Phantom Traffic" -- Problems Billing for the Termination of Telephone Calls: Issues for Congress

Phantom Traffic" -- Problems Billing for the Termination of Telephone Calls: Issues for Congress

Order Code RL34550
“Phantom Traffic” — Problems Billing for the
Termination of Telephone Calls: Issues for
Congress
June 27, 2008
Charles B. Goldfarb
Specialist in Telecommunications Policy
Resources, Science, and Industry Division

“Phantom Traffic” — Problems Billing for the
Termination of Telephone Calls: Issues for Congress
Summary
Every company that terminates telephone calls made to its customers faces some
number of calls for which it is unable to obtain its due compensation. For a variety
of reasons, a significant amount of telephone (voice) traffic that is originated by the
customers of one company and terminated to the customers of another company is
not adequately identified, making appropriate billing for that traffic difficult or
impossible.
This “phantom traffic” is a more serious problem for small, rural telephone
companies than for other telephone companies. One representative of these small
carriers has claimed that between 20% and 30% of their intercarrier traffic cannot be
billed because it lacks sufficient billing information.
There are three interrelated factors that foster phantom traffic:
! Under the current intercarrier compensation system, charges for the
termination of voice traffic vary significantly, depending on the
source and type of call, creating a strong incentive for originating
carriers to mask traffic that is subject to high termination rates.
! For certain types of calls, the FCC has not yet adopted definitive
rules about the interconnection rights and obligations of originating
and terminating carriers, the call detail information that must be
provided by the interconnecting companies to identify the source and
type of traffic, and/or the rates to be charged by companies for
terminating calls originated by customers of other companies, thus
fostering billing disputes among carriers.
! Given the significant differences in network architectures and the
multiplicity of terminating charges for different types of calls, the
signaling and call detail systems of many companies cannot
accommodate the complex routing of some calls, often resulting in
terminating carriers not receiving all the call detail information
needed to bill for termination.
From a public policy perspective, phantom traffic can be viewed as a symptom
of the shortcomings of the current intercarrier compensation regime and addressed
in the context of comprehensive intercarrier compensation reform. Or it can be
addressed narrowly, as a unique billing problem created by the lack of call detail
information needed to identify and bill specific calls. Each approach has its
advantages and disadvantages. S. 2919 takes the latter approach.

Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Causes of Phantom Traffic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Multiplicity of Termination Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Undefined Interconnection Rights and Obligations and
Interconnection Compensation Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Technical Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
One Possible Arbitrage Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Phantom Traffic and Rural Telephone Companies . . . . . . . . . . . . . . . . . . . . . . . 16
Issues and Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Comprehensive Intercarrier Compensation Reform vs. Measures
Specific to Phantom Traffic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Comprehensive Intercarrier Compensation Reform . . . . . . . . . . . . . . 18
Measures Specific to Phantom Traffic . . . . . . . . . . . . . . . . . . . . . . . . . 20
One Legislative Proposal — S. 2919 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Figures
Figure 1. Differences in Intercarrier Compensation Rates . . . . . . . . . . . . . . . . . . 7

“Phantom Traffic” — Problems Billing for the
Termination of Telephone Calls: Issues for
Congress
Overview
Every company that terminates telephone calls made to its customers faces some
number of calls for which it is unable to obtain its due compensation. For a variety
of reasons, a significant amount of “traffic is not adequately identified, making
appropriate billing for the traffic difficult or impossible.”1 This “phantom traffic,”
which has never been formally defined by Congress or the Federal Communications
Commission (FCC or Commission), can best be described as:
! telephone (voice) calls made to a telephone company’s customers
(the “called parties”) and that thus traverse and terminate on that
telephone company’s network, and
! that originate somewhere outside of that telephone company’s
network, typically as traditional long distance calls, cellular calls, or
Voice over Internet Protocol (VoIP) calls originated by “calling
parties” that are the customers of other providers of voice telephone
services, but
! for which the telephone company is not receiving from the calling
parties’ service providers the compensation it is due under current
rules and regulations for the use of its network to terminate those
calls.
Some have alleged that telephone companies that terminate calls are losing as
much as $2 billion in compensation annually as a result of phantom traffic,2 and that
these revenue losses have potentially significant public policy implications. Those
lost revenues can force local telephone companies to raise their rates for local
service, thus undermining the goal of universal service, and also can reduce company
funds available for broadband investment.
1 See the prepared Testimony of Lawrence E. Sarjeant, Vice President for Federal
Legislative and Regulatory Affairs, Qwest Communications International, Inc., before the
Senate Committee on Commerce, Science, and Transportation, Hearing on Phantom Traffic,
April 23, 2008, at p. 4.
2 Ibid., at p. 5, citing estimates that ranged from $600 million to $2 billion in submissions
filed in the FCC’s intercarrier compensation proceeding (Docket WC No. 01-92).

CRS-2
It is difficult to measure the size of the problem unambiguously, however,
because the FCC has not yet adopted definitive rules about the interconnection rights
and obligations of certain voice services providers and the termination rates for
certain calls.3 As a result, there are strong differences of opinion among the parties
about what the appropriate termination charge is for many calls and, in some cases,
whether any payment is due at all. In some cases, what a telephone company that is
terminating voice traffic views as phantom traffic, the company that is originating
that traffic may consider appropriately compensated traffic — and there has been no
definitive FCC ruling to resolve these conflicts.
As will be explained below, phantom traffic is a more serious problem for small,
rural telephone companies than for other telephone companies. One representative
of these small carriers has claimed that “industry estimates show between 20% and
30% of ... intercarrier traffic cannot be billed because it lacks sufficient billing
information.”4
The Causes of Phantom Traffic
Over the past 30 years, telecommunications policy in the United States slowly
has evolved from government sanctioned monopoly provision of all
telecommunications services to competitive provision of most telecommunications
services. Congress explicitly mandated this competitive market approach in the
Telecommunications Act of 1996 (1996 Act).5 Today, most consumers have access
to multiple providers of voice services, often with the option of placing telephone
calls using traditional wireline technology, wireless technology, or VoIP technology.
In most cases, when a consumer makes a call, to reach the called party that call
travels not just over the facilities of the company to which the consumer subscribes,
but also over the facilities of one or more other companies. Since the calling party
3 Both the federal and state jurisdictions have concluded it is not possible to leave it entirely
to the market to set rates for the termination of traffic because the terminating company
enjoys, in effect, a monopoly position. Once the called party has chosen her provider, any
calls to her must be terminated over her provider’s network. If that provider were to impose
extremely high charges for terminating long distance or wireless or VoIP calls to the
customer, the providers originating those calls would have no option but to pay those
charges or else they would not be able to complete the calls originated by their customers.
(In many cases, refusing to complete the call is not a legal option. For example, long
distance carriers are required to complete all calls originated by their customers, even if they
would lose money by completing such calls because the termination charges they had to pay
exceeded the nationally-averaged retail rates they are required to charge under federal law.)
Thus, the FCC has intervened to set regulatory ground rules for the completion of interstate
calls and state regulatory commissions have intervened to set regulatory ground rules for the
completion of intrastate calls. These ground rules, however, remain incomplete.
4 Statement by Raymond Henagan, General Manager, Rock Port Telephone Company,
before the Senate Committee on Commerce, Science, and Transportation, Hearing on
Phantom Traffic, April 23, 2008, at p.4.
5 P. L. 104-104, 110 Stat. 56. See, especially, the provisions in “Part II — Development of
Competitive Services” and in “Title IV — Regulatory Reform.”

