Clarifying the Mechanisms for Ensuring that Telephone Subscribers Have Minimum Reasonable Local Calling Areas and Opportunities to Make Interexchange calls at Flat Rates or Rates Less Than Statewide Tariffed per Minute Toll Rates. ) ) ) ) ) ) ) ) Docket No. UT-970545 COMMENTS OF MCI TELECOMMUNICATIONS CORPORATION MCI Telecommunications Corporation (MCI), in response to the Washington Utilities and Transportation Commission's (Commission) Preproposal Statement of Inquiry, issued April 9, 1997, hereby submits its Comments in the above-referenced matter. Extended Area Service (EAS) proceedings pose a public policy dilemma for state commissions. With the enactment of the federal Telecommunications Act of 1996 (the Act), this is even more true than before. The mandate of the Act, inter alia, is the promotion of competition in the local exchange market. This Commission has taken important steps toward the promotion of competition in local exchange markets with its decisions in the interconnection docket and the most recent U S WEST rate case. (Docket No. UT-94164, UT-941465, UT-950146, Fourth Supplemental Order Rejecting Tariff Filings and Ordering Refiling; Granting Complaints, In Part. Docket No. UT-950200, Fifteenth Supplemental Order, Commission Decision and Order Rejecting Tariff Revisions; Requiring Refiling.) However, the Act also calls for promotion of competition in the interexchange market. The Act allows this Commission to order intraLATA equal access after February 8, 1999, and perhaps sooner if certain requirements are met. (The Act 1996, Section 71(e)(2)(B).) Additionally, RCW 80.36.300(5) calls for the promotion of diversity in the supply of telecommunications services and products in all telecommunications markets throughout the state. The Commission must be ever vigilant so as not to implement rules that might have a negative effect on the promotion of competition -- and the resulting benefits to consumers --in either the local or long distance market. As noted in the Commission's policy statement regarding suspension of new requests for EAS in Docket No. UT-970546, dated April 9, 1997, the establishment of EAS has many detrimental effects. Implementation of EAS shifts revenue requirements among different customer classes and often forces low volume users to subsidize high volume users. More importantly, EAS effectively eliminates potential competitive toll markets. While MCI concedes that EAS may be beneficial in a few limited instances, MCI believes that a reduction of access charges to economic costs and true equal dialing parity in the intraLATA market will eliminate much of the desire or need for EAS. A reduction of access charges to economic costs will benefit all consumers, even low volume toll users. A reduction in access charges will promote competition in the interexchange toll market because opportunities for incumbent local exchange carriers to use the large gap between access charges and costs to distort long distance competition will be reduced. With access charges reduced to costs, price squeezes are less likely to occur. While imputation rules appear to solve the problem of a price squeeze, imputation rules are hard to enforce given the complexity of toll service offerings and incentives for local monopoly telephone companies to abuse them. Additionally reducing access charges to cost will remove any impediment to the efficient development of local competition. Finally, MCI will flow-through access charge reductions to its customers resulting in an immediate substantial benefit to consumers in Washington. While intraLATA equal access is not currently possible in the USW exchanges, the possibility of intraLATA equal access is in the foreseeable future. IntraLATA dialing parity will promote competition in the intraLATA toll market, which will stimulate reduction in toll rates. The Commission should be careful not to eliminate competitive toll routes that will be even more competitive with intraLATA equal access, through the expansion of local calling areas. In those instances where the Commission deems that EAS is in the public interest, the Commission can promote and protect competition through EAS rules that require the EAS to be offered as an additional feature, separate from the basic local calling area, optional and available for resale by all telecommunications providers. In this manner, competition can continue to develop, consumers that need extended calling will have the capability, yet other consumers will not be forced to purchase a service they neither want nor need and there will be no subsidization of high volume users by low volume users. CR-101 Questions 1. Should there be a statewide standard for minimum local calling capability that is required to be available for every exchange? If so, how should the standard be defined? There are certain standards that the Commission may find applicable to every exchange. Such factors may include access to public necessities or essential services that pertain to health (doctors and medical facilities, etc.) and safety (fire and police). However, one size does not always fit all. While there may be other socioeconomic factors which the Commission