Priming the pump: good business or gamesmanship?

A battle between Iowa service providers a group of rural and the big guns of telecom — including AT&T, Qwest and Sprint — began with a difference of opinion over the legitimacy of charging access fees for calls using numbers from Iowa exchanges but not necessarily terminating in them. The fight became public in late March and now threatens to divide the rural telecom industry itself, as some smaller telcos are lining up against the Iowa group.

The conflict started with the interexchange carriers' (IXCs) claim that they should not have to pay access charges to a group of rural companies generating high volumes of access revenue by leveraging voice-over-IP (VoIP) technology to terminate calls for free-calling conference services, pornographic chat lines or international calling services. It escalated when IXCs began blocking those calls.

Services such as Free Call Planet, freeconferencecall.com and others have teamed with Iowa telcos such as Great Lakes Communications and Superior Telephone Cooperative to set up inexpensive or free calling services that generate profits for the providers primarily by collecting millions in access fees. The local telcos provide the Iowa telephone numbers and voice gateways for the services, bill long-distance companies to terminate calls and then pay what both sides call “marketing fees” to the conference calling services.

AT&T has attacked this business model as illegal because the local companies don't actually terminate the calls. AT&T calls this “traffic pumping” and has appealed to the FCC to rule it illegal. Both AT&T and Qwest have sued the Iowa companies in federal district court in Iowa and, along with other IXCs, are refusing to pay millions in access charges.

Josh Nelson, CEO of Great Lakes Communications, a CLEC since 2005 in Iowa, said his company is owed about $2 million total in access fees and can't sustain a long legal battle.

“They talk about their costs — we also have fixed costs that we have to continue to pay, including new switches that benefit the community,” he said. “If they drag this out for years and years of attorney fees and [affect our] ability to defend ourselves, it will be hard to exist.”

For a period of time, AT&T, Qwest and others were blocking calls to the Iowa exchanges, but under pressure from regulators, including the FCC, that is supposed to have stopped.

The Iowa companies are not backing down. If anything, they have gotten more aggressive, hiring attorney Jonathan Canis of Kelley Drye & Warren LLP. They filed their own lawsuit in the federal district court in New York and met with the FCC in mid-April to make their case. Most recently, the companies banded together in what they are calling the Coalition for Carrier Neutrality (CCN). According to Canis and the CCN members, there are numerous legal precedents for what they are doing, and the only problem here is that AT&T, Qwest and others have illegally stopped paying the Iowa companies money they are rightfully owed.

Now a group of independent LECs have lined up on the side of the large incumbents, expressing concerns that the “access pumping” behavior — the term they use for what the Iowa telcos are doing — threatens the entire settlements process currently administered by the National Exchange Carrier Association.

“Small, high-cost companies like mine are very dependent on access as a revenue source through the NECA pool,” said Gary Gilmer, president of Southwest Texas Telephone and one of 15 rural telco executives who signed the April 30 letter to the FCC. “Access is under a lot of pressure anyway. We are worried that this type of pressure will cause the whole access system to kind of fall apart.”

In their letter, the executives said they are concerned that “access pumping poses a threat to the integrity of the existing inter-carrier compensation system” and should be stopped by the FCC.

What the Iowa companies have chosen to do is exit the NECA pool under Section 61.39 of the FCC rules, which applies only to service providers with fewer than 50,000 lines. Normally, NECA files interstate access tariffs on behalf of pool members and manages the access revenue pools themselves, distributing funds. When rural LECs choose to leave the pool, which they can do for a two-year period, they can set access fees based on their history of calling volumes that differ from NECA rates.

According to the rural telco executives' letter, the Iowa companies are “filing tariffs with access rates based on historical minutes of use in full knowledge that their actual minutes of use will be many times higher, resulting in an unreasonable windfall in profits.” Once the tariff period expires, the rural companies jump back into the NECA pool rather than accept the access rate decreases their high volumes of traffic would ordinarily dictate, they say.

“We are very concerned that schemes designed to inappropriately inflate access revenues irreparably diminish the integrity of the access charge system,” the letter stated.

What the other rural telcos fear, Gilmer said, is that this behavior by the Iowa companies will prompt the FCC to draw up more stringent rules for getting into and out of the NECA pool and to create greater problems for all rural telcos in the process.

“It is hard to say exactly what will happen,” he said. “It's hard to imagine the FCC will continue to allow this kind of windfall. When they do make rules, it is very possible that the changes will hit too broadly, and that will cause us all kinds of reporting requirements. It could even be worse. They could just eliminate the provision that allows you to get out of the pool and then, within two years, get back in. There are legitimate reasons why a company would want to do that.”

AT&T had earlier written the FCC, asking the agency to take action against the Iowa companies. In its letter, written by James Cicconi, senior executive vice president for external and legislative affairs, AT&T said the Iowa companies are engaged in a scam, offering a variety of services that are free to consumers — including conference calls, international calls, voicemail services and pornographic chat lines — for a single purpose, “to artificially stimulate massive increases in traffic by promising consumers the communications equivalent of a free lunch.”

