forward, the cost variable is the estimate from the FCC's model. While the variable is not
ideal, it should capture the factors that account for the discrepancies in costs, such as
population density, wire center locations, and local cost levels.27
As explained in Section 2, UNE rate proceedings are often lengthy. As such, it
takes time for commissions to incorporate new information in their cost studies. Further,
state commissions may not learn the results of proceedings in other states for some time
or may be in an earlier stage of their UNE rate study. Therefore, it is appropriate to model
with a lag the influence of the rates of the other states. However, as the number of lags
included in the model increases, the number of explanatory variables increases quickly28,
thus limiting degrees of freedom. With this constraint in mind, the model is estimated
using two different lag structures. The first includes the neighbor states' rates over each
of the last four quarters, thus spanning one year. The second structure includes the
neighbor states' rates from each of the last four half-years, thus spanning two years.29
As described above, characteristics of the state utility commissions may also
influence UNE rates. To control for the length of time commissioners have served, the
average tenure of the commissioners is included. The political ideology of the
commission is captured in the fraction of commissioners that describe themselves as
Republican. The effect on UNE rates of the form of retail rate regulation is captured in a
dummy variable that equals one if the state employs rate of return regulation on either
27 The results do not change substantially when embedded costs are used for the entire period.
28 For each lag of other states' rates that is included in the estimation, three explanatory variables are added
(the weighted average of the neighbor rates interacted with the leader and follower dummy variables and
the leader's rate interacted with the follower dummy variable).
29 Given the rates of other states enter the model with a lag, they are treated as exogenous from the
perspective of the commission setting current rates.