Seven Years After Kahn and Shew: Lingering Myths on Costs and Pricing Telephone Service

In 1987, Alfred E. Kahn and William B. Shew argued that the costs of linking customers with the public switched telephone network have been ill-defined as costs common to all telecommunications services. Now as the pace of change in telecommumications accelerates, the proper assignment of these so-called loop costs is increasingly important, since it affects many areas of public network law and policy, including rate-setting, cross-subsidy tests, and franchise obligations. An argument in favor of Kahn and Shew is developed, and 8 additional arguments for attributing loop costs directly to the provision of access to the network are presented. The misclassification of loop costs is traced to careless nomenclature, misapplied microeconomics, and the merging of inconsistent concepts. Telecommunications policy must embrace loop costs as attributable to their own service rather than allocated to other network-using services.