Reality Check

By Neil Ende

Posted: 12/1999

Reality Check
It May Be Time for a Regulatory Audit
By Neil S. Ende

If your company is like many telecommunications services re-sellers, it has not fully
considered regulatory issues in structuring the business, nor in budgeting or planning
timelines. Don’t make this mistake–it can be costly.

Like it or not, the telecommunications industry remains subject to myriad, often
complex, frustrating and ever-changing regulatory requirements at the state and federal
levels. These requirements include entry regulation in the form of certification and
tariffing requirements, regulations addressing day-to-day operational issues, including
rules regarding the acquisition of new customers (i.e., slamming and third-party
verification), payphone dial-around issues and periodic reporting requirements. Properly
understood, these requirements can be managed effectively and need not be an undue burden
on your business. The key is to get on top of them early and work them into your business
plan and day-to-day operations.

The following is a partial list of key regulatory issues that you should consider and
strategies that can be employed to manage them effectively.

Entry Regulation

Jurisdiction over telecommunications service providers and resellers is divided between
the states and the federal government. As a general matter, the states have jurisdiction
over telecommunications services, local and interexchange, that originate and terminate
within the boundaries of their state (intrastate services). The federal government has
jurisdiction over telecommunications services that originate within the boundaries of one
state and terminate outside that state but within the 50 United States (interstate
services), as well as telecommunications services that originate within the United States
and terminate outside the United States (international services).

Facilities-based service providers, facilities-based resellers and non-facilities-based
resellers can be subject to entry regulation. As a general matter, agents and distributors
(as contrasted with resellers) are not subject to entry regulation. The legal distinctions
between these operating arrangements and the business implications of each can be
complicated and should be discussed with experienced telecommunications counsel before you
decide how best to structure your operations. This discussion should occur, of course,
before you seek certification and/or file tariffs at the state or federal level.

At the federal level, all entities selling or reselling interstate services are
required to file a tariff setting forth the terms and conditions under which those
services will be provided. With respect to international services, both facilities-based
providers and resellers are required to obtain a so-called 214 certificate from the
Federal Communications Commission (FCC) and to file a tariff. Absent an opposition or
other problem (which is very rare if the application is prepared properly), the entire
process normally takes from four to six weeks.

State entry regulations vary significantly by state. In the interexchange marketplace,
where entry regulation exists, it generally takes one of three forms:

1. A simple registration or notification requirement;
2. A formal certification and tariffing process; and
3. A formal tariffing process.

Local service providers are generally subject to even more rigorous certification
requirements. It is important to keep in mind that, regardless of the form of the entry
regulation, it is a condition precedent to the offering of service; that is, you need to
file and receive any required approval before you begin to provide service. It is
not enough simply to have made the filing. Entities providing service without necessary
approvals and/or tariffs are subject to significant fines and, in some states, may be
required to disgorge some or all revenues received from the provision of service prior to
approval.

Where formal certification is required for interexchange services, the process
generally consists of a reasonably straightforward application in which you provide data
regarding your ownership, finances (in some states) and planned operations. Certification
applications for local services are, as a general matter, much more comprehensive. The
application is then reviewed, either by a commission staff person or by an administrative
law judge. Depending on the state, this process can take from several weeks to a couple of
months for interexchange service providers. Where local services are at issue, it can
often take many months for the application to be approved. State filing fees range from no
charge to several hundred dollars.

Where formal tariffing is required, some states either allow or require that the tariff
be filed along with the certificate application. Other states bifurcate the process,
requiring approval of the application before the tariff is filed. As with the
certification process, interexchange tariffs are generally straightforward and subject to
minimal scrutiny; local tariffs are quite complex and are generally reviewed in much
greater detail.

