The Regulation

The Federal Communications Commission seeks comments 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.
• These charges reduce consumer welfare by an additional $300 million by prompting consumers to use less long-distance service.

Our Recommendations

• Replace intercarrier payments with a "bill-and-keep" system to eliminate hidden subsidies.
• 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.