^{Democracy & Technology Blog} Access reform moves forward in Tennessee

Tennessee’s House Commerce Committee heard testimony this week on reforming intrastate access charges that long-distance providers pay to local tlecommunications carriers to originate and terminate calls between local calling areas within the state.
Access charges traditionally have been set far above cost to generate subsidies to maintain ubiquitous and affordable local service. In the Telecommunications Act of 1996, Congress directed the FCC and the states to pull the hidden or implicit subsidies out of access charges, because they are unsustainable in a competitive market. The FCC reduced interstate access charges, and exhorted the states to reduce intrastate access fees.
A brief paper that George Gilder and I prepared notes that in Tennessee today, for example, a long-distance provider would pay one randomly selected small rural carrier only 4.45 cents per minute to originate and terminate a call between any location in Tennessee and Los Angeles or New York City. But the same phone company would collect 22.84 cents per minute to originate and terminate any non-local call between two points within Tennessee. Yet the carrier furnishing the same service and incurring the same cost in either case.

(Note: with respect to any particular call, a local carrier generally provides only an originating or terminating service, however the long-distance carrier pays originating and terminating fees to the local carriers on either end of the call. The combination is what a long-distance carrier has to recover from consumers. For illustrative purposes, both we and the FCC reduce the number of variables and avoid arbitrary selections by focusing on what carriers charge for both origination and termination.)

We recommended that Tennessee’s intrastate rates should mirror the interstate rate the FCC has established for each carrier, which is fully compensatory. The recent National Broadband Plan makes a similar recommendation (p. 148).

The Tennessee Regulatory Authority recently considered this matter, as I described here. The vote at the TRA against the smaller carriers who are seking to maintain the status quo was 3-1, which must have come as a shock.
Friends of 17 small, rural telephone companies and cooperatives, including a sheriff, a city councillor and a dentist, showed up at this week’s hearingsto emphasize that the providers are active, valued members of their local communities who provide great service. No one disputes any of that.
Nor did anyone point out the flip side, i.e., that rural carriers — who are legally entitled to recover their costs plus an 11.25% rate of return — have been criticized for years for spending whatever it takes to gold-plate their networks. The FCC got so disgusted that many years ago it established price caps for larger providers, so whatever they spend comes out of their own pocket. Largers carriers have been busy cutting costs and developing new sources of revenue ever since. Smaller carriers have fought hard against price caps, and they have always managed to win. In a competitive market, sellers do not always get to recover all of their investment.
Aside from the fact that the rural carriers and their friends like things just the way they are, here are a few specific issues that were discussed during the hearings:

• Local rateimpact
  Rural company representatives warned that rates for local service in rural areas could increase from $12 to $20 per month if intrastate access charges are reduced. That’s still not bad. According to FCC data (p. 13-1), nationwide average local rates for residential customers in urban areas were $25.62 back in October, 2007.
• Mirroring interstate rates
  They also claimed interstate access rates are not fully compensatory, so they are not an appropriate benchmark. The carriers have built networks that provide both local service and access to long-distance services. Cost allocation has been a perennial source of friction throughout the industry’s history. The FCC has taken the position — and most observers agree — that there has been a significant over-allocation of costs to long-distance for the purpose of generating subsidies for local service. In recent times, the FCC has set interstate access charges to reflect the actual cost of providing access for long-distance, not to subsidize local service. If the interstate rates have been set below the cost of providing access, the carriers have a takings claim under the Fifth Amendment and should hire lawyers to vindicate their legitimate rights to recover their actual costs plus an 11.25% return. I am not aware that this has ever happened.
• Passing through savings
  The small companies complained there is nothing in the legislative proposal that would force telecom “giants” to pass through savings from lower intrastate access charges to their customers. In our paper, we cite research by Debra Aron, et al., which confirms that access reform leads to lower retail toll prices for consumers — to the full measure of the access reductions — without flow-through mandates. Telephone companies already have an incentive to reduce prices when their incremental costs fall, according to the authors, because at lower incremental costs profits are higher at lower prices. Legal pass-through requirements “have no measurable effect.”

As the hearings neared an end, the main issue seemed to be how long of a transition would be appropriate for bringing intrastate access rates to parity with the lower interstate fees. Although the rural carriers have seen this coming since the 1996 law was signed by President Clinton, they are seeking 10 more years. The National Broadband Plan proposes 2-4 years.
The House Commerce Committee will meet again next week for further deliberations and possibly a vote.