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Recovering Local Distribution Costs

Fortnightly Magazine - November 15 1995

of cost recovery. The charge need not be a true one-time charge; a commitment to a long-term contract with a stream of monthly payments should suffice. The key aspect is the commitment to payment before facilities are placed.

MARKET LESSONS

A one-time connection fee appears consistent with other commercial practices in regulated and unregulated industries, where customer-specific or geographic-specific assets are often purchased outright or provided through long-term contracts.

For example, a company paving a driveway typically will charge the customer at the time the paving facilities are placed. Certainly the paving company does not attempt to recover its costs by charging the homeowner each time the driveway is used. Telephonos de Mexico has utilized a service connection charge to equivalent to over $900 for business and over $500 for residential customers to help recover local distribution costs. For U.S. utilities, "special construction" charges have been used to establish a commitment by the customer for at least partial payment for local distribution facilities. Also, when facilities are placed specifically for a large Centrex or private-line customer with a customer-specific offering, the facilities are recovered completely through a long-term customer contract. Several years ago in U.S. telecommunications, the last few feet of local distribution facilities, inside wire (loop inside the home), was recognized to be sunk after placement. Now when inside wire is placed, the cost is recovered through a one-time charge or long-term contract. (Unlike inside wire, if the utility incurs the franchise obligation to place local distribution facilities to subdivisions, that utility would presumably continue to serve as the sole provider of such facilities and maintain control of the facilities for maintenance purposes.)

As with a monthly recurring customer charge, a one-time service connection charge offers the advantage that the usage-insensitive capital costs of providing local distribution facilities are recovered through a usage-insensitive charge. Such a one-time charge (or long-term contract) has the additional advantage that it reflects the true underlying nature of the capital costs of placing local distribution facilities: It occurs at a single point in time (as a commitment with a long-term contract), not on a recurring basis.

ACCOMMODATING

THE SERVICE FRANCHISE

Although generally more efficient than recovering local distribution costs through usage charges, often the practical disadvantage of a one-time service connection charge is that facilities are either placed with a lag after customers desire service, or the charge occurs after facilities are already in place and sunk.

The duty to serve has led to the traditional placement of local distribution facilities before customers actually demanded service. On the other hand, a relatively high service connection charge, established after local distribution facilities are sunk, may actually discourage some customers from ordering service and paying the connection charge. Unfortunately, if facilities are placed in advance of an order for service connection, the service connection order does not cause the capital costs of providing local distribution facilities (other connection expenses can occur). The utility cannot avoid these capital costs if the customer decides to forego service connection.

Should local distribution facilities be placed (sunk) in advance of customer commitment