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Ellig Rotondi U Service In Texas Jan 2007
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Ellig Rotondi U Service In Texas Jan 2007



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  • 1. Outcomes and Alternatives for Universal Telecommunications Service: A Case Study of Texas Jerry Ellig Joseph Rotondi Senior Research Fellow Legal Fellow
  • 2. Motivation for the Study
    • Universal service has been a source of significant debate on both the federal and state levels
    • Previous Mercatus Center research has analyzed outcomes, forgone benefits, and performance measurement for federal universal service programs
    • Texas Legislature directed the Texas PUC to study and consider reform of Texas USF programs
    • This study applies methods we used to analyze federal USF in order to analyze effects of Texas USF and proposed reforms
  • 3. Questions Addressed
    • Outcomes: How do the High-Cost and Lifeline programs affect rates, service availability, and subscribership?
    • Forgone Benefits: What does Texas give up in order to fund these programs? (What is the “total social cost” of raising the funds?)
    • Reform options: How would proposed reforms affect the size of the High-Cost programs and the forgone benefits?
  • 4. Outcomes
    • Effect on subscribership =
    • # of subsidized subscribers
    • x
    • % price change due to subsidy
    • x
    • Elasticity of demand
  • 5. Lifeline Prices Note: “Local Rate” is a subscriber-weighted statewide average, assuming each company’s average residential rate is the midpoint in its range of residential rates.
  • 6. Lifeline Effect on Subscribership
  • 7. Estimating High-Cost Outcomes
    • Large company residential High-Cost:
      • Use data in PUC Report, Table 5
      • Assume change in local rate due to subsidy = average per-line support in each support range
      • Local rate is subscriber-weighted average rate for the large companies, assuming each company’s average rate is the midpoint of its range of residential rates
      • Change in subscribership is calculated for each subsidy range, then summed
    • Large company business High-Cost:
      • # of subsidized business lines is estimated.
      • Estimate assumes business lines are distributed among the per-line support ranges in the same proportion as residential lines, and annual subsidy to business lines totals $65 million
      • Remainder of calculation mimics calculations for large company residential high-cost
    • Small company High-Cost:
      • Use data in PUC Report, Table 7
      • Assume change in local rate due to subsidy = average per-line support for each company
      • Each company’s average local rate is assumed to be the midpoint of its residential rates
      • Change in subscribership is calculated for each subsidy range, then summed
  • 8. High-Cost Effect on Subscribership (Spreadsheet inputs)
  • 9. High-Cost Effect on Subscribership
  • 10. Comments on Outcomes
    • Programs targeted to low-income subscribers are much more effective at increasing subscription
    • Likely due to higher elasticity of demand among low-income households
    • Small company High-Cost program appears slightly more cost-effective than large-company High-Cost program
      • Small company rates are often lower than large company rates
      • A dollar of subsidy represents a larger % reduction in price
      • This generates a larger change in subscriptions per dollar spent
    • Results are consistent with previous scholarly research on the effects and cost-effectiveness of federal universal service subsidies
  • 11. Forgone Benefits
    • Any resource allocation decision involves a forgone benefit: what was not done because resources were used one way rather than another way
    • The forgone benefit is larger than the money spent, because the universal service assessment mechanism increases the prices of telecom services
    • If consumers use less of a service because USF assessments increase its price:
      • Consumers lose value they would have gained if they had used more
      • Telecom firms lose revenues and operating profits
      • Governments lose tax revenues
      • (Economists call these forgone benefits “deadweight loss.”)
