An Economic Analysis of the Fcc's Notice of Inquiry on Flat Rate Charges in the Long Distance Industry

19 Pages Posted: 20 Feb 2004

See all articles by George S. Ford

George S. Ford

Phoenix Center for Advanced Legal & Economic Public Policy Studies

Date Written: May 2001

Abstract

On July 20, 1999, the Federal Communications Commission released a Notice of Inquiry (NOI) seeking comment "on the impact of certain flat-rated charges on single-line residential and business customers who make few, or no, interstate long-distance calls (1)." These "flat rated charges are attributable to universal service and access charge reform (1)" that the Commission implemented in January of 1998. The purpose of this reform, as indicated by the Commission, was "to phase in an economically rational common line rate structure . . . and to reduce the support burden on high-volume long-distance and business customers (1)." Although the Commission lists its "primary focus" as being on the consequence of its own policy reforms, it also inquired about the impact on consumers of flat monthly account maintenance fees charged by some interexchange carriers (IXCs) to customers with zero or low usage.

This Policy Paper shows that if the goals of Access Reform, both specifically and generally, are to be accomplished, it is necessary that the pricing structure of access services and long distance rates consist of both fixed monthly fees and usage charges. Such cost causative, two part pricing structures are consistent with both the stated intent of the Commission's Access Order and the general economic principles of efficient pricing. The Commission's intention to eliminate the implicit subsidies created by the pre Reform access pricing structure will, by necessity, force some consumers to pay more. Specifically, previously subsidized consumers will pay more while previously subsidizing consumers will pay less. This consequence of Access Reform was expected, indeed inevitable, and is no cause for alarm. Any attempt to regulate away intended consequences is particularly undesirable.

In addition, this Policy Paper provides some evidence on the relationship between usage and income. This evidence indicates that while usage and income are positively correlated, the correlation is weak. Furthermore, low usage (the focus of the NOI) is found to be common at all income levels suggesting that the recent changes in the industry are not excessively burdensome to households of a particular income level. Thus, Access Reform would appear to be fairly innocuous on fairness grounds.

Keywords: Telecommunications, access charges

JEL Classification: K23, L10, L50, L96, O33, 038

Suggested Citation

Ford, George S., An Economic Analysis of the Fcc's Notice of Inquiry on Flat Rate Charges in the Long Distance Industry (May 2001). Available at SSRN: https://ssrn.com/abstract=504564 or http://dx.doi.org/10.2139/ssrn.504564

George S. Ford (Contact Author)

Phoenix Center for Advanced Legal & Economic Public Policy Studies ( email )

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

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