Intercarrier Compensation and Consumer Welfare

The Regulation

The Federal Communications Commission sought comments in 2005 on industry proposals to reform "intercarrier compensation" - the fees that phone companies pay each other when they hand off phone calls to each other.

Our Findings

• Intercarrier compensation imposes large costs on consumers by increasing the prices of long-distance and wireless service and discouraging consumers from using them.
• Because of these hidden subsidies, local phone rates are below cost for residential subscribers in all but the most dense urban locations.
• The hidden subsidies do little to promote universal telephone service, because subsidies for local telephone service have little effect on subscriptions.
• Replacing these hidden subsidies with payments from the Federal Universal Service Fund would not reduce the consumer costs, unless the FCC changes the universal service funding mechanism.
• Replacing hidden subsidies with increased federal subscriber line charges would make consumers better off by eliminating a usage-based "tax" on long-distance and wireless services.

By the Numbers

• Intercarrier payments range from virtually nothing to as much as 36 cents per minute - to pay for switching services that cost a few tenths of a cent per minute to provide.
• The biggest intercarrier payments are long-distance access charges. Interstate long-distance access charges take $3.3 billion annually from long-distance users, to subsidize local phone companies and their customers. 3. These charges reduce consumer welfare by an additional $300 million by prompting consumers to use less long-distance service. Recommendations 1. Replace intercarrier payments with a "bill-and-keep" system to eliminate hidden subsidies. 2. Promote competition in local telephone service by deregulating the federal subscriber line charge, so that monthly local rates will no longer be held below cost.
• If hidden subsidies are to be replaced with universal service subsidies, fund the subsidies in ways that distort prices the least, and phase them out by a date certain.
• Keep "Voice Over Internet" services that do not now connect with the phone network free from interconnection requirements and obligations to subsidize telephone services.

To read this entire report please refer to the PDF to the right or the spring 2005 issue of the University of Illinois Journal of Law, Technology & Policy.