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only pays the company to which it subscribes for service, a system of intercarrier
compensation is needed to compensate the other companies whose network facilities
are used to complete the call.6
There are two basic elements of any intercarrier compensation system. First, it
is necessary for each company to be able to identify the amount and source of traffic
6 Each company bears costs associated with handling the calls that are originated by the
subscribers of other companies — as an intermediate network that is “transiting” calls
and/or as a final network that is “terminating” calls. At the same time, each company
benefits from having other companies transit and terminate calls that are originated by its
own customers. If the costs and the benefits to each company from transiting and
terminating one another’s calls were a wash, there would be no need for a system of
intercarrier compensation. But traffic patterns are not symmetrical. A carrier may originate
more calls than it terminates (for example, a carrier may have many subscribers who are
telemarketers and thus make many calls, but receive few or none), or vice versa (for
example, a carrier may have many subscribers who are Internet service providers and receive
many calls, but originate few). Or a carrier may be at the geographic edge of the web of
interconnecting telephone networks that use circuit-switched technology (known, in
aggregate, as the public switched telephone network or PSTN) and therefore never be used
as an intermediate carrier to transit calls from other companies, but may originate many calls
that are transited on other networks. Moreover, rural companies have higher costs than
others because they serve low-density, high-cost areas, and thus even if their incoming and
outgoing traffic is in balance, their costs for terminating calls originated elsewhere will
exceed the costs borne by other companies terminating the calls that are originated on the
rural networks. Thus, the costs and benefits of transiting and terminating one another’s calls
are not a wash, and a system of intercarrier compensation is needed. For a detailed
discussion of intercarrier compensation and related policy issues, see CRS Report for
Congress RL32889, Intercarrier Compensation: One Component of Telecom Reform, by
Charles B. Goldfarb. It is worth noting that a carrier might be able to receive compensation
for terminating a call even if it is not able to charge the originating carrier. The FCC has
ruled that wireless carriers may seek to receive access charges as compensation for
terminating calls by negotiating contracts with long distance and other originating carriers,
but cannot unilaterally impose access charges (In the Matter of Petitions of Sprint PCS and
AT&T Corp. For Declaratory Ruling Regarding CMRS Access Charges, WT Docket No.
01-316, Declaratory Ruling, adopted July 2, 2002 and released July 3, 2002). In the absence
of a regulatory requirement that they pay wireless carriers terminating access charges,
however, the long distance carriers have refused to enter into agreements with wireless
carriers to make such payments. But the retail pricing scheme typically used by wireless
carriers gives customers a bucket of incoming and outgoing minutes of use for a set price
and then imposes a per minute of use charge for any additional incoming or outgoing
minutes of use. Thus, the wireless carriers are able to recover at least some of the costs
associated with terminating calls originated by other companies’ customers through charges
on their own customers’ incoming minutes of use. There is merit, however, to the wireless
carriers’ argument that their inability to collect terminating access charges from originating
carriers the way wireline carriers do places them at a competitive disadvantage vis-a-vis
wireline carriers, since many customers do not like having to pay minute of use charges for
incoming calls and the wireless carriers’ end user rates (unlike wireline carriers’ rates) must
be higher to take into account their inability to recover terminating costs from originating
carriers. The FCC ruling seems to treat wireless service as a niche, supplement to wireline
service, rather than as a competitor, since it does not appear to consider the competitive
implications of allowing one set of competitors to receive intercarrier compensation for
terminating calls but not another set of competitors.

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on its network that is originated by the subscribers to other companies. Second, it is
necessary to set rates and bill the appropriate originating voice provider for transiting
or terminating that traffic. (If, as currently is the case, the charge for terminating
traffic varies depending on the type of traffic, then information on the source is
necessary both to determine who to charge and the rate to charge.) For a variety of
reasons, neither of these elements is fully in place today.
To a great extent, phantom traffic is a symptom and consequence of the current,
still incomplete, intercarrier compensation system. There are three interrelated
aspects of the current system that foster phantom traffic.
! Although the underlying cost to a terminating carrier is basically the
same for terminating all types of voice traffic, the current system sets
different rates for the termination of voice traffic depending on the
source or type of traffic involved, thus creating incentives for
originating carriers to mask the source or type of calls that are
subject to high termination charges, so that they appear to be calls
subject to lower termination charges.
! For certain types of calls, the FCC still has not adopted definitive
rules about the interconnection rights and obligations of originating
and terminating carriers, the call detail information that must be
provided by the interconnecting companies to identify the source and
type of traffic, and/or the rates to be charged by companies for
terminating calls originated by customers of other companies, thus
fostering billing disputes among companies.
! The various companies’ signaling and call detail systems, challenged
by significant differences in the network architectures of the various
services providers and the multiplicity of terminating charges for
different types of calls, still often are incomplete or incompatible and
therefore unable to communicate to one another all the information
needed for accurate billing of termination charges.
Multiplicity of Termination Charges
To date, the intercarrier compensation system has been implemented on a
piecemeal basis. As specific existing telecommunications services were opened to
competitive provision and providers offering entirely new services (such as wireless
service) or using new technologies (such as VoIP) were allowed to interconnect with
the existing web of interconnecting wireline telephone company networks (known
as the public switched telephone network or PSTN), intercarrier compensation rules
have been adopted that are specific to those services or technologies. For example,
to help keep the rates for local telephone service “affordable” in rural areas, rural
telephone companies have been allowed to set above-cost rates for the termination
of interstate, and especially intrastate, long distance calls.7 These rates tend to be
7 The single biggest cost for a telephone network, especially in rural areas, is the fixed cost
(continued...)

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much higher than the rates for terminating other traffic. At the same time, in order
to encourage new information services, the FCC has treated enhanced service
providers (including information service providers or ISPs) as end users, rather than
carriers, for intercarrier compensation purposes. This allows ISPs to purchase lines
out of the local carriers’ tariffs for business customers, which do not include usage-
based charges, rather than out of the tariffs for interexchange carriers, which have
usage-based charges for both originating and terminating calls. Since ISP customers
often stay online for long periods of time, if ISPs had to pay minute-of-use access
rates it would have made it prohibitively expensive to offer flat rated retail service.
As a result of these piecemeal rules, today intercarrier compensation payments vary
widely, depending on:
! whether the interconnecting party is a wireline local telephone
company (known as a local exchange carrier or LEC),8 a long
distance company (known as an interexchange carrier or IXC), a
wireless carrier (known as a commercial mobile radio service or
CMRS carrier), or an information service provider (ISP);
! whether the service is classified by the FCC as telecommunications
or information, local or long distance, or interstate or intrastate; and
! if the call uses IP technology, whether the call travels from the
calling party to the Internet and then to the called party without
traversing the public switched telephone network, or travels in part
or in its entirety over the PSTN.
Sprint claims “[t]here are at least nine different classifications of rates between
carriers.”9
7 (...continued)
of providing the telephone line, sometimes referred to as the local loop, from the customer
premise to the telephone company switch that serves that customer. Some of that fixed cost
is recovered through a monthly subscriber line charge. It has been U.S. telecommunications
policy to limit the size of the subscriber line charge in high cost areas, however, by
recovering some of those fixed costs through above-cost per-call access charges imposed
on long distance and wireless carriers that originate calls from outside the rural telephone
company’s service area. The access charges for intrastate long distance calls, which are
subject to regulation by state regulatory commissions, tend to be higher than those for
interstate long distance calls, which are subject to FCC regulation.
8 These payments vary even among LECs, depending on whether the carrier is an incumbent
local exchange carrier (ILEC), that is one of the legacy LECs that was a government
sanctioned local monopoly provider prior to the implementation of the 1996 Act; a small
LEC (sometimes referred to as a rural LEC), that is an ILEC serving a small rural area; or
a competitive local exchange (CLEC), that is a new competitive provider of local exchange
service that was allowed to enter the market as a result of enactment of the 1996 Act.
9 Written Testimony of Charles W. McKee, Director of Government Affairs, Sprint Nextel
Corporation, before the Senate Committee on Commerce, Science and Transportation,
Hearing on Phantom Traffic, April 23, 2008, at p. 3.

