In a Declaratory Ruling and Report and Order released on June 30, 2006, the FCC clarified that all prepaid calling card providers (“PCCPs”) offering telecommunications capability—including those offering menu-driven services as well as utilizing IP transport to deliver calls—are subject to federal regulation as telecommunications services providers.  As such, PCCPs must contribute to the federal Universal Service Fund (“USF”) and pay access charges.  In addition to clarifying that PCCPs are required to transmit the Calling Party Number (“CPN”) to interconnecting carriers, the decision establishes requirements that PCCPs report traffic data to underlying providers and file quarterly certifications with the FCC.  The FCC’s ruling applies retroactively to PCCPs utilizing IP transport but prospectively to PCCPs providing menu-driven services.  Intended to level the regulatory playing field for PCCPs and reduce the potential for “gaming” of the regulatory system, the decision is expected to have a significant impact on PCCPs and underlying providers which serve PCCPs.   Classification   The FCC’s decision specifically addresses a) menu-driven prepaid calling cards and b) prepaid calling cards that utilize IP transport to deliver all or a portion of the call.  While specifically finding that both types of prepaid calling products are telecommunications services and not unregulated information services, the decision also concludes more broadly that “all prepaid calling card providers will now be treated as telecommunications service providers”.  The FCC’s decision notes that if, in the future, PCCPs introduce new prepaid calling cards which they believe should be classified as unregulated information services, they should petition the FCC for a waiver or declaratory ruling to secure such a classification.    Menu-driven prepaid calling cards allow the user the option of utilizing the card as a transmission service or to access additional information (such as sports, weather, restaurant or entertainment information, time, reverse directory assistance, stock quotes, sports scores and schedules, horoscope information, etc.).  In analyzing such cards, the FCC relies upon the Supreme Court’s recent Brand X Decision where the Court stated that the key question in classifying offerings with both telecommunications and information service capabilities is whether the telecommunication transmission capability is “sufficiently integrated” with the information services component “to make it reasonable to describe the two as a single, integrated offering”.  In the case of menu-driven prepaid calling cards, the FCC finds that there is no functional integration between the information services features and the use of the telephone calling capability.  In other words, the telecommunications component is “completely independent” of the enhanced menu features and thus this component constitutes a regulated telecommunications service.   In assessing prepaid calling cards that utilize IP transport to deliver all or a portion of the call, the FCC looked to its 2004 IP-in-the-Middle Order which concluded that AT&T’s use of IP transport to route 1+dialed interexchange calls constitutes a telecommunications service.  In that ruling the FCC found that an interexchange service that a) uses ordinary customer premises equipment with no enhanced functionality; b) originates and terminates on the public switched telephone network; and c) undergoes no net protocol conversion and provides no enhanced functionality to end users due to the provider’s use of IP technology is a telecommunications service.  Here the FCC concludes that, except for the use of 8YY dialing instead of 1+ dialing, prepaid calling cards that use IP transport are identical to the services considered in its 2004 decision and thus are telecommunications services.   Since they are classified as offering telecommunications services, the FCC’s ruling determines that all PCCPs must contribute to the federal USF (based on interstate and international telecommunications revenues) and pay interstate or intrastate access charges based on the location of the called and calling parties.    USF Contributions   Many prepaid calling card offerings today combine enhanced non-telecommunications capabilities with telecommunications services, thereby making the task of allocating the telecommunications portion of interstate and international revenue for USF contribution purposes difficult.  The ruling indicates that the FCC has already established two USF “safe harbors” for use by providers that offer retail packages that bundle enhanced and telecommunications services, and that PCCPs may avail themselves of these safe harbor approaches.  Use of the safe harbors are afforded a presumption of reasonableness for enforcement purposes.  The decision also concludes that calling cards sold by, to, or pursuant to a contract with, the Department of Defense (“DoD”) or a DoD entity should be exempt from the USF contribution requirement.    