These following comments are submitted on behalf of the American Association 
of Retired Persons and the Public Counsel Section of the Washington Attorney 
General, pursuant to the Commission’s Notices of May 4 and 14, 1998.  The 
comments were prepared by Dr. Mark Cooper.  
 Dr. Cooper has presented testimony on universal service and lifeline issues in 
Connecticut, Florida, Hawaii, Illinois, Manitoba, Mississippi, New York, North 
Carolina, Ohio, Oklahoma, South Carolina and Texas as well as before the FCC 
and CRTC.  In addition, he has conducted several major studies of universal 
services including Universal Service: An Historical Perspective and Policies 
for the 21st Century (The Benton Foundation and the Consumer Federation of 
America, 1996), Protecting the Public Interest in the Transition to Competition 
in Network Industries in The Electric Utility Industry in Transition (Public 
Utilities Reports and the New York State Energy Research Development Authority, 
1994), Consumers with Disabilities in the Information Age: Public Policy for a 
Dynamic Market (The Dole Foundation, 1993), Utility Lifeline Programs: 
Prevalence and Performance (American Association of Retired Persons and the 
Consumer Federation of America, 1991), Expanding the Information Age for the 
1990s: A Pragmatic Consumer Analysis (American Association of Retired Persons 
and the Consumer Federation of America, 1990), The Telecommunications Needs of 
Older, Low Income and General Consumers in the Post-Divestiture Era, (American 
Association of Retired Persons and the Consumer Federation of America, 1987), 
Low Income Households in the Post-Divestiture Era: A Study of Telephone 
Subscribership and Use in Michigan (Michigan Divestiture Research Fund, 1986), 
and Energy and Equity: Rising Energy Prices and the Living Standards of Lower 
Income Americans (Westview, 1982).  A statement of Dr. Cooper’s qualifications 
is attached as Appendix A.


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 that 
specifically details the ramifications your answer would have for various 
consumer groups, including residential and small and large business consumers.

 Many of the issues which are raised in the questions posed by the notice 
derive from the new legal structure established by the Telecommunications Act 
of 1996 (hereafter TA96 or the Act). .Telecommunications Act of 1996, 47 
U.S.C.  § 254.    Therefore, it is useful to base our response on the 
principles of universal service laid down in that Act.  Moreover, it is 
important to identify the full structure of principles that govern rates under 
the Act.  
 The Communications Act of 1934 had one sentence dealing with universal 
service. 47 U.S.C. § 151, in pertinent part, states that the Communications Act 
of 1934 was enacted:
For the purpose of regulating interstate and foreign commerce in communication 
by wire and radio so as to make available, so far as possible, to all people of 
the United States, a rapid, efficient, Nation-wide and world-wide wire and 
radio communication service with adequate facilities at reasonable charges….
(emphasis added)  Section 254 of the TA 96 has fifteen paragraphs on the 
subject.   The most critical language is found in two key provisions of the 
section.  The first is Section 254(b)(1) of the Act which opens with the 
principle that “[q]uality services should be available at just, reasonable, and 
affordable rates.”   The second is Section 254 (i), which restates this 
principle and extends the obligation to the states:  
Consumer Protection – The Commission and the States should ensure that 
universal service is available at rates that are just, reasonable and 
affordable.”

 Congress had never before used the term ”affordable” in connection with 
universal service,  nor had it identified specific groups or areas for specific 
support in ensuring universal service, as it has now done in Section 254 
(b)(3), which provides:
Access in rural and high cost areas – Consumers in all regions of the Nation, 
including low-income consumers and those in rural, insular, and high cost 
areas, should have access to telecommunications and information services, 
including interexchange services and advanced telecommunication and information 
services, that are reasonably comparable to those services provided in urban 
areas and that are available at rates that are reasonably comparable to rates 
charged for similar services in urban areas.

