US/ND-3: Residential subsidy? -Was:The FCC's and State Commission's

Residential subsidy? -Was:The FCC's and State Commission's

Jack McFadden (jmcfadden@mail.state.tn.us)
Mon, 09 Sep 1996 12:32:13 -0500 

On 9/6 Marty Tennant wrote:

From: Marty Tennant <marty@sccoast.net>
Date: Fri, 06 Sep 1996 08:24:43 -0700
Subject: The FCC's and State Commission's Role

I'd like to provide a little backgound and a few predictions on
the current and future state of universal service.

First of all, the current rate structure in the US has businesses
paying from 2 to 3 times the rate paid by residential users.  This has
been part of the strategy of Universal Plain Old Telephone Service for
as long as most people can remember.  Business rates subsidize
residential.

---[stuff deleted]---
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I would observe that we should not take as a given the statement: 
*Business rates subsidize residential*.  While I find the general thrust 
of Marty's comments regarding likely future trends in telco rates 
plausible, I have encountered cost studies by state regulators & others 
that show that residential service is not historically a net loss 
proposition for telcos.  While there are certainly specific locations that 
cost more to serve than is charged - e.g. the most remote rural residence 
- in aggregate I would not assume that residential service requires a 
subsidy from business rates.  (Telcos have their own cost studies that 
typically peg the cost of residential service at a higher rate than the 
cost studies to which I refer.  Opposing cost studies are frequently 
presented to state regulatory commissions in proceedings which set rates.) 
 

Business rates are indeed higher, implying either that business users put 
more load on the network and actually cost more to serve, or telcos make a 
better profit margin serving business customers, or both.  The dilemma: 
this is a historical perspective.  In a future competitive environment 
where no one provider is guaranteed all the residential phone service, the 
aggregate cost for a given provider of providing residential service will 
be a function of which subset of customers are being served, and the costs 
of serving those particular customers.  In theory, a *carrier of last 
resort* could be stuck with all the high cost customers and not enough of 
the profitable ones to sustain affordable residential rates, unless 
through some subsidy mechanism.  

Of course, the other thing that could happen is that in a competitive 
environment the twin mechanisms of market forces and technology could 
combine to produce the deployment of more efficient (e.g. wireless local 
loops?) infrastructure that allows providers to offer stable residential 
rates and still make a profit.    ...Now where is that crystal ball?

   -Jack McFadden