June 8, 1998 Commission Notice Of Proceeding Opportunity To File Rulemaking Comments Re: Universal Service Issues Proceeding In Docket No. Ut-980311(R) On May 4, 1998 the Commission requested a response to a set of questions relating to rulemaking issues, to help develop rules for Universal Service. The Commission also invited parties to comment on any additional matters considered relevant to universal service. U S WEST Communications, Inc. (“U S WEST”) has been a leader nationally in fashioning a Universal Service support mechanism that would comply with the requirements of the Federal Act. The FCC has had numerous proceeding on this issue over the last several years and has adopted a number of the U S WEST proposals incorporated in the responses that follow below. Following are U S WEST comments in response to this request. QUESTIONS FOR UNIVERSAL SERVICE RULEMAKING 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. Response: The key goals of the Washington universal service fund should be to ensure that consumers in all regions of Washington including low-income consumers and those in rural high cost areas have access to universal services at rates that are reasonably comparable to rates charged for similar services in urban areas. The Telecommunication Act of 1996 (“Act”) acknowledges that existing rate structures that provided implicit support to subsidize high cost location customers can no longer be sustained in a competitive environment. Therefore such implicit subsidies must be replaced with a combination of rate rebalancing and explicit USF support. Incumbent LECs have already lost millions of dollars to alternative local service providers in lower cost areas due to the current regulatory paradigm that mandates a implicit support mechanism for purposes of funding universal service. Elimination of implicit subsides requires rate rebalancing and a state USF fund that provides for specific, predictable and sufficient explicit support to preserve and advance universal service. The fund must be supported by all providers and ensure that all carriers contribute to maintaining and enhancing the quality, capability and ubiquity of the telecommunications network. State and federal USF support must adequately compensate designated local exchange telecommunications carriers (LECs) for investment required to provide service to customers located in high cost areas before competitive alternatives will be available to such areas. The compensation should be made to the LEC that incurred the investment or to the carrier that is paying for an unbundled service at a rate that is greater than the applicable benchmark and at a rate that covers the costs of the high cost location. If the high-cost fund is properly structured, it will foster an environment conducive to competition across regions and classes of customers as opposed to the current competitive response which is to cream skim more lucrative urban business customers away from incumbent providers while sidestepping social responsibility concerns. If a more balanced approach can be attained, Washington will spur economic development, improve educational opportunities and enhance the quality of life for all Washington residents. Providers assured a reasonable chance for recovery of their investment in high-cost areas will be more likely to invest. If the high cost fund is designed to keep rates affordable for all basic lines provided to a residential customer and to single line businesses, it is more likely that entrepreneurs, home-based businesses, lone eagles and small business will locate in remote areas. Farmers and ranchers already located in remote areas may be able to grow their businesses through the use of an adequately supported basic universal service infrastructure. By the end of the twentieth century, telecommunications should be a key infrastructure requirement, comparable to roads, schools, heath care facilities, etc. An adequately funded, explicit, and competitively neutral high cost funding mechanism is not only required under federal law but also is a necessary prerequisite for economic development in high cost areas. In UT-971121, U S WEST submitted a list of principles incorporating these goals which the Washington universal service fund should meet. Specifically these principles include: 1. Quality and Rates - Quality services should be available at just, reasonable, and affordable rates. 2. Access to Advanced Services - Access to advanced telecommunications and information services should be provided in all regions of Washington. 3. Access in Rural and High Cost Areas - Consumers in all regions of Washington, including low-income consumers and those in rural and high-cost areas, should have access to telecommunications and information services, including interexchange services and advanced telecommunications and information services, that are reasonably comparable to the rates charged for similar services in urban areas. 4. Equitable and Nondiscriminatory Contributions - All providers of telecommunication services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service. 5. Specific and Predictable Support Mechanisms - There should be specific, predictable, sufficient federal and state mechanisms to preserve and advance universal service. Funds for the support of high-cost areas will be available only to the designated eligible carriers providing service to such areas. The distribution of universal service funds should encourage the continued development and maintenance of the telecommunications infrastructure. 6. Competitive Neutrality - Universal service support mechanisms and rules should be competitively neutral. In this context, competitive neutrality means that universal service support mechanisms and rules neither unfairly advantage nor disadvantage one provider over another. 7. Access to Advanced Telecommunications Services for Schools, Health Care, and Libraries - Consistent with the Act, elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced telecommunications services. 8. All Universal Service Support Should be Explicit - All implicit support inherent in telecommunications rates must be replaced through a combination of rate rebalancing and explicit support mechanisms. Support mechanisms must be explicitly funded. 9. Administration Costs Should be Minimal - The costs of administration of the universal service fