From: ECONOMIDES, Nicholas
Sent: 14 November 1999 10:10 pm
To: Charlie Sands
Subject: Re: Incremental Cost of A Local Phone Call

Thanks for your note.

The termination cost estimate of $0.002 is calculated by the engineering 
model of Hadfield Associates filed with the FCC by AT&T and MCI.  This is a 
sophisticated engineering model of the local exchange network.  The 
estimate depends mainly on the present technology but can vary with 
population density, soil, etc. .

The quick answer to your question is $0.002 per minute or a slightly larger 
number, say $0.0022.  $0.002 per minute is the average long run cost for 
termination of long distance calls.  A local call uses two local loops, 
local transmission (twice), and local switching (once).  Termination uses 
one loop, local transmission (once) and local switching (once).  Local 
loops use does not have an incremental cost.  So the average long run 
incremental cost of a local call per minute is $0.002 (same as termination) 
plus one more local transmission cost.  I take local transmission cost as 
negligible (but it might be a very small number).  Therefore the average 
long run cost for local calls is $0.002 to $0.0022.  This cost of local 
calls is recovered by American local exchange carriers (such as Bell 
Atlantic)  by (only) a fixed monthly fee everywhere in the US, except in 
NYC and Chicago where besides the fixed monthly fee there is a fee per 
local call-- not per minute.

If BT is able to recover the cost of local calls through a fixed monthly 
fee, it should make local calls free.  If BT does not charge a fixed 
monthly fee for local service, it should charge per minute the number I 
mentioned earlier.  Of course, no local per minute charges simplifies the 
bills and makes them less costly.

There is also another possible solution to your problem.  There is a way to 
switch Internet calls in non-traditional switches (made by Lucent) that can 
utilize the variable bandwidth that Internet connections utilize rather 
than use the standard voice switches which have fixed bandwidth.  Then, all 
BT would need to do in a large city is to set up some of these switches and 
assign them to ISPs so that all Internet calls go to them.  In this way, 
the switching costs (and the cost of Internet calls) can fall significantly 
below the $0.002 per minute.  Local telephone companies in the US have been 
reluctant to use these new switches, and will probably not do so unless 
they are forced by the State regulators.

Nick