Like a bad penny, the issue of access arbitrage continues to turn up every year or two. The last time we confronted this issue was in 2019, when the FCC released the Access Arbitrage Order, in Docket 18-155, in which it revised its Access Stimulation Rules to prohibit local exchange carriers (LECs) and Intermediate Access Providers from gaming the inter-carrier compensation process by inflating traffic volumes to maximize access charge revenues.

In early 2020, interexchange carriers (IXCs) complained that several companies continued to engage in access arbitrage by inserting IPES Providers (IP enabled service) into the call path of a long-distance call. In response, the Commission did nothing. Now, more than two years later, it is finally ready to act at its upcoming July meeting by adopting a Further Notice of Proposed Rulemaking (Notice) to stop the latest gaming of the access system. Before we discuss what the FCC is proposing, here is where we stand today on access arbitrage:

In September 2019, the agency stuck with its existing definition of access arbitrage. That definition 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.).

To further stop cheaters, the FCC 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 be designated 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.

However, this apparently is not enough. Offending carriers are evading these rules by insetting IPES in the long-distance call path.

For example, some parties described concerns that access stimulators are “converting traditional CLEC [(competitive LEC)] phone numbers to IPES numbers in order to claim that the [Access Arbitrage Order] is inapplicable” because the traffic is bound for telephone numbers obtained by IPES Providers and not bound for LECs serving end users.

 

USTelecom and its members allege that a substantial and growing portion of traffic that previously terminated through access stimulating LECs now terminates through IPES Providers. AT&T and Verizon allege that certain LECs are attempting to evade the Commission’s Access Stimulation Rules by, for example, having an IPES Provider take the place of the LEC delivering calls to an end user. As a result, IXCs allege, certain LECs claim the Access Stimulation Rules do not apply because the IPES Provider—and not the LEC—is responsible for delivering calls to the end user. (Draft Notice at paras 8-9.).

The Commission asserts that this is becoming a more serious problem by the day as IPES providers become more prevalent in modern day networks. Therefore, it proposes

that when traffic is delivered to an IPES Provider by a LEC or an Intermediate Access Provider and the terminating-to-originating traffic ratios of the IPES Provider exceed the triggers in the Access Stimulation Rules, the IPES Provider will be deemed to be engaged in access stimulation. In such cases, we propose that the Intermediate Access Provider would be prohibited from imposing tariffed terminating tandem switching and transport access charges on IXCs sending traffic to the IPES Provider or the IPES Provider’s end-user customer. (Id., at para 10).

Under this proposal, the IPES Provider would be responsible for calculating its traffic ratios and for making the required notifications to the Commission and affected carriers, just as LECs are responsible for these activities under the current rules.

If the IPES Provider’s traffic ratios exceed the applicable rule triggers, it would have to notify the Intermediate Access Provider, the Commission, and affected IXCs. The Intermediate Access Provider would then be prohibited from billing IXCs tariffed rates for terminating switched access tandem switching or terminating switched access transport charges. Instead, the Intermediate Access Provider could recover the costs from the IPES Provider, or the IPES Provider’s LEC partner. Thus, the entities choosing the call path—the IPES Provider or its partner— should only be willing to generate traffic that creates more value than the costs these tariffed access charges are intended to recover. As a result, they would have an economic incentive to make efficient call routing decisions and little, if any, incentive to artificially stimulate traffic. (Id., at para 19).

The Commission will vote to adopt this Notice on July 14, 2022. Let’s hope that once the new rules are adopted, it’s at least another two years before we hear about this issue again.