Carriers Sue Iowa Telcos over ‘Traffic-Pumping’

Published October 1, 2007

AT&T, Sprint Nextel, and Qwest Communications International have filed lawsuits against 14 Iowa telecommunications companies–10 rural local exchange carriers (LECs) and four other service providers–over alleged “traffic-pumping schemes” aimed at inflating the number of inbound long-distance calling minutes in order to profit from the higher network interconnection rates rural LECs are permitted to charge.

The larger phone companies, which have significant interexchange carrier (IXC) operations, say rural Iowa LECs are aggressively courting teleconferencing bridge companies, adult chat, and dial-a-porn operators in a deliberate effort to drive more long-distance traffic onto their networks.

Rates Vary Widely

The court action adds yet another wrinkle in the ongoing debate over the regulation of intercarrier compensation (ICC) for call completions. The Federal Communications Commission (FCC) is charged with setting parameters for these rates, which can vary widely from company to company, with rural companies generally allowed to collect more.

Access Revenues

Critics say increasing competition, plus certain transmission characteristics inherent to Internet Protocol now used to route almost all phone traffic, can lead to attempts to game the system through ICC rate arbitrage involving the handoff of so-called “phantom traffic.” (See sidebar.)

At the same time, rural phone companies, faced with declining revenues from their traditional access line business, are looking to ICC payments and other such regulated “network access” charges to make up the difference. The FCC, for its part, is attempting to create a new ICC regime.

Something About Iowa

For veteran industry watchers, it’s no surprise to see Iowa at the center of the latest dispute.

For several years regulatory and court cases in Iowa have involved phantom traffic problems, access charge irregularities, and ICC payment disputes. The AT&T, Sprint, and Qwest lawsuits claim a spate of new, often “free” services being offered out of rural LEC calling areas–including teleconferencing, certain international calling services, and adult chat lines–are available only because they are subsidized thanks to high access charges.

The IXCs claim the provider companies obtain local numbers from Iowa telcos and profit because they share in the access charges obtained by the LECs.

“Left unchecked, such schemes will grow and force carriers to abandon the unlimited long-distance pricing plans,” a Sprint statement about the lawsuits said. “This illegal scheme abuses a system intended to keep the price of basic telephone service affordable for rural consumers.”

In its court filings, Sprint contends the alleged “pumped traffic” can’t be legitimately considered “terminating access traffic” as defined by FCC regulations.

Access Fees Rising

The IXCs say several LECs in Iowa have raised their access charges up to 13 cents per minute in the past year alone. Sprint claims some access fees in Iowa are about 26 times higher than some of the other access fees in the industry. AT&T reportedly refused payment to the Iowa rural LECs for this traffic and filed suit.

Besides the court actions, Qwest has filed a formal complaint to the FCC specifically citing Farmers and Merchants Mutual Telephone Co. for unreasonably high call termination fees.

Logan Paul Gage, a policy analyst with the Discovery Institute’s Technology & Democracy Project, says the ICC subsidy is just as onerous as Universal Service Fund (USF) collections. “It’s all the same,” he said, citing FCC Chairman Kevin J. Martin at a recent Senate hearing as saying ICC is simply unsustainable and clearly creates opportunities for rent-seeking.

Martin is correct, Gage said, in wanting to move to a single rate for all traffic types. Gage also agrees with suggestions to jettison the ICC regime in favor of vouchers or direct payments to consumers.

“But eliminating distinctions between the carriers looks much more difficult,” Gage said. “The rural LECs like the system the way it is, at least in this respect.”

Rural LECs Strike Back

The Iowa LECs and their partners responded to the IXC lawsuits with the April formation of a new group called the Coalition for Carrier Neutrality.

The coalition produced a long list of statements designed to counter what it called false and misleading information issued by the combatant IXCs. In the final analysis, according to the coalition, the traffic in question is not illegal and the FCC has already rejected comparable IXC contentions.

“What this is all really about is a rate dispute,” said Jonathan Canis, a partner at the law firm Kelley Drye & Warren LLP representing the group. “The IXCs think the rates are too high. They first started by withholding payment.”

The coalition also charges AT&T and Sprint have been blocking calls and says it wants an FCC investigation. “This indicates dirty tricks in the routing of traffic that has the effect of blocking some calls and degrading overall service,” said a coalition statement.

Frank Barbetta ([email protected]) writes from Little Falls, New Jersey.