BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Investigation of Universal Service Issues ) and the Development of Suitable ) UT-980311(r) Processes to Accomplish the ) Investigation ) COMMENTS OF GTE NORTHWEST June 8, 1998 GTE COMMENTS DOCKET NO. UT-980311(r) COMMENTS OF GTE For each question followed by an asterisk (*), please include a paragraph which addresses the impact on consumers; please do this for all parts of the question. As stated in question one, "In your answer, please include a separate paragraph which specifically details the ramifications your answer would have for various consumer groups, including residential and small and large business consumers." GOAL OF UNIVERSAL SERVICE 1. What should be the goal of a Washington universal service support system and fund (USF)? In your answer, please include a separate paragraph which specifically details the ramifications your answer would have for various consumer groups, including residential and small and large business consumers. As GTE has recommended previously to the WUTC, consistent with Section 254(b) of the Telecommunications Act of 1996 (Act), the following principles should guide the formulation of a state universal service plan: Policy should promote competitive market outcomes. Public policies should support the development of competition in telecommunications markets. Market forces should be relied upon whenever possible to determine efficient prices, service packaging, and quality levels. Rates should reflect cost and market conditions for all services. Market interventions to promote universal service should be designed to minimize distortion of the competitive market. Commissions may find it necessary to intervene in the market to ensure the widespread availability of basic service at affordable rates. When they intervene, they should do so in a way that minimizes the resulting distortion in the competitive market. Support should be linked to an obligation to serve. Commissions should define the service obligation they want carriers to undertake in return for support. This should include an obligation to provide basic service to any customer in an area at rates and terms the commission finds affordable. Support mechanisms should be competitively neutral. Universal service support mechanisms and rules should be competitively neutral. (CC Docket 96-45, paragraph 46). The definition, contribution, distribution, and administration of state universal service support mechanisms should not favor one carrier over another, or influence customer's choices of services or providers. It should not artificially affect a carrier's choice of technology, or its decision to make or buy inputs. Support should be portable among carriers who undertake the universal service obligations. Support mechanisms should be explicit, specific, predictable, and sufficient. There should be specific, predictable, and sufficient federal and state mechanisms to preserve and advance universal service (Section 254(b)(5) of the Act). Section 254(e) states that all implicit support for universal service should be made explicit and sufficient for the preservation and advancement of universal service. Wherever the universal service obligation causes a carrier to do something it would not otherwise have done in the competitive market, support should be sufficient to compensate the carrier. This compensation can best be determined through the market mechanism of competitive bidding, much as the government selects suppliers to perform other desired functions. Until support can be determined through bidding, the amount of support should be sufficient to ensure that each carrier of last resort receives, through the combination of the price the subscriber pays for basic local service and the support established by the Commission, its cost of providing that service. In order for support to be sufficient and portable, the universal service obligation must be the same for each carrier that receives support in a given area. All providers of telecommunications services should make equitable and nondiscriminatory contributions. All providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service (Section 254(b)(4) of the Act). Contributions towards universal service should be collected and passed through to end users in a competitively neutral manner. Explicit Support mechanism should equal the identified implicit support for incumbent carriers. ILECs should identify the implicit support inherent in the ILEC's revenue streams. The rates and charges for intrastate services that include implicit support for universal service today would be reduced concurrent with the receipt of explicit support from the state and federal USFs. Support mechanisms should foster incentives to maintain quality service at affordable rates. Quality services should be available at affordable rates to all consumers of telecommunications services, consistent with Section 254 of the Act. Support mechanisms should provide positive incentives for carriers to build facilities and serve high-cost areas. Support should include a low-income consumer support program. Support for a statewide Lifeline program should be part of the universal service fund. Lifeline and Link-up programs for low-income consumers should not be inconsistent with federal guidelines. Support for low-income consumers should not be linked to the obligation to serve. Schools, non-profit rural health care providers, and libraries should have access to advanced telecommunications services. Consistent with federal guidelines and available funding at the federal and state levels, elementary and secondary schools and classrooms, libraries, and non-profit rural health care providers should have access to advanced telecommunications services. If the WUTC implements GTE's full proposal, consumer rates will be set closer to their market levels and, thus, send more efficient market price signals. The rates for UNEs and other wholesale and retail services will be set on a consistent basis and minimize artificial opportunities to selectively target only high-value customers. Thus, a wide range of consumers would benefit from the emergence of local competition and the reform of universal service. 