Local telephone rate structures: before and after the Act

supports research bearing on economic and public policy issues. The SIEPR Discussion Paper Series reports on research and policy analysis conducted by researchers affiliated with the Institute. Working papers in this series reflect the views of the authors and not necessarily those of Abstract: Large urban-to-rural and business-to-residential cross-subsidies are embedded in local rates; in fact, on average, state rates in high-cost areas are lower than rates in the state's low-cost areas. This disparity in rates grows as the relative cost of serving rural customers within a state increases. We also find that prices in urban areas are driven more by the dispersion of costs throughout a state than they are by costs in urban areas. Residential rates are equal to less than one-half the rate paid by business users, holding costs constant. Finally, we present evidence that suggests that states have begun to rebalance business and residential rates through a combination of higher residential and lower business rates. We find that this rebalancing process is incomplete and that a large amount of rebalancing is still required to align rates with costs. * We thank Alan Schlottmann and Scott Savage for their helpful comments. We would also like to thank Bill Sharkey, Tracy Waldon and Petyton Wynns for their help in gathering and understanding the data used in this study. We also thank the individual staff members at the various state regulatory commissions for their help in collecting the data and answering our questions about rates. Finally, we thank Dan Steinert and Steve Loughlin for their competent research assistance. All mistakes, of course, are ours alone.