Expressing concern about price volatility in the natural gas market, New Jersey, Virginia and Michigan regulators have directed local gas distribution companies to try fixed-price contracts and...
Price Reform and Universal Service: Not Mutually Exclusive
When the Federal Communications Commission (FCC) instituted the subscriber line charge (SLC), telephone household penetration rates actually increased, even though local rates rose when the SLC was rolled in. That experience now finds confirmation from regulatory reform in Illinois, where a case study demonstrates that efficient pricing of local telephone service need not undermine the goal of universal access.
From 1986 to 1993, the Illinois Commerce Commission restructured residential telephone rates, phasing in mandatory local measured service (LMS) throughout the state. During that period, the commission allowed the access-line price component of the LMS rate to climb from roughly 10 to 30 percent for subscribers in the various Illinois calling regions. Nevertheless, the actual penetration levels (reported for Illinois by the FCC) fell only a small amount (em from an annual average of 94.3 percent in 1990 to 93.6 percent in 1993. The measured decline in household penetration is significantly less than would be expected given the accepted range of demand elasticities for telephone access. This decline might arise from many factors: increasing income levels, improvements in service, or the introduction of alternative pricing plans such as LMS.
Table 1 shows monthly residential telephone rates for three Illinois calling regions: Access Area B (portions of Chicago outside downtown [Area A], plus certain suburbs), Access Area C (mostly suburban), and the region Outside MSA1, which includes the remainder of the state served locally by Illinois Bell.1 The rates include the monthly cost of unlimited flat-rate service as well as the local line charge under LMS for individual residential customers.2 Rate changes in the three regions in Illinois from 1986 to 1993 were as follows:3
Outlying Chicago. In 1987, mandatory LMS was initiated in Access Area B (outlying Chicago and some suburbs). Those callers who were required to switch from flat rates to LMS saw their minimum price of access fall, but had to pay usage charges. In 1990, the local line charge under LMS increased by $1.03, from $4.53 to $5.56 (20.5 percent). With a supplemental line charge of $3.484 included in the base price of access, the minimum monthly price of access rose to $9.04, or 12.9 percent above its 1989 level.
Suburbs. In 1987, mandatory LMS was initiated in Access Area C (most Chicago suburbs). Callers in this region who were required to switch from flat rates to LMS also saw their minimum price of access fall, but had to pay usage charges. In 1990, the local line charge under LMS increased by $1.03, from $8.00 to $9.03 (12.1 percent). Including the supplemental line charge of $3.48 in the base price of access gives a minimum price of access of $12.51, or 9.0 percent above the 1989 level.
Downstate. In 1990, LMS became mandatory in non-MSA1 regions (em making LMS mandatory statewide. Callers in this region who were required to switch from flat rates to LMS in that year also saw their minimum price of access fall, but had to pay usage charges. However, residents in this region saw their monthly local line charge increase by $3.00 (em from $6.03 in