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 PUBLIC  NOTICE  Federal  Communications  Commission  445  12  th  St.,  S.  W.  Washington,  D.  C.  20554  News  Media  Information  202  /  418-  0500  Internet:  http://  www.  fcc.  gov  TTY:  1-  888-  835-  5322 
 September  15,  2003 
 FCC  RELEASES  STAFF  WORKING  PAPER  ADDRESSING  ISSUES  RELATED  TO  TELRIC  PRICING  RULES 


 The  Federal  Communications  Commissions  Office  of  Strategic  Planning  and  Policy  Analysis  today  released  a  staff  working  paper  that  addresses  issues  related  to  the  Commissions 
 TELRIC  pricing  rules. 
 The  paper,  OSP  Working  Paper  No.  40,  entitled  Dynamic  Pricing  and  Investment  from  Static  Proxy  Models,  evaluates  the  use  of  static  computer  cost  models  and  cost  studies  typically 
 used  by  regulators  in  setting  forward-  looking  prices,  and  also  seeks  to  address  some  of  the  issues  raised  by  critics  of  TELRIC.  1 


 It  was  written  by  Professor  David  M.  Mandy,  Department  of  Economics,  University  of  Missouri  and  William  W.  Sharkey,  Senior  Economist  in  the  Office  of  Strategic  Planning  and 
 Policy  Analysis.  The  views  expressed  in  this  paper  are  those  of  the  authors  alone  and  do  not  necessarily  reflect  the  views  of  the  Federal  Communications  Commission,  any  Commissioners, 
 or  other  staff. 
 Section  2  of  the  paper  addresses  the  argument  that  periodic  recalculation  of  TELRIC  prices  prevents  incumbents  from  recovering  the  cost  of  their  investment. 


 It  shows  that  if  investment  costs  are  falling  over  time,  and  the  period  between  TELRIC  price  adjustments  is  shorter  than  the  assumed  asset  life,  then  traditional  TELRIC  pricing  will  not 
 permit  incumbents  to  recover  the  cost  of  their  investment.  It  then  shows  that  when  investment  costs  are  rising  over  time,  TELRIC  pricing  will  result  in  an  over-  recovery  of  investment  costs. 


 The  paper  explains  that  in  either  of  these  situations,  it  is  possible  to  compute  a  simple  correction  factor,  such  that  the  corrected  TELRIC  prices  follow  the  time  path  of  underlying 
 investment  costs  and  simultaneously  recover  the  firms  investment  cost. 


 1  In  the  present  context,  a  static  cost  model  is  one  which  does  not  explicitly  take  account  of  the  way  that 
 investments  are  made  at  different  points  in  time.  Instead  such  a  model  assumes  that  a  one  time  investment  is  made  to  serve  all  current  and  expected  future  demand. 
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 Section  3  of  the  paper  examines  a  carriers  cost  minimizing  investment  plan  in  a  dynamic  environment  with  large  fixed  investment  costs. 
 This  section  of  the  paper  explicitly  computes  a  cost  minimizing  investment  plan  for  an  efficient  firm  under  two  different  assumptions  about  asset  obsolescence,  and  various  assumptions 
 about  other  relevant  parameters,  including  the  rate  of  change  of  investment  cost,  the  rate  of  growth  of  demand  and  the  cost  of  capital. 


 It  then  compares  the  time  path  of  prices  which  result  from  a  particular  implementation  of  TELRIC  pricing  with  the  time  path  of  prices  that  would  occur  in  a  contestable  market,  which 
 may  be  simply  defined  as  a  market  in  which  entry  barriers  are  absent.  While  the  section  does  not  recommend  specific  input  prices  for  cost  models,  it  is  directly 
 relevant  to  the  selection  of  forward-  looking  fill  factors  for  such  models.  As  such,  it  may  be  used  to  evaluate  the  arguments  of  some  incumbents  that  state  commissions  have  set  unrealistically 
 high  fill  factors. 
 It  also  provides  a  simple  framework  in  which  to  compare  pricing  rules  derived  from  static  cost  models  with  pricing  rules  derived  from  dynamic  investment  decisions  made  over  time. 


 The  paper  is  available  in  either  Microsoft  Word  or  Adobe  Acrobat  format  on  the  FCC  Web  site,  www.  fcc.  gov/  osp. 


 WC  DOCKET  NO.  03-  173  OSP  contact:  William  Sharkey  (202)  418-  2743. 
 -FCC  - 
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