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As shown in Figure 1, a chart prepared by the Intercarrier Compensation Forum
(ICF),10 in 2004 the average intercarrier compensation rate for terminating calls
ranged from 0.1 cents per minute for traffic bound to an ISP to 5.1 cents per minute
for intrastate traffic bound to a subscriber of a small (rural) incumbent local exchange
carrier; individual rates were as low as zero and as high as 35.9 cents per minute.11
This broad range of rates has not changed significantly since 2004.12
In each case, the terminating carrier is providing basically the same functions
to complete the call. This has created the strong incentive for those companies that
are originating calls for which the termination charges are very high to attempt to
mask the type of call — perhaps make an intrastate call appear to be an interstate call
or any type of long distance call appear to be a local call — so they can pay a lower
termination charge,13 or, at the least, has created the disincentive for those companies
10 The ICF is a group of carriers from different segments of the telecommunications
industry that submitted to the FCC a proposal for comprehensive intercarrier compensation
reform, In the Matter of Developing a Unified Intercarrier Compensation Regime, CC
Docket No. 01-92, Ex-Parte Brief of the Intercarrier Compensation Forum in Support of the
Intercarrier Compensation and Universal Reform Plan (“ICF Plan”), October 5, 2004.
11 ICF Plan at Appendix C, p. 2. In Figure 1, “RC” refers to “reciprocal compensation,”
the cost-based system for intercarrier compensation between providers of local service
mandated by the 1996 Act (47 U.S.C. 251(b)(5), 252(d)(1)(A), and 252(d)(2)(A)).
“IntraMTA” and “InterMTA” refer to the distinction between those calls originating on
wireless networks that are treated as local vs. long distance for intercarrier compensation
purposes. All classifications with the words “intrastate” or “interstate” refer to intercarrier
compensation rates for long distance calls.
12 Given the wide variation in intercarrier compensation rules applied to carriers and
technologies that are now competing with one another, the FCC adopted a Further Notice
of Proposed Rulemaking (FNPRM) in February 2005 to review and reform its rules with the
goal of constructing a unified intercarrier compensation regime. The FCC sought public
comment on nine comprehensive intercarrier compensation reform proposals or sets of
principles that have been submitted to the FCC as well as a staff proposal. The issues raised
in the ICC FNPRM were not new to the FCC. In 2001, the Commission opened a
rulemaking proceeding and adopted a Notice of Proposed Rulemaking seeking information
on how to develop a unified intercarrier compensation regime. To date the FCC has not
followed through on any of these proceedings for comprehensive intercarrier compensation
reform. In a recent court hearing involving the appeal of an earlier FCC intercarrier
compensation ruling, the FCC attorney stated that the FCC chairman has committed to
complete the proceeding on comprehensive reform within six months. ( See Adam Bender,
“FCC Order on Intercarrier Compensation Due in Six Months,” Communications Daily,
May 5, 2008.) Other FCC commissioners indicated, however, they were not aware of such
a goal. (See Adam Bender, untitled article in the “Wireline” section of Communications
Daily, May 12, 2008.)
13 These intercarrier compensation charges can represent a substantial portion of the costs
of providing certain services and, in the case of long distance calls that interexchange
carriers are required by statute and FCC rule to offer at a single rate nationally, can exceed
the retail price for the service. The access charges that some rural local exchange carriers
charge long distance carriers for originating the long distance calls made by customers
located in those rural areas, or for terminating the long distance calls made to customers
located in those rural areas, exceed the nationally averaged price that the long distance
(continued...)

CRS-7
to take any steps that would make it easier for terminating companies to identify
traffic that is subject to high termination charges.

Figure 1. Differences in Intercarrier Compensation Rates
Source: Intercarrier Compensation Forum.
Undefined Interconnection Rights and Obligations and
Interconnection Compensation Rates
As part of the mandate for competition in the 1996 Act, the first obligation
identified for each telecommunications carrier is “the duty ... to interconnect directly
or indirectly with the facilities and equipment of other telecommunications
carriers.”14 In implementing this requirement, the FCC developed ground rules for
interconnection, including specific requirements and/or general guidance about where
the physical interconnection can take place, and the terms, conditions, and rates for
exchanging traffic and terminating calls, as well as the call detail information to be
provided to be able to identify the source and type of call.
13 (...continued)
carriers charge their subscribers for those calls, and thus the long distance carriers lose
money on each long distance call into or out of those rural exchanges. As a result, long
distance carriers are reluctant to make available to customers in those areas service packages
that are likely to be attractive to heavy long distance users.
14 1996 Act, section 251(a)(1). This legislation amended the Communications Act of 1934,
at 47 U.S.C. 251(a).

CRS-8
These ground rules covered a wide range of issues, for example, identifying
certain situations in which terminating traffic would be subject to tariffed access
charges or reciprocal compensation or negotiated rates, identifying situations in
which one company could request interconnection with another company and invoke
the negotiation and arbitration procedures set forth in the 1996 Act, and imposing
certain signaling and call detail requirements on companies.
As the wireless and VoIP technologies have come on-stream, for certain types
of traffic the FCC has not yet adopted definitive ground rules. There are gaps in the
rules about the interconnection rights and obligations of the new providers and the
incumbent providers, in the rules about the call detail information that must be
provided by the interconnecting companies (to identify the source and type of traffic
for billing purposes), and/or in the rules about the rates to be charged by companies
for terminating calls originated by customers of other companies. For example:
! Certain VoIP services are provided by software applications
providers, such as Skype, that do not own their own networks and do
not have interconnection rights to the PSTN since they are not
telecommunications providers.15 A customer who purchases one of
these “non-interconnected VoIP services” can only make calls to
other subscribers of that non-interconnected VoIP service — unless
she also purchases a supplementary service that allows her calls to
be terminated on the PSTN (through the use of the network of an
interconnected carrier) in order to reach all telephone users.
Similarly, a purchaser of one of these non-interconnected VoIP
services can receive calls from parties that do not subscribe to that
VoIP service only if he pays separately for a telephone number to
which the calls from the subscribers of traditional wireline and
wireless can be routed. The FCC has not set definitive rules,
however, on how to assess charges for the termination of calls that
originate with non-interconnected VoIP service providers and
terminate on PSTN networks or that originate on PSTN networks
and terminate with non-interconnected service providers.16
15 As explained earlier, under section 251(a)(1), all telecommunications carriers have the
duty to interconnect their networks with any other requesting telecommunications carrier.
They have no obligation to interconnect their networks with any other entities.
16 The FCC has made some rulings relating to the termination charges for VoIP service. It
has ruled that pulver.com’s Free World Dialup (FWD) service, which offers users of
broadband Internet access the opportunity to join other such users worldwide in talking with
one another directly over the Internet, but has no transmission capability, is an Internet
application that facilitates using the customer’s broadband access service to make free VoIP
calls (but does not directly provide VoIP service), and thus is an unregulated information
service subject to FCC jurisdiction under Title I of the Communications Act, rather than a
telecommunications service. However, it “expressly decline[d] to exercise Title I
jurisdiction over FWD to impose any economic or entry/exit regulation .... or any other type
of regulation ... at this time.” (See In the Matter of Petition for Declaratory Ruling that
pulver.com’s Free World Dialup is Neither Telecommunications nor a Telecommunications
Service, WC Docket No. 03-45, Memorandum Opinion and Order, adopted February 12,
(continued...)

CRS-9
! The FCC has ruled that wholesale telecommunications carriers are
entitled to interconnect and exchange traffic with incumbent local
exchange carriers when providing services to other service
providers, including VoIP service providers.17 This ruling is
important because in the 1996 Act local telephone companies are
only obligated to interconnect with requesting telecommunications
carriers. Thus a retail VoIP provider offering a VoIP service that is
classified as an information service cannot itself demand
interconnection rights with a local telephone company and if it could
not exchange its traffic with the local telephone company it would
not be able to compete with that local telephone company. But it
can contract with a wholesale telecommunications carrier for that
carrier to exchange the VoIP traffic on its behalf. Several recent
FCC actions, however, suggest that the Commission has not yet
made a definitive ruling on which entities qualify as wholesale
telecommunications carriers with interconnection rights. In a
recommended decision in one proceeding,18 the chief of the FCC
enforcement bureau found that two entities that had obtained state
certificates as wholesale telecommunications carriers and had
entered into interconnection agreements with local exchange carriers
nonetheless did not meet the definition of a telecommunications
carrier because they did not make their services generally available
to non-affiliated customers through tariffs or public written or oral
offerings, but rather their only customers were their affiliated
providers of retail VoIP services. A majority of commissioners
(with the chairman dissenting) overruled that recommended
16 (...continued)
2004 and released February 19, 2004.) The FCC stated that the customer, not pulver.com,
originates the communication, and thus implied, but did not explicitly state, that pulver.com
would not be required to pay intercarrier compensation. At the other extreme of voice
service involving VoIP technology, the FCC has ruled that a long distance (interexchange)
service that (1) uses ordinary customer premises equipment with no enhanced functionality,
(2) originates and terminates on the public switched telephone network, and (3) undergoes
no net protocol conversion and provides no enhanced functionality to end users due to the
provider’s use of IP technology, is a telecommunications service and its provider must pay
access charges to the local carriers that originate and terminate the call. (See In the Matter
of Petition for Declaratory Ruling that AT&T’s Phone-to-Phone IP Telephony Services are
Exempt from Access Charges, WC Docket No. 02-361, Order, adopted April 14, 2004 and
released April 21, 2004.)
17 See In the Matter of Time Warner Cable Request for Declaratory Ruling that
Competitive Local Exchange Carriers May Obtain Interconnection Under Section 251 of
the Communications Act of 1934, as Amended, to Provide Wholesale Telecommunications
Services to VoIP Providers, WC Docket No. 06-55, Memorandum Opinion and Order,
adopted and released March 1, 2007.
18 See In the Matter of Bright House Networks, LLC, et al., Complainants v. Verizon
California, Inc., et al., Defendants, File No. EB-08-MD-002, Recommended Decision,
adopted and released April 11, 2008, at paras. 15-20..

