United States: Prepaid Card Providers to "Pay Their Fair Share"

Article by Thomas K. Crowe, Esq.¹

"Today we level the playing field so that all calling card carriers pay their fair share."
-FCC Chairman Michael Powell

Recent developments at the FCC, summarized separately below, are likely to have a significant and direct impact upon the operations of prepaid calling card providers.  On February 23, 2005, the FCC released an Order and Notice of Proposed Rulemaking that concludes AT&T Corp. unlawfully avoided paying approximately $500 million in Universal Service Fund ("USF") contributions and intrastate access charges since 1999. The company claims its "enhanced" prepaid calling card service is an unregulated "information service" and will likely fight the FCC’s decision., 

In the same text, the FCC also initiated a rulemaking proceeding to comprehensively address the appropriate regulatory regime for all prepaid calling cards. 

The FCC regulates most prepaid calling card services as "telecommunications" services subject to annual contributions to USF.  Traditionally, prepaid calling cards have also been considered "jurisdictionally mixed" telecommunications services because they enable the caller to make both interstate and intrastate calls.  To determine the jurisdictional treatment of calling card calls, the FCC has applied an "end-to-end" analysis, classifying calls as either jurisdictionally interstate or intrastate based on the ultimate endpoints of the calls (and not intermediate switching points).  Under this analysis, intrastate access charges apply when customers use prepaid calling cards to make long distance calls that ultimately originate and terminate within the same state, even if a carrier's switching platform is located in a different state.

On May 15, 2003, AT&T filed a petition requesting the FCC rule  its "enhanced" prepaid calling card service is an unregulated "information service" under the Telecommunications Act of 1996, as amended.  AT&T also asked the FCC to rule that any call using AT&T's "enhanced" prepaid calling card platform is jurisdictionally interstate, and therefore exempt from higher intrastate access charges, when the platform is located outside the state in which both the calling and called parties are located.  AT&T's "enhanced" prepaid calling card service allows the caller, as part of the call setup, to hear an advertisement from the retailer that sold the card.  Only after the advertisement is complete can the caller dial the destination telephone number. 

By treating the prepaid calling cards as unregulated "information services", AT&T has avoided $160 million in USF contributions on the product since 1999.  AT&T also reported that it avoided $340 million in intrastate access charges since November of 2002 by treating the vast majority of its calls as jurisdictionally interstate (and not intrastate).

As explained below, the FCC's Order denies AT&T's petition, ruling that its "enhanced" prepaid calling card is a regulated "telecommunications service"; that calls made using the product will be considered on an "end-to-end" basis for purposes of determining access charges; and that revenue generated from the product was subject to USF reporting and contribution requirements.

The FCC concludes that the "enhanced" prepaid calling card service described in AT&T's petition is a "telecommunications" service and not an unregulated "information service".  AT&T's claim that the product is an information service is based upon the fact that, as part of the call setup process, the caller accesses an advertisement from the retailer that sold the card.  While a true "information service" falls outside the scope of FCC regulation, the FCC concludes that AT&T's service fails to meet the statutory definition of an information service because, among other things, the product is offered solely as a telecommunications service.  According to the Order, the advertising message is provided automatically, without the advance knowledge or consent of the customer.  In addition, the customer is provided with no "capability" to do anything other than make a telephone call.  The Commission's determination is also based in part on its finding that the advertising message is an "adjunct-to-basic" service, meaning that it is "incidental" to the underlying telecommunications service and does not fundamentally alter the character of that service.  The FCC's Order cites precedent where the FCC has found supplemental services to be merely incidental to the fundamental and underlying transmission service.

AT&T argued that by placing an advertising message at the switching platform, the calling card communication was necessarily divided into two calls.  The first was a call to the switching platform, and the second a call from the switching platform to the called party.  In instances where calls originate in "state A", access the switching platform in "state B", and then terminate to a called party also located in "state A", AT&T contended that two separate interstate calls were involved, neither of which was subject to intrastate access charges.  Relying upon traditional end-to-end analysis, the FCC rejected AT&T's position.  In other words, the FCC disregarded the switching platform and looked only to the ultimate origination and ultimate termination points of a call to determine its jurisdictional status.  Under this analysis, service provided to a calling card customer is subject to intrastate access charges when calls ultimately originate and terminate within the same state.  The Order notes that claims against AT&T for unpaid intrastate access charges should be filed before the appropriate court or state commission. 

