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Price Reform and Universal Service: Not Mutually Exclusive

Fortnightly Magazine - March 15 1996

for the cost of access in 1990 (when the telephone subscription rate actually rose). All in all, the cumulative percentage change in telephone subscribership in Illinois declined by -0.274 percent for 1990 to 1993.

This decline can be compared to the predicted changes in telephone subscribership shown in Table 2. Using the elasticities estimated by Lewis Perl,14 Table 2 gives the predicted changes on telephone subscribership for 1990 to 1993 (em the period during which LMS was mandatory statewide in Illinois. Table 3 compares predicted to actual yearly (and cumulative) changes in telephone subscribership.

For 1990, the expected change in telephone subscription would range from -0.612 to -1.836 percent. By 1993, when additional rate increases had taken hold in the downstate non-MSA1 region, one would have expected a higher overall change in subscribership rates for the combined regions (em somewhere between -0.837 and -2.514 percent. Nevertheless, the actual cumulative percentage change in actual telephone subscribership for 1990 to 1993 in all three regions was only -0.274. This figure is three to nine times smaller than the predicted decline.

Moreover, the disparity between actual and predicted declines in penetration rates may actually be understated. When LMS and flat-rate service were both available, high-volume callers could be expected to opt for flat-rate service, with low-volume callers choosing LMS. Thus, with the mandatory switch to LMS, the move away from flat rates would affect a high proportion of high-volume callers, and thus create an apparent price increase larger than expected and imply a greater drop in household penetration. But on the other hand, high-volume callers are not likely to leave the network.

The experience with mandated LMS in Illinois indicates that the impact of rate restructuring is

considerably less than might be expected. In part this conclusion is due to the fact that LMS keeps telephone access prices low in absolute terms. Nevertheless, no statistically significant changes occurred in Illinois' household telephone penetration rates.

Several other factors may also explain this disparity: reduced long-distance rates,15 an increase in the demand for complementary services available through the telephone network, and a general trend of rising incomes. Whatever the reasons, the Illinois experience demonstrates that telephone rates for residential customers can be restructured to reduce subsidies with minimal impact on universal service. t

Peter K. Pitsch is a communications attorney and an adjunct fellow at both The Hudson Institute and The Progress and Freedom Foundation. David P. Teolis is a PhD candidate in economics at Indiana University.

1. Market Service Area 1 (the MSA1 region) includes Access B and C, but not Access Area A, which represents downtown Chicago. Area A is excluded from MSA1 because Area A already had mandatory LMS and thus did not incur any rate increases when Illinois imposed mandatory LMS throughut the state.

2. Flat rates were obtained from various issues of Bell Operating Companies' Exchange Service Telephone Rates, published by the National Association of Regulatory Utility Commissioners. Local-line charges under LMS were obtained from A Modified Regualtory Structure and General Rate Restructuring, published by Illinois Bell (Nov. 1989). Table 1 assumes