 Congress was also more specific than it had been in the past about how rates 
were to be kept just, reasonable and affordable for the purposes of achieving 
universal service.  In addition to the general requirements of  Section 254 (b) 
(1) and 254 (i), the law also requires in Section 254 (k) that rates for 
service deemed to be part of universal service bear only a reasonable share of 
joint and common costs.  
Subsidy of Competitive Service Prohibited – A telecommunications carrier may 
not use services that are not competitive to subsidize services that are 
subject to competition.  The Commission, with respect to interstate services, 
and the States, with respect to intrastate services, shall establish any 
necessary cost allocation rules, accounting safeguards, and guidelines to 
ensure that services included in the definition of universal service bear no 
more than a reasonable share of the joint and common costs of facilities used 
to provide those services.

 Taken together, these provisions require that a broad definition of universal 
service policy must be adopted.  The definition of universal service has three 
components -- (1) access to and (2) use of telecommunications services at (3) 
affordable rates.  Access has traditionally been defined as the dial tone -- 
having the telephone in the home.  Use of the phone is defined as the actual 
placing of calls and activation of other functionalities embedded in the 
network.  Affordability of the phone is frequently measured by estimating the 
percentage of income that households spend on telephones and the percentage of 
households with telephone service. 
 As a succinct definition (see the response to question 14a for an elaboration 
of this definition), we offer the following:
Universal service is the ability of all subscribers to have and use 
telecommunications services at rates, terms and conditions that do not cause 
them serious consequence or detriment and do not yield profits for service 
providers that are excessive.  

 Of utmost important is the fact that the law goes farther than merely 
requiring affordability of service.  Charges for telecommunications services 
cannot be increased simply because they would remain affordable; they must also 
be just and reasonable.  Thus, the Congress clearly rejected the notion of 
pricing telephone service up to whatever the market will bear.  
 Consistent with the first universal service principle, there are two pillars 
on which universal service stands under the law.
1Universal service in high cost areas and for low income households is to be 
ensured through targeted subsidies. 

1Universal service for other subscribers is to be assured by the requirement 
that rates be just and reasonable.    

 Given the clear public policy on how the costs of the network should be shared 
and the universal service goal, another principle should guide the Commission 
in this proceeding.
1The keys to accomplishing the dual goals of just and reasonable rates and 
affordable service is to ensure that all services share the costs of facilities 
that they use and all revenues are taken into account in determining the level 
of subsidies necessary to achieve universal service.  Several years before the 
passage of TA96, AARP recommended precisely this balancing of the aspects of 
universal service as follows (American Association of Retired Persons and the 
Consumer Federation of America, Universal Service Requirements for the 
Information Age, 1994, pp. 2-3).

EXPAND AFFORDABLE AND UNIVERSAL BASIC SERVICE
Policy makers should make a commitment to lower the price of basic 
communications service in order to reaffirm the commitment to universal service 
found in the 1934 Communications Act.  The following principles must be adhered 
to if basic service is to remain affordable for everyone in the information age:
a.  As revenues from video, data, and other non-basic services expand, they 
should be made available to lower the price of basic service, since these new 
services piggy-back on the existing infrastructure;
b.  Basic customers should be protected from bearing inappropriate risk 
associated with entry into new, competitive businesses.  Protections should 
include separate subsidiaries, separate capital structures, and payments for 
the value of intangible assets flowing from  monopoly customers;
c.  Users of service which require expensive upgrades and investments should 
bear the primary burden of these upgrades. 


 The implications of this view of universal service for all consumers 
regardless of size or customer class, will be to make basic service ever more 
affordable.  As the uses of the telecommunications network expand, the joint 
and common costs of the network, which are substantial, will be spread across 
an expanding array of services.  Prices for basic service should decline.  
1Should the USF program guarantee sufficient operating revenue to companies 
serving high-cost locations no matter how much market share is lost to 
competitors?*

