Local Telephone Rate Structures: Before and After the Act

Large urban-to-rural and business-to-residential cross-subsidies are embedded in local rates; in fact, on average, state rates in high-cost areas are lower than rates in the state's low-cost areas. This disparity in rates grows as the relative cost of serving rural customers within a state increases. We also find that prices in urban areas are driven more by the dispersion of costs throughout a state than they are by costs in urban areas. Residential rates are equal to less than one-half the rate paid by business users, holding costs constant. Finally, we present evidence that suggests that states have begun to rebalance business and residential rates through a combination of higher residential and lower business rates. We find that this rebalancing process is incomplete and that a large amount of rebalancing is still required to align rates with costs.