The Federal Communications Commission (FCC) is close to finishing a long-running transition away from legacy telecom regulation—but outdated rules still pay carriers to stay in the past. Last month, the FCC adopted a notice of proposed rulemaking (NPRM) to eliminate payments to legacy telecommunications carriers that have not upgraded to networks based on internet protocols (IP). The proposal forms part of a broader effort to retire copper networks that rely on costly, outdated time-division multiplexing (TDM) switching and to accelerate the transition to IP-based fiber networks.
As International Center for Law & Economics (ICLE) scholars explained in comments to the FCC in a separate proceeding, intercarrier compensation (ICC) rules still on the books for some rate-of-return regulated carriers—particularly rural and competitive local exchange carriers (LECs)—create perverse incentives. These rules encourage legacy carriers to maintain copper networks to generate revenue from ICC fees.
The FCC should complete ICC reform by fully transitioning to a bill-and-keep model. Under this approach, carriers recover service costs from their own customers, rather than extracting call termination and origination fees from interconnecting carriers. This shift would eliminate remaining arbitrage schemes in which legacy carriers partner with high-traffic callers to stimulate access charges, imposing additional costs on carriers that have already transitioned to IP-based networks.
The agency should also phase out Universal Service Fund (USF) distributions to legacy carriers that rely on subsidies to offset lost ICC revenue. Doing so would reduce strain on the USF and help address concerns about rising contribution fees.
The Per-Minute Model Meets Its Expiration Date
Voice telephony historically operated as a regulated utility. Incumbent providers served defined geographic areas, and regulators set the rates those firms could charge. When a call originated on one network and terminated on another, the originating carrier paid termination fees to the receiving carrier under a “calling-party-pays” regime. Regulators also subjected these fees to price-cap regulation.
That system created opportunities for arbitrage. Some local exchange carriers (LECs)—particularly rural LECs—partnered with call centers and other high-traffic businesses to inflate terminating minutes and maximize access-charge revenue. In some cases, these arrangements became central to their business models.
As competition in voice communications increased, the case for strict price controls weakened. Consumers could switch providers if prices rose too high. At the same time, many telecommunications companies retired legacy switched telephone networks and shifted to IP-based networks that deliver traffic over fiber. These networks differ fundamentally from time-division multiplexing (TDM)-based systems. The relevant constraint is no longer minutes of use, but bandwidth. Per-minute price caps on intercarrier exchanges no longer fit this technological reality.
IP-based networks instead rely on a bill-and-keep model, under which carriers exchange traffic without charging termination fees. Each provider recovers its costs from its own customers and retains the associated revenue. This approach strengthens incentives to reduce costs and improve service quality. It also reduces compliance and transaction costs associated with ICC, which requires extensive tracking, auditing, and administrative oversight. Bill-and-keep largely eliminates these burdens and better aligns with the economics of digital networks.
How ICC Still Pays to Stay in the Past
The FCC has taken several steps to facilitate the transition to IP-based networks and, indeed, ICLE scholars have consistently highlighted the benefits of an all-IP communications grid. Despite this progress, ICC rules still create incentives for some legacy carriers to maintain TDM-based and copper networks. These incentives come at the expense of their own customers, as well as customers of interconnecting networks, and delay the broader benefits of modern communications infrastructure.
Although the FCC has eliminated many terminating charges, some remain. In particular, when a terminating carrier does not own the tandem switch—an intermediary switch between two LECs—that carrier may still collect terminating access fees, including tandem-transport fees for delivering the signal from the tandem switch to the end user. By routing calls through an intermediate tandem, whether independent or affiliated, a terminating carrier can ensure that both tandem-switching and tandem-transport fees apply.
LECs also retain opportunities to exploit 8YY toll-free charges. Unlike standard calls, the receiving party pays for 8YY calls. This structure has long encouraged partnerships between 8YY service providers and LECs to increase revenue from originating end-office charges. In 2020, the FCC moved many of these charges to a bill-and-keep framework, but some elements remain. These include a nationwide joint tandem-switched-transport rate capped at $0.001 per minute and a database-query charge capped at $0.0002.
