An Empirical Analysis of Regulator Mandates on the Pass Through of Switched Access Fees for In-State Long-distance Telecommunications in the U.S.

Debra J. Aron, Navigant Economics
David E. Burnstein, Lime Telecom
Ana Danies, Navigant Economics
Gerry Keith, Navigant Economics

Abstract

In the parlance of regulatory economics, “pass through” refers to the effect of a change in an incremental cost – generally, the effect of a change in a regulated input price – on the retail price of a good or service. In this paper we examine pass through with regard to the switched access fees paid by long distance companies to local exchange carriers in the United States. We estimate the degree to which long distance companies pass through differences in access rates to their customers, and we examine whether mandates imposed by regulators on long distance companies to pass through access fee reductions to customers affect the extent of pass through. We evaluate annual panel data on intrastate long-distance revenues, access expenses, and minutes of use from 2004 to 2008 in each of the 50 states in the U.S. using a proprietary and detailed data set. We leverage the fact that some states have accompanied access rate reductions with pass through mandates, and others have not. Using standard multivariate regression techniques our results are consistent with 100% pass through of access rate reductions in states that have undergone regulatory access reform. We also find that a regulatory mandate on long distance companies to pass through access rate reductions has no statistically significant effect on the magnitude of access fee pass through, supporting the economic hypothesis that pass through is driven by incentives for profit maximization and by competitive forces.