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decision, however,19 arguing that the two entities did qualify as
wholesale telecommunications carriers, but explicitly limited the
decision to “the specific record in this specific case.” But because
this decision occurred within the context of a “restricted” complaint
proceeding, for which only parties with direct interest could
comment, the majority chose not to make a general ruling. In a
different case, the FCC put out for public comment a petition from
an incumbent local exchange carrier claiming it did not have to
interconnect with a company that provided wholesale
telecommunications services for its affiliated retail provider of VoIP
service, questioning whether the entity qualified as a
telecommunications carrier (despite having received state
certification).20 The Commission has not yet ruled in that case.
! In a declaratory ruling,21 the FCC found that “neither the
Communications Act nor any Commission rule prohibits a CMRS
carrier from attempting to collect access charges from an
interexchange [long distance] carrier [for terminating a long distance
call].” But it also found that “there is no Commission rule that
enables Sprint PCS [a CMRS] unilaterally to impose access charges
on AT&T [an interexchange carrier].” Thus, CMRS carriers can
receive compensation for terminating long distance calls only if they
can negotiate rates, terms, and conditions with the interexchange
carriers. Since CMRS carriers are prohibited from blocking long
distance calls (if, for example, an interexchange carrier refuses to
pay access charges), the interexchange carriers have had no incentive
to agree to such payments and no interexchange carrier has made
such payments.22 The FCC stated its intention to “address CMRS
carriers’ requests to be placed on equal footing with wireline
carriers” in its Intercarrier Compensation proceeding, the goal of
which “is to move toward a unified compensation regime that
eliminates the opportunity for arbitrage due to different regulatory
19 In the Matter of Bright House Networks, LLC, et al., Complainants, v. Verizon California,
Inc., et al., Defendants, File No. EB-08-MD-002, Memorandum Opinion and Order, adopted
June 20, 2008 and released June 23, 2008, at paras. 37-41.
20 See “Pleading Cycle Established for Comments on Vermont Telephone Company’s
Petition for Declaratory Ruling Regarding Interconnection Rights,” FCC Public Notice, WC
Docket No. 08-56, DA-08-08-916, April 18, 2008.)
21 In the Matter of Petitions of Sprint PCS and AT&T Corp. For Declaratory Ruling
Regarding CMRS Access Charges, WT Docket No. 01-316, Declaratory Ruling, adopted
July 2, 2002 and released July 3, 2002.
22 As explained earlier, wireless carriers at least partially recover the costs associated with
terminating calls originated by the customers of other voice providers by imposing on their
own customers per minute usage charges for incoming calls. This does, however, place
them at a competitive disadvantage vis-avis wireline carriers who receive compensation for
terminating calls originated by customers of other service providers and who therefore do
not have to impose usage charges on their own customers’ incoming calls to recover their
termination costs.

CRS-11
treatment of different types of traffic.” But six years later, the FCC
still has not moved forward with that proceeding.
! When first implementing the requirement of the 1996 Act, the FCC
determined that “traffic to or from a CMRS network that originates
and terminates within the same MTA [major trading area] is subject
to [the reciprocal compensation] transport and termination rates
under section 251(b)(5) [of the Communications Act, as amended by
the 1996 Act], rather than interstate and intrastate access charges.”23
Since MTAs often are very large, sometimes a call made by the
customer of a wireline local telephone company to the customer of
a wireless carrier is intraMTA, but must be routed over the network
of an interexchange (long distance) carrier to reach the called party.
Some originating wireline carriers have claimed that these calls
should be treated as interexchange calls, which would mean that the
wireless carrier terminating the call would not be eligible for
reciprocal compensation and, as explained in the previous bullet,
also not able to impose access charges. In one appeal of a state
regulatory commission decision,24 the federal court, based on and
upholding FCC decisions interpreting and implementing the 1996
Act, found that all intraMTA calls are subject to reciprocal
compensation, even if the call was transmitted over an interexchange
carrier’s network. The FCC, however, has never issued a decision
that directly addresses this dispute and there still are many local
exchange carriers that maintain they do not have to pay reciprocal
compensation on an intraMTA call if they hand off that call to an
interexchange carrier.
! There also appear to be unresolved differences of opinion among
industry players about other interconnection rules as they apply to
wireless carriers.25 For example, local exchange carriers and
wireline carriers disagree about what the LECs must do to meet their
duty under Section 251(b)(3) of the Communications Act to
“provide dialing parity to competing providers of telephone
exchange service and telephone toll service, and the duty to permit
23 In the Matter of Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996; Interconnection Between Local Exchange Carriers and
Commercial Mobile Radio Service Providers, CC Docket Nos. 96-98 and 95-185, First
Report and Order, adopted on August 1, 1996 and released on August 8, 1996, at para. 1036.
24 United States Court of Appeals for the Tenth Circuit, Atlas Telephone Company, et al.
Appeals from the United States District Court for the Western District of Oklahoma (D.C.
No. 03-CV-347-F), March 10, 2005.
25 See, for example, In the Matter of Developing a Unified Intercarrier Compensation
Regime, CC Docket No. 01-92, Comments of CTIA — The Wireless Association, submitted
to the Federal Communications Commission on December 7, 2006.

CRS-12
all such providers to have nondiscriminatory access to telephone
numbers, ... with no unreasonable dialing delays.”26
In the absence of definitive FCC rulings on the terms and conditions for
interconnection, call data detailed that each company must provide to the terminating
carrier, and the rates for such termination, companies will continue to have billing
disputes that are difficult to resolve.
Technical Challenges
Even if the FCC were to rule definitively on the various companies’ rights and
obligations with respect to interconnection, termination rates, and the provision of
call detail information, however, there still would remain a number of technical
factors that make it difficult to identify the amount and source of traffic on each
company’s network, and thus phantom traffic would continue to exist.
The current intercarrier compensation system, which sets different termination
rates for different types of calls, places a heavy burden on companies to construct,
maintain, and keep current and interoperable the signaling and call detail data
systems needed to communicate with other companies the information needed to
identify and bill for calls. In many case, when the necessary call information is not
available to bill terminating traffic, the problem is attributable to limitations in the
systems of the originating, intermediate, or terminating company.
There are many challenges to constructing, maintaining, and updating call detail
systems and databases needed to identify calls and determine the appropriate rates.
The biggest problem is “the complexity of interconnections used to carry traffic.”27
Telephone calls frequently are routed over the networks of multiple companies, and
somewhere along that chain the call detail information may be accidentally or
purposely lost or modified. It is cost-prohibitive for long distance and wireless
carriers to have direct trunks to every local telephone switch in a geographic area —
and especially to the switches of small rural telephone companies and other
independent telephone companies that serve sparsely populated areas. Instead, they
usually have trunks that link their network’s single point of presence in the area to
a large access tandem switch,28 which most frequently is owned by the largest
telephone company in the region (for example, Verizon, AT&T, Qwest or Embarq)
26 47 U.S.C. 251(b)(3).
27 Susana Schwartz, “Phantom Traffic: Identifiable but Not Billable,” B/OSS — Billing and
OSS World, July 1, 2005, available at [http://www.billingworld.com/
articles/feature/Phantom-Traffic-Identifiable-but-Not.html], viewed on June 18, 2008. The
following discussion is based in part on the technical explanation provided in this article.
28 There are two primary categories of switches in the circuit-switched telephone networks
that comprise the public switched telephone network. Tandem switches are hubs in a
company’s network that receive traffic over large trunks from sources both internal to and
external to the company’s network and then re-route that traffic over trunks to the next
destination, which also can be either internal to or external to the company’s network. End
office switches are the switches at the edge of the network that are used to route traffic to
the company’s customers’ premises.

