The FCC intends to adopt a Report and Order (Order) at its September 26, 2019 meeting to update the switched access regime to once and for all eliminate access arbitrage. The proposed Order in Docket 18-155 comes more than 18 months after the Commission began this proceeding and it a long time coming!

The Order specifically targets an arbitrage technique known as “access stimulation,” in which LECs artificially increase their switched access charge revenues by stimulating terminating call volumes through arrangements with providers of “free” high-volume calling services, such as conference calling and chat lines. According to the Commission:

Access stimulation generates extraordinary numbers of inbound calls, which results in excessive access charges that long-distance providers (known as interexchange carriers or IXCs) are forced to pay. This traffic currently costs IXCs between $60 and $80 million annually, and these costs are generally borne by all of their users, regardless of which customers actually make calls to high-volume calling services. As a result, long-distance customers collectively subsidize the “free” services offered by high-volume calling service providers. (FCC Docket 18-155, FCC Fact Sheet, released September 5, 2019).

The FCC thought it had eliminated most access arbitrage schemes in 2011 in its Intercarrier Compensation Transformation Order. It moved most switched access rates to bill-and-keep and specifically forced carriers engaged in access arbitrage to lower their rates. Unfortunately, some LECs found new ways to abuse the system. They make use of the remaining high tandem switching and tandem-switched-transport charges that were not moved to bill-and-keep and force incoming traffic to be routed to access-stimulating LECs and the intermediate access providers chosen by them to generate millions of excess access minutes. To illustrate the scope of this problem, AT&T observed that “twice as many minutes were being routed per month to Redfield, South Dakota (with its population of approximately 2,300 people and its 1 end office) as is routed to all of Verizon’s facilities in New York City (with its population of approximately 8,500,000 people and its 90 end offices).” Thus, it is clear the FCC had to act.

In the Order, the Commission will take the following measures to eliminate the financial incentives for LECs to engage in access arbitrage:

To eliminate the use of the intercarrier compensation system to subsidize “free” high-volume calling services, the Order would adopt rules requiring access-stimulating LECs—rather than IXCs—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.

The current access stimulation definition adopted in 2011 includes only those LECs that have a revenue sharing agreement, that directly or indirectly results in a net payment to the other party to the agreement. The LEC must also meet one of two traffic triggers. An access-stimulating LEC either has “an interstate terminating-to-originating traffic ratio of at least 3:1 in a calendar month, or has had more than a 100 percent growth in interstate originating and/or terminating switched access minutes-of-use in a month compared to the same month in the preceding year. This definition will remain in place.

However, recognizing that access stimulation may occur even when there is no revenue sharing agreement between the LEC and the high-volume calling service provider, the Order would expand the current definition of “access stimulation” in the Commission’s rules to include situations in which the access-stimulating LEC does not have a revenue sharing agreement, but has at least 6 times more minutes of inbound calling traffic than outbound calling traffic.

The Order would also eliminate decades-old requirements that force IXCs delivering traffic to access-stimulating LECs that subtend certain intermediate access providers (known as centralized equal access or CEA providers) to use those CEA providers for tariffed tandem switching and transport services. (Id.)

To ensure that LECs have enough time to comply with the new rules, the Commission adopts a transition period for them to implement any necessary changes to their tariffs and to adjust their billing systems. This Order and the new rules will become effective 30 days after they are published in the Federal Register. After that date, access stimulating LECs and affected intermediate access providers will have an additional 45 days to come into compliance with the rules.

An access stimulating LEC must provide notice to the Commission and to any affected IXCs and intermediate access providers that the LEC is an access stimulator and accepts financial responsibility for all applicable tariffed terminating tandem switching and transport charges. Notice to the Commission will include the LEC filing a record of its access-stimulating status and acceptance of financial responsibility on the same day that the LEC issues such notice to IXCs and intermediate access providers. A 45-day tariffing and notice time period will begin to run for any new access stimulating LECs from the time they meet the definition of a LEC engaged in access stimulation.

While it is possible that access stimulators may seek to appeal this Order to the courts, we believe the Commission is well within its legal rights and would easily win a judicial appeal. Therefore, it is very likely that the majority of access arbitrage schemes should soon be history.