The 1996 Telecommunications Act will eventually open local telephone markets to competition, but some analysts are wondering how telephone customers in high-cost, usually rural, service areas will be protected against higher rates for service.

The act maintained universal service subsidies for customers in high-cost areas. These subsidies, from long distance phone companies, have been going to local monopoly phone companies. But how will the subsidies be distributed to local competing phone companies?

One suggestion is

a "competitive bidding" system whereby companies bid against one another to serve a single market at the lowest price.

Hudson Institute analyst Peter Pitsch, however, is suggesting an alternative: a "consumer choice" plan.

• Pitsch contends that the competitive bidding system is actually anti-competitive because it confers special advantages on one company in an area -- rather than allowing true competition.

• Under the consumer choice alternative, companies would be subsidized per customer -- allowing customers to move from one company to another and carry their subsidies with them.

• Such a system would have the advantages of being competitively neutral, he argues, and pressures would be generated for low prices as well as high quality service.

• In all likelihood, rates would be reasonably comparable in all areas, urban as well as rural.

Other advantages of a consumer choice plan would be greater ease of administration and lower entry costs. Moreover, he contends, subsidies could be more easily phased down under the consumer choice system.

Source: Peter Pitsch, "Reforming Universal Service: Competitive Bidding or Consumer Choice?" Briefing Paper No. 29, May 7, 1997, Cato Institute, 1000 Massachusetts Ave., N.W., Washington, D.C. 20001, (202) 842-0200.

For the full text of this Cato study http://www.cato.org/pubs/briefs/bp-029es.html