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| The Telephone Bill of a "Typical" Residential Customer | |
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| February
2001
Introduction The telephone bill of a residential customer What is a typical residential bill? Measuring the Median Bill Results for 1999/2000 BT Price Control and the Effect of Price Changes on the Median Bill Glossary This note discusses the methodology used to estimate the telephone bill of a typical residential customer and provides an estimate of this figure for 1999/2000. This information is used by OFTEL to assess the impact of price changes on customers. The bill is defined as comprising all services which are commonly used by residential customers. Call charges and rental fees are included, as are connection charges. However, discounts are not included and results should not be used as an accurate guide to the actual price paid by residential consumers. The median bill is used as a proxy for the typical bill and is obtained from a 1 in 100 sample of residential phone bills. The median is likely to be more representative than the mean which will be skewed by a small number of very high usage customers. The mode is not used as it unstable over-time. To provide a more reliable breakdown of a typical bill into its constituent parts, however, it is necessary to consider the usage profile of a wider range of customers. Hence, the usage pattern of customers in the second and third quartiles of the distribution is used to provide a more representative mix. This is then priced, together with the rental and connection elements, to give the full bill. In 1999/2000 the value of the typical residential bill was £52.57 per quarter. While this represents a slight rise in the previous year’s figure this is the result of increased usage. Had usage remained constant the median bill would have been reduced by over 5 per cent in real terms.
The Telephone Bill of a "Typical" Residential Customer The telephone bill of a typical residential customer is important to OFTEL. As part of monitoring BT’s compliance with price control rules, OFTEL monitors the extent to which differential price changes by BT affect typical residential customers. This note details the method which has been agreed between BT and OFTEL to determine the impact of price changes on the representative or typical residential bill and outlines the results of the calculation for 1999/2000. The results, while useful for regulatory purposes, cannot be considered an accurate guide to the actual prices paid by residential customers. Results are based on BT’s standard prices only and do not consider the impact the wide range of alternative tariff packages and discount option schemes.
What is a typical residential bill? There are various ways of defining a typical bill. The statistics most commonly used are the mean (or average), the mode (or most commonly occurring) and the median (or the middle one if all bills were arranged in order of size). Figure 1 shows the relationship between the three measures for a particular frequency distribution.
A customer’s quarterly bill comprises of a fixed rental together with call charges which vary with his or her usage. The distribution of residential bills is highly skewed, as a small number of customers generate very high bills. Because of this the average bill bears only a limited resemblance to the bills of the majority of customers. In 1999/00, only 8% of call bills were within £5 of the average bill and only 16% were within £10. Nevertheless, the average bill is the correct basis for measuring trends in total consumers’ expenditure. The modal bill is an even more unsatisfactory measure of the representative experience. The distribution of quarterly bills is fairly flat over a significant range of bill sizes and this could result in the modal bill being unstable in that it could fluctuate markedly in size over time. The median call bill, however, does not suffer from problems of stability and is more typical than the average bill. In 1999/00 12% and 25% of residential call bills lay within £5 and £10 respectively of the median bill. The next issue to consider is the range of services, which should be covered in the bill. Clearly all call charges and the basic exchange line rental should be included. Connection charges are also included. While, most residential customers will pay connection charges only occasionally these charges can be an important part of the bill for many customers. Consequently, some means should be found of taking into account annual price changes. Rental charges for telephone instruments and any other apparatus are not included. These markets are now fully competitive, and all customers have an effective choice of supplier, which need not be BT.
BT is able to estimate the absolute size of the median bill (excluding connection charges – see paragraph 13) by means of an information system which uses data from a 1 in 100 sample of the telephone bills of residential customers. The average sample size in 1999/00 was about 200,000 and sampling errors are of the order of 0.6%. Although this system provides the best estimate of the size of the median bill, it does not provide a breakdown of the bill into its constituent parts. In any event, it would not be appropriate to use the call mix of the particular customer who happened to receive what turns out in the sample to be the median bill. That customer might, for example, make international calls regularly yet make very few inland calls and thus be untypical of other customers receiving bills of similar size. Also, the median customer will be a different person each year and hence the call mix will change arbitrarily. Usage information is available from another of BT’s operational billing systems, again from a 1 in 100 sample of residential customers. One possibility is to use the call mix of all those included in the sample, but this gives undue weight to high users who have a different calling pattern from most other users. A more satisfactory approach is to analyse bills which fall in the middle of the call bill distribution. So instead, the usage mix of all customers in the middle 50 per cent of the distribution (i.e. those customers within the second and third quartiles of the distribution) is considered. The customers in this sample are allocated into 11 call bill bands, based on their estimated usage in the previous financial years. From these, it is possible to obtain a representative call bill mix for each quartiles and reconcile the total revenue for each call type with the outturn as measured by BT’s financial reporting system. Call revenue in the inter-quartile range is split into call types to be used in the measurement of the ‘median’ bill. A typical residential quarterly bill is defined as above, based on current tariffs and call usage in the preceding financial year. As most customers do not incur connection charges (including take-over charges) in a particular year, the methodology described in paragraphs 10-12 does not really lend itself to the incorporation of such charges into the median bill. Instead a simple average of the quarterly expenditure of all residential customers on connection charges in the financial year is included.
