Local telephone rate structures: before and after the Act

This paper examines how the structure of local telephone rates has changed in the four years following passage of the Telecommunications Act of 1996. Data on local rates as they stood at the end of 1995 and in 2000 for the Bell Operating Companies in 45 states and the District of Columbia and estimates of wire-center-level costs from the Federal Communication Commission's cost model show that large urban-to-rural and business-to-residential inequities are embedded in local rates. In the average state, rates in its high-cost areas are lower than rates in its low-cost areas. This disparity in rates grows as the relative cost of serving a state's rural customers increases. Residential rates are equal to about one-half the business rate, holding costs constant. Interestingly, costs in outlying areas appear to have a larger impact on urban rates than the cost of serving urban customers. The evidence suggests that states are in the process of rebalancing business and residential rates. These efforts are more pronounced in states that allowed competition before 1996. The data suggest that the rebalancing process is incomplete.