There is an old joke about a man that falls from an airplane, that goes through a series of “good news,” “bad news” lines —”Bad news, a man falls out of an airplane at 30,000 feet,” “Good news, he is wearing a parachute,” “Bad news, the parachute does not open,” “Good news, he has a backup parachute,” ad infinitum. A reading of the FCC Report and Order, issued on October 3, brings this old joke to mind, in that it has good news, and bad news for those in the prepaid telecom industry. Some of the new provisions will represent good news to some and bad news for others, and vice versa.

Because of the length of the new order — 15,000 words, covering over 48 pages — we have chosen not to print it in its entirety in this issue of The Prepaid Press. CLICK HERE for the complete, unexpurgated version. We recommend that you take the time to read the complete Report and Order as you have time, but we will summarize the most important points here.

A LITTLE BACKGROUND

Amidst a great deal of fanfare, the US Congress passed an update to the 1934 Communications Act in 1996, known as the Telecommunications Act of 1996. The technology had advanced light years in the intervening 62 years, and the original Act was badly in need of updating. (Some may claim that the Act was updated badly!) Since the original Act was drafted and passed before broadcast television, Direct Distance Dialing, the transistor, fax machines, the divestiture of AT&T, the PBX, VoIP and even, prepaid calling services, it did not directly address many of the important legal, regulatory and technical issues that existed in 1994, when the first discussions on the 1996 Act started.

The 1996 Act was passed in a heady period between the divestiture of AT&T in 1984, and the WTO agreement and EU mandates, purportedly opening global telecom markets to competition. It was also in a period where “next gen” telecom services and emerging global carriers were exploding around the world. Investments in telecom were at all time high levels, with billions and billions of dollars being thrown at anyone who could make a cogent case for their business plan. In 1996, there was little reason to assume anything other than the majority of these investments would ultimately pay off. In fact, the opposite happened, and the majority of the late 1990s telecom investments went sour, but the effect of the investment hysteria on the 1996 Act is unmistakable. There is an aura of invincibility underlying most of the assumptions in the 1996 Act.

The ink of President Clinton’s signature on the 1996 Act was not dry before the debate started. Many of the details of the 1996 Act were left intentionally vague, and the Federal Communications Commission was charged with filling the blanks. During an extensive implementation period, the FCC fine tuned the provisions of the 1996 Act and filled in some of the blanks.

But, just as it was impossible to predict in 1934 what would occur in the future, the events that would shake the telecom world in the late 1990s, could not be foreseen in 1996. In fact, where it took over 60 years for draconian changes to occur after the original Act in 1934, it only required less than five years for the 1996 Act to start showing its age. One of the most visible changes was in the area of public telephones.

Up until 1996, the airports in Atlanta, New York, Los Angeles and dozens of other cities around the US, were lined with literally thousands of public pay stations. Payphones had been a cash cow of the LECs, and other companies rushed in to create revenue of their own. Handheld, cellphones, although emerging in the mid-1990s, did not offer the flat rate long distance plans as ubiquitously as they do today, so payphones were heavily used by business and individual travelers for domestic long distance. The problem was, the free 800 access that most prepaid service providers utilized, provided no compensation for the payphone service providers. Many short sighted service providers saw the free ride as an advantage, but those with a more strategic view correctly perceived the risk. The risk was, that if payphone providers could not make a profit, the payphones would disappear.

A cursory glance at most of the airports and public transportation locations in the US reveal the obvious, payphones are as rare as redcaps in airports. In fact, without the Dial Around Compensation, or DAC, that was provided for in the 1996 Act, it is possible that the only place you would have found payphones today is in the Smithsonian. The huge decline in the number of payphones is testament to the rise in importance in cellular phones, and the fact that DAC alone is not a highly profitable business.

DAC — A MIXED BLESSING

But DAC has proven to be a mixed blessing. One of the problems has been in actually identifying, billing and collecting for the calls. In fact, the administration of DAC charges was recognized by the authors of the 1996 Act and the FCC implementation committee to be a significant expense to 800 number providers, who were permitted to charge more than the actual DAC charge. The DAC amount is established each year by the FCC to adjust for inflation and other costs that may increase over time. But 800 service providers are permitted to increase this amount to cover administrative costs.

