FCC Examining Whether to Address Phantom Traffic Before Broader ICC Reform

Wireline and wireless interests have been pressing FCC officials on the issue, with some sources saying remarks by Chmn. Martin at an Oct. USTelecom show fueled the fire. In answer to a question, Martin told participants phantom traffic is an issue the FCC needs to address. He said carriers should be “direct about what kind of traffic” they send. He also voiced concern about proposals on the table suggesting “any kind of traffic blocking.”

The FCC may act on phantom traffic in advance of broader ICC reform for several reasons, some industry sources said. If an ICC order “is too difficult to have done in a short time, they may start biting off things like phantom traffic,” an observer said. “It’s a hot- button issue for rural carriers that are facing a declining access revenue and it becomes more of a concern for them,” said Medley Global Advisors analyst Jessica Zufolo: “The question is what the FCC will do to address it and whether it will be met with significant oppositions from wireless carriers and IP-based providers.”

Recent state actions on phantom traffic could push the FCC to address the issue “sooner rather than later,” Zufolo said. A telecom deregulation bill the Mich. legislature passed in Oct. requires carriers to place call identifiers to make it easier to locate a call’s origination, Zufolo said. And carriers must enter into reciprocal compensation arrangements arbitrated by the Mich. PSC, she said. “This issue has definitely caught the attention of a lot of regulators at state and federal levels, and it’s time for the FCC to develop a plan to address the concerns of rural carriers,” Zufolo said.

An FCC phantom traffic ruling would be sympathetic with rural carrier concerns, several sources said. The FCC will “more likely lean toward addressing ILEC and RLEC concerns,” an industry observer said: “The question is, does Martin then lose some leverage if he wants to do a broader intercarrier compensation reform?” The source said considering phantom traffic within a broader reform package would let Martin use it as a bargaining chip. Addressing it separately means “you are taking one of the drivers off the table… It’s a tactic[al] issue,” this source said. Said Zufolo: “My guess is that the FCC will rule in favor of rural carriers, given Chairman Martin’s support for rural carriers and the world where switched access revenue continues to shrink.”

The telecom industry is split on how best to eliminate phantom traffic and whether to do so independently of ICC reform. For example, the wireless industry believes phantom traffic arises largely from rural LECs’ use of intermediate tandems and lack of Signaling System 7 capabilities, and want the problem resolved via broader ICC reform. But midsized LEC carriers disagree. The problem’s resolution “is absolutely necessary before addressing the larger [ICC] reform,” CenturyTel, TDS Telecom, Fairpoint Communications and Consolidated Communications said in an ex parte filing.

At the FCC’s request, industry segments offered proposals on phantom traffic. Most recently, USTelecom suggested the FCC require carriers to deliver signaling information to tandem providers and terminating carriers, with “significant penalties” for violations. It said phantom traffic doesn’t stem from network limitations or disputes among carriers on the appropriate rate for terminating calls. A proposal from Alltel, BellSouth, Hickory Tech, Iowa Telecom, SBC, Smart City Telecom and Verizon also outlined steps the FCC could take today to reduce phantom traffic.

The midsized LECs want the FCC to set a “rigorous system” to label traffic accurately, better define geographic origination of traffic coming from wireless and IP providers, maintain the data to the termination point and “strengthen the discipline through the threat of strong sanctions through blocking of traffic after appropriate notifications and warnings, and/or decertification if the carrier is determine to be a repeated offender.” Small rural LECs, according to NTCA, want the FCC to require all unlabeled traffic be billed to the carrier at the other end of the trunk group on which that traffic arrives as access. Where a rural ILEC doesn’t have an existing interconnection agreement with an originating carrier, the FCC should set equitable default termination rates, NTCA said.

The wireless industry, now reviewing other industry segments’ proposals, hasn’t formed a formal position on any of them, sources said. “Most of the proposals have a common element that all carriers provide [signaling information] so that a call can be properly billed and that’s something wireless carriers do already,” a wireless source said. “The problem lies with an intermediate carrier or a terminating carrier that doesn’t have capability to read that information,” another wireless source said.

“We are considering certain clarifications [regarding] the responsibilities of different parties to interexchange traffic,” a 3rd wireless source said. The industry believes the phantom traffic problem can’t be solved under the existing ICC system, the source said: “We don’t want the situation where this issue becomes such a distraction from a broader [ICC] reform effort and end up being a step back in the process.” Another wireless source agreed. “Whether or not the FCC adopts bill-and- keep system, any intercarrier compensation reform would make a lot of these issues go away,” that source said. Wireless carriers haven’t been as active in lobbying the FCC on the issue as other industry segments, but Zufolo said as the FCC moves “closer to resolving the issue, you will see more wireless interests to speak out.”

“We don’t disagree with wireless” that “we obviously need an overall intercarrier compensation reform,” an RBOC source said: “But that’s going to take some time so there is a desire to do phantom traffic sooner rather than later.” The source disagreed with making tandem providers financially responsible for phantom traffic: “We are a middle man in this so we just pass what we receive and it’s not fair to penalize tandem providers for that. It’s the obligation of originating carriers to identify the information.”

“The overall solution goes to ensuring that there are contractual agreements between originating and terminating carriers,” addressing “how to bill the traffic if jurisdiction is unclear,” the Bell source said. The source agreed with the wireless industry that some technical limitations cause phantom traffic, but stressed that’s just part of the problem. “There are some steps the FCC can take to clarify the requirement for originating carriers to label traffic appropriately and to make sure that people pass identification information unaltered.”

“This is an issue about fairness and carriers paying for the use of capital intensive networks,” said a source from a midsized carrier: “If networks can be used without appropriate compensation, investment won’t flow into those networks, so we must have this solved.” The source said there’s “no way” to restructure ICC “without first ensuring that all traffic on networks is fully accounted for. It’s foundational to a broader ICC reform.” The time is right for FCC action, since “phantom traffic has grown as a problem in the last few years,” in some cases accounting for 20-30% of a terminating carrier’s minutes. “Whatever rules the FCC will adopt should be across the board competitively neutral dealing with all traffic,” the source said.