 Universal service payments should be analyzed with respect to customers and 
the cost of serving the customer, not on the basis of a company’s profits or 
losses.   Proposals for a revenue replacement universal service fund are 
unacceptable.  Instead of targeting support to specific areas identified as 
high cost or individuals that are identified as low income, such approaches 
seek to have the Commission assume that if revenues decline, all such losses 
are due to universal service obligations. This approach makes it impossible to 
distinguish between universal service obligations and competitive losses. 
Moreover, it is anti-competitive and results in a vastly inflated universal 
service fund.  This strategy shifts cost recovery from the rates for 
competitive services to the universal service fund.  It forces consumers and 
competitors to, in effect, insure the cover incumbent local exchange company 
(ILEC) against competitive losses.
 By rejecting this “revenue replacement” view of universal service, basic 
service is likely to become ever more affordable as competition grows in the 
industry.  As long as incumbents are not shielded from competitive market 
forces by excessive universal service funds or uneconomic rebalancing of rates, 
prices for basic service should decline.  

3. What relationship, if any, should payments from a universal service fund 
bear to changes in efficiency and productivity of the recipient?

 Payments from the universal service fund must be adjusted to reflect gains in 
efficiency and productivity.   Failure to do so would result in rates that are 
not just and reasonable.

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? *

 The Commission cannot, as a matter of law, nor should it as a matter of public 
policy, restrict high cost support to primary lines only.   TA 96 seeks to 
ensure that reasonably comparable services are available at reasonably 
comparable rates and to promote use of the telecommunications network for 
advanced services (section 254(b)(3)).  
 To discriminate against residential and small business customers in rural 
areas by requiring them to pay a much higher price for second lines than their 
urban brethren is directly contrary to the goal of “reasonably comparable” 
services at “reasonably comparable” rates.  To the extent that second lines 
have become associated with use of information services, rural households would 
be severely discriminated against in access to advanced services.  
 Even if the statute could be interpreted to suggest that the universal service 
language in TA96 covers only primary lines, attempting to determine which line 
is a primary line and which is a secondary line presents an administrative 
nightmare.  Multi-family households would be required to share lines.    Large 
families would be at a disadvantage compared to small.  Married couples would 
pay more than unmarried partners would.  
 Recent testimony by GTE in Hawaii makes a number of similar points.  Rebuttal 
Testimony and Exhibits of Dennis Weller, Chief Economist, GTE Hawaiian 
Telephone Co. Inc. Subject: Universal Service Fund, In the Matter of Public 
Utilities Commission Instituting a Proceeding on Communications, Including an 
Investigation of the Communications Infrastructure of the State of Hawaii, 
Docket No. 7702.
  When asked
why should second lines be supported, the GTE witness observed:
There are several reasons.  First, it maintains a reasonable price relationship 
between first and second lines.  Our customers generally expect that if you buy 
a second line from us, they will pay no more for the second line then they did 
for the first.  This is a reasonable expectation; in most markets, the per unit 
price declines if you buy more of something.  It also correctly reflects the 
relative cost of providing first and second line.  It will be very difficult 
for us to explain to our customers why, if the first line costs nineteen 
dollars and 80 cents, the second line should cost 40 dollars or 100 dollars...

Second, there is no good policy reason for distinguishing between primary and 
additional lines for universal service reasons.  Underlying this policy 
proposal is the implicit assumption that there is a unit, a "household", that 
has a unique need for basic telephone service.  But this is clearly not the 
case.  Different households have different patterns of consumption, for 
perfectly good reasons.  Consider, for example, two different households.  They 
live on the same block, and have similar incomes.  One household has a single 
child; the other household has ten children.  If the two families go to the 
grocery store, we do expect them to buy the same amount of milk?..

Third, in order to limit support to second lines, we would need to define 
them.  Since, as I have already explained, the proposal is not based on any 
clear concept, there is no clear basis for defining the lines to be included or 
excluded.  In the recent California proceeding, for example, one witness 
suggested that one line should be supported per household; it was suggested 
that the company should inquire about the family relationships among the people 
sharing a living arrangement.  Another witness proposed that one line should be 
provided per dwelling; he suggested that the company should consult the local 
plant maps in each town to make this determination.  Whatever criterion is 
adopted, the one thing that is clear is that this idea would be difficult to 
administer...

