"True" Cost of Local Telephone Service?

Edwards Finance > Phones

Q. Calculating utility costs, especially telephone costs, is tough. I know this doesn't answer the question, but let's look at the issues involved ... The telephone industry, more so than electric, gas, or water, has a very low marginal cost per call. That is, the actual DIRECT cost of making a phone call is extremely low -- a trifling amount of electricity to carry the call. The cost of the call is virtually the amortization of the central office machines, inter office trunks, and local loop to your home (plus something for administrative overhead, engineering, etc.) Determining that "amortization" is highly debatable. First is the issue of the length of time the cost should be spread -- the phone company wants it as short as possible to maximize revenues, while the public wants it as long as possible to minimize cost.

A. The second issue is how and where the cost should be assigned, which is not simple. For example, a basic party-line rotary dial customer making very few calls a month doesn't use as much of the switch as say a phone used by a teenager with Call Waiting, Caller ID, Call Forward, 3-way Calling and other features. How much more should those premium services cost? Another issue is time of day when plant is used. One reason business customers pay more is that they generally use the plant during the busiest 9-5 hours while residential users use the plant more evenings nad weekends. Obviously a lot of costs are averaged out over all the customers. For instance, a customer next door to the central office has less of a loop than the customer furthest away. Some customer have complex "drops", others are simple. A crackpot residential customer could call the business office to go over his $7.00 bill, while a business with a $1,000 bill might not call for months. Who's paying for the service rep and who's receiving the services? Another issue is load on the central office. If the phone company over estimates need, it will have built unnecessary excess capacity. Who is to eat those costs, the customers or the stockholders? Or, a company could underestimate, requiring emergency construction to catch up, that is expensive. Again, who should pay? Commercial electricity billings are complex. Commercial meters have time plots -- power used during peak times is billed at a sharply higher rate than off peak times, and your rate is largely based on your "demand" -- the maximum PEAK power you used during the month, on the grounds that the power company had to have that capacity to serve you, even if you used it only briefly. People interested in analyzing telephone charges should also study billing of other utilities to compare methods. As with most such questions, the answer (if it exists) depends on a whole chunk of definitions! It's fairly obvious that it's possible to say 'zero incremental cost, to a good approximation' (forget 'local', by the way!). The main triumvirate of technology cost-contributing factors are clearly demand density, peak demand magnitude and quality requirement (one idea I toy with is - why not bump free local calls off the network on an 'oldest in, first ejected' basis when there's severe congestion ;-) ?). However, billing and collections costs are usually a significant proportion of costs for relatively low-using customers - and how will you assign those per minute?? Still, there are lots of sources for cost models, historic cost data and the like to which I have no doubt you will be pointed

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