[Senate Hearing 110-1143]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1143
PHANTOM TRAFFIC
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
APRIL 23, 2008
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
__________
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California GORDON H. SMITH, Oregon
BILL NELSON, Florida JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey JIM DeMINT, South Carolina
MARK PRYOR, Arkansas DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Paul Nagle, Republican Chief Counsel
C O N T E N T S
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Page
Hearing held on April 23, 2008................................... 1
Statement of Senator Inouye...................................... 1
Prepared statement........................................... 1
Statement of Senator Stevens..................................... 2
Witnesses
Henagan, Raymond, General Manager, Rock Port Telephone Company;
on Behalf of the National Telecommunications Cooperative
Association.................................................... 16
Prepared statement........................................... 17
McKee, Charles W., Director, Government Affairs, Sprint Nextel
Corporation.................................................... 3
Prepared statement........................................... 4
Sarjeant, Lawrence E., Vice President, Federal Legislative and
Regulatory Affairs, Qwest Communications International, Inc.... 6
Prepared statement........................................... 8
Simpson, Angela, Director, Government Affairs, Covad
Communications and President, Voice on The Net (VON Coalition). 10
Prepared statement........................................... 12
Appendix
McCaskill, Hon. Claire, U.S. Senator from Missouri, prepared
statement...................................................... 31
PHANTOM TRAFFIC
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WEDNESDAY, APRIL 23, 2008
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:30 p.m., in
room SR-253, Russell Senate Office Building, Hon. Daniel K.
Inouye, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
The Chairman. This afternoon we deal with a matter that is
rather complicated, and I would like to commend the Vice
Chairman of the Committee for bringing this matter up, and he
is in the process of drafting a measure which I will be
cosponsoring. I will, without objection, yield the floor, yield
the chair to the Vice Chairman because he is the expert on
phantoms.
[Laughter.]
The Chairman. I have very little expertise on phantoms.
[The prepared statement of Senator Inouye follows:]
Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii
It is easy to forget the small miracle of science that takes place
every time you pick up a phone and make a call. No matter where you are
in the country and no matter who you are calling, you are connected in
a fraction of a second. This is possible because all telephone
companies are required to interconnect with each other, to complete a
phone call even if the carrier has no relationship with the calling
party.
Historically, for the system to work, phone companies have sought
compensation for the services they provided to other carriers. Today,
many telephone companies complain that too many of the calls to their
customers arrive lacking signaling information necessary for billing
purposes. This so called ``phantom traffic'' financially burdens small
carriers in particular.
I applaud Vice Chairman Stevens' desire to shine a light on this
issue. Today's hearing allows us to explore the scope of the problem
caused by phantom traffic. It also allows us to discuss legislation
Vice Chairman Stevens intends to introduce that would direct the
Federal Communications Commission to improve its signaling rules with
respect to the transmission of information necessary for billing
purposes.
I welcome the opportunity for the Committee to consider possible
solutions to phantom traffic. As communications networks and consumer
services have evolved over the past decade, the problem has grown more,
not less, complex. Ultimately, we should strive for rules that ensure
fair compensation for all service providers while encouraging continued
innovation and greater network efficiency.
I look forward to hearing the testimony from today's witnesses on
this issue.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. That is just because he never listened to
that old radio program. Remember The Phantom? That is the
problem.
I do thank you, Mr. Chairman. I thank you for scheduling
the hearing. I am delighted that we have this series of
witnesses.
Phantom traffic is a definite problem for rural carriers in
our home State of Alaska and throughout rural America. Alaska
providers face unique geographic challenges and depend on the
ability to accurately bill other carriers for delivering
traffic. However, phantom traffic prevents carriers from
collecting funds that are rightfully owed to them by other
carriers. This in turn impacts Universal Service and ultimately
the telephone rates for customers in rural America.
During today's discussion, we will hear from a diverse
cross section of the industry representatives. I am hopeful
that this discussion will lead to an agreement that carriers
should not disguise the origination of traffic.
Some will try to suggest that phantom traffic must be tied
up in a broader discussion about reforming intercarrier
compensation. In my opinion, that is not necessary. I think
resolving this issue will make it easier to address those
broader issues, but until this issue is settled, it will be
almost impossible to attempt to solve the other problems that
we have.
We have heard about the problems of phantom traffic for
many years, and I have encouraged the Federal Communications
Commission to actively analyze this issue. It is time now to
try to find a solution and it is time for the FCC to pull back
the mask and see who or what is behind phantom traffic.
I look forward to working with my colleagues here on this
committee to address the problem, and I thank Senator Inouye,
Senator Dorgan, Senator Smith, and Pryor, Thune, and Snowe for
agreeing to cosponsor legislation that I hope to introduce
today. This legislation would very simply require the FCC to
establish rules within 12 months imposing a duty on originating
carriers, including Voice over Internet Protocol providers, as
well as intermediate carriers to ensure that all traffic has
sufficient signaling data to enable accurate billing. It is
unfair to the system to have some people disguise their traffic
and not pay for it as others do. In establishing these rules,
the FCC should consider at a minimum industry standards for
signaling, technical implications of signaling equipment
currently being used in industry, and costs incurred in
modifying equipment to accommodate any changes that may be
necessary to accurately reflect the origination of any signal.
And I do thank you as witnesses for participating. I look
forward to your testimony.
I am sorry to be a little bit late, Mr. Chairman. I had
about 70 young people from Alaska over there on the steps of
the Capitol. If they had been from New York, there would have
been 700. You understand. That is a large group for us.
In any event, I would welcome Charles McKee, Director of
Government Affairs, Sprint Nextel; and Mr. Lawrence Sarjeant,
Vice President, Federal Legislative and Regulatory Affairs of
Qwest; Ms. Angela Simpson, Director for Government and
Regulatory Affairs of Covad Communications and President of the
VON Coalition; and Mr. Raymond Henagan, General Manager of the
Rock Port Telephone Company. Gentlemen and lady, if it is all
right with you, we will proceed in that order and call on Mr.
McKee first.
STATEMENT OF CHARLES W. McKEE, DIRECTOR, GOVERNMENT AFFAIRS,
SPRINT NEXTEL CORPORATION
Mr. McKee. Good afternoon, Chairman Inouye, and Vice
Chairman Stevens, and members of the Committee. My name is
Charles McKee and it is my privilege to be here today.
On behalf of Sprint, I would like to take this opportunity
to thank Vice Chairman Stevens and Chairman Inouye for your
leadership and commitment to fostering the growth of the
competitive telecommunications industry and for this
opportunity to discuss Sprint Nextel Corporation's perspective
on the issue of phantom traffic.
Sprint does not condone fraudulent activities of any kind,
nor does it support activities designed to avoid legitimate
compensation obligations between telecommunications carriers.
Sprint does not believe, however, that there is a significant
volume of telecommunications traffic that is being manipulated
for fraudulent purposes and, accordingly, does not believe
legislation in this area is necessary at this time.
On the contrary, Sprint believes that most disputes
characterized as phantom traffic are a result of the inherent
limitations of the existing public switched telephone network
and ambiguity regarding the legal status of various types of
telecommunications traffic.
The rates applied for the termination of traffic vary
widely, even though the actual service provided, completion of
a call to an end-user, is largely identical in all
circumstances. These varying rate levels result in many
disputes between the billing and billed companies over whether
the correct rate level was applied on a particular call and
what amount is actually due. Accordingly, it is not surprising
that what one carrier characterizes as fraud another carrier
would consider entirely appropriate under existing rules.
The testimony of all the witnesses here today acknowledges
that there are many different means of exchanging billing
information and that the existing network infrastructure is
inherently limited in its ability to provide billing data even
with the best signaling information. The lack of signaling data
can result from many limitations in the network, such as the
existence of multiple tandems or the limited signaling
capability of a particular route, and likewise, given that
carriers do not agree on what rate should apply to certain
types of traffic, such as Voice over Internet Protocol traffic,
the receipt of signaling information will not resolve those
disputes.
Accordingly, while Sprint does not object to an obligation
that all telecommunications providers populate appropriate
signaling information, Sprint does not believe this change
alone will address the core causes of today's billing disputes.
Given the complex questions that surround these payments,
it is important that any legislation in this area be carefully
crafted to avoid unintended consequences. We, therefore,
applaud the narrow and focused approach of this proposed bill.
Indeed, Sprint would encourage the Committee to expressly state
that it is not attempting to modify existing intercarrier
compensation obligations, for example, the manner in which the
jurisdiction of traffic is to be determined or the type of
network architecture required for the exchange of traffic.
Specifically, any legislation should expressly acknowledge
that it is not establishing a new rule that called and calling
party numbers should always be used to determine the
jurisdiction or rate applicable to a call for billing purposes.
In this increasingly mobile world, the use of phone numbers to
determine a caller's location for intercarrier compensation
purposes does not reflect the growth of wireless and Voice over
Internet Protocol technology.
Similarly, Sprint urges the Committee to ensure that the
legislation does not require carriers to reengineer their
network architecture in an inefficient and costly manner.
Specifically, the legislation should make explicit that these
call identification obligations should not require carriers to
segregate different types of traffic onto separate facilities
or require direct connection between carriers. Such measures
are not necessary to address the issue of billing and could
increase the cost of service to consumers.
Ultimately, Congress or the FCC must come to terms with
these broader issues of intercarrier compensation that are not
being addressed here. The existing system is inherently
irrational and is suppressing investment particularly in rural
areas. Reform of this broken system is critical to sustaining
robust competition in the telecommunications industry.
Thank you for your time, and I would be happy to take any
questions you may have.
[The prepared statement of Mr. McKee follows:]
Prepared Statement of Charles W. McKee, Director, Government Affairs,
Sprint Nextel Corporation
Good afternoon Chairman Inouye and members of the Committee. It is
a privilege to be here today. Thank you for this opportunity to discuss
Sprint Nextel Corporation's perspective on proposed legislation
addressing the question of network traffic identification or ``Phantom
Traffic.''
In my testimony today, I will outline Sprint's understanding of the
term Phantom Traffic, the significance of this issue to Sprint and the
potential consequences of this legislation. Sprint does not condone
fraudulent activities of any kind, nor does it support activities
designed to avoid legitimate compensation obligations. Sprint does not
believe, however, that there is a significant volume of
telecommunications traffic that falls within these categories and does
not believe legislation in this area is necessary at this time. On the
contrary, Sprint believes that most disputes regarding ``Phantom
Traffic'' are a result of inherit limitations of the existing Public
Switched Telephone Network and ambiguity regarding the legal status of
various types of telecommunications traffic.
While Sprint questions whether this specific issue warrants
legislative action, it applauds the narrow and focused nature of this
proposed bill. Given the complex questions that surround the payments
exchanged between telephone companies, it is important that any
legislation in this area be carefully crafted to avoid unintended
consequences. This legislation is appropriately limited and appears
designed to avoid these unintended consequences. Ultimately, however,
Congress or the FCC must come to terms with the broader issues of
intercarrier compensation that are not addressed here. Reform of this
broken system is critical to sustaining robust competition in the
telecommunications industry.
The Meaning of Phantom Traffic
Under current FCC rules, telecommunications carriers can impose
charges on one another when they exchange telecommunications traffic.
These charges vary based upon the type of carrier, the location of the
callers, the manner in which the traffic is exchanged and the format or
protocol of the traffic. There are at least nine different
classifications of rates between carriers. The rules governing these
charges are now very complex, and I will not attempt to outline or
explain them in this testimony. For purposes of this proceeding, it is
sufficient to state that these charges can only be assessed if the
carrier receiving a call from the Public Switched Telephone Network is
able to identify the carrier responsible for payment and the
appropriate rate to be applied.
Phantom Traffic is not a term defined within the Communications Act
or the FCC's rules and has been used by different parties to refer to
different issues. Accordingly, the term itself is somewhat ambiguous in
nature. As Sprint understands the issue, however, ``Phantom Traffic''
describes telecommunications traffic that either lacks sufficient
information to identify the carrier responsible for payment or which
lacks sufficient information to determine the rate to be applied to the
traffic. This lack of information can be the result of many different
causes, from the type of network used to transmit traffic, to disputes
over the legal status of the traffic exchanged.
