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Legislators Are Urged to Permit Logical Pricing of Phone Service.

Up to 10 or 15 years ago, the peculiarly American institution of regulated public-utility monopoly served us very well. The quality of service was generally extremely good; productivity improvement continuous; and--this is the acid test--prices had over the preceding decades fallen in real terms: charges for local telephone service and gas rose considerably less than the Consumer Price Index, and charges for electricity and long-distance telephoning had declined in absolute terms as well. Not surprisingly, practically no one therefore had any bad things to say about either public utilities or their regulators.

Today, in contrast, the entire institution is turmoil and disrepute. Companies and regulators compete with one another for the label of public enemy number two, each knowing that the loser will automatically be characterized as number one.

Some Prices Have Outpaced CPI

Prices have outstripped the Consumer Price Index--in electricity and gas for a decade, in local telephone service during the last two or three years.

And worse lies ahead: electricity rate payers in many jurisdictions face the prospect of 30 to 60-percent increases in rate as new plants either do come into service and the rate base, or do not and are amortized. It is widely predicted, similarly--and I see no reason to doubt--that the basic monthly charge for telephone service is in the process of doubling over the next several years.

The main message of my talk, which many of you, I fear, and most of your constituents, I am certain, will find unpalatable, is that there's not a great deal you can really do about this, directly.

Outside Forces Determine Fate

The reason for this comparatively gloomy observation is what we have learned over the last 10 to 15 years--namely, that it is forces [technological and economic] almost totally outside the control of utility companies and regulators, preponderantly, that determine how well these industries perform. The happy record of the 1950s and '60s, it has become abundantly clear, was the product primarily of a [favorable] series of such exogenous factors. . . . In the mid and late '70s, in contrast, the outside world turned sour [economically].

There aren't enough hats in the world, or rabbits to pull out of them, to make all the [resultant] problems go away.

Consumer Advocacy Won't Do

Nor will the setting up of layer upon layer of consumer advocacy boards and intervenors. In New York State, the governor and half of our legislature are working now on constructing a fourth layer, and I already find myself wondering when they will be ready for a fifth: I shudder to think what would happen if all of you were paid on a piece-rate system.

In communications, the problems, in my opinion, would be recognized as really quite minor if it were not for a great deal of demagoguery and hysteria: I predict that five years from now we will look back and wonder what all the excitement was about.

The problems flow from our attempt to ride two thoroughly incompatible horses to reach our social goals--competition and cross-subsidization. On the one side, we have presided over a dramatic and accelerating transformation of telecommunications during the last 25 years, from a collection of tightly regulated, integrated, franchised monopolies into a battleground of intense competition. And while it is arguable that we may one day wish we hadn't made this change, my own feeling is that it was the inevitable consequence of the explosion of communications and computing technology--of microwave, coaxial cable, the microchip and microcomputer, satellites, cellular radio, fiber optics--a revolution that continues unabated to this day.

I believe we would never have been satisfied to leave all the dazzling opportunities opened up by these burgeoning technologies to a single monopoly supplier, no matter how efficient.

Rates Not in Line with Costs

The other component of the problem is that under the regime of regulated monopoly we let the structure of rates for various telephone services get way out of line with costs. Specifically, and most glaringly, we kept over these same years loading more and more of the costs associated with simply providing subscribers with a telephone and a dial tone onto the charges for long-distance calling, in an essentially political process, designed to hold down the basic monthly charge to the user.

Political Expediency Won Out

It was politically an easy thing to do, because it relieved state regulators of the need to let basic local rates go up, and long distance was able to absorb those rapidly increasing charges--which in recent years added about 60 percent to interstate long-distance rates--because technological progress there was so rapid that its effect was merely to keep rates from falling as far as they would otherwise have fallen.

The system of regulated cross-subsidizing monopoly served us well: between 1940 and 1980, the proportion of households with telephone service increased from 37 percent to 93 percent, largely because in that same period the real price of the basic monthly charge--that is, the nominal price adjusted for economy-wide inflation--actually declined more than 55 percent!

This kind of cross-subsidization, however, was possible only under monopoly: Once an industry is opened to free entry, competitors will invade the subsidizing markets where prices have been artificially held above cost, and eventually dry up that source of subsidy. And that is exactly what is happening at this time in telecommunications.

No Reason to Be Hysterical

There is, however, no reason to be hysterical about the need to realign telephone rates in order to eliminate the incompatibility between the new policy of competition, on the one hand, and cross-subsidization, on the other. It is worth asking ourselves where we would be if over the last 25 years we had not, succumbing to political expediency, increased the tax on long-distance calling from 10 or 15 to something like 60 percent, but had instead let the charge for basic service rise with the Consumer Price Index.

We'd Be Congratulating Ourselves

I'll tell you where we would be: the percentage of households with telephone service would have risen, according to our best estimate, from 37 not to 93 but to 88 percent, and we would today be congratulating ourselves on how close we had come in this period to virtually universal service.

Instead, confronted now by the need to pay the piper, we encounter outrage and hysteria.

And what about the prospect of the basic monthly charge rising from, say, $10 to $20 over a five-year period? Suppose I had told you in 1975 or 1976 that the price of gasoline would in the next five years rise from between 40 and 45 cents a gallon to $1.25--that's more like tripling, not doubling. I think you would have predicted rioting in the streets. Well, it was painful, but we have just recently re-elected Ronald Reagan, by an overwhelming majority--that is not, in my view, the equivalent of rioting in the streets.

People Have Big Expectations

The difference between the two situations is that public-utility regulation has in the telephone case generated ridiculous expectations. People who spend $75,000 or $80,000 for an average house, including thousands of dollars to equip it with electric service and thousands more for plumbing, expect to have telephone service attached for $50. People who spend $10 for a single night out at the movies--not including the price of the babysitter--or $15 to $25 a month for Home Box Office think they are morally entitled, because of regulation, to be able to make unlimited telephone calls over an entire month for only $10.

I urge you not to play up to these economically unjustified expectations, on the one side, or to try, on the other side, to reverse the course of history that has finally undermined them. The task of intelligent public policy is to embrace competition, to welcome the advantages that it will bring to the economy and to all of us, while devising other ways of serving the social purposes that were previously served by overcharging some users in order to subsidize others.

The Solution Is Lifeline Rate

The obvious solution is to offer low-income subscribers a lifeline rate--along with, perhaps, a certain allowance of local calls per month.

The total cost of such a subsidy would be only a small fraction of our present 60-percent tax on long-distance calling alone. I doubt it would take more than a one or two-percent tax on all calls, local and toll: remember that 85 to 90 percent of all calls are local.

What possible logic can there be to perpetuating a 60-percent tax on long-distance calling--that is, on the use of our most dynamic technology, which offers the greatest prospect of putting our contry back on the road to healthy, continuous and noninflationary economic growth--in order to subsidize the price of telephone service to everyone, rich and poor alike, mainly at flat rates that entail a zero charge for local calling? Please do not confuse the preservation of such an irrational system with your duty to promote the public interest.

Present Mess Will Disappear

I predict that we will get over the present mess--unless, that is to say, you try to reverse the course of history and defy the laws of economics, the most fundamental one of which is that there is no such thing as a free lunch. And, as I say, I think there's a high probability that five years from now we will wonder what all the shouting was about.
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Author:Kahn, A.
Publication:Communications News
Article Type:transcript
Date:May 1, 1985
Words:1573
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