Comments of AirTouch Communications May 22, 1998 1 Before the Washington Utilities and Transportation Commission Olympia, Washington 98504-7250 In the Matter of: ) ) ) Universal Service Rulemaking ) Docket No. UT-980311(r) ) ) ) Comments of AirTouch Communications, Inc. Michael D. Gallagher, Esq. AirTouch Communications, Inc. 3350 161st Ave., S.E. Bellevue, Washington 98008 (425) 603-7968 (425) 603-7659 FAX E-mail: mgalla1@uswnvg.com Charles D. Cosson, Esq. AirTouch Communications One California Street, 29th Fl. San Francisco, CA 94111 658-2434 (415) 658-2154 FAX E-mail: charles.cosson@airtouch.com June 8, 1998 Before the Washington Utilities and Transportation Commission Olympia, Washington 98504-7250 In the Matter of: ) ) ) Universal Service Rulemaking ) Docket No. UT-980311(r) ) ) ) Comments of AirTouch Communications, Inc INTRODUCTION AirTouch Communications, Inc., (“AirTouch”) hereby submits its comments in response to the Notice of Proceeding released May 4, 1998, in this proceeding. “Notice of Proceeding - Opportunity to file Rulemaking Comments,” Universal Service Issues Proceeding, Docket No. UT-980311(r) (May 4, 1998)(“Notice”); see Letter from Paul Curl, Acting Secretary, WUTC, dated May 14, 1998 (inviting comment on two additional questions from WUTC staff). AirTouch provides a variety of wireless telecommunications services, including cellular and paging, in the State of Washington, throughout the U.S., and internationally. In the Notice, the Washington Utilities and Transportation Commission (“WUTC” or “Commission”) seeks comment on a series of important questions for the universal service rulemaking. AirTouch responds to these questions in the numbered paragraphs below. 1. What should be the goal of a Washington universal service support system? The goals of any Washington universal service support system must be: 1) to assure that basic telecommunication service is affordable to all citizens, and; 2) to tax the people of Washington as minimally and efficiently as possible in the process. The new arrangement must identify with specificity how much money might be needed to supplement federal support for high-cost areas or low-income subscribers, in order to prevent large numbers of disconnections from the network in a competitive environment. This amount of money, obviously, is not necessarily equal to the existing level of support, since the existing level of support was not determined in a competitive environment. The goal must not be to preserve the status quo revenue flows for the incumbent LECs. Preserving these subsidy flows may make network connections affordable to some citizens, but it will also stifle competition, retard innovation, and reward inefficiency. Any universal service plan should eliminate the existing system of implicit subsidies that prohibits economic competition for certain local exchange services, and replace it with a specific, predictable, and market-oriented arrangement. The first goal of a universal service fund should be to address directly the cause of network disconnections stemming from price to the consumer. Washington may well find that generally favorable economic conditions in the state, competitive pricing from new entrants, a number of offsetting affordability factors in high-cost areas such as lower housing costs, and the federal high-cost support amounts, mean that no additional intra-state tax revenues are needed. Since a primary element of gross telecommunications charges paid by high cost and low income consumers is for toll, eliminating the cost burden of local subsidies from toll rates would reduce those consumer’s total bill - and the number of network disconnections. Once the proper amount (if any) of subsidy needed to maintain affordable local rates in high-cost areas is identified, the next goal should be to create a collection system that does not tax one telecommunications service to subsidize another and that targets the support to only those consumers who need it. A Washington State universal system must strive to eliminate the distortions of demand and the barriers to competition, that are characteristic of the approach taken by the Federal Communications Commission. As described below, basic economics shows us that the common approach of collecting implicit subsidies from toll rates creates deadweight losses in overall consumer welfare. Universal service subsidies do not come free. Either implicit or explicit taxes have to be levied to fund the subsidies. In addition to the direct cost of implicit taxes - and the administrative costs of assessing and collecting them - a third type of costs arise, as well: the imposition of a tax distorts providers’ investment and supply decisions and subscribers’ consumption decisions, and thus gives rise to efficiency losses. By artificially raising the price of certain telecommunications services, universal service mechanisms frustrate consumer demand for toll services, wireless services, and vertical features. These efficiency costs are in