Fourth, when we attempt to administer a distinction between first and second 
lines, there will be unintended effects.  Some screening procedure will be put 
in place, and no such procedure is ever perfect.  For every wealthy family 
whose second line is screened out, there'll also be some other family who will 
be denied access to an affordable first line...

Today, customers call us and we provide the services they request.  We don't 
ask whether they deserve the services; we don't ask about their families or 
their living arrangements.  We assume that customers can make their own 
decisions about where to live and about what services they need.

 Public Counsel and AARP recommend against a policy which would, in effect, 
discriminate against residential and small business customers with second 
lines. 
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)? *

6a. If you propose support for one primary line, particularly for only one 
residential primary line, how do you propose this be administered? 

6b. Could a family of three (two parents and a minor child) order three primary 
lines?  Order two, one for each adult?  

6c. How many primary lines could be ordered for a residence occupied by a group 
of college students?  By persons who share an apartment?  

6d. Could a residential customer order a primary residential line and a primary 
business line? *

7a. If you propose support for only one business primary line, how do you 
propose this be administered? 

7b. Could a partnership order a primary line for each partner? 

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?*

8a. If a business or residential customer orders one line from each of three 
companies, would each be a primary line?  

8b. If not, which of the three would be the primary line?  

8c. Who would make the determination?  Who would verify it? *

9. Please estimate the cost, in detail, of administering a program which 
supports less than all lines.
 
 The response to Question 4 renders questions 5-9 moot.

10. Should unsubscribed lines be supported?

 No.  Unsubscribed lines should not be supported.   In building cost models, an 
assumption about fill factors are made and levels less than 100 percent are 
typically used.  The models assume extra capacity for normal growth and the 
cost of carrying that capacity is built into the calculated cost of service.  
Therefore, to allow companies to recover the cost of unsubscribed lines from a 
universal service fund would be a double recovery of cost.
 It is also important to recognize the difference between extra capacity that 
is acceptable within the framework of cost models and excess capacity, which is 
not.  Excessive capacity should be excluded from the cost models.

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?*

 Vertical services should be priced the same.  Generally, the costs of these 
services do not vary greatly on a geographic or market basis.  Moreover, 
pricing these services the same meets the requirement that rates be reasonably 
comparable between rural and urban areas for reasonably comparable services.  
Finally, it is important to underscore that the purpose of universal service is 
to promote access to the network, not punish people for living in high cost 
areas.  

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?

 USF support and UNE pricing should be coordinated in two ways:  

 2. 1.  Matching Costs And Support
 First, the forward-looking economic costs of a service should be equal to the 
sum of the unbundled network elements of that service. The whole should equal 
the sum of the parts in this cost analysis.  Failure to achieve this equality 
would either allow the incumbent to overrecover costs (if UNEs exceed costs) or 
allow entrants to be the recipient of the implicit subsidies (if 
forward-looking efficient costs exceed UNEs).  As long as the costs are 
forward-looking and efficient, they should be the basis for both UNEs and 
universal service calculations.
 With the efficient forward-looking costs identified, the principle should be 
that the subsidy goes with the responsibility to maintain the underlying 
facilities.  If the unbundled element is priced at its full cost (as calculated 
with a forward-looking, most efficient methodology) then the purchaser of the 
UNE should get the subsidy.  If the UNE is not priced at its full cost, then 
the subsidy should stay with the entity selling the UNE.  If the subsidy goes 
to the seller of the UNE and it is priced at its full cost, there would be a 
double recovery.

