By an Order issued late last week, the Wireline Competition Bureau (Bureau) provided important insight regarding determining the jurisdictional classification of private line revenues. In ruling on long-pending petitions for reconsideration of Universal Service Administrative Company (USAC) audit findings regarding the classification of private line revenues, the Bureau explained that the longstanding Ten Percent Rule does not establish any presumption that a private line is jurisdictionally either intrastate or interstate. Instead, the Bureau clarified that it is the jurisdictional nature of the traffic carried over private lines, not the existence (or nonexistence) of a customer certification, that determines the appropriate jurisdictional classification. Moreover, carriers must conduct a good faith inquiry into the nature of the traffic carried on the private line when determining the jurisdiction of those line revenues. Carriers that provide private line services should be sure to review the Order to ensure their private line jurisdictional classification methods will withstand any Bureau or USAC scrutiny.

Private lines are dedicated connections chiefly used by businesses, banks, and other institutions to transmit large amounts of sensitive data, and by wireless carriers to ease congestion by funneling traffic from cell towers to wired telephone and broadband networks. Private lines can carry solely intrastate or interstate traffic or a mix of both, and under the FCC’s rules interstate telecommunications revenues are subject to federal universal service fund (USF) contributions, while intrastate telecommunications revenues are not.

In classifying the jurisdiction of a private line, providers have long looked to the Federal Communications Commission’s (FCC or Commission) Ten Percent Rule defining interstate telecommunications. Specifically, the Commission has held that where more than ten percent of the traffic on a private line is interstate, the revenues and costs of the entire line are classified as interstate. The Commission previously agreed that the best method for confirming the traffic carried over a private line was by obtaining a customer certification regarding the traffic. Many in the telecommunications industry viewed the Ten Percent Rule as establishing a presumption that a private line was intrastate unless a customer certified that more than 10 percent of the private line’s traffic was interstate.

In its Order, the Bureau denied and remanded back to USAC long-pending requests from six carriers to review USAC audit findings that reclassified the carriers’ private line revenues from jurisdictionally intrastate to jurisdictionally interstate, thereby subjecting the carriers to significant USF contribution obligations. However, the Bureau’s Order has import for the telecommunications industry in general. The Order not only rejects the perceived intrastate jurisdiction presumption, it also clarifies that carriers are required to conduct a good faith inquiry into the nature of the traffic carried on the private line. Moreover, the Order is instructive that, for purposes of audits – and therefore relevant to a carrier’s proactive measures – examples of supporting documentation include customer certifications or other acknowledgements (such as contract terms) that more than ten percent of the traffic is interstate or that ten percent or less is interstate, provided the carrier explains to customers what constitutes intrastate and interstate traffic before relying on such certifications. Carriers also can rely on sworn declarations from a corporate officer attesting the private lines are technically unsuitable for any interstate usage and the Bureau noted that these declarations ideally would be supported with detailed engineering reports or other evidence of the service’s technical specifications. However, the Bureau acknowledged the challenges of meeting this standard in light of the difficulty for a carrier to demonstrate that the customer has not linked the private line to other network facilities that permit the private lines to carrier interstate traffic.

The key takeaway for private line providers is the importance of carefully considering the nature of the traffic carried over private lines – and retaining documentation of that nature – when classifying the jurisdiction of private line revenues. The importance of document retention was underscored by the Bureau’s statements that carriers subject to USF contributions are required to retain, for five (5) years from the contribution date, all records demonstrating compliance with the FCC’s rules regarding reporting of revenues on the FCC Form 499A. The Bureau also issued an important warning to carriers undergoing audits, that if a carrier withholds or fails to timely provide information during a USAC audit, the carrier cannot later claim that USAC failed to consider all evidence or request additional information related to a carrier’s untimely filed information. While not directly relevant to private line classifications, all carriers should take heed of the need to completely and promptly respond to audit requests.