Legacy carriers can also continue to extract rents from TDM-based signaling services. These networks rely on Signaling System 7 to route calls, and carriers assess fees for these services. In an all-IP environment, these charges would disappear.
Taken together, the ICC regime functions as a de facto subsidy for legacy TDM technology. The remaining fees apply only to TDM networks and would vanish in a fully IP-to-IP environment. Carriers that depend on ICC revenue—whether through legitimate charges or arbitrage—therefore have incentives to delay network upgrades and force incoming communications onto TDM infrastructure.
Paying Twice for Yesterday’s Network
Interconnection rules that require conversion to TDM force many carriers that have upgraded to fiber to maintain parallel TDM networks in parts of their service areas. Maintaining these duplicative systems imposes significant costs and can slow fiber expansion.
Copper networks depend on electrically powered equipment, and signal quality degrades over distance due to resistance in the wire. Carriers compensate with repeaters, amplifiers, remote terminals, and TDM switches that clean and retransmit signals. They also maintain large switching offices. Fiber networks eliminate much of this powered equipment, reducing energy use, lowering costs, and improving reliability. Copper infrastructure also attracts theft due to high scrap value, often forcing carriers to replace stolen lines, rather than upgrade to fiber.
Recent data underscore the scale of these costs. In 2024, AT&T reported roughly $6 billion in annual direct operating costs to maintain its copper network—about 5% of its $122 billion in annual revenue. These costs persist even as the company lost nearly 1 million subscriber lines year over year, leaving about 3.3 million network-access lines. Verizon has migrated 4.5 million circuits from copper to fiber and fully retired 36 central offices, generating approximately $180 million in annual operating savings. Fiber deployment has reduced maintenance dispatches by about 60%. In a 2017 FCC filing seeking approval to retire copper in eight Northeast markets, Verizon reported 3.4 million fewer repair and troubleshooting dispatches between 2012 and 2016 than would have occurred had those customers remained on copper. Decommissioning TDM switches also allowed the company to consolidate facilities that once required up to 13 floors of equipment into just one or two.
Maintaining copper networks ultimately raises costs for consumers. IP-based networks offer greater reliability than legacy TDM systems, deliver higher call quality, and enable more effective robocall mitigation. Where carriers delay transition, customers remain on outdated technology that cannot meet modern needs. In competitive markets, consumers can switch providers. In many rural areas, however, a single carrier may dominate, leaving customers with no alternative to copper service. While carriers ultimately decide whether to upgrade, the FCC should act when ICC-driven arbitrage—not consumer demand—drives the decision to delay investment.
Turning Off the Subsidy Spigot
The FCC’s NPRM proposes to eliminate the remaining ICC fees that have not yet transitioned to a bill-and-keep framework. Completing this transition would remove incentives for carriers to maintain copper networks solely to extract rents under ICC rules. As more legacy carriers upgrade, providers that have already transitioned will be able to retire larger portions of duplicative copper infrastructure maintained only for interconnection. These cost savings should support further investment in communications networks, including broadband and mobile data services. Reduced reliance on copper networks would also limit theft and service disruptions tied to copper infrastructure.
Pulling the Plug on a ‘Temporary’ Subsidy
As the FCC began the transition to bill-and-keep, some legacy carriers that had not upgraded to IP-based networks lost ICC-related revenue. In response, the commission implemented a temporary safety net. CAF ICC—a component of the Connect America Fund (CAF), itself part of the Universal Service Fund (USF)—allows eligible carriers to recover a portion of lost revenue.
Under this framework, carriers first attempt to recover revenue through a capped “Access Recovery Charge” (ARC) on customers’ monthly bills. If the ARC does not cover the full amount of “eligible recovery” under the FCC’s formula, the carrier may receive the remaining balance through CAF ICC support.