has the discretion to consider, such factors do not always apply to the majority of consumers. For example, access to schools in neighboring areas is probably not of any value to single people without children or perhaps retired senior citizens. Except for the basic, essential services referenced above, socioeconomic factors such as access to professional and retail services or a wide array of government offices are too varied to be considered as major factors in determining whether EAS is in the public interest. Use of calling data, rather than socioeconomic needs, gives the Commission a quantifiable starting point by which to judge the current calling patterns of communities and, therefore, a community of interest between communities. Calling data will also indicate whether EAS should be one-way or two-way. Such data would also be critical to establishing compensatory rates for EAS routes. 2. If there were a statewide standard, should it be achieved by incorporating exchanges into larger local calling areas? Should such expansion be paid for by subscribers in the area where the expansion occurs, or should the relevant telephone company balance all local rates? (a) It may not always be necessary to incorporate exchanges into larger local calling areas to achieve the standards the Commission wishes to establish. Occasionally, remedies can be accomplished by combining two small exchanges. However, as stated above, one solution does not always fit every circumstance. (b) Expansion of local calling areas should be paid for by subscribers in the area where the expansion occurs. In other words, those that benefit should pay. To do otherwise would increase the rates of those who do not benefit. Additionally, as stated above, EAS should be optional so that those consumers not needing the EAS are not unfairly forced to incur additional costs. Such a practice of mandatory EAS can also jeopardize universal service. For example, there may be some low-income consumers that can only afford their current local calling area, which may suffice for their needs. To spread the cost of the expansion over all local rates also sets non-cost-based, subsidized local rates. If local rates do not reflect true costs, competition in the local exchange market will not develop as quickly as might otherwise occur. 3. How should we encourage or require other opportunities for flat-rated or other lower-priced interexchange calling? As previously stated, MCI recommends the lowering of access charges to true economic costs as the preferred method of encouraging competition. Such reductions will encourage market entry and result in lower rates for consumers. Also, if EAS is available, and billed, separately as an addition to the basic local calling area and is available for resale by all other telecommunications providers, including interexchange providers, such resale will stimulate competition and, thus, lower prices for the EAS portion. Keeping EAS separate, as an optional addition to the basic local calling area will provide the service to those consumers that need the EAS, yet not unduly burden those consumers that do not want the extended calling area. 4. The Commission has in selected instances allowed telephone companies to incorporate additional exchanges into an expanded local calling area in order to offer some subscribers "optional local calling plans" at rates lower than toll. Is the incorporation of additional exchanges into an expanded local calling area the best way to get companies to offer flat-rated and lower-priced interexchange calling? What costs should be reflected in the price of such local interexchange calling plans? What if any requirements would be needed to ensure a level playing field for all competitors? As stated in response to #3 above, incorporation of additional exchanges into an expanded local calling area is not the best way to proceed. Reduced access charges and an EAS offering based on economic costs, subject to resale, is the best method to stimulate competition and lower prices for consumers. EAS prices must recover all costs involved in providing the new service. EAS prices must recover additional investment and the total service long run incremental costs of all the network functions and features necessary to provide the EAS. The rate that the incumbent local exchange carrier (ILEC) charges to consumers must impute the charges that a reseller must pay to the ILEC when it resells the EAS. The rate charged for EAS must be priced above a price floor, based on the factors stated above, to prevent ILECs from subjecting its competitors to a price squeeze. Unless such costs are required to be incorporated into potentially competitive retail services, competitors will find it extremely difficult, if not impossible, to compete against the monopoly provider. Additionally, the Commission should not allow the ILECs to automatically replace revenues from lost toll or access charges. To automatically guarantee recovery of previous revenues from competitive services would be cross-subsidization and would be blatantly unfair not only to consumers, but also to those competitive providers which would receive no similar compensation