On Developing Route - Specific

(NRRI) with funding provided by participating member commissions of the National Association of Regulatory Utility Commissioners (NARUC). The views and opinions of the authors do not necessarily state or reflect the views, opinions, or policies of the NRRI, the NARUC, or NARUC member commissions. EXECUTIVE SUMMARY This project was initiated for the purpose of exploring ways in which route-specific intraLATA toll cost studies could be performed. This involves two primary tasks: 1. Providing a generic guide for performing route-specific cost studies. 2. Presenting an illustrative example of some descriptive analyses useful in exploring alternative regulatory policies regarding rate design and competitive entry, once the route-specific costs are known. A generic guide should be more useful than a cost manual utilizing one specific set of procedures, because of the perceived need to tailor cost study procedures to individual state characteristics. The guide includes basic "building blocks" of information regarding network design and intraLATA toll cost elements. It discusses alternative procedures; reviews the relationship of intraLATA toll routes, access charges, and separations; and examines some practical problems in implementing route-specific cost studies. The illustrative example utilizes a set of one company's route-specific embedded costs for transmission facilities and circuit equipment. The descriptive analyses are used to investigate (1) the impact of deaveraging, (2) the likelihood of broadscale price competition developing, and (3) the factors which cause differentials in costs among routes. Background The issue of route-specific cost studies has gained interest recently because of the potential for competitive entry in the intraLATA toll markets. One contention is that if competitive entry is allowed, competitors will be most interested in the high density routes and will presumably price those routes at their costs. The regulated local exchange carrier that is currently pricing intraLATA toll routes on the basis of averaged costs may then be at a competitive disadvantage (assuming the averaged costs are higher than the route-specific costs of high density routes). This scenario poses difficulties for the state regulatory commission. If open entry is allowed, cost-based prices (which means deaveraged toll rates) are desirable for promoting a true test of the competitive nature of the market and for removing a competitive disadvantage faced by the regulated local exchange company. On the other hand, there is concern about the impact of deaveraged rates on universal service. In more rural or sparsely populated exchanges, emergency calls and calls for other vital services may be …