2.  Matching UNE And USF Areas
 The unit of analysis should be consistent between USF and UNE calculations.  
That is, if UNEs are offered over a specific area, e.g. urban areas, then USF 
should be estimated over the same area.  Failure to use a consistent unit of 
analysis will create opportunities for overrecovery of costs and will impede 
competition.  If the USF is calculated on an exchange-by-exchange basis, but 
UNE prices are calculated on a larger unit of analysis, companies can recover 
costs twice.    By using a more disaggregated analysis for universal service 
than for UNE pricing, they receive prices for low cost loops that are higher 
than the costs of those loops.  This is supposed to be offset by receiving an 
average price that is lower than the cost of high cost loops.  If the 
Commission calculates USF support at a lower level of aggregation the company 
would also receive support for high cost loops that were already included in 
the average UNE price.
 The Commission can spend a lot of time trying to correct the problem of a 
mismatch between the USF area and the UNE area, backing out any overrecovery 
from USF funds from the price of low cost UNEs, but this is an indirect 
administrative contrivance that is considerably less desirable than the direct 
approach of matching USF and UNE areas.  When the Commission defines the 
fundamental terms of competition by setting the UNE area, it also sets the area 
over which USF will be necessary.  
 The FCC has recognized the need for consistency, in general, and the fact that 
USF areas should be consistent with UNE areas, in particular, in its initial 
universal decision.
We also encourage a state, to the extent possible and consistent with the above 
criteria, to use its ongoing proceedings to develop permanent unbundled network 
element prices as a basis for its universal service cost study.  This would 
reduce duplication and diminish arbitrage opportunities that might arise from 
inconsistencies between the methodologies for setting unbundled network element 
prices and for determining universal service support levels.  In particular, we 
wish to avoid situations in which, because of different methodologies used for 
pricing unbundled network elements and determining universal service support, a 
carrier could receive support for the provision of universal service that 
differs from the rate it pays to acquire access to unbundled network elements 
needed to provide universal service.  Consequently, to prevent differences 
between the pricing of unbundled network element and the determination of 
universal service support, we urge states to coordinate the development of cost 
studies for the pricing of unbundled network elements and the determination of 
universal service support. In the Matter of  Federal-State Joint Board on 
Universal Service,  CC Docket 96-45, FCC 97-157, Report and Order, May 8, 1997 
(Universal Service Order), ¶ 251.  

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.)

 Please refer to the comments of Public Counsel related to “obligation to 
serve” in Docket No. UT 970325.  The incumbent has had and continues to have 
the obligation to serve all.  It is the carrier of last resort (COLR).  The 
incumbent has ubiquitous facilities.  It has deployed those facilities using 
significant resources and enjoying significant advantages provided by 
ratepayers, including a monopoly position and regulatory rights to an 
opportunity to recover costs.  The pervasive market presence and longstanding 
name recognition conferred on the incumbent also endow it with substantial 
assets as competition increases in the industry.  The obligation to serve is a 
“burden” placed on the incumbents and compensated by historical and ongoing 
benefits of immense value.
 Incumbents are directly compensated by setting rates that are, in the 
aggregate, just and reasonable.  They are provided an opportunity to recover 
prudently incurred used and useful costs.  Should costs increase due to an 
increase in the burden of its carrier of last resort obligation, they can make 
a showing that they are in need of a rate increase.  New entrants have no such 
opportunity.  Incumbents are also compensated for specific expenses in cases 
where such expenses would be large.  Indirectly, the benefits of the monopoly, 
incumbent ubiquitous network compensate the incumbent.  Given the current 
market structure, with virtually no change in market share and no observable 
price competition, the obligation to serve falls fairly on the incumbent.   
With that as a given, at present the fund should not be used to provide special 
support for provision of service where an incumbent is already obligated to 
provide such service and receives compensation.    Only as market structure 
actually changes and in coordination with other changes in the approach to the 
obligation to serve, would such a use of these funds be justified.
 
 At some point in the future, when competition has balanced revenue 
opportunities and new entrants have facilities deployed that could shoulder the 
obligation to serve, alternative approaches may be necessary.  Contributions to 
a universal service fund to support the obligation to extend service or sharing 
of the obligation to extend facilities may be necessary at that point.  
 
