FCC to Eliminate the Subscriber Line Charge?

In WC Docket 20-71 the FCC is considering eliminating the Subscriber Line Charge (SLC). The SLC has been around since 1984. The FCC at that time wanted to lower the cost of long-distance. It was not unusual at that time to have long-distance rates as high as $0.30 per minute with the average long-distance rate in the country somewhere between $0.12 and $0.15 per minute. The FCC understood that high long-distance rates were hurting the country and they wanted to lower the fees that local telcos charged to long-distance companies like the newly formed AT&T long-distance company, MCI, and other competitive long-distance providers.

The FCC only had jurisdiction over Interstate rates. In those days every regulated telephone company calculated jurisdictional costs using Part 67 of the FCC rules. Companies performed ‘separation’ cost studies to determine the portion of the costs that were associated with local service, state long-distance service, and interstate long-distance service. In 1983 the FCC approved Part 69 which created access charges – specific interstate rates that local telephone companies were allowed to charge to long-distance carriers to use the local telephone network for originating or terminating an interstate long-distance call.

As part of the creation of access charges, the FCC decided to arbitrarily shift some Interstate costs from long-distance carriers to telephone subscribers – this was the start of the Subscriber Line Charge (SLC). In that first year, the FCC shifted $1 from Interstate costs to the fee charged to every telephone subscriber. The SLC was raised annually until it reached $4.50. Over time the FCC eventually increased the fee to as much as $6.50. The SLC is still an FCC access charge, but it is billed to end-user customers and not to long-distance carriers. Theoretically, this means that every telephone subscriber is paying $6.50 for the right to make or receive long-distance calls – even if they don’t use that right.

The FCC’s actions had the desired effect, and long-distance rates dropped annually. This was a big deal for homes and businesses. I remember as a kid when making a long-distance call was a big deal, since a 7 to 10-minute call cost a dollar. Long-distance rates got cheaper until eventually, we have cellphones and local phones that come with unlimited long distance.

I remember working for a holding company of small telcos after divestiture and everybody was concerned that raising local rates a dollar per month was going to cause customers to drop phone service. I don’t think we lost any customers from the first local rate increase, or in subsequent years as the SLC continued to be increased. Customers applauded the cheaper long-distance rates.

The SLC has caused confusion over the years. A lot of customers have assumed the SLC is a tax – but the amount is billed and kept by the telephone company. The real confusion started after the Telecommunications Act of 1996 that allowed competitive local exchange carriers (CLECs) to compete with local telephone companies. CLECs didn’t have a clear way to set competitive rates. For example, if a CLEC was competing against a telco with $20 local rates, that telco might also have had a SLC charge of $6. That means the true local rate was $26. If the CLEC wanted to give a modest discount and charge $23, they had a dilemma. While a $23 rate was a good deal for customers, it didn’t compare well against the $20 base telephone rate that was charged before adding the SLC. Most CLECs elected to break their local rate into two parts to match the separate local rate and the SLC charged by the telcos. In this example, a CLEC might have set a $17 local rate and kept the $6 separate rate.

CLECs were not authorized to bill the SLC charge because they were not subject to the same jurisdictional separations of costs. Instead, CLECs just split local rates into two pieces to try to match telco rates. Many CLECs tried to make their version of the SLC charge sound like a tax by calling it the ‘FCC Fee’ or some similar name. The FCC made a few CLECs change the name of the fee, but mostly the FCC ignored how CLECs billed, and many customers have long believed that the SLC fee was a tax and not part of local rates.

It was inevitable that the FCC would finally end the SLC – the need for it is long over. However, for local telephone companies, the SLC has part of the basic rate for telephone service. If the FCC eliminates the SLC, most telcos cannot automatically add the lost revenue back to local rates. As hard as it might be to believe today, many telcos are still under state regulation of rates and would need permission from a state regulator to add the lost SLC fee to local rates. I predict that many state commissions will deny a local rate increase, or at least make telcos jump through a lot of hoops to get it. Local telephone regulation is largely dead, but this would give state regulators perhaps their last chance to feel relevant for local telephone rates.

Meanwhile, CLECs that decided to charge the SLC can instead just add the lost amount to their base rate. The FCC has made it clear in this docket that once approved, no company is to bill a line item that could be construed to be the SLC. The chances are that anybody that still has a landline from a telco, including numerous businesses, will see a rate reduction by as much as $6.50 per telephone line per month. Telcos will likely just see revenues drop as they lose the SLC fee and aren’t able to replace it.

The End of Free Conference Calling

Like many of you reading this blog, I have been using the service Free ConferenceCall.com for many years. I got an email from them last week warning that their service will likely go dark, and they wanted users of the service to call Congress to help keep them in business.

Their issue stems back to an FCC order issued in September of last year that seeks to stop the practice of access arbitrage. This FCC summary of the order describes the situation well. Some small telcos have been making money by billing access on ‘free’ minutes generated by services like free conference calling. The process of making money from free calling services has been known in the industry as access arbitrage.

The FCC tried to stop access arbitrage in 2011. At that time, small rural telcos billed a rate of as much as a penny or two per minute to originate or terminate a long-distance call. Some telcos that were allowed to bill the high rates were making a lot of money by originating calls for free outgoing call center services or by terminating calls from 800 numbers, conference calling services, or free chat lines.

In the 2011 order, the FCC eliminated the access fees associated with terminating a call, migrating to what the FCC called ‘bill and keep’, and they hoped that eliminating the access revenues would kill the arbitrage practices. The FCC order was largely effective and chat lines and other free arbitrage services quickly disappeared.

