Telecommunications Licensing (Prepaid and Postpaid) Entering the Retail Telecommunications Market   By Thomas K. Crowe, Esq.   Entering the heavily-regulated U.S. telecommunications marketplace as a 1+ provider or prepaid provider (provider) is no small undertaking.  The following attempts to summarize selected components of the entry and licensing process. Under federal and state law, telecommunications providers offering retail-level services are not allowed to commence providing service until they have been authorized to do so by the Federal Communications Commission (FCC) and/or applicable state Public Utilities Commission(s) (PUC(s)).  Potentially severe penalties apply to companies that commence operations without prior authorization.  Practically speaking, most 1+ and prepaid providers offer services that will be subject to licensing at both the FCC and state levels.   FCC Requirements A telecommunications provider seeking to offer international services originating in the United States and/or domestic U.S. interstate services (calls originating in one state and terminating in another) is required to comply with the FCC’s authorization requirements.  These requirements are briefly summarized below. FCC International Authorization (Section 214).  A provider seeking to offer international services originating or terminating in the United States must first obtain FCC Section 214 authority to provide such services.  Unless the applicant is affiliated with a foreign entity or other unusual issues arise, the application is usually acted on by the FCC in just over two weeks (from date of electronic submission).  For more information, see http://www.tkcrowe.com/fcc_section _214.html. FCC Registration (Form 499-A).  A provider seeking to provide domestic U.S. interstate services (calls originating in one state and terminating in another) must first register to do so with the FCC.  Registration is accomplished by filing with the Universal Service Administrative Company a signed copy of certain pages of FCC Form 499-A.  Among other things, the form requires a company to list an agent for service of process in the District of Columbia and calls for a listing of states where the company either provides or anticipates providing service in the future.  For more information, see http://www.tkcrowe.com/fcc_forms_ 499.html. The FCC Form 499-A registration is particularly important. One reason is that it automatically ties a provider into the FCC’s Universal Service Fund (USF) contribution system, identifying a company as a payer under the program.  (See below, “FCC Fees and USF”)  Another reason is that 499-A registrants are added to the FCC’s online, searchable database of registered companies.  Under the FCC’s rules, facilities-based providers are only allowed to contract with providers on the FCC registration list.  Thus, failing to register will not only subject a company to potential FCC enforcement action, but could prevent it from being able to enter agreements with underlying facilities-based providers. Price Lists.  An additional step in the entry process on the federal side is the creation of a price list, which is a document that contains a telecommunications provider’s rates, terms and conditions for international and interstate services.  Prior to detariffing, the price list was termed a “tariff” (and even today bears significant resemblance to a tariff).  Under existing FCC rules, a provider is required to post both its international and domestic rates, terms and conditions of service on its website, if it has one, and make such information available at its business office for public access.   CALEA.  Telecommunications providers must comply with the Communications Assistance for Law Enforcement Act (CALEA).  CALEA is intended to preserve the ability of law enforcement agencies to conduct electronic surveillance by imposing specific obligations on “telecommunications carriers” for assisting law enforcement, including delivering call interception and call identification functionality to the government with a minimum of interference to customer service and privacy.   CPNI.  Providers must also comply with the FCC’s rules protecting Customer Proprietary Network Information (CPNI), which is the personally identifiable information derived from a customer’s relationship with a telecommunications provider, including call-identifying information and customer identity.  Under the current CPNI rules, providers must establish safeguards and procedures for the use of CPNI and implement a system under which the status of a customer’s CPNI approval can be clearly established prior to the use of the CPNI.  Recently announced federal rules likely to take effect in the fall of 2007 impose additional requirements on providers in order to safeguard CPNI.   State Certification A 1+ or prepaid provider seeking to offer intrastate services must obtain authorization or “certification” (as it is commonly called) from the PUC in the state in which it intends to provide service.  An overview of the state authorization or certification process is provided below. Applications/Registrations.  Most states require providers to seek authorization or certification to operate as a telecommunications provider by submitting an application with the state PUC or similar regulatory agency.  In many instances, the application requests that the PUC issue a Certificate of Public Convenience and Necessity (CPCN) or similar authorization, which is formal approval of the provider’s proposed operations and may be thought of as essentially a license to operate as a telecommunications provider in a given state. Applications for certification can take many forms and vary in length and complexity.  Some states require only the submission of short registration forms, while others require full petitions, with notarized affidavits, and the submission of tariffs.  Tariffs are documents outlining a provider’s rates, terms and conditions for the services it offers and are typically 20 pages to 40 pages in length. Legal Fees and Other Costs.  The costs associated with gaining authorization or certification include legal fees for preparation of the applications and tariffs, fees assessed by most PUCs for filing applications and other costs.  As each application requires varying degrees of interaction with officials at the PUC, which can result in the accumulation of billed attorney time, we offer flat-fee arrangements whereby the costs associated with each application are controlled and set upfront.  PUC filing fees for each state typically range from $35 to $350, with the rare exception of a higher fee of up to $1,000.  A state-by-state breakdown of our flat-fee schedule and PUC filing fees is available upon request. Processing Times.  Applications for CPCNs can take anywhere from one month to one year to process by a state PUC, with an average processing time from the date of filing of around six weeks.  Processing times vary depending on how elaborate a state’s requirements and procedures are, the efficiency of the state PUC’s staff (staff availability and workload), how well an application is prepared (mistakes slow processing times) and other factors, such as hearing requirements (discussed below).  