BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Rulemaking to Establish a ) Docket No. UT-980311(r) Universal Service Mechanism ) for Intrastate Service ) Comments of TRACER ______________________________) The Washington Telecommunications Ratepayers Association for Cost-based and Equitable Rates (TRACER) submits these comments in response to the Commission's notices of May 4, 1998, and May 14, 1998, inviting comments on a series of questions relating to universal service. The TRACER point of contact for this rulemaking is Arthur A. Butler, 601 Union Street, Suite 5450, Seattle, WA 98101-2327. Phone number is (206)623-4711. Fax number is (206)467-8406. E-mail address is aab@aterwynne.com. TRACER is an association of large users of telecommunica-tions services. All of the members are substantial users of voice services provided over the public switched telephone network (PSTN). They also have significant communications needs involving the transmission of large amounts of data. As they look to the future, they have increasing interest in viable work-at-home communications services for their employees. A number of TRACER's members have facilities located throughout the state, including what would be considered high cost areas. As a result, TRACER has a vital interest in promoting the availability of high quality telecommunications services at reasonable prices throughout the state. TRACER has consistently supported the concept of supporting universal service so long as the subsidy support is properly sized, and collected and distributed in an economically efficient, competitively neutral, equitable, and nondiscriminatory manner, both with respect to carriers and end-users. GENERAL COMMENTS It is widely recognized that affordable basic service rates have been maintained historically through, among other things, a combination of geographic rate averaging, high rates for business customers, high intrastate access rates, high rates for intrastate toll service, and high rates for vertical features and services such as call waiting and call forwarding. In the case of small, rural LECs, explicit subsidies and above-cost access charges probably provide the largest source of high-cost support, although some is provided by high business rates and geographic averaging. In the case of the large incumbent LECs, more of the high-cost support likely comes from high business rates and geographic averaging. This traditional means of supporting universal service in high cost areas becomes problematical as competition develops. The specific concern is that competition could erode this source of support, thereby jeopardizing the state's ability to achieve its universal service goals. TRACER supports the Commission's goal of reforming the intricate web of implicit subsidies that have been relied upon to support universal service in high cost areas of the state, and respectfully recommends that the Commission pursue that goal with the key objectives in mind. First, to minimize the disruption and adverse impacts on consumers of all kinds. Second, to act consistently with the purpose of the federal Telecommunications Act of 1996 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (codified at 47 U.S.C. § § 151 et seq.). ("Act"). The stated purpose of the Act is "to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies." (Emphasis added.) Act, supra, purpose statement, at 56. In section 254 of the Act, Congress also stated that "[t]here should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service." As explained in the Joint Explanatory Statement of the Committee of the Conference, Congress intended that, "[t]o the extent possible, . . . any support mechanisms continued or created under new section 254 should be explicit, rather than implicit as many support mechanisms are today." Joint Explanatory Statement of the Committee of the Conference, S. Conf. Rep. No. 230, 104th Cong., 2d Sess. 131 (1996). Thus, in reforming telecommunications service pricing, the Commission needs to act to identify and remove the implicit subsidies that support universal service in high cost areas and do so in the context of, and in strict coordination with, policies that will enable competition capable of putting downward pressure on retail prices to develop. But, it is important to be mindful of the fact that this goal must be pursued slowly and carefully if enormously disruptive and inequitable impacts on ratepayers are to be avoided. Obviously, the overall level of intrastate universal service support implicit in existing rates is substantial. TRACER believes that it will not be possible to immediately remove all implicit support, even just that contained in access charges, without significant inequitable impacts on customers or on incumbent local exchange carriers. Instead, TRACER believes that a process that over time eliminates the implicit support from access charges, from high business rates, from geographic rate averaging, and from other services, is the preferred course. The most critical task is developing a suitable state high cost support program that, operating in conjunction with federal high cost support mechanisms, will ensure the availability of basic telecommunications service to all residents of the state at affordable prices. As discussed below, TRACER submits that this means that one line per residence and business location be supported through an explicit support program that is insulated from the effects of competition. Existing methods of supporting secondary lines and other services in high cost areas should continue, with a realistic eye to the actual development of competition and its effect