CRS-13
but may be owned by a competitive local exchange carrier. These access tandem
switches provide centralized switching that aggregates and routes traffic between the
various carriers in the region — the long distance companies, wireless companies,
rural telephone companies and other independent telephone companies, and CLECs.
As a result, except where a company generates enough traffic to a particular
destination to justify a direct trunk, all of the traffic destined for a particular
telephone company end office — interstate and intrastate long distance wireline
traffic, local and long distance wireless traffic, local extended area service traffic
between neighboring telephone companies, traffic from CLECs — may be
aggregated at an access tandem switch and put on a single direct trunk to that end
office.
Addressing and routing mechanisms are needed to deliver each call to the right
point on the right network (in order to reach the called party) and to provide all the
information necessary to identify the appropriate charge for terminating each call.
Creating mechanisms that communicate across networks is a challenge when
different networks use very different network architectures, especially since many
calls traverse several intermediate networks before reaching the terminating network.
For example, the PSTN employs addressing and routing mechanisms that rely on the
information provided by the calling party’s 10-digit telephone number and the called
party’s 10-digit telephone number. In the past, that provided sufficient information
for the terminating carrier to determine how much to bill the originating carrier to
terminate the call. But today some customers are able to make voice calls using VoIP
services that do not require a telephone number — which can make it difficult for
traditional telephone companies to determine who to bill, and what rate to bill, for
terminating a call. Also, the billing systems used by some wireline telephone
companies are based on locational information that is not relevant for voice services,
such as wireless and some VoIP services, that are not made from fixed locations.
Even where the location of the called party and calling party is known, the
complexity of the current intercarrier compensation system imposes stiff burdens on
billing systems. For example, the geographic boundary for what constitutes a local
call is different for calls originating on a wireline network and calls originating on
a wireless network. The areas considered to be local for wireline-originated calls
(known as local calling areas) tend to be much smaller than the areas considered to
be local for wireless-originated calls (known as intra-major trading areas or
intraMTA). This means that each company’s signaling systems and databases must
be able to associate each telephone number with both the appropriate local calling
area and appropriate MTA in order to bill calls correctly.29 Unfortunately, according
29 Consider, for example, a call made by a wireless customer located in one end of the Iowa-
wide MTA to a recipient who is a customer of a rural telephone company located at the
other end of the same MTA — which qualifies as an intraMTA (local) call, subject to low
reciprocal compensation charges. The most efficient way to route that call might be from
the originating wireless carrier to a long distance company that is large enough to have
facilities throughout the state, and then to the tandem switch provider located near the
terminating rural telephone company. Although by FCC rule this qualifies as a local call
subject to low reciprocal compensation termination charges, from the perspective of the
rural telephone company, that call will look like an intrastate long distance call that should
be subject to its intrastate access charges, which are likely to be very high. Thus, there often
(continued...)

CRS-14
to one industry source, the Jurisdictional Information Parameters (JIP) currently
encoded in most companies’ databases are not sufficient to do this and all the
relevant parties — wireless carriers, both large and small local telephone companies,
and CLECs — would have to significantly expand their JIP databases to accomplish
this.30 Given the complexity of creating, maintaining, and upgrading these databases
and systems, and the lack of incentive on the part of companies (unless required to
do so) to make upgrades that might not work to their benefit, it is not surprising that
there continue to be some system incapabilities across networks.
Most companies have installed what is known as the SS7 signaling protocol,
which provides, during the transmission of the call, information on the calling party
number, the called party number, and a “charge number” that depends on the type of
call. Sometimes, however, as the call is transmitted from the originating carrier
through intermediate carriers to the terminating carrier some of this call detail
information is lost. Also, some small rural companies have never deployed SS7
capability. In addition, for calls from mobile sources (wireless or VoIP) information
on the calling and called telephone number does not provide information on the
actual geographic location of the parties, or the JIP coded into the systems fail to take
into account the different jurisdictional boundaries employed by wireless and
wireline services.
As a result, other information often is needed for billing. Information can be
provided after the call is completed through the exchange of records between
companies. For example, although a carrier may receive traffic over a large trunk
that carries lots of different types of traffic aggregated together from multiple
sources, the company that has aggregated that traffic often can provide information
on which companies are responsible for originating which traffic. The aggregating
company and the terminating company must negotiate agreements about the
collection and exchange of such information. Also, in some situations, companies
negotiate “payment factors” based on traffic studies that are used to estimate the
percentage of calls that are local vs. interstate long distance vs. intrastate long
distance, etc. in order to determine what payment should be. But rural telephone
companies claim that originating and intermediate carriers often have provided data
that are incomplete or inaccurate.31 Rural telephone companies are employing a
number of auditing capabilities (for example, drilling deeper into signaling data from
SS7 billing records for data mining) to verify — and where appropriate challenge —
29 (...continued)
is uncertainty about whether a particular call should be treated as local or long distance for
the purposes of determining the charge for terminating the call.
30 See the discussion of Jurisdictional Information Parameters (JIP) in Susana Schwartz,
“Phantom Traffic: Identifiable but Not Billable,” B/OSS: Billing & OSS World, July 1, 2005,
available at [http://billingworld.com/article/feature/Phantom-Traffic-Identifiable-but-
Not.html], viewed on June 18, 2008.
31 See Statement by Raymond Henagan, General Manager, Rock Port Telephone Company,
before the Senate Committee on Commerce, Science, and Transportation, Hearing on
Phantom Traffic, April 23, 2008, at pp. 4-6.

CRS-15
the provided data.32 But these audits impose costs on the rural carriers, who seek
enforceable FCC rules requiring originating and intermediary companies to provide
complete and accurate call detail data for billing.
One Possible Arbitrage Scenario
As explained earlier, since many calls pass over multiple networks before
reaching the terminating carrier, there are potential opportunities for the call detail
data information that would identify a call as one that is subject to high termination
charges to be accidentally or purposely modified or removed. Also, since there are
very positive efficiencies from aggregating different types of calls (that would be
subject to different termination charges) on a single large trunk, rather than requiring
companies to use a different trunk for each type of call, intermediate carriers have the
strong incentive to mix different types of traffic, from a number of different sources,
on a single trunk, but that can facilitate misidentifying the source or type of traffic in
a fashion that allows them to pay a lower termination rate.
An originating long distance carrier is not likely to have direct trunks to every
small rural telephone company, since it does not send enough traffic to those small
companies to justify the investment in such trunks. Rather, a long distance carrier
with traffic to the customers of a small rural company is likely to route that traffic to
a larger local telephone company located near the small rural company, for that
intermediate company to aggregate the traffic with other traffic bound for the
customers of the small rural company. Since the originating carrier’s traffic is long
distance traffic, the rural company would be eligible to receive access charges, which
tend to be high, for terminating that traffic. In contrast, the small rural company
could only charge reciprocal compensation, which is lower than access charges, for
the termination of local traffic that originates on (and is passed from) the larger local
telephone company to the small rural carrier. The originating long distance company
and the larger, aggregating carrier might find it in their self-interest to perform
arbitrage in the following fashion. The aggregating carrier would charge the long
distance carrier a termination fee that is higher than the rural carrier’s reciprocal
compensation fee and lower than the rural carrier’s access charge to “terminate” the
traffic at the aggregator’s network. The aggregator would strip off the call detail
information from that long distance traffic so that it appears to be local traffic that
originated on its own network, and then send the traffic to the rural carrier to
terminate, with the aggregator paying reciprocal compensation to the rural company
for terminating the “local” traffic. In practice, this might not require the originating
or aggregating carrier to actually strip information from the call detail signal that
accompanies that call; it might simply require these companies not to take all the
affirmative steps necessary to ensure that the information needed for billing is passed
through the chain of networks from the originating network to the terminating
network.
32 See Susana Schwartz, “Phantom Traffic: Identifiable but Not Billable,” B/OSS — Billing
and OSS World, July 1, 2005, available at [http://www.billingworld.com/
articles/feature/Phantom-Traffic-Identifiable-but-Not.html], viewed on June 18, 2008.