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 local service rate and the USF program together, however, absolutely must provide a reasonable opportunity for carriers to recoup the costs they will incur in providing universal service. Recognizing that the WUTC has been effective in its regulation of incumbent local exchange carriers (ILECs), so that the current overall recovery level for the firm is adequate, the WUTC should reform universal service to make explicit support that is implicit in rates on a support-neutral basis at day one. The correct starting point is crucial to the competitive neutrality of universal service and thereby the development of meaningful local competition. As competition develops, which the question appears to contemplate, ILEC revenue streams reasonably should be expected to change. If, however, implicit subsidies are not removed from current rates then the high-volume customers that generate implicit support today will be lost selectively by the ILEC, and the WUTC may discover that the support it calculates to be sufficient on average for an area may be insufficient to serve the remaining low-margin residential customers. Furthermore, competitive losses by the incumbent would complicate greatly any future recalculation of the need for universal service using revenue-based criteria. Further concerning the issue of market share changes, notice that the cost models currently being used to determine the "efficient" unit costs for universal service assume that the hypothetical entrant serves the entire market, i.e., a 100 percent market share. Although the USF plan by itself should not guarantee operating revenues to carriers regardless of their market shares, the plan must account for the fact that if units costs are higher when, for example, two companies split the market, then no firm will receive sufficient high-cost support if the model assumes economies associated with 100% market share. By contrast, GTE's auction proposal accommodates this concern since firms can make their bids contingent on the market share they anticipate earning in the competitive market. 3. What relationship, if any, should payments from a universal service fund bear to changes in efficiency and productivity of the recipient? The question appears to contemplate how universal service support payments might reflect any increases in efficiency or productivity. GTE already has proposed a more effective method for adjusting the support amount over time than any productivity offset, or any recalculation of the cost estimates. Subjecting the support amount to the market discipline of competitive bidding is the best way to correct any possible errors in the initial support, and periodic rebidding would assure the most accurate means of adjusting support over time to reflect changes in technology, input prices, or the definition of universal service. Notice, by contrast to the market share concern raised in question number two, the main source of "productivity" in the past has been unit growth. As an incumbent firm loses market share to competition, its unit costs will rise. Absent significant technological change, it is not reasonable for the WUTC to expect to capture significant productivity gains as incumbent carriers lose significant market share. SUPPORTED SERVICES 4. Should USF provide support for each customer's primary line only? Or should USF provide support for all lines or some number of lines greater than one but less than all lines? * All single-party residential and single-line business lines in Washington for which the cost of service exceeds the maximum permissible rate should be supported by state universal service funds. Section 254(b)(3) of the Act establishes that consumers in rural, insular, and high-cost areas should have access to telecommunications and information services--including interexchange and advanced services--at prices that are reasonably comparable to those in urban areas. Key words are "consumers" and "prices...comparable." As the WUTC's subsequent questions appear to anticipate, supporting only some lines based on an artificial distinction between "primary" and "non-primary" can result in any number of instances where some consumers in high-cost areas invariably would not be able to receive local service at prices that are comparable to those in low-cost areas. Furthermore, if only primary lines for residential and business customers are supported, GTE and other ILECS would have to be permitted to increase the tariffed rate for second lines to reflect the cost of providing that service. If rates for second lines are not brought to cost and universal service support is not provided, uneconomic below-cost pricing would be maintained, which is not viable or desirable in a competitive market. Given the degree of penetration of second lines in Washington, consumers will also be harmed. In a competitive market, a customer decides how much to buy by comparing the price of the next unit to his or her willingness to pay. The marketplace does not dictate how much a customer "needs"; the customer makes the appropriate decision in response to relative prices in the market. Although limiting support only to “primary” lines might appear to reduce the need for funding, the artificial distinction imposes additional costs. For example, the artificial distinction would have adverse effects on consumer choices of how much service to buy, and from whom. Whereas many consumers are accustomed to paying less per unit as they purchase greater quantities of telecommunications services, the artificial distinction would penalize consumers in high-cost areas who want or need additional lines. If the cost differences are marked between adjacent areas, the artificial distinction could have a material impact on small businesses, favoring those in a low-cost area over those in a high-cost area. As a side effect, unless the WUTC implements an effective system by which to monitor the purchases made from each carrier, consumers would have positive incentives to purchase multiple "primary" lines simply by contacting different carriers. Incentives to game the system in this manner would be harmful both to consumers and local exchange carriers. The impact of supporting all residential and business single lines is discussed in the responses to questions 5 through 8c. 