Stephen B. Pociask*

Executive Summary

The Coalition for Affordable Local and Long Distance Service ("CALLS") recently submitted modifications to an initial plan it filed with the Federal Communications Commission ("FCC"). At the request of the Alliance for Public Technology ("APT"), this study reevaluates the consumer benefits that would result if the modified plan was implemented and compares these benefits to the initial CALLS plan.

The initial CALLS plan proposed reductions in switched access rates, consolidation and changes in the levels of fixed line charges, expansion of Lifeline support for low-income consumers, and establishment of rural caps supported by $650 million in explicit universal service support. While the modified plan still includes all of these main components, it proposes lowering the initial plan's caps on monthly fixed line charges, as a means to provide more benefits to low-usage rural telephone customers, and new price reductions on special access services.

Recalling the results from the initial study of the plan, the study predicted substantial consumer welfare benefits as a result of implementing the plan. Based on the modification to the initial CALLS plan, revised estimates of consumer benefits were analyzed. The following represents key findings of this study on the latest CALLS plan:

• The latest plan will generate $7.4B in annual benefits to residential and business consumers. Compared to the initial CALLS study, this represents an increase of $2.2B or 41% in consumer welfare benefits.
• Stacked up against the initial plan, residential consumers should receive an increase in benefits of 54%, mostly due to lower residential subscriber line charge caps under the modified plan.
• Residential consumers are predicted to benefit significantly across every major household income group, compared to the initial CALLS study. Furthermore, the variance of benefits across income categories decreased slightly, indicating a more uniform distribution of benefits than previously observed.
• Due to decreases in the subscriber line cap for rural subscribers, a disproportionately higher share of the new consumer benefits are predicted to accrue to rural customers under the modified plan compared to the initial plan. For example, urban customers should benefit $0.39 per household per month more than the initial plan predicted. In comparison, a rural customer will see an additional benefit of $0.76 per household per month more than the initial plan.
• While this study focuses on many of the direct benefits that will result from implementing the CALLS plan, there are other benefits that have not been quantified in this analysis. For example, today, consumers pay PICC fees that are passed through from IXCs. Because the CALLS plan eliminates the PICC fees to residential and single line business customers, these customers benefit, including customers served in areas operated by non-price cap local carriers. These spillover benefits are estimated to be worth $120M of reductions on customer bills.
• Finally, in comparing the initial CALLS plan to the modified plan, businesses are estimated to obtain an additional 37% increase in benefits, predominantly due to reductions in special access rates that were not included in the initial CALLS plan.

While providing substantial improvements in benefits for the average consumer, the modified CALLS plan provides significant improvements for low income and rural consumers, compared to the initial plan. In short, the plan makes improvements in providing more uniform benefits across customer groups. Furthermore, the CALLS plan, as modified, takes significant steps in setting more rational economic prices that will facilitate additional benefits from competition, and it does this without harming low-income and rural customers.

Background and Purpose

Recent modifications to the CALLS plan require a reassessment of the consumer benefits of the CALLS plan.8 The plan was modified, in part, due to concerns that the initial plan offered fewer benefits to rural customers and residential consumers who make fewer long distance calls. The purpose of this section is to analyze how well the modified CALLS plan addresses these concerns and to quantify the benefits in this regard.

The plan's two major modifications include decreases in prices for special access services and reductions in the caps placed on subscriber line charges (SLC). First, the modified plan sets lower caps on the SLC at the outset and then over the five-year plan. By July 2004, the cap will reach $6.50, instead of $7.00 as proposed in the initial plan. This new $6.50 cap provides additional protection for rural consumers.

In its second major change, the latest plan offers new price reductions for special access services - namely, services that include high-speed dedicated transport between the customer premise and interexchange carrier switch, thus bypassing local switched access. Under the modified plan, these special access revenues will be subject to X-factor reductions of 3% in July 2000, 6.5% in July 2001, 6.5% in July 2002 and 6.5% in July 2003. Assuming inflation continues its modest increase, special access prices will decrease by nearly 14% by July 2003.

In addition, two major long distance carriers, AT&T and Sprint, have pledged to offer at least one calling plan that does not charge a monthly minimum usage fee. This assurance offers customers who make no long distance calls an opportunity to avoid paying monthly minimum charges. While the repercussions of this pledge will lead to direct benefits to their customers, and possibly competitive responses from other carriers to eliminate their minimum usage charge plans, this study does not include these benefits. As a result, the estimates of benefits will be conservative.

Finally, the CALLS long distance members have pledged to pass access savings from this plan to their long distance customers. This is consistent with and strengthens the assumptions in the original assessment of consumer benefits.

Data Improvement

Before analyzing the benefits that would result from implementing the latest CALLS plan, it should be noted that the November 1999 baseline estimates were revised from the initial study. This revision uses more recent data from the FCC November 1, 1999 tariff filing to implement the fifth circuit court decision. The revised figures, absent of any modification to the CALLS plan, would yield additional consumer welfare benefits of $565 million or approximately 10% above the estimate in the original study. Hence, the original study was, in fact, conservative as it claimed at the time. These more recent data are reflected in the Appendix and are used throughout the remaining portion of this study.

