Intercarrier Compensation and Universal Service

Reform of federal programs and regulations that subsidize phone companies in rural areas is a perennial topic of debate at the Federal Communications Commission and in Congress. Economic analysys suggests several principles that would lead to a reform plan most conducive to overall consumer welfare: (1) minimize charges on services whose demand is price-sensitive, (2) use fixed charges to recover fixed costs, (3) eliminate hidden cross-subsidies between different groups of customers, and (4) reduce incentives for waste and inefficiency. This paper employs these principles to assess three alternative reform proposals considered by the FCC in late 2008. It was originally submitted as a comment in the FCC's proceedings on intercarrier compensation and universal service in November 2008