FCC Puts Providers “Exploiting Loopholes” Under Fire (Finally)
JSI Capital Advisors continues its detailed analysis of the 759-page USF/ICC Reform Order by looking at the FCC’s new rules for curbing access stimulation and phantom traffic—two forms of access charge arbitrage, which together have likely cost the telecom industry and consumers hundreds of millions of dollars per year. The new rules to reduce arbitrage are not especially drastic, and for the most part reflect the FCC’s initial recommendations in the USF/ICC NPRM. The intention is that these new rules, in conjunction with the overall transition to bill-and-keep, will eventually eliminate access stimulation and phantom traffic…and hopefully not give rise to new forms of arbitrage along the way.
Access Stimulation – A Two-Prong Definition
Access stimulation is a pervasive problem that “occurs when a LEC with high-switched access rates enters into an agreement of high call volume operations such as chat lines, adult entertainment calls, and ‘free’ conference calls.” The FCC explains, “the arrangement inflates or stimulates the access minutes terminated to the LEC, and the LEC then shares a portion of the increased access revenues resulting from the increased demand with the ‘free’ service provider, or offers some other benefit to the ‘free’ service provider….Meanwhile, the wireless and interexchange carriers (collectively IXCs) paying the increased access charges are forced to recover these costs from all their consumers.” The FCC claims that access stimulation “imposes undue costs on consumers,” has cost IXCs over $2b in the last five years, and harms competition especially in the conference calling market.
A sudden jump in traffic can equal a boon for the LEC because “they are currently not required to reduce their access rates to reflect their increased number of minutes.” Not all situations that result in drastically increased traffic are a result of an access stimulation scheme, and may occur if a new call center or other call-heavy business moves into the area. However, the FCC is hoping that the new rules will weed out the “bad actors” and ensure that access rates are not “unjust and unreasonable under section 201(b) of the Act.”
The FCC adopts a definition of access stimulation that includes two conditions, and “if both conditions are satisfied, the LEC generally must file revised tariffs to account for its increased traffic:”
- A revenue sharing condition
- An additional traffic volume condition, achieved by either a 3:1 interstate terminating-to-originating traffic ratio in one month; or a greater than 100% growth in interstate originating and/or terminating traffic compared to the same month in the previous year
To help identify LECs who may be engaging in access stimulation, IXCs can file “complaints based on evidence from their traffic records.” Following a complaint, the LEC has the burden of proof to “establish that it has not met the access stimulation definition and therefore that it is not in violation.” The FCC explains that it adopted the two-prong definition for access stimulation because “the use of a revenue sharing approach alone was criticized by some as being ambiguous, circular, or a poor indicator of access stimulation.” The definition that the FCC adopts for revenue sharing arrangements is contingent on a net payment from the LEC to its revenue sharing-partner. The FCC believes that this definition “best identifies the revenue sharing agreements likely to be associated with access stimulation and thus those cases in which an LEC must re-file its switched access rates.”
The traffic volume condition has two triggers in order to “address the shortcomings of using either component separately.” The FCC intends for the 100% growth trigger to act as backup insurance in case a carrier tries to “game” the 3:1 ratio trigger: “The traffic growth component protects against this possibility because increasing originating access traffic to avoid tripping the 3:1 component would likely mean that total access traffic would increase enough to trip the growth component.”
Once it has been determined that a LEC is engaged in access stimulation, the carrier must file a revised tariff “except under limited circumstances.” RLECs and CLECs cannot file a new tariff again until their revenue sharing agreements are terminated, even if the 3:1 or traffic growth conditions are no longer met. Access stimulating RLECs are also no longer able to base rates on historical costs and demand, and cannot participate in NECA tariffs. Carriers who are currently engaged in access stimulation have a bit of a window to end this behavior before facing the consequences: “If a carrier sharing access revenues terminates its access revenue sharing agreement before the date on which its revised tariff must be filed, it does not have to file a revised tariff,” because “traffic patterns should return to levels that existed prior to the LEC entering into the access revenue sharing agreement.”
One last point worth mentioning about the access stimulation rules is that CLECs engaged in access stimulation have to benchmark their interstate switched access rates to the lowest in the state, and the FCC concludes “the lowest interstate switched access rate of a price cap LEC in the state” is the appropriate benchmark.
Overall, the FCC anticipates that “the approach we adopt will reduce the effects of access stimulation significantly, and the intercarrier compensation reforms we adopt should resolve remaining concerns.”
Phantom Traffic – “Gamesmanship is Rife”
Phantom traffic in the most basic sense, “refers to traffic that terminating networks receive that lacks certain identifying information.” The FCC further explains, “In some cases, service providers in the call path intentionally remove or alter identifying information to avoid paying the terminating rates that would apply if the call were accurately signaled and billed.” The FCC estimates that the problems are “widespread,” and anywhere from 3-20% of all traffic is missing identifying information. This costs carriers and consumers “potentially hundreds of millions of dollars annually.”
The FCC is taking a straightforward approach to reducing phantom traffic—simply requiring that certain identifying information be included in PSTN and VoIP calls. As with access stimulation, the FCC is adopting its recommendations from the NPRM with some minor modifications. The new rule is as follows, which the FCC anticipates “will assist service providers in accurately identifying billing for traffic terminating on their network, and help guard against further arbitrage practices:”
Service providers that originate interstate or intrastate traffic on the PSTN, or that originate inter- or intrastate interconnected VoIP traffic destined for the PSTN, will now be required to transmit the telephone number associated with the calling party to the next provider in the call path. Intermediate providers must pass calling party number (CPN) or charge number (CN) signaling information they receive from other providers unaltered, to subsequent providers in the call path.
The FCC believes that requiring all telecommunications providers (PSTN and interconnected VoIP) to maintain the integrity of the calling party information, and prohibiting the stripping or alternation of such information, is in the public interest. The FCC is not allowing any general exceptions to the phantom traffic rule, for example if a carrier does not have the technical feasibility to comply. However, “parties seeking limited exceptions or relief” can file a waiver.
Simple and straightforward, right? The FCC maintains that the phantom traffic rule “is consistent with our goal of helping to ensure complete and accurate passing of call signaling information, while minimizing disruption to industry practices or existing carrier agreements;” and “should significantly reduce the amount of unbillable traffic that terminating carriers receive.”
Do you think that the FCC’s access stimulation and phantom traffic rules will get to the root of the problems? Will the rules provide necessary relief for the carriers and consumers who are pulled into these costly arbitrage schemes, and prevent future arbitrage schemes from arising? The rules appear to be very uncontroversial, obvious and easy remedies; and it is almost surprising that they have not been adopted sooner.
Coming up next, we will take a look at the new bill-and-keep ICC transformation regime that surely has some RLECs quite concerned.
The full FCC Order is available here, with access stimulation and phantom traffic rules covered on pages 209-240.