Federal Communications Commission Chairman Julius Genachowski’s criticism of intercarrier compensation in extensive remarks on telephone subsidies last week is a reminder for many states of the need to reform intrastate switched access rates.
Although Congress mandated the elimination of implicit subsidies embedded in the rates for both interstate and intrastate telecommunications services in the Telecommunications Act of 1996, it did not set a deadline. The FCC has substantially reduced interstate switched access rates in recent years, but a considerable amount of hidden subsidies remain in intrastate switched access fees.
In Florida, for example, one telecom service provider charges 5.64 cents per conversation minute for intrastate long distance versus only 1.65 cents for interstate long distance. The difference represents a hidden subsidy component that operates as a form of tax that only residents of Florida pay, since the lower interstate fees apply to calls which cross state lines.


The National Broadband Plan issued by the FCC at the request of Congress recommends that states reduce intrastate access charges to interstate rate levels in equal increments over a period of 2-4 years, and eliminate per-minute charges altogether by 2020 (see pp. 148-50).
Recently Georgia and Tennessee prohibited telecom service providers from imposing intrastate switched access charges that exceed applicable interstate rates (with a 5 year transition). (See O.C.G.A. � 46-5-166 and Tenn. Code Ann. � 65-5-302.)
Evidence shows that reductions in access charges are passed along to consumers in the form of lower prices for telecom services.
Inflated intrastate switched access rates are a vestige of the monopoly era; they are no longer sustainable as a result of competition. Consumers are making fewer long distance calls that originate and/or terminate on a wireline telephone, so intrastate access revenue is declining. The FCC reports that interstate “minutes of use” of incumbent telecom providers declined 50% between 2000 and 2009 (see Table 8.1).
Intrastate access charges can be reduced without forcing rural and residential consumers to pay higher prices for basic service. For one thing, current regulation does not create incentives for small telecom service providers to practice aggressive cost control, and there is anecdotal evidence of waste and abuse. More on that in my next blog post.
For another thing, the trend in the industry is for telecom service providers to develop other sources of revenue, such as video, wireless and broadband. The providers can also work to reap savings from the efficiencies made possible by newer technologies, such as Voice over Internet Protocol (VoIP).
Ultimately, the best way to ensure affordable voice service is to remove barriers to broadband investment. Hidden subsidies in intercarrier compensation “actually discourages investment in 21st century Internet protocol networks,” according to Genachowski, “because companies fear losing the subsidies they receive for connecting calls using traditional telephone technology.”
Florida is not unique in not having fully tackled this problem. Earlier this year, Florida updated its telecom laws (see House Bill 1231 (2011)). But ultimately Florida and many other states must address this issue.