The Significance of the Issue
While there are significant disputes over which rates apply and
which carriers are responsible for payment in various scenarios, almost
all carriers recognize that traffic must be identified so that a
billing carrier knows where to send its invoices and the rate to apply.
This identification can occur in different ways. Most commonly,
carriers use information provided during the transmission of the call
using a special signaling protocol. This signaling information
provides, among other things, the calling party number, the called
party number and, depending on the type of call, the charge number
(``CN''). (It is this network that enabled caller ID, for example).
Information for billing can also be provided after the call is
completed through the exchange of records between companies. These
records frequently identify the responsible party based upon the trunk
group originating the traffic. In yet other situations, companies may
negotiate payment factors based on traffic studies that are used to
generate invoices based on the total volume of traffic (as opposed to
call-by-call records).
Despite the sinister label, the vast majority of ``phantom
traffic'' is not the result of intentionally wrongful or nefarious
conduct. Rather the lack of identifying information or the lack of
sufficient information to determine a call's jurisdiction (or rate) is
most frequently the result of the current architecture of the Public
Switched Telephone Network, regulatory ambiguity regarding the
appropriate rating and routing of particular types of traffic, and the
creation of new services, such as Voice over Internet Protocol (VoIP),
that do not fit neatly within the current rules.
For example, under current rules, the jurisdiction or rate to be
applied to a call depends, in part, on the location of the calling and
called party. In the traditional wireline network, the location of a
party was generally determined by their phone number, which was
associated with a fixed address. With the advent of mobile phones,
however, the location of a caller can no longer be determined merely on
the phone number used. A call from a New York mobile telephone to a
traditional Kansas City telephone will appear identical from the
perspective of the landline network, whether the caller was in either
New York or Kansas City. Likewise, new voice applications using
Internet protocol can be initiated on any broadband connection and may
not have a single fixed location.
In Sprint's experience, however, the amount of traffic that cannot
be identified through any of the means I previously mentioned is
relatively small. Wireless carriers, for example, frequently negotiate
traffic factors to account for the issue of mobility. These factors
require wireless carriers to pay higher rates on a proportion of the
traffic exchanged with other carriers on the assumption that some
percentage of the calls exchanged were in a different jurisdiction and
thus subject to a different rate. These factors are established based
upon traffic studies that review data over a period of days or months
rather than call-by-call signaling information. Although it is not
always reliable to determine the location of a wireless caller based
only on the called and calling numbers, the reality is that most
carriers have found appropriate means to measure and identify this
traffic, and are meeting their payment obligations.
Consequences of the Legislation
Sprint currently identifies all traffic it originates on the Public
Switched Telephone Network and accordingly does not object to the
imposition of such an obligation on other providers of voice
communications. Indeed, Sprint agrees that providers of voice
communication should not be permitted to affirmatively disguise their
voice traffic or otherwise take steps to avoid a legal obligation to
compensate the carriers with whom they exchange traffic.
Sprint notes, however, that the issue of traffic identification is
closely related to the broader issue of intercarrier compensation.
Indeed, the only reason to measure traffic in this way is in order to
impose charges. Given the complexity of that subject, this legislation
appropriately avoids attempting to restructure the current rules. The
issue of intercarrier compensation reform has been the subject of
thousands of pleadings and years of debate. Legislation which purports
to address the relatively narrow issue of ``Phantom Traffic'' or
traffic identification should appropriately avoid addressing these
larger questions. Indeed, Sprint would encourage the Senate to clarify
that this legislation is not intended to modify the current
intercarrier compensation rules.
Specifically, the legislation should expressly acknowledge that it
is not establishing a new rule that called and calling party numbers
should always be used to determine the jurisdiction or rate applicable
to a call for billing purposes. In this increasingly mobile world, the
use of phone numbers to determine a caller's location for intercarrier
compensation is backward-looking and ignores the trends of wireless and
Voice over Internet Protocol (``VoIP'') technology. Until Congress or
the FCC are prepared to address all of the ramifications associated
with changes in the manner in which calls are rated and routed, it
should avoid any action that would further distort the current broken
system.
Similarly, Sprint urges the Senate to ensure that the legislation
does not require carriers to re-engineer their network architecture in
an inefficient and costly manner. Specifically, the legislation should
make explicit that these call identification obligations do not require
carriers to segregate different ``types'' of traffic onto separate
facilities or require direct connectivity between carriers. Such
measures are not necessary to address the issue of billing and could
increase the cost of service to consumers. Sprint is concerned,
however, that this legislation could be read to require inefficient
trunking arrangements that would disrupt the existing network
architecture, which currently allows carriers to combine traffic of
different types or jurisdictions on the same facilities. While Sprint
does not believe this is the intent of the legislation, we urge the
Senate to carefully review the language in this context.
Future Reform
Once again, Sprint commends the Senate staff for crafting such
narrow legislation. Sprint does not condone fraudulent efforts to mask
a carrier's identity or to avoid compensation obligations. Sprint,
however, does not believe the specific issue of Phantom Traffic
currently warrants legislation. While Sprint can support narrow
legislation addressing traffic identification, we urge the Senate to
avoid unintended changes to the already complex and dysfunctional
intercarrier compensation regime.
Unfortunately, the issue of intercarrier compensation, including
both switched and special access, is not one that can be avoided much
longer if viable competition is to remain in the telecommunications
marketplace. The distortions in the current system that heavily favor
incumbent carriers and outdated technologies threaten to undermine the
successes of the 1993 and 1996 revisions to the Telecommunications Act.
Sprint strongly urges Congress to address these broader issues as soon
as possible.
Senator Stevens. Thank you, Mr. McKee.
Mr. Sarjeant, who is the Vice President of Legislative
Affairs for Qwest, please.
STATEMENT OF LAWRENCE E. SARJEANT, VICE PRESIDENT, FEDERAL
LEGISLATIVE AND REGULATORY AFFAIRS, QWEST COMMUNICATIONS
INTERNATIONAL, INC.
Mr. Sarjeant. Good afternoon, Mr. Chairman and Mr. Vice Mr.
Chairman. My name is Lawrence Sarjeant, and I am Vice
President, Federal Legislative and Regulatory Affairs for
Qwest. Qwest thanks the Committee for focusing attention on the
phantom traffic issue by holding this hearing, and I appreciate
the opportunity to share Qwest's views on phantom traffic with
you.
Qwest provides local telephone service, broadband Internet
access service, and VoIP service in 14 states that cross three
U.S. time zones. Qwest also operates a long distance network
and one of the world's largest Internet backbones. Qwest
provides a variety of other telecommunications and information
services on a nationwide basis for businesses and state and
Federal Government agencies. In providing these services, Qwest
utilizes a network that consists of both traditional public
switched telephone network, PSTN, facilities and state-of-the-
art broadband and other IP-based facilities.
Qwest commits considerable investment capital and other
resources on an annual basis to operate and maintain its
facilities. For example, Qwest invested $800 million in 2007 to
augment the broadband capabilities of its network, including
delivering higher speeds to all of its sales channels. This was
a part of the approximately $1.67 billion in total Qwest
capital investment for 2007. Further, Qwest recently announced
a planned 2008 capital investment of $300 million to extend
fiber optics deeper into its local network supporting Internet
access services.
Given the breadth and diversity of its services and the
size of its capital investment, Qwest cares deeply about
ensuring that the public policy environment in which it
operates is one that is investment-friendly. This is certainly
a primary focus of the 1996 Telecommunications Act as evidenced
by the specific requirement in section 157 that the Federal
Communications Commission, the FCC, encourage the deployment on
a reasonable and timely basis of advanced telecommunications
capability to all Americans by utilizing regulating methods
that remove barriers to infrastructure investment. It is this
goal of bringing advanced telecommunications capability to all
Americans that should guide our communications policy
deliberations and actions.
Unfortunately, the communications industry is experiencing
a serious problem with certain industry participants avoiding
their intercarrier compensation obligations to those carriers
that own and operate the PSTN. If legitimate intercarrier
compensation costs cannot be recovered because of such
arbitrage, less capital is available for future network
investments and consumers lose.
The term ``phantom traffic'' describes a number of
different situations in which traffic is not adequately
identified, making appropriate billing for the traffic
difficult or impossible. This happens for a variety of reasons,
but generally it occurs because the current intercarrier
compensation regime has not kept pace with technological and
competitive changes in the communications market and, as a
result, has made certain arbitrage opportunities possible.
In today's communications world, both traditional
telecommunications carriers and service providers utilizing
more recent technologies depend upon the ability to
interconnect with one another and exchange traffic. Because the
exchange of traffic sometimes involves different types of
services that are accorded different regulatory treatment,
intercarrier compensation is accomplished through a variety of
arrangements.
In any arrangement where service providers must compensate
each other, it is essential that they negotiate agreements that
spell out the terms and conditions by which they exchange
traffic and that they also exchange adequate call data to
enable accurate billing. Phantom traffic occurs in part because
not all service providers obtain adequate agreements that
ensure that other carriers receive the call data necessary for
billing.
Qwest and others have asked that the FCC address phantom
traffic on an interim basis, one, by reinforcing that the 1996
Telecom Act requires and enables all types of service providers
to enter into agreements for the exchange of traffic, and two,
by expanding the scope of the FCC's rules that require the
passage of information necessary for accurate billing.
Call records. The exchange of call records pursuant to an
agreement provides information to facilitate billing and is in
fact the industry standard and the most common way in which
information is exchanged for billing purposes. While service
providers are already able to negotiate commercial terms for
the exchange of call records as a part of their agreements,
they all too often fail to obtain agreements in the first place
and, when they do obtain agreements, sometimes fail to
negotiate for the necessary call records.
Signaling rules. Signaling is just one method of passing
some of the information necessary for accurate billing, and the
existing call signaling rules were targeted to a narrow subset
of traffic, interstate traffic using the most common,
traditional public switched telephone network signaling
protocol. As the communications marketplace becomes
increasingly diverse and PSTN-based services become a
complement to a variety of non-PSTN-based services, it is
necessary to expand the FCC's signaling rules.
Qwest believes that comprehensive intercarrier compensation
reform that creates a holistic bill-and-keep-at-the-edge regime
for all traffic is the only true and complete solution to the
phantom traffic problem. Nonetheless, expeditious adoption of
an interim solution addressing agreements and signaling rules
is an important step in mitigating the phantom traffic problem.
Thank you.
[The prepared statement of Mr. Sarjeant follows:]
Prepared Statement of Lawrence E. Sarjeant, Vice President, Federal
Legislative and Regulatory Affairs, Qwest Communications International,
Inc.
Good morning Mr. Chairman and Members of the Committee. My name is
Lawrence Sarjeant, and I am Vice President for Federal Legislative and
Regulatory Affairs for Qwest Communications International, Inc.
(Qwest). I appreciate the opportunity to share Qwest's views with you
at today's hearing on the issue of phantom traffic.
Before I address the phantom traffic issue directly, I just want to
give a little background about who Qwest is and why we care so much
about this issue. As you may know, Qwest provides local telephone
service, broadband Internet access service, and VoIP (voice services
using an IP protocol) service in fourteen states across the Central,
Mountain and Pacific time zones. Qwest also operates a long-haul long
distance network and operates one of the world's largest Internet
backbones. Qwest also provides a variety of other telecommunications
and information services on a nation-wide basis (i.e., both inside and
outside of its local service area). These services include VoIP service
and a broad variety of other innovative telecommunications solutions
provided to businesses and state and Federal Government agencies. In
providing these services, Qwest utilizes a network that consists of
both traditional Public Switched Telephone Network (PSTN) facilities
and state-of-the-art broadband and other IP-based facilities. Qwest
commits considerable investment capital and other resources on an
annual basis to operate and maintain these facilities. By way of
example, Qwest invested approximately $800 million in 2007 to augment
the broadband capabilities of its network, including delivering higher
speeds to all of its sales channels.\1\ This was a part of the
approximately $1.67 billion in total Qwest capital investment for
2007.\2\ On top of that, Qwest recently announced a planned 2008
capital investment of $300 million to extend fiber optics deeper into
its local network supporting state-of-the-art Internet services.\3\
---------------------------------------------------------------------------
\1\ As stated in the Earnings Release for Qwest's 4th Quarter and
Full-Year 2007 results.
