Call classification, the
achilles heel of PSTN deregulation
...long distance calls have long subsidized local service, especially in rural areas where local telephone lines are particularly expensive to provide...
...Local calling areas, after all, are merely a tariff artifact, a retail pricing technique. They have no basis in cost....
...they seek to classify CLEC-bound calls as toll, so that they can be on the receiving, rather than sending, end of the payment stream for calls they send to CLECs...
...MCI's alleged misrouting of calls is an example of the risks of call classification...
Americans are accustomed to having a distinction between "local" and "toll" calls. In almost all of the country, residential telephone subscribers are allowed to make as many local calls as they want at no charge -- a true flat rate. But they're accustomed to paying by the minute for toll calls. This retail pricing distinction goes back to the early years of telephony, and while there are those who argue that all calls should cost the same, for so-called postalized rates, there are plenty of reasons for distinctions to remain. Internet backbone providers haven't exactly made great profits out of their postalized rate structure! And don't even think about the hue and cry that has come up every time a telephone company has proposed abolishing flat rate local service.
But a cost-justified distinction between different types of retail rates, or for that matter a cost-justified distinction in wholesale inter-carrier rates, is not the same as the current system. As a result of a long chain of federal and state regulatory decisions, telephone calls are subject to an arbitrary system of classification, in which rates are based on rather historical "value of service" constructs. This was workable during the monopoly era, when there were no alternatives, but it's causing far more harm than good today.
Exchange vs. tollThe Telecommunications Act of 1996 made substantial changes in the structure of the industry, but some were rather subtle. It did not, alas, do away with arbitrary call classification. Instead, it divided telephone calls into two categories, telephone exchange service and exchange access. Telecom lawyer Chris Savage has noted, "Under the 1996 Act, a service is "exchange access" only if it is used for the origination or termination of 'telephone toll service,' another defined term in the Act." Telephone toll service applies when the carrier levies a toll charge for making calls. Other calls are, by the plain language of the Act, telephone exchange service.
When newly-minted CLECs started picking up calls directed for ISPs in the 1990s, the incumbents balked, since the way CLECs and ILEC pay each other is based upon what type of call it is. For telephone exchange service, the originating local carrier pays reciprocal compensation to the terminating carrier. For exchange access, the interexchange carrier pays switched access, and pays it to the originating carrier. In effect, exchange access calls are originated "collect". Since ISP-bound calls aren't charged tolls, the originating ILECs couldn't legally charge switched access, although they sometimes tried, and continue to try. (ILECs are nothing if not trying.) But an ILEC-friendly FCC in 2001 decided to discover a third category of calls, information access, hidden in a section of the Act that almost anyone else would read to refer to things like 900-number calls. And thus exempted the ILECs from paying CLECs for calls classified as ISP-bound. To be sure, this gambit hasn't exactly been blessed by the relevant courts, but it remains in effect for the foreseeable future.
The particular classification of calls as local or toll, telephone exchange service vs. exchange access, has two rational motivations behind it. For one thing, long distance calls have long subsidized local service, especially in rural areas where local telephone lines are particularly expensive to provide. Thus switched access rates in rural areas can be as much as an order of magnitude higher than in urban (Bell) areas. This is part of the industry's cross-subsidy structure, along with explicit High Cost Support payments from the FCC-overseen Universal Service Fund. A second rationale is that the IXC, not the originating LEC, has the billing relationship with the caller, and thus is the logical one to pay for the originating leg of the call. (They pay for the terminating leg too, but because the IXC is the caller, that leg of the call is sent paid, and thus the only issue is price, not who pays whom.)
The 1984 restructuring of the domestic telephone industry created a Chinese wall between the local and long distance industries, with these access charge payments an integral part of the scheme. The Telecom Act of 1996 allowed the players on each side to enter each others' markets, but it did not remove the distinction between the IXC and LEC roles. ILECs who provide LD services are still required to maintain accounting separation between the two lines of business, and deal at arms' length. Albeit very short arms, at this point.
The problem is most serious within a LATA
Call classification causes the most grief when applied to intraLATA
calls, especially between CLECs and ILECs. In such cases, there is
no IXC present, so the calls could rationally be handed off on a
reciprocal compensation basis, like any other local call. Local
calling areas, after all, are merely a tariff artifact, a retail pricing
technique. They have no basis in cost, and local interconnection
in general is theoretically based on cost, not retail pricing. The
problerm is that most ILEC-CLEC interconnect agreements (ICAs) require
the originating carrier to pay intrastate
switched access rates on calls sent to destinations that are
outside of the ILEC-defined local
calling area. Switched
access rates are often much higher than reciprocal compensation;
intrastate switched access rates are also often much higher than
corresponding interstate rates. (Reciprocal compensation is moving
towards zero, as the FCC encourages "bill and keep" as the long-term
solution to the "ISP problem".) So the CLEC cannot offer an
enhanced local calling area unless it eats the terminating access