Introduction Statement of Qualifications Unmetered Telephony in America The Benefits of Unmetered Calling Response to OFTEL Memorandum

Capacity Overload Effects on Investment Cross-Subsidy Effect on Local Competition Conclusion

Electronic Commerce and Unmetered Local Calling The following is a Memorandum written by Tom Long in response to the OFTEL Memorandum to the Parliamentary Select Committee on Trade and Industry Committee's Inquiry into Electronic Commerce. We publish it here with permission. © May 1999, Tom Long

1. Introduction

I am submitting this Memorandum as a supplement to the statement I wrote for the Campaign for Unmetered Telecommunications (CUT) and which CUT attached to its April 1999 submission to this Committee. In particular, I wish to respond specifically to statements and suggestions regarding unmetered local calling in the US appearing in OFTEL's March 1999 Memorandum.

This Memorandum makes the following points:

• Unmetered calling is enormously popular in the US;

• Unmetered calling promotes civic affairs, universal service, local commerce, and e-commerce;

• Unmetered calling is consistent with excellent service quality and has had no adverse effect on the ability to connect calls in the US;

• Unmetered calling does not undermine investment incentives or capabilities;

• Unmetered calling in the US is not dependent on cross subsidies from other services;

• Unmetered calling is not responsible for the lack of residential local competition thus far in the US;

• The absence of unmetered calling in the UK is the result of market failure, the remedy for which requires regulatory intervention.

I have been an advocate for the interests of residential and small business telecoms users in California for almost a decade. My organisation, TURN, is a nonprofit consumer advocacy organisation that specialises in telecoms, electricity, and gas issues. We are completely independent of government and receive most of our funding from membership contributions and from attorneys' fees in matters in which we are found to have made a substantial contribution. Though TURN is independent of government, we have a right of access to all of the information on which the regulators rely in reaching their decisions. Through my access to such information, I have a detailed understanding of the economics of the telecoms industry in the US.

In recognition of my achievements and leadership position in my field, I have been awarded an Atlantic Fellowship in Public Policy. The fellowship is sponsored and funded by the UK and enables Americans to conduct research about UK-based developments in their fields. Since September 1998, I have been researching telecoms regulation in the UK, examining in particular the UK's efforts to promote local (access) competition. Although I am far from an expert regarding UK telecoms regulation, my nine months of research here (including several dozen interviews with key players in the industry) perhaps make me uniquely qualified to make comparisons and draw informed conclusions regarding key telecoms issues in our two nations.

3. The Enormous Popularity of Unmetered Calling in the US

Before specifically addressing OFTEL's memorandum, some context regarding unmetered calling in the US is necessary. When establishing telephone service, most [1] residential customers in the US have a choice between flat and measured local service. Flat service means that, for a fixed monthly charge, the customer may make an unlimited number of local calls of unlimited duration at any time of day or night, all without any additional charge. This is fully unmetered local calling. Measured service carries a substantially lower monthly charge than flat service (the differential is often $5 or more), but requires the customer to pay for most local calls on a usage basis. Even measured service is not always fully metered; some measured service offerings, as in California, include an allowance of uncharged local calls. Nevertheless, measured service is the closest the US has to BT's scheme of charging for the 'line rental' and for all local calls on a usage basis.

Flat service is enormously popular in the US. Despite its relatively high price compared to measured service, the vast majority of California residents (over 85%) take flat service.

4. The Benefits of Unmetered Calling

There are several reasons for the popularity of flat service in the US.

• First, it promotes civic affairs. Citizens can call their neighbours regarding community, school, and church meetings and activities without extra charge. Likewise, charitable or political organisations can raise money or engage in get-out-the-vote efforts without extra charge.