One final point should be kept in mind. Many states require you to obtain foreign
corporation authority as part of the telecommunications certification process. This
generally requires you to obtain a Certificate of Good Standing from the state of
incorporation and to file that, along with an application form, with the state in which
you are seeking foreign corporation status. Typically, you also will be required to
identify an agent on whom service of process can be served within each foreign
jurisdiction. There are a number of companies that will provide this service for an annual
fee.

Operational Regulation

The myriad state and federal regulations applicable to your day-to-day operations
cannot be addressed properly in a single article. Instead, we will highlight two of them
here.

Third-Party Verification (TPV)/Slamming. Over the past several years, Congress,
the FCC and many states have become increasingly active in establishing formal procedures
for changes in a customer’s presubscribed carrier. Essentially, these rules currently
require that all changes in a customer’s presubscribed carrier be verified either by a
written and signed Letter of Authorization (LOA), by toll-free electronic verification or
through a verification process performed by a third party independent from the service
provider. The FCC is currently considering revisions to its TPV rules, including
verifications through the Internet.

Payphone Dial Around. Few issues have been more controversial in the past few
years than the FCC’s rules regarding dial-around compensation. The purpose of these rules
is to ensure that payphone operators are compensated for the use of their equipment to
originate calls wherein the caller dials around the payphone’s presubscribed carrier. At
present, interexchange carriers (IXCs) are required to compensate the payphone provider on
a per-call basis. The specific rules applicable to compensation are detailed and arcane,
as are the procedures to effectuate billing and payment.

Periodic Reporting Requirements

You’ve obtained your certificates, filed your tariffs, dealt with the regulations
applicable to your day-to-day operations. Your business is now up and running smoothly.
You’ve taken a deep breath–firmly believing that you’ve slain the regulatory beast–and
you’re now completely free to spend your time and resources running your business.
Unfortunately, life is never that easy. Like a bad rash, regulatory filing requirements
may subside for a while, but they never really go away. Indeed, the list of periodic
reporting requirements at the state and federal levels is far too long to address properly
here. The following, however, are a few important federal requirements that you should
keep in mind.

Tariff Updates. Where required, tariffs must reflect the rates, terms and
conditions under which telecommunications services currently are being provided. Thus,
when rates, terms or conditions are added, deleted or modified, you must amend your tariff
before such modifications are put into place.

Universal Service Surcharge. As a matter of regulatory policy, the FCC is
committed to ensure that all citizens have access to affordable telephone services.
Whether true or not, the FCC believes that to meet this objective it is necessary to
subsidize the provision of those services in certain circumstances. The FCC also believes
that the revenues necessary to provide that subsidy should be derived from a surcharge on
interstate traffic. Essentially, the surcharge is assessed against all telecommunications
service providers that provide interstate telecommunications services.

North American Numbering Plan Contribution. The North American Numbering Plan
(NANP) is the basic numbering scheme for the telecommunications networks located in
Anguilla, Antigua, Bahamas, Barbados, Bermuda, British Virgin Islands, Canada, Cayman
Islands, Dominica, Dominican Republic, Grenada, Jamaica, Montserrat, St. Kitts and Nevis,
St. Lucia, St. Vincent, Turks and Caicos Islands, Trinidad and Tobago and the United
States (including Puerto Rico, the U.S. Virgin Islands, Guam and the Commonwealth of the
Northern Mariana Islands). The FCC has adopted rules requiring U.S. telecommunications
providers to contribute to the funding of the administration of the NANP based on their
proportionate share of gross U.S.-originated international, interstate and intrastate
revenues less payments to other providers. Only those carriers providing services
internationally must make the required filing and contribution.

Painful as it may be, it is critical that you stay on top of your regulatory and
compliance filings and that they be made in a timely and accurate manner. Professional
resources are available to help in this effort–you should take advantage of them so that
you can dedicate yourself to the more enjoyable task of building a thriving
telecommunications enterprise.

Neil S. Ende is founder and partner in the Technology Law Group LLC, a
Washington-based telecommunications law firm. He can be reached at +1 202 895 1707 or by
e-mail at [email protected].