addition to the direct losses of income that consumers suffer from bearing the tax burdens. These efficiency costs are referred to by economists as the deadweight loss of taxation because they represent costs for which there is no offsetting benefit. In contrast, the taking a dollar from one subscriber and giving it to another is referred to as a pure transfer because there is a dollar benefit to the recipient that offsets the dollar cost to the other consumer. Existing universal service taxation policies, as promulgated by the FCC, generate billions of dollars of deadweight loss per year. In a recent study, Professor Jerry Hausman found that for each additional dollar of tax placed on interstate telecommunications services, the additional burden on the economy is $2.25.See Jerry Hausman, “Taxation by Telecommunications Regulation,” National Bureau of Economics Research, Working Paper 6260, November 1997, at 15. The $1.25 difference between the amount of the tax and harm to the economy is the deadweight loss - a loss greater than the revenues raised! In contrast, Hausman found that the estimates in the academic literature on the cost of raising a dollar of revenue through the overall federal tax system range from $1.26 to $1.41 per dollar raised.Id. at 16. In other words, estimates of the deadweight loss associated taxes on the general tax base range from $0.26 to $0.41—less than one third of the efficiency losses associated with taxes on telecommunications services. Moreover, if consumers (particularly small businesses) are to see the benefits of competition, then a universal service system must not force competitive carriers to subsidize the incumbent LEC. It must also not permit LECs to recover the costs of its contributions from captive toll carriers while requiring all other carriers to reflect the costs of universal service contributions in their retail rates. This approach effectively insulates incumbent LECs from competition. The ramifications for consumers (of all categories) are more favorable where taxes are not excessive, and where the burden of taxes is spread across as many individuals as possible. Economic choices are not distorted. As a general matter, all consumer groups are harmed where more tax dollars are collected than are necessary to meet the public purpose of the tax. Specific consumer groups, however, may be harmed more than others. Data analyzed by the FCC demonstrates that low income, unemployed, and minority individuals have far lower penetration levels than do other households - universal service subsidies should address this directly, not with a scattershot approach that subsidizes carriers instead of customers. See FCC Monitoring Report, Common Carrier Docket No. 87-339, May 1997; FCC Report on Telephone Subscribership, January 21, 1998, at Table 4. Taxing telecommunications services to pay for these subsidy programs, rather than a more broad based tax, harms these customers the most, by pricing telecommunication service beyond their reach. 2. Should the USF program guarantee sufficient operating revenue to companies serving high-cost locations no matter how much market share is lost to competitors? The USF program should not “guarantee” the revenues of any particular company. A USF program for the state of Washington must be designed to be compatible with competition. In order to accomplish that goal, the program must not be “revenue-neutral” for incumbent carriers. Subsidies should go to consumers, not carriers. To the extent that an incumbent LEC loses market share, the LEC should be permitted to respond competitively and not be constrained by its existing tariff. But, to the extent that affordable service relies on internal cross-subsidies within a carrier serving a high-cost area, these pricing subsidies should be eliminated, or at least made explicit and recovered from the general tax base. The solution must not to obstruct competition by taxing other telecommunications carriers to make up the costs of the ILEC’s lost revenue. A number of wireline carriers already are seeking to compete for market share with the incumbent LEC in Washington state. Wireless carriers have the potential to evolve into competitors for this market share also. If these competitors are required to pay into a fund that preserves the revenue flow of their competitors, they will not only be burdened by tax, but also be forced to directly reward the inefficiency of the incumbent provider. The effects of competition on consumers are beneficial, not harmful. Presumably, when a company is losing market share to competitors, its former customers are getting what they perceive to be better service at a better price. There is absolutely no reason why consumers would be harmed. In general, consumers will also benefit if subsidies are made more efficient by targeting them to households, not carriers. It is inefficient - and thereby harmful to consumers - for carriers who serve both high-cost and low-cost areas (permitting universal service to be supported with internal cross-subsidies) to receive subsidies based on their total costs of service. Consumers would be better off were subsidies simply targeted to those households who are truly in need. Those households could then purchase the services they desire the most from the carrier of their choice - imposing discipline on telecommunications providers to serve, innovate, and cut prices. 