Reform Intercarrier Compensation

by on October 30, 2008 · 5 comments

The Federal Communications Commission began a broad inquiry of intercarrier compensation in 2001 and now it may finally be getting around to acting on it on Nov. 4 while everyone’s thoughts are on something else.

This is about 12 years overdue. Congress in 1996 foresaw that implicit phone subsidies were unsustainable and ordered the FCC to replace them with a competitively-neutral subsidy mechanism. Due to political pressure, regulators have failed to complete the job.

Intercarrier compensation refers to “access charges” for long-distance calls and “reciprocal compensation” for local calls. A long-distance carrier may be forced to pay a local carrier more than 30 cents per minute to deliver a long-distance call, but local carriers receive as little as .0007 cents per minute to deliver calls they receive from other local carriers.

Once upon a time, before fiber optics, there were significant distance related costs. Now distance isn’t a major factor.

The high access charges remain only because the recipients, typically small and mid-size phone companies serving sparsely populated areas, have successfully lobbied regulators and legislators to keep them.

Thanks to outdated regulatory classifications, wireless and VoIP services pay far less when the connect to the legacy phone network.

This is the reason a small phone company named Madison River Communications attempted to block its customers from accessing VoIP services, however the FCC intervened. As a result of that episode, and others have argued for imposing common carrier regulation on broadband providers under the guise of net neutrality. Regulation truly tends to beget more regulation.

Reducing the hidden subsidies for local phone service would put incumbent phone companies in a better position to attract private investment to expand their broadband offerings and ought to be a key item in any agenda for promoting broadband deployment.

Otherwise, investors face a choice between investing in one category of broadband providers whose broadband profits may be forced to subsidize plain old phone services, and another category who get to reinvest 100% of their broadband profits or distribute them as dividends.

Reducing access charges would also remove a perverse disincentive which may be inhibiting some providers of legacy phone service in rural areas from updating their networks. If they offer wireless or Internet phone service, they are deprived of the generous compensation they currently receive for handling long-distance calls.

It may no longer be politically correct to criticize regulation, but intercarrier compensation is an example of harmful regulation which distorts competition. It needs to be eliminated and replaced with something which does not harm competition.

The FCC ought to just allow the carriers to negotiate these rates. The small and mid-size carriers would be afraid of that, and even the big carriers might prefer a reasonable FCC-set rate to endless bickering with 1,400 other carriers.

Either approach would be a huge improvement and is long overdue.

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