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The Vanishing LATA: Pricing Chasms and Clashing Markets for Toll Service

Fortnightly Magazine - July 15 1996

merely fall to a par with the average price level for U S WEST. Reducing prices below the average U S WEST price level may produce a different conclusion.

In contrast, lower toll rates are anathema to AT&T. Whether AT&T benefits from declining toll prices depends critically on the assumed elasticity of demand. Low demand elasticity (-0.5) causes AT&T's revenues to decline. Conversely, high demand elasticity (-2.0) lifts AT&T toll revenues. Thus, AT&T's argument that local rates cross-subsidize toll rates comes as no surprise. These results are consistent with economic axioms.

However, for U S WEST we must consider impacts before as well as after the 1996 Telecommunications Act. Before the Act, U S WEST would have stood at risk, since there was no interLATA entry quid pro quo for RBOCs when IXCs received 1+ intraLATA dialing parity. Nevertheless, U S WEST would see an increase in net revenues in the lower mileage bands if it lost sales to competitors (the 8.8¢ CAC rate collected by U S WEST exceeds its toll rates at lower mileage bands).

Now that U S WEST's entry into the interLATA market (in-region) is linked under the Act with 1+ intraLATA dialing parity, a price-adjustment period will ensue. Both U S WEST and the IXCs offer volume discounts to customers with relatively high usage. Similarly, customers with relatively small intraLATA and interLATA usage, purchased separately from U S WEST and AT&T, may exhibit a combined usage that now qualifies for a discount plan. Whether, and to what extent, the merged markets will benefit customers with inconsequential aggregate toll demand remains unclear.

Finally, our analysis reinforces the importance of cost-based pricing for U S WEST's toll and local rate. Although night/weekend, MTS, additional-minute rates for U S WEST do not exceed the CAC, its aggregate MTS revenues do exceed the aggregate of CACs. However, if rate rebalancing leads to lower CACs, reductions to some or all toll rates may follow.

We suggest two questions for further study. First, as discussed above, do RBOCs and IXCs face fundamentally different toll-cost functions? Second, and beyond our resource capability, how will the pending merger of intra- and interLATA markets impact demand elasticities? t

Michael Lee is bureau chief of rate design and economics at the Montana Public Service Commission. He has an MA in economics from the University of Montana. William Rosquist is a utility rate analyst with the PSC. The opinions expressed in this paper are those of the authors and do not necessarily represent the views of the Montana PSC or any individual Commissioner.

1. With the AT&T breakup, the divested Bell carriers could serve only "within" a LATA (em not "across" a LATA boundary. Remaining traffic, the so-called "interLATA" market, fell into the domain of AT&T, MCI, and other interexchange carriers.

2. See, section 271, the Telecommunications Act of 1996. To gain entry to the interLATA market prior to 1999, U S WEST must offer equal access in the intraLATA market.

3. Rivalrous (not effective) competition, if allowed, could lie veiled in repackaged toll services.

4. Dr. Lester