\2\ Id.
\3\ As stated in the Earnings Release for Qwest's 3rd Quarter of
2007 results.
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Promoting an Investment-friendly, Consumer-friendly, Market-based
Environment
Given the breadth and scope of its services and the size of its
capital investment, Qwest cares deeply about ensuring that the public
policy environment in which it operates is one that is investment
friendly. This is certainly a primary focus of the 1996
Telecommunications Act, as evidenced by the specific requirement in
Section 157 that the Federal Communications Commission (the ``FCC'')
``encourage the deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans . . . by utilizing . . .
regulating measures that remove barriers to infrastructure
investment.'' It is this goal of bringing advanced telecommunications
capability to all Americans that should guide our communications policy
deliberations and actions. Policies that discourage investment in
communications infrastructure by making such investment uneconomic
operate at cross-purposes with the goal of encouraging the timely and
ubiquitous deployment of advanced communications capability to all
Americans. Phantom traffic bears on a carrier's ability to make
investments in advanced telecommunications capabilities by depriving it
of the compensation it is due for handling the traffic of other
communications providers. We are experiencing a serious problem with
certain industry participants avoiding their intercarrier compensation
obligations to those carriers that own and operate the PSTN.
Facilities-based providers of communications services such as Qwest
have high fixed costs. If we cannot recover our legitimate costs
because of such arbitrage, less capital is available to us for future
network investments to achieve the Congress's goal of bringing advanced
telecommunications capability to all Americans. If this happens,
consumers lose. Qwest commends the Committee for its interest in this
issue and shining a spotlight on it by holding this hearing.
The Phantom Traffic Problem
The term ``phantom traffic'' describes a number of different
situations in which traffic is not adequately identified, making
appropriate billing for the traffic difficult or impossible. This
happens for a variety of reasons, but generally occurs because the
current intercarrier compensation regime has not kept pace with
technological and competitive changes in the communications market, and
as a result, has made certain arbitrage opportunities possible. In
today's telecommunications world, both traditional telecommunications
carriers and service providers utilizing more recent technologies all
depend upon the ability to interconnect with one another. The
intercarrier compensation regime, in turn, governs the manner in which
interconnecting communications service providers give or receive
compensation when these service providers exchange traffic. Because the
exchange of traffic sometimes involves different types of services that
are accorded different regulatory treatment, intercarrier compensation
is accomplished through a variety of arrangements. In some
circumstances, service providers agree to exchange no compensation
while accepting each other's traffic. This is called ``bill and keep.''
In other cases, local exchange carriers exchange or carry traffic
pursuant to tariffs or carrier agreements that define the terms and
conditions for the provision of compensation. For long distance
services, there are both interstate and intrastate tariffed access
charge regimes that are regulated by the FCC and state public service
commissions, respectively. Under these regimes, long distance carriers
typically pay local exchange carriers to deliver and receive long
distance calls to and from local customers. Among competing local
exchange carriers, there are the reciprocal compensation rules, which
allow a local exchange carrier to be compensated by another local
exchange carrier for the termination of local traffic. When wireless
carriers exchange traffic with wireline carriers, there are yet
additional rules. In some cases, traffic merely transits an
intermediate carrier's network, but the transit provider neither
originates nor terminates the call. In any compensation arrangement
where service providers must compensate each other, it is essential
that they not only negotiate agreements that spell out the terms and
conditions by which they exchange traffic, but that they also exchange
adequate call data to enable accurate billing.
Phantom traffic occurs, in part, because not all service providers
obtain adequate agreements that ensure that other carriers receive the
call data necessary for billing, particularly in those circumstances
where the call signaling data is not adequate. Moreover, because
intercarrier compensation treatment varies by jurisdiction, some
service providers have the incentive to engage in arbitrage when they
exchange traffic. For example, because interstate access rates are
typically lower than intrastate access rates, access traffic is
sometimes erroneously designated as interstate when in fact it is
jurisdictionally intrastate. Similarly, access traffic is sometimes
erroneously designated as local traffic because intercarrier
compensation rates for local traffic are lower and/or because such a
designation improperly seeks to shift the compensation burden to
another carrier (e.g., an originating carrier may be due compensation
for access traffic but owe compensation for local traffic). In other
words, phantom traffic occurs because certain service providers seek to
pay less than they should, seek to avoid their compensation obligations
altogether, or seek to receive compensation when they should be paying.
Regardless of how it happens, phantom traffic is a large problem.
Estimates as to the amount of revenue lost annually to phantom traffic
have varied in filings in the FCC's intercarrier compensation
proceeding (Docket WC No. 01-92) from $600M to $2B. The FCC is
currently studying potential intercarrier compensation reform proposals
that would largely address this problem by eliminating differences in
intercarrier compensation treatment based on the type of traffic.
However, it may be some time before comprehensive intercarrier
compensation reform occurs. Because of this, Qwest and numerous other
industry representatives are encouraging the FCC to at least adopt
interim measures that would provide significant relief from the phantom
traffic problem.
Qwest's Phantom Traffic Position
Qwest and a diverse group of industry representatives have asked
that the FCC address phantom traffic on an interim basis by: (1)
reinforcing that the 1996 Act requires and enables all types of service
providers to enter into agreements for the exchange of traffic; and (2)
expanding the scope of FCC rules requiring the passage of information
necessary for accurate billing. The first principle is important
because signaling is just one method of passing some of the information
necessary for accurate billing. The exchange of call records pursuant
to agreement also provides information to facilitate billing and is, in
fact, the industry standard and the most common way in which
information is exchanged for billing purposes. While service providers
are already able to negotiate commercial terms for the exchange of
these call records as part of their agreements, they all too often fail
to obtain agreements in the first place and, when they do, fail to
negotiate for the necessary call records. The second principle is
important because the FCC's existing call signaling rules were targeted
to a narrow subset of traffic--i.e., interstate traffic using the most
common traditional PSTN signaling protocol. The rules do not cover, for
example, voice calls originated in IP protocol which terminate on the
PSTN. As the communications marketplace becomes increasing diverse and
PSTN-based services become a complement to a variety of non-PSTN-based
services, it is necessary to expand the FCC's signaling rules.
Again, Qwest believes that the best interim solution to phantom
traffic is to merely expand the scope of current rules as discussed
above. To be clear, given the nature of the arbitrage problem
underlying phantom traffic, Qwest believes that comprehensive
intercarrier compensation reform that creates a holistic bill-and-keep-
at-the edge regime for all traffic is the only true and complete
solution to the phantom traffic problem. The solution described above,
addressing agreements and signaling rules, is only an interim step.
But, it is an important step, and Qwest hopes it can be taken
expeditiously.
Thank you.
Senator Stevens. Thank you very much.
The next witness is Ms. Angela Simpson, Director for
Government and Regulatory Affairs of Covad Communications and
President of the VON Coalition. Ms. Simpson?
STATEMENT OF ANGELA SIMPSON, DIRECTOR, GOVERNMENT
AFFAIRS, COVAD COMMUNICATIONS; AND PRESIDENT,
VOICE ON THE NET (VON COALITION)
Ms. Simpson. Thank you, Chairman Inouye, Vice Chairman
Stevens. My name is Angela Simpson. I am Director of Government
Affairs at Covad Communications and the President of the VON
Coalition.
I am proud to be here representing a group of high-tech
innovators who are ushering in a new world of communication
opportunity. We believe VoIP can be a force for increased
competition and innovation and a driver for broadband
deployment and economic growth. With the right policies, VoIP
competition can save consumers billions of dollars over the
next several years, and as the Nation faces economic
challenges, VoIP is now projected to be the number one job
creator of any industry in the country. But this promise and
potential are at risk if rules of the last century's telephone
network are arbitrarily imposed onto the Internet.
Phantom traffic is a somewhat sinister sounding phrase
coined by some incumbent phone companies to refer to traffic
that may not conform to the billing methods used by those
carriers. In essence, such traffic confuses the terminating
carrier because the traffic may not contain information that
the legacy system can easily handle. Some attribute fraudulent
motives to phantom traffic, but it is inaccurate to view all
phantom traffic as fraud or theft. There are other innocent and
valid reasons for this phenomenon.
Namely, the current compensation scheme does not reflect
the technological realities of today's communications market.
Many new technologies like some VoIP services have no business
reason to track information in the traditional way, and to do
so would require extensive and costly network modifications
simply to generate artificial information.
While VoIP technologies may not be the primary cause of the
so-called phantom traffic problem, some of the proposed
solutions put forth have very real potential to stall emerging
VoIP benefits and limit consumer choices. For these reasons,
the VON Coalition respectfully urges policymakers to carefully
consider two key principles before acting on phantom traffic.
First, to help accelerate the transition to a nationwide
broadband network, we believe regulators should create
technologically neutral incentives rather than disincentives
for exchanging traffic between Internet networks and the legacy
phone network.
And second, rather than reflexively applying yesterday's
rules to tomorrow's technologies, we encourage the Committee to
take a practical, forward-looking approach that extends VoIP-
driven benefits throughout the economy.
Those who seek quick action on the narrow issue of phantom
traffic might create the short-term appearance of solving a
problem, but the related fallout is likely to have significant,
unintended negative consequences. The best approach is for
policy experts at the FCC and stakeholders to eliminate the
phantom traffic issue by enforcing existing rules and
establishing a new compensation regime that fosters fair
competition.
Many proposed solutions to the phantom traffic phenomenon
tend to tie together the signaling issue, the identification of
the IP voice packet, and the compensation issue. This is
neither necessary nor advisable. A combination of FCC
enforcement of its current rules, minor changes in the current
call signaling requirements, and completion of the broader FCC
policymaking provides a far more rational solution.
It is also important to note that some legacy carriers
themselves bear a part of the blame for the phantom traffic
issue where they have not updated their networks to accommodate
SS7 technology. Before imposing burdensome, new technical and
regulatory requirements on the entire VoIP industry, those
carriers should be required to make the necessary updates to
their networks to be able to handle the existing signaling
information.
We are concerned that proponents of new traffic signaling
regulation have not adequately demonstrated a quantifiable
problem that cannot be addressed through better enforcement of
existing rules. This is a necessary precondition for any
additional actions. Any fix should also consider impacts on
other laws, broadband deployment, and the regulation of the
Internet in general. There is no need to conduct open heart
surgery to fix a paper cut.
Regardless of the path taken, however, the VON Coalition
believes that no one should have the right to block allegedly
improperly labeled traffic. Because such action is blatantly
discriminatory, policymakers should never tolerate or permit
blocking of IP traffic under any circumstances.
The VON Coalition believes that acting on an ad hoc basis
at this stage is unwarranted. However, to the extent that this
committee does act, it should focus its initial efforts on
quantifying the scope of the phantom traffic problem. This is a
legitimate debate. The risks associated with retrofitting
outdated technological and compensation regimes onto bold, new
communications tools vastly outweigh the temporary financial
rewards some of these ILEC's seek.
VoIP technology has benefited people across America from
cities to suburbs to exurbs, and it has been especially
important for consumers living in rural America who are just
now beginning to enjoy the benefits of broadband and voice
competition. Facilitating Internet- based voice communication
can help all consumers to benefit from voice competition and
innovation. It can also help communities connect to a new world
of remote job opportunities, resulting in rural economies
becoming an engine for higher paying information age jobs.
