Corporate Subsidies Are Not in Tennesseans’ Best Interest: The Case of Telephone Access Charges

In the realm of public policy, the most egregious form of tax comes from the imposition of hidden fees.  For telecommunications services, the prime example of this are what are referred to as access charges.  Access charges were once designed for telephone companies to recoup network costs by placing extra fees on long distance calls.  The purpose was to subsidize local telephone company monopolies.  While the monopolies have vanished, the arcane subsidies remain.  Since then, the longest (and most expensive) interstate calls have seen access charges decline to near zero levels, yet shorter distance calls, some within the same local calling area, can require extra charges of several cents per minute.  The amounts may seem small, but the can rack up billions of dollars of subsidies for these telephone companies.  In effect, telephone companies bill one another for calls between their networks and then pass these costs along to unwitting consumers in the form of higher prices.

 

 

The rates of these hidden intercompany payments differ depending on whether or not a customer uses a traditional telephone, wireless, competitive wireline or Internet-based services, with traditional telephone services garnering the largest subsidies.  These charges are not based on cost.  The chart below shows the variation in intercompany payment per minute, and how these payments differ by technology, firm size and distance.  In short, there is simply no rational economic justification for why this is so.

 

Click Here for the Chart

 

For example, a call from “inside a city” to “outside the city” can generate terminating access charges that are several times greater than a call going in the reverse direction, even though both calls use the exact same facilities in either direction.  This means that low-income consumers living in an urban area could be subsidizing more affluent consumers living elsewhere.  The access charge associated with a 30-mile intrastate call can average several times higher than a 1,300-mile interstate call.  This is the very sort of rate distortion that was outlawed decades ago when regulators discovered that railroads were charging more for short haul traffic than for longer distances.  The result there, and here, is to discourage investment and competition, by distorting market prices.

 

The disparity in intercompany access charges creates odd incentives.  As Tennessee consumers increasingly adopt wireless and high-speed Internet services, and disconnect their traditional telecommunications services, these subsidies undermine competition among different technologies, which discourages investment in advanced services while supporting outdated networks now in decline.  Tennessee consumers feel the pain over time through fewer choices and higher rates.  And, the amounts are not trivial to most households.

 

This “tax and subsidy” scheme has a long history in the telecom sector, but the consensus is that it is outdated, inefficient, not sustainable in the face of continued increased competition in the state, and, most importantly, discourages investment in new technologies in all parts of the state, including high cost rural areas.  Academic and government research on the matter are clear and unanimous. The practice of hiding taxes and subsidies in prices creates inefficiencies, the costs of which are borne by consumers.  Importantly in this context, most consumers prefer transparency in the taxes they pay and the use of the funds generated.  Neither of those is present in the current access charge scheme.

 

In developing a coherent policy for encouraging investment in broadband, wireless and other digital networks, the first step is to end the access charge subsidy for old wireline networks.  Subsidizing rural rates below cost only defeats the prospect that new investors might find it profitable to construct competitive alternatives.  Thus, the current scheme tends to deprive rural consumers of diversity and choices enjoyed by others.

 

If the hidden taxes resulting from access charges could be reduced and made uniform, competitors would have the right incentives to invest in new technologies and Tennessee consumers would have greater choice among them.  That would spare urban consumers the cost of subsidizing other networks, which, in turn, would provide the correct incentives for rural investment into newer technologies.  That, in turn, will lead to increased jobs and, most importantly, increased consumer benefits in the state as advanced technologies reach Tennessee citizens.

 

All across the country, state policymakers are addressing access reform, working to find solutions to outdated regulations.  Currently, legislators are adopting plans that implement a gradual reduction of the fees over a specified time.  But, ending these corporate subsidies is a must.

 

In summary, through reducing these hidden subsidies, Tennessee policymakers would lower rates for all long distance consumers in the state and free up resources for increased investment in advanced telecommunications technology.

 

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