Inefficient Competition in Local Exchange Access Services

Abstract

Local exchange companies (LECs) charge interexchange carriers (IXCs) for access to the local telephone network and for transport of telephone calls to the IXC's premises. In the 1990's, competing companies, called Competitive Access Providers (CAPs), entered this market. CAPs provided transport services from LEC offices and the premises of larger individual customers to the IXCs' networks. When LECs used usage-sensitive fees to recover the largely usage-insensitive costs of access provision, the highest volume users were required to contribute a greater share of the local exchange company's costs. For such customers, total revenues recovered from access were higher than the costs of stand-alone access services, leading LECs to claim that the pricing structure created an artificial incentive for CAPs to enter the market. Evidence presented in this paper supports that hypothesis. In particular, the level of the Common Carrier Line Charge, an access fee to recover the joint and common costs of the local loop, is strongly correlated with entry of CAPs. The levels of fees for transport and switching services are not significant, reflecting different characteristics of these charges. The results are robust across a variety of regulatory models.