Seven Years After Kahn and Shew: Lingering Myths on Costs and Pricing Telephone Service

Abstract

The costs of linking customers with the public switched telephone network have been ill-defined as costs common to all telecommunications services, argued Alfred E. Kahn and William B. Shew here in 1987. Now as the pace of change in telecommunications accelerates, Steve Parsons argues that the proper assignment of these so-called loop costs is increasingly important, since it affects many areas of public network law and policy, including rate-setting, cross-subsidy tests, and franchise obligations. Parsons argues in favor of Kahn and Shew's position and poses eight additional arguments for attributing loop costs directly to the provision of access to the network. He traces the misclassification of loop costs to careless nomenclature, misapplied microeconomics, and the merging of inconsistent concepts and arguments. He suggests how and why telecommunications policy, as it evolves, must embrace loop costs as attributable to their own service rather than allocated to other network-using services.