subsidizing high-cost telephone lines stimulates growth

From its beginnings, the U.S. telephone industry has included many small telephone companies. Over time government programs have been established to subsidize small, high-cost telephone companies.[1] Under the High-Cost Loop Support program, about $1 billion in subsidies were given in 2007 to incumbent local-exchange telephone companies (ILECs) that had relatively high-cost loops.[2]  The subsidy to a telephone company is proportional to the number of high-cost loops that the telephone company operates.  Subsidizing high-cost loops provides a greater incentive for their growth than would otherwise exist.

Growth in telephone company loop counts across the study-area loop-size distribution is generally consistent with subsidies stimulating loop-count growth. Study areas typically contain the loops that a telco serves in a particular state.[3] In 2007, the 50th, 70th, and 90th percentiles in the study-area loop-size distribution were study areas with about 3000, 10000, and 57000 working loops, respectively.[4] Loop counts at these percentiles grew about 80%  and -15% from 1988 to 2001 and 2001 to 2007, respectively.  Loop growth at the 99th percentile was 52% and -30% from 1988 to 2001 and 2001 to 2007, respectively. The 99th percentile represented a study-area size of about 2 million loops in 2007. Hence loop counts in the largest study areas grew considerably less than loop counts in much smaller study areas. In 2007, the larger study areas received no high-cost loop subsidy, while those smaller study areas received roughly $100 in high-cost subsidy per loop in 2007. A similar difference in subsidy levels existed back to 1988. Hence these data are consistent with an economically plausible effect: subsidizing high-cost loops stimulates growth of relatively more of them.[5]

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Data:  trends in ILEC study-area loop count distribution, 1988-2007 (Excel version); dataset containing loop counts for every ILEC study area, as well as other cost data, 1988-2007

Notes:

[1] These subsidies tend to be associated with universal service; in particular, providing service in rural areas.  However, any telephone telephone company that provides telephone exchange service to fewer than 100,000 lines is defined under U.S. law to be a “rural telephone company” even if it provides service only in urban areas.  See definition of “rural telephone company” in 47 CRF 51.5.

[2] Summed from the NTS Cost Dataset, annual support pay, 2007.  This figure is lower than Federal-State Joint Board’s Monitor Report’s figure for High-Cost Loop Support primarily because the NTS Cost Dataset does not include subsidies to competitive local-exchange telephone companies (CLECs).

[3] The NTS Cost Dataset description provides further information about study areas.  Study areas are the basis for the calculation of high-cost loop subsidies.

[4] Data are currently available through 2008.  However, AT&T did not report after 2007. Growth rates are compared relatively to 2007, rather than 2008, to avoid effects from this reporting change.

[5] The growth pattern at the 10th and 25th percentiles is more varied. Loop growth from 1988 to 2001 at the 10th and 25th percentiles was similar to that at the 99th percentile. However, from 2001 to 2007, the reduction in loop counts at the 10th and 25th percentiles was similar to that at the 50th through 90th percentiles, and only about half as much as at the 99th percentile. The smallest telephone companies may be less oriented to profit maximization than larger telephone companies and may be more capable of stabilizing their income streams.  Study areas with size less than or equal to the 25th percentile in the loop-size distribution served about 0.7% of all loops in 2007.