MN Rural Phone Companies Face Increased Scrutiny After “Free” X-Rated and Conference Calls

Regulatory loophole allows handful of rural phone providers to cash in—for now

It’s dialing for dollars and it’s making a few Minnesota rural telephone companies very rich.
It’s all due to a regulatory loophole that allows millions of dollars to flow to a handful of small Minnesota phone companies. They do this by generating a high volume of “free”, often X-rated “chat line” phone calls and conference calls through their small, local telephone service providers.  Existing telecommunications regulations allow these small, rural telephone companies to charge higher access fees to deliver long distance calls, fees which were intended to subsidize essential, local phone service to those communities. 
The controversial practice known as “traffic pumping” started quietly about five years ago but now faces increasing scrutiny from the Minnesota Legislature and Public Utilities Commission (PUC) to the Federal Communications Commission (FCC) and Congress.
An advertisement on file in a regulatory case involving the northwestern Minnesota provider Tekstar Communications reveals how it works. The ad promotes a “free party line” and “gay man2man chat” at two phone numbers with telephone exchanges associated with Mahnomen, Minnesota.  The tag line: “100% FREE means we never charge for this service. Just a regular call to Minnesota.”
It’s all legal and virtually happens with the flick of a switch on equipment that’s installed in rural phone companies, mainly in Iowa, Minnesota and South Dakota. They team up with high-volume phone sex and conference call services often located in California, Nevada and New York.  Phone companies can increase their long distance business from 100,000 minutes, a relatively small number, to well over a million minutes per month, all subject to an access fee about eight times higher than non-rural calls. 
Larger long distance and wireless phone companies say it’s their customers that eventually pay for the “free” calls, which amount to $150 million annually for cell phone users alone, according to industry studies.
Tekstar Communications in Perham, Minnesota was among two dozen companies in several states contacted last year by the U.S. House Energy and Commerce Committee, which has jurisdiction over telecom issues.  Federal investigators were looking into traffic pumping at the time. “There are allegations that several of the companies engaged in practices designed to increase call volumes and access charge revenue do so by providing free calling services for indecent or pornographic content,” the letter stated according to a report in Tech Law Journal Daily
“We’re not in the business of policing our customers’ calls,” said Dan Lipschultz, an attorney representing Tekstar. “I can tell you most of Tekstar’s customers are strictly in the conference call business, though there’s a significant minority percentage of customers in the chat business and some are in both.”
Tekstar has sued Sprint in Minnesota federal district court “for withholding payment of millions of dollars of access fees associated with its traffic pumping activities”, according to public documents. 
“It’s revenue sharing and everyone knows it’s revenue sharing,” Lipschultz said. “It’s commonplace in the telephone business as an incentive to drive up call volume.”
Larger phone companies and wireless providers who get billed tens of millions of dollars more because of the fees, however, call it a “kickback” scheme that cynically takes advantage of a well-intentioned regulation.  They also say it’s harder for parents to monitor such calls by their kids.
“As a parent, you can easily block a 900 number,” said Sean Simpson, a T-Mobile representative who recently testified about this practice at a Minnesota legislative hearing.  “You cannot block a local number to an adult chat room like you can a 900 number.”
Several additional judicial and regulatory proceedings involving rural phone companies and wireless and leading phone companies are underway in Minnesota and other states.  Bills that would essentially ban the lucrative practice of traffic pumping were introduced in both houses of the Minnesota Legislature this year, though no action was taken during the session.
Much of the legal and legislative activity over the controversial calls has been put on hold, pending action by the Federal Communications Commission (FCC).  Since the overwhelming majority of chat and conference calls come from outside Minnesota, the FFC is expected to rule on and potentially resolve the issue this summer.  The key question is whether the higher fees to connect long distance calls to rural phone exchanges can be justified any longer given the higher volume of calls coming in.  Some rural phone companies aren’t looking forward to the FCC’s call. 
“At the end of the day, it’s a rate issue and the FCC recognizes it’s a rate issue.  A lower rate is the right solution to the problem,” Lipschultz said. “Tekstar has 1,500 customers, mainly residential and small businesses in Detroit Lakes, Park Rapids and that area.  If this business goes away, they will survive but people will probably lose jobs.”
Many thought the party line that used to be so common in rural areas went away long ago. Future FCC regulations could mean the end of an era for the X-rated version of the rural party line, as well.
                      Tips or comments?  Contact Tom Steward at 612-354-2192.



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