Ensuring Fair Competition Remains Regulatory
Challenge for Prepaid
By Howard Segermark
Payments in advance for services yet to be rendered is an unusual and
sometimes problematic arrangement. When I buy long-distance service from a
carrier, every month I get what amounts to a contract–a fine-print list of the
conditions I agree to.
When I enter into a post-paid cell phone contract, the terms are spelled out.
This means that the service provider has my explicit agreement to those terms
But prepaid is a wholly different paradigm. The "agreement" on
terms and conditions may consist of a point-of-sale poster or packaging
information. A consumer or an attorney can argue that no terms and conditions
disclosure was made. Handing over a package–a phone card or prepaid
cellular–does not provide an opportunity for a formal contract.
And a fiduciary responsibility is involved for those who take money prior to
providing service. If the neighbor’s kid asks if he can wash the car, I say
fine. When he’s done, he gets paid. If he asks me for $5 and tells me he’ll wash
my car next week, that complicates the arrangement. A far greater responsibility
is placed on one who collects money prior to service delivery.
The regulatory history for prepaid phone cards tells us this factor weighs
heavily when it is time to adopt regulations on other prepaid communications.
They likely will come to prepaid wireless too.
One issue when potential regulations are discussed will be adoption of
Universal Service Fees. This is a fee that applies to all telecom service
providers. The rate varies.
In 2000, 5.7 percent of gross interstate and international call revenues was
directed to the fund. The law says that carriers are to pay the announced rate
on booked revenues, which is the number you see on your monthly phone bill under
"Federal Universal Service Fund."
However, explanatory information the FCC (www.fcc.gov)
has printed says that for prepaid service providers, it is the retail
price of the service. This means that prepaid providers are expected to pay a
rate far higher than Congress authorized. If a prepaid provider sold service at
a 40 percent discount to distributors and retailers, and it had to pay on the
retail price, the USF bill would be 67 percent higher than the rate imposed on
Put another way: If I am a carrier and my long-distance division sells $1
million of interstate service to consumers, at 5.7 percent, my bill is $57,000
in USF "fees." If my prepaid phone card (or wireless) division sells
$1 million face value of phone cards for $600,000 (a 40 percent discount), my
tax bill is still $57,000, according to this latter interpretation.
I would have to pay that fee, even though I only booked $600,000. That would
mean that prepaid providers would pay a 9.5 percent rate on their booked
A final problem in the USF administration is that the FCC seems to hold that
the basis of the tax "should include revenues from prepaid calling cards
provided either to customers or to retail establishments. Gross billed revenues
should represent the amounts actually paid by customers and not the amounts paid
by distributors or retailers, and should not be reduced or adjusted for
discounts provided to distributors or retail establishments. All prepaid card
revenues are classified as end-user revenues."
This presents an impossible situation for cards that are sold on unit bases,
and where the issuer has no knowledge of the "amounts actually paid by
I have brought this to the FCC’s attention, and it seems willing to work with
the International Prepaid Communications Association (IPCA, www.I-PCA.org) to
find a solution. The FCC is sympathetic and agrees the industry should have
An alternative would be to get the FCC USF administrators to adopt the
default mechanisms currently used in the Federal Excise Tax treatment of phone
cards, which is set at 134 percent of the sales price. The IPCA (formerly the
International Telecard Association) objected to certain provisions of the excise
tax treatment, however, in that we advocated a "true-up" mechanism to
provide for adjustments in overpayment when it can be shown that the final
retail price was different than that on which the tax was paid. No resolution of
this is imminent, however.
One of the most unusual regulatory approaches has been taken by Texas. It
appears that because one Texas company, Twister Communications, defaulted on its
promises to distributors and consumers, the Texas Public Utility Commission (PUCT,
www.puc.state.tx .us) and Texas
politicians received tons of complaints. As a result, they developed rules that
require prepaid phone cards to disclose the highest possible per-minute rate a
consumer might incur in making a call.
One can debate the virtues of a "clean" card. And one can argue
that multiple surcharges and fees are confusing. But these are not prohibited
under Texas law. The bottom line is that the rules provide as much useful
information to the average Texan using a phone card as disclosure in the
language of ancient Sumer would.