Table 1: Quarterly Median Bill Estimates
*Includes calls to the Republic of Ireland, calls to mobile networks and premium rate calls. It should also be noted that the above analysis relates to BT’s standard prices only. The results are not necessarily representative of other telecom operators’ residential customer base. In addition, there are a number of options available to BT customers that give discounts on calls, thereby reducing the actual price paid. The most significant of these are BT Together, BT Talk Together and BT Surf Together. For example, BT Together gives lower prices across most call types, including 49% off National Daytime and Evening rates and up to 75% on certain International calls. Additional savings can be achieved via schemes such as Friends & Family (10%) or BestFriend (20%) which can also be combined with other option, further reducing the actual price paid. BT Price Control and the Effect of Price Changes on the Median Bill The current BT price control rule has been in place since 1 August 1997 and will last until 31 July 2001. The ‘basket’ of services currently covered includes direct dialled inland and international calls, exchange line rentals, connection charges and operator assisted calls for the lowest spending 80% of customers. The current regime requires BT to reduce the overall price of this basket by RPI-4.5% in each price control year. Further information about this and previous price control regimes are available on the OFTEL website. Whenever price changes are proposed by BT, OFTEL carries out a detailed review to establish that the changes are consistent with BT’s licence rules. This review ensures that, at any point, the cumulative effect of BT’s price changes within a price control year does not increase that bill by more than observed inflation over the relevant reference period. The effect of a proposed tariff revision on the median bill is evaluated in the same way as the calculation for the ‘basket’ of BT’s main services except that the weights to be applied are those associated with the composition of the median bill. The reference period for price changes in the year ending July 2000 is the 12 months up to June 1999. The most recent price changes included in the calculations are those announced on 1st April 2000. Table 2 summarises the effects of price changes on the median bill over recent years. Table 2: Effect of Price Changes on Median Bill
*Price changes in 1999/00 are assessed against the 1998/99 median bill Comments and questions about this Statistical Note should be addressed to : Hilary Anne Anderson Tel : 020 7634 8937 OFTEL gratefully acknowledges the help provided by BT’s statisticians in the preparation of this note.
RPI : Retail Price Index Retail Price Index : A measurement of "the rate of change in consumer prices and is based on the weighted prices of 600 different items sold in 180 areas in different regions and different types of outlet Basket : A group of goods and services that are treated as one entity under a constraint or rule. Mean : This is the sum of the observations divided by the number of observation. (2) Median Bill : The bill in the "middle" of the distribution. (2) Mode : The observation which occurs with the greatest frequency (2) Skewness : A lack of symmetry with regard to a vertical axis [See graph 1] (3) Sampling Error : This is the measure of the possibility that a sample is not representative of the population as a whole. Usage Mix : A representation of how a person’s or group of people’s telephone bill(s) are made up of local calls national calls etc. Calling pattern : a.k.a usage mix. Quartile : The quartile is calculated in a similar way to the median. The first quartile is the observation that occurs one-quarter of the way through the distribution, the third quartile occurs three-quarters of the way through and the second quartile is the median itself. Decile : This is a generalisation of the idea behind quartiles. [Dividing the distribution by ten] (2) Percentile : This is a generalisation of the idea behind quartiles. [Dividing the distribution by a hundred] (2) (1) UK Statistics : A guide for Business Users, David Mort (2) Statistics for Economic, accounting and Business Studies, Michael Barrow (3) Learning and Practicing Economics, William E Griffiths; R. Carter Hill; George G. Judge. (February 1999)
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