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The forecasting implications of telecommunications cost models

  • Timothy J. Tardiff
Part of the Topics in Regulatory Economics and Policy book series (TREP, volume 34)

Abstract

The Federal Communications Commission and state regulators have relied on models of long-run forward looking costs when establishing prices for the services and facilities provided by incumbent local exchange carriers. These models produce results that are fundamentally complicated long-run forecasts: what constant price(s) can the incumbent charge for the output it produces that will just recover its expenses and allow it to earn a reasonable return on and of its capital investments. This paper discusses the underlying assumptions of these forecasts and identifies methods for properly representing their inherent uncertainty in the estimates produced by cost models.

Keywords

Cash Flow Cost Model Real Option Input Price Federal Communication Commission 
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Notes

  1. 3.
    Some models create a “revenue requirement” (a time series of annual depreciation and return on investment) corresponding to the initial investment, and then take the present value of that “cash flow.” It turns out that this calculation is equivalent to the purchase price of the investment, reduced by the tax benefit of depreciation deductions. See Tardiff, Timothy J. and Miles O. Bidwell, Jr.. May 10, 1990. “Evaluating a Public Utility’s Investments: Cash Flow vs. Revenue Requirement,” Public Utilities Fortnightly.Google Scholar
  2. 7.
    Hausman, Jerry A. 1997. “Valuing the Effect of Regulation on New Services in Telecommunications.” Brookings Papers on Economic Activity Microeconomics, M.R. Baily, P.C. Reiss, and C. Winston, eds., pp. 1–38.Google Scholar
  3. 8.
    Krouse, Clement G. 1999. “LRIC Pricing, Dynamically Competitive Markets and Incentives to Invest.” Department of Economics, University of California, unpublished manuscript.Google Scholar
  4. 14.
    Hausman credits Dixit and Pindyck for the formula that produces the markup. Dixit A. and R. Pindyck. 1994. Investment Under Uncertainty, Princeton, NJ: Princeton University Press, pp. 279–80 and p. 369.Google Scholar
  5. 15.
    MacDonald, Robert and Daniel Siegel. 1986. “The Value of Waiting to Invest,” Quarterly Journal of Economics, Vol. 101, pp. 707–728.CrossRefGoogle Scholar
  6. 16.
    Dixit and Pindyck, op. cit., p. 153.Google Scholar
  7. 17.
    Federal Communications Commission, Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket No. 96–98, Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket No. 95–185, August 8, 1996, p. 687. Although the FCC correctly concluded that term contracts mitigate risk, it did not require competitors to enter such contracts as a condition for receiving low prices.Google Scholar
  8. 20.
    Emmerson, Richard D. 1999. “Cost Models: Comporting with Principles,” in this volume. Emmerson characterizes such adjustments as “crude but useful.”Google Scholar

Copyright information

© Kluwer Academic Publishers 1999

Authors and Affiliations

  • Timothy J. Tardiff
    • 1
  1. 1.National Economic Research AssociatesUSA

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