Reforming universal service and intercarrier compensation

The implicit subsidy system that is the combination of intercarrier compensation -- i.e. access charges -- and the Universal Service Fund (USF) has been in place for decades and was designed for a monopoly telephone system whose finances could be controlled by regulators. In that world, local rates could be kept artificially low by subsidies that came from artificially high access charges paid by long-distance providers for carriage of their traffic on local networks. Rural customers could be subsidized by urban customers. In today's competitive marketplace that is no longer the case -- competitors are forcing prices down to cost in the areas where it is economic for them to compete, leaving the uneconomic areas to the incumbents who are forced by regulators to serve them.

Today's -- and tomorrow's -- highly competitive, innovative, global broadband ecosystem needs the flexibility to evolve naturally. Support and regulation must both be targeted strategically to the increasingly rare places where they are needed, and they must be eliminated from the places where they disrupt innovation and investment. The transition has to be made carefully, but it must begin.

[Kovacs is a Visiting Senior Policy Scholar at Georgetown University's Center for Business and Public Policy]