The Regulation

The Federal Communications Commission (FCC) regulates the prices phone companies charge each other when they hand off traffic to each other.  Long-distance companies pay “access charges” to local companies when they receive or terminate calls on the local networks. Other phone companies pay “reciprocal compensation” to the company of the customer who receives the call. The commission may soon undertake comprehensive reform of intercarrier compensation, either in response to a November 5 court deadline on a reciprocal compensation dispute, or as part of the recently-announced Biennial Review of telecommunications regulations.

Our Findings

• Access charges and some forms of reciprocal compensation subsidize rural and high-cost telephone companies at the expense of all other telephone customers.
• Access charges and reciprocal compensation are per-minute charges that act like a usage-based “tax” on phone calls. Since access charges are much higher, their potential to reduce consumer welfare by reducing use of long-distance service is much greater.
• The more price-sensitive consumers of a service are, the greater the harm intercarrier compensation charges impose on consumers.
• Consumer demand for local wireline phone connections is not very sensitive to price. Demand for long-distance and wireless service is much more price-sensitive, and demand for broadband is even more price sensitive.

By the Numbers

• Access charges are much higher than reciprocal compensation.  Access charges averaged 0.8 cents per conversation minute in 2006, compared to the FCC’s reciprocal compensation rate of $0.0007 per minute.
• Historically, the FCC has recognized the distortive effects of access charges. As a result, the FCC gradually reduced them from 16.6 cents per conversation minute in 1985 to 0.8 cents per conversation minutes in 2006.
• The most recent MercatusCenter analysis estimated that in 2002, access charges reduced economic welfare by approximately $1.5 billion annually, in addition to the revenues raised.

Recommendations

An approach to intercarrier compensation that best promotes consumer welfare would:

• Minimize charges on services whose demand is price-sensitive, such as long-distance and wireless
• Avoid imposing new charges on broadband
• Use fixed wireline charges, like the Federal Subscriber Line Charge, to replace some or all of the subsidies the rural and high-cost phone companies would lose as a result of intercarrier compensation reform
• If money from the USF is used to replace lost intercarrier compensation revenues, transform USF contributions from revenue-based to numbers- or connections-based charges in most cases.