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

Abstract

On July 20, 1999, the Federal Communications Commission released a Notice of Inquiry (NOI) seeking comment 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 rated charges are attributable 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 reduce the support burden on high-volume long-distance and business customers (1). Although the Commission lists its primary 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) customers with zero or low usage. This Policy Paper shows that if the goals of Access Reform, both specifically and generally, are 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 eliminate the implicit subsidies created by the pre Reform access pricing structure will, by necessity, force some consumers 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 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 be common at all income levels suggesting that the recent changes in the industry are not excessively burdensome households of a particular income level. Thus, Access Reform would appear be fairly innocuous on fairness grounds.