3. What relationship, if any, should payments from a universal service fund bear to changes in efficiency and productivity of the recipient ? As discussed above, this question assumes, that the recipient of universal service funds must be a telecommunications carrier. AirTouch believes a more efficient universal service system would target support to households, not carriers. Thus, the efficiency of the recipient is irrelevant. Indeed, by placing subsidy funds on the demand side of the equation - in the hands of consumers - market incentives can work, driving carriers to become more efficient and productive. 4. Should USF provide support for each customer’s primary line only? 5. If you propose that USF support less than all lines, should the support vary by class of customer (e.g., small and large business)? 6. If you propose support for one primary line, particularly for only one residential primary line, how do you propose this be administered? Because these questions are inter-related, AirTouch proposes a comprehensive response to all three. Certainly subsidies for all lines is not necessary to ensure the basic goal of universal service: access to a defined basic level of telecommunications service. “Basic access” does not include multiple lines. There is no need for Washington to provide extra subsidies for extra services such as second lines, call waiting, voice mail, or high-speed data capability. However, AirTouch recognizes the administrative complexities in asking carriers to determine whether a customer has ordered a primary line or a secondary line, whether a line is residential or business, whether the line is “primary” to a household, and the like. Scenarios such as that described in question 7c concerning the real estate broker emphasize that this administrative burden is significant. The answer, however, is not simply to subsidize all lines. To start, subsidizing all wirelines is discriminatory. No doubt the Commission is looking forward to the day when wireless will be competitive with wireline on quality and price. Subsidizing second wireline telephone lines, but not wireless subscriptions, discriminates against wireless service and inhibits the ability of wireless and other telecommunications services to eventually compete in the local exchange service market. A small but growing number of customers purchase cellular service as an alternative communications line. The subsidy system is particularly skewed where wireless carriers are required to pay into a universal service fund - subsidizing second lines offered by their competitors - but not subsidizing a second line offered by a wireless carrier. A better result is to target the subsidy to the consumer, and let the consumer decide whether the amount will be spent to secure a single line, discounts on multiple lines, or to purchase additional telecommunications services. Indeed, the Federal Communications Commission’s construction of the schools, libraries, and rural health care subsidy programs operates from this premise: it is the school, library or health care provider who determines which services they need most, not carriers. Other welfare programs, such as food stamps, AFDC, identify needy households, and allocate a particular amount per household. Public programs to support affordable telephone service should be no different. And administering this type of program should not be any more difficult. The WUTC should establish a benchmark affordability figure for telecommunications services - the difference between the estimated cost of basic services and the amount that any household can be expected to pay per month and still remain on the network. The estimated cost of basic service will, of course, be established through the companion adjudicatory proceeding. To the extent that the cost of service for that particular census block exceeds the affordability benchmark, eligible low income subscribers can apply to receive the difference from the universal service fund. Similarly, funds could be provided to subscribers of average income who reside in high-cost areas. The efficiency of the fund could be maximized by not paying subsidies to high-income customers, including those in high-cost areas, who need no subsidy.Under the existing system, the phone rates paid by a welfare mother in the inner city subsidize lower phone rates for celebrities who live in high cost areas, including resort communities. Eliminating this disparity would be both fair and just, and improve the efficiency of low-income subsidy programs. AirTouch’s recommended approach eliminates many of the administrative burdens of attempting to build the subsidy into a carrier’s rates. Rate design is a matter better left to the competitive market. 