Altice Appeals USAC’s Retroactive Application of Higher Evidentiary Standard to FCC’s 10% Rule

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The Federal Communications Commission’s (FCC) Wireline Competition Bureau (WCB) released an Order last year that elevates the audit risk to private line service providers labeling revenues as “intrastate.”

According to the Order, private line service providers may no longer rely on any “presumption” that services are intrastate.  Instead, service providers must make a good faith effort to determine whether services are interstate or intrastate.  To do so, companies should, in the regular course of business, obtain certifications from their customers that confirm whether the private line meets the requirements for intrastate or interstate use.

An interstate/intrastate designation is significant for a few important reasons.  First, companies are required to disclose in filings with USAC whether or not services are considered interstate or intrastate.  Second, interstate services are subject to federal regulations and federal regulatory fees, whereas intrastate services are subject to state regulations and state regulatory fees.  Federal regulatory fees are higher than state regulatory fees.

To determine whether service is interstate or intrastate, service providers should use the “ten percent rule.”  The FCC has said that where over ten percent of the traffic carried over a private line is interstate, the revenues and costs generated by the entire line should be classified as interstate.  Conversely, if less than ten percent of traffic is interstate, the revenues and costs generated by the entire line should be classified as intrastate.

In an audit context, service providers should be prepared to hand over evidence to USAC or the FCC that documents why a carrier labeled revenues as either interstate or intrastate.

Typically, service providers can create this documentation by asking their customers questions that help the service provider apply the “ten percent rule.”  For example, customers can be asked to what extent that the private line connects traffic within a state or between states.

Altice USA, Inc., the parent company of Cablevision Systems Corporation, recently filed an appeal before the FCC of a USAC decision reclassifying private line services as interstate that the company had claimed were intrastate.  Cablevision’s experience demonstrates that USAC is paying close attention to this issue in an audit context.  It remains to be seen how the FCC will come out on this issue in response to Cablevision’s appeal, as well as pending requests for review of WCB’s Order.

Until then, private service providers should be aware of the elevated risk and associated scrutiny that will be applied to the labeling of revenues as either “interstate” or “intrastate.”  It is important that service providers review their current policies to ensure that they are conforming with the WCB’s Order.

If you have questions about the Ten Percent Rule or the Private Line Order, please contact Jonathan Marashlian at jsm@commlawgroup.com or 703-714-1313; Seth Williams at slw@commlawgroup.com or 703-714-1326; or Alex Schneider at ais@commlawgroup.com or 703-714-1328.

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