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Who Stands to Benefit?

Fortnightly Magazine - March 15 1996

customers to disconnect their phone service altogether. Despite strong evidence to the contrary, congressional anxiety mounted to the point that the FCC halted its SLC implementation plan, capping the monthly charge at $3.50 for residential and single-line business customers, and at $6 for multi-line business customers.

Fears of a network exodus proved unfounded. In fact, telephone subscribership actually rose from 91.6 to 93.1 percent between 1984 (when the SLC began) to 1989 (when it was capped). This outcome corroborates econometric estimates indicating that the price elasticity of demand for local service is extremely small. The FCC's assessment of the SLC on end users aligned a portion of customer-access costs with those demanding service, while bringing no harm to telephone penetration levels.

Trimming Interstate Costs

To set the stage for efficient competition, a prudent path would complete the process of fully recovering the interstate portion of traffic-insensitive loop costs

via the SLC, and recover fixed interstate switching costs in a similar manner. Full recovery of the interstate portion of nonusage-sensitive loop costs would require a average monthly SLC of approximately $5.85 per line (based on Southwestern Bell's 1994 loop costs, which closely reflect the average for the Bell companies). The increase (up $2.35 from the current charge of $3.50) could be phased-in over, say, three years to ease the transition. With the multi-line SLC already capped at $6.00, no increase is needed to fully recover fixed loop costs for multi-line business customers.

In addition to costs associated with the local loop, a portion of the central office switch must be dedicated exclusively to each and every telephone line. The cost of this switch connection does not vary with usage and is recovered most efficiently on a flat-rate basis from purchasers of local telephone service. Southwestern Bell estimates this interstate "switching-port charge" at $0.25 per line per month, based on Southwestern Bell's embedded switching network.

The recommended switching-port charge and SLC increase would go a long way toward reducing the interstate portion of the indiscriminate subsidy to basic local service. Recovering the entire interstate portion of the cost of customer access through federal end-user charges makes possible dollar-for-dollar reductions in LEC interstate access charges billed to IXCs. Since LEC access charges account for nearly half of the cost incurred by IXCs to provide long-distance service, this roll-back would allow significant cuts in long-distance prices. Such reductions, should they occur, would offer consumer gains and actually enhance telephone subscribership.3

How much would consumers gain by paying directly for local network access? In economics, this gain is known as consumer surplus, or the difference between the amount consumers would be willing to pay overall for a given quantity of service and the amount that consumers actually do pay. The objective is to isolate the net gain in consumer surplus resulting exclusively from lower interstate long-distance prices brought about by lower interstate access prices (assumed to be fully passed through to consumers). The figure below displays the consumer surplus and shows clearly that consumers in the aggregate can benefit from lower access and long-distance rates.

Area A