However, the 2011 order didn’t kill all access charges, and over time the folks who make money with arbitrage found another way to make money with free calling. One of the few access charges left untouched in 2011 was transport, which compensates telcos for the use of fiber networks connecting telcos to the outside world. I’ve noticed that the caller ID for FreeConferenceCalling.com numbers is mostly from Iowa and South Dakota, and I have to assume those calls are being terminated at switches that are remote and that can still bill significant miles of transport.

The access fees billed to terminate calls are paid by the carrier that originates the call. This means that most remaining terminating access is paid today by long-distance carriers like AT&T, Sprint and CenturyLink, which together still sell the bulk of long-distance telephone services. The dollar magnitude of access arbitrage is much smaller than a decade ago. The FCC estimates arbitrage is currently a $40 – $60 million problem, whereas it was hundreds of millions before the FCC’s 2011 order. But those fees are being billed to the long-distance companies that get no benefit from the transaction (thus the term arbitrage – the companies are billing the fees because the rules allow a loophole to do so).

FreeConferenceCalling.com is not the only company doing this, and it’s likely that many conference calling services rely wholly or partially on the arbitrage. It’s worth noting that conference call services that use the Internet to place calls will not be affected by this change – because those calls don’t invoke access charges. The carriers billing for the access on the conference calling may or may not be sharing the revenues with companies like FreeConferenceCalling.com – in either case those carriers no longer have any financial reason to continue the practice.

Companies like FreeConferenceCalling.com don’t automatically have to go out of business, but the FCC order means a drastic change to the way they do business. For instance, the company could start charging a monthly fee for conference calling – likely forcing this particular company to change its name. They might sell advertisements for those sitting waiting for a conference call. They could charge for services like recording calls.

It’s more likely that companies like FreeConferenceCalling.com will quietly die or fade away. I tried using the service yesterday and it already seems to be broken. This latest FCC order probably puts the final nail into the coffin of access arbitrage – although I’ve learned to never say never. As long as there are any fees for calling based upon regulatory orders, there is a chance that somebody will find a way to generate lots of calls that fit the circumstance and get enriched by the arbitrage.

Dropped Rural Calls

Fuld-modell-frankfurtA lot of rural places in the country are having problems receiving calls. Calls will be placed to rural areas but are never completed. This is not a problem everywhere and it’s not a problem in urban areas, so most people have no idea this is happening.

Senators Amy Klobuchar, Jon Tester, and Jeff Merley introduced a bill in the Senate aimed to fix the problem. A similar bill was introduced last year that died in committee. This is not a new issue and the FCC has taken several steps in the recent past to try to fix the problem. In 2011 the FCC placed 2,150 calls to rural areas and 344 of them never reached the called party. Another 172 calls were of very poor quality and almost impossible to hear. That’s an astounding one fourth of the calls placed and either failed or didn’t work.

In 2012, in Docket CC 01-92 the FCC prohibited several practices by carriers that were resulting in huge delays in completing calls, in lost calls and in the poor quality. For example, they made it illegal to place a ring onto the phone of the calling party until that call has reached the called party. People making calls heard a long ring and were giving up on calls they placed to rural areas before the call even reached the other end.

That order also put a limit on the number of times that a given call could be handed from one carrier to another. That is something that is common in the world of least-cost call routing. Carriers have tables that choose one of many possible different carriers to send a given call based upon the price that carrier is going to charge them. But then the carriers they hand the calls to do the same thing and it’s possible for calls to be handed between carriers multiple times during the process.

This is a problem for calls made to rural areas because the access charges in those areas are higher than the charges for calling urban places. Access charges are the fees that a local telephone company bill to long distance carriers for using their networks. In a world of least-cost routing, many carriers don’t want to pay the higher cost to complete a rural call. The FCC has taken steps to remove the price barrier by phasing the access charges for terminating calls to zero. But even that isn’t going to completely eliminate the problem because there is also a mileage charge component to access charges, and so places that are far outside of cities will continue to cost more than calls to urban areas.

The FCC further implemented new rules in 2013 (Docket WC 13-39) that give the FCC the ability to fine carriers who don’t properly complete calls to rural locations. But the problem still persists. The common belief in the industry now is that  some long distance carriers are just dumping rural calls and not handing them to anybody else. The proposed new laws would make it easier for the FCC to prosecute such carriers.

The problem that least-cost routing creates in the industry is that the margins on long distance calls are really slim for the intermediate carriers. For intermediate carriers that guarantee their rates to others, too many calls to rural places can put their profits underwater.

In the industry we call this sort of situation “arbitrage”. This arises when there are different costs for doing the same function in different ways. Arbitrage situations have always caused troubles. Carriers who can bill the higher prices in an arbitrage situation strive to bill for as many minutes as they can. And carriers who pay those higher prices look for alternatives to pay something less. A significant percentage of the carrier issues with long distance over the last few decades are the results of these arbitrage situations.

The problem the FCC faces is that it’s really hard to catch the carriers who are dropping calls. The whole phone network was established with an understanding that when a carriers is handed a call to that they always tried their best to complete it. That understanding is what made the US phone network the envy of the world. But generally there were not too many companies involved in a long distance call. Most calls years ago involved the local telco where the caller lived, one long distance carrier in the middle, and another local telco where the called party lived.

But today the least-cost routing tables and the fact that many calls are partially or totally VoIP calls makes it hard to even find out which carriers are in the middle of a given call. If a carrier is dumping rural calls, if they are smart enough to destroy any records that they ever received such calls, it’s very hard to definitely prove they are the culprit.

We are undergoing a transition over the next decade to an all-IP network between carriers. This might eliminate some of the problem if that reduces the need for intermediate least-cost carriers. But it also might not change anything, and as long as there is a price difference between completing a rural and an urban call, this problem is likely to remain.