In its first Payphone Order after passage of the 1996 Act, the FCC decided that “the primary economic beneficiary” of payphone calls should compensate the Payphone Service Providers, or PSPs.

The Commission identified three categories of beneficiaries.
1. facilities-based long distance carriers (usually the interexchange carriers)
2. switchless long distance resellers
3. switch based resellers, or SBRs

The Commission further required that interexchange carriers who complete calls also pay the payphone compensation. This structure was supposed to cover the vast majority of carriers using payphones for call origination, and probably did, at least in 1996. But, the rise of VoIP and other unforeseen changes in the telecom industry was giving rise to entirely new classes of carriers and services that could not have been contemplated in 1996. When the telecom bubble began to burst in the late 1990s, everyone, including PSPs, began cutting back unprofitable services. Gone were the battles that raged over payphone placements in airports, and many PSPs, including the Local Exchange Carriers, began removing payphones in earnest. A few PSPs, who had guaranteed minimum numbers of payphones during the bidding process, and were unable to convince government administrators of the need to cut back, actually went out of business.

Meanwhile, back at the 800 service providers, there was great confusion on when, how and who the DAC charges should be collected. The 800 service providers made this even more complex by failing to identify who the switched based reseller was, and not collecting the charge. The 800 service providers, interexchange carriers, felt that they had been put into the role of an enforcement agency, which they were not equipped, and not inclined, to do.

To address this problem, the Commission, in what was known as The Second Order on Reconsideration, required the “first underlying facilities-based interexchange carrier to whom the LEC directly delivers the call to compensate the PSP.” This assumed that the PSPs would be able to identify the interexchange carrier who originated the 800 call, in case the 800 carrier did not volunteer the payment. The interexchange carrier would then seek reimbursement from the SBR. The Commission allowed the 800 carrier to collect the set fee for the call, plus the carrier’s cost for tracking the call and providing the information to the PSP.

However, this Second Order was overturned by US Court of Appeals D.C. Circuit, on procedural grounds, so the remedy was not implemented. In the meantime, the Commission did further investigation into the structure of the industry. As part of this process, it invited comment from all affected parties, and held hearings on the matter. As a result of this input, the Commission further tweaked the provisions of the Second Order to arrive at what it hopes is a reasonable compromise between the need for PSPs to be adequately compensated, and the fluid structure of the telecom industry. This new Order, which goes into effect on April 1, 2004, is no April Fools joke; the penalties for non-compliance can be up to $1.2 million and a revocation of the 214 authority for violators. The most significant difference between this Order and the Second Order on Reconsideration is the requirement that SBRs track payphone ANIs (Automatic Number Identification) and arrange payment to the PSPs themselves. 800 service providers will also provide CDRs to PSPs to make sure that SBRs are reporting properly. To make sure the process is working, SBRs will be required to have an independent audit performed to prove that all the required processes for compensating PSPs are in place and working.

The Order greatly expands the definition of a “Switch Based Reseller,” encompassing even those who use service bureaus and partitioned switches.

One indication that the Commission has accomplished its goal of reaching a compromise between the parties, is the fact that none of the participants appears to be particularly happy about the new rules. The 800 carriers believe that they have become responsible for guaranteeing the debt of their customers to the PSPs, and that the PSPs are overcompensated. The PSPs, on the other hand, would like to go back to the Second Order, because it makes it easier for them to collect the fees from the 800 service providers. And, SBRs, who may have been able to slip through the cracks in the old structure, and avoid payment, are probably silently upset about the new plan. The audit requirement is widely criticized as being onerous, expensive and unnecessarily bureaucratic.

The only group that appears to be pleased with the new rules, besides the Commission itself, are the attorneys that will likely be called upon to litigate them.

Attorney Ed Maldonado’s comments on the new DAC rules

In a nutshell, the changes of the October DAC Order are straight-forward: the DAC Order requires the SBR whose platform the coinless payphone call terminates to implement a call tracking system and pay the PSP directly; it requires interexchange carriers that pass a coinless payphone call to provide more of the information it currently collects internally to the PSP; it expands the group of carriers in the call path that must report data to the PSP; and it expands the types of information that carriers in the call path must report to the PSP.