Access Charges    As with other services that require the caller to dial an access number, the assessment of interstate and intrastate access charges based on the location of the called and calling parties can be complicated with respect to prepaid calling card traffic because the caller initially dials a 8YY number associated with the calling card platform and only later dials the number of the called party.  As a result, the originating carrier will not be able to determine the appropriate jurisdiction of the call based on a comparison of the calling and called numbers because it will only know the 8YY number associated with the platform, not the telephone number of the called party.  Unless the CPN is passed, the terminating carrier will face a similar problem.   The FCC concludes that these complications can be best addressed in the following manner: a) clarifying that PCCPs must transmit the CPN; b) requiring PCCPs to report the Percentage of Interstate Usage (“PIU”) to underlying transport providers; and c) requiring PCCPs to file quarterly certifications with the FCC as to compliance with the PIU reporting requirements and use of such PIU data for USF contribution purposes.  The FCC’s decision clarifies that “if prepaid calling card providers do not comply with these rules they will be subject to the Commission’s enforcement authority, including complaints and forfeitures.”   Transmitting CPN—The FCC’s decision clarifies that PCCPs, if SS7 technology is used, are required to transmit to interconnecting carriers the CPN of the calling party (i.e., the number associated with the telephone used by the cardholder) and not replace that number with the number associated with the platform.  To address similar concerns, the FCC also prohibits carriers that provide underlying service to PCCPs from passing the telephone number associated with the platform in the charge number (CN) parameter of the SS7 stream.    Reporting PIU—The decision requires PCCPs to report PIU data to those carriers from which they purchase underlying transport services.  This requirement is intended to address situations where CPN information is not available.  Specifically, a PCCP must report prepaid calling card PIU factors, and call volumes on which these factors were calculated, based on not less than a one-day representative sample.  The data must be computed separately for originating and terminating traffic on a state-specific basis.  This information must be provided to the transport provider no later than the 45th day of each calendar quarter.  If the PCCP fails to provide the appropriate PIU information to the transport provider in a timely manner, the transport provider may treat the PCCP’s traffic as subject to a 50% default PIU.  In addition, the transport provider may audit the PIU reports it receives from a PCCP “if it has a reasonable basis to believe that such reports contain inaccurate or misleading data.”    FCC Certification—To further ensure accurate reporting, the FCC's decision requires PCCPs to file certifications with the FCC, on a quarterly basis, signed by an officer of the company under penalty of perjury, stating that they are in compliance with the reporting requirements described above.  The certification should also include the percentage of interstate, intrastate, and international calling card minutes for that reporting period.  To facilitate USF contributions and in addition to required FCC Form 499A and Form 499Q submissions, PCCPs must also certify the percentages of total prepaid calling card service revenues that are interstate and international and therefore subject to federal USF assessments for the reporting period.  Lastly, the certification must include a statement that the company is making the required contribution based on the reported information.  These certifications will be due on a quarterly basis, beginning with the last day of the first full calendar quarter after OMB approval of this new requirement.    Retroactive Effect   The FCC determined that the new reporting and certification requirements applicable to PCCPs as well as its decision to classify menu-driven prepaid calling cards as telecommunications services will apply on a prospective basis.  On the other hand, its decision to classify prepaid calling cards that utilize IP transport as telecommunications will be applied retroactively.  While the FCC found that its prior decisions did not clearly point in the direction of treating providers of menu-driven prepaid calling cards as telecommunications carriers, its prior rulings applicable to IP transport did.    Effective Date   The FCC’s decision will take effect 90 days after publication in the Federal Register (or sometime after October 1, 2006).  The new certification and reporting regime will commence beginning with the last day of the first full calendar quarter after OMB approval of this new requirement.  We will be tracking both of these implementation dates.    The new regulatory compliance obligations applicable to PCCPs and their underlying providers will necessitate modifications in the ways these providers conduct business.  Providers should begin to implement changes now to ensure they are in compliance by applicable deadlines.   Back