However, imposing rules meant for yesterday's phone network
on tomorrow's digital age would adversely affect these vast
consumer benefits. We urge the Committee to take extreme
caution in how it proceeds with this phantom problem.
Thank you.
[The prepared statement of Ms. Simpson follows:]
Prepared Statement of Angela Simpson, Director, Government Affairs,
Covad Communications; and President, Voice on The Net (VON Coalition)
Thank you, Chairman Inouye, Vice Chairman Stevens, and
distinguished members of the Committee. My name is Angela Simpson. I am
Director of Government Affairs at Covad Communications and President of
the Voice on The Net or VON Coalition \1\--the voice for the VoIP
industry. On behalf of the VON Coalition, I thank the Committee for the
opportunity to appear before you today to discuss the so-called phantom
traffic issue.
---------------------------------------------------------------------------
\1\ The Voice on the Net or VON Coalition consists of leading VoIP
companies, on the cutting edge of developing and delivering voice
innovations over Internet. The coalition, which includes AT&T, BT
Americas, CallSmart, Cisco, CommPartners, Covad, EarthLink, Google,
iBasis, i3 Voice and Data, Intel, Microsoft, New Global Telecom,
PointOne, Pulver.com, Skype, T-Mobile USA, USA Datanet, and Yahoo!
works to advance regulatory policies that enable Americans to take
advantage of the full promise and potential of VoIP. The Coalition
believes that with the right public policies, Internet-based voice
advances can make talking more affordable, businesses more productive,
jobs more plentiful, the Internet more valuable, and Americans more
safe and secure. For more information, see http://www.von.org.
---------------------------------------------------------------------------
I am proud to be here representing a group of high-tech innovators
who are helping to usher in a new world of communications opportunity.
We believe VoIP can be a force for increased competition, a platform
for innovation, a driver for broadband deployment, and a vehicle for
continued economic growth. In fact, with the right policies, VoIP
competition can save consumers an astounding $111 billion over the next
5 years--putting real money back into consumers' pockets through the
power of competition at a time when families really need it.\2\ And by
harnessing VoIP as a broadband driver, just a 7 percent increase in
broadband adoption could create an estimated 2.4 million new jobs.\3\
Indeed, as the Nation faces economic challenges, VoIP is now projected
to be the number one job creator of any industry in the country.\4\
---------------------------------------------------------------------------
\2\ Micra report (available online at http://www.micradc.com/news/
publications/pdfs/Updated_MiCRA_Report_FINAL.pdf) found that VoIP
competition can save consumers $111 billion over the next 5 years.
\3\ Just a 7 percent increase in broadband adoption could result in
an additional 2.4 million jobs per year created. See http://
www.connectednation.com/documents/2008_02_21_TheEco
nomicImpactofStimulatingBroadbandNationally_AConnected Nation
Report_001.pdf.
\4\ The industry leading the way in terms of employment growth over
the next few years will be Voice over Internet Protocol providers
(VoIP), according to economic research firm IBISWorld, with average
annualized jobs growth of around 19.4 percent through 2012. See http://
www.ibisworld.com/pressrelease/pressrelease.aspx?prid=116.
---------------------------------------------------------------------------
But the promise and potential that I outlined above are at risk if
rules meant for the last century's telephone network are arbitrarily
imposed on to the Internet. This would not only stall and stifle these
vast consumer and small business benefits, but it runs counter to the
course the Committee has charted over the years to promote competition,
investment, and innovation.
``Phantom traffic'' is a somewhat sinister-sounding phrase used by
some incumbent phone companies to refer to communications traffic that
does not conform to the billing methodologies used by those terminating
LECs. In essence, such traffic ``confuses'' the terminating carrier's
systems because, in some instances, the traffic does not contain
information that the legacy carrier's system utilizes to determine the
traffic's regulatory classification for compensation purposes. Some
read fraudulent motives into phantom traffic by suggesting that the
originators affirmatively alter or remove the information necessary for
intercarrier compensation billing purposes in order to make traffic
appear to be the type of traffic that is assessed lower termination
fees. But it is inaccurate and simplistic to view ``phantom traffic''
as fraud or theft. There are other, innocent and valid reasons for the
``phantom traffic'' phenomenon.
Namely, the current compensation scheme does not reflect the
technological realities of today's communications market. Many new
technologies, like some VoIP services, have no business reason to track
such information in the traditional way that the ILECs would prefer.
And to do so would require extensive network modifications simply to
generate artificial information. For example, many innovative Internet-
based communication services and technologies are not tied inextricably
to North American Numbering Plan (``NANP'') numbers, which are the
foundation of many intercarrier compensation calculations. In other
instances, the consumer is simply utilizing the full range of features
of a technology, whether IP-enabled or wireless, such as using a
communications device to originate calls from locations unrelated to
the calling party number.
While VoIP technologies may not be the primary cause of so-called
phantom traffic problems, some of the proposed ``solutions'' put forth
have the very real potential to stall the vast emerging benefits and
limit consumer choices in the future. For these reasons, the VON
Coalition respectfully urges the Committee to carefully consider two
key principles before it advances any legislation related to phantom
traffic that might forestall these vast consumer benefits:
First, to help accelerate the transition to a nationwide
broadband network, we believe regulators should adopt rules
that create technologically neutral incentives rather than
disincentives for exchanging traffic between Internet networks
and the legacy phone network. This means strengthening and
reforming interconnection and intercarrier compensation
policies as a whole.
Second, rather than automatically applying yesterday's rules
to tomorrow's technologies, we encourage the Committee to
support a practical, forward-looking approach that empowers
consumers, extends VoIP driven benefits, and boosts
productivity in the economy. Extreme caution should be taken to
not unduly impede the FCC's comprehensive intercarrier
compensation reform efforts currently underway and to avoid the
serious unintended negative consequences that could arise by
virtue of a reflexive ``band-aid'' fix to the ``phantom
traffic'' issue.
We are concerned that a ``shoot then aim'' approach to solving the
so-called phantom traffic issue could have the unintended effect of
stifling innovation and stalling investment in this still nascent IP-
enabled communications industry. Those who advocate for quick action on
the narrow issue of phantom traffic might create the appearance of
solving a problem, but the related fallout is likely to have
significant and unintended negative repercussions. For example, a band-
aid fix imposed on VoIP services is likely not to adequately solve the
problem experienced by the LECs, and will disproportionately harm VoIP
providers and their consumers. A better approach is for policy experts
at the FCC and industry stakeholders to eliminate this phantom traffic
issue once and for all by establishing a new intercarrier compensation
regime that fosters fair competition and innovation to the benefit of
consumers and small businesses nationwide. The FCC has the tools and
the appropriate authority to develop the balanced, pro-competitive, and
forward-looking policies that are needed here. Indeed, the FCC opened
such proceeding in 2001, but has yet to act partly because they are
overwhelmed by a tidal wave of petitions seeking to eliminate statutory
interconnection obligations.
I. Proposed Phantom Traffic ``Solutions'' Confirm the Failures of the
Current Compensation Structure
Many proposed solutions to the ``phantom traffic'' phenomenon tend
to inextricably tie together the signaling issue and the compensation
issue. This is neither necessary nor advisable, especially if Congress
or the FCC is contemplating an interim solution. A combination of
vigilant FCC enforcement of its current rules, potentially minor
changes in signaling requirements, and completion of broader FCC
policymaking provide far more rational solutions.\5\
---------------------------------------------------------------------------
\5\ The Commission has taken a strong view against piecemeal
decisions that might ``stymie comprehensive reform.'' For example, in
rejecting a recent forbearance petition, the Commission was concerned
that ``such relief would . . . require us to prejudge important issues
pending in broader rulemakings and otherwise distort the Commission's
deliberative process.'' Petition of SBC Communications Inc. for
Forbearance from the Application of Title II Common Carrier Regulation
to IP Platform Services, Memorandum Opinion and Order, 20 FCC Rcd 9361
(2005).
---------------------------------------------------------------------------
There are two distinct issues that proponents of phantom traffic
solutions seek to resolve. The first issue involves the information
about a call that is generated and exchanged. The FCC's rules already
address this concern, but they need to be enforced.\6\ Vigorous FCC
enforcement of its existing rules can go a long way toward solving the
phantom traffic problem. It is also important to note that certain
ILECs themselves bear part of the blame for the phantom traffic issue
where they have not updated their networks to accommodate Signaling
System 7 (``SS7'') technology. But before such ILECs seek to impose
burdensome new technical and regulatory requirements on the entire VoIP
industry, they should be required to make the necessary upgrades to
their own networks to be able to handle ``necessary'' signaling
information prior to suggesting that other intermediate carriers assume
any additional burdens.
---------------------------------------------------------------------------
\6\ Specifically, carriers that utilize SS7 signaling already are
required to transmit the calling party number associated with an
interstate call to interconnecting carriers. 47 C.F.R. 64.1601(a).
---------------------------------------------------------------------------
Current signaling requirements could potentially be fine-tuned to
further address the situation to the extent such actions are
technically, operationally, and economically feasible for all, to the
extent that they are necessary for an interim solution to be effective,
and in a manner that spreads the burden equitably between all entities
in the transmission chain. To this end, the VON Coalition could support
a requirement that, where technically and operationally feasible with
the network technology deployed at the time the call was originated,
the originating providers transmit the telephone number received from
or assigned to the calling party. For PSTN connected services, all
providers in the communications stream pass currently generated call
identifying information without modification. This requirement would
not apply where no telephone number is assigned to the calling party.
Importantly, however, the VON Coalition does not support any new
obligations to generate call identifying information where such
information does not generate organically.
The second issue involves the compensation structure for traffic
that does not meet the billing requirements of legacy terminating phone
companies. Proponents of additional regulatory burdens seek to impose
backward-looking obligations and high access rates on new entrants and
new technologies in the guise of ``phantom traffic'' solutions for two
underlying reasons. First, the current compensation structure does not
reflect current technological and market realities and
disproportionately benefits legacy terminating LECs. And second, some
are seeking to remedy deficiencies in their own networks and billing
systems at the expense of others. Comprehensive intercarrier
compensation reform is one of the fundamental policy issues currently
being considered by the FCC.
The so-called phantom traffic ``solutions'' not only won't solve
these fundamental policy challenges, but worse, they will delay the
reform that is necessary to put all carriers on a level playing field.
A rush to judgment on the phantom traffic issue, without proper
consideration of the broader interests of consumers and small
businesses would be a dramatic departure from the Federal goals on
compensation reform which include encouraging network efficiency and
investment, and the development of efficient competition.\7\
---------------------------------------------------------------------------
\7\ See Developing a Unified Intercarrier Compensation Regime,
Notice of Proposed Rulemaking, 16 FCC Rcd 9610, 9612 (2001).
---------------------------------------------------------------------------
II. Congress Should Proceed Cautiously to Avoid Negative Unintended
Consequences of New Phantom Traffic Regulation
The VON Coalition cannot over-emphasize the need to proceed
cautiously. There is a significant danger of negative unintended
consequences of going too far to fast here. As an initial matter, we
are concerned that proponents of one-off phantom traffic regulation
have not adequately demonstrated a quantifiable problem that cannot be
adequately addressed through vigilant enforcement of existing rules.
Information regarding the true size and scope of the so-called phantom
traffic problem, and tending to show that it is a significant problem
that cannot be addressed by FCC enforcement, is a reasonable and
necessary precondition for any additional regulatory requirements.
There is also insufficient evidence that the long-term costs to
consumers, service providers, and our economy from a new Internet
regulatory scheme imposed to address any quantifiable phantom traffic
problem--are outweighed by any short term benefit to incumbents. In
addition to this fundamental cost-benefit analysis, the Committee
should refrain from acting until the impacts of any such action on
existing law (such as the Call Home Act), broadband deployment, and the
Internet generally, are understood. There's no need to conduct open-
heart surgery to fix a paper cut.