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)? * GTE does not propose that USF support less than all single lines. 6a. If you propose support for one primary line, particularly for only one residential primary line, how do you propose this be administered? GTE does not propose support for only a "primary" line, and there does not appear to be any administratively manageable or cost-effective manner by which to classify lines and enforce the artificial distinction. It would be very difficult to define and implement the distinction between the first line and other lines. At the root of this difficulty is the fact that the policy rests on an untenable premise: namely that the “need” for basic telecommunications services is somehow a fixed amount per household (or some other social unit). Common experience shows that different people buy different amounts of any product or service in the marketplace. Add to this the difficulty in defining the social unit to which this notion applies, and the difficulty of defining a “line” in a world of new technology and hybrid services, and the result of this conceptual vacuum is an administrative quagmire. 6b. Could a family of three (two parents and a minor child) order three primary lines? Order two, one for each adult? Yes, it is possible that this scenario could occur, especially if the lines are obtained from different providers and no enforcement mechanism exists. The WUTC's question is a good one since it implicitly recognizes that the artificial definition of a primary line provides incentives for consumers to game the system. 6c. How many primary lines could be ordered for a residence occupied by a group of college students? By persons who share an apartment? The result may be limited only by the quantity of facilities that are available at a given location. 6d. Could a residential customer order a primary residential line and a primary business line? * Yes, it is possible that this scenario could occur, especially if the lines are obtained from different providers and no enforcement mechanism exists. 7a. If you propose support for only one business primary line, how do you propose this be administered? GTE proposes support for all business single lines, and there does not appear to be any administratively manageable or cost-effective manner by which to classify lines and enforce the artificial distinction. 7b. Could a partnership order a primary line for each partner? Yes, it is possible that this scenario could occur, especially if the lines are obtained from different providers and no enforcement mechanism exists. 7c. Would, for example, a real estate broker who had individual agents order their own line be receiving service through many primary lines? In this example, if the lines rolled over to any other line would any or all of the lines be primary lines?* This example aptly demonstrates precisely the kind of difficulties that may arise as a result of an artificial distinction between "primary" and "non-primary" lines. 8a. If a business or residential customer orders one line from each of three companies, would each be a primary line? Yes, as discussed in previous answers, it is possible that this scenario could occur if lines are obtained from different providers and no enforcement mechanism exists. Also, as a result of the poor incentives provided by the artificial distinction, the customer would forgo some of the benefits of competition, such as the packaging of services and the convenience of having one bill for all telecommunication services. In addition, notice that if the two of the three carriers are providing these “primary” lines by purchasing UNEs and the prices of UNEs do not contain any contribution towards the USF, then universal service can be compromised further. 8b. If not, which of the three would be the primary line? GTE answered question 8a in the affirmative. 8c. Who would make the determination? Who would verify it? * GTE is not aware of an efficient and accurate method of making the determination. 9. Please estimate the cost, in detail, of administering a program which supports less than all lines. It is not possible at this time to quantify the cost to administer a system that classifies lines and enforces the artificial definitions. The commission could take one of two approaches; (1) develop tariffs that outline all restrictions and trust consumers to abide by the tariff and pay higher rates for a second line; or, (2) require a certification process, where an independent central bureau validates that each “household” is only receiving one primary line. The latter approach has more direct costs, but both approaches would entail significant costs to the state and to carriers. If the former approach--consumer self-certification--were relied upon, there would have to be some consideration of auditing costs and an additional load on the law enforcement and judicial systems as auditing reveals fraudulent activity. 10. Should unsubscribed lines be supported? The question appears to ask whether support should be provided for physical facilities that presently are installed but to which no one subscribes. In its comments concerning the context of the support calculation and an ultimate universal service auction, GTE has advocated that support only be received for actually serving customers. Inherently, however, the underlying cost of network capacity (which determines the amount of USF support) must reasonably anticipate the need for additional lines to existing customer locations and for growth to new locations; the "fill factor" in the cost models, for example, is a parameter that allows the WUTC to make allowances for capacity that is not utilized immediately but nonetheless serves the public interest through its availability on a timely and cost-effective basis. 