CRS-16
Phantom Traffic and Rural Telephone Companies
Phantom traffic is a more serious problem for small, rural telephone companies
than for other telephone companies for three interrelated reasons.
First, as discussed earlier, it tends to be more difficult to identify the originating
company and the rate to be assessed for terminating a call if that call has passed over
multiple networks or if that call has been aggregated with all types of traffic. Since
rural telephone companies tend to be located at the edge of the public switched
network, a disproportionately large share of their incoming calls pass over multiple
networks. Also, since rural telephone companies tend to receive little incoming
traffic of any specific type or from any specific company, a disproportionate share of
their incoming calls tend to be aggregated with different types and sources of traffic.
Thus, rural telephone companies tend to have more incoming telephone calls for
which it is difficult to identify the source and type of call for purposes of billing
termination charges.
Second, the revenues generated from access charges and other forms of
compensation for terminating calls that originate outside the local company’s
network represent a far greater share of total revenues for small, rural companies than
for larger wireline and wireless telephone companies. Therefore the loss of revenues
due to the inability to identify the source of calls will have a larger financial impact
on rural carriers than on other carriers. One small telephone operator recently told
Congress that “NECA [the National Exchange Carriers Association, the organization
that administers the FCC’s access charge plan for small, rural telephone companies]
has estimated that small rural carriers across the nation typically receive about 29%
of their total net telephone company operating revenues from intercarrier
payments.”33
Third, although the cost for a carrier to terminate a call does not vary (or varies
only very slightly) by the type of call, the access charges set by the rural telephone
companies for terminating certain types of telephone calls tend to be both very high
in absolute terms and a lot higher than the charge for terminating other types of calls.
This partly reflects the higher costs associated with serving sparsely populated rural
areas, but also reflects the decision of the FCC and state regulatory commissions to
allow access charges that exceed underlying costs in order to keep the rates for local
service low. But these high access charges create a strong incentive for the wireline
and wireless carriers that originate those calls to avoid full payment by failing to
provide all the information needed to identify the source of the call or by masking the
type of call and making it look like a local call or an interstate call.
33 Statement by Raymond Henagan, General Manager, Rock Port Telephone Company,
before the Senate Committee on Commerce, Science, and Transportation, Hearing on
Phantom Traffic, April 23, 2008, at p.3.

CRS-17
Issues and Proposals
Comprehensive Intercarrier Compensation Reform vs.
Measures Specific to Phantom Traffic
As discussed earlier, there are three interrelated factors that foster phantom
traffic.
! Under the current intercarrier compensation system, charges for the
termination of voice traffic vary significantly, depending on the
source and type of call, creating a strong incentive for originating
carriers to mask traffic that is subject to high termination rates.
! For certain types of calls, the FCC has not yet adopted definitive
rules about the interconnection rights and obligations of originating
and terminating carriers, the call detail information that must be
provided by the interconnecting companies to identify the source and
type of traffic, and/or the rates to be charged by companies for
terminating calls originated by customers of other companies, thus
fostering billing disputes among carriers.
! Given the significant differences in network architectures and the
multiplicity of terminating charges for different types of calls, the
signaling and call detail systems of many companies cannot
accommodate the complex routing of some calls, often resulting in
terminating carriers not receiving all the call detail information
needed to bill for termination.
From a public policy perspective, there are two general approaches to the issue
of phantom traffic. It can be addressed broadly, as a symptom and consequence of
an inconsistent and incomplete intercarrier compensation system that has created
incentives for companies to mask the type of traffic their customers generate in order
to pay lower termination charges. Under this approach, phantom traffic would be
addressed in the context of a comprehensive intercarrier compensation reform
process that explicitly identifies the rights and obligations of all service and network
providers and sets up transitional steps leading to the same or similar cost-based rates
for the termination of all types of traffic by a date certain.34 Alternatively, phantom
traffic can be addressed narrowly, as a unique billing problem created by the lack of
call detail information needed to identify and bill specific calls. Under this approach,
it would be addressed through the implementation of narrowly focused rules that set
34 It is likely that under any comprehensive reform plan high-cost carriers (such as rural
carriers serving sparsely populated geographic areas) would continue to have higher
termination charges than lower-cost carriers, to reflect those higher costs, but for any
individual carrier its termination charges would be the same or similar for all sources and
types of traffic. Also, because intercarrier compensation revenues currently represent a far
higher portion of rural carriers’ total revenues than of non-rural carriers’ total revenues, the
transition to the same termination rates for all traffic likely would be longer for rural carriers
than for non-rural carriers.

CRS-18
requirements for companies to provide specific call detail information and perhaps
prohibit activities that could make it more difficult to identify and bill calls. Each
approach has advantages and disadvantages.
Comprehensive Intercarrier Compensation Reform. Comprehensive
intercarrier compensation reform is likely to require three concurrent actions — rate
restructuring to move toward uniform termination rates for all sources and types of
traffic; the creation of explicit and competitively neutral network interconnection
rules that set out the technical and financial rights and obligations of all the parties
and allow diverse networks to interconnect efficiently with one another; and the
creation of new explicit universal service support mechanisms to replace the implicit
support in those intercarrier compensation rates that currently are set above cost.
Such comprehensive reform is likely to reduce phantom traffic by eliminating
incentives for carriers to mask the source and type of traffic they generate. But given
the potential impact of comprehensive reform on both providers and consumers, it
will not be easy to accomplish. Although the FCC has had open proceedings to
address such reform throughout this decade, to date intercarrier compensation issues
have only been addressed on a piecemeal basis and many inconsistencies and gaps
remain. In 2004, the Intercarrier Compensation Forum, a group of carriers from
different segments of the telecommunications industry, submitted to the FCC a
proposal for comprehensive reform.35 The Commission formally sought public
comment on the proposal, but there was enough criticism of the proposal that the
FCC did not use it as the basis, or even as a starting point, for developing and
adopting its own rules. Two years later, the National Association of Regulatory
Utility Commissioners’ Task Force on Intercarrier Compensation developed a
comprehensive intercarrier compensation reform proposal, known as the Missoula
Plan, that it filed at the FCC on July 24, 2006.36 A number of early participants in the
development of the plan left the process, and ultimately the primary industry
sponsors of the plan were AT&T, BellSouth, Cingular, and hundreds of small rural
telephone companies. The FCC also sought comment on this proposal, but again did
not use it as the basis, or the starting point, for developing and adopting its own rules.
The continued lack of a comprehensive framework for intercarrier compensation
has had significant consequences and generated certain unhealthy market symptoms,
one of which is the growth of phantom traffic. Other consequences include distorted
investment decisions and uneconomic arbitrage motivated by the existing intercarrier
compensation rules rather than by underlying cost and demand conditions; harm to
efficient competition as some providers are artificially favored and others are
artificially disadvantaged by the inconsistent rules; and forced carrier expenditures
of millions of dollars and scarce information technology resources to develop
systems to identify, measure, monitor, bill, reconcile, audit, and dispute the
classification of traffic.
35 In the Matter of Developing a Unified Intercarrier Compensation Regime, CC Docket
No. 01-92, Ex-Parte Brief of the Intercarrier Compensation Forum in Support of the
Intercarrier Compensation and Universal Reform Plan, submitted October 5, 2004.
36 See, for example, Cheryl Bolen, “‘Missoula’ Intercarrier Payment Plan Filed at FCC in
Hopes of Public Comment,” BNA, Inc. Daily Report for Executives, July 25, 2006.

