A Market-Based Approach to Telecom Interconnection

Posted: 26 May 2003

See all articles by David Gilo

David Gilo

Tel Aviv University - Buchmann Faculty of Law


This Article offers an all-new solution to the problem of interconnection between telecommunication networks. According to the FCC's 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 will 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 shows how 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 directly interconnect with long-distance carriers and to voluntarily charge them, for incoming calls, no more than the competing LEC's marginal costs of transit. Moreover, future growth of cellular telephony and broadband IP 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 1996 Act's requirement that long-distance carriers equalize their rates is amended, direct competition between 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 between the LECs themselves should be regulated in order to enable the proposed deregulation of interconnection between the LECs and long-distance carriers. First, interconnection between 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 ISP's), leaving the rest of the market to the incumbent.

Suggested Citation

Gilo, David, A Market-Based Approach to Telecom Interconnection. Southern California Law Review, Vol. 77, No. 1, 2003. Available at SSRN: https://ssrn.com/abstract=401580

David Gilo (Contact Author)

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv 69978, IL
+972-3-6406299 (Phone)

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