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April 13, 2007

When Arbitrage is a Good Thing, or at Least a Wake Up Call -- The Dispute Over Access Charges for Conference Call Traffic Terminating in Iowa

So, I am hearing an escalating furor regarding the battle between Iowa rural telcos and conference-calling companies on the one side and the major telcos including AT&T, Qwest and Sprint on the other side over the rates for terminating traffic in Iowa. Perhaps the issue will come to a head this week when parties meet at the FCC. Perhaps this is the incentive the carriers and the FCC need to finally move away from the unworkable, patchwork, intercarrier compensation regime.

For me, it's interesting to see the shoe on the other foot. Although the rural carriers have always had VERY strong allies at the FCC, in Congress and in the state commissions, so have the largest telcos. Now that they are going head-to-head, perhaps the largest telcos are feeling a little vulnerable and recognize the absurdities of the kluged and archaic inter-carrier compensation regime.

The small carriers seem to have the law on their side. As best I can tell, if their rates have been properly filed with the Commission, the telcos must terminate traffic to these rural carriers and conference centers. There was some effort to block traffic to these rural LECs and conference calling centers, but I think the FCC has historically ruled that carriers cannot block traffic if the tariffed rates were legally filed and unchallenged. That is not to say the law is right. But, it is a system that the largest telcos have allowed to persist for ten years, in part, because they have typically been the net beneficiaries. And, in those rare situations where they have been the net losers, that have generally succeeded in stalling or undermining or reversing the payment process (e.g., the recip comp for ISP-bound traffic battles; the phantom traffic and FX traffic scenarios; the charging of access rates, rather than recip comp or no rate, for VoIP traffic).

This Iowa traffic termination situation, to me, is a clear demonstration that the current inter-carrier compensation regime is unsustainable. This is an instance where Qwest, at&t and Sprint are the net payors and it is they who are screaming fraud, bloody murder, and the dirtiest of words - "arbitrage". Well, it is arbitrage, but so what? Arbitrage is just real world evidence of the market failure of an inter-carrier compensation that the biggest telcos have propped up for ten years. When the inter-carrier compensation regime ensured they were the net recipient of revenue, that regime was great. In the few instances where the biggest telcos have been the net payors, they have screamed fraud and arbitrage. Well, they cannot perpetuate a system that only allows for arbitrage and usurious rents when they are the net beneficiary. Perhaps this is the final impetus all the carriers need to come to the table and finally break the stalemate and allow their friends at the FCC to pass an omnibus reform of the inter-carrier compensation regime that will move to either bill and keep or a compensation scheme that more adequately reflects costs.

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Posted by jeff on April 13, 2007 06:01 PM | Permalink

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Posted by: Tarus at November 8, 2007 09:26 AM

The issue here is exactly what Jeff says. The CLECs have the law but the Bells have the gold. Golden rule. he who has the gold rules. But the CLEC's did the smart thing and hired Kelly and Drye, or Jon Canis. There is no backing down on this fight. The bells will pay 110%. Many of these companies will take it all the way, they have the law. Hope AT&T reaps what they sow, they did this thing years ago.

Posted by: CLEC at September 5, 2007 10:38 PM

John, how does bidding on rural coverage, which has been suggested as a way to deal with the rising cost of USF, deal with ICC?

Posted by: Anonymous at April 16, 2007 01:46 PM

Agree completely with your analysis. The hopeful idea is that this will force the FCC to reform the intercarrier rates in a sensible way. The idea that's been floating around for bidding on rural coverage is one possible method to keep the rates from being artificially too high.

Of course, if the big companies end up being allowed to just block then that would be disastrous. It does pretty clearly seem to violate the FCC regulations. Though the FCC regulations at the same time prevent them from directly passing on these intercarrier charges; they're forced to spread them around.

Posted by: John Thacker at April 15, 2007 10:07 PM

Hello All:

Jeff has the correct legal and regulatory tack. In a nutshell no carrier--even one headed by Ed Whitacre--can unilaterally establish itself as judge, jury and executioner. As a common carrier still subject to at least some provisions in Title II of the Communications Act, all wireline and wireless carriers have to interconnect with other similarly situated carriers. No carrier can unilaterally decide to refuse to hand off traffic to another carrier, because the termination costs are "too high." If AT&T had a problem with Iowa carriers' access charges exceeding the NECA safe habor rate, it should have filed a formal opposition.
In the longer term arbitrage opportunities will abate as occurred with international callback. Both market-based and regulatory remedies will occur, but not if a carrier can short circuit the process.

Posted by: Rob Frieden at April 14, 2007 05:10 PM

I've been blogging about this myself, though I liked somebody else's characterization of this myself -- you are forced to pick sides between a bad company and a worse company.

The right answer is the internet model. Each party pays for their line to the middle, and you don't do settlement payments, especially regulated non-negotiable settlement payments. I mean imagine how the Internet would work if packets to Iowa cost 10 times what packets to New York cost? If we want to subsidize people in Iowa's expensive lines into the cloud, then we can do that, but nobody would put a conference bridge there deliberately to take advantage of loopholes.

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Posted by: Brad Templeton at April 13, 2007 10:50 PM

It doesn't small carriers seem to have the law on their side, the big ones will allways win. That's the law.

Olavo

Posted by: voip at April 13, 2007 08:06 PM

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