CRS-19
There would be several benefits from addressing phantom traffic within the
context of comprehensive intercarrier compensation reform. Creation of a consistent
rate structure and similar rate levels for the termination charges on all calls:
! would significantly reduce the incentive for companies to mask the
source or type of traffic they generate because such activity would
no longer yield lower termination charges.
! would reduce the amount of call detail information needed to bill
calls and thus reduce the costs of all companies to construct,
maintain, and update databases. For example, if it were not
necessary to maintain databases capable of determining whether a
call was local or interexchange, intraMTA or interMTA, etc., the
complexity of coding the necessary information into the call
databases would be substantially decreased.
! would reduce the depth of traffic auditing that carriers had to
perform in order to ensure that they were receiving proper payment
for terminating calls. Carriers still might want to perform audits to
ensure originating and transiting carriers fully report the total
volume of calls they generate, but it would no longer be necessary
to perform the level of data mining required to determine the source
and type of calls traversing their networks.
In addition, removing the implicit universal service support incorporated into above-
cost access charges would meet the requirement in Section 254(e) of the 1996 Act
that “any [Universal Service] support be explicit.”
But there also are disadvantages of addressing phantom traffic through
comprehensive intercarrier compensation reform.
! As explained above, it is very difficult to accomplish comprehensive
reform. Parties that benefit financially or competitively from the
current intercarrier compensation system will not have an incentive
to support change unless they receive countervailing benefits. Thus,
tying resolution of the phantom traffic issue to comprehensive
intercarrier compensation reform could slow down relief from
phantom traffic — as demonstrated by the inability of the industry
and the FCC to accomplish such comprehensive reform this past
decade.
! Many of the current differences in termination rates represent
explicit public policy decisions at the federal and state level to keep
termination charges artificially high or low in order to foster other
public policy objectives — such as maintaining affordable rates for
rural local telephone service or fostering enhanced services. If these
continue to be public policy objectives, then rationalization of
intercarrier compensation rates would have to be accompanied by
efforts to support those other objectives, for example, through
creation of an explicit source of universal service funding to replace

CRS-20
the implicit support currently received from above-cost access
charges. But there already is concern that the Federal Universal
Service Fund has grown too large and there would be resistance
from some parties to expanding it to replace the implicit subsidies
currently in access charges.37
! Intercarrier compensation rates for intrastate wireline services are
within the jurisdiction of state regulatory commissions and thus
comprehensive intercarrier compensation reform at the federal level
might not be able to address intrastate access charges, which tend to
be the termination rates that most exceed cost. Thus unless the
reform process includes the active participation and support of state
jurisdictions, it may not be able to resolve some of the problems
underlying phantom traffic. Section 253 of the 1996 Act,38 however,
allows the FCC to preempt state statutes or regulations that are
barriers to entry into the provision of interstate or intrastate
telecommunications service, and thus potentially could be used as
the basis for the FCC to modify intrastate intercarrier compensation
rates as part of comprehensive reform, if the absence of reform can
be shown to harm competition.
Measures Specific to Phantom Traffic. The alternative approach is to
focus narrowly on traffic that is not adequately identified, and therefore makes
appropriate billing for that traffic difficult or impossible, by enacting laws or
adopting FCC rules intended to improve identification of the source and type of calls,
and by increasing FCC enforcement of its rules. Most trade associations and many
industry parties have made specific proposals and/or critiqued the proposals of
others, a representative sample of which are presented here.
The National Exchange Carrier Association (NECA), the organization that
administers the FCC’s access charge plan for small rural telephone companies, has
petitioned the FCC to modify its signaling requirements and to take other actions to
address phantom traffic issues.39 NECA claims that small rural carriers cannot rely
upon the process enacted in sections 251 and 252 of the 1996 Act,40 which allows a
local exchange carrier that receives a request from another telecommunications
carrier to interconnect to its network to negotiate a binding agreement with the
requesting carrier and to seek arbitration if the negotiations reach an impasse, to
37 See CRS Report RL33979, Universal Service Fund: Background and Options for Reform,
by Angele A. Gilroy.
38 Incorporated into the Communications Act of 1934, as amended, at 47 U.S.C. 253.
39 See letter dated April 24, 2008, and attachments, from Joe A. Douglas, vice president,
government relations, NECA, to Marlene Dortch, Secretary, FCC, Re: WC Docket No. 01-
92, Developing a Unified Intercarrier Compensation Regime. The FCC’s signaling rules
were developed in its caller ID proceeding, which was concerned with privacy issues, and
therefore were not developed with intercarrier compensation billing in mind.
40 Incorporated into the Communications Act of 1934, as amended at 47 U.S.C. 251 and
252.

CRS-21
obtain the signaling and call detail information needed to bill interconnecting carriers
for the termination of calls. It claims the rural carriers are in a weak bargaining
position and are constrained from taking advantage of the arbitration option by the
costs of pursuing arbitration. Instead, NECA proposes that the FCC impose strict
requirements on originating carriers. Specifically, it proposes that the FCC:
! extend its call signaling rules to all interconnected voice service
providers.
! require that accurate and unaltered calling party number (CPN)
information be transmitted with all voice calls that terminate on the
PSTN.
! require CPN to be transmitted through the entire call path.
! establish the use of originating and terminating telephone numbers
as a fallback rule to determine the call jurisdiction (that is, intrastate
or interstate, local or long distance), absent actual geographic data
or a negotiated agreement.
USTelecom, the largest industry trade association with membership that spans
a broader range of wireline carriers, also has a multi-pronged proposal,41 with some
elements similar to those of the NECA proposal. Specifically, USTelecom proposes
that the FCC apply the following obligations on all traffic originating on or
terminating to the public switched telephone network, including traffic originating
on other networks:
! Every originating provider must transmit in its signaling, where
feasible with its network technology deployed at the time the call
was originated, the telephone number received from or assigned to
the calling party.
! Every provider must transmit without alteration, except where not
feasible with network technology deployed at the time the call was
originated, or where PSTN industry standards would dictate
otherwise, the telephone number information that it receives from
another provider in signaling.
! It should be deemed an unreasonable practice for a provider to route
traffic for the purpose of disguising the identify of the financially
responsible provider or the traffic’s originating jurisdiction.
! The initiating carrier must perform a local number portability query
that would identify who the called party is, in order to deliver the
41 Letter from Glenn T. Reynolds, Vice President - Policy, USTelecom, to Marlene Dortch,
Secretary, FCC, Re: Developing a Unified Inter-carrier Compensation Regime, WC Docket
No. 01-92, May 8, 2008.

CRS-22
call to the tandem switch serving the carrier to whom the called
party subscribes.42
! The FCC should provide incumbent local exchange carriers the
ability to invoke the negotiation and arbitration procedures set forth
in sections 251 and 252 of the 1996 Act.
! The FCC should commit to aggressively enforce these rules and
obligations.
The primary difference in these two proposals is that USTelecom would have the
FCC explicitly take into account the capabilities and limitations of the network
technology currently deployed when setting requirements. USTelecom also would
rely on the negotiation and arbitration provisions in the 1996 Act to obtain the
signaling and call detail information needed for intercarrier billing.
Qwest claims that comprehensive intercarrier compensation reform “is the only
true and complete solution to the phantom traffic problem.”43 It states that the FCC
could address phantom traffic on an interim basis, however, 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. This approach
appears to be similar to that of USTelecom. Qwest claims the FCC’s call signaling
rules were targeted to a narrow subset of traffic — interstate traffic using the most
common traditional PSTN signaling protocol — and do not cover VoIP-originated
calls that terminate on the PSTN.
The Voice on the Net or VON Coalition, representing the VoIP industry, has a
very different take on phantom-traffic specific proposals.44 It claims the FCC already
has rules about the call detail information to be provided for a call that is generated
and exchanged — specifically, that carriers that utilize SS7 signaling already are
required to transmit the calling party number associated with an interstate call to
interconnecting carriers — and those rules simply must be enforced. It claims some
of the blame for phantom traffic falls on incumbent local exchange carriers that have
not updated their networks to accommodate SS7. The VON Coalition could support
a requirement that, where technically and operationally feasible with the network
42 This is needed because the telephone number, itself, does not identify the called party’s
carrier since customers can change carriers but retain their telephone number. If the
initiating carrier does not perform a local number portability query, the call may be routed
to the called party’s previous carrier and then have to be rerouted, with the possibility that
some of the call detail information needed for billing is lost.
43 See Testimony of Lawrence E. Sarjeant, vice president for federal legislative and
regulatory affairs, Qwest, Before the Senate Committee on Commerce, Science, and
Transportation, Hearing on Phantom Traffic, April 23, 2008, at p. 6.
44 See, for example, the Testimony of Angela Simpson, director of government affairs,
Covad Communications, and president of the VON Coalition, on behalf of the VON
Coalition, Before the Committee on Commerce, Science and Transportation, Hearing on
Phantom Traffic, April 23, 2008.

