To All Telecommunications Services Provider Clients-
On September 21, 2009, the Iowa Utilities Board (“IUB” or “Board”) issued a decision in response to Qwest Communications Corporation‘s (“QCC”) February 2007 complaint against several Local Exchange Carriers (“LECs”), seeking credits for unlawful assessments of switched access charges. In its complaint, QCC alleged that the LECs engaged in a practice known as “traffic pumping,” which increased the access rates it owed well above the LECs‘ legitimate cost of providing access. AT&T and Sprint intervened in the case, also seeking refunds for excessive access charges. The IUB held that the LECs violated the terms and conditions of their intrastate tariffs and ordered the companies to issue refunds or credits to QCC, AT&T and Sprint (collectively “the IXCs”).
Traffic pumping occurs where a LEC, usually a rural carrier with higher access rates, enters into an agreement with a free calling service company (“FCSC”) to stimulate access traffic. The FCSC provides the carrier with equipment that the LEC installs in its central office. Thereafter, the carrier assigns large blocks of telephone numbers to the FCSC, which the FCSC advertises as available for free services such as conference calls, chat rooms, podcasts or voicemail, substantially increasing the traffic to these numbers. Interexchange carriers (“IXCs”) must deliver calls to these numbers to the LEC. The LEC bills the IXCs for the traffic at the high rate and then shares a portion of the receipts with the cooperating FCSCs.
The IUB explained that, under the LECs‘ tariffs, switched access charges apply only to calls terminated to an end user at the end user‘s premises in the LEC‘s certified local exchange area. The FCSCs failed to qualify as end users because they did not subscribe to services offered in the LECs‘ tariffs. The IUB noted that during most of the relevant period, none of the LECs billed the FCSCs for local exchange or access service. Rather, the FCSCs functioned as the LECs‘ business partners because they shared both profits (in the form of access revenues to the LECs) and losses (in the form of unpaid access charges billed to IXCs).
The IUB further concluded that the calls terminated to the LECs‘ premises or to equipment owned or controlled by the LECs, rather than by the FCSCs, and therefore, did not terminate to end-user premises. The IUB added that some portion of the calls ultimately terminated outside of the LECs‘ certified local exchange areas, further demonstrating that the calls were not subject to intrastate access charges. Finally, the IUB noted that several of the LECs had engaged in what it called traffic laundering in violation of their tariffs by transferring access billings to affiliates located in another exchange.
Therefore, the IUB held that switched access charges did not apply to the calls at issue, and directed the LECs to provide refunds or credits to the IXCs. Because several LECs backdated contracts and invoices, the IUB could not determine the precise amount of credits owed. Thus, the Board requested that the IXCs submit calculations of the amount of improper intrastate access charges billed by the LECs. While the Board expressed disapproval for the IXCs‘ “self-help” methods of withholding payment for the disputed access charges, it rejected the LECs‘ counterclaims that they were entitled to compensation for the IXCs‘ actions. Likewise, the IUB refused to order Sprint to compensate the LECs for its blocking of allegedly unlawful calls, but demanded that the company cease the practice.
The Iowa case is not the only instance of traffic pumping gaining attention among regulators. The IUB has already proposed amendments to its rules to prohibit LECs from billing access charges for a High Volume Access Service. IXCs in South Dakota recently filed complaints similar to QCC‘s compliant before the IUB. Several matters related to the practice also remain pending with the Federal Communications Commission (“FCC”). In particular, rural LECs are actively lobbying the FCC to address the issue, many arguing that, while they believe traffic pumping is legal, the current nebulous state of the law is worse than definitive regulations barring the practice.
AT&T and other large IXCs are also involved in the debate. For example, in September, AT&T urged the FCC to stop Google‘s alleged systematic blocking of telephone calls from Google Voice consumers to certain rural communities, asking that the FCC end “patently unlawful traffic pumping schemes.” In 2008 and 2009, AT&T and the Rural Independent Competitive Alliance and Verizon submitted competing proposals to limit the number of terminating minutes qualifying as “rural.” Both proposals remain pending before the FCC.
Large IXCs began targeting traffic pumping and the LECs that practice it several years ago in an effort to reduce their access costs. The practice is now gaining substantial attention from regulators at the federal and state level. Thus, traffic pumping may soon become unlawful or otherwise subject to restrictions and monitoring by state public utilities commissions, the FCC or both. Clients are encouraged to monitor the proceedings pending at the FCC and in the states relating to traffic pumping. In addition, all LECs should review their access charge practices to ensure that they only assess access charges in accordance with the terms of their tariffs and do not engage in unreasonable revenue sharing arrangements with their customers.
Clients with questions about this Advisory or who are interested in participating in any pending matter before the FCC should contact Jonathan S. Marashlian at firstname.lastname@example.org or (703) 714-1313.