Gaming the system

It’s been a while since we have seen traffic pumping, a kind of regulatory arbitrage.

When phone companies exchange traffic, the company that receives the call (the “terminating carrier”) gets paid by the “originating carrier” to route the call to the final destination. In most cases, the traffic is somewhat balanced; there are around as many calls in each direction. To handle any imbalance, a termination rate is established and on a regular basis, such as monthly, an accounting is done to compensate the carrier that received more traffic than its customers originated. The originating carrier got paid by the customer, so termination rates are a way for the terminating carrier to be compensated for handling their portion of the call.

In general, termination rates have fallen dramatically which has removed incentives for major “traffic pumping” scams that were popular 20 years ago. Today, it generally costs less than a tenth of a cent for carriers to terminate traffic inside Bell Canada territory.

On the other hand, there are still some areas that have unusually high termination rates. In Canada, area code 867 for the Northwest Territories has a termination rate of 3.8 cents, about 40 times the rate for Ontario and Quebec. Iowa has been home to a number of complaints because of exceptionally high termination rates.

There is an arbitrage opportunity created if the termination rate exceeds the cost of actually handling the calls. A carrier can try to stimulate the number of inbound calls in order to receive more traffic. Traffic can be stimulated by attracting a disproportionate number of inbound call centres (think pizza places) or interactive voice systems, such as tele-banking or listening to audio programming. In the old days, dial-up internet modem pools were a major source of inbound termination imbalances.

Here is how the scam worked: an “entrepreneur” found an area that has an unusually high termination rate. Twenty years ago, international destinations were a popular choice – my personal favourite was Moldova – but there were also some domestic opportunities created by higher than average local terminating rates. The entrepreneur works out a deal with the carrier that receives the traffic and shares the proceeds of the stimulated inbound calls. In the olden days, some companies would offer free meet-me conference calling services using Iowa phone numbers, covering their costs completely from their share of the exceptionally high Iowa inbound settlement. Consumers who had nationwide calling plans were indifferent to where they called since those calls were all part of their plan. The originating carrier was stuck paying millions of dollars to the arbitrager.

In at least one case, calls for one of those late night lonely people chat lines were being promoted with a Moldova international phone number, but the calls never left North America; the seductive sounding operators were located here. So international terminating rates were being charged for calls that never went overseas. In that case, it wasn’t just traffic pumping, but fraudulently charging overseas rates for calls that were handled locally. Another Moldova scam in days of dial-up internet had a trojan-horse application connect people’s computers to a destination charging overseas rates. It is not clear that those calls actually left North America either.

cjmrBut, there is now a new case in front of the CRTC. Rogers has filed a complaint against Iristel [zip] claiming that Iristel has entered into an deal to stimulate traffic to certain exchanges in the Northwest Territories. Rogers claims that in 2016, the scheme has increased traffic destined for area code 867 nearly 500 times the levels a year earlier (2015), and the increase was isolated to 3 of the 6 exchanges belonging to Iristel. Rogers believes the traffic is being stimulated by a “call-to-listen” service from Audio Now, said to be “a “traffic pumping” or “traffic stimulation” scheme designed to take advantage of Rogers and other IXC’s offers to their customers of Canada-wide calling plans for a flat fee, in concert with the high traffic termination charges in Iristel’s Northwest Territories exchange.”

A Toronto area multicultural radio station is promoting access to an AudioNow phone number to listen to its radio programming live, as can be seen on CJMR’s home page. Listeners are instructed to dial a Northwest Territories area code 867 number or an Iowa area code 712 number.

What is the harm? Ultimately, these arbitrage schemes put nationwide flat rate calling plans at risk. For example, carriers may have to exclude calls to the Northwest Territories from their flat rate plans, similar to the way some US carriers exclude Hawaii from their otherwise nationwide calling plans.

Rogers has asked the CRTC to intervene, saying:

The current proceeding is not just an issue between Iristel and Rogers, it will affect all of Rogers’ customers that call the Northwest Territories for legitimate reasons such as to call a business, friends or family. These customers of Rogers and legitimate customers of Iristel may end up losing the benefit of Canada-wide fixed priced calls – whether they place or receive such calls.

This would not be a just outcome of this proceeding. The wrong parties would be hurt.

Rogers has asked the CRTC for expedited relief to immediately set the termination rates as “interim,” enabling the rates to be retrospectively adjusted at the end of the proceeding.

It has been a while since we’ve seen one of these arbitrage arrangements. The history of traffic stimulation programs is not a good one.

Rogers has proposed interrogatories to the CRTC to determine if the stimulated traffic is in fact being routed to the Northwest Territories. Among the issues the CRTC may choose to consider is whether it makes a difference where the traffic is actually routed. For example, if a pizza ordering call centre is physically located in the North, stimulating new traffic and new employment, would that make a difference to its determination? With portability enabled by mobile services and voice over IP services, is it possible to know where calls are being routed? How do we ensure that termination rates are being used to fairly cover the costs of providing service in higher cost areas, and not being abused through regulatory arbitrage?

Not all Canadians have unlimited nationwide calling plans. If calls are being routed to a location other than the Northwest Territories, are consumers’ calls being rated correctly?

How quickly will the CRTC move to review the impact of this 500 fold traffic increase to area code 867?

[Update: December 13, 2016] Iristel has filed its answer to the CRTC, as found below. Iristel concludes:

The most important takeaway from this submission is that the problem that Rogers faces, excessive calling by a group of customers leading to correspondingly high call termination charges, is the result of a business decision by Rogers to provide a Canada wide unlimited calling plan. The onus is on Rogers to now apply a business solution to resolve its predicament. Fortunately, Rogers, being a sophisticated telecommunications carrier with a long history of experience with unlimited use plans foresaw the very risk that has now materialized and even created a contractual tool to address such problems: the Rogers acceptable use policy. Other carriers, including Iristel’s affiliate, Sugar Mobile, routinely apply similar contractual tools with success. In these circumstances, Rogers should not be allowed to escape the consequences of its own business decisions and worse, impose those consequences on other innocent carriers.

Iristel Answer 20161213

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