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Published byRoxanne Simon Modified over 9 years ago
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How Telephone Companies Make Money Doug Kitch Vince Wiemer Vince Wiemer
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Discussion Rate-of-Return Regulation Revenue Requirement Jurisdictional Separations Cost Recovery Local Rates Access The NECA Pools Universal Service Funds
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Rate-of-Return A method of utility regulation that provides a company with an exclusive service area but limits their earnings The utility earns a pre-determined rate-of-return on their utility investment plus recovers allowed operating expenses and income taxes
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Rate-of-Return (cont’d) RoR regulation was put in place to encourage the large investments required for utilities Common for gas, electric, and telephone utilities The amount of money that a RoR utility is entitled to earn is called their REVENUE REQUIREMENT
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Revenue Requirement TThe authorized level of earnings allowed Telephone Property, Plant & Equipment - Accumulated Depreciation = Rate Base x Rate-of-Return % = Return on Rate Base + Operating Expenses + Income Taxes = REVENUE REQUIREMENT
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Revenue Requirement (cont’d) Rate-of-Return regulation means that more plant investment and more operating expenses result in more income (revenue requirement)
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Revenue Requirement Example RoR also means that over time, earnings will decrease as plant depreciates
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Jurisdictional Separations Telephone carriers are regulated by both state & federal government State jurisdiction → local & state toll Federal jurisdiction → interstate toll So rate base and revenue requirement must be divided into their respective jurisdictions Separations or “cost” studies are performed to accomplish this task
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Separations Net Telephone Plant x Rate of Return + Operating Expenses = Total Revenue Requirement State & Local Revenue Requirement Jurisdictional Separations Interstate Revenue Requirement
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Part 36: Separations Rules Primary purpose of Part 36 is to assign “property costs, revenues, expenses, taxes and reserves between state and interstate jurisdictions” Costs are categorized based on function and use of the related plant
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Basic Studies Four basic studies are performed to determine the use of facilities: Traffic Study Commercial Office Study Central Office Equipment Study Cable & Wire Facility Study Then costs (plant balances & expenses) are allocated to jurisdictions based on these usage factors
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Cost Recovery Once the jurisdictional revenue requirements are determined, there is the issue of recovering the costs Telephone companies have three revenue streams: Local service rates from end-users Access rates from long distance carriers Interstate and State access rates Universal Service Funds from the Federal & state governments
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Revenue Sources State & Local Revenue Requirement Jurisdictional Separations Interstate Revenue Requirement Interstate Access NECA Pools Intrastate Access USF Local Revenue Total Revenue Requirement
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Universal Service & Rates All rates are influenced by universal service Universal Service is a policy that states that all Americans have the right to quality telecommunications services at affordable rates Because of universal service, local telephone service in urban areas subsidizes rural service
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Cost Recovery (cont’d) Local Rates are set by State PUC Access rates are determined by the cost of providing toll services (access costs) Determined by cost study Universal service funds make up most of the difference between the cost of providing local service and the local rate
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Access Rates Access costs vary for each telco Access cost ÷ Toll minutes = Access rate For ease of administration, the National Exchange Carrier Association (NECA) produces one tariff for a large number of telcos
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Access: NECA Pools The telco charges the long distance company the tariff rate (the average access rate developed by NECA) NECA pools the money and distributes it to the telco based on the telco’s individual costs Determined from the cost study
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Universal Service Funds Universal service funds are government subsidies for local service in high cost area The telco’s average cost per loop is calculated [rate base + operating expenses] ÷ number of lines and compared to the National Avg Cost per Loop (NACPL) A percentage of the difference is received as a subsidy
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COLORADO 2055 Anglo Drive, Suite 201 Colorado Springs, CO 80918 Phone: (719) 531-6342 OKLAHOMA 9210 North Garnett Road Owasso, OK 74055 Phone: (918) 376-9901 www.alexicon.net
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