From the Regulatory perspective, the new DAC reporting requirements expand the previous class of carriers considered to be Switch Based Resellers (SBRs) that are obligated to compensation to include the new category of “Intermediate Carriers” who are common carriers that own or lease a switch and are in the call path and transfer payphone originated calls. This is a definite jump in the class of carriers who must tender call reporting to the public record.

While the intent of the FCC is to improve the “audit trail” from resellers for payphone providers by increasing the class and scope of call reporting information, there are still concerns whether the categories are properly based. Take Prepaid Calling Cards as an example. The majority of the categories of the DAC Order are established from The Telephone Trends Report data, which may not be entirely reflective of the market of toll resellers and calling card providers. The FCC definition of an SBR that is a small business prepaid calling card provider, is a company of less than 1500 employees engaged in the business of prepaid calling cards. This definition was based upon the Telephone Trends Report, which reflects that 21 companies - in total — reported that they were engaged in the provision of prepaid calling cards, and of this number from the Telephone Trends Report 20 would qualify as small businesses under the new rules.

I'm not entirely convinced this raw data really reflects the prepaid calling card industry, however the impact is clear - reporting is now required. I really see the Intermediate Carrier as class that will bear the brunt of the “new” DAC reporting requirements from the Prepaid Industry, and I see them as a large portion of the providers currently operating in Prepaid.

Now from a Litigator's perspective, the scope of available information (evidence) for telecom litigation may well have been equally expanded with DAC reporting, and not just in payphone compensation cases. The DAC reporting information may constitute a public record of traffic that can be Judicially Noticed to a Judge of in a Court of Law. That is to say it may be a record recognized by the Courts as official declarations of a SBR's traffic — at least in which a coinless call was made. Should this be the case, there will be a lot of lawyers salivating at the DAC reports as a new element of Discovery. It would definitely take the “he said/she said” out of a number of telecom carrier disputes and controversies, as an available, and independent, information source. This is because the SBR has a lot at stake not to report correctly because if the DAC traffic numbers are not reported or are intentionally “fudged”, the SBR can ultimately face fines or revocation of its Section 214 authority.

ITXC’s, Mark Delaney’s comments on the DAC rules

DACs is an important issue because of the valuable role that PSPs play in the Prepaid Calling Card Marketplace. The marketplace relies heavily on the availability of pay phones for subscribers to use to place calls on their calling cards. Making sure that these providers are compensated for the use of those phones is important and a necessity.

While the government's ruling includes an onerous auditing burden and still doesn't place the full financial responsibility on the SBRs it is a step in the right direction. Considering how contentious the relationships are between the PSPs, the 800 service providers and the SBRs, the fact that no one is happy means the decision is probably a correct one and in the right direction.

Editor Gene Retske’s comments on the DAC rules

Legend has it that the famous football coach George Halas, frustrated at the insipient play of his team in the first half of a game, waved a football in front of them, and declared loudly, “This is a football!” This back-to-the-basics approach suggests a possible solution to the payphone compensation problem. Since we are talking about payphones, why not have the caller pay for the call? As odd as this may sound at first blush, except for customer service calls, the caller is going to end up paying, plus a lot of markups, anyway, so why not just have them put in a quarter for each call and go from there? I think most callers would readily accept the concept of having to pay to use a pay telephone. It is not such a radical concept, hotel guests are charged often exorbitant rates to access 800 numbers from hotel rooms.

The only group that would potentially object are the operators of customer service centers that use 800 service for access, whose callers get a free ride under the current system. Under this simple payphone compensation plan, callers using a pay telephone, would have to accept the fact that they have to pay to use a payphone. There is a possibility that 800 customers could be offered a choice of paying the payphone charge themselves. If they desired to provide this service, they would be motivated to be proactive in arranging for this payment. This is in contrast to SBRs, who are motivated to stay under the radar.

In the words of Coach Halas, slightly paraphrased, “This is a PAY telephone!”

Give us your thoughts about DAC. In the above article, we have provided a summary of the new FCC Report and Order on Dial Around Compensation. We believe that public telephone access to prepaid services is a key issue in our industry, and have included the comments of some industry experts, observers and practitioners on DAC. We would like to hear your comments, and we may even publish them, if they are relevant and thought provoking.

Please send your comments to us at gretske@prepaidpress.com.