End-user access charges—the Federal Communications Commission (FCC) allows local telephone companies to include a subscriber line charge (SLC) on phone bills to partially offsets companies’ expenses for building and maintaining the telephone network. (In some states, local telephone companies can also collect a state SLC.) The FCC contends that these increases were designed to adjust service prices to reflect costs, thereby establishing a pricing structure more like that of competitive markets. The theory is that with market deregulation, competitive pressures will force the industry to price all products and services at their respective costs. In reality, this justification does not accord with competitive market behavior and ultimately harms consumers.

Companies in more competitive industries, such as US banking and wireless communications, rarely set prices equal to the cost of each specific, stand-alone product. These companies instead respond to competition by lowering or eliminating the price of customer access, later recouping this cost by providing multiple products and pricing options. Wireless telephone service providers, for example, often discount or give away mobile phones in order to gain network subscribers. With more subscribers, wireless providers earn higher profits from commissions on airtime and increase their networks’ value to existing subscribers. These companies recognize that their overall profitability is tied to the total profits that customers generate, and not necessarily to profits from particular products or services.

New federal rules have reduced the rates companies charge one another to carry telecommunications traffic; to recoup part of the revenue lost, the FCC approved an access recovery charge that local telephone companies may include on customer bills.

Cost allocation—by design, the telephone network was to supply voice telephone service, with separate networks providing high-speed data and video services. Currently, local telephone companies are redesigning the voice network so that it will be able to transmit high-speed data and video. Redesigning and upgrading this network may cost hundreds of billions of dollars. Although this expensive investment is unnecessary for basic voice service, local telephone companies are attempting to shift its cost onto residential ratepayers. These added costs will threaten consumers’ ability to afford basic telephone service.

Rates: Policy

Cost allocation

In this policy: FederalState

The Federal Communications Commission (FCC) and state public utility commissions should devise cost-allocation methods that appropriately assign investment costs and accelerated depreciation expenses to the services that incur them.

Policymakers should adopt a user-pays principle to ensure that all services share in the allocation of their joint and common costs.