May 1, 1998 Christine O. Gregoire Attorney General of Washington 1125 Washington Street SE PO Box 40100 Olympia, Washington 98504-0100 Dear Attorney General Gregoire: The Washington Utilities and Transportation Commission on April 22 approved a tariff filing by US West Communications, Inc. to provide a high-speed data service, called Megabit service. In the course of our review of this filing, issues relating to antitrust or fair trade practices were raised. These issues relate in some cases to the prices and marketing practices of US West’s unregulated Internet access service and appear to fall outside our regulation of US West’s telecommunications services. The purpose of this letter is to refer those issues relating to unregulated services to your office for review and possible action. Megabit service is a telecommunications service that uses digital subscriber line (DSL) technology. Megabit rates and terms are subject to regulation by the WUTC. A primary application of Megabit service is likely to be Internet access. The service would be used to provide a high-speed data connection between an Internet service provider (ISP) and a residential or business customer. Both the ISP and the customer would pay US West for a Megabit connection. US West will begin offering Megabit service to the general public in the Seattle, Bellevue, Des Moines, Federal Way, Issaquah, Kent, Mercer Island, Tacoma, Puyallup, Renton, Olympia, Lacey, Bellingham, and Spokane beginning June 19, 1998. Among the concerns raised by ISPs during our review of the filing was one of unfair competition by US West in the Internet access business. US West Communications provides Internet access service in addition to regulated telecommunications service. The Internet access service, which operates under the names !nterprise, !nteract, and uswest.net, is an unregulated activity of US West Communications. The WUTC attempts to ensure that the expenses, investment, and revenues relating to this activity are not considered in setting rates for regulated services. Christine O. Gregoire Attorney General of Washington Page Two The specific concern is that US West’s prices for Megabit service and for Internet access service result in an unlawful “price squeeze” for its competitors. Some ISPs argue that US West could not make a profit on its Internet service (which is priced at $19.95 per month and in some instances includes a free DSL modem and waiver of installation charges) if it had to pay the tariffed rates for various Megabit services required for ISPs to provide the service. Two documents from ISPs addressing this issue are attached. The WUTC did not, during the course of its review of the Megabit tariff filing, attempt to determine whether US West’s Internet service rate covers its cost, including the tariffed rates for Megabit service. We concluded that, while the WUTC will regulate rates, terms, and practices of the Megabit service itself, it was outside our purview to determine whether regulated prices result in an anticompetitive price squeeze in any downstream markets, including the Internet access service market. Therefore, we refer this matter to your office without taking any position on its merits. The staff of the WUTC are available to provide factual or technical assistance and to explain details of our regulation of the Megabit service itself. Please direct any questions about this letter to Glenn Blackmon, Assistant Director-Telecommunications, at 360 664-1290 or e-mail blackmon@wutc.wa.gov. Sincerely, Paul Curl Acting Secretary Enclosures: Letter from Matthew Sutton Memorandum from Chris Easley WUTC order re. Megabit services WUTC staff memorandum re. Megabit services cc: Gary Gardner, Washington Association of Internet Service Providers Matthew Sutton, SiteConnect, Inc. Chris Easley, Telisphere Communications, LLC Scott McClellan, US West Communications, Inc.