The FCC's rejection of AT&T's argument that its "enhanced" prepaid calling card is an information service gives rise to unpaid USF contributions.  In other words, since the service was found to be a "telecommunications" service, AT&T should have a) filed FCC Forms 499A to report revenue on the service and b) paid USF contributions on such revenues.  Consequently, the Order directs AT&T to file revised FCC Forms 499A with USAC properly reporting prepaid calling card revenue in order that USAC may calculate and assess back-owed USF liability against AT&T.  Notably, the Order states, "we expect all other companies providing calling card services similar to those described herein to file new or revised Forms 499A within 30 days of the effective date of this Order as needed to properly report revenues from these services...."  The Order goes on to state that to the extent AT&T or "other similarly situated companies" do not file new or revised USF forms and begin paying back-owed USF amounts, the FCC's Enforcement Bureau is directed to take appropriate enforcement action against such companies.

AT&T contended that it should not be subject to retroactive USF liability because its treatment of "enhanced" prepaid calling cards as information services was consistent with FCC precedent.  The Order flatly rejects this claim, stating that the FCC's prior decisions had always treated prepaid calling cards as telecommunications services and USF contribution forms plainly require revenue from prepaid calling cards to be reported.

On November 22, 2004, AT&T filed a supplement to its petition seeking additional rulings on two new "variants" of its "enhanced" prepaid calling card service.  Under the first variant, rather than immediately providing the advertising message, the platform provides the caller with a series of options other than making a call (e.g., "press "1" to learn more about specials at ABC Store; press "2" to add minutes to your card").  Following these menu options, the caller is then directed to dial the destination number and the call is routed to the called party.  Under the second variant of the service, the service provided is the same as described above in the AT&T petition, but some portion of the transport is provided over AT&T's Internet backbone using Internet Protocol (or VoIP) technology. 

The FCC decided to initiate a separate rulemaking proceeding to consider the regulatory treatment of these two AT&T variant services.  Based on the wording of the FCC's Notice of Proposed Rulemaking ("NPRM"), however, it is clear that the proceeding will impact many prepaid calling card providers other than just AT&T.  Public comment on the issues raised in the rulemaking are due 30 days following publication of the NPRM in the Federal Register, and reply comments are due 60 days following publication in the Federal Register.

With respect to the first variant service, the FCC seeks industry comment on, among other things, the following issues:

• Does offering the caller a menu of options satisfy the definition of an information service or must the information made available be more integral to the underlying telecommunications service?

• Is there any evidence that customers purchase the cards for any reason other than making telephone calls?

• How relevant is the frequency with which customers use any such additional features?

In short, the FCC's NPRM is looking to gather more extensive information about the nature of such "menu based" value added prepaid calling cards and the features and functionalities they offer.

With respect to the second variant discussed above, the FCC's NPRM similarly seeks more extensive information regarding the use of IP technology to deliver calls placed using prepaid calling cards.  The FCC notes that in its AT&T IP Telephony Order (see our Legal Alert dated April 26, 2004), it concluded that an AT&T voice service utilizing 1+ dialing from a regular telephone that is converted into IP format for transport over AT&T's network and converted back into analog format for delivery to local exchange carrier lines is a telecommunications service.  Notwithstanding this, the NPRM seeks comment on, among other things, the following:

• Are prepaid calling card services that use "IP-in-the-middle" also telecommunications services?

• Does the fact that 8YY dialing is used to originate calls to AT&T's centralized platform make a difference, distinguishing this from the AT&T IP Telephony Order wherein 1+ dialing was involved?

• How does the FCC's recent Vonage ruling (see our Legal Alert dated November 9, 2004) impact this analysis?

Finally, the rulemaking proceeding seeks public comment on whether there are steps the FCC can take to ensure that prepaid calling cards continue to be made available to U.S. military personnel and their families at reasonable rates.  Among other things, the NPRM asks whether there are any special circumstances in which soldiers and their families would be negatively impacted if prepaid calling cards were subject to USF and access charges.  Comment is also sought on whether the FCC has the authority to exempt calling cards sold at military exchanges or other military retail outlets from USF or access charges, or whether the agency has authority to forebear from applying such charges. 

At the end of the day, the FCC's Order and Notice of Proposed Rulemaking raises as many questions as it answers.  For example, where does the Order leave value added prepaid calling card providers which, up until now, have treated their product as not subject to regulation nor USF contributions?  What are the chances that a prepaid calling card provider will be subject to enforcement action by the FCC for nonpayment of USF?  Can incumbent LECs be expected to take action against prepaid calling card providers for nonpayment of intrastate access charges?  What will the future regulatory framework be for value added cards?

Footnotes

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