IP networks and the gateways that enable the transition between
broadband communications and the PSTN are critical links for empowering
consumers and driving economic benefits related to IP-enabled
communications. That's why it's critical to consider the technical
variations of networks and not try to retrofit new technologies into
legacy network solutions. By avoiding rules that create new and onerous
obligations to generate call identifying information where such
information does not generate organically, policymakers can help ensure
continued investment in IP-enabled networks, and avoid backward-looking
decisions that can stifle innovation, impede technology investment, and
slow the transition to broadband communications.
Regardless of the path taken, the FCC should never permit
terminating carriers to resort to ``self-help.'' Some ILECs have
suggested that both intermediate and terminating carriers should have
the right to block ``improperly labeled traffic.'' Because such action
blatantly gives competitors the ability to discriminate and is customer
affecting, policymakers should never tolerate or permit blocking of any
IP traffic under any circumstances.
III. Getting to the Right Intercarrier Compensation Regime
Only a few years ago, five rural ILECs and U.S. Telecom wrote to
this Committee arguing that the FCC should not take interim steps to
clarify the correct compensation regime for VoIP because ``[t]hese
issues should be addressed comprehensively and not in a piecemeal
fashion, as the FCC has previously recognized.'' \8\ They argued that
to ``act on an ad hoc basis on only one aspect of a much larger problem
at this stage is totally unwarranted.'' And they asked for help in
preventing the ``FCC from taking any hasty, ill-timed, and ill-
conceived action.'' \9\
---------------------------------------------------------------------------
\8\ Eastern Rural Telecom Association, Independent Telephone and
Telecommunications Alliance, National Telecommunications Cooperative
Association, Organization for the Promotion and Advancement of Small
Telecommunications Companies, United States Telecom Association,
Western Telecommunications Alliance Letter to Senator Daniel K. Inouye
(Feb. 3, 2005).
\9\ Id.
---------------------------------------------------------------------------
The VON Coalition likewise agrees that acting on an ad hoc basis on
only one aspect of a much larger problem at this stage is totally
unwarranted, especially when the ad hoc solution being proposed by the
ILECs is likely to impose high per-minute access charges on VoIP
providers. Such access charges would overcompensate ILECs because they
do not remotely reflect the true costs of traffic exchange, while at
the same time stifling consumer benefits of IP-enabled communications
and slowing broadband adoption in the United States. Instead, we urge
the Committee to encourage regulators to continue to focus attention on
completing action on its omnibus intercarrier compensation reform
proceeding. Such an approach avoids imposing costly but temporary
``band-aid'' requirements on broadband communication, protects VoIP
consumers from arbitrary price increases, and ensures that new
investment in IP-enabled networks, applications, and services is not
unnecessarily deterred.
The current regime is, in a word, broken and the apparent catalyst
behind the request for new phantom traffic solutions is the very issue
that should be driving the FCC to adopt comprehensive compensation
reform: rapid technological changes in the communications industry have
made virtually all current compensation and billing mechanisms
obsolete. Thus, to the extent this Committee acts, it should focus its
initial efforts on quantifying the scope of the ``phantom traffic''
problem. The existence of a problem is a gating issue, and estimates as
to the size and scope of the problem vary greatly. Congress should
focus on doing no harm prior to mandating new regulatory constructs.
The risks associated with retrofitting outdated technological and
compensation regimes onto bold new communications tools vastly outweigh
the financial rewards these ILECs seek.
IV. Conclusion
VoIP technology has benefited people all across America from cities
to suburbs to exurbs. And it has been especially important for
consumers living in rural America who are just now beginning to enjoy
the benefits of broadband and voice competition. Enabling Internet-
based voice communication can help consumers (particularly rural
consumers) to benefit from voice competition, encourage rural telecom
companies to extend broadband infrastructure more affordably, allow
remote businesses to transform the way they operate, and help rural
communities to connect to a new world of remote job opportunities,
resulting in rural economies becoming an engine for higher paying
information age jobs.
However, imposing rules meant for yesterday's phone network on to
tomorrow's digital age would adversely affect these vast consumer
benefits. The VON Coalition in no way endorses fraudulent removal of
call signaling information. Many legacy telephone companies, however,
would use this fear as a means to burdensomely regulate the balance of
innocent VoIP actors. We urge the Committee to take extreme caution in
how it proceeds with this ``phantom'' problem.
Thank you very much. I am happy to answer questions.
Senator Stevens. Thank you very much.
Our last witness is Mr. Raymond Henagan, General Manager of
Rock Port Telephone Company. Mr. Henagan?
STATEMENT OF RAYMOND HENAGAN, GENERAL MANAGER,
ROCK PORT TELEPHONE COMPANY; ON BEHALF OF THE
NATIONAL TELECOMMUNICATIONS COOPERATIVE ASSOCIATION
Mr. Henagan. Good afternoon, Senators. Thank you for
inviting me here today.
Before I outline the problems, please understand that small
rural carriers get about 29 percent of their revenues from
carrier payments. Schemes to avoid these payments make it
difficult to afford service to rural consumers.
The first key problem is carriers are not sending all the
detailed information required for proper billing. Recent
analysis of our records show that 11 percent of the calls sent
for termination on Rock Port's network lack of calling party's
number. Sherburne Telephone Company in Minnesota also
discovered that 30 percent of their terminating calls arrive
without valid CPN.
Second, Rock Port and most other small carriers are not
receiving all the detailed call records from the tandem carrier
who provides us with connections to the outside world. To give
you an idea of the size of the problem, in 2007 we saw over 18
percent of our minutes being sent over Rock Port's network were
traveling for free because they are not receiving the call
records needed to bill for these calls.
Third, many rural carriers cannot send an accurate bill out
to certain wireless carriers because we are not privy to the
necessary traffic information. Wireless carriers insist on
using traffic factors to bill access charges for nonlocal
calls. However, this factor is not based on real traffic. Not
surprising, these percentages range from 0 to 3 percent. We
need actual traffic information to be able to negotiate
agreements with wireless carriers on an equal playing field.
Fourth, rural carriers are receiving letters from carriers
refusing to pay access bills claiming the FCC has given them
permission to use their networks for free because they are IP.
Now, you and I both know these are regular voice calls, people
talking to people. Because these companies have sprinkled IP
fairy dust on them, they think they get a free ride. IP
technology has never been magic. Everyone has it. I have it.
AT&T has it. IP is a technology. It is not a service. It is not
a network. It is not the Internet. These are regular voice
calls.
Senators we need your action at the Federal level. Present
policy is failing to get me critical billing information and is
giving these carriers excuses for not paying for calls they
sent to our network. Additionally, the FCC is not allowing us
to block the non-pay carriers, and this is like an
unconstitutional taking. What other business is required to
give away its product or services free due to government
action?
NECA has filed a petition asking the FCC to extend its call
signaling rules to all voice service providers who use the PSTN
regardless of the technology that is used. NECA has asked the
FCC to allow carriers to use phone numbers as a default proxy
for billing purposes when wireless carriers do not provide real
traffic data or when you cannot mutually agree upon a traffic
factor. Granting NECA's petition would be a good first step.
We also need the FCC to confirm all users of the network.
The network must pay for its use. FCC has stated this is a
policy and has implemented rules and has said voice services
are the same as telephone services in the customer's eyes, but
has not confirmed that voice calls are subject to its access
rules like all other calls. If FCC lets this continue,
Americans who live in rural areas will likely see their phone
bills escalate, their quality of services will be decreased, a
large reduction in investment in broadband, and an increase in
Universal Service contributions.
Senators Missouri is the ``Show Me State.'' So I am asking
you to please show us some action on this critical issue. Thank
you.
[The prepared statement of Mr. Henagan follows:]
Prepared Statement of Raymond Henagan, General Manager, Rock Port
Telephone Company; on Behalf of the National Telecommunications
Cooperative Association
Introduction
Good afternoon Senators, and thank you for this opportunity to
share with you today the serious financial problems that phantom or
unbillable traffic is presenting for America's small rural
telecommunications carriers. For the past 10 years I have served as the
General Manager of the Rock Port Telephone Company in Rock Port,
Missouri, and my professional career in the telecommunications industry
spans more than 38 years.
In addition to Rock Port and the National Telecommunications
Cooperative Association (NTCA), I am also appearing on behalf of the
Organization for the Promotion and Advancement of Small
Telecommunications Companies (OPASTCO), and the Western
Telecommunications Alliance (WTA).
Specific Company Dynamics
Organized as a cooperative, Rock Port's top priority has always
been to provide every one of its consumers, who are also its owners,
with the very best telecommunications and customer service possible.
Rock Port serves 1,695 access lines across its 187 square mile rural
service area. This is about 9 lines per square mile. The population
throughout our service area is aging, and the average county wage is
$21,373. We employ a total of 9 people--yes, 9--and our annual revenue
is $1.6 million. By comparison, Embarq, which is a Tier 2, or midsize,
carrier, has 18,000 employees and total revenues for 2007 of $6.37
billion.\1\ Verizon, which is a Tier 1, or large carrier, has 235,000
employees and last year generated consolidated operating revenues of
$93.5 billion.\2\
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\1\ See, http://investors.embarq.com/phoenix.zhtml?c=197829&p=irol-
irhome.
\2\ See http://investor.verizon.com/.
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The entrepreneurial spirit of Rock Port is representative of its
approximately 1,100 small rural counterparts in the industry, who
together serve 50 percent of the Nation's land mass. We have always
been early adopters of new technologies, and it's been no different
with regard to Internet Protocol (IP) capabilities. Presently, Rock
Port makes high-speed broadband available to 90 percent of its
customers and we expect that figure to be 100 percent within 3 months.
Due to this commitment, rural Americans today are enjoying universal
telephone service, access to broadband Internet services, and enhanced
emergency preparedness.
Yet, small rural companies simply do not enjoy the economies of
scale and scope that would permit them to interconnect with every
service provider in America who might send a call to one of their
customers. Most small rural carriers, including Rock Port, interconnect
with a larger carrier, such as Embarq or Verizon, who in turn provides
them with access to all other telecom service providers. We call these
intermediary carriers ``tandem providers.''
Rural Telecom Network Cost Recovery
Due to the extremely high costs associated with serving rural
markets, small carriers like Rock Port depend on three primary sources
of revenue to provide the cost recovery that is necessary to provide
advanced, high quality services to rural Americans. They are: (1)
intercarrier compensation payments from other carriers, (2) direct
payments from our own customers, and (3) support from the Federal
Universal Service Fund (USF). Using the analogy of a three legged
stool, if any one of these three legs are missing or shortened, the
stool is thrown off balance and the company mission is toppled.
Intercarrier compensation payments are made by one carrier to
another for the use of its network, for example when one of Carrier A's
customers calls one of Carrier B's customers. Intercarrier compensation
takes the form of either interstate access charges, intrastate access
charges, or reciprocal compensation charges.
The term ``phantom traffic'' refers to voice communications traffic
on the public network that lacks sufficient information for billing
purposes. In other words, carriers do not receive the information
necessary to know who to bill or what rate to bill for the call--thus
under today's policy the call remains unbilled. In some cases, because
rural carriers do not receive the billing information, they cannot
identify the traffic traversing their networks--thus the term
``phantom.'' Increasingly, rural carriers are discovering blatant
schemes intended to avoid the payment of access charges entirely. This
translates into dramatic losses of legitimate cost recovery revenue for
telecommunications carriers of all sizes, while the carriers are still
obligated to provide and maintain the facilities.
NECA has estimated that small rural carriers across the Nation
typically receive about 29 percent of their total net telephone company
operating revenue from intercarrier payments. For some companies, this
percentage is as high as 49 percent of total net operating revenue. So,
you can see how important these intercarrier payments are for providing
affordable service to rural consumers. You can see why we view the
growth of phantom traffic and other schemes to avoid paying
intercarrier fees with such concern. And you can see why this is a
topic critical enough for this Committee and Federal policymakers in
general to address.
