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CAPITAL CURRENTS: Telephone games

Fri, 11/30/2007 - 7:05pm
Jeffrey Krauss, President of Telecommunications and Technology Policy

Jeffrey Krauss
The latest game is called
‘access stimulation’

The games people play with telephone tariffs! It’s shameful, shameful. Or it would be if there were not so much money involved. The latest game is called “access stimulation.”

Local exchange telephone companies impose access charges on long distance telephone companies for the local access portion of long distance calls. The caller pays the long distance company for a long distance call, but the long distance company has to split that revenue with the local phone companies at each end of the call. The local companies file tariffs with the FCC for these access charges. Large local phone companies have to base their access charge tariffs on their actual network costs, but smaller phone companies can either file their own tariffs or participate in an average cost pool administered by the National Exchange Carrier Association.

The way to game this system is to start a conference call service or a chat line, and locate the terminating phone number and conference bridge in a small rural telephone company. The Farmers and Merchants Mutual Telephone Company of Wayland, Iowa (population about 1,700) evidently made a deal with one or more such services in 2005.

According to an FCC complaint filed by long distance company Qwest, in the first half of 2005, Qwest delivered between 32,000 and 45,500 minutes of use per month to Farmers. In August 2005, Qwest delivered 732,977 minutes, and a year later, it delivered 2,221,767 minutes to Farmers.

AT&T, in a complaint filed against Superior Telephone Cooperative, a small phone company that serves a community of 142 people in Iowa, said that its access bills from Superior averaged $2,000 per month prior to mid-2006, but then increased to $2 million per month. Sprint said that from March 2006 to March 2007, Superior’s billing increased from approximately 14,945 minutes to 3,854,390 minutes per month.

Superior was claimed to charge 13 cents per minute for its access charges. I don’t know about you, but I pay about 4 cents per minute for complete end-to-end long distance calls. Most long distance calls originate or terminate with phone companies that have far lower access charges, because their average costs are far lower than these small rural companies.

So here’s the game. You’re a small rural phone company. You’re allowed to use the average cost access charges. You make a deal with a conference call service or a chat line company, and assign them some of your phone numbers. You provide space in your central office for that company’s conference call bridge equipment. But even when the traffic increases, your total costs don’t really increase very much, because a telephone switch is a large fixed cost, mostly independent of traffic volume. You get a huge increase in revenues from the long distance companies, which, as you previously arranged, you split with the conference call service under the term “marketing fees.”

In the Qwest dispute with Farmers, Qwest simply stopped paying. The FCC decided that Farmers was acting illegally because Farmers wound up with a rate of return that was greater than the FCC allowed for access service. But under the FCC’s arcane tariff rules, Farmers’ tariff was “deemed lawful” because nobody complained when it was filed. And when Farmers asked the FCC to force Qwest to pay up the money owed, the FCC told Farmers to get lost, saying “that the Commission does not act as a collection agent for carriers with respect to unpaid tariffed charges, and that such claims should be filed in the appropriate state or federal courts.”

The FCC did affirm Farmers’ contention that it is legal to impose access charges for long distance calls that terminate in conference bridges, even if none of the conference call participants are located in the same area as the bridge. But when revenues went up much more than costs went up, that was illegal, because Farmers’ rate of return exceeded the FCC-regulated limit.

The FCC has started up a proceeding to figure out what to do. It wants to prohibit a phone company from splitting the access revenues with the conference call services. It also wants to require phone companies to file new cost-based tariffs that reflect lower costs when access charge minutes go up more than some percent over the previous period. But that only works for phone companies that file their own tariffs, not those that participate in the average pool.

Part of the problem is the longstanding FCC policy that tariffs are “deemed lawful” unless someone complains when they are filed. For a “deemed lawful” tariff, refunds cannot be ordered. A possible new approach would allow tariffs to be challenged later, and then refunds could be required if the rate of return were found to be too high.

There will probably always be small rural phone companies with high costs and low traffic volumes. There will probably always be FCC policies that try to ease the regulatory costs and record-keeping burdens on these small companies. And so, in spite of FCC rule changes, there will probably always be opportunities to play these games.

 jkrauss@krauss.ws

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