For instance, states with minimal regulatory requirements, such as Colorado and Montana (which require the submission of one- to two-page registration forms), authorize providers to begin operations immediately upon filing the forms, with no processing times.  Other states, such as Oregon and Oklahoma, take approximately two to three months to process applications. Finally, states such as Louisiana and Arizona have been known to take over six months, and sometimes close to a year, to process applications, depending on the factors discussed above. Hearings and Local Counsel.  As mentioned above, several states currently require hearings as part of the certification process, which can add significant delays in processing time.  Hearings before state PUCs require a representative from the applicant’s company to testify (either in person or, depending on the state, telephonically) about the company’s managerial, technical and financial fitness to provide telecommunications services, as well as other related matters.  Hearings typically last about an hour or two but require preparation on the part of counsel and the witness to facilitate a favorable outcome.  Hearing preparation, as well as the requirement in states such as South Carolina that in-state, local counsel represent the applicant in the hearing, can increase the costs of obtaining certification in such states. It is also important to note that some states, while not requiring hearings, require that in-state, local counsel be used to file the applications and represent the applicant on a limited basis to obtain certification.  Currently, local counsel is required in Alabama, Missouri, Mississippi and South Carolina.  We have established relationships with competent attorneys in these states and typically enlist their services on behalf of our clients.   Business Considerations It is important that new telecommunications providers (whether prepaid or postpaid) consider strategy in entering state markets.  Some providers with access to sufficient startup capital and/or nationwide marketing strategies choose to enter all fifty states (or a majority of them) simultaneously.  Others, however, have been very successful by initially entering only carefully selected states based upon marketing plans, market population (e.g., California and New York) or other specific factors and then focusing their efforts on gaining a strong presence in such states.  A provider should also bear in mind that with each additional state in which it seeks to provide service, additional regulatory compliance obligations arise.   Beyond Entry Successfully entering the telecommunications market is only half the battle.  Once a provider has been authorized by the FCC or certificated by a state PUC to commence operations, it will face a range of ongoing FCC and state compliance requirements.  Specifically, providers holding an FCC Section 214 authorization or registered to provide domestic, interstate service will be subject to regulation under federal law, while providers offering intrastate service will be subject to regulation under state PUC laws in those states in which they are authorized to operate. FCC and state ongoing compliance requirements include a range of regulatory assessments and reporting obligations, some of which are described below.  FCC Fees and USF.  The most important federal assessment a provider will face is the mandatory contribution to the USF.  USF fees underwrite telecommunications services for a number of different groups including residents of rural areas, low-income consumers, rural health care providers, schools and libraries.  USF contributions are calculated based on quarterly submissions of FCC Form 499-Q and annual submissions of FCC Form 499-A (due each April 1st). Providers are then billed and payment is required on a monthly basis.  The contribution rate, which changes quarterly, has in recent years run at 9 percent to 12 percent of combined interstate/international revenues. In addition to a provider’s USF contribution, other federal regulatory assessments are likely to apply.  These assessments will be used to fund the following: the North American Numbering Plan (NANP; allocates number resources), local number portability (LNP; allows customers to keep their numbers when switching service providers) and telecommunications relay services (TRS; provides telecommunications service to the hearing impaired).  Finally, the FCC also generally requires the payment of annual regulatory fees by companies holding FCC authorizations, which are typically assessed at a small fraction of one percent of gross revenues.   Reporting PIU (Prepaid).  Prepaid card providers must report PIU data to the carriers from which they purchase underlying transport services on a quarterly basis.  If the prepaid card provider fails to provide the appropriate PIU information to the transport provider in a timely manner, the transport provider may subject the prepaid card provider’s traffic to a default 50% PIU factor.  PIU reports are due to underlying carriers 45 days after the end of each calendar quarter.   FCC Certification (Prepaid).  Prepaid card providers must also file certifications with the FCC on a quarterly basis stating that they are in compliance with the PIU reporting requirements described above.  The certification should also include the percentage of interstate, intrastate and international calling card minutes, as well as revenue information for that reporting period.  Lastly, the certification must include a statement that the company is making the required USF contribution based on the reported information.  The certifications must be filed with the FCC on a quarterly basis. State Fees and Compliance.  Most states require some sort of ongoing regulatory compliance similar to that at the federal level (most often via data requests and annual regulatory fees).  Requirements vary by state.  Some states also have their own state-level USF, independent of the federal USF.  The annual contribution for state-level funds varies widely – from approximately 0.2 percent of all intrastate retail revenues to just under 5 percent of revenues. Our firm can offer a turnkey solution to the entry process (typically at competitive flat pricing), as well as ongoing legal and compliance assistance once your company has commenced operations.  Our attorneys and paraprofessionals have successfully prosecuted dozens of entry efforts on behalf of varied types of service providers before the FCC and each of the state PUCs.   The author is a Washington, D.C.-based attorney specializing in telecommunications (prepaid and postpaid), VoIP and wireless legal/regulatory matters.  To obtain additional information regarding any of the issues covered above, please contact Thomas K. Crowe at (202) 263-3640 or visit our website at www.tkcrowe.com.  The foregoing is intended to provide a general overview only and should not be viewed as a substitute for conferring with qualified legal counsel.  Each new business will have unique requirements that should be analyzed by counsel.  Please note that these materials were last updated on June 12, 2007, and do not include developments occurring after that date.