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

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 retail long distance telephone service prices in the United States for evidence of pass-through of the switched access fees paid by long distance telephone companies to local exchange carriers. We estimate the degree to which long distance companies pass through to their customers reductions in access rates, 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 we find that the market induces carriers to pass-through most of the reduction in access rates, and that this market-based pass-through is consistent with “full�? (100%) pass-through in the 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.