11. Universal service is intended to assure affordable access to the network to use a group of enumerated services (See ESSB 6622, Sec. 1(7)(b)(i) through (ix)). Many customers desire additional features or services, for example, call waiting, voice mail, and call blocking. Should features or services in addition to those which constitute basic service, when provided to customers in high-cost locations, be priced the same, or higher or lower than they are priced in non-high-cost locations?* Section 3 of ESSB 6622 clearly states that “Services to be supported are only those basic services defined in section 1(7) of this act.” Therefore, features or services in addition to those which constitute basic service, when provided to customers in high-cost locations, should be priced according to their cost. The above mentioned features and services are competitive and their prices should be dictated by the market, not by more regulation. If the WUTC determines that the set of supported services should be expanded to include additional features or services, it should only be done after (1) notice is given to all affected parties and there has been an opportunity for a public hearing; (2) a finding that the uniform statewide demand for the additional service or feature is such that including the service within the definition of universal services will further the public interest, and will provide a benefit which outweighs the cost of supporting that service; and, (3) market forces will not work to provide the service in the absence of a market intervention. Any costs associated with expanding the universal service definition are recoverable through the USF by the affected carrier(s) of last resort. 12. When an incumbent local exchange carrier (ILEC) provides unbundled network elements (UNEs) to another carrier designated as an ETC, how should USF support be allocated between the companies? As outlined in the Proposed Universal Service Rules GTE filed with the March 30, 1998, comments, GTE Comments, Attached Proposed Rules, page 8. GTE proposes that the support be split between the CLEC purchasing the UNEs and the COLR providing the facilities. See the March 30, 1998, comments for the details of this proposal. 13. Should the universal service fund be used to pay for infrastructure necessary to provide service to potential customers who do not reside within established company service areas?* (Please see material related to Obligation to Serve in Docket No. UT-970325.) The commission should consider the costs verses the benefits of utilizing universal service funding to provide currently unserved customers with service. In GTE’s May 22, 1998, Obligation to Serve comments in Docket No. UT-970325, GTE stated that the WUTC has two alternatives in funding universal service in unserved areas GTE Obligation to Serve comments in Docket No. UT-970325, May 22, 1998, page 3.. On the one hand, the selected carrier(s) could raise the necessary capital and recover it via recurring support payments from the USF. (In this case, the commitment term -- i.e., length of the Universal Service contract between the Commission and the carrier -- would affect the amount of required recurring support payments.) On the other hand, the USF could wholly or partially supply the capital, i.e., as a sort of “aid to construction” payment, in which case the recurring support payments would be decreased accordingly. Where the costs are significant the commission should consider the use of line extension type charges. The commission must increase the size of the USF in order to cover the costs associated with unserved areas. The use of universal service support to pay for infrastructure will provide consumers the opportunity to obtain affordable phone service in a timely manner. AFFORDABILITY AND COMPARABILITY 14a. What rate(s) for basic telecommunications service are affordable in Washington? The WUTC must make its own determination as to what basic service rates are "affordable" and acceptable. A consistent standard should apply for all universal service purposes. Given high penetration rates, current rates should be deemed to be affordable. Higher rates also would be affordable, but a specific threshold beyond which rates no longer are affordable is not apparent. It would be reasonable to expect the affordability level to vary across different parts of Washington state. In its May 1997 Order on Universal Service (at paragraph 118), the FCC relegates any determination of affordability to the states and suggests factors, such as local calling area size, income levels, cost of living, and population density, that may deserve consideration. But the FCC does not mandate that states consider these factors or reach any specific conclusion. One measure the WUTC should consider is that the sum of the support and the affordable rate for local service should approximate the outcome of a competitive market (i.e., affordable rate and support amount equals economic cost). Otherwise, the WUTC risks preempting competition in high cost areas and promoting inefficient entry in low-cost areas. To foster meaningful competition, the WUTC must strive to correct the market price signals that currently are affected adversely by implicit support. Please refer to pages 22 through 27 of GTE’s March 30, 1998, comments for a more detailed discussion of benchmark rate, retail rate, maximum rate and tariffed rate. 14b. Is there a different affordable rate for a business and a residence? Yes, it is reasonable to expect that business and residential customers may have different willingness and ability to pay, so the maximum rate that is affordable may vary by customer class. Historically, business customers have been charged higher rates for service than residential customers to help offset the cost of low-priced residential service by exploiting the fact that businesses may have a greater willingness and ability to pay, i.e., value-based pricing. With local competition, however, this historical assumption must be modified. Any implicit universal service support built into rates across customer classes must be made explicit and portable to new entrants and not left in jeopardy by competitive erosion. Thus the affordable rate for business customers should not be greater than the economic cost of providing service. 