University of Southern California

A Market-Based Approach to Telecom Interconnection

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Article by David Gilo
From Volume 77, Number 1 (November, 2003)

This Article offers a new solution to the problem of interconnection among telecom networks. According to the Federal Communications Commission’s (“FCC”) proposal, interconnection between local exchange carriers (“LECs”) and long-distance carriers would be mandatory, and all charges demanded by LECs for outgoing and incoming long-distance calls would be regulated down to zero. In contrast, this Article proposes simple regulatory changes that would foster the deregulation of interconnection between long-distance carriers and LECs. Such regulatory changes would enable several market forces, revealed by the Article and neglected by the FCC and the previous literature, to keep LECs’ charges for interconnection from rising above competitive levels and encourage carriers to interconnect. First, long-distance carriers should be allowed to transit long-distance calls made to one LEC’s subscribers by interconnecting with the competing LEC. The Article illustrates that if LECs are forbidden from charging each other for completing each other’s calls, the credible threat to use such transit will induce each LEC to interconnect directly with long-distance carriers and to charge them voluntarily for incoming calls no more than the competing LEC’s marginal costs of transit. Moreover, future growth of cellular telephony and broadband Internet-protocol telephony is expected to strengthen this market force, especially if the FCC’s current requirement that long distance carriers average their rates is eliminated. As to the rates LECs charge long-distance carriers for long-distance calls made by the LECs’ subscribers, if the Telecommunications Act of 1996’s (“1996 Act”) requirement that long-distance carriers equalize their rates is amended, direct competition among LECs is shown to restrain them. Even short of amending the 1996 Act, the Article shows how long-distance carriers’ ability to ask one LEC to transit long-distance calls made by the competing LEC’s subscribers is expected to drive these rates down to the marginal costs of transit. The Article shows how interconnection among the LECs themselves should be regulated in order to enable the proposed deregulation of interconnection between the LECs and long-distance carriers. First, interconnection among LECs themselves should be mandated. Second, LECs should not be allowed to charge each other for completing each other’s calls. The Article also exposes an additional justification for not allowing LECs to charge each other for completing each other’s calls: LECs might negotiate an excessive reciprocal rate for such calls to enforce an implicit commitment on the part of a new LEC entering the market to focus only on “net receivers of calls” (such as Internet service providers), leaving the rest of the market to the incumbent.

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