Residential Rate Rebalancing: The three "Rs" that could revitalize competition

Jan 11, 2002 12:00 PM

Although incumbent local exchange carriers, long-distance companies and competitive local exchange carriers rarely see eye to eye on anything these days, there is one bandwagon all these service providers can jump on: rebalancing the local rate structure for residential customers. Due a legacy of Byzantine and often mind-boggling subsidies, some dating back to the Great Depression, competitive carriers are discouraged in many states from marketing services to consumers. In many cases, the subsidies that are part and parcel of regulation in this country are keeping CLECs from earning even a dime on residential customers.

A number of public service commissions have tried in vain to spur competition in the local market by slashing the UNE rates competitors pay to the incumbents, but this is not going get the job done. Even if UNEs were given out for free like lollipops at the doctor's office, CLECs in some states would still be in the red because of marketing costs.  Competitors are smart, as are their shareholders and financial backers, and they know that you can't make a business out of losing money. Until states conjure up the chutzpah to rebalance their rates, competitors will continue to shy away from serving households that generate little more than $25 to $30 a month in revenue.

If, however, state legislators and/or regulators decide to eliminate the nefarious web of cross-subsidization in favor rational pricing complemented by attractive bundles, they will enable competition will flourish. Today, an average customer's phone bill for local service is about $40 per month, but the price paid for local service is closer to $25.  The remainder is comprised of fees, taxes, subsidies, charges and other minutiae that end up costing consumers a pretty penny. 

If this system were abolished and flat rates for bundled service -- local, toll, caller ID, voice mail, call forwarding, plus a couple other goodies -- were simultaneously adopted with similar rates ($40 per month or so), CLECs and long-distance providers could effectively compete; whereas today they must offer service at the $25 level depriving them of any return on investment. The subsidy elimination would add a comfortable layer of profit onto a previously unattractive business. 

Business-focused CLECs have deployed facilities across the country -- Tampa, Fla., for instance has 35 facilities-based CLECs in the metro area -- and would, if properly motivated, pursue the residential customer.  But until the value proposition is there, these carriers will keep their facilities and marketing forces focused on the small and medium business customers to the continued dismay of consumers waiting for the benefits of the Telecommunications Act of 1996 to come knocking at their door. 

The good news is that rates can be rebalanced without a net increase in consumer phone bills. Massachusetts tried and succeeded. Today, Bay Staters are reaping the benefits of this decision and pay the same for phone service as their neighbors in other states. With smart regulatory policy and the cooperation of ILECs and competitors, this can occur elsewhere. 

The benefits are clear:

• Balancing the rates will allow competitors the breathing room they need to succeed in the local residential market

• Eliminating subsidies will allow customers to use their hard-earned dollars to pay for communications services, not prop up a moribund system that was created for a bygone era

• New opportunities in the state(s) will attract investment resulting in job creation and new technology deployment

Now we, as an industry, just have to convince lawmakers that this isn't the "third rail" of state politics, a.k.a. rate increases.

Robert A. Saunders is a senior analyst with The Eastern Management Group, a management consulting firm focused exclusively on the communications industry. He can be reached at rsaunders@easternmanagement.com.

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