Incremental Costs of Telephone Access and Local Use

Marginal and incremental costs are well-established concepts in economics, but are less familiar to local telephone companies and regulators. Incremental costs are the additional costs a firm will incur to expand service in the future. This report develops a methodology for assessing the incremental costs of local telephone services and provides initial estimates of those costs for conditions typical of California markets served by the two major local exchange carriers — Pacific Bell and GTE. The author constructs a small engineering-economic model of the three functional divisions of a local exchange: the local loop (the cables connecting subscribers to the switching point), the central office switch, and the interoffice transport facilities that link switches together. Data for the model are drawn from a wide range of GTE, Pacific Bell, and other industry sources, and are aggregated and combined to obtain values representative of California conditions. In addition, the author examines the salient characteristics of four other services — centrex, private line, voice mail, and common-channel signaling — and identifies functional components and sources of data that can be employed to extend the model developed in this study.