Traffic Pumping

Kelly Cobb
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Posted: Feb 23, 2011 10:45 AM

For two years, President Obama's Federal Communications Commission (FCC) has launched a number of regulatory campaigns purporting to protect consumers. Their onerous Net Neutrality Internet regulations – sure to be shot down in court or by Congress – were labeled as helping to “ensure robust Internet for consumers.” Their ongoing “bill shock” effort would place burdensome requirements on wireless providers under the guise of keeping phone bills down, while the FCC itself has helped raise the tax on consumers' wireless bills to over 16 percent.

With its anti-free market horse-blinders directed at piling on ever more regulation, the FCC has failed to rectify harms to consumers and companies caused by abuse of rules it already has on the books. Yet, the Commission’s announcement this month to reform two programs presents an opportunity to eliminate the waste, fraud and abuse the FCC has long ignored.

Amongst the FCC's worst oversights has been the rise of shell phone companies setting up shop across the country that take advantage of the Commission's intercarrier compensation regime. Under this system, companies compensate each other for phone calls that start on one network and are completed on another, so consumers aren't billed by both companies.

Yet, the rules open the door for abuse from companies like Native American Telecom (NAT). Shortly after it was founded in 2008, NAT entered into a contract to provide phone service with the Crow Creek Indian Reservation in central South Dakota. By setting up shop on an Indian reservation, the company avoided state oversight and took advantage of FCC rules that allow companies in rural areas to charge astronomically higher compensation rates than if they were located in an urban area with more phone traffic.

But providing phone service to a small, rural community was never the goal. Instead, NAT teamed up with FreeConferenceCall.com to direct a huge number of phone calls through – but not starting or ending on – the Indian reservation. President Obama's campaign alone ran “millions of minutes” through FreeConferenceCall.com in 2008.

By inflating call volume, NAT could demand enormous compensation from other phone carriers at a higher rate due to its rural location. With a newfound pot of gold, NAT hired an employee who also happened to work as the legal and finance director for another company owned by the CEO of FreeConferenceCall.com.

Similar scams with sham phone providers and “free” calling services exist across the country. They skim as much as $400 million a year out of the system, an enormous cost to legitimate phone providers that is ultimately passed on to consumers. They have led Google Voice and other Internet-based VoIP phone services to block calls to these “free” services, arguing that it is too costly to pay the rates. Yet, other FCC rules prevent most phone companies from taking similar action.

The FCC has failed to intervene in these cases, despite the authority to do so and court cases pending in multiple states. The Commission’s announcement that it will review such practices is overdue, but certainly welcomed.

On another front, the FCC has announced reforms to the Universal Service Fund (USF). Similar to the intercarrier compensation system, the high cost fund subsidizes rural phone companies – only this time it is funded by excessively high and discriminatory taxes on phone lines, a direct hit to consumers.

The FCC admits that hundreds of millions of dollars are doled out of the $7 billion fund in error each year. But the program also lacks performance benchmarks and sends out checks without adequately reviewing what the money is even going toward. The result is taxpayer dollars subsidizing things that do not pertain to providing phone service in the least (think holiday parties).

Here too the FCC should focus strongly on rooting out waste and abuse, and they can easily start by setting benchmarks and capping the size of the fund. The Commission has also promised to review how they redistribute funds to rural areas, where some subsidies amount to tens of thousands of dollars for each home connected.

Abuse of federal programs is certainly nothing new, but neither is government's indifference to such fraud and waste. Instead of focusing its attention on imposing a host of new “consumer” regulations, it is encouraging to see the FCC turn to real consumer and company harms caused by lackluster oversight of existing programs. Let’s just hope this opportunity for real reform isn’t masking more regulatory ambitions like those of the last two years.