Intercarrier Compensation

Nextel calls to BellSouthBellSouth pays to terminate Nextel callsIn aggregate, it may cause BellSouth to increase capacity

2 Theoretical Pricing Schemes

Bill and KeepCalling Network Pays

Crazy Patchwork of Intercarrier Compensation

SchemesLong Distance Access ChargesILEC to CLEC reciprocal compensation for local interconnection

Price DiscriminationSelling the same product to different customers for a different priceMust be able to prevent arbitrage

LD ArbitrageIf local interconnection price is less than LD access charge, there is an incentive to use arbitrage and terminate LD traffic as local. Worldcom/MCI, July 2003 accused of doing this.

ISP Reciprocal Compensation

With "high" terminating rate for local calls, CLECs have an incentive to connect users with large terminating traffic like ISPs.Popular in late 90’s; 2001 FCC exempted inbound ISP traffic from reciprocal compensation

Intercarrier Compensation and VoIP

IP-to-IP – no chargesPSTN-to-PSTN – regular access chargesIP-to-PSTN

ILECS say access chargesVoIP providers say reciprocal compensation

Other VoIP ComplicationsVirtual FX arrangement – VoIP subscriber gets telephone number that “acts” as a local numberVerizon lawsuit against Vonage

Wireless InterconnectionShould wireless companies get terminating access charges?

1996 FCC suggested that they should1996-2002 nothing is done2002 no tariffs only contracts; FCC gave no guidance on contracts; left in limbo again

What charges for “transiting” or bridging a wireless carrier and other carrier?

Access Charges after Divestiture (1984)

How do Long Distance Companies pay for Local Network after divestiture?

Types of Local CostsNTS (non-traffic-sensitive) costs

largest category of costssubscriber lines, station equipment, inside wiring, and parts of the central office

TS (Traffic Sensitive) CostsLocal switching,trunking, tandem switching

1980 Access Charge Plan – Pure I

NTS (non-traffic-sensitive) costs would be distributed on the basis of minutes of use. This plan is called Pure I - all NTS recovered through TS rates.

1982 Access Charge Plan – Pure II

Argued that it was inefficient to recover NTS costs through TS rates. Pure II recovered NTS costs through fixed charge per subscriber. "Every customer would pay a flat (per line) access charge that did not vary with use, plus usage based interstate charges that reflected only usage sensitive facilities.”

1982 Plan cont’dCommission adopted Pure II as a long-run goal but had a long transition period and many special provisions.NTS costs for 1984 were $8.5 billion for 100 million lines or $85 per line. Plan had first year phase in of $4 per line for business and $2 per line for res. This became known as a SLC charge or subscriber line charge. Initial business rate changed in 1983 to $6 per line.

FCC changes plan. SLC delayed until June 1, 1985 and capped at $4 until 1990. OCCs were given a 55% discount and gradually phased out as equal access became available.

Initial Switched Access Charge

Massive in size 43,000 pages of tariffs, 160,000 pages of support material.Price was based on RR/Q. Usually based on historical data - none existed.

CCL Rate declined5.24 cents per minute (1984)1 cent per minute originating and 1.53 cents per minute terminating (1990)Total TS & CCL on both ends went from 17.3 cents in 1984 to 7.8 cents in 1990.

Access Reform History after the Telecom Act of 1996

Unbundling of network under Telecom Act of 1996

Pricing for unbundling is based on T[E]LRIC. Total element long-run incremental cost. Forward-looking cost standard that looks at the incremental or additional cost that that element imposes on the network. FCC is modifying the TSLRIC methodology to include joint and common costs and a normal return on profit. Subject of much criticism.

Access Charge Reform Decision Effective 1/1/98SLC charges -

Res. - Primary Lines capped at $3.50; secondary lines $5.00Single line bus. $3.50Multiline bus. - 9.00/line/mo (avg now is $6,92/line/mo)

Access Charge Reform Effective 1/1/98

PICC - Presubscribed Interexchange Carrier Chargeflat rate per line charge to IXCs to keep SLC low and lower CCLin 1998, max. PICC is $0.53/line/mo for res and single line bus.Non-primary res. PICC is $1.50/line/moMultiline bus. Is $2.75 1/1/99 increase by $1.50

PICC increase 7/1/99Max PICC raised to $1.04/line/mo for res. And single line businessNon-primary res. PICC is $2.53/line/moLowered switched access charge (CCL rate)

Changes effective 2/1/00Eliminates residential and single line business PICCReduces over time the PICC for multiline business until it is eliminated in most areas

SLC IncreasesIncreases SLC charge of residential and single line business

7/1/2000 $4.357/1/2001 $5.007/1/2002 $6.007/1/2003 $6.50

Removes Implicit Subsidies

$650 million in implicit universal service support from access charges replaces it with an explicit, portable universal service fund charge ensures affordable phone service for high-cost areas.

Need for Unified Solution and Terminating Access monopoly

Antiregulatory solution: Freedom to deny interconnectionHighly regulatory solution: Cost-based calling network pays with no implicit subsidiesModerately regulatory solution: Bill and Keep