for their lost toll on these routes. Second, the ILECs have no inalienable right to such revenues. With competition, ideas of "revenue replacement" and "revenue neutrality" are misplaced. To guarantee the ILECs their revenue stream would eliminate several of the most powerful incentives associated with competitive entry -- incentives to attract and keep consumers, incentives to innovate and develop new services, incentives to control and reduce costs, and incentives to understand and respond to consumer needs. The Commission should not automatically provide any mechanism to replace revenues. The Commission should not assume that the ILECs need to be made whole with regard to any revenue reductions that may result from EAS. The ILECs should be required to demonstrate whether they are incapable of recovering their costs, including a reasonable return on their investment. 5. Would it be better to pursue optional calling plans that do not depend on the Commission's approval of an expanded local area? Would the price of such optional toll calling plans have to reflect access costs? It is unclear to MCI in this question whether the ILEC could implement the optional calling plan without the Commission's approval. MCI believes, however, that optional toll calling plans are preferable to mandatory EAS. Moreover, any optional toll calling plans should cover the cost of providing the service, including actual or imputed access charges. If access charges are reduced to true economic cost, imputation and other competitive safeguards are much less important. 6. Is it a good idea for a company to charge some customers toll rates based on access charges, and other local rates for the same calls? Generally speaking, a provider should not discriminate among its customers. Nevertheless, customers should be allowed to select the calling plan that best meets his or her needs. It is conceivable that, based on a customer's decision, the same or similar call might be completed as either toll or local. The whole point of competition is to allow consumers to make their own decisions and choices between and among various services, based on their individual needs -- the intent of competition is not to force consumers to subscribe to and pay for services they do not want. If access charges are based on true costs, and the optional EAS plan is based on true economic costs, there will be no economic disparity between customers. 7. Should flat-rated and other lower-priced interexchange calling plans if offered in any exchange be available on consistent terms in all exchanges served by the offering telephone company? Should they be available only to subscribers in selected exchanges? If the latter, what should be the basis for selecting the exchanges? If by "consistent terms" the Commission is also including the "price", as set out in response 2(b) above, it is MCI's position that the price for the individual calling plans must be set based on the individual costs. To do otherwise is unfair to consumers and will inhibit the promotion of competition. MCI understands, however, that there are significant public interest benefits associated with rate averaging. MCI would not oppose a requirement for all carriers to average rates in their respective serving area. As to the question of which exchanges should be selected for expanded local calling, MCI urges the Commission to proceed in a cautious manner. Expansion of local calling areas must be based on the demonstrated needs of consumers. Exchanges cannot be automatically picked merely because they meet some set of circumstances or because of the ILEC choice of exchanges. In these instances the EAS may not be desired by the consumers. The Commission should establish stringent calling data criteria. Consumers that might desire expanded local calling would then have some idea of the threshold necessary to demonstrate a true need for the EAS. The community could then apply to the Commission for the expansion. After which, the Commission could decide if there were truly a demonstrated need for the EAS and develop a compensatory rate for the service. SUMMARY MCI understands that there may be some very limited instances where EAS may be needed by consumers. However, as the telecommunications markets is poised for the introduction of effective competition beyond that which has been enjoyed in other telecommunications markets, MCI recommends that the Commission consider EAS expansion with the utmost caution. Access charges which are lowered to true economic costs will benefit all consumers, not merely those high volume toll users that are seeking relief through EAS. In those instance where the Commission deems EAS to be in the public interest, MCI proposes that an EAS that is both optional and separate from the basic local calling plan will benefit consumers and promote and protect competition. MCI appreciates this opportunity to comment and respond to the Commission's questions. MCI looks forward to working with the Commission in any workshops it may schedule on these issues. Respectfully submitted, MCI TELECOMMUNICATIONS CORPORATION Rebecca J. Bennett 707 17th Street, Suite 3600 Denver, Colorado 80202 303-291-6392