CLECs Challenge FCC’s 2019 Access Stimulation Rules

Briefing is now complete at the D.C. Circuit in the latest appeal involving the FCC’s rules on access stimulation schemes.  Access stimulation (or traffic pumping) refers to a practice in which a local telephone company partners with entities that generate large amounts of terminating long-distance traffic, such as “free” conference calling providers and chat lines.  This allows the local telephone company to generate large revenues from the access charges that long-distance carriers must pay to terminate the calls through the local telephone company.  The revenues are then shared with the conferencing or chat line entities, which allows the services to be “free” to the end users.

In 2011, the FCC declared access stimulation a “wasteful arbitrage scheme” and adopted rules to curb the practice, primarily through requiring companies engaged in traffic pumping to reduce their rates to those of the large, urban carriers.  Connect America Fund, 26 FCC Rcd 17663, ¶¶ 656-201 (2011), aff’d, In re FCC 11-161, 753 F.3d 1015 (10th Cir. 2014).  However, those rules did not reduce the practice as much as hoped.  For instance, some traffic pumpers  adjusted their schemes by including intermediate carriers (tandem and transport providers) in the call flow, which increased the overall charges.

To address these new schemes, the FCC in 2019 issued new rules, including new triggers that define what qualifies as access stimulation.  Among other things, the FCC adopted different triggers for competitive local exchange carriers (CLECs) than for local exchange carriers subject to rate-of-return regulation.  Under the 2019 rules, CLECs are deemed to engage in access stimulation if, among other things, they have an interstate terminating-to-originating traffic ratio of 6:1 in a calendar month, while rate-of-return local carriers are deemed to engage in access stimulation if the ratio is 10:1 over a three-month period (and only if the terminating interstate traffic they handle meets a certain minimum in that period).  Updating the Intercarrier Compensation Regime to Eliminate Access Arbitrage, 34 FCC Rcd 9035, paras. 43-50 (2019) (2019 Order); 47 C.F.R. § 61.3(bbb)  The 2019 rules also eliminated the requirement that a local carrier have a “revenue sharing” arrangement with the high calling volume entities.

In adopting the new rules, the FCC found access stimulation to be an “unjust and unreasonable” practice under 47 U.S.C. § 201(b), in that it shifts significant costs onto long-distance carriers and their customers, all for the benefit of a few CLECs and their customers.  For example, there was evidence that AT&T routed twice as many minutes of calls to a single local carrier’s end office switch in Redfield, South Dakota (a town of about 2,300 people) than it did to all of Verizon’s 90 end offices in New York City, and that the rural states of Iowa and South Dakota accounted for more than half of Sprint’s switched access charge payments nationwide.  Under the 2019 rules, if a local phone company is engaged in access stimulation, that carrier (rather than the long-distance carrier) becomes financially responsible for all interstate and intrastate tandem switching and transport changes for terminating traffic to its end offices.

Several CLECs petitioned for review of the 2019 Order to the D.C. Circuit (No. 19-1233).  Their primary complaint is that the new rules treat CLECs differently from rate-of-return LECs (which have different access stimulation triggers), and from price-cap incumbent LECs (which are not addressed in the access stimulation rules).  They therefore view themselves as being unfairly singled out as the “targets” of the new rules.  The FCC’s brief responds that rate-of-return LECs are subject to different triggers than CLECs because rate-of-return LECs have not been found to engage in a material amount of access stimulation and have characteristics that make it much less likely they will engage in access stimulation, such as having inadequate capacity to handle the large volume of traffic typical of access stimulation schemes.  The FCC therefore adopted higher triggers to avoid inadvertently treating such rate-of-return LECs as access stimulators when they could have a high traffic ratio for reasons unrelated to access stimulation.  As for price-cap incumbent LECs, the FCC responded that such LECs have not previously been found to engage in access stimulation at a material level, but if that changes the FCC will be prepared to take action.

In a more fundamental attack on the premise behind the FCC’s access-stimulation rules, the CLECs contend that the FCC improperly assumed that the costs of the access charges that long-distance carriers pay to access stimulating CLECs are borne by the long-distance carriers’ customers.  The CLECs argue there was no evidence for that conclusion, and the FCC refused to gather evidence to test it, despite the CLECs’ request.  Further, they argue that the access charges paid to access stimulating carriers paled in comparison to the revenues long-distance carriers obtain from their long-distance service.  The FCC responds that it had no duty to gather additional evidence when the parties do not present it, and that more was not necessary (an argument that may be helped by the FCC’s recent victory on a similar issue in FCC v. Prometheus Radio Project, No. 19-1231 (S. Ct., April 1, 2021)).  It also noted that long-distance carriers paying an extra $80 million a year to access stimulating CLECs, as was estimated, inevitably harms those carriers’ customers, whether it be through higher rates, the diversion of those funds from improving the network and service, or increased risk of call blocking and dropped calls in areas where access stimulation occurs.

With a somewhat creative angle, the CLECs contend that the FCC’s new rules improperly define the “Network Edge” between long-distance carriers and access stimulating LECs as being at the tandem switch, even though the FCC left it to states to define the “Network Edge.”  The “Network Edge” is the point where cost responsibility for a call shifts from one carrier to another in a “bill-and-keep” regime (in which carriers recover costs from their customers, not other carriers).  The FCC responds that its order did not redefine the “Network Edge,” as states remain free to define that point in reviewing individual interconnection agreements between carriers.  In its brief, AT&T argues that the type of traffic at issue (interstate long-distance) is provided under federal tariffs, not interconnection agreements overseen by state commissions, and therefore the access stimulation rules cannot interfere with any state authority.

Finally, the CLECs argue requiring access stimulating LECs to effectively provide exchange access service for free (including tandem switching and transport the end office), even though other LECs still are allowed to recover access charges, exceeds the FCC’s power.  The FCC responds that it has the power to prohibit access stimulation because it found access stimulation to be an unjust and unreasonable practice under 47 U.S.C. § 201(b), and can take steps to prevent such practices.

CLECs have not had success in challenging access stimulation rules to date, but of course it remains to be seen how the D.C. Circuit will rule here.