By: Andy Regitsky
The FCC last attempted to address the issue of switched access arbitrage (also known as access stimulation) in 2019. Not surprisingly, it was not successful. As the agency ruefully notes, access arbitrage has been an ongoing problem:
For over a decade, the Commission has combated abuse of its access charge regime. Such regulatory arbitrage has taken several forms over the years, all of which center around the artificial inflation of the number of telephone calls for which long-distance carriers (interexchange carriers or IXCs) must pay tariffed access charges to the local telephone companies (local exchange carriers or LECs) that terminate the telephone calls to their end users. Some local telephone companies, often in areas of the country with high access charges, partner with high-volume calling service providers, such as “free” conference calling or chat line services, to inflate the number of calls terminating to the LEC and, in turn, inflate the amount of access charges the LEC can bill IXCs. This practice is inefficient because it often introduces unnecessary entities or charges into a call flow, perverts the intended purpose of access charges (i.e., to cover the LECs’ cost of providing the service), and raises costs for IXCs, and ultimately their customers, whether they use the high-volume calling service or not. (Docket 18-155, Draft Second Report and Order, at para. 1).
The current definition of access arbitrage (stimulation) requires
that the involved LEC has a revenue sharing agreement and, second, that it meets one of two traffic triggers. The LEC must either have an interstate terminating-to-originating traffic ratio of at least 3:1 in a calendar month or have had more than a 100% growth in interstate originating and/or terminating switched access minute-of-use in a month compared to the same month in the preceding year. (Report and Order and Modification of Section 214 Authorizations, Docket 18-155, Released September 27, 2019, at para. 43.).
Sometimes, however, there is access arbitrage even without a revenue sharing agreement. To address these instances, the Commission added two alternative tests to this definition, one for CLECs and one for rural ILECs. Neither requires any revenue sharing agreement to be in place.
First…competitive LECs with an interstate terminating-to-originating traffic ratio of at least 6:1 in a calendar month will be defined as engaging in access stimulation.
Second…we define a rate-of-return LEC as engaging in access stimulation if it has an interstate terminating-to-originating traffic ratio of at least 10:1 in a three-calendar month period and has 500,000 minutes or more of interstate terminating minutes-of-use per month in an end office in the same three calendar month period. These factors will be measured as an average over the same three calendar-month period. Our decision to adopt different triggers for competitive LECs as compared to rate-of-return LECs reflects the evidence in the record that there are structural barriers to rate-of-return LECs engaging in access stimulation, and at the same time, a small but significant set of rate-of-return LECs can experience legitimate call patterns that would trip the 6:1 trigger. (Id.).
In instances in which access arbitrage is detected, the Commission requires the access-stimulating LEC—rather than IXC—to bear financial responsibility for the tariffed tandem switching and transport charges associated with the delivery of traffic from an IXC to the access-stimulating LEC’s end office or its functional equivalent. Moreover, access stimulating LECs must designate in the Local Exchange Routing Guide (LERG), or by contract, the route through which an IXC can reach that LEC’s end office or functional equivalent.
The latest “solution” to access arbitrage was short-lived. In early 2020, IXCs complained that certain CLECs continued to engage in access arbitrage by inserting Internet Protocol Enabled Service (IPES) Providers into the call path of a long-distance call. In response, last July, the Commission released a Notice of Proposed Rulemaking in Docket 18-155 seeking industry comments on how it should address the IPES problem. On April 20, 2023, it will adopt a Second Report and Order, (Order) hopefully solving the problem.
The Order extends the current access stimulation rules to traffic that terminates through IPES providers. An IPES provider is “a provider offering a service that: (1) enables communications; (2) requires a broadband connection from the user’s location or end to end; (3) requires Internet Protocol-compatible customer premises equipment (CPE); and (4) permits users to receive calls that originate on the public switched telephone network or that originate from an Internet Protocol service
IPES providers will be required to calculate the ratio of their terminating and originating call volumes, just as LECs are already required to do. If the IPES provider’s traffic ratio meets or exceeds the triggers established in the existing access stimulation rules, it would be deemed to be engaged in access stimulation. Thus, IPES providers with a revenue-sharing agreement will be subject to the two traffic triggers. The IPES provider must either have an interstate terminating-to-originating traffic ratio of at least 3:1 in a calendar month or have had more than a 100% growth in interstate originating and/or terminating switched access minute-of-use in a month compared to the same month in the preceding year. If the IPES provider does not have a revenue-sharing agreement, if it has an interstate terminating-to-originating traffic ratio of at least 6:1 in a calendar month it will be designated as engaging in access stimulation.
The new rules establish a bright-line methodology for calculating the traffic ratios of both LECs and IPES providers. LECs and IPES providers will be required to count all calls that go through each end office or equivalent, to and from any telephone number associated with the operating company number that identifies the LEC or IPES provider.
An end office equivalent is defined as the geographic location where traffic is delivered to an IPES provider for delivery to an end user. This location shall be used as the terminating location for purposes of calculating terminating-to-originating traffic ratios.
If an IPES provider engages in access stimulation, the intermediate access provider LEC) will be prohibited from collecting tariffed terminating switching and transport charges from an IXC for traffic bound to the access stimulating IPES provider or its customers. IPES providers themselves are not LECs, therefore they cannot collect access charges directly.
The new rules will take effect 45 days after the Second Order is released, likely in early June.
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