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Capitol Comment

    Capitol Comment 178 - Administered Prices Administer Economic Disaster

    03/06/1998

    The Ohio Legislature is expected to consider legislation to reduce telecommunications access fees. These fees flow between various telecommunications providers in order to transfer telephone calls between different companies' networks. For example, long distance companies pay a fee to local telephone companies to bring a long distance call all the way to a consumer's home - usually the last portion of that call travels over a local telephone company's network.

    The Ohio Legislature is expected to consider legislation to reduce telecommunications access fees. These fees flow between various telecommunications providers in order to transfer telephone calls between different companies' networks. For example, long distance companies pay a fee to local telephone companies to bring a long distance call all the way to a consumer's home - usually the last portion of that call travels over a local telephone company's network. Instead of mandating prices for access, or any service, government activity should focus on efforts to remove existing distortions and cross-subsidies in telecommunications markets.

    The power of government to command resources from the economy is limited to two fundamental activities: regulation and taxation. America's telecommunications markets drag the heavy chains imposed by both types of government intrusion. Potentially at issue in Ohio is legislation that would set fees for one aspect of telecommunications service, access to local telephone networks. Make no mistake - administered prices harm consumers. Prices play an important role in a market economy - they coordinate the decisions of producers and consumers. Administered prices are inflexible and, if wrong, can distort decisions made in the marketplace.

    Price setting - whether done by a government agency, legislature or private entity - is ultimately arbitrary. Of all the possible combinations for price and quality, consumer satisfaction, and the cost of a product or service, there is no single entity to accurately determine the price of a product or service. Prices should be set by the dynamic forces of a market, which harness information beyond the reach of any individual, to coordinate the decisions of many buyers and sellers. Despite volumes of data and analysis, prices are not accurately set without competitive forces.

    Subsidies prevent competition. The market for telecommunications services - local and long-distance telephone service, as well as advanced and new services - is heavily regulated. There is a trilogy of telecommunications regulation - interconnection, access fees and universal service - that are intertwined to the point where it is not possible to address one component independent from the others. Telecommunications services, especially telephone services, depend upon an intricate and complex cross-subsidy system that lies at the heart of the relationship between interconnection, access fees and universal service.

    The universal service program is fundamentally flawed and should be revamped.1 However, the symbiotic relationship that it has with the structure of access fees prevents a change in one without a change in the other, whether it is intended or not. Certainly, the entire subsidy and tax regime can be substantially improved. However, a piecemeal approach to reform may create more economic damage than economic benefit, while slowing the march toward full competition in all telecommunications markets.

    Regulation has prescribed mandatory agreements between competitors called interconnection. Interconnection agreements allow competing telecommunications providers to share information and to connect their telephone networks.
    Universal service regulation has determined that urban, business and long-distance consumers should pay higher prices to reduce rates for rural, residential and local consumers.
    Universal service fees are supported through subsidies built into access fees charged to long-distance carriers for originating and terminating calls on a local network.
    Eliminate the root problem. The legal foundation for the current telecommunications subsidies is found in the 1934 Communications Act - which was exacerbated by the 1996 Telecommunications Act - as well as in federal and state implementing regulations. A reduction in the current funding mechanism for subsidies will not remove the need to finance the underlying subsidy. As anyone who has ever been without a job knows, when the primary source of income has been removed, the underlying costs of living are not also removed. The solution in Ohio, and across America, is to make subsidies visible, shrink their size and eliminate them where possible.

    Nonintervention as a bias. The bias or tendency of policymakers should be toward nonintervention and for allowing market forces to determine prices. Administered prices are nothing more than a guess - and no one should be guessing about the price of a consumer's telecommunications service. In most states, access charges are capped, unable to grow without approval from regulators, and the rates decline at regular intervals. Last year, market forces helped to significantly reduce access charges twice in Ohio; the total rate reduction was $12 million. Although the charges associated with access have not been determined in a free market, competitive forces continue to bring down access rates.

    Legislation or regulation that would set prices is bad because it assumes knowledge that cannot be found outside of a competitive market. Legislation or regulation that would significantly hide telecommunications subsidies is bad because it perpetuates an anti-competitive model in an important sector of our economy. Administered prices for access charges attempt to do both and therefore deny the consumers' best interests.

    1For more information, see Wayne Leighton "Telecommunications Subsidies: Reach Out and Fund Someone," Issue Analysis, CSE Foundation, January 5, 1995; and Kent Lassman "Hanging Up on Telephone Subsidy Takers," The Washington Times, February 15, 1998, p. B4.