The Regulation

On November 5, 2008, the Federal Communications Commission (FCC) sought public comment on three different proposals to reform intercarrier compensation and universal service programs. "Intercarrier compensation" refers to payments phone companies make when they hand off calls to each other. Universal service programs collect assessments from most telephone customers to subsidize rural phone companies, phone service for low-income households, Internet connections for schools and libraries, and telecommunications service for rural health care facilities.

Our Findings

Two of the proposals - the "Chairman's Draft" and "Alternative Proposal" - would reform both intercarrier compensation and universal service.  The "Narrow USF Reform" proposal only addresses universal service.

• Most intercarrier compensation takes the form of per-minute charges that act like a usage-based "tax" on phone calls. 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 reducing intercarrier payments to a low, cost-based per minute charge, the Chairman's Draft and Alternative Proposal would do more to reduce hidden subsidies. However, the Narrow USF Reform has greater potential to reduce waste because it would award all rural universal service subsidies through reverse auctions, in which the winning carrier is the one that requires the lowest subsidy to serve a high-cost area. The two broader proposals could be significantly improved if they were amended to award all high-cost subsidies via reverse auctions.

By the Numbers

• All three proposals would replace current usage-based universal service charges with a flat fee per phone number. By eliminating a 10 percent "tax" on price-sensitive services, a numbers-based universal service charge would improve economic welfare by about $1.69 billion annually while raising the same amount of revenue.
• The two broader proposals would replace a large portion of current intercarrier payments with fixed charges, such as increases in the federal subscriber line charge and additional universal service support funded by a numbers-based charge. Based on the most recent calculations available in published economic literature, the two broader proposals would increase overall economic welfare by at least $1.5 billion more annually than the Narrow USF Reform.