Rural companies, AT&T in tussle over phone rates

The Web site for Wayland, Iowa, boasts of "clean, well-kept homes," but the telephone lines running through town pulse with sultry talk on adult chat lines and a strange number of conference calls.

There's nothing particularly steamy or talkative about this city of fewer than 1,000 people, just a quirk in telecommunications law that gets certain large phone companies all hot and bothered — so much so they've warned of higher phone bills for everyone.

Wayland is one of at least 25 mostly Midwestern towns, about half of them in remote corners of Iowa, where the volume of incoming calls from other area codes has surged to a level that would be hard to explain even if every resident had taken to chatting long distance day and night.

Instead, the spike can be traced to assorted dial-in services with local phone numbers, from providers of free conference calling to chat lines with names like "Alibi" and "Butt Monkey."

For reasons of economics — not family values — the nation's biggest phone companies are trying to stop these calls, even going so far as to block their customers from dialing long distance to hundreds of numbers.

The blocking largely ceased after a stern prod by the Federal Communications Commission (FCC). The agency has been struggling for two years to overhaul the arcane system by which pennies per minute change hands between phone companies with every long-distance call. Similarly, this dispute is hardly resolved.

Sour grapes

Long-distance providers like AT&T and Verizon are charging abuse of that system, which helps ensure phone service for every home in the most secluded parts of the country. They say customers everywhere could face rate increases.

The Iowa companies, pleased with the revenue from these calls, accuse the long-distance providers of sour grapes and really bad business judgment. They warn that consumers could lose access to useful, affordable services.

"What AT&T and Sprint and Verizon may not like is the fact that it's successful," said Ronald Laudner, chief executive of Farmers Telephone of Riceville, Iowa.

"As far as I can tell, it's not illegal, but it raises questions whether this is achieving what the policy was set out to do," said Blair Levin, a former FCC official.

Pennies add up

Despite their differences, both sides agree on the basic facts in the escalating tussle. All agree, for example, that pennies add up quickly.

AT&T and Verizon typically get billed just thousands of dollars or less per month to connect long-distance calls with a sparsely populated town, paying 2 cents or more per minute in termination charges to the local phone company.

Since a growing number of consumers have regular phones and cellphones with unlimited long distance or large monthly buckets of minutes, it often costs them nothing to call rural area codes. The carriers swallow the charges as a cost of doing business.

But now some rural carriers are billing the big phone companies hundreds of thousands or even millions of dollars per month, sharing that revenue with partners that help drive long-distance calls onto their networks: Web sites promoting free services such as FreeConferenceCall.com and party-line providerTalkee.com.

Though usually based elsewhere, these services direct their customers to dial phone numbers in remote locales.

The bounty from these partnerships can be striking for rural phone companies, many of which would struggle without the supplemental income the government steers their way from the universal service surcharges that urban dwellers pay on their phone bills.

Farmers Telephone reports that the long-distance traffic coming onto its local network for conference calls surged from less than 1.5 million minutes in April 2005 to nearly 25 million in October 2006.

But in recent months, incoming traffic slowed sharply. AT&T and Sprint Nextel began blocking their cellphone customers from calling some dial-in services. Qwest told other phone companies that use its long-distance network it wouldn't carry their calls to such numbers.

At least three long-distance companies also began withholding payment on invoices from rural carriers. A group of these companies from Iowa say they are collectively owed $40 million.

Lawsuits have been traded, and both sides have appealed for government intervention.

At issue is the system by which rural telephone companies with relatively few customers are compensated for keeping their distant corners of the nation connected.

Since the 1930s, when Congress set as policy the goal of ensuring affordable phone service for every home, the government has allowed rural carriers to charge higher per-minute rates to long-distance companies for connecting their calls to local carriers.

Rural rates

The rural rates typically range from 2 cents a minute to perhaps a nickel, though occasionally exceed a dime. By contrast, AT&T, Verizon and Qwest get paid closer to half a cent per minute when they connect one of their local customers to a long-distance call from another provider.

The extra revenue enables the smallest carriers — there are roughly 500 companies with fewer than 2,000 phone lines — to generate a profit without jacking up local rates.

Farmers Telephone gets paid 5 cents per minute, which means the jump in conference-call traffic alone was generating almost $1.25 million a month in revenue at the peak.

The company passes on about half of that money to the conferencing providers.

Most small carriers get 2 cents per minute by participating in a pool run by the National Exchange Carrier Association, which proposes its rate by submitting data on operating costs and past call volume to the FCC.

If the FCC or other carriers raise no objections, the rates take effect for one year.

AT&T, Verizon, Sprint and Qwest essentially view the situation as a bait and switch.

In a letter to the FCC, AT&T claimed the local companies use the system to "establish grossly excessive access charges under false pretenses" and then "offer kickbacks to operators of pornographic chat lines and other calling services."

Dangerous precedent?

The rural phone companies say the number blocking and withheld payments set a dangerous precedent that empowers the major phone companies to deny consumers access to competing services.

AT&T warns the situation could force higher rates for all its customers across the country to offset what it estimates may add up to $250 million in extra costs during 2007.

All sides are urging quick FCC action, including some small phone companies that oppose their Iowa peers: Four of them signed a letter to the commission saying the dial-in partnerships could ruin the rate system for everyone.

Qwest filed a formal complaint Wednesday, and AT&T may soon follow suit.

The FCC declined comment on any specifics of the overall dispute or the Qwest complaint, which targets the local carrier in Wayland, Farmers & Merchants Mutual Telephone. That company didn't return a call seeking comment.

But the FCC may not rush to further action beyond its speedy warning to the long-distance companies that "self-help" measures like call blocking are not allowed.

Instead, it may leave the rate dispute to the courts rather than weigh in one aspect of a thorny issue amid the agency's effort to overhaul the system.

For now, the phone lines to Iowa are open, steamy or otherwise.