on the sources of support for those high cost services. At a minimum, it is important that the process of changing existing implicit subsidies should be an evolutionary one. The Commission should be prepared to rely more heavily on competition to identify and remove implicit subsidies for secondary lines and non-basic services. Where competition can force telecommunications prices to competitive levels, implicit supports will be substantially eliminated. This is because the prices charged by new entrants presumably do not contain any implicit universal service support. It is important to keep in mind that, under present law, incumbent LECs have considerable flexibility in responding to competition: they can lower prices without prior Commission approval; in U S West's case, it can offer banded rates for any retail service; and they can offer ICB contracts in instances of competitive necessity. If competition actually does develop in a way that puts pressure on the existing sources of high cost support, the Commission can take a measured response and authorize appropriate levels of zone pricing necessary to counteract that pressure. One area of particular concern to TRACER is the apparent disjoint between (1) the Commission's announced intentions regarding the reform of telecommunications service pricing and (2) the actual implementation of local competition. At this point, the costs for UNEs and the wholesale discount approved in the 8th Supplemental Order in Docket Nos. UT-960369, 960370, and 960371, and the prices for UNEs that are likely to come out of that proceeding, in TRACER's opinion, will disable resale and UNE-based competition from being able to put any meaningful downward pressure on the prices charged by incumbent LECs. Given that, facilities-based competition can be expected to develop much more slowly and be much more narrowly targeted than otherwise might be expected. With facilities-based competition being confined to niche markets, the competitive pressure on traditional sources of universal service support will simply not be present, at least not any time soon. Thus, there is no present cause for concern about the viability of existing sources of support for services in high cost areas. Moreover, any proposal to create new explicit subsidies, will simply turn into guarantees of revenues for incumbent LECs, insulating them from any competitive pressures. Competition likely will be disabled from producing any public benefits in the form of lower prices, and the promise of the Act will have been lost. There appears to be an assumption implicit in the Staff's questions in this rulemaking that the federal Telecommunications Act requires that all implicit subsidies in rates be removed immediately and replaced with a new explicit subsidy fund. It does not. Indeed, as the FCC stated in its recent Access Charge Reform Order, at paragraphs 9-10, FCC 97-158, CC Dockets Nos. 96-262, 94-1, 91-213, 95-72, rel'd. May 16, 1997: Although Congress said in the Act that "support should be explicit" (emphasis added), it did not provide that support shall be explicit. Congress's decision to say "should" instead of "shall" is especially pertinent in light of Congress's repeated use of "shall" in the 1996 Act. Moreover, in the Act's legislative history, Congress qualified its intention that "support mechanisms should be explicit, rather than implicit," with the phrase "[t]o the extent possible." Thus, Congress recognized that the conversion of the existing web of implicit subsidies to a system of explicit support would be a difficult task that probably could not be accomplished immediately. As explained below, we conclude that a process that eliminates implicit subsidies from access charges over time is warranted primarily for three reasons. First, we simply do not have the tools to identify the existing subsidies precisely at this time. Second, we prefer to rely on the market rather than regulation to identify implicit support because we are more confident of the market's ability to do so accurately. Third, even if we were more confident of our ability to identify all of the existing implicit support mechanisms at this time, eliminating them all at once might have an inequitable impact on the incumbent local exchange carriers. . . . We find that the Act does not require, nor did Congress intend, that we immediately institute a vast set of wide-ranging pricing rules applicable to interstate and intrastate services provided by incumbent LECs that would have enormously disruptive effects on both ratepayers as well as the affected LECs. (Emphasis added). RESPONSES TO SPECIFIC QUESTIONS 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. The goal of a Washington USF should be to establish a mechanism that, operating with federal high cost support mechanisms, is sufficient to ensure the availability of quality basic telecommunications service at affordable rates in all parts of the state. 