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Price Reform and Universal Service: Not Mutually Exclusive

Fortnightly Magazine - March 15 1996

1989 to $9.03 in 1992 (em a cumulative increase of 49.8 percent over the three-year period. Including the SLC of $3.48 in the base price of access gives a minimum price of access of $12.51 (em a 31.5-percent cumulative increase above the 1989 level.

On November 9, 1989, in response to proposals filed by Illinois Bell in December 1988, the Illinois Commerce Commission (ICC) entered an order on a modified regulatory structure and rate restructuring.5 Effective January 1, 1990, rates were reduced by $45.8 million (em above-rate changes that replaced a $85-million temporary credit implemented in July 1988. This rate restructuring represents a total permanent rate reduction of $95 million (em far more than the $35-million reduction proposed by Illinois Bell. Although residential local line charges were raised under the rate restructuring and prepaid flat-rate service was eliminated, usage rates were reduced by $128 million through improved discount schedules as well as reduced charges for calls beyond eight miles. The rate restructuring included reduced rates of up to 50 percent on intra-MSA toll calls as well as volume discounts of up to 33 percent for residential customers.6

Predicting the impact of these price changes on telephone penetration requires knowledge of the price elasticity of demand for telephone access. In 1983 Lewis Perl came up with an estimate of -0.0414 for the elasticity of demand for measured rate access, by analyzing elasticity as a function of the cost of telephone service, income, and several socio-demographic factors.7

Elsewhere, Kenneth Gordon and John Haring8 cite additional studies of price elasticity of demand for telephone access. These studies include empirical estimates at various levels of consumer demand (e.g., city, state, household). Of these studies, the highest and lowest elasticity estimates (in absolute terms) are -0.17 and -0.05 for U.S. cities and states, respectively.9 These elasticity estimates allow us to predict the expected change in the demand for telephone access as a result of yearly price changes. Table 2 shows the predicted changes in residential telephone subscribership for our three regions. The statewide impact of the price increases in the access component of LMS was calculated using a weighted average of the predicted changes for the three separate regions.

Data on the number of subscribers were taken from the FCC's time series on telephone subscribership (at the state and national levels) by selected demographic characteristics. The FCC data reflect a staggered panel survey of approximately 58,000 households conducted by the Bureau of the Census.10 Since no seasonal variation appears in the "telephone available" statistics, the data in the FCC report are not seasonally adjusted.11

Data reporting the actual percentage of Illinois households owning a telephone allowed us to evaluate the impact of the rate restructuring on universal access. For 1985 through 1993, Illinois telephone subscribership based on "units available" fell by 0.1 percent (em from 93.7 to 93.6 percent (em and is not statistically significant.12

To analyze the effect of rate restructuring in Illinois, we begin with the year 1989 (em the year before LMS first became mandatory throughout the state.13 All three regions experienced higher rates