How Carriers Game the System

Published October 1, 2007

Here’s an explanation of how rural exchange carriers can work the regulated interconnection compensation rates to their advantage.

Let’s imagine three phone companies–Sam’s Telephone Co., Karla’s Telephone Co., and James’ Telephone Co.–for which the Federal Communications Commission (FCC) has mandated the following interconnection rates:

  • Sam’s Telephone Co. must pay Karla’s Telephone Co. 15 cents a minute to terminate calling traffic.
  • Sam’s telco must pay James’ telco 10 cents a minute to terminate calling traffic.
  • James’ telco must pay Karla’s telco 6 cents a minute to terminate calling traffic.

Sam does not want to pay 15 cents a minute to Karla, so he negotiates an agreement with James, to whom he’s required to pay only 10 cents a minute, to route all traffic bound for Karla’s network through James’ Telephone Co. As a result Sam saves 5 cents a minute on calls bound for Karla.

Note that while James must pay Karla 6 cents a minute when he transfers Sam’s traffic to her network, he is collecting 10 cents a minute from Sam, netting a profit of 4 cents a minute on each call. To Karla, it appears Sam’s calls are coming from James’ network, hence the term “phantom traffic.”

While carriers have accused each other of such rent-seeking, the lack of transparency in intercarrier payment mechanisms and technical aspects of Internet Protocol routing have made such arrangements difficult to prove. And while these agreements may run counter to the spirit of intercarrier compensation rules, it is unclear whether they are truly against the law.

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.