27. How should the USF be funded? What is an “equitable” basis for all telecommunications providers and services to contribute to the USF? Subsidizing affordable telecommunications service, like subsidizing affordable housing, food and other staples, is a legitimate public purpose, the costs of which should be borne by society at large. Consequently, any Washington USF should be funded out of the general tax revenues available to the State of Washington. If additional tax revenue is necessary, then the Commission should report that fact to the Legislature. But there is no economic reason that the costs of certain goods and services should be raised to pay for this purpose, particular the costs of certain telecommunications services and not others. An earlier Report to the Washington State legislature proposed that the state of Washington should require contributions from the same telecommunications carriers as the FCC, and should base assessments for contributions on “gross revenues net of payments to other carriers.”“Preserving and Advancing Universal Service in a Competitive Environment,” A Report to the Washington State Legislature prepared by the Washington Utilities and Transportation Commission, January 1998, at 8. But as recent public news reports have shown, the FCC’s system is seriously flawed, distorts economic demand, obstructs competition, and is not “equitable.” As of the date of this filing, the FCC is holding a series of (somewhat frantic) meetings to significantly revise its universal service approach. Also, AirTouch believes that states may not simply duplicate the FCC’ s set of contributing carriers, because the Communications Act precludes states from requiring a CMRS carrier to contribute to state universal service funds until that carrier provides a substitute for landline communications for a significant portion of the communications in a given state. Those conditions have not developed for any CMRS carrier.47 U.S.C. § 332(c)(3). Finally, contribution plans based on “gross [intrastate] revenues less payments to other carriers” impose administrative burdens by requiring carriers to separate interstate and intrastate revenues - which is particularly difficult for CMRS carriers - and perhaps to publicly report competitively sensitive data. Congress directed that universal service mechanisms be funded from “equitable and non-discriminatory” contributions from telecommunications carriers, but Congress did not require that state universal service mechanisms must be funded only through taxation of telecommunications carriers. Nothing in the 1996 Act prevents states from funding universal service from its general tax base, which of course includes telecommunications carriers and other businesses. The only requirement is that a state universal service program be funded in a manner which does not rely on or burden the federal universal service mechanisms.See 47 U.S.C. § 254(f). The premise of taxing only telecommunications carriers was, in the FCC’s words, intended to advance universal service by avoiding local rate increases.See “Federal-State Joint Board on Universal Service,” CC Docket No. 96-45, Report and Order, FCC 97-157 (May 8, 1997)(“Universal Service Order”), para. 16. In other words, the FCC wanted to subsidize low local rates provided by incumbent LECs by passing some of the costs of those services to other carriers and to other services. But it is fundamentally impossible as a matter of economics for the Commission to tax competitive telecommunications carriers or other services and avoid any rate impacts on the services they provide.Of course, in the monopoly environment to which regulators are accustomed and in which many incumbent LECs still operate, Congress and the Commission could restrict or direct how consumers would eventually bear these costs. Consumers pay for those services, too. As Commissioner Chong explained in her separate statement regarding the Joint Board decision, the Commission should make no mistake about the fact that the ultimate contributor to new universal service programs will be consumers.Universal Service Recommended Decision, 12 FCC Rcd 87 (1996), Separate Statement of Commissioner Rachelle B. Chong. Washington State must not make the same mistakes as the FCC in determining how to fund any universal service program. The FCC’s “solution” effectively preserves implicit subsidy flows which the FCC simultaneously acknowledges are “not sustainable in a competitive environment.”Universal Service Order, at para. 17. The FCC also attempted to hide the costs of the LECs’ contributions from the public by insulating the LECs from the costs of their contributions. Specifically, the FCC has permitted LECs to recover the costs of their contributions in access charges paid by toll carriers. In a recent Public Notice and the accompanying Report to Congress, the FCC acknowledges this fact, observing