Re: ISP phone ratio's and Interoffice trunkage for voice

["Fred R. Goldstein" <fgoldstein@bbn.com>]

  At 10:41 AM 7/13/96 -0400, James Love wrote:
  >With data calls (including ISDN) from residential consumers there seem to
  >be two sides to the pricing thing.  1st, what does it cost for the
  >residential consumer to call, and 2nd, what does it cost for the ISP to
  >recieve the call. 
  
  Good questions, but since the nominal topic is tariffing, I think it's
  reasonable to identify the set of rules by which tariffing generally occurs.
  No sense generating numbers that aren't the ones plugged into the pricing
  process.
  
  A general principle used in most places is that the caller is responsible
  for the entire traffic-sensitive cost of the call.  In other words, the
  recipient's phone bill shouldn't be affected if it receives zero or a
  thousand calls.  That's certainly how inter-LATA toll works; the caller
  pays the IXC and (via the IXC) both ends' intra-LATA carriers.  And an
  800 call reverses charges on all three.  Local calls sometimes work that
  way.  Measured-use (timed) local rates *always* recover more than the
  marginal cost of the call, including costs incurred at the recipient's 
  end.  So in an all-measured environment, telco has a positive incentive
  to make it easy and cheap to receive calls.
  
  An extreme example, perhaps, is France Telecom.  There, local calls are
  rather costly.  But an incoming-only ISDN PRI is under $200 per month.
  They'd rather take a small loss on the fixed cost than lose usage revenues
  to busy signals.
  
  A second general principle:  Traditional telephone rate regulation, still
  used in some states, is based on an 1880s railroad accounting technique
  called the Uniform System of Accounts.  Basically, it lumps all expenses
  (including depreciation) together and lumps all income together, and 
  calculates a rate of return based on the gross profit and the "rate base",
  which is the undepreciated total of invested capital.  Individual telco
  services do not necessarily pay their own way, but the totals have to
  add up to the right rate of return.  There is no single agreed-upon way
  to compute "cost" of specific services; there are several alternatives.
  If you can agree on a cost figure, then a service can be classified as
  "non-compensatory" (loses money), "compensatory" (breaks even, including
  the desired rate of return), and "contributory" (makes even more profit).
  The contributory services (typically, monopoly carrier measured-usage rates)
  make up for losses in non-compensatory rates (typically, rural monthly
  rates, some residential rates, and some installation charges).
  
  I point out the latter because in last week's Baltimore Sun article on the
  BA rate case, a BA exec was quoted as saying that the $10-12 cut in the
  monthly rate for resi ISDN was wiping out half of the intended
  "contribution".  Remember, resi POTS is at best compensatory.  He was
  admitting that resi ISDN was supposed to make around a $20-25/line
  contribution *above cost and nominal rate of return*!  My suspicion is that
  they were expecting the Telpak 60 option to be the biggest seller, and
  didn't expect hardly anyone to take the $236-249 flat rate.
  
  Now back from my digression and to Jamie's question.  If the caller is
  responsible for the full cost of calls, then what does it matter how busy an
  ISP's lines are?  They're revenue generators to the telco!  The exception
  here is in flat-rate areas.  Flat rate local service tends to penalize the
  ISP, because the incoming-only user is paying the same flat rate as the
  outgoing caller.  In such areas, it could easily be argued that the cost of
  local calls is evenly divided between originator and recipient.  
  
  It gets sticker in the common case wherein the resi subscriber gets flat
  rate and the business customer (including the ISP) pays measured rates.
  Telco apparently loses. But it's only an apparent loss, because the flat
  rates charged to resi subscribers are still supposed to be set high enough
  to cover the *average* cost of usage. So they are making the money; if they
  attribute 100% of the traffic-sensitive cost to the callers, as they are
  typically entitled to do (though some state PUCs might be troublesome here,
  I don't know), then they can simply use the growth of Internet traffic as a
  positive factor in their overall residential flat rate setting.
  
  The other fly in their ointment is the "rate stability" plan in effect in
  many states.  This frees the telco from strict rate of return regulation,
  allowing them to turn "productivity" gains into higher profit margins, in
  exchange for capping flat-rate residential, at least for POTS, for some
  time.  In such cases they can't directly recover the cost of increased usage
  by ISPs.  But then in every case telco *asked* for this deal.  If they
  couldn't forecast their usage correctly, then they are hoist by their own
  petard, and we don't owe them "hold harmless" for their own folly.  Of
  course they don't see it that way and want to penalize the ISPs, who are as
  a class generally not protected by rate caps.  This is the heart of the
  conflict.
  
  >1.  If the RBOCs are built out so that more than 1 of 8 residential
  >consumers can be connected at one time, and the ISP's are built out so
  >that they can connect less than 1 of 8 residential consumers, the calls to
  >ISP's don't cause (can't cause) a burden from the residential end.  Right? 
  
  Not really.  If an ISP is generating incremental traffic (i.e., voice usage
  is not going down as people move from handsets to modems), then the "cost"
  side of the Uniform System of Accounts equation has to absorb the cost of
  that incremental traffic.  It doesn't matter how the ISP's customers are
  distributed; a few heavy users or a lot of light users do the same.
  
  >2.  However, on the ISP end, they are using their lines much more 
  >densely.  But they pay business rates, which are higher, and indeed, over 
  >the company's incremental costs, probably even when used densely.  Since 
  >the ISP business is new, and for right now adds to total traffic 
  >(internet telephone is mostly a toy at this point), interoffice trunkage 
  >is way cheaper than it was 5 years ago..., where's the harm?
  
  See above.  ISP business rates are often quite low, if they're based on
  measured usage and the ISP is incoming only.  That in fact is how it works
  with Bell Atlantic, with some of the country's cheapest ISDN PRI (if they
  ever deliver it to you).  It does cover incremental costs IF you attribute
  usage costs to the caller.  Thus indeed no harm, unless they can't recover
  from the caller in any way, shape, or form, and if that's the case they have
  other problems.
  
  >3.  Moreover, since the RBOCs seem to think that residential second lines
  >are very profitable (how else do you explain the promotions for
  >residential second lines), and a high percentage of modem calls are made
  >from second lines, it is not unreasonable to think that the ISP is
  >contributing to demand for products which are making positive 
  >contributions to the joint costs, from the residential end. 
  
  Exactly.  And if that second line is BRI or analog it still is the same, so
  discriminatory pricing is senseless.  Of course under old-style regulation
  they may be actively promoting a *non-compensatory* analog second line
  service, since under the Uniform System they're entitled to the profits
  anyway, and can make it up from some other contributory area.  This is
  sometimes called "padding the rate base".
  
  >4.  The RBOCs now see themselves as competitors to the independent ISP's, 
  >and want to raise their costs as much as they can.  When the RBOC owned 
  >ISP pays for its phones, it's just moving money from one pocket to another.
  
  True, though of course nominally illegal since the ISP business is
  unregulated and shouldn't be cross subsidized by the regulated monopoly.
  Yeah, right.
  ---
  Fred R. Goldstein     k1io    fgoldstein@bbn.com   +1 617 873 3850
  Opinions are mine alone.  Sharing requires permission.