The Role of Costing as a Ratemaking Tool in an Environment of Dynamic Change

Abstract

In this paper I describe how regulators have addressed these trade-offs and what they mean for the future of costing, assuming that ratemaking has a long-term role in telecommunications regulation. I explain how information rents and credibility concerns were important factors leading regulators to adopt rate-of-return regulation in the early part of the 20th century. Further concerns over legitimacy and information rents caused regulators to develop increasingly detailed techniques for rate-of-return regulation and eventually for jurisdictional and service costing. Jurisdictional costing is the process known as Separations. Separations’ purpose is to determine how much of a telephone company’s costs will be recovered through prices for interstate services, the services that the Federal Communications Commission (FCC) regulates. State regulators, called Public Utility Commissions or PUCs, regulate intrastate prices and are responsible for whatever costs are left over (Bolter et al., 1984). Service costing is the process of measuring costs for particular services or categories of services. Regulators first became interested in service costing in the 1960s when certain telecommunications markets became competitive and regulators were called upon to protect against cross subsidization.