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? No. First, if rate-base rate-of-return regulation is relied upon either to examine the appropriate level of funding of USF or to determine the size of rate decreases required when the USF is established, the USF should not depart from long-held principles that rate-making offers a regulated utility only an opportunity to earn a fair rate of return. There should never be any guarantees. Second, if a cost proxy model is used to compute costs, it should presume the economies of scale that would be experienced if all service were provided by one firm. TELRIC costs should be based on that assumption. This must be done both to assume service is provided in the most efficient way If one network is substantially lower cost than two, it would pay the two (or more firms) to set up a wires company to build the wires needed by all of them, share the costs and then compete. It would be inefficient to build two networks unless both were large and could be expected to achieve most of the economies of scale of a large network. The FCC determined that such cost efficiencies should be assumed in computing TELRICs. and if consumers are to receive the benefits of competition. If -- in the unexpected case TRACER expects entry to occur in the high cost areas in only rare cases. Thus, policy should not be overly concerned about such entry. In high-cost areas, there are lower economies of scale than in lower cost areas. It is reasonable, therefore, to expect it will be more difficult for a new entrant to build a network and achieve low enough costs to stay in business, unless a new technology (not now known) is introduced. -- there is entry and market share is lost, the incumbent should be allowed to make a case to the Commission to raise retail prices in the exchange. The subsidies computed by assuming one firm provides all service, however, should be the basis for subsidies. The first line to each customer (whether that line is served by the incumbent or the new entrant) should receive that subsidy. The incumbent should be allowed to make a case to the Commission to raise prices in that exchange for the lines it still serves to recover no more than the subsidy lost in that exchange This "lost" revenue to be demonstrated would be the subsidy per line times the number of lines served by the entrant. The maximum price increase would be limited to that lost revenue divided by the number of lines still served. . In no case should the incumbent be allowed to raise prices in other areas (i.e., directly or indirectly increase the USF) to make-up alleged lost revenues from entry. If the incumbent does raise prices in that exchange, presumably, its actions will lead to even more loss of market share (if there is irreversible entry) as more customers discover the entrant is providing acceptable service at lower prices. In no case should the incumbent be allowed to increase the burden on customers in other areas where it has more monopoly power. This would defeat one of the primary benefits to be derived from competition --market-based downward pressure on prices. 3. What relationship, if any, should payments from a universal service fund bear to changes in efficiency and productivity of the recipient? None. Cost proxy model estimates of costs should already assume that the firm providing service is as efficient as possible. USF subsidies should contain "no fat" to be removed if an incumbent becomes more efficient. 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 line? TRACER recommends that only primary residential and business lines should be supported. This is consistent with both the Congressional directive in the Act and with traditional notions of universal service. In defining the services that should be supported, Congress directed the FCC to consider whether a particular telecommunications service is "essential to education, public health, or public safety," "subscribed to by a substantial majority of residential customers," "deployed in public telecommunications networks," and "consistent with the public interest, convenience, and necessity." Secondary lines, whether for residential or business customers, do not satisfy these criteria. Secondary lines have never been considered a core universal service. They are neither essential to education, public health, or public safety, or subscribed to by a substantial majority of residential customers. To support these lines would be a marked departure from past and present universal service policies, which are aimed at supporting services which are essential to public health and safety or otherwise consistent with the public interest. Services which are discretionary should not be supported by a universal service program. The objective of a high cost support program should be to provide one reasonably priced telephone line to each residential housing unit and business location in the high cost areas of Washington. In general the residential housing unit is defined to be an apartment or a house and does not depend upon how many families live or could live in the unit. Ramifications of Proposal: TRACER's proposal is expected to provide benefits to all business and residential customers (those with subsidized and unsubsidized lines) in the state. The benefits from the subsidized lines are not limited to the customers who receive the subsidized service because all customers benefit from being able to call others. If the high cost customers did not have a subsidized phone line, fewer of them could afford to take service, penetration would be lower and the number of customers who could be called by others would decrease. This benefit to unsubsidized customers is called an "externality" in economics and has been a long held justification for subsidizing high cost telephone lines. It is not necessary to subsidize more than one telephone line to achieve the externalities. One line is enough to provide access to each residential unit or each business location. Thus, whereas all customers in the state can be expected to benefit (to some extent) from subsidizing the first line to a residential unit or a business location, only the customers receiving the subsidized additional lines gain a benefit if more than one line is subsidized. As a result, though there may be net welfare gains from subsidizing first lines (depending upon whether the benefits of the externality offset the cost of the subsidy), there will always be expected welfare losses from subsidizing additional lines. Numerous studies of the demands for telecommunications services by residential and business customers have found that telephone services are "price inelastic". Changing prices cannot be expected to have much of an impact on the number of lines demanded or on penetration. Those studies have found that in relative terms, the demand for telephone lines is far more sensitive to differences in income than to changes in prices. Dropping prices does not provide more income. It cannot be expected to have a large impact on penetration. But with lower prices, the customer has relatively more purchasing power and some customers could be expected to purchase telephone service that it would not purchase in the absence of the subsidy. It is a far stretch to assume that this indirect effect on income would cause customers to buy more than one telephone line, however. This raises serious questions about the social benefit of subsidizing additional lines. With price inelastic demands for service, there will be very few customers who would be expected to buy additional lines as a result of the subsidy. Most customers buying additional lines would be buying such lines with or without the subsidy. Thus, they would receive an unnecessary windfall benefit at the expense of those funding the USF. TRACER's proposal is also preferred to one which proposes to subsidize multiple high cost lines from the perspective of the economic ramifications for the Washington economy and impacts on unsubsidized customers. Whenever subsidies are minimized, the Commission will be able to set other rates closer to costs and thus gain the multiple economic benefits from cost-based rates. 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)? There should be two "classes" with different levels of support. All residential lines would be in one class and all other lines in the other. Support for each "class" of service would be determined by the statewide average revenues for the class, less the proxy cost estimate, and less any monies received from federal high cost support mechanisms. 6a. If you propose support for one primary line, particularly for only one residential primary line, how do you propose this be administered? Administration of the USF would require the company requesting the subsidy to provide documentation supporting the level of subsidies to an independent administrator of the USF. If a customer has service from more than one provider, only one line will be subsidized. In this case, the customer will designate which of the serving companies is providing the line to be subsidized. The carrier designated to get the subsidy will be responsible for documentation to the fund administrator. Duplication of subsidies will be avoided by the fund administrator ascertaining that only one line per address is subsidized. Possibly the same data base as the E-911 data base could be used for this purpose. 6b. Could a family of three (two parents and a minor child) order three primary lines? Order two, one for each adult? No. There should be only one subsidized line per residential address or unit. 6c. How many primary lines could be ordered for a residence occupied by a group of college students? By persons who share an apartment? One. See responses to No. 1 and No. 6a. 6d. Could a residential customer order a primary residential line and a primary business line? No. There should be only one subsidized line per address. 7a. If you propose support for only one business primary line, how do you propose this be administered? See response to 6a. 7b. Could a partnership order a primary line for each partner? No. There should be only one subsidized line per service address. 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? No. There should be only one subsidized line per address. 8a. If a business or residential customer orders one line from each of three companies, would each be a primary line? No. See 6a. 8b. If not, which of the three would be the primary line? See 6a. 8c. Who would make the determination? Who would verify it? See 6a. 9. Please estimate the cost, in detail, of administering a program which supports less than all lines. TRACER does not have a detailed cost estimate at this point. 10. Should unsubscribed lines be supported? No. No line should be supported until it is being used. 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? The only subsidy should be the subsidy necessary to provide access to the network at a reasonable price, i.e., the revenue benchmark less the cost proxy model estimate of the cost to provide that line, less any monies received from federal high cost support mechanisms. 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? No comment. 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.) See response to No. 11. AFFORDABILITY AND COMPARABILITY 14a. What rate(s) for basic telecommunications service are affordable in Washington? Rates paid today are affordable. Given that demand for switched telecommunications services is very price inelastic, higher prices may also affordable. No study has been made as to how high the prices could be increased and still be affordable. 14b. Is there a different affordable rate for a business and a residence? TRACER has not made a study to determine if there are different affordable rates for residential and business services. 14c. For a small business versus a large business? TRACER has not made a study to determine if there are different affordable rates for small and large businesses. 