Regulating Retail Pricing by ILECs

Even if all the players could settle on a way to resolve the UNE/TELRIC pricing issue-and the conference gave little reason for optimism on that score-government officials still must confront the distortions from the implicit subsidies embedded within retail prices for local service. Many participants felt competitive entry for residential local service will occur slowly, if at all, in the absence of change in the structure of retail telephone rates. It was proposed and widely agreed that policy should strive to separate retail prices from subsidies, by making the latter explicit rather than burying them in pricing formulae.

Among the specific components of rate realignment suggested at the conference:

• Geographic deaveraging of rates within perhaps three broad density bands, encompassing urban, suburban, and rural. Given the finite amount available in the high-cost fund, this would enable targeting of subsidies to those in the highest cost areas.
• Bringing residential and business rates into closer calibration with each other and with the costs of service. Rate changes would be phased in over a defined time period.
• Making subsidies explicit and portable, so that consumers in high-cost areas could use them, after the introduction of competition, for the telecommunications services and carriers they wished.
• Providing rate flexibility to ILECs. In order to prevent predatory pricing but encourage competition, a floor for ILEC rates might be set by a formula that allows rates to go down to the equivalent of TELRIC plus any explicit subsidy.
• Finding methods to create more efficient price structures for high-usage lines, whether serving businesses or residences (e.g., for Internet access).

Often enunciated at this and other policy conferences and enshrined within the 1996 Act, these goals have long eluded policy makers sensitive to the political fallout. And certainly political realities and other considerations dictate protection of residential customers from rate shock. But this need not preclude all local rate increases. Conference dialogue suggested that proper political leadership and forthright explanation of the benefits from competition could enhance the political feasibility of raising local service rates. A persuasive case can be made that in numerous areas competition will soon yield lower prices and innovative services to compensate for many initial rate hikes. The public does increasingly appreciate the attractions of an information superhighway, of multichannel, multimedia services, and of diverse choices for local, wireless, and long distance. Preceding efforts to enact the rate reforms listed, officials from private and public sectors alike could organize a program of education for consumers about the benefits of advanced telecommunications and the need for regulatory reform to encourage investment. This program would emphasize that investors will take greater risk and invest more in competitive local facilities and alternative technologies if regulators allow competition to drive prices (both retail and wholesale) from current levels over time. However, rate payers should receive assurance that retail price levels will remain regulated as needed to protect consumers from market power exerted through control of bottleneck facilities.

Send comments or questions to tricia.kelly@aspeninst.org