Ellig Vo Ip And Telecom Regulation 2004

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  • 1. VoIP and Telecom Regulation Jerry Ellig Senior Research Fellow
  • 2. Outline
    • What is “Voice over Internet Protocol?”
    • What policy conflicts does it create?
    • What does economic research say that is relevant to these policy issues?
    • What does economic reasoning suggest about policy issues on which there’s little to no research?
  • 3. What is “VoIP”?
    • Packet-switched, not circuit-switched
    • Can run on any data lines using Internet Protocol
    • Can (but doesn’t always) connect to regular telephone network
    • Providers pay business rates when they connect to the phone network
  • 4. Regulatory conflicts
    • VoIP:
    • Encourages broadband deployment
    • Increases local telephone competition
    • Lets US consumers end-run foreign telephone monopolies
    • But also undermines subsidies to local phone service
  • 5. Big policy questions
    • Economic regulation?
    • Access charges?
    • Universal service contributions?
  • 6. When can economic regulation benefit consumers?
    • Natural monopoly and sunk costs
    • Entry regulation: maybe, maybe not
    • Price regulation
    • VoIP seems to have low start-up costs and multiple competitors
  • 7. Interstate access charges
    • Paid by long-distance companies to local phone companies
    • 1.44 cents/conversation minute (June 2004)
    • $3.2 billion
    • (vs. $28 billion total interstate access revenues, 2002)
    • Exceeds incremental cost of access
  • 8.  
  • 9. Meanwhile, in the background…
    • Access charges are one of many forms of “intercarrier compensation”
    • Range of rates: 0.1 to 5.1 cents/minute
    • FCC has a stalled initiative to establish a single intercarrier compensation system
  • 10. Universal service funding
    • 8.7 percent assessment on interstate telecom revenues
    • $5.7 billion in 2003
    • $4 billion (69 percent) spent to subsidize local phone service
  • 11.  
  • 12. What’s the intended outcome?
    • Increase telephone subscription?
    • Increase telephone subscription among the poor?
    • Redistribute wealth to the poor via the telephone lines?
    • Improve educational outcomes?
  • 13. Subsidies and subscription
    • 1% local price reduction increases subscription by only 0.005%
    • Eliminating the access charge subsidy would reduce subscribership by no more than 1.5 percentage points (Crandall and Waverman 2000)
    • Reductions in access charges between 1984 and 1990 increased subscription by 0.45 percent (Hausman, Tardiff, and Belinfante 1993)
  • 14. Lifeline/Link-up subsidies
    • 10% increase in expenditures raises subscription rate by less than 1/10 of 1% (Garbacz and Thompson 1997)
    • Total increase in subscribership is less than 0.155 % (Ryan 2004)
    • Lifeline has no effect on subscription rates, and Linkup has mixed effects (Crandall and Waverman 2000)
  • 15. Why are people phoneless?
    • 1994 NJ survey
    • Long-distance
    • Collect calls
    • Calling card calls
    • Features
    • 1995 Texas survey
    • Long-distance
    • Cost of reinstallation after service cutoff
    • Hard to control who uses phone
    • Long-distance is 40 percent of average telephone expenditures even for households making < $10,000
  • 16.
    • “ Income, employment, and other measures of wealth or poverty are strongly related to low penetration not because the price of basic local phone service is too high, but because low-income users who run up large usage-related bills are unable to cover them.”
    • Mueller and Schement (1996)
  • 17. Cost per successful outcome (Expenditures per additional subscriber attributable to the program) $20,000 All high-cost support $11,000 High-cost loop support $5,155 High-cost switching support $1,899 Lifeline/Linkup
  • 18. Effective redistribution? Targeted to low-income users Lifeline/Linkup $700 million Lower for wealthier locations Internet discounts for schools/libraries $1.7 billion Not targeted based on income Subsidy to high-cost phone companies $3.3 billion Not targeted based on income Access charge subsidy $3.2 billion
  • 19. Schools & libraries program
    • No studies show whether schools/libraries have more Internet access than they would have in the absence of subsidies
    • No studies show whether the subsidies have caused any improvement in academic achievement
  • 20. 3 effects of mandated price increases
    • The amount consumers buy costs more
    • This redistributes wealth
    • Higher price reduces consumption
    • Value to consumers in excess of cost is forgone “consumer surplus.”
    • Reduced consumption reduces firm’s revenues and may reduce profits
      • Lost profits plus lost consumer surplus are called “excess burden.”
  • 21. Hidden costs of inflated LD and wireless charges “ Excess burden” of $739 million Wireless universal service contributions “ Excess burden” of $1.8-2.2 billion Interstate long-distance universal service contributions Reduce consumer welfare by $2.5- 7 billion Interstate long-distance access charges
  • 22. So what’s this have to do with VoIP?
    • VoIP is currently free from economic regulation, access charges, and universal service assessments
    • Results of including VoIP depend on outcomes and costs of these programs
    • VoIP debate is an opportune time to rethink telecommunications cross-subsidies and intercarrier compensation
  • 23.
    • For further information, see the Mercatus Center Public Interest Comment in the FCC’s IP-enabled services proceeding:
    • http://www.mercatus.org/regulatorystudies/article.php/785.html