Intercarrier compensation and the move to bill-and-keep

The problem it solves

When you place a call to someone on a different carrier’s network, more than one company carries it. Intercarrier compensation is the set of rules for who pays whom in that hand-off. Two legacy categories mattered most:

• Access charges — per-minute fees a long-distance (interexchange) carrier paid to the local carriers that originate and terminate the call. These were the economic heart of the old long-distance business.
• Reciprocal compensation — payments between two local carriers for terminating each other’s local traffic.

Both were built for a circuit-switched, per-minute world, and both created durable incentives to keep that world running.

Bill-and-keep: the end state

Bill-and-keep is the alternative the FCC has been steering toward for more than a decade: carriers stop billing each other for exchanging traffic, and each recovers its costs from its own customers instead. The terminating rate goes to zero. The appeal is simplicity — no per-minute settlements, no rate design to arbitrage, no metering of minutes between networks — which is exactly the model the internet already uses for interconnection.

How the reform unfolded

The 2011 USF/ICC Transformation Order (FCC 11-161) was the pivotal step. It adopted bill-and-keep as the national end state for intercarrier compensation, capped most access rates, and stepped terminating switched-access rates down over a multi-year glide path through roughly the end of the decade. That order did not finish the job: a set of originating and terminating switched access charges still exist today, still filed in access tariffs — the last per-minute residue of the old system.

Access stimulation: the arbitrage the per-minute system invited

The clearest illustration of why per-minute rates distort behavior is access stimulation, better known as “traffic pumping.” A local carrier partners with a high-volume calling service — free conference calling, chat lines — that generates large amounts of inbound long-distance traffic. Because the local carrier could bill long-distance carriers a per-minute terminating access charge on all of it, and then share that revenue with the calling service, the arrangement turned inflated minutes into money. The cost fell on long-distance carriers and, ultimately, their customers.

The FCC has chased this scheme through three rounds. The 2011 order set the first triggers (a revenue-sharing agreement plus a lopsided ratio of terminating to originating traffic) and required offending carriers to file lower rates. The 2019 Access Arbitrage Order (FCC 19-94) went further, shifting financial responsibility for the terminating tandem-switching and transport on stimulated traffic from the long-distance carrier to the access-stimulating local carrier — removing the profit by making the stimulator eat the cost (codified largely at 47 CFR § 51.914). The 2023 Second Report and Order (FCC 23-31) closed a workaround in which carriers inserted an IP-Enabled Service provider into the call path to dodge the 2019 rules. Access stimulation is the concrete case for why moving to bill-and-keep is not just tidier accounting: when the terminating rate is zero, the arbitrage has nothing to feed on.

The recovery mechanism: CAF-ICC and the Access Recovery Charge

Dropping terminating rates stripped real revenue out of carriers that had built their books around it, so the 2011 order paired the cuts with a transitional recovery mechanism. It has two parts. The Access Recovery Charge (ARC) is a flat monthly fee a carrier may add to end-user bills to recover part of its lost revenue — capped (for example, $2.50/month for a residential or single-line-business line at a price-cap carrier, higher for multi-line business), stepped up in small annual increments, and barred entirely on Lifeline lines and where it would push a residential bill above a set ceiling. Where the ARC does not cover the shortfall, eligible carriers could draw transitional CAF-ICC support from the universal-service fund.

Crucially, that support was designed to decline: the recoverable amount shrinks each year on a fixed schedule. Price-cap carriers’ CAF-ICC support ended in 2019; rate-of-return carriers’ support has no sunset date under the current rules — which is one of the loose ends the 2026 proposal moves to tie off.

The 2026 proposal

The FCC’s “Reforming Legacy Rules for an All-IP Future” rulemaking (NPRM FCC 26-11, WC Dockets 25-311 and 25-208, released February 2026) proposes to finish the transition. The core mechanic is a 24-month glide path that takes all remaining originating and terminating switched access charges to zero in three annual steps — 33%, then another 33%, then a final 34% — at successive annual access-tariff filings, alongside an immediate cap on the intrastate originating rates that are still uncapped. It further proposes to detariff interstate access charges once they reach bill-and-keep (using section 10 forbearance from the tariffing statute), to detariff the end-user “Telephone Access Charges” (the Subscriber Line Charge, ARC, and related fees), and to phase out the remaining rate-of-return CAF-ICC support over roughly two years after the transition completes.

Because it is a proposal in an open proceeding — comments were due 60 days after Federal Register publication, replies 90 days — the specific schedule and effective dates can change in a final order. But the direction is unambiguous, and it is the economic companion to the interconnection reforms in the parallel dockets.

Why it matters for the transition

Legacy intercarrier compensation is one of the strongest reasons the last stretch of TDM interconnection survives. As long as a carrier can earn per-minute revenue from a legacy arrangement, it has a reason to keep that arrangement — and the TDM hop — alive. Completing bill-and-keep removes that incentive, which is why the reform is treated as a lever for the all-IP transition rather than a standalone accounting change. It also intersects the identity work this site follows: an unbroken IP path is what lets a signed call keep its authentication end to end, and the economics are part of what clears that path.