• Second, it promotes local commerce. Unmetered calling enables US consumers to do a considerable amount of shopping by telephone, especially to determine in advance whether a particular merchant has a product meeting the customer's specifications (eg, shoes in the right style and size). This makes shopping more convenient and benefits the environment by curtailing unnecessary uses of the car (upon which Americans are far too reliant). A 1998 McKinsey report found that, on a per capita basis, for every 100 call minutes in the US, there are only 37 in the UK. [2] The report found 'considerable evidence' that 'many of the calls foregone in the UK are ... consumer-to-business calls ..., calls that might have created economic value.' [3]

• Third, it promotes universal service. Consumers have the security of knowing exactly how much they will be billed for local service at the end of the month, which greatly assists in keeping people connected to the telephone network.

• Fourth, and perhaps most relevant to this Committee, flat service promotes Internet use and e-commerce. Internet searches do not lend themselves to time constraints, as one piece of information typically leads to another path of research that may have been previously unforeseen. If consumers cannot afford to stay on-line to complete their desired research or browsing, they are not able to exploit the Internet's full potential. Moreover, many software applications assume that the consumer has an open link to the Internet. However, with metered calling, keeping the link open is cost prohibitive, again preventing many consumers from taking full advantage of their computer.

In light of the enormous benefits to consumers and the economy from unmetered local service, it is right for this Committee to ask why most UK consumers have no meaningful choice of unmetered service.

5. Response to OFTEL Memorandum

OFTEL suggests that unmetered calling in the US has resulted in problems of four different types. I wish to respond to each of the supposed problems.

5.1 Capacity Overload

OFTEL suggests in paragraphs 32 and 33 that unmetered local calls make it likely that network capacity will be overwhelmed. OFTEL even claims that, in the US, 'it has been known, in some instances, for calls to emergency services to not get through.' I can assure you that a capacity overload that prevented the completion of a call to emergency services would be treated with the utmost seriousness by any telecoms regulator in the US. I am aware of no such instance since the explosion in Internet use. In California, the state with the highest concentration of Internet users, there is absolutely no problem completing calls of any type at any time of day or night.

5.2 Effects on Investment

OFTEL claims (paragraph 34) that unmetered calling creates the need for additional investment to increase network capacity, but that the lack of additional revenue from increased call minutes prevents local operators from recovering the cost of that additional investment. OFTEL fails to consider, however, that additional local calling stimulates demand for additional phone lines, which significantly enhances the revenues of local operators. When a household phone line is tied up with an Internet connection for long periods, the household often decides to add one or more lines. Additional lines is an area of fast growth for US local operators. With respect to advanced infrastructure investment, Pacific Bell, the largest incumbent local operator in California, is well ahead of BT in terms of offering broadband DSL service over copper phone lines. Moreover, Pacific Bell earns healthy profits for its parent SBC Communications, one of the largest and most financially secure phone companies in the US.

5.3 Cross-Subsidy

OFTEL suggests in paragraphs 30 and 31 that consumers in the US are paying for unmetered calling either through very high monthly fixed charges or through inflated charges for non-local calling. The additional monthly charges for flat service are not so high as to make the service undesirable. As noted previously, consumers have a choice between metered and unmetered calling and they willingly pay $5 or more extra per month in order to enjoy unmetered calling. In my statement attached to the CUT submission, I showed that, in California, the monthly charges for flat service are only £2.50 per month higher than BT's line rental. For that additional amount, customers can make all the local calls they desire, which would carry a high price tag in the UK. (Unfortunately, I lack data regarding the volume and time-of-day distribution of local calling in the US that would allow me to quantify the price for a typical basket of US local calling at BT's rates). In my CUT statement, I also explained that it is incorrect to view local rates in the US as receiving a subsidy from long distance rates. Additional rate comparisons I have made since I prepared my statement for CUT also suggest that charges for local calling in the US are dramatically lower than in the UK and that long distance rates in the US do not offset this large differential [4]. My results are summarised in the following tables:

	US	UK	% Difference
Line Rental ($/month) [5]	$10.78	$12.14	+13%
Day	6.6	27.0	+309%
Evening	4.6	10.0	+117%
Weekend	2.9	6.8	+134%

Table 1 - Comparison of Residential Local Rates

	US (21-40 miles)	UK	% Difference
Day	42.0	54.0	+29%
Evening	33.6	28.5	-15%
Weekend	25.2	20.0	+21%

Table 2 - Comparison of Residential Long-Distance Rates

In both tables the sources are BT rates (UK) and Pacific Bell rates (US): all calls are assumed to be 5 minutes, charged in cents.

