A New Form of Arbitrage

Cell-TowerIronically, the motivation behind the FCC’s access reform order of a few years ago in FCC 11-161A1 was to end arbitrage. The FCC defined arbitrage to mean that IXCs were trying to change the characteristic of minutes to save money. The classic example would be to define minutes as Interstate if that was charged at a cheaper rate than intrastate, and vice versa.

And largely the FCC has succeeded. They required carriers to bring state and interstate rates into parity to eliminate jurisdictional arbitrage. They outlawed phantom traffic where carriers were removing the details in the call records that made it impossible to bill for them. And they outlawed traffic pumping of various types that were charging very high amounts to carriers for some very dubious minutes.

And this was all driven by the fact that the FCC and state commissions were getting inundated by complaints from carriers seeking redress from parties on both sides of the transactions. So one of the motivating factors behind the new rules was to eliminate the number of complaints they were seeing, and it seems to have worked. There are certainly still things that carriers argue about, but to a large degree the arguments over rate arbitrage are over.

All except in one instance. There was one part of the ruling that actually is leading to a whole new rash of disputes between carriers and that will end at commissions in the form of disputes. In the same docket the FCC reminded us that cellular calls that stay within the same MTA are local calls. MTA are Metropolitan Trading Areas that are defined by Rand McNally and that generally define large circles of common economic interest. Some wireless licenses such as PCS were granted using MTAs as the boundaries.

So the FCC reminded us that calls that stay within an MTA are local (and always have been). This means that a call that goes from a south suburb of Chicago to a west suburb will be free for a wireless carriers but may be long distance for a landline carrier.

But the real world treatment of these calls has always been somewhat complicated. If a wireless carrier negotiated an interconnection agreement with a telco or CLEC, then reciprocal compensation was used to pay each other for handing off calls between the two networks. But if no such agreement was ever negotiated, then these calls were billed by access charges by the telco as if they were a long distance call. The cellular companies had interconnection agreements with all of the large telcos, but they often did not bother to ask for them with smaller companies due to the much smaller volumes of traffic.

The FCC access reform order says that cellular intraMTA calls are now to be settled only using reciprocal compensation instead of access. But the order then went on to say that the reciprocal compensation rate for terminating cellular calls is now zero. So cellular companies now get free termination of their intraMTA calls at telcos and CLECs.

This sounds pretty straightforward until you think about the nature of cellular traffic. It is nearly impossible for a telco to know which cellular calls are intraMTA because you can’t tell by the phone numbers. Cellular phones can roam anywhere and further, there is number portability between landline telephone numbers and cellular numbers.

Take the example of where I live in southwest Florida. In my town in the winter the population more than doubles and the area is flooded by cell phones that come from somewhere up north. When those people call a local business, those calls are going to be intraMTA, even though by looking at the two numbers one would think they are interstate.

If the cellular companies were honest about reporting the jurisdiction of these calls there would not be an issue. But the arbitrage comes in when the wireless companies hand these calls off to intermediate long distance companies who then try to claim that almost all of the calls they send should be terminated for free. That is a classic definition of an arbitrage situation and telcos are being asked to charge nothing to terminate any cellular calls. And they don’t have the facts to fight this. They can’t tell if a call from a New York number is intraMTA without knowing the cell site where the call was originated – which is something that is not included in the call detail record.

And so telcos and CLECs are losing a lot of legitimate access charges for cellular traffic because the carriers bringing them these calls are asking to terminating them for free and are disputing any charges. This is one area where there was not a lot of fights in the past, but the FCC has created a new arbitrage situation by not thinking through how difficult it is to know the jurisdiction of cellular traffic.

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