n Chapters 8 and 10, transaction costs can justify replacing a metered regime of interconnection access with a "bill and keep" or "peering" regime in which networks interconnect on a settlement-free basis. Indeed, trans- action costs can help explain another of the persistent puzzles of telecommuni- cations pricing, which is the persistence of flat-rate pricing for local telephone service. Local telephone service in the U.S. has not historically been priced on a usage-sensitive basis. Instead, subscribers can place unlimited local calls for a flat monthly fee (FCC 1996b). 10 Economists have long theorized that the fact that local calling was unmetered at the margin was inducing customers to make excessive calls and that usage-sensitive pricing would lead to welfare gains (Mitchell 1978). It is for this reason that some local telephone companies began experimenting with usage-sensitive pricing regimes generally known as "local measured service" (LMS). The economics of congestion arguably suggest that LMS would eventually emerge as the dominant pricing regime, and yet network providers, regulators, and consumers all failed to embrace LMS. Acceptance of LMS was deterred in part because of the magnitude of the transaction costs of metering local telephone ser- vice. 11 The available data suggest that the transaction costs associated with metering and billing for local telephone service may well be substantial. Studies conducted several years ago indicate that the costs of metering and billing represent more than 50% of the costs associated with an incremental call and roughly 100% of the incremental cost of a nonpeak call, with the total cost to the industry exceeding $10 billion. The problem is further complicated by the nature of congestion on communi- cations networks. When total network usage is relatively low and network resources are slack, the costs associated with incremental usage approach zero. It is only when demand peaks that congestion costs become significant. As a result, a first-best solution would re