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MINNESOTA TELEPHONE ASSOCIATION Telecommunications Guide March 2001
All About Access Charges Access charges - we all pay them whenever we pay for long distance service. But few know what they are or what they are for, and sometimes what is known isn't entirely accurate. For example, access charges are not a "hidden tax." They are part of a willing contract between two parties - the local and long distance provider - and don't require mandated regulations. Long distance companies need access to the local switch so they can connect to their customers. The access charge is simply a service fee local providers charge for using their local loop. But because the Ventura administration has talked about drastically reducing them, a look at these charges seems in order. What are access charges? Access charges are what long distance providers pay local providers for the use of the latter's lines and switches. The costs long distance carriers incur when they pay local telcos to originate and terminate long distance calls are passed on to consumers as part of our long distance bills. There are four distinct access charges (not to be confused with the end-user access charge which supports school/libraries and is collected at the order of the Federal Communications Commission): 1. Carrier common line charge - this covers the cost of using the local company's line from the customer to the company's switch. 2. Switching charge - this covers the switch itself. 3. Transport revenue - this results when "local" phone lines are run between cities. 4. Special access charge - when a long distance company or a business wants to transport data or voice traffic over a dedicated line or higher speed lines they may lease capacity or space in a local telco's facilities. The amount of access charge is driven by distance - the farther away from the switch, the greater cost to the local provider. Tom Farm, president of Olsen Thielen & Co., Ltd., which specializes in providing accounting services to small telcos, wants to dispel one myth about access charges. "It's not just the last mile to the house as many think. Most companies pick up a call and carry it long distances. Mankato Citizens Telephone Company, for example, picks up some of the calls intended for Mankato at Owatonna and transports them many miles to Mankato and then terminates the calls to the intended customers," said Farm. What are the charges really for? To help make sure that rates in rural areas are reasonable, Congress established the federal Universal Service Fund. The fund defrays the enormous costs of providing phone lines to people living in sparsely populated areas. But the federal Universal access fund is not intended to pay the entire cost of access. Access revenue is an essential funding source for telephone companies in rural areas. Telcos use access revenue to help them maintain their facilities and provide quality service to their customers. Chokio-based Federated Telephone Cooperative gets 22 percent of its regulated revenues from the Universal Service Fund and 57 percent from access charges. Only 21 percent of its regulated revenues come from what it charges for local service, including such "add-on" features as call waiting and caller ID. The numbers for other small companies are similar. Park Region Mutual Telephone Company (Underwood), receives 77 percent of its regulated revenues from universal service and access charges, only 17 percent from charges for local service. Crosslake Communications (Crosslake) gets about 71 percent of its regulated revenue from access charges and 23 percent from local service. Farm notes that smaller companies typically get a greater percent of their regulated revenues from access charges than metro companies because calls must be carried greater distances and serve less dense areas. Why are access revenues so important for local telcos? Without Universal Service Fund and high-cost loop revenues, the $8.25 that Federated charges for basic dial tone on one phone line would rise to $30.77. Take away access charges and the per-line cost jumps to $65.87. "I don't believe anyone would pay that much for local service," said Kevin Beyer, the co-op's general manager. "People here would switch to wireless before they'd pay local service rates that high." Farm knows of another company where the real costs to provide local service is $136 per line per month. To the charge that metro customers, who generally pay more for basic dial tone service, subsidize basic rural services, Beyer offers this reply. "Overall, rural phone bills are as high or higher than those in the metro area because we have to make so many long distance calls. People in our calling area only have 600 numbers they can call - everything else is long distance. The Twin Cities' local calling area has millions of numbers." Rural companies also need access and other charges to pay for expensive equipment that serves many fewer customers. "We have two customers per route mile here," said Beyer. "I'm sure the metro area has more than 500." A rural telcos' investment in up-to-date technologies like fiber optic cable and computer switches is determined by the amount of access funding it receives. Park Region has spent $4 million on upgrades to its system in the last two years and will spend the same amount in the next two. From 1952 to 1998, Federated spent a total of $9.2 million on equipment. Though inflation plays a part, equipment costs for the last two years alone are about $3.2 million. In fact, Federated is installing fiber right to the home, something most metro customers don't have. Why the latest technology, when demand for high-tech services in rural areas - or the willingness to pay for it - is still limited? "We have revenue we can count on to support updating our systems," explains Beyer. "And if you don't build advanced capacity in now, even though people might not want it for two to five years, it won't be there when people do want it. And once you've replaced your network, you can't just turn around and do it again because it's out of date. Replacing systems is expensive and takes time." Another problem that arises with the rapid changes in technology is the effect on depreciation. Equipment needs to be depreciated and replaced at a faster rate because of the shorter life expectancy. "What you used to be able to depreciate in 20 years has to be done in three to five now. Our business requires us to provide the most advanced services available, but if the funding isn't there then we'll have to look at other options," said Kevin Larson, Crosslake's general manager. What would happen if access charges disappeared? Without access charges, long distance rates would be expected to drop, though that's not what happened when access rates were lowered from 1995 to 1997. The impact of decreased access charges on the local service provider then was offset by the increase in the number of long-distance calls and faxes in a robust economy. However, the explosion in wireless phones and e-mail, as well as a declining population in some cases, is changing that situation. What would happen in rural areas without access charges? "Without the support of access charges, we would not be able to upgrade facilities in a timely manner. We just wouldn't be able to do it," said Beyer. "That's what provides us the money to purchase new equipment and keep rates low," adds Larson. "You can't have unknown revenues and expect us to continue buying new products and providing new services," Larson said. Farm comments, "If access charges are reduced so they're no longer available to help pay for local loop costs, the state would have to make up some portion of those revenues through a state universal service fund. Would the funds be adequate? Will the incentive to put in high-tech be lost? Those are some of the questions that would need to be answered." Paul Hoff, Park Region's general manager and CEO, agrees that the fund also needs to be "predictable." Hoff puts the case for access charges this way. "The big long distance companies gain by having access to high-cost-to-serve rural customers and somebody has to put in the equipment - and maintain it. All the funds that support rural communication needs are a social good for the country. I think most people agree it's a good social goal to make all local service affordable so people who live in certain areas aren't penalized."
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(c) 2001 Minnesota Telephone Association
Published by the Minnesota Telephone Association (MTA) |