the party originating the call must incur costs to provide a connection between the customer's premises and the long-distance carrier's point of presence in the originating LEC's central office. Furthermore, the terminating LEC must also incur the cost of connecting the call from its central office to the customer premises of the party to whom the call is placed. Long-distance carriers compensate originating and terminating LECs through a series of federally mandated access charges, which under current law must be uniform across all carriers and all customers. In other words, the cost of terminating access is covered by requiring customers to make uniform contributions to a common pool (Crandall and Waverman 1995; Laffont and Tirole 2000; FCC 1999d). The Regulation of Local Telephone Networks The key question is what impact the deregulation of access charges would have on originating and terminating LECs' pricing behavior. The FCC has concluded that the possibility that the originating carrier might charge excessive access charges is effectively limited by the fact that the calling party chooses its local service provider, decides whether to place the call, and ultimately bears the cost of the call. The calling party, either directly or indirectly through its long-distance carrier, is thus well situated to exert price discipline over originating access charges. The same is not true, however, for terminating access charges. Because neither the calling party nor its long-distance carrier has any influence over the called party's choice of LEC, neither can exert any price discipline over terminating access charges. Furthermore, the common pool aspect of the access charge regime means that a LEC's customers will not bear the full brunt of any increase in terminating access charges. Instead, the impact of the higher prices will be spread over the entire universe of local telephone subscribers. This, in turn, gives terminating LECs both the ability and the incentive to raise terminating access charges above competitive