Identification of Phantom Traffic
Recognizing or identifying phantom, or unbillable, traffic is not
always automatic or easy. The inherent dilemma with phantom traffic is
that, by its very definition, it is essentially hidden and thus
extremely difficult to identify or track. And by extension, it is very
difficult to quantify its overall negative impact.
In its most insidious form, phantom traffic is a result of some
carriers stripping the data completely, manipulating the data into an
unreadable form, or the outright refusal to pay the intercarrier bill
for the calls they send to another carrier's network. In other cases,
phantom traffic materializes as a result of an originating service
provider's failure to attach appropriate call signaling information to
its traffic. And in its most subtle form, phantom traffic is merely the
outcome of flawed policies that allow for false jurisdictional
classification of calls, which results in the erroneous billing of
lower charges. All forms distort marketplace competition and force
carriers inappropriately to seek cost recovery through other means. For
rural carriers this means higher access charges for those who do pay
and increased reliance on the Universal Service Fund.
At Rock Port, the unbillable or phantom traffic traversing our
network is substantial--over 18 percent of total minutes.
Unfortunately, Rock Port is not alone. They say misery loves company,
and we seem to have plenty of it. Industry estimates show between 20
percent and 30 percent of such intercarrier traffic cannot be billed
because it lacks sufficient billing information.\3\ This figure is
growing as service providers find new ways to avoid paying intercarrier
compensation.
---------------------------------------------------------------------------
\3\ E.g.,Letter from Donna Epps, Verizon, to Marlene H. Dortch,
FCC, CC Docket No. 01-92 (Nov. 1, 2006), attachment, at 11. Letter from
Karen Brinkmann, Latham & Watkins, to Marlene H. Dortch, FCC, CC Docket
No. 01-92 (July 1, 2005), attaching presentation entitled ``Phantom
Traffic: Problem and Solutions'', Balhoff & Rowe (May 2005), at 5.
---------------------------------------------------------------------------
In 2007 alone, Rock Port lost access revenue equal to about $37 per
access line per year--because we did not have enough information to
bill for the calls. Over the course of 8 years, say from 2000 to 2008,
this would amount to about a half million dollars. While this may seem
like peanuts up here in Washington D.C., where I come from it
translates into meat and potatoes. I would not like to have to tell my
customers that their phone bills have to go up to pay for someone
else's free ride on the network we are obligated to build, maintain and
support. Unlike the industry's larger carriers, we small rural carriers
do not have the scale, market alternatives, or customer numbers to make
up the revenue elsewhere--nor should we have to. And if we do not meet
our financial targets, our sources of financing for introducing new
technology and modern, advanced communications services dry up PDQ--
pretty darn quick.
Key Phantom Traffic Problems
One of the key causes of phantom traffic is the failure of certain
carriers to send all of the call signaling information (intentionally
or unintentionally) required for proper billing. The FCC does have a
rule requiring carriers sending an interstate call to transmit the
Calling Party's Number (CPN). This information helps carriers establish
what rate to bill and can help identify what service provider sent the
call. This information is also required in order for law enforcement
officers to trace the call, for emergency workers to track the calling
party, and to provide Caller ID services. Yet, if the number is altered
or stripped off entirely, as it often is, these statutory and
regulatory objectives are easily frustrated.
A case in point involves the Alaska Communications Systems Group
which in 2005 sent a letter to the FCC describing traffic being
terminated in Alaska as ``local'' traffic, but which in fact originated
from out-of-state phones.\4\ In this case, the intermediary carrier had
replaced the telephone number of the originating caller with a local
Alaska number in order to disguise the jurisdiction of the call and
thereby avoid paying the access charge. ACS indicated that in the month
of October 2005 alone, over 20 percent of minutes to Fairbanks had this
problem.
---------------------------------------------------------------------------
\4\ Letter from Karen Brinkmann, Latham & Watkins, LLP, to Marlene
H. Dortch, FCC, CC Docket No. 01-92 (Dec. 12, 2005).
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Recent analysis shows about 11 percent of calls other carriers sent
Rock Port for termination on our network lacked a CPN. Another Kansas
company received about 11.7 percent of calls without CPN. Sherburne
Telephone in Minnesota recently performed a similar analysis only to
discover, to their surprise, that about 30 percent of their terminating
traffic arrives without a valid CPN.
A second key problem faced by Rock Port and most other small rural
carriers is we don't receive all the detailed call records from the
intermediate ``tandem'' carrier who provides us with connection to the
outside world. If we don't receive this information, we cannot bill for
the traffic.
In 2000, we at Rock Port discovered that we were not receiving call
records for about 25 percent of the minutes traveling over our network.
Because we could not bill for them without these records, they were
traveling for free. Armed with this information, we negotiated with the
tandem provider to alter how its network switches were configured so
that they could send us complete records. We thought the problem was
essentially solved. In 2007, however, we did a comparison of the
minutes our own switches recorded with the number of minutes contained
in the bill records we receive from the tandem provider. We had
recorded 10.5 million minutes, but received call records for only 8.6
million minutes. That left 1.9 million minutes that we could not bill
for. The percent of phantom traffic on our network had climbed from
14.5 percent in 2006 to 18.2 percent in 2007. There is no logical
technical reason why we should not be receiving accurate call records
from the tandem provider that tracks our network's actual traffic
volume.
And it is certainly not just Rock Port. Our industry colleagues in
Montana had a problem big enough to convince state lawmakers to address
the issue of phantom traffic by adopting a state law in 2003 that
required carriers to send call signaling information and required
tandem transit providers such as Qwest to provide complete call
records. The rural carriers use this data to crosscheck their own
network data, which has helped reduce phantom traffic loss levels from
10 percent to less than 5 percent of their volume. A similar initiative
was enacted in South Dakota in 2004, though it was recently overturned
on procedural grounds tied to preemption. Likewise, industry colleagues
in Washington and Oregon took their phantom traffic case to their state
PUCs, providing data showing as much as 50 percent of the traffic on
their local interconnection trunks was ``phantom.'' In 2005, however,
these PUCs decided that it was more appropriate to bring these issues
to the FCC for consideration. Clearly with this level of state
activity, it is obvious this is an issue that is crying out for Federal
action.
Some industry players argue that when we don't receive call
signaling or records, we can still bill based on ``traffic factors''.
These are percentages given to us by the sending carriers that are to
be used for assigning traffic into the interstate, intrastate or local
categories--by which we then assign rates. The sending carriers provide
absolutely no supporting data to back up these unilateral traffic
factors, and studies have shown that the factors do not represent the
actual traffic patterns on the network. Therefore, the third ``phantom
traffic'' problem is that we have no means to verify the accuracy of
these traffic factors. These carriers will only accept and pay a bill
reflecting these factors.
This is particularly critical for traffic from wireless carriers.
Rural companies in South Dakota ran a study to compare the non-local
wireless traffic factor (for calls that cross a wireless Major Trading
Area, i.e., inter-MTA calls) given to them by one wireless carrier with
the actual percent of non-local wireless (inter-MTA) calls on their
networks. They found that as much as 30 percent of total wireless
traffic terminating on their network was inter-MTA, compared to the 3
percent interMTA factor given to them by this wireless carrier. And
many of their wireless agreements have a 0 percent inter-MTA factor.
These South Dakota companies are, therefore, not able to bill the
correct rate for the 25-30 percent of wireless traffic that is legally
subject to access charges. In 2004, the amount of access revenue lost
due to these unrealistic factors represented an astonishing $12 to $39
per access line per year. In light of this demonstrated lack of ``good
faith'', it is clear that small rural carriers need the FCC to provide
them with additional negotiating leverage to be able to negotiate
inter-MTA traffic factors that are realistic and reflect the actual
usage on the network.
The final dilemma associated with phantom traffic that I will
discuss today involves the outright refusal of so-called VoIP providers
to pay their access charge bills. Rural carriers across the Nation are
receiving an increasing number of letters from interconnected carriers
refusing to pay access charge bills, claiming the calls were ``IP.''
Laurel Highlands Tel (PA) has provided the FCC evidence that carriers
such as ChoiceOne are not only refusing payment of access charges, but
may also be enticing other carriers to migrate their traffic to its
``free'' network. Montana Telecom Association provided the FCC with
similar letters from CommPartners, which admitted that 90-100 percent
of its terminating traffic to various Montana ILECs is interexchange,
but stated that ``because this traffic represents VoIP transmissions
rather than circuit-switched telephone calls, your company is not
entitled to collect access charges on these calls.'' NECA has also
provided a number of such letters to the FCC.
At the end of the day, you and I both know these are nothing more
than voice calls--people talking to people. But because these companies
have sprinkled ``IP fairy dust'' on them, they think they should get a
free ride on our network.
IP technology has never been magic--controlled by a few magicians
in their Internet labs. I have IP technology in my network, AT&T has it
and Verizon has it. Public telephone networks around the world are
introducing IP technology into their networks. IP is a technology--it
is not a service, it is not a network, and it is not the same as the
Internet. IP is today's iteration of communications technology--not
tomorrow's iteration--and once again, however delivered these calls are
just voice calls.
But because the FCC has not yet confirmed that access charges apply
to interconnected VoIP service, these CLECs are claiming their services
are ``enhanced'' and, therefore, exempt from access charges. Because
the FCC has remained silent, more and more rural phone companies are
receiving letters from service providers who refuse to pay the
intercarrier bills for calls they agree they sent to rural telecom
company networks. And current Federal policy requires us to continue
giving our product away to companies who refuse to pay for it, even
when we do send them a bill.
Please tell me why we allow other utilities to stop service when we
are late in payment, why I could not check into my hotel until my
credit card company agreed to make payment, and we let banks foreclose
on homeowners and take their homes from them when they don't pay their
mortgages, but we do not take service away from these ``high tech''
companies who won't pay their bills?
Turning Point
So, the big question is--what can be done about phantom traffic?
First, the FCC needs to require all service providers to send all
the telephone numbers and other traffic identifiers--just like is
required for an ATM cash transaction to take place. NECA has filed a
petition for an interim order with the FCC asking it to: (a) Extend
their existing call signaling rules to all interconnected voice service
providers; (b) Require accurate CPNs be transmitted with all calls,
regardless of jurisdiction and regardless of technology used; (c)
Clarify that the true CPN must be provided, not a number associated
with intermediate switches, gateways, or platforms; (d) Require all
intermediate service providers to transmit signaling information
unaltered; and (e) Clarify that the originating and terminating
telephone numbers can be used as a default proxy to determine
jurisdiction of calls for billing purposes, when traffic factors cannot
be mutually agreed or data on the actual origination or termination
point is not provided. Almost every segment of the telecom industry in
America has expressed support for strengthened call signaling rules.
Yet, we are still awaiting some action on this front.
Second, I need to be able to bill for all the calls on my network.
I need to receive call records for all the calls, and when I don't, I
need the tools to hold the person who sent those calls to me
accountable. The Montana state law may provide a good model for Federal
action. It requires the tandem transit providers to provide call
records to the terminating carriers. However, when I don't receive
those call records, I need to be able to charge the guy at the other
end of the trunk who is sending me those calls without the records.
Just like in the children's game of telephone, I can only see the
person next to me who is passing me the message. I cannot see the
person originating the message. The guy at the other end of the trunk
can then pass the charges down to the next guy who is sending him the
traffic, and so on down the food chain. I cannot hold some unknown,
unnamed service provider accountable without such tools.
Third, we need a federally-approved tool that will provide small
carriers with the ability to negotiate realistic traffic factors for
non-local, inter-MTA wireless calls with wireless carriers. The NECA
petition has proposed the use of the ``telephone numbers rule'' as a
reasonable proxy for when actual traffic data is not provided or a
traffic factor cannot be mutually agreed. A 2004 South Dakota study has
demonstrated that using call records and using telephone numbers
produces fairly close results. We believe the telephone numbers rule is
a reasonable proxy, and will give wireless carriers a strong incentive
to bring real traffic data with them to the negotiating table.