14c. For a small business versus a large business?* No. All supported lines where costs are roughly equivalent should be priced equally. Defining and validating the determination of small verses large business would be an administrative nightmare. 15. Should business and residential lines be priced differently? If so, on what basis?* Within the standard of reasonable comparability so that no undue price discrimination exists, price differences across customer segments would be efficient to the extent that there are cost or demand elasticity differences. In addition, any implicit universal service support built into rates across customer classes must be made explicit and portable to new entrants and not left in jeopardy by competitive erosion. 16a. If all lines are supported, should second lines be priced at the same level as primary lines? The question appears to ask, for example, whether current prices of a first and second line to a given customer account should be the same. So long as the costs are similar, yes, the prices should be on par with one another. 16b. Should there be an even greater charge for each additional line above two? No. All supported lines where costs are roughly equivalent should be priced equally. 16c. Would this present administrative problems and expenses?* Charging equal prices as GTE advocates would not impose any administrative problems or costs. If, however, charging a different price for a first and additional line for a given customer account necessitates a change in a local exchange carrier's billing system, then there would be some expenses incurred by that carrier. The Administrator would also incur additional administrative expenses. 17a. If all lines are not supported and second lines are priced at cost, will the rates for high-cost and non-high-cost areas be "reasonably comparable" as required by the Telecommunications Act of 1996? No, as highlighted in the answer to question four and the scenarios contemplated in question six, some consumers in rural and high-cost areas invariably would be denied access to telecommunications and information services at rates that are reasonably comparable to those in urban areas; this outcome would be contrary to the requirements of Section 254(b)(3). 17b. Will the access to telecommunications and information services be reasonably comparable? No. Please refer to the answer to question 17a. 17c. Expressed in dollars or as a multiple (e.g. twice, four times), what rate above your answer for an affordable rate (question 14) would no longer be "comparable"?* Since GTE does not present a quantitative result in its response to question fourteen, no multiple can be offered. In general, rates should be deemed to be reasonably comparable if they are not so different as to produce undue price discrimination among consumers. A firm in a competitive market should be allowed to respond to demand and cost conditions so long as consumers are protected from undue price discrimination. As competition matures, the WUTC's role should change from one of prescriptive regulation towards consumer protection in terms of setting reasonable boundaries within which competitive firms may set prices. USF BENCHMARK 18. What cost of providing basic telecommunication service in Washington should be deemed to be "high cost" (what is the benchmark figure)? How should it be determined? For universal service support requirements, all lines for which the cost of service exceeds the maximum affordable rate that a carrier may charge for local service should be considered to be "high-cost." The local service rate should include the interstate end user common line (“EUCL”) charges and any mandatory basic service charges, such as non-optional extended area service (EAS) or touch tone charges. By referring generically to a "benchmark figure," the question appears to contemplate an average revenue benchmark. In the comments filed on March 30, 1998, GTE presents an extensive discussion as to why a statewide revenue benchmark is inappropriate, unsustainable, and lacks competitively neutrality. Stated simply, calculating a revenue benchmark with anything other than the “affordable rate” approach inappropriately minimizes the calculated level of explicit support and results in a continued reliance on an implicit support mechanism only within the rates of ILECs; the requirement in Section 254 that all carriers support universal service on an equitable and nondiscriminatory basis would not be satisfied. 19a. Should the benchmark be company specific? Yes. GTE proposes that the Commission-determined affordable rate be utilized (or companies’ tariffed rates until the Commission determines an affordable rate). Otherwise, the WUTC would invariably impose the rate characteristics of U S WEST on any other carriers that are averaged into the same calculation. The targeting of support would be affected accordingly. 19b. If so, what common factors should be used to derive the benchmark number for each company? (If you are answering for a carrier and your answer to part one of this question is yes, please state in dollars the benchmark you recommend for your company and how you determined it.) The benchmark for GTE's area should equal the currently tariffed local rate plus all mandatory charges until the commission-determined affordable rate is available. 19c. Should the benchmark be higher or lower for some technologies based on the traditional differences in customer revenue associated with different technologies? No, the benchmark should be the same throughout a given area regardless of the technology used to provide service. The WUTC's objective should be to promote the least-cost technology. As GTE has advocated