Letter to FCC Chairman William Kennard on Interstate Access Charge and Universal Service Reform

March 31, 2000

The Honorable William Kennard


Federal Communications Commission

445 12th Street, S.W.


Washington, D.C. 20554

RE: Interstate Access Charge and Universal Service Reform

Dear Chairman Kennard:

Citizens for a Sound Economy Foundation (CSE Foundation) supports the principles that guide the Coalition for Affordable Local and Long-Distance Service (CALLS) proposal now pending before the Commission.1

CSE Foundation is a non-profit, 501 (c)(3), non-partisan research and education foundation. For more than fifteen years, CSE Foundation has been educating consumers and the policy community about market-based solutions to public policy problems. In the last year alone, CSE Foundation hosted five educational events in Washington, D.C., and participated in more than 150 events around the country with a technology or telecommunications policy focus.

While there are many factors that contribute to a healthy communications marketplace, freedom to set prices and to make price information available to consumers are certainly important. The CALLS proposal is a positive step toward each of these objectives. In addition, the proposal would make progress toward the elimination of hidden cross-subsidies in the telecommunications marketplace.

The best possible outcome for consumers would be to have the Federal Communications Commission – and any subsequent regulatory institution – remove itself from the process that sets access charges. Failing that, a second best result would be for the Commission to adopt policies that would allow market forces to be introduced to the pricing of communications services.

Either outcome would reduce, or at least bring to light, the inherent tension between a marketplace open to competition and a marketplace artificially segmented by regulatory barriers that encourages the flow of subsidies between the consumers of various telecommunications services.

Price setting for the access fees on either the originating or terminating end of a long-distance telephone call is arbitrary. The type of institution used to determine prices, such as a government agency or legislature, does not affect this fact. The dynamic forces of a market should determine prices. Negotiated agreements between buyers and sellers of various services – like access to local or long-distance telephone networks – is one way for market forces to be introduced to the historically over-regulated communications marketplace.

The CALLS proposal would shift the recovery of access charges from a per minute basis to a per line basis. There are two positive effects of such a shift. First, since much of the costs associated with local telephone service are incurred on a per line basis, better price information would be available to the buyers and sellers of access. Second and related to the first, with better price information it is less likely that prices for the combination of access charges and universal service obligations would be set significantly higher or significantly lower than the cost of such a bundle of goods. The effect would be to give to consumers exactly what they buy – no more, and no less.

The objective of good policy in this matter is not to simply lower prices to consumers by fiat. The objective is to promote competition. A competitive marketplace produces goods and services with a variety of price, quality, and ease-of-use attributes. The evidence is clear that through innovation and existing incentives to fulfill consumers’ desires, telecommunications providers will lower prices and improve service.

We believe that the CALLS proposal would make subsidies more explicit to consumers. This is both good public policy – in accordance with section 254 (e) of the 1996 Telecommunications Act – and it is good economics. While subsidies in general have a negative effect on the communications marketplace, hidden or implicit subsidies impede the free flow of price information, making it more difficult to eliminate distortions in the marketplace or identify the true costs of telecommunications services.

The CALLS proposal sends an important signal. It is time for the Commission to extract itself from the decades-old practice of setting the terms and prices for access between various telecommunications carriers. This is a job that can be, should be, and in a competitive marketplace is, left to private actors.

The CALLS proposal would ameliorate some of the negative effects from hidden cross-subsidies. For example, the highly elastic long distance telephone market would be punished less from the inter-service subsidy flow. Consumer prices for goods and services produced by businesses that use a great deal of telecommunications services would be positively affected. This problem would not be eliminated, because businesses would still pay artificially inflated rates and fees, but it would be helped.

Perhaps the most important result of the CALLS proposal could be a positive impact on the development of competition in the marketplace for local telephone service. In many areas, the current regulated rate system forestalls the introduction of competition in the market for local wireline service. This pernicious effect is the direct result of local rates that are held artificially low.

In all, the CALLS proposal is a step in the right direction and warrants favorable consideration.


Kent Lassman

Deputy Director of Communications and Technology Policy

CC: Susan Ness

Harold W. Furchtgott-Roth

Michael K. Powell

Gloria Tristani

Lawrence Strickling

1 The revised CALLS plan was filed with the Commission on March 8, 2000 in the matter of CC Docket No. 94-1, CC Docket No. 96-45, CC Docket 99-249, and CC Docket No. 96-262.