Selecting the best method of charging for local phone calls

Press, 24 March 1988, Page 16

Selecting the best method of charging for local phone calls

Dr

John Fountain

examines the alternatives open

to Telecom if it [changes its [price; structure

I i. -n -| i I ■ fppLEPI|ONE companies have ; I Essentially ’two ways of ) JL charging for access ser- i yices and local; calling. Local calls [can be | metered and charged. for on a usage basis [(per ball or periminute of use) Similar to the way that lopgdistanlce calls are; charged for. Customer access charges for connection frpm; residence to an [exchange can be priced separately. | : : ' } Alternatively, local calls lean ,] be priced at zero and the costs of j providing capacity for local call; | jng recovered in a monthly ' 'chargb added to the access \ ’charge paid by subscribers. Both forms of calling have relative : ladvaritages and disadvantages in i .different situations. The best I .pricing policy for local calling; incorporates | the advantages; while] avoiding the disadvantages! I • “ . • • ' ; Most of [the time a local . call i costs | nothing j extra to provide. | [Excels switching and signal processing capacity exists and the [use of it requires no additional [resources. To] charge a: price at these] times, say 25c per call, is inefficient. Some calls by some customers will be deterred by the plrice. I - | ' I [ The customer, values the. call , (albeit at something l|ess than 25c) and it really costs nothing to provide him or her with the call. . These considerations favour a ’ local| calling charge that is inde-l i pendent of either the number or’ i duration of calls. i I At lottierj times during the; day' and 'at some; times during the! year,] however,, the i capacity: limits of| the network | are! reached. To place another call at those, timEs effectively! requires new,] additional switching ; and signal processing capacity. With-; I out that capacity customers bear | busy Isigna'ls and their calls have to be deferred or abandoned. • Additional [ capacity j for! an extra! call may cost to the order of several hundred ■ ddllars; per year |to provide, although it will only |be used for a few hours during the year.] Are these infrequent, additional calls really worth thE extra hundreds of dollars to install the capacity? ] Charging for local calls during these peak time periods, [at a rate that reflects the additional costs of providing calling, capacity, has [he advantage of making customers who want to use

the? network at these times think; twice about whether their calls Should be] deferred to' a cheaper 'off-peak period, or perhaps abandoned altogether. If customers [decide ltd postpone or abandon their calls it indicates) that the’ additional calls during these time periods are not [as valuable) to them’as the price that has to [be charged for the resources used to provide the calls. I I Pricing calls at zero during peak periods means that calls that could easily be deferred ! or abandoned tie up the) network, displacing more ; valuable calls). The inevitable delays in being able to 1 complete d call will ajlsd raise cries for further additional capacity.. In a queue to gain ’access! to free local calling, customers only signal that they want additional capacity. They do not signal any measure of how much [that extra capcity is worth; to them. Thus there is no way to judge whether it ’is worth while to (draw resources away from other valuable uses in the economy into the production of additional telephone capacity. i ‘lntelligent’ phone sets 1 | A recent study by the Rand Corporation in the United States indicated that an efficient pattern of pricing for local calling in’small Midwestern cities would involve a charge of 34c per call during the few'hours per day that the network was [ congested and no charge during other hours during the day. [The study also found that charging a single price per call throughout the day was actually, inferior to. a policy of (pricing local calls at zero’and recovering costs in higher access charges. The single price (4c pe!r call) deterred calls unnecessarily in| off-peak periods,’ required metering and billing [resources, and had. only a modest impact on reducing the amount, of peakperiod calling. . - ■! - With the type of telephones in our) homes today, the lengthy delays between time [of calling