that long-distance carriers pay for 82.5% of the program’s costs although, for example, in the first half of 1998 they were nominally responsible for only 28.7% of the $624.5 million in the fund, based on their “gross revenues less payments to other carriers.”See Report to Congress, CC Docket 96-45, FCC 98-85 (May 8, 1998), at para. 22 (2Q 1998 fund expects to receive $179 M from ILECs, $266 M from IXCs, $87 M from CMRS, and $92.5 M from other = $624.5 M; 179/624.5 = 28.7%). This represents a serious flaw in the existing funding mechanism. The FCC’s system must not be adopted in the State of Washington because it discriminates in favor of incumbent LECs. The best way to finance any necessary universal service support would be to fund the programs out of general tax revenues. This is, in fact, the form of financing used for several federal universal service subsisy programs, such as the Rural Utilities Service of the U.S. Department of Agriculture. AirTouch does not dispute the legitimate public interest in affordable telecommunications services for all. And AirTouch does not dispute that everyone, including telecommunications carriers, benefits from having low-income customers, and high-cost area residents, on the network. But if additional tax revenue is required for an intra-state universal service fund, that revenue should be raised in the same way as revenue for other important public purposes are raised. Since all residents of Washington benefit from universal service, any program to further that goal should be coordinated with other tax programs to ensure that burdens are fairly and efficiently shared among all members of society. This approach is not only fair, it is sound economic policy. It is a well-established economic principle that broad-based tax collection schemes are less disruptive to economic activity and give rise to smaller social costs. For a summary of the optimal taxation literature, see Anthony B. Atkinson and Joseph E. Stiglitz, Lectures on Public Economics. New York: McGraw-Hill, 1980. See also, Alan Auerbach, "The Theory of Excess Burden and Optimal Taxation." In Handbook of Public Economics Vol. 1, edited by Alan J. Auerbach and Martin Feldstein. Amsterdam: North Holland, 1985. Additionally, this approach is sound telecommunications policy because carriers are not being asked to subsidize their competitors. Finally, an additional reason to simply fund any needed costs out of the general tax base is that, to the extent that Washington does intend to seek legislative authority to tax telecommunications carriers, it must report to the Legislature that federal statutory law prevents it from assessing CMRS carriers until certain conditions are met. As noted above, federal law provides that: “[n]othing in this subparagraph shall exempt providers of commercial mobile services (where such services are a substitute for landline telephone exchange service for a substantial portion of the communications within such State) from requirements imposed by a State commission on all providers of telecommunications services necessary to ensure the universal availability of telecommunications services at affordable rates.” 47 U.S.C. § 332(c)(3)(emphasis added). By expressly permitting states to require cellular providers to contribute to universal service where that service is a significant substitute for landline service, Congress made it unambiguous that cellular providers in states where their service is not such a substitute may not be subject to state universal service assessments. See also Metro Mobile v. Connecticut Dept. of Public Utility Control, Memorandum of Decision (December 9, 1996)(Conn. Super. Ct.) (court determines that universal service assessments on CMRS providers violate 47 U.S.C. § 332(c)(3). Any other provisions of the Communications Act, including Section 254, must be read in harmony with this earlier provision of law. CONCLUSION AirTouch appreciates the opportunity to respond to the Commission’s questions concerning creation of a new universal service program. This proceeding also represents an opportunity for the WUTC to take a national leadership role in designing a universal service program for this state that, for the first time, taxes consumers no more than necessary, taxes consumers and carriers fairly, and does not effectively prohibit competition from taking hold in local exchange services markets. AirTouch encourages the Commission to consider the responses suggested above in light of the FCC’s current difficulties implementing their approach, and welcomes any opportunity to discuss these approaches in further detail. Respectfully submitted, By:____________________ Michael D. Gallagher, Esq. AirTouch Communications, Inc. 3350 161st Ave., S.E. Bellevue, Washington 98008 (425) 603-7968 (425) 603-7659 FAX E-mail: mgalla1@uswnvg.com Charles D. Cosson, Esq. AirTouch Communications One California Street, 29th Fl. San Francisco, CA 94111 658-2434 (415) 658-2154 FAX E-mail: charles.cosson@airtouch.com June 8, 1998