AFFORDABILITY AND COMPARABILITY

14a. What rate(s) for basic telecommunications service are affordable in 
Washington? 
 
 As previously noted, the definition of universal service has three components 
-- access to the phone, use of the phone, and afford-ability.  Universal 
service is the ability of all households to have and use a phone at rates that 
do not strain the household budget.
 A narrow definition of universal service as simple access to the phone should 
be rejected because the telephone is a necessity and people will cling to it.  
Even if households do not drop off the network, we must still ask whether they 
are able to use the phone as the basic means of communication in the last 
quarter of the twentieth century.  For the past half-century we have woven the 
phone into the fabric of daily life.  We have let decisions about where to 
live, where to locate services, how to acquire information, and how to allocate 
our time be fundamentally influenced by the ease of access to unlimited local 
calls.  The telephone has become the mainstay of daily communications.  While 
it is easy to conceive of a way of life in which the telephone does not play 
this vital role, it is not the way of life we live in this country.  
 At the same time that we ask whether households are able to use the phone, we 
must also ask whether the cost of having and using the phone places a strain on 
the household budget.  It does not suffice to say that if a household has a 
phone it must be affordable, regardless of how much of a burden it places on 
the household budget.  Affordability is more complex than that.  In this 
context the test of affordability is not simply whether or not people keep the 
phone, or whether or not they use it, but how much of a burden a normal level 
of consumption of this vital necessity places on the household budget.  
 Households will continue to subscribe to the network because the phone is a 
necessity, but if they are forced to pay more for this necessity and reduce 
their consumption of other necessities, then the phone is not truly 
affordable.  It is seriously diminishing the living standard of the household.
 These observations on the nature of the telephone and its use can be briefly 
summarized by a familiar economic measure -- the elasticity of demand.  This 
gauges the rate at which demand changes in response to a change in price.   The 
elasticity of demand is measured as the percentage change in demand that occurs 
in response to a one- percent change in price.  Demand elasticities are 
generally negative.  When prices increase, demand decreases (conversely, when 
prices decrease, demand increases).  
 Telephone demand elasticities are small.  A one percent increase in price will 
cause a reduction in demand which is less than one percent.  In the case of the 
telephone, it is considerably less than one percentage point.   It has become 
widely acknowledged that the elasticity of demand for access (availability) is 
very low.  Increases in price elicit very small reductions in demand. See 
generally Lester Taylor, Telecommunications Demand: A Survey and Critique 
(1994). 
 It turns out, however, that the elasticity of demand for use is also quite 
low.  The demand response to usage price increases is somewhat larger than 
those for access but still quite small.  People do not want the telephone as an 
alarm box.  They apparently want it as a means of communications that requires 
being able to use it.   It can be generally concluded that the long run 
elasticity of demand for access is in the range of  -.01 to -.2 and the long 
run elasticity for use is about in the range of -.2 to -.4.  That is, all other 
things being equal, a ten- percent increase in the price of access results in 
about a one- percent decrease in demand for access.  A ten- percent increase in 
the price of use results in about a three- percent decrease in the demand for 
use.  Lower income households have been found to have considerably higher 
elasticities of demand. 
 The low demand response to price increases for both access and use means that 
one cannot analyze the third aspect of universal service -- affordability -- 
with reference only to the reduced access charge.  One must recognize that 
households will struggle to keep and use the telephone at levels fairly close 
to the average in order to have a level of communications commensurate with a 
decent standard of living.  
 Assessing affordability in this context means that the test of affordability 
is not simply whether or not people keep and use the phone, but how much of a 
burden a decent level of consumption of this vital necessity places on the 
household budget.  For this reason, making access and use more affordable for 
poor households that already have service should be considered a part of the 
goal of universally affordable service. 
 Dictionary definitions support this view.  Webster’s gives the primary 
definition of “affordable” as a relative concept: --
(1) (a) To manage to bear without serious detriment; (b) To manage to pay for 
or incur the cost of.  Webster's Third New Int