How to Prime the Access Charge Pump

Forget Haiti and Guyana, Iowa is fast becoming the capital of dial-a-porn. Call it another example of the unintended consequences of regulation. One of the more opaque ways the FCC funds universal service is through an elaborate method of carrier cross-payments for the termination of long-distance calls. That is, AT&T will pay Verizon a certain per-minute rate for the termination of calls that are switched from its network to a Verizon’s to reach a customer. This goes for wireless carriers as well. The problem is that the FCC sets different access rates for different carriers. Rural incumbent local exchange carriers (ILECs) collect more per minute than those serving urban areas, the rationale being that the higher fees offset the higher cost of providing service in rural areas. The problem is that rural ILECs are losing customers to competition, so they are turning to access charges as a strategic source of revenues. That means figuring out ways to drive more long distance traffic into their territories. One way, as Billing World reports, is to give out local numbers to adult chat lines.

Sprint Nextel announced this week that it had filed lawsuits against 14 Iowa telcos and their partners in what Sprint refers to as “a wide-ranging scheme to abuse the intercarrier compensation system.” Sprint now joins AT&T and Qwest, which are suing Iowa LECs over what they refer to as a traffic pumping scheme. The lawsuits stem from the popular use of free calling services. These free services include free conference calls, international calling services and adult chat lines. According to the large telcos, these services are available compliments of high access charges that they must pay to the Iowa telcos. The free calling companies obtain local numbers from Iowa and are able to profit from the “free” prices because they share in the access charges obtained by the LEC. Over the past year, a number of LECs in Iowa have raised their access charges up to 13 cents per minute. Sprint says that the access fee is about 26 times higher than some of the other access fees in the industry.

Elsewhere, Logan Paul Gage of the Discovery Institute reports:

But recently, some shrewd RLECs granted local numbers to “adult” chat lines. This way they now collect fees from the long-distance providers for all these additional calls. Revealing how out of control all this has gotten, one Senate staffer recently explained: “In July 2005, the rural phone company in Wayland, Iowa showed 40,000 minutes of long-distance calls received; in December 2006, they showed 10 million minutes. Of those calls, half were to the same four phone numbers, all adult chat lines.” AT&T refused payment to the Iowa RLECs for this traffic and filed suit. They allege that some Iowa RLECs charge 13 cents per minute, and last week the FCC suspended these fees pending investigation. In what seems an increasing rarity these days, this issue is uniting social and fiscal conservatives. Family groups complain about porn lines having local numbers. Parents can block 1-900 numbers automatically; not so these local numbers. And fiscal conservatives see a textbook example of the folly of regulation. When government forces redistribution of wealth, companies adapt in Darwinian fashion to the new environment. Universal Service has yet another unintended consequence: Because RLECs can sit back and collect fees on existing infrastructure, they have little incentive to innovate. Contrastingly, cable VoIP and wireless companies deployed competitive services without subsidies–though they now want a slice of the pie. If FCC Chairman Kevin Martin’s vision is truly to “remove regulations that inhibit innovation,” he should start here.

Steven Titch served as a policy analyst at Reason Foundation from 2004 to 2013.