price-cap revenue for a U.S. local telephone company

The U.S. Federal Communications Commission (FCC) has used price caps to regulate large U.S. local telephone companies’ rates for jurisdictionally interstate services.  Data filed publicly at the FCC provides yearly revenue totals for service categories defined under price caps.  Such data for the historic Bell Atlantic service area for filing years from 1990 to 2009 is now readily available in a format that makes trends over time easier to analyze.[1] The historic Bell Atlantic service area accounted for 22% of total U.S. local telephone private-network revenue in 1997.

Included within FCC price caps are non-traffic-sensitive rates for network connectivity.  Examples of such connectivity are voice-grade lines and DS1 (1.54 Mbps symmetric bandwidth) lines.  Historically such connectivity has been categorized as trunking and special-access services. Trunking typically is voice-service connectivity sold at wholesale to other telephone companies.  Special-access service typically is sold to businesses other than telephone companies to provide private network services.

Price-cap revenue categories for the historic Bell-Atlantic service region show a large shift to higher-bandwidth connectivity from 1989 to 2008. Revenue reported in a given filing year for previous-year demand at current rates provide an estimate of revenue in the previous calendar year.[2]  Using this dating for estimates, voice-grade connectivity in 1989 accounted for 53% of total price-cap connectivity revenue.  By 2008, the revenue share of voice-grade connectivity had fallen to 1%.  DS3 connectivity (44.7 Mbps symmetric bandwidth), in contrast, rose from a revenue share of 1% in 1989 to 27% in 2008.

The stability of price-cap revenue categories obscures part of the shift to higher-bandwidth services.  In 1989, “Digital Data Service (DDS) and other high-capacity (HC) services” accounted for 9% of connectivity revenue. All this revenue was for DDS services, which were used for digital connectivity with bandwidth less than 100 kbps.  By 2008, the revenue share of “DDS and other HC”  had risen to 29%. Revenue within this price-cap category, however, had shifted to new, high-capacity data services, including dark fiber and connectivity with bandwidth greater than 100 Mbps.

Actions under the FCC’s pricing flexibility order and other forbearance and waiver orders have removed a large amount of revenue from price caps after 1999. Total connectivity revenue under price caps (trunking and special-access revenue, minus revenue for tandem-switched transport and per-minute interconnection charges) in the historic Bell Atlantic region grew 127% from 1989 to 1998. Total connectivity revenue under price caps for Bell Atlantic fell 40% from 1999 to 2008. Total connectivity revenue under price caps in 2008 was only 26% of what total connectivity revenue would have been if it had grown from 1999 to 2008 at the same average rate as it did over the previous decade.   Thus a rough estimate of the share of revenue removed from price caps for the 2009 filing is 74%.

The removal of revenue from price caps is associated with a shift in price-cap connectivity revenue toward more rural areas.  Rates for DS1 and DS3 connectivity in the historic Bell Atlantic region have been differentiated by three geographic zones since 1993.  As DS1 and DS3 connectivity in the Verizon’s National Discount Plan illustrates, moving from zone 1 to zone 3 is associated with greater inter-office mileage and a lower ratio of channel terminations to inter-office links. These patterns indicate that zone 3 is the most rural zone.  From 1995 to 1999, zone 3 accounted for about 29% and 12% of DS1 and DS3 revenue, respectively.  From 2000 to 2008, the revenue share of zone 3 increased to 49% and 31% of DS1 and DS3 revenue, respectively.

The removal of revenue from price caps has important implications for analyzing price-cap data.  Price-cap data were the basis for relatively good estimates of bandwidth in use from 1989 to 1999.  Without additional, specific data on bandwidth removed from price caps, price-cap data no longer can provide comprehensive estimates of bandwidth in use.  In addition, the shifting coverage and composition of price-cap revenue must be considered in interpreting price indices constructed from price-cap data.[3]

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Data:  The summary data discussed above is available in more detail as a web page and an Excel file.  Also available is the full dataset of price-cap revenues for price-cap reporting categories for the Bell Atlantic Service area from 1992 to 2009.


[1] FCC price caps went into effect in 1991.  The initial price-cap filings included 1990 rates and 1989 service demand (base period demand).

[2] Rates for individual service elements tend to change slowly.  To the extent that current rates are less than average rates for the previous year, the estimate for previous year revenue is an over-estimate.  The analysis above focuses on revenue trends over time and revenue distributions.  If the extent of over-estimate does not differ across years or across services and zones,  the over-estimate does not affect the figures calculated above.  Moreover, any over-estimate is not likely to be significant relative to the broad revenue patterns described above.

[3]  In 2009, for the service groups generating the most revenue, channel termination rates for zone 3 were 17.5% and 10% higher than rates for zone 1 for DS1 and DS3 services, respectively.  See DS1 and DS3 zone pricing comparison sheet.

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