South Dakota Bill Proposes Fee-Split Ban, as Sides Trade Complaints

Peters’ bill focuses on the fee-splitting integral to traffic pumping, she said. “We're hoping to get rid of the revenue splitting that those three companies are doing. Attorneys can’t split fees with clients. Accountants can’t,” said Peters, a CPA. “Doctors can’t. Why should telecommunications companies be able to?”

Peters found inspiration for her bill in draft federal legislation that has been circulating on Capitol Hill since last year, she told us in an interview. Peters estimated that South Dakota-based revenue-sharing has run up more than $100 million in access fees. This has saddled her state with an unwanted and hurtful reputation, she said. “I'm afraid that if the FCC sees the traffic in South Dakota the agency will cut the permanent rates,” she said. “I'm worried that we'll lose our rural telecom as a result of the actions of only three companies.” The situation came into focus for her through her work on a telecom and tax task force of the National Council of State Legislators, Peters said.

House bill 1097 squeaked through committee 7-6 because South Dakotans are hypersensitive to the threat of lawsuits, Peters said. Many court cases are in the pipeline there and elsewhere, revolving around allegations of traffic pumping, she said.

“The opposition has thrown up arguments that we should let the courts settle this,” Peters said. “People in South Dakota are very conservative about lawsuits. But revenue sharing isn’t the issue being brought up in court. The courts are considering access rates. There are suits back and forth between big and little companies over billing. My bill is talking about fee-splitting between the conference callers and rural phone companies. This results in misunderstandings that make the leave-it-to-the-courts argument an easy sell.”

Addressing last week’s State Affairs Committee hearing, Peters pointed to two problems for South Dakota. “First, traffic pumpers are undermining a compensation system that is supposed to support low volume, rural telecommunications companies by inducing calls to terminate in certain exchanges,” she told colleagues. “These exchanges charge higher than average access termination fees. When calls to rural exchanges are at their normal volume this weighted compensation system is intended to be absorbed by the overall market.” But call volumes in South Dakota are higher than normal, she added.

The other major problem is “damage being done to our image and business climate because we are viewed as a haven for traffic pumping activity,” Peters said. “The South Dakota rural telecommunications association has stated: ‘Carriers engaged in such arrangements hurt the interests of all rural carriers in South Dakota,'” she said. “I feel we need to take action to correct the idea that we are a home for clever manipulators that take undue advantage of government structured pricing schemes.”

Under her bill, rural carriers still could offer conference calling -- “just no fee splitting with the access revenue,” Peters said. “We need to make traffic pumping prohibited in South Dakota. By taking action with this bill this legislature is also saying to the South Dakota Public Utility Commission, the FCC and Congress that traffic pumping needs to be eliminated.”

The narrow House committee vote reflects a conviction among some South Dakota legislators that fee-splitting should be left to FCC control, said James Groft, CEO of Aberdeen, S.D.-based Mountain Valley Communications, one of the companies whose fee-splitting arrangements prompted Peters to act.

“I'm pretty disappointed with the bill,” Groft said. “Revenue sharing is very, very common in telecom, and the FCC has ruled many times that it’s OK and legally justified. The rates we charge are due to FCC regulation. We follow the rules. We're not picking these figures out of the air. Years ago we filed a tariff with the FCC. AT&T could have challenged it, but they didn’t. So now they're trying to get the South Dakota Legislature to do it.”

An AT&T official hailed Peters’ efforts against what the company representative called “fraudulent traffic pumping schemes designed to artificially inflate access revenues at the expense of consumers and long distance companies.” AT&T Director of Legislative Affairs Beth Canuteson said in an e- mail that the fee-splitting arrangements that the Peters bill would outlaw are designed “for one express purpose: to abuse the State’s subsidy system, which supports phone service in rural areas, by siphoning off huge profits for private gain.”

Of all long-distance traffic in South Dakota, “84 percent is generated by traffic pumpers,” another AT&T spokesman told us by e-mail. “Out of 700+ carriers in the U.S., just 12 of them (traffic pumpers) are billing 40 percent of all access nationally.”

Peters and her bill are tools of big telecom and cable, said attorney Ross Buntrock of Washington, D.C., firm Arent & Fox. Buntrock represents Mountain Valley Telecom and Woonsocket-based Santel Communications in federal matters including fee-splitting. “I suspect this state legislation is being sponsored by big long-distance companies and cable companies,” Buntrock said. “I haven’t seen their exact fingerprints on it, but Qwest testified at the South Dakota hearings, as did the cable company Midcontinent Communications.”

The South Dakota Legislature “is just the latest venue for these attacks,” Buntrock said. “Qwest has been active in multiple forums, from the FCC to the Iowa Utility Board to U.S. Court in Iowa.” Buntrock railed against long-distance companies for conducting a “scorched-earth” campaign of more than three years’ duration against small phone companies that operate inside the law.

“The long-distance companies keep telling state Legislatures and the FCC and Congress that they're losing all this money, but the truth is that they haven’t paid for three years for services that they've received, and they are still collecting long-distance revenues,” Buntrock said. “Their customers are making these calls using a lawful service. There is zero documentation for the long-distance companies’ claimed losses. They won’t and can’t produce this evidence because it doesn’t exist. Instead, they're using their market power to attack South Dakota phone companies.”