AT&T cited the case of Superior Telephone, which had a high access rate based on the low volume of calls from the 250 residents of Superior, Iowa. AT&T had been paying about $2500 per month in access to Superior Telephone until mid-2006, Cicconi wrote. “Only months after Superior revised its tariff, however, Superior's access bill to AT&T suddenly skyrocketed as the millions of calls associated with Superior's traffic-pumping schemes … began pouring in,” he wrote. “Indeed, Superior billed AT&T more than $2 million for a single month, far more than Superior could have billed AT&T if every resident of Superior, Iowa, was the recipient of calls from AT&T long-distance customers 24 hours a day.”

Cicconi also raised concerns that other rural telcos are planning similar operations, pointing to 29 rural LECs who have announced plans to leave the NECA pool on July 1 — a number he pointed out is much higher than normal.

Attorney Canis says there is nothing illegal about what his clients are doing. He points to three separate cases the FCC has handled over the last six years in which it rejected AT&T complaints over the same issues against Jefferson Telephone Co. in 2001 and against both Frontier Communications of Mt. Pulaski Inc. and Beehive Telephone Co. in 2002.

In each case, AT&T had objected to a revenue-sharing arrangement between a rural telco and an ISP.

“These are, of course, the exact same arguments that AT&T — and now the 15 LECs — are making today. Only now they're calling the revenue sharing arrangement an ‘illegal traffic pumping scheme,’” Canis said.

He also maintains that AT&T and other long-distance carriers haven't completely stopped blocking calls but are instead routing them to specific numbers over facilities that can't handle the traffic due to congestion or low-quality of lines, resulting in some calls being blocked.

The access fees that the Iowa companies charge range from 4.2¢ per minute to 13.6¢ per minute — with most under 8¢ — while the national average is 4¢, according to the Coalition. It points out that AT&T Alascom charges 23.5¢ per minute. The group has also balked against AT&T's claims, in Cicconi's letter, that it will cost AT&T $250 million in 2007 to pay the access fees the Iowa companies are claiming. To date, they say, the access charges being withheld by all long-distance companies total $20 million.

Canis questions the motivation of the 15 LECs who signed the letter to the FCC because only four of them — Guadalupe Valley, Rainier, Southwest Texas and Western New Mexico — appear to be companies that would qualify to withdraw from the NECA pool voluntarily under section 61.39. One of the signatories, Embarq, is a company that the CCN has accused of blocking its calls.

The bottom line for Canis is that AT&T, Qwest and others have illegally withheld revenue from his clients instead of pursuing the legal means of challenging the Iowa companies' practices.

“There have always been two ways that anybody, whether a carrier or a customer, can legally pursue changes to tariffed access charges,” he said. That includes filing a formal complaint against the carrier at the FCC and filing a petition for rule making to ask the FCC to change rate calculations. The former process can take place in as little as four months; the latter can take six months but more often requires a year or more.

“If any of these carriers has a legitimate issue, why aren't they pursuing these lawful means of resolving them?” he asks. “Instead, carriers like AT&T and Embarq (again, one of the signatories to the most recent letter to the FCC) are engaging in self-help call blocking and/or refusals to pay tariffed access charges, both of which have been repeatedly found to be illegal by the FCC.”

Gilmer, the Southwest Texas Telephone executive, said it's hard for him to imagine the FCC would approve of what the Iowa telcos are doing but admitted it's the uncertainty of it all that concerns him the most.

“From a fundamental fairness type of issue, I can't imagine the FCC would approve of this,” he said. “But we don't know what they are going to do.”

The only public word from FCC Chairman Kevin Martin on the issue has been to publicly admonish incumbent long-distance companies about blocking calls. In comments made to a Silicon Valley group in April, however, Martin added that the FCC would need more time to resolve the larger issues of disputed access fees.

THE COALITION FOR CARRIER NEUTRALITY

All American Telephone Company Inc.

Audiocom LLC

Aventure Commuincations

Chase Com

e-Pinnacle Communications Inc.

Farmers Telephone Company of Riceville, Iowa, Inc.

Free Conference Call Holdings Corp.

Great Lakes Communications Corp.

Interstate 35 Telephone Co.

Superior Telephone Cooperative

Source: CCN

THE $250,000,000 MYTH

The total amounts of access charges withheld by all long distance carriers (IXCs) from the Iowa telcos are listed below. IXC withholding practices vary widely; typically, withheld amounts reflect AT&T, Embarq, Qwest, Sprint and Verizon.

Aventure	$3 million
Farmers' of Riceville	$14 million
Farmers Mutual	$1.8 million
Great Lakes	$6 million
Interstate 35	$10 million
Superior	$16.8 million
Source: CCN

RURAL TELCOS DO NOT OVERUSE PHONE NUMBERS

	NPA*	NPA	NPA	NPA	NPA	Iowa	% of
	319	515	563	641	712	TOTAL	TOTAL
ILECs	13	37	8	0	13	71	6%
CLECs	39	119	37	62	96	353	30%
Wireless	145	121	100	233	160	759	64%
Iowa total	197	277	145	295	269	1183	100%
Source: Iowa Utilities Board *NPA = Numbering Plan Area, aka area code

CONFERENCE CONTENT

Freeconferencecall.com is the largest conference provider in the U.S. Its statistics regarding its conference call customers:

	20,205 nonprofits
	7342 universities
	1292 government
	349 military
	0 adult services
Source: CCN