Under the Telecommunications Act, estimates of local distribution costs may be used to help quantify the subsidy for specified local services whose costs exceed their tariffed rates and as a guide for the pricing of unbundled network elements. The most widely-circulated model for estimating these costs, the HAI model, uses a particular procedure to calculate the distribution network and cable length that is required to serve a cluster of customers.

The authors compare the HAI procedure with the minimum spanning tree (MST), which gives the shortest distance for connecting a set of locations. For each cluster in Minnesota, they calculated the distribution length with the HAI procedure and the length of the MST. The authors find that the HAI length is shorter that the MST length in 77% of the main clusters. In low-density areas, the HAI length is less than the MST length for 81% of the main clusters. The too-short cable lengths mean that the HAI model underestimates network costs; this underestimation extends beyond the cost of the cables themselves since many cost components are tied to cable length, such as support structures, maintenance, and associated power and back-up equipment. The use of underestimated costs in determining subsidies and network prices would discourage the provision of services in subsidized areas and encourage inefficient entry that utilizes unbundled network elements.

This article was published in Telecommunications Policy, Vol. 24, No. 3, April 2000.