CRS-23
technology deployed at the time the call was originated, the originating provider
transmit the telephone number received from or assigned to the calling party. The
requirement would not apply, however, where no telephone number is assigned to the
calling party. The VON Coalition opposes any new obligations to generate call
identifying information where such information does not generate organically. The
VON Coalition strongly opposes any blocking of VoIP calls by terminating carriers.
CTIA, the Wireless Association, generally supports proposed rules detailing the
responsibilities of carriers exchanging traffic to deliver signaling and call identifying
information to tandem providers and terminating carriers to facilitate the creation of
accurate billing records and identification of the parties responsible for payment.45
It does not oppose an obligation on carriers to transmit call originating information
pursuant to relevant Commission rules and industry standards, but does not support
mandating any requirements that the industry standards groups have not mandated.
For example, some of the fields in the SS7 databases are set aside for Jurisdictional
Information Parameters, but it is not mandatory under current industry standards to
populate these fields with call detail data. Since such data often will not identify the
jurisdiction of a wireless call, CTIA opposes mandatory population of the JIP fields.
CTIA supports imposing an obligation on tandem transit providers, or any other
provider in the transmission chain, to pass along all call origination information
received from the originating carrier, or subsequent carrier in the chain, without
alteration. It opposes requiring carriers to make costly investment to enable last
generation equipment to make jurisdictional distinctions between categories of traffic
while the FCC is considering whether to eliminate those jurisdictional distinctions.
Sprint does not believe the specific issue of phantom traffic warrants
legislation.46 It would oppose any legislation or rule requiring that the called and
calling party numbers always be used to determine the jurisdiction or rate applicable
to a call for billing purposes, because such a rule would fly in the face of the trend
toward mobile calling using wireless and VoIP technologies. It also would oppose
any legislation or rule that required carriers to re-engineer their network architecture
in an inefficient and costly manner — for example, by requiring carriers to segregate
different types of traffic onto separate facilities or to require direct connectivity
between carriers. According to Sprint, restrictions on traffic aggregation would
undermine scale economies and raise costs, imposing inefficiency and unnecessary
investment burdens on many companies.
All the phantom traffic-specific proposals are intended to improve the quality
of call detail information available to terminating carriers, but they could have
several drawbacks.
45 See, for example, In the Matter of Developing a Unified Intercarrier Compensation
Regime, DD Docket No. 01-92, Comments of CTIA — The Wireless Association, December
7, 2006.
46 See the Written Testimony of Charles W. McKee, Director of Government Affairs, Sprint
Nextel Corporation, before the Senate Committee on Commerce, Science and
Transportation, Hearing on Phantom Traffic, April 23, 2008.

CRS-24
! Placing responsibility and liability on intermediate carriers might not
be appropriate when it is the originating companies that have failed
to provide the call data needed for billing.
! Given the differences in network architectures, the FCC would face
a difficult task in determining what call detail information is needed
and which set of carriers would have the obligation to update their
signaling and call detail database capabilities. For example, the
traditional wireline companies’ billing databases typically rely on the
location-specific information provided by 10-digit telephone
numbers to determine termination rates, but the wireless and VoIP
providers offer services that are not geographically fixed, and often
do not include jurisdictional information parameters in their
databases. The FCC would have to determine the extent to which
the burden of making their systems compatible should fall on the
wireline carriers or the wireless and VoIP carriers. This would be a
less difficult and contentious regulatory task if comprehensive
intercarrier compensation reform significantly reduced the amount
of call detail data needed for billing.
! More generally, focusing solely on the quality of call detail
information available to terminating carriers would not reduce the
need for all voice providers to develop and maintain highly complex
signaling and call detail systems.
! Narrowly focused solutions that do not address the large differentials
in termination rates would not eliminate the incentives of originating
and transiting carriers to mask the source or type of traffic if that
would allow them to pay lower termination charges (though they
would make it more difficult to perform arbitrage).
! Comprehensive intercarrier compensation reform is most likely to
be achieved if all of the interested parties have something to gain, as
well as something to sacrifice, from a compromise package. Since
phantom traffic represents the one aspect of intercarrier
compensation of most concern to the rural telephone companies, if
their most important need was met by a piecemeal solution they
might no longer have the incentive to support comprehensive
reform, thus undermining that effort.
One Legislative Proposal — S. 2919
Although to date the public policy debate on how to resolve phantom traffic has
primarily occurred at the FCC, state regulatory commissions, and industry forums,
it is now reaching Congress, as some parties are seeking a federal legislative solution.
One piece of legislation has been introduced. S. 2919, the Signaling Modernization
Act of 2008, introduced on April 24, 2008 by Senator Stevens, focuses relatively
narrowly on improving the quality of call detail information available to terminating
carriers, but explicitly takes into account the technical limitations of the signaling
equipment currently used in the industry. It applies to voice communications service

CRS-25
providers, where voice communications service means telecommunications service
or IP-enabled voice service.47
Section 2 of the bill would amend Title VII of the Communications Act by
adding a new Section 715, “Network Traffic Identification Accountability Standards”
that delineates duties of voice communications service providers. Section 3 of the
bill would require the FCC to establish rules and enforcement provisions to
implement the requirements of Section 715 within 12 months of enactment. There
are three key provisions in these sections.
! A voice communications service provider “shall ensure that all voice
communications service traffic that originates on its network
contains the signaling information reasonably needed to facilitate
intercarrier billing in accordance with industry standards, as
determined by the Commission.”
! Further, “except as otherwise permitted by the Commission, a
provider that transports or transits traffic between voice
communications service providers shall forward without altering the
signaling information it receives from another provider that is
reasonably needed to facilitate intercarrier billing in accordance with
industry standards.”
! “In determining the signaling information that is reasonably needed
to facilitate intercarrier billing, the Commission shall consider, at a
minimum — (1) industry standards regarding the transmission of
call detail information; (2) the technical limitations of signaling
equipment used in the industry; and (3) the costs and resources
required to modify equipment or procedures to accommodate any
changes from industry standards.”
The incorporation of the phrase “signaling information reasonably needed to
facilitate intercarrier billing” in all three provisions provides the FCC with guidance,
but also with great latitude. The additional instruction for the FCC to consider
industry standards, the technical limitations of existing signaling equipment, and the
costs of modifying equipment and procedures also provides guidance without taking
away FCC discretion, since it does not tell the FCC how to weigh these factors.
Consider, for example, how the legislative language might be applied to two
different situations that exist today. Industry standards have long incorporated the
SS7 signaling system and almost all carriers have deployed that system. It would
appear that the FCC could use the language in S. 2919 to require those few
companies that have not yet deployed SS7 to do so. On the other hand, although
47 IP-enabled voice service is defined in the bill as “the provision of real-time two-way
voice communications offered to the public, or such classes of users to be effectively
available to the public, transmitted through customer premises equipment using Internet
protocol, or a successor protocol, with two-way transmission capability such that the service
can originate traffic to, and terminate traffic from, the public switched telephone network.”

CRS-26
most companies encode Jurisdictional Information Parameters into their routing and
billing databases, current practice varies widely across technologies. What is
standard practice in one industry segment may not be standard practice in another
segment. Wireline carriers incorporate certain JIP locational data that many wireless
and VoIP providers do not, and many wireline carriers do not encode data that are
needed to appropriately identify intraMTA calls.48 The FCC would have to
determine the signaling and call detail database upgrades required for each segment
of the voice market. More generally, although the industry standards bodies are open
to all companies in the industry, new entrants — particularly those deploying new
technologies — are likely to be underrepresented initially. The FCC therefore might
have to determine how closely to abide by industry standards that new entrants do not
consider appropriate to their network architectures or business plans. This will
require the expert agency to exercise its judgment.
One notable aspect of S. 2919 is that it attempts to minimize its intrusion into
companies’ network architecture and investment decisions. Notably, it would not
restrict companies from exploiting economies of scale by prohibiting the aggregation
of different sources or types of calls on particular trunks.
S. 2919 has some aspects common to proposals that focus narrowly on the
availability of call detail data needed for accurate billing. It does not address the
multiplicity of termination charges currently in effect and therefore would not remove
the incentive of originating and transiting companies to mask the source or type of
traffic they originate in order to try to avoid termination costs. Nor does it reduce the
need for companies to invest in very complex signaling and call data information
systems. Some observers may argue that its enactment might erode support by rural
telephone companies for comprehensive intercarrier compensation reform
48 See Susana Schwartz, “Phantom Traffic: Identifiable but Not Billable,” B/OSS — Billing
and OSS World, July 1, 2005, available at [http://www.billingworld.com/
articles/feature/Phantom-Traffic-Identifiable-but-Not.html], viewed on June 18, 2008.