15. Should business and residential lines be priced differently? If so, on what basis? To the extent possible, consistent with general policy goals, business and residential rates should both be cost-based. 16a. If all lines are supported, should second lines be priced at the same level as primary lines? There is insufficient information to answer this question; therefore, TRACER has no comment at this time. 16b. Should there be an even greater charge for each additional line above two? To the extent possible, consistent with general policy goals, additional lines in excess of primary lines should be priced to reflect costs. 16c. Would this present administrative problems and expenses? No. 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? Yes, depending on the level of rate averaging permitted. 17b. Will the access to telecommunications and information services be reasonably comparable? Yes. 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"? TRACER has not made such a study. 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? High cost service in Washington is service in exchanges which are more costly to serve than the adopted revenue benchmark. If the Commission adopts different revenue benchmarks for residential and non-residential services, the definition of "high cost" should vary accordingly. 19a. Should the benchmark be company specific? No. Each benchmark should recognize the current level of revenues that are now being paid by customers of various telecommunications companies in Washington. These benchmarks provide a reasonable basis to determine the level of affordable telecommunications service. The benchmarks also provide a reasonable limit on the amount of revenues that each ETC subject to the benchmark should be required to obtain from other sources before it turns to consumers or carriers generally for subsidies. 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.) There should be statewide average benchmarks determined as discussed in 19a. 19c. Should the benchmark be higher or lower for some technologies based on the traditional differences in customer revenue associated with different technologies? No. 19d. How should it be calculated for each technology? Does not apply. ELIGIBLE TELECOMMUNICATIONS CARRIERS 20. What process should be used to designate eligible telecommunications carriers (ETCs)? Should it be by petition? By some other process? No comment. 21. What criteria should apply to the designation of eligible telecommunications carriers? No comment. 22. At what geographic level (exchange, wire center, census block group or other) should ETCs be designated? No comment. 23. Should a bidding process be utilized to select ETCs? If yes, describe in details how such a process would work. No comment. 24. What facilities, if any, should an ETC be required to self-provide? No comment. 25. Should the Commission adopt ETC basic service advertising guidelines that differ from the federal guidelines? No comment. 26. For what service areas can the provision of support payments be reasonably administered? Support payments should be administered at the exchange or wire-center level. FUNDING 27. How should the USF be funded? What is an "equitable" basis for all telecommunications providers and services to contribute to the USF? Reading the federal Act, the recommendations of the Federal/State Joint Board, the FCC's USF Report and Order, and the Staff's questions in this rulemaking would lead one to believe that telecommunications carriers will be the supporters of universal service. However, these carriers are not nonprofit or charitable organizations. They are competitive businesses that will pass any universal service costs to their customers. Let there be no mistake. The true funding for universal service will come from consumers of telecommunications services, many of whom will not benefit from the contributions they will be asked to make because they live in low cost locations, spend their money on services that do not use the public switched telephone network, or do not meet the definition of a low income consumer. As stated clearly by FCC Commissioner Chong: Let us make no mistake about who will foot the bill for this universal service program. It is not the telecommunications carriers, but the users of telecommunications services to whom these costs will be passed through in a competitive marketplace.Universal Service Recommended Decision, 12 FCC Rcd. 87, 560 (separate statement of FCC Commissioner Rachelle B. Chong, concurring in part and dissenting in part). Thus, any funding mechanism should be designed with a clear understanding of its impact on consumers, not just carriers. TRACER submits that the USF ultimately should be funded by all residential and business customers of switched services. It is those customers who receive the benefits (externalities) of being able to call customers in the high cost areas. This approach is equitable and is based upon the historic rationale for universal serviced support. TRACER understands the desire to establish a broad funding base and reduce the contribution burden on any particular contributor. However, having a broad base of funding does not necessarily ensure "equitable and nondiscriminatory" contributions. This is particularly true given the fact any carrier contributions will be passed on to end-users in rates. There is nothing "equitable" or "nondiscriminatory" about a funding mechanism that effectively requires select end-users to contribute over and over and over again to universal service simply because of the mix of telecommunications services they require. For example, many business users