Certain Silence

Rate of return regulation happens at two levels, state and federal. Actually, prior to the creation of the FCC the Bell and independents weren’t subject to much in the way of federal regulation (Interstate Commerce Commission anyone?). As every good law student knows, even the most powerful state regulatory commission has no power to regulate the instrumentalities of interstate commerce, so any investments or rates that are dedicated to long-distance, interstate calling is off limits.

Long distance, interstate calls travel through the local, intrastate portion of the telephone system, which creates something of a billing problem. There were two schools of thought on this one:

1. Station-to-Station: include usage of the local loop when calculating long distance investment and rate-setting. (i.e., 15% of call time is spent on long distance calls, so 15% of the cost should be allocated to long distance rates)
2. Board-to-Board: don’t include the cost of the local loop when calculating long distance investment and rate-setting. The entire cost of the local loop must be recovered through state rate-setting (and the cost of local calls).

At first, the Bell companies preferred Board-to-Board, because there was essentially no regulation at the federal level, and state utility commissions were very strict. The more costs allocated to the state level, the higher the rates they could charge under rate of return at the state level. Interstate charges were essentially what the (monopoly) market could bear.

The FCC, established by the Communications Act of 1934 and charged with overseeing the telephone system at the federal level, proved surprisingly effective at regulating interstate rates, winning a number of interstate rate decreases in its first decade of existence. As a result, the Bell companies began advocating Station-to-Station billing, to push some of the costs back to the interstate level and counter the aggressive rate reductions by the FCC.

And it worked. Some (though not all, AT&T played this game well) of the rate increases earned at the federal level under new accounting were passed back to consumers in state rate settings, creating a system in which long distance rates subsidized local phone service. By making local phone service more affordable, this policy arguably fulfilled the goals of “universal service.” This is a product of the Bell system’s attempts to navigate dual jurisdictions, not of any explicit effort on the part of the Bells or regulators to make local phone service universal.