MEASURED PROGRESS

Customers must be offered attractive calling plans. Local exchange carriers must recover their costs. Why not match price to usage, stimulate broadband adoption and compete on the strengths of underlying technologies and customer service?

Local measured service (LMS) is a viable alternative to traditional regulatory pricing. Simply stated, LMS means that users pay a measured rate for network usage when originating and terminating calls. Once a family of LMS calling plans is established, the best per-minute retail rate offered among the plans is presumed to be a lawful, or “safe harbor,” interconnection fee, chargeable to all other carriers using the local carrier's network.

LECs offering LMS will effectively compete with wireless carriers by creating buckets of minutes and bundles of services. LMS can also establish the correct price of access to the Internet. Traditional flat-rate local pricing prevents LECs from matching prices to Internet users, but LMS is more efficient. When access to the Internet is correctly priced, more consumers will likely make the choice to upgrade to DSL. And when voice over IP becomes widespread, LMS may be the only remaining method to charge customers for use of the local network when making toll calls.

LMS requires the continued maintenance of the existing federal universal service fund to offset proportionately higher costs to serve rural LEC territories. Besides being good public policy, LMS relies on universal service funds to make it workable in high-cost areas. Our data suggests the typical rural LEC's total revenue needs, offset by universal funds, permit local measured service and corresponding safe harbor interconnection rates in the range of 1.5¢ to 2.5¢ per minute.

Assuming a rural LEC offers a best-rate calling plan of 2¢ per minute, its safe harbor interconnection fee is 2¢. Because each carrier charges a safe harbor rate based upon its individual retail pricing decisions, a carrier offering a best-rate plan of 4000 minutes for $40 would calculate a 1¢-per-minute interconnection fee charged to all other carriers, including IXCs. Each carrier must balance its competitive environment against its desire to maximize interconnection revenue.

A market-oriented solution to interconnection is more rational than a mandated bill-and-keep regime, and preliminary data suggests competitive calling plans can be developed. Regulatory approval is required, and some critics have argued that regulators will never allow LMS. But the real question is not regulatory permission but market realities. LECs will easily demonstrate that reformation of retail pricing and interconnection is essential for their survival and beneficial to customers and competing carriers alike.