should not be relied upon as legal advice.  The determination of whether a telecommunications business or any particular service offering may qualify for the private carriage and/or systems integrator exemption is intensely fact-specific and the consequences of reaching an incorrect conclusion may be administratively and economically burdensome.  Wherefore, decisions should not be made without first seeking the advice of experienced telecommunications counsel.

The Federal Communications Commission (FCC) regulates interconnected VoIP differently than traditional telecommunications.  For the most part, the differences have favored interconnected VoIP companies, helping them to compete with incumbent carriers.

Nevertheless, a significant legal classification available to traditional telecommunications competitors remains out of reach for the interconnected VoIP industry.  That’s because interconnected VoIP carriers cannot offer their services on a private carriage basis, or take advantage of certain deregulatory benefits associated with private carriage- namely the avoidance of so-called “Title II fees” and the potential to avoid direct Universal Service Fund (“USF”) contributions when also qualifying for the Systems Integrator exemption.

The ability to classify a service offering (and the associated revenue stream) as “private carriage,” as opposed to common carriage, empowers telecom providers that negotiate each deal on an individualized basis to avoid the full regulatory oversight and associated costs imposed under Title II of the Communications Act.  Private carrier classification may also reduce regulatory burdens at the state level, including avoidance of state USF fees in as many as twenty-two jurisdictions. The Systems Integrator exemption enables systems integrators that derive less than five percent of their systems integration revenues from the resale of telecommunications to avoid filing or contributing directly to universal service.

But interconnected VoIP service providers are presently ineligible for either the private carrier classification or Systems Integrator exemption.  Whereas private carrier telecommunications companies enjoy benefits of lesser regulation over their common carrier telecommunications services competitors, all interconnected VoIP is created equal and, thus, disqualified from certain exemptions and other benefits enjoyed by providers of private telecommunications.

The resulting regulatory disparities can be significant.  For example, traditional telecommunications companies providing services to sophisticated business customers on a one-on-one, negotiated (i.e. private carriage) basis are often able to:

• claim exemptions from numerous federal Title II program fees (including TRS fund contributions, NANP and LNP support payments), amounting to as much as 2.5% of end-user telecommunications revenues;
• avoid an array of FCC regulations, especially regulations designed to protect consumers, but largely irrelevant in the business-to-business context;
• avoid state Public Utility Commission registration and regulatory fee impositions on intrastate revenues (including state USF); and
• enjoy flexibility and freedom to customize individual deals, take risks, and reap rewards from free-market deals without the uncertainty of heavy regulatory scrutiny.

Due to the unique federal definition and treatment of interconnected VoIP services, these benefits simply do not apply to providers of interconnected VoIP services, at this time.  Interconnected VoIP service providers offering services to business customers on an individualized basis are regulated to the same extent as VoIP providers serving mass market consumers.

Opportunities denied

The disadvantages of this regulatory framework are most impactful on systems integrators that are increasingly being asked by their business customers to upgrade networks by substituting VoIP for traditional telecommunications.  Systems integrators package together component subsystems, ensure these subsystems function well together, and sell entire packages as bundled solutions, usually to enterprise customers.  As an example, a systems integrator may package a communications service with a larger data, IT, or technical support solution and sell the package to a customer.

If a systems integrator bundles traditional telecommunications with a non-telecommunications offering, the entire bundle can be treated as a private carriage service, thus usually eliminating any Title II regulatory obligations.  If the systems integrator’s revenue from telecommunications does not exceed 5% of its systems integration revenue, the provider can also avoid 499 registration, remittance and direct USF contribution obligations, as well.  But if the same systems integrator replaces telecommunications with interconnected VoIP, the exemptions would not apply.  The incentives of these regulations may lead systems integrators to choose to work with traditional telecommunications carriers as opposed to competing VoIP providers or to avoid offering their business customers advanced communications options all together.

Without the benefits of private carriage being extended to encompass interconnected VoIP services, some providers will refuse to enter the market, and the U.S. communications sector’s migration to advanced communications may stagnate.  The FCC recognized this fact recently in an analysis of private carriage in the business data services industry:

“Some service provider commenters also explain that they have relied on their ability to operate on a private carriage basis, and the flexibility it provides, when electing to enter the marketplace with particular business data services.  Thus, we find it likely that Commission action broadly treating as common carriage services that providers wish to offer as private carriage would discourage investment in such services.”

The FCC under the leadership of Chairman Ajit Pai recently issued a robust endorsement of private carriage law in its Business Data Services Report and Order.  But the FCC has been silent generally on deregulation of VoIP.

A petition to the FCC requesting parity between private carriage and interconnected VoIP providers of services with private carriage qualities would provide the FCC with an opportunity to reevaluate its stance toward regulation of VoIP.  We believe the FCC can be persuaded that:

• Current regulatory disparities disproportionately punish interconnected VoIP providers seeking to expand individually negotiated, private sales, as seen in the systems integrator industry.
• Interconnected VoIP providers serving individual customers in a manner that matches the elements of private carriage should receive the deregulatory benefits of private carriage.
• As communications increasingly move to IP format, now is the time to reevaluate regulatory disparities holding back growth.
• This deregulatory approach does not deter the public interest mission of the FCC.  The framework would encourage private deals and increase competition, but leave common carriage and existing interconnected VoIP regulatory responsibilities in place.

Ultimately, the FCC will be required to determine its stance based on the record available.  For this reason, we need your help.  Tell us your story – if the FCC reduced regulations applicable to your individually negotiated, private sales, how would your business be impacted?  Let’s work together to bring these concerns to the FCC.

To learn more about private carriage, read our White Paper:  “The Private Carriage Path to a Less Regulatory, More Market-Based Telecommunications Future.”

If you believe your company is impacted by the current disparate treatment of interconnected VoIP services under both federal and state regulations and you seek guidance on your options and risks, please contact Jonathan S. Marashlian at jsm@commlawgroup.com or 703-714-1313.