And finally, we need the FCC to affirm that all users of the
network must pay for its use. The FCC has stated that this is the
policy, has implemented rules, has said that VoIP services are the same
as telephone services in the customer's eyes. But the FCC has not yet
confirmed that VoIP calls are subject to its access charge rules just
like all other voice calls. This has allowed service providers to
sprinkle the ``IP fairy dust'' over their refusals to pay their access
bills and to claim they should be treated different--that they are
Internet Service Providers--rather than what they really are, which is
providers of voice calls used by people to talk to other people.
If the FCC lets this continue, Americans who live in rural areas
will likely see their phone bills increase and the quality of their
services decrease. IP-originated voice services are expected to account
for more than 20 percent of all voice calls in 2008, 33 percent in
2010, and 40 percent in 2011. We simply cannot afford to give the use
of our networks away for free. The Coalition of Telecom Manufacturers
has said that if this continues, it will result in large reductions in
telecom infrastructure investment, particularly investment in broadband
access technologies. I can tell you, Senators, this will certainly be
true in rural America, and will jeopardize the national objective of
ubiquitous broadband Internet access.
Conclusion
Senators, time is of the essence. With each passing day, small
rural carriers lose millions in intercarrier compensation revenue. We
are not asking for special treatment. We are only asking for carriers
that use our network to pay for its use. It is anti-competitive to
allow some carriers to avoid these fees while others pay, and it is
affecting the ability of small rural carriers to roll out new
technology and services to rural America.
Americans today uniformly rely on communications infrastructure and
services to satisfy their commerce, safety, security, entertainment,
and leisure needs. Moving forward, these needs will be met via a
combination of 2-way voice, video, and data options. Ensuring that
small rural companies have the financial wherewithal to meet these
needs is the primary reason to take action to exterminate phantom
traffic. Lack of action on phantom traffic is putting in jeopardy rural
carrier's ability to help us achieve our shared national objective--
ubiquitous and robust broadband capable infrastructure.
Senator Stevens has been hard at work drafting a legislative
proposal that would go a long way toward helping resolve the phantom
traffic issue by providing the FCC with specific guidance on actions it
could take to ensure this practice is stopped. Please support Senator
Stevens in his efforts to address phantom traffic through this
legislation. And please urge the FCC to take immediate action by
granting NECA's Petition. You know--Missouri is the ``Show me'' state,
and we'd sure be pleased if you could show support for our concerns on
this crucial matter. Thank you.
Senator Stevens. Well, thank you very much.
Mr. Chairman, do you have any questions?
The Chairman. I wish to say for the record that Senator
McCaskill of Missouri has asked me to express her regret in not
being able to attend this afternoon's hearing because at this
moment she is presiding in the Senate chamber.
Senator Stevens. Thank you.
I am perplexed. Ms. Simpson, I would probably come to you
first because you indicate that you think the FCC is right in
not imposing any requirement on the originating carrier to
properly disclose the type of information that would allow
billing by the final terminating carrier. The rural telephone
companies are primarily those who receive these calls and must
deliver them. I take it you take the position that they have no
right to just turn around and send it back.
Ms. Simpson. Well----
Senator Stevens. Why not? Why do we not just say to the
rural carriers, if you get something that does not have
identification of where it came from, send it back to whoever
gave it to you?
Ms. Simpson.--well, the lack of information about where it
came from does not prevent it from being terminated onto the
network.
Senator Stevens. Well, it does because what you do, as Mr.
Henagan says, you force the terminating carriers to pay the
cost of delivery when they have no way of billing anybody.
Ms. Simpson. Senator Stevens, I would disagree with that
statement.
Senator Stevens. Will you tell me how they can bill?
Ms. Simpson. Well, VoIP providers do pay for the
termination of traffic. Many VoIP carriers have agreements with
incumbents for the termination of traffic. So----
Senator Stevens. They do not apparently have it with rural
carriers. They have it with the big city carriers. We are
talking about the tentacles of this communication system. You
go out to the end. You are dealing with rural areas like our
area or like the islands in Hawaii. They are going to receive
these without any information of who to bill.
Ms. Simpson.--well, yes, sir. I mean, there are instances
where VoIP providers try to reach agreements with rural
carriers and rural carriers either refuse to enter into
agreements or----
Senator Stevens. You know why, do you not? The legacy
carriers have more investment, and the other carriers that come
in on broadband and Voice over the Internet Protocol have very
little investment in their communications system. Do you
disagree with that, Mr. Sarjeant?
Mr. Sarjeant. The rural incumbent carriers have made a lot
of investments to put in place the public switched network
which is really the core on which all other networks to some
extent rely, whether they be wireless or IP-based. So clearly,
there is a tremendous amount of investment that has been made
by incumbent local exchange carriers in the public switched
telephone network.
Ms. Simpson. Senator Stevens----
Senator Stevens. Pardon me. My mind goes back to the time
when Senator Inouye and I used to sit here at this same table
and talk about the fact that all of the telephone ads and the
television said these rates do not apply in Alaska and Hawaii.
We introduced a resolution that called for rate integration,
and that rate integration required that Alaska and Hawaii
become part of the Union. We were already a state, but we were
not in the union of communications.
That gradually led to what we called rate integration task
forces, and they finally figured out how to do that. You know
what it was. It was the interstate rate pool that paid for the
termination of these calls and allowed us to come into the
total communications system, but because the cost of getting to
our states was greater than any other states--at that time,
there were basically legacy carriers. They were basically
terrestrial. And we finally came in.
Now, what you are saying, Ms. Simpson, is those areas like
ours, which are still operating basically on the systems that
in many instances you all got rid of 20 years ago, should incur
the costs of modernization to catch up with VoIP,
notwithstanding the fact that you are asking them to terminate
calls that came from VoIP with no compensation. As Mr. Henagan
says, how can they do that unless they get some compensation
which will justify the investment in the modernization you
require?
Ms. Simpson. Senator Stevens, I would not suggest at all
that the VON Coalition believes that rural carriers should not
be compensated for the cost of terminating other folks'
traffic.
And I would also just note that the interconnected VoIP
providers pay into the Universal Service Fund at rates higher
than traditional wireline carriers or wireless carriers. So,
indeed, we are helping rural carriers invest in their networks.
What the issue comes down to is not necessarily the rates
that would compensate them for the cost of terminating traffic.
What we are talking about here is sort of the broader issue
that the FCC is currently investigating, which is bringing the
whole intercarrier compensation regime to a more modern and
equalized type of a system.
Senator Stevens. I do not want to pick on you.
Mr. McKee, you said something that also made me write it
down as you were talking. Where does the ultimate carrier get
its income to really affect the delivery unless there is some
identification on the message that allows them, in effect, to
back-charge and collect and get part of the cost of originating
that call?
Mr. McKee. Senator, we do not disagree that all calls
should be identified and that the signaling record should be
populated.
Senator Stevens. Well, what should we do with the people
that do not do it? You pick up VoIP and send it through your
systems and through your switch, but you do not require the
identification. You know when it is coming through the switch
it does not have the information, and yet you send it on.
Mr. McKee. Well actually, Senator, Sprint--I will not try
to speak for other telephone companies, but Sprint, when it
originates VoIP traffic, it does populate CPN when it passes it
out to the PSTN.
Now, the lack of information on the other end can be for
different reasons, not because Sprint did not populate the
signaling record at the beginning of the transmission of the
call----
Senator Stevens. Are you suggesting someone erases it?
Mr. McKee.--well, not that they erase it, but----
Senator Stevens. That has been one of the suggestions one
of my carriers made, that there is someone in this business who
is automatically erasing the system so that no one can be
properly billed.
Mr. McKee.--well, again, we have not seen evidence that
there is a significant amount of traffic where people are
erasing it. The nature of a way in which, for example, tandems
operate frequently do not pass along information, or if two
tandems are involved in the call, it is not unusual for some of
that call information to be stripped. That is why that type----
Senator Stevens. Who strips it?
Mr. McKee.--well, again, it is not as if it has been
intentionally removed. It is just not information that
continues to flow with the call because it is broken when it
passes through that switch.
And the way in which traditionally we have handled that
issue is through billing records so that tandem owner will
collect the necessary information. It may not flow in the
signaling protocol. It may not be part of an automated system,
but instead billing records are passed after the fact. So that
is one way in which that issue gets addressed.
So, again, part of my testimony was there are many
different ways to exchange information that allows these
carriers to bill. Again, Sprint in no way objects to carriers
billing for the traffic they receive.
In fact, one of the issues that wireless carriers have is
that we also cannot bill for a large portion of the traffic we
receive. It is not because we do not get sufficient
information, but because the FCC has set rules up in such a way
that inter-exchange carriers, for example, are permitted to
terminate traffic on the wireless networks without compensating
us.
It is a part of, again, what I characterize as an
irrational intercarrier compensation structure, and we are
hopeful that all of these issues get addressed by the FCC since
they have had a docket outstanding since 2001.
Senator Stevens. I tell you, you sort of indicate that the
bill that I am about ready to introduce is meaningless.
Mr. McKee. No. I am not suggesting that it is meaningless,
sir. Again, our concern here is that much of the dispute in
this area is, again, not because of intentional fraudulent
acts, but because of either inherent structural problems within
the network that do not allow signaling to occur not because--
--
Senator Stevens. Well, if I initiate a call over VoIP, I
should have within my system--the carrier that I contact with
my Internet call--something that identifies where the call
originated. Would you not agree with that?
Mr. McKee.--we would agree that the CPN, the standard
fields that are provided for----
Senator Stevens. That is the first carrier that my VoIP
message intersects. Right? They would put the identification on
where it came from, would they not?
Mr. McKee. Generally, yes. That or else they would have to
contract with somebody to do that. In other words, when----
Senator Stevens. You are not suggesting that just because I
originated on VoIP, I am automatically originating phantom
calls. None of us believe that.
Mr. McKee.--no, no, of course, not.
Senator Stevens. So the first carrier that really received
that message ought to have some identification on it, do you
not think? I think that is their responsibility to see that is
done, and if it is done, then the terminating carrier is going
to get paid. And the problem is how to figure it out because a
lot of the carriers are like Mr. Henagan's carrier and those in
our States which are still legacy carriers. They are using
lines and using a lot of ground equipment that you all are not
going to be using any longer. But they have to be compensated
for it or they are going to go out of business. Thirty percent
of their business is coming in through VoIP now and not getting
compensated. Now, how can they survive?
Mr. McKee. Well, again, Senator, we are not disagreeing
that calling party number information should be part of the
populated record. Not at all.
Senator Stevens. But VoIP users are almost being told that
it is cheaper to do that, and the only reason it is cheaper is
no one is sending the information along with the message so
that they have to pay when it finally is terminated. Would you
not agree?
Mr. McKee. I agree that there are certainly carriers that
are offering discounted services. The services that Sprint
provides we are careful to ensure that we are compensating the
carriers we hand that traffic off to. Now, if that means that
we are at a competitive disadvantage, that may be the case, but
I cannot speculate on what other carriers are doing.
Senator Stevens. Mr. Henagan, my people tell me that the
lack of this compensation for this phantom traffic is putting
them in the position where they cannot afford to go to
broadband. Do you think this is a burden on these legacy
carriers to carry this phantom traffic and puts them in a
position where they cannot modernize?
Mr. Henagan. That is correct, Senator. To the future, we
are not going to be able to modernize to go to broadband if
this continues on at the pace that it is going. In 2006,
overall all the phantom traffic that came through was 14.5
percent. In 2007, it jumped up to over 18 percent. If this
continues on, it will not be long until it will be over 50
percent of the traffic that is coming through, and I will not
have the funds at that time to continue on with broadband
expansion.
Senator Stevens. Mr. Sarjeant, does the FCC have a
sufficient record of phantom traffic to move forward and find a
solution now in your opinion?
Mr. Sarjeant. Yes, Qwest believes that it does and Qwest
believes that it could act forthwith and address at least on an
interim basis and begin to mitigate the damages associated with
phantom traffic in very short order. So we believe they have a
record. As Mr. McKee pointed out, the intercarrier compensation
proceeding was opened in 2001. So it is a longstanding
programming, and the issues of phantom traffic have been
debated for some period of time now.