A final disadvantage in these rules is that the impossibility of accurate
conformance makes every phone card issuer a target for arbitrary enforcement
There is good news, however: The financial rules the PUCT proposed have been
Rules, Rules, and More Rules
The latest state to consider prepaid telephony rules is Tennessee. The
proposal before the Tennessee Regulatory Authority (www.state.tn.us
/tra/) is comprehensive. The industry believes that before adopting the rules
for prepaid communications, a special workshop should be scheduled.
In proposing a comprehensive rule, the initial draft does not take into
account the unique circumstances under which prepaid communications are
I expect to visit Tennessee this spring to work on standards that will
benefit the state’s consumers and allow the industry to operate.
In Florida, a point-of-sale tax on phone cards was implemented nearly two
years ago. However, the state failed to modify the law regarding local taxation.
If the industry gets behind the effort, the Florida Legislature could revisit
the issue this year. Some municipalities–Homestead, in particular–have been
imposing massive taxes on phone cards, contrary to the intent of the
Some Florida state legislators are interested in tackling another problem.
They want to toughen state enforcement practices against phone card issuers who
do not provide promised service; who do not clearly disclose all surcharges; or
who do not conform with state certification, tariff, tax and registration laws.
The Federal Trade Commission (FTC, www.ftc.gov)
has a long-standing policy on deceptive practices. It is a federal offense to
advertise in a way that is meant to mislead or deceive.
We have indications that at least one major state has a full-time
investigator preparing a case against a phone card seller–maybe more.
The state is not alone. All states and most counties have deceptive trade
practices laws, and attorneys general and district attorneys can prosecute
It’s also important to note that everyone in the distribution chain can be
liable in deceptive practices cases. This includes retailers and distributors.
This brings us to enforcement. Perhaps the most basic concern, when it comes
to regulation of prepaid communications, includes whether the laws are written
only to make legislators and regulators feel that they have "done
something" to help consumers.
Or are the laws meant to enable enforcement agents to take action against
those that harm consumers?
The last time I was in Austin, the PUCT had a single person doing all its
enforcement work. This means, of course, that it is unlikely that Texas’ new
rules are being enforced. However, the legitimate companies will spend a great
deal of time and money attempting to conform to them. Their scofflaw competition
will not bother with such burdens.
Although the Public Utility Commission of California (CPUC, www.cpuc.ca.gov)
approved six full-time investigators a year ago to enforce that state’s phone
card rules, I am unaware of any firm in that state that has been penalized for
ripping off consumers.
As an IPCA board member says: The law-abiding members of the prepaid industry
have a franchise to do business. Presumably that franchise is worth
something–yet their investments and profits are threatened by competitors that
do not conform to the laws, do not pay taxes and fees and do not provide the
service they promise. Those competitors steal valuable market share by
underpricing–they don’t have the overhead that the legitimate firms do.
The actions of the scofflaws result in the imposition of costs on the
law-abiding firms in the form of tighter regulations.
What is the industry doing to protect its franchise?
Perhaps the interest expressed by Florida legislators will be the spark that
ignites a fire resulting in action to accomplish fair competition and reform of
the negligent attitudes taken by most enforcement agencies today.
Howard Segermark is executive director of the International Prepaid
Communications Association (www.I-PCA.org), formerly the International Telecard
Association. Segermark has been with the Association since its founding in 1995,
and is the recipient of many industry awards for his leadership efforts. He can
be reached at howard@I-PCA.org
On renewed lobbying efforts for broadband
legislation…"Americans–and providers of high-speed Internet
services–now face a crazy patchwork of broadband regulation … This patchwork
of regulation will stifle the future development of Internet applications,
products and services."
Gary R. Lytle, interim president and CEO, the United States Telecom
Association (USTA, www.usta.org)
"We need to develop and encourage national broadband policies that
foster faster, more efficient deployment of broadband services, and to strongly
oppose any new legislation that would give the Bells unnecessary ‘relief’ from
the InterLATA data restrictions without first allowing competition for local
H. Russell Frisby Jr., president, Competitive Telecommunications
Association (CompTel, www.comptel.org)
"This bill represents my commitment to making sure that West Virginia is
not left behind in the technology revolution. High-speed Internet access is
critical to our economic future, and this bill will ensure that communities
across the state will have the tools necessary to be players in the new
Sen. John "Jay" Rockefeller, D-W.Va.