The first table is the closest possible approximation of a like-to-like comparison of local rates given the absence of unmetered calling in the UK. Monthly line rental charges are at least 13% higher in the UK than in California. UK local usage charges are more than double those in the US, and in the daytime period, UK charges are over four times higher.

The second table examines the most comparable non-local rates in California and the UK. The US rates shown are for intrastate regional long distance calls (called intraLATA calls in US jargon [6]) provided by Pacific Bell. In the daytime period, the UK rates are higher, whereas in the evening and weekend periods, the UK rates are lower.

Thus, even with most of its residential customers taking unmetered local service, Pacific Bell is able to offer a substantially better deal for local service than BT, while offering a broadly comparable deal for long distance calls.

5.4 Effect on Local Competition

OFTEL suggests (paragraph 35) that unmetered local calling in the US has stifled local competition. In particular, OFTEL notes that UK cable operators offer telecoms competition for more than half of BT's residential lines, while in the US there is minimal local competition.

OFTEL is correct that there is considerably more local competition here than in the US, but draws improper inferences from that difference. There are several reasons for the absence of residential local competition in the US, none of them related to unmetered local calling. First, the US only fully opened its local markets to competition in 1996, five years after the UK ended its duopoly policy. As the UK well knows, it takes several years to implement the complex regulatory framework for local competition. Second, federalism problems have significantly delayed the construction of that framework in the US. Third, cable operators in the US deployed their television networks in the 1960s and 1970s, long before they contemplated providing telephone service. In contrast, the UK cable operators (with a high level of US ownership) had the advantage of a much later start and being able to design their networks to include copper wire for telephony.

6. Conclusion

The US experience and the concerted efforts of groups like CUT show that consumers want unmetered calling. If there were a truly competitive market for local telephone service, operators would surely strive to meet this demand by offering attractive unmetered local calling options. The US experience shows that it is possible to offer fully unmetered local calling, while providing first-class telecoms service and excellent value for money, and sustaining a financially healthy telecoms industry.

The competition that BT faces, almost entirely from the cable operators, is not strong enough to force BT to satisfy customer demand for unmetered service. The absence of unmetered calling in the UK is the result of the failure of limited and imperfect competition to deliver what consumers want. To remedy such market failure, regulatory intervention is necessary.

Footnotes

[1] I say 'most' because local rates are a matter for state regulation and each state has a separate scheme of local rate regulation. Still, there is broad similarity among the various state schemes.

[2] McKinsey Global Institute, Driving Productivity and Growth in the UK Economy, October 1998, p.15 (hereinafter 'McKinsey Report').

[3] McKinsey Report, p. 17.

[4] I acknowledge that, because of geographic and market structure differences in our two countries, such comparisons are complex and require difficult exercises of judgment. Unfortunately, I have not been able to examine the Eurodata comparisons cited by OFTEL because that research is proprietary and only available by subscription.

[5] As a US surrogate for the UK line rental, I have used the monthly charge for measured service, which in California, also includes five uncharged directory enquiries plus an allowance of unmetered calls worth an additional $3.00/month. Thus the percentage difference shown understates the extent to which line rentals in the UK are more expensive than in the US.

[6] Unlike those of BT, Pacific Bell's rates vary by distance. I have used the distance range in which the highest number of regional long distance calls fall. For shorter distances, Pacific Bell's rates are lower than those shown in the table, and for longer distances, the rates are higher.