Senator Stevens. Mr. McKee, is this going to require that
we tell the FCC they must adopt new, different switching
technologies in order to solve this problem?
Mr. McKee. I hope that is not the case, Senator. Obviously,
that would create significant expense within the industry.
Senator Stevens. I hope you will repeat that because
everyone seems to think that the burden should remain on the
poorer carriers at the end and the ones in the middle that are
capable already are making these magnificent, monstrous
investments. If there is a change, it will place an additional
burden on them.
Now, why should they not help us find a solution?
Mr. McKee. I think we are more than happy to try and help
you find a solution, Senator.
Senator Stevens. I hope you will.
Mr. Chairman, I do not have any other questions. I really
think if this continues, what the two of us saw when bringing
our own States into the communications system will fail because
we are the end of the system. We receive more traffic than we
originate, and the burden on our people of receiving these
messages from outside our States really means that these legacy
carriers cannot continue to operate. They do not have a 17
percent profit to start with. So if you have a 17 percent
burden on the average, in terms of this phantom traffic which
they must deliver under current FCC rules, they are destined
for failure. Above all, they are destined not be in a position
to do what we want them to do and that is deploy broadband.
I hope that we will find some way to get the FCC involved
in this and get the industry that is going to pay the price
ultimately because if our people fail, you are still going to
have to find some way to deliver your messages. Unless you have
the legacy carriers survive, you have to find some way to
deliver them, and I do not know you would do it under the
existing system. And you cannot say that Sprint can deliver
anywhere in the world or any of the rest of you can deliver
anywhere in the world if you cannot deliver right here at home
in terms of these small carriers in rural America.
Mr. Chairman, do you have any questions?
The Chairman. Yes. I would like to ask Mr. Henagan a
question. How many people do you employ?
Mr. Henagan. On the telephone side, I employ nine people.
The Chairman. What is your gross income?
Mr. Henagan. It is $1.6 million.
The Chairman. And according to your testimony, 11 percent
of the calls would be phantom traffic. What is the dollar value
of that?
Mr. Henagan. On a per access line basis, it is $37 per
access line.
The Chairman. $7 per call?
Mr. Henagan. $37 per an access line. It is about $63,000 a
year on my company as such for that today as such. And if you
look at it over a 10-year period--and I have looked back over a
10-year period--it would be over a half a million dollars for a
very small company.
The Chairman. And other small companies have had 20 or 30
percent of their traffic as being phantom?
Mr. Henagan. That is correct. As a whole, it is anywhere
from 10 to 30 percent today that is coming in as phantom
traffic.
The Chairman. So this will mean depriving some of your
fellow workers a pay raise.
Mr. Henagan. That is correct.
The Chairman. I thank you very much, sir.
Senator Stevens. There is a difference here between the
phantom traffic and those messages that are missing billing
information my staff tells me. There is a double problem here.
One is the billing information has been stripped off. The other
is phantom. Never had it.
Mr. Henagan. That is correct. Some of them we never get
records whatsoever, and then some of them we get records in
that have no billing information so that I have no idea who to
bill for that call. So out of that, the tandem sends me the
records and I have nobody to bill for some, and then the other
is we have no records at all that ever come in.
Senator Stevens. Ms. Simpson, after we had the original
hearing in this room on our rate integration concept, the
industry got together and came up with the interstate rate
pool. It did not take an action of the Federal Government. It
did not take an action of the FCC. They started the process
toward change to accommodate the problems that were faced by
the fact that we had two new States. Is it possible that
industry could get together, in your opinion, and try to work
this out without Federal regulation or without interference of
Congress?
Ms. Simpson. I believe that it is possible and that the
industry should work together. I mean, to be clear, the VON
Coalition--we do support reasonable call signaling obligations
for interconnected VoIP providers where it is technically
feasible and operationally feasible as well.
Senator Stevens. What about where it is not and you are the
receiving carrier? Do you have to deliver it anyway?
Ms. Simpson. Well, that becomes the situation where there
needs to be a cost-benefit analysis, what is the size of the
phantom traffic problem versus what is the cost of having VoIP
providers modify all their networks to be able to provide the
information the way the rural carriers want it, and then the
corresponding problems with the economy, broadband deployment,
and just regulation of the Internet. So I mean, there is
definitely a cost-benefit analysis that has to be undertaken on
a broader scope.
Senator Stevens. I am reading between the lines that you
think Congress is going to have to solve this problem.
Ms. Simpson. No. I definitely believe that there are ways
for the industry to do it on their own and that there are ways
for the FCC to do it within their current authority and their
current expertise to help fix the problem.
Senator Stevens. Well, these terminating carriers want to
be paid for the phantom traffic at the same rate that they are
paid for all other traffic that comes through their system. You
are saying you think that you should be able to enter into some
agreement where that is not the case. You said handle the
traffic the way they want it. How should they handle it?
Ms. Simpson. According to the legacy telecommunications
industry billing standards. It is difficult to retrofit
Internet voice products, and when we are talking about voice
products, there are so many different kinds. It is not
necessarily the type that Sprint would provide or Covad would
provide. We are talking about VoIP applications that do not
even have any need whatsoever for a phone number, which would
be one of the main parts of information that rural carriers
would want for billing purposes.
Senator Stevens. Well, it would seem to me that the FCC
could require that no system could launch such a message
without some identifying mark to see who is going to be billed
for delivering it. Is that wrong?
Ms. Simpson. It is not necessarily wrong. I think it is one
of the things that the FCC is currently working on.
Senator Stevens. Well, that is new technology. That is what
you have the luxury of in the major cities that they do not
have the luxury of in Missouri and in some of the rural States
and places like I live.
Ms. Simpson. There is also a difference, Senator Stevens,
between the potential for having interconnected VoIP providers
have to implement two different solutions, a temporary solution
based on the existing intercarrier compensation regime, which
would cost money for the VoIP industry to implement, and then
presuming that the FCC, since it does have a proceeding open
and it is working on it right now, does do comprehensive
intercarrier compensation reform, then the VoIP industry has to
turn around and implement yet another solution at yet another
additional expense.
Senator Stevens. Well, that implies that there is one
solution for the areas where you have a monstrous number of
messages and a different solution for the areas where you have
a smaller number in rural America.
Mr. McKee, do you agree with that, that there is a
difference in the system where you are integrating between
those entities who have already gone to broadband and been
modernized and those that integrate with the legacy carriers
that are still on the wirelines?
Mr. McKee. Let me try to answer your question, and if I do
not do it right, I am sure you will let me know. But I think
what you are asking----
Senator Stevens. I used tubes once, remember?
[Laughter.]
Mr. McKee.--well, as I understand your question, you are
saying, well, should these two systems be treated differently
and I would say no, absolutely not. In fact, one of the things
that we really hope the FCC will do is to try and unify the way
in which all these systems are treated so that there can be one
uniform set of rules that applies to everyone.
One of the problems we have right now is that there is not
just one rate that is applied when you hand traffic to a
carrier. In fact, there are nine or more different categories
of rates that apply depending upon whether you are a wireless
carrier, whether you are a long distance carrier, whether you
are another CLEC, whether you are an ILEC, you know, the
distance of the call. So there are a number of different rates
here.
And what we would really hope to see is that the FCC
addresses the thing in such a way that both IP providers, VoIP
providers, it does not matter what kind of telecommunications
you provide, you have an obligation to pay and it is some kind
of straightforward, easily calculated rate that everybody knows
they are going to have to pay, including pay to rural carriers.
Senator Stevens. The intercarrier compensation proceeding
has been pending before the FCC for 7 years now.
Mr. McKee. That is correct.
Senator Stevens. How do you think we are going to get an
answer to this question in time for these rural carriers to
survive?
Mr. McKee. Well, I believe, Senator, you can probably bring
some pressure on the FCC to do what they need to do.
Senator Stevens. I think I can bring greater pressure on
you guys who are making all the money to find some way to pass
some of it on to the people who are failing. Certainly this is
an industry problem more than it is an FCC problem. The
industry is carrying messages that it knows will not be
compensated for because the billing information is not there,
regardless of whether it was deleted or just not there to begin
with. They are passing it on. I would put the burden on whoever
passes on a message that does not have that information, that
they should pay from there on.
And I think that the industry ought to find some way to get
together before that happens because I do believe we cannot
wait for 7 years for this to be solved.
Mr. Chairman, I do not have any more questions. Do you have
any more questions?
The Chairman. This may sound naive, but Mr. McKee, if Mr.
Henagan's company goes bankrupt with nine employees and $1.6
million in income and it gets worse and worse, would your
company be willing to take over the system?
Mr. McKee. Well, again, Senator, we have no desire for his
company to go bankrupt. In fact, we are more than willing to
pay them for the traffic that we send them.
Again, Sprint--I can only speak to my company--does
populate identifying information for all traffic it sends to
the PSTN, and we stand ready to compensate rural carriers for
the traffic we send them.
We also contribute a significant amount of money to the
Universal Service Fund to also help support those carriers, and
I think that is certainly useful----
Senator Stevens. Do not say you contribute. You said that
before. That is not so. It is the user that pays that. That is
a charge that the customer pays. It is not paid by the company
at all. You just transmit the money that has been collected
under Universal Service charges added to each customer's
charge. That is not something you pay in the industry at all.
And I have heard that several times in recent hearings here
about how the industry is paying those. The consumer is paying
those and has from the very beginning. It was an addition to
interstate calls and it was the result of that conference we
had on rate integration, but it is not something that is paid
by the company. It does not come out of your top or your bottom
line. It is something that is paid by the individual into that
Fund. That is not your money. You did not earn it, and you did
not pay it. So I hope you do not say to me again. OK?
Mr. McKee.--absolutely, Senator.
Senator Stevens. Thank you.
Anything further, sir?
The Chairman. No.
Senator Stevens. Thank you all very much. I am going to
introduce the bill. I am not sure yet whether it is going to go
very far after what I have heard from you all, but I do hope we
will find some solution. Otherwise, rural carriers are going to
go out of existence. They cannot continue to get these messages
that they cannot identify, they cannot bill, and yet have the
duty under the FCC current regulations to deliver without
regard to being paid by anybody. It just will not work.
Thank you very much.
[Whereupon, at 3:35 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Claire McCaskill, U.S. Senator from Missouri
Chairman Inouye, thank you for holding today's hearing on the
subject of ``phantom traffic.'' I regret that I am not able to attend
the hearing due to my obligations as presiding officer in the Senate.
I want to thank you and Vice Chairman Stevens for inviting a
Missouri witness to testify. Mr. Raymond Henagan, General Manager of
Rock Port Telephone Company, has presented a compelling case as to why
the Federal Communications Commission needs to address the problem of
``phantom traffic'' on our communications networks. I would be remiss
to not also thank you for inviting Mr. Charles McKee from Sprint Nextel
Corporation to testify. I often claim Sprint Nextel as a Missouri
company because its headquarters is located just across the state line
in Kansas and it is one of the largest private employers in the Kansas
City metropolitan area.
Phantom traffic refers to telephone calls which do not contain
identifying information that can be used for billing purposes between
voice service providers. As the amount of phantom traffic has grown due
to new technologies, so has the impact on the bottom line of telephone
companies. Rural telephone companies have been especially impacted.
According to one estimate by the National Exchange Carrier Association
(NECA), phantom traffic has resulted in annual losses of approximately
$600 million for rural carriers and $2 billion for the industry
overall.
I know the Federal Communications Commission is looking closely at
proposals to address phantom traffic and has received comments on
various proposals from the wireless, cable, and voice providers. I am
hopeful today's hearing sends a message to the FCC and industry that
they must work constructively to come to an agreement. We need clarity
and fair rules to identify traffic traveling over our Nation's
telecommunications network.
Thank you again for holding today's hearing.