Results

Using the identical methodology from the assessment of the initial CALLS plan, a reevaluation of total consumer welfare benefits was performed assuming the revised rates that result from modified plan. Figure 1 shows the distribution of benefits across end-user market groups and indicates marked improvement for those customers.

Total consumer welfare increases from $5.3B (using the initial CALLS plan assumptions) to $7.44B per year (using the modified CALLS plan assumptions), an increase of 41% from the initial study. Special access services increases as a direct result of rate reductions and will benefit carriers and large business enterprises. Residential customers see increases in benefits predominantly due to lower monthly fixed line charges. Increases in business customer benefits can be explained largely by the data revisions (discussed above), as well as by lower monthly fixed line charges for single-line business customers.

A review of residential consumer benefits demonstrates substantial improvements across major customer groups. As Figure 2 shows, the annual welfare gain from the CALLS plan results in additional benefits for every major household income group. Compared to the initial study, an analysis of the variance in household benefits concludes that these new results exhibit slightly less dispersion around the mean benefit. In other words, not only are household benefits greater in magnitude under the modified CALLS plan, but also benefits are somewhat more uniformly distributed among households of varying income groups. Thus, consumers across all income groups are unequivocally better off under this latest plan.

In the initial study of consumer benefits, the CALLS plan produced small, but positive results for rural customers. Under the modified plan, customers in all geographic areas are estimated to benefit from the rate reforms, particularly as a result of reductions in the cap on fixed monthly line charges. Assuming that geographic deaveraging occurs to the maximum levels permissible under the plan, then as Figure 3 indicates rural customers receive substantial positive benefits under the proposal. In fact, comparing the improvement to the initial plan, the modified plan suggests disproportionately higher benefits to rural customers. Thus, concerns about rural customer benefits appear to be addressed without fully sacrificing the benefits of more rational cost-based pricing.

About the Estimates

It should be stressed that these estimates are conservative. This study does not attempt to anticipate significant marketing changes that may result from efficient pricing, nor does the study attempt to capture benefits from improving customer selection (substitution effects) of long distance plans. The study does not include the benefits of lower toll rates for those rural customers who cannot reach the Internet through local dial-up access. Also excluded from this study are pledges by long distance carriers to offer at least one long distance plan containing no minimum usage charges, which can benefit customers who make few long distance calls. Recent data from PNR Associates indicates that 12% of long distance customers had no long distance calls in a given month and 22% of all long distance customers pay minimum usage charges.9 According to the PNR data, long distance customers who pay minimum usage charges could avoid (on average) $2.77 each month, under the CALLS proposal. This study excludes these benefits, since they were not a direct rate change proposed in the modified plan.

While this study focuses on many of the direct benefits that will result from implementing the CALLS plan, there are other benefits that have not been quantified in this analysis. For example, today, consumers pay PICC fees that are passed through from IXCs. Because the CALLS plan eliminates the PICC fees to residential and single line business customers, these customers benefit, including customers served in areas operated by non-price cap local carriers. These spillover benefits are estimated to be worth $120M of reductions on customer bills.

There are several other potential benefits not captured in this study. For example, the assumptions may overstate the levels of fixed monthly line charges, because the emergence of competitors will likely result in pressure to lower monthly line rates. While the consolidation of the SLC and PICC simplify customer bills, this benefit could not be objectively quantified for this study. Also, there are income effects that would lead to additional consumer benefits. Finally, in a clarification filing with the FCC on March 29, 2000, CALLS proposed dropping the local Universal Service Fund charge on Lifeline subscribers.10 All of these potential benefits were excluded from this study in order to keep the results as concrete and conservative as possible.

Conclusion

In light of these results, the CALLS plan, as modified, will yield marked improvements in consumer welfare when implemented. For residential consumers, improvements in benefits will accrue across all income groups and geographic locations, as shown in this study. In short, the CALLS plan attempts to develop more rational pricing that will lead to more effective competition and efficient entry, while not sacrificing consumer safeguards. Thus, failure to reform these rates will withhold these benefits from consumers, and therefore, policymakers should adopt the modified plan.

7For an extensive review of the initial plan, see the initial study - Stephen B. Pociask, "An Assessment of Consumer Welfare Effects of the CALLS Plan, Joel Popkin and Co., Oct. 20, 1999 at www.apt.org/policy.

8Memorandum in Support of the Revised Plan of the Coalition for Affordable Local and Long Distance Service, in CC Dkt. Nos. 94-1; 96-45; 96-262; and 99-249; filed March 8, 2000. For a list of rate change assumptions similar to the initial consumer benefits study, see the Appendix at the end of this analysis. Except for the assumption modifications described briefly above, these rates were developed similarly and explained fully in the initial study.

9MarketShare Monitor, PNR and Associates, and Market Facts Inc., Bill Harvest data ending 1999.

10 Letter from Kathleen Wallman to Magalie Roman Salas, CC Dkt.94-1; 96-45; 96-262; 99-249; and 96-98, Ex Parte filing March 29, 2000.