and ime of billing, and the inconvenience of obtaining manual, price-required calls, the thought of paying for local calls at different rates during the day is unattractive to say the least.) However, ; modern computer technology will make it muich easier and I cheaper for ciistomei's to monitor their own lise and spending on telephone calls,) local r of long-distance. I Ji] A simple] and inexpensive; video display) on an ‘'intelligent”; telephone handset, like that on a digital watch,’ could indicate current [expenditures and the rele-: vanti [price of the call, local [ or, long distance,) about to be made.; Alternatively,' customers valuing the Convenience of unlimited free local calling could [be charged for that service. ] There is no data available in New! Zealand’ to estimate how much the telephone network is used [ for local calling by different types ofj consumers and) no: publicly available evidence ’on) the extra of providing additional switching and signal pro-; cessing capacity. Thus, the methods employed for estimating gains] from Ipng-distance price reductions cannot readily be lap-) plied | to estimate the losses associated with higher access and local) calling prices. ■! [ American studies show that average households in small citied make about 85 calls) per month. There is a significant deviation about this average; with [ many households making fewer than 25 calls per, month and as many [others making over 150 calls per month. I I I Subrisingly, this variation |in household calling patterns cainriot be explained by differing levels of household income. High inf come groups and low income groups have;' the same average number of calls and the same variation in [amounts of calling.. This situation parallels What we observed) about long-distance calling in New Zealand. Providing [subsidised access services and | local balling services I is likely to benefit the average New Zealand household just as much as it benefits the low income

household. | If New Zealand local calling patterns are similar to the calling patterns in these small United States studies and if only 10 per cent of local calls have to be made during peak periods (early in the morning, late in the afternoon) then even at a price of 50c per call during peak times the additional cost to households will be less than $5 per month or $6O per year. Hard pressed households can avoid or reduce these costs simply by postponing calls to times outside the peak period;’’ ’ ' i- ' . ’ Prices and competition [ Several telephone! companies in the United States! offer what are called “lifeline” telephone rates to help keep lower income, ’elderly and the disadvantaged on ithe network. While access ito : lifeline rates are sometimes ’means’ tested, some companies offer lifeline rates to all their customers. ) I For | example, Southwestern Bell offers customers a choice between a monthly rate of SUS 11 per month for access and an unlimited number of local calls or a plan with a $7 per month i charge, 15 free local calls, and a ’charge of 25c per call above the limit. They estimate;that 70 per [cent of their subscribers could ’ lower their telephone bills by switching to this plan. Alternatively, the Government can take the added costs of local calling) into account in it’s general policy of income assistance to low’income groups. This form of subsidy targets benefits much more effectively than an indiscriminate subsidy to both rich and poor. The sort of price structure for telephone services Telecom is likely to offer will reflect their ’ perception of the costs of provid- . ing access and calling services. Competitors can win customers from Telecom by charging prices for services more in line with costs. Alternatively, Telecom cankeep customers or win customers

from competitors by pricing j closer tq’relevant costs for cus- : tomers.i While the precise towels of price? obtained in the 'United States studies are no irrelevant) for [New Zealand,|i the general) structure', .’of I; price changes [is predictable. Competition will] constrain Telecorh to offer cost-based’ prides. ; Long-distance rates will]’remain usafee sensitive and decline significantly [relative I to other telephone prices, especiallj [during off-peak | periods. ; Access charges | will rise in low population density locations [further from exchanges and fall in other locations) where population' [density ' is highest and where [residences i are ’ located closer, to exchanges. Local calls will [tend to jbe Charged for during peak periods.) j |’ | 1 ■ [ ’!' ' ' These [ movements in prices are relative, not absolute, ih fact price levels may not increase at all! There are two reaspiis for this. J| I ’ ' |U], First, the Touche Ross; Report on’ telecommunications in [New Zealand! claims that thebe | is great scope [for j efficiency in Telecom’s provision of services. Telecom itself’ agrees on’ this point’ las well as on the means to attain it —! through compet tion. The actual levels of charges I for telephone services will reflect least-cost: methods of providing services if!)Teletom is. constra tied, to! be more efficient in its provision of services >y:the j ’ presence of competitors.; I j! I J Second,! f since cost-reducing technology is Continually improving in j telecommunications, consumers 'can ’ look forward to a stream of continually improving’] features and prices. | i’ll CompEtition [in telecommi ideations services [will [require Abandoning 'past policies of subsidisation and I taxation.) Rathei; than press ’! wr | the Continuation) of jsubsidiqE in the form of uniform, [zero-priced local calling,! tele-’ Iphone subscribers’ should) press ito hastqn the introductic n) |bf competition and the costj-pased prices jhat will emerge through “■ il !’’’ !: |I|:J DR JOHN FOUNTAIN] is a senior lecturer inleconomtcs at the'Urliversity of Canterbury. He took His Ph:D. .at Sta zford University in California and has studied the econorriics of t telecommunications. \ | [