  • 12. Measuring Forgone Benefits
    • Forgone Consumer Benefits approximated by
    • .5 x change in price due to USF assessment
    • x
    • Change in quantity due to USF assessment
    • Forgone Benefits for telecom firms and govt. approximated by
    • Change in quantity due to USF assessment
    • x
    • (Price – marginal cost)
    • (Formulas are texbook economics. Use 2005 data and 5.65% USF assessment rate)
  • 13. 3 major USF contributors
    • Local
      • Since demand is very insensitive to price, USF likely causes little change in quantity, and hence little deadweight loss
    • Long-Distance
      • USF acts like a per-minute surcharge
      • 1% price increase generates 0.7% reduction in minutes used
    • Wireless
      • USF acts like a per-minute surcharge
      • 1% price increase generates >1% reduction in minutes used
  • 14. Forgone Benefits, Long-Distance
  • 15. Forgone Benefits, Wireless
  • 16. Total Forgone Benefits, Texas USF
  • 17. Social Cost-Effectiveness (Change in subscribership divided by total social cost)
  • 18. Reform Options Modeled
    • Turn back the clock (pre-2000 funding via access charges)
    • Per number charge
    • Rate equalization on subsidized lines
    • Increase revenue benchmark
    • Adjust to reflect cost reductions
    • Target subsidies to low-income subscribers
  • 19. Turn Back the Clock
    • Pre-2000 system: implicit subsidies via high access charges, high long-distance rates, and toll revenue pooling
    • At 2005 prices and level of conversation minutes, it is mathematically impossible to set an access charge that raises anywhere near the $618 million in USF assessments collected in 2005
    • At 2000 prices and level of conversation minutes, an access charge of 7.15 cents/conversation minute raises $619 million. But deadweight loss would exceed revenues raised!
    • Main implication: The PUC was exactly right in 2000: Pre-2000 system was not sustainable
  • 20. Turn Back the Clock
  • 21. Per Number Charge (excl. Lifeline)
  • 22. Effect of Per Number Charge
  • 23. Rate Equalization Scenarios
    • Within Company: Raise rates on all of a company’s subsidized lines to highest rate charged by that company
    • Within Program: Raise rates on all subsidized lines in each program to highest rate charged by a company in that program
    • Across All Companies: Raise rates on all subsidized lines to highest rate charged by any incumbent wireline company in the state
  • 24. Rate Equalization - Results
  • 25. Increase Revenue Benchmark
    • “ Revenue Benchmark” in Large Company program is deducted from per line cost to determine subsidy per line
    • Alternative yardsticks for setting benchmark
      • National average rates
      • Prices of competitive alternatives
      • Assumed increases in local revenues due to vertical services, broadband, or video
    • We model an increase in Large Company revenue benchmark plus an equivalent reduction in small company per-line subsidies
  • 26. Effects of Increased Revenue Benchmark
  • 27. Adjustments for Cost Reductions
    • Actual changes in costs since 2000 are unknown
    • 2 kinds of changes may have happened:
      • Increased population density in “borderline” rural areas that have become outer suburbs or vacation destinations
      • Reduced costs of alternative technologies to serve very rural areas
    • We examine results of hypothetical cost reductions to see if closer scrutiny of costs may be warranted
      • Eliminate subsidies for least-subsidized lines
      • Cap subsidies for most-subsidized lines
  • 28. Hypothetical cost reduction scenarios (Per line subsidies are monthly, expenditures and savings are annual.)
  • 29. Target Subsidies to Low-Income Subscribers
    • Exempt Lifeline subscribers from effects of reforms that increase rates
      • Continue High-Cost subsidies at current levels for any Lifeline lines, or
      • Increase funding for Lifeline to offset any rate increases
    • Lifeline subscribers are 4.8% of total subscribers
    • If they are distributed evenly, then targeting subsidies reduces savings from any reform by 4.8%
  • 30. Reform Options Not Modeled
    • Provide all subsidies directly to consumers
    • Limit per line subsidies based on household income
    • Eliminate subsidies in deregulated exchanges
    • Eliminate subsidies where unsubsidized competitors offer service at price comparable to those they offer elsewhere
    • These would require significant extensions of the model
  • 31. For more information …
    • About the Mercatus Center: www.mercatus.org
    • Universal Service Research:
      • Performance measurement, comments to the FCC
      • Oct. 2005:
      • http://www.mercatus.org/repository/docLib/MC_RSP_PIC200507FCCPerfMeasures_051017.pdf
      • Jan 2006:
      • http://www.mercatus.org/repository/docLib/MC_RSP_ExPartePIC200602FCCPerfMeasures_060126.pdf
      • Consequences of federal USF
      • “ Costs and Consequences of Federal Telecommunications Regulation,” Federal Communications Law Journal 58:1 (2006)
      • http://www.mercatus.org/repository/docLib/MC_RSP_RPTJTelecomCostsandConseq_060307.pdf
      • Intercarrier compensation
      • “ Intercarrier Compensation and Consumer Welfare,” Journal of Law, Technology, & Policy (2005)
    • http://www.mercatus.org/repository/docLib/MC_RSP_RPTJIntercarrierComp_060303.pdf