This approach was understandable as a transitional measure. But CAF ICC was always intended as a temporary stopgap to limit consumer disruption. Today, it applies only to rate-of-return carriers—typically small, rural incumbent LECs. The NPRM would finally phase out this subsidy over two years. Carriers would receive 66% of baseline support in the first year, 33% in the second, and no support by the third.
Killing Arbitrage, Easing the Squeeze
Eliminating CAF ICC would serve two key purposes.
First, it would reduce the arbitrage opportunities embedded in the current system. Legacy carriers can still recover costs through mechanisms other than customer payments, which weakens incentives to upgrade legacy TDM networks. Even as ICC reforms advance, some carriers may rely on USF support to sustain outdated infrastructure. Phasing out CAF ICC would remove both ICC-based and USF-based incentives to delay investment. Carriers could still maintain TDM networks where consumer demand or economic conditions justify it, but market forces—not regulatory arbitrage—would determine those outcomes.
Second, reducing USF expenditures would help ease mounting pressure on the program’s funding mechanism. Under the Communications Act, USF contributions are assessed primarily on telecommunications services, especially voice. Consumers, however, have shifted toward data services that support voice, video, and other applications. While these data services benefit from USF programs, they do not contribute to the fund, placing increasing pressure on a shrinking base of voice-service revenues.
Reform proposals have focused on expanding the contribution base, but reducing program costs offers a more immediate and practical step. Eliminating CAF ICC would save more than $300 million annually—nearly 7% of the USF high-cost program budget. Lower costs would ease pressure on the contribution factor, reduce the burden on telecommunications customers, and create more flexibility for policymakers considering broader USF reform.
The Sky Isn’t Falling
One concern with the proposed action—particularly the elimination of CAF ICC—is that legacy carriers may not recover sufficient revenue from their customers to cover costs, potentially undermining their ability to serve their communities. Some also argue that certain carriers cannot profitably upgrade to fiber. These concerns, however, are largely overstated.
First, most rural and competitive LECs have already begun the transition to IP-based services. Carriers have been on notice of the shift to bill-and-keep since 2011. Today, 86% of rural local exchange carrier (RLEC) customers are served by fiber-to-the-premises networks, and 83% of carriers have IP-enabled switching capabilities within their networks. These trends reflect both consumer demand for higher-quality service and the operational efficiencies of modern networks. Most carriers already have the capacity to complete the transition.
Second, the FCC’s proposal does not require carriers to undertake unprofitable network upgrades. It requires only that carriers recover their costs from their own customers, rather than through intercarrier payments or subsidies. Carriers that choose not to upgrade can continue to provide voice service over copper networks, while their customers remain free to switch to alternative providers.
If prices rise, many consumers may turn to mobile voice services offered by nationwide or regional carriers. As of June 2024, retail switched-access lines accounted for only about 8% of subscriptions, most of which were likely business lines, rather than residential. Consumers have already shifted toward mobile voice, and those whose wireline providers fail to meet their needs have viable alternatives. This competitive pressure will push legacy carriers to reduce costs and improve service quality.
Time to Let Copper Go
The FCC’s efforts to facilitate the retirement of copper networks have advanced many of the agency’s goals. But outdated ICC rules remain a barrier to a fully IP-based telecommunications environment in the United States. The FCC’s NPRM would remove regulatory incentives that encourage legacy carriers to maintain outdated infrastructure. By accelerating the transition to fiber networks, these reforms would reduce costs across the system and allow customers of legacy networks to realize the full benefits of modern communications technology.
Some carriers will lose revenue if the FCC adopts these changes. But revenue loss does not mean widespread service failure or loss of coverage. Consumers today have a wide range of communications options, and the data show that continued support for carriers that have not transitioned to IP-based networks is not necessary to ensure access. Phasing out CAF ICC—always intended as a temporary measure—may reduce revenue for carriers that decline to upgrade, but it will deliver net benefits to American consumers.
