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Recovering Local Distribution Costs

Fortnightly Magazine - November 15 1995

to pay for the facilities? Charging developers for local distribution facilities offers the major advantage of commitment of payment before facilities are placed, but without delay in providing service to the final customer.

Going forward, a one-time service connection charge to developers is appealing as a method for recovering the capital costs of local distribution facilities. Ongoing maintenance costs caused by customers subscribing for service should be recovered through a monthly recurring charge. However, in recovering the capital costs of existing facilities, the choice between a one-time charge and recurring monthly charges is more difficult.

The choice should be based largely on how price- responsive customers are to each charge. It may well be that customers are more sensitive to a one-time charge; if this is the case, a monthly recurring charge is preferable to a one-time charge.



The problems of local distribution cost recovery are exacerbated by the fact that costs of providing customers with access to the distribution system can vary substantially across customers and/or geographic areas. For all utilities, distribution costs per customer are lower in densely concentrated urban areas. In addition, costs are often lower for customers that are near certain facilities (large mains, central offices, transmission lines, and so on).

A single jurisdiction-wide charge (regardless of whether it is a one-time, usage-based, or recurring monthly charge) cannot properly reflect the differentials in local distribution costs across geography and customers. An economically proper charge should reflect the major differentials in the costs of local distribution across geography and customers. The historical use of "outside the base-rate area" (OBRA) charges in telecommunications gives an example of an efficiency-improving rate structure that can appropriately reflect geographic cost variations. Customer-specific offerings employ customer-specific costs, rather than some measure of jurisdiction-wide costs to form the basis for sound pricing and cost recovery.


As the issues of interconnection, alternate service providers, bypass, and relaxation of franchise protection come to the fore in utility industries, local distribution costs and the methods of recovering them become more important.

Moreover, the very concept of the traditional franchise obligation (em to provide all customers, regardless of the circumstances, with service in a timely fashion (em is placed in question.

Viable solutions should allow incumbents to recover costs and encourage entry only by efficient competitors, preferably in a way that minimizes damage to franchise obligations. t

Steve Parsons is a regulatory economist at Southwestern Bell Telephone Company, in St. Louis, MO. The opinions expressed here are those of the author and do not necessarily reflect the opinions or business plans of SBC Communications or any of its subsidiaries.Common Costs, Common MisconceptionsIn telecommunications, the term "common line" refers to the local distribution facilities (and some "feeder" and central office investment) connecting subscribers to local and long-distance networks. The term "common line" was traditionally employed because the same line was "used" by customers for both local and long-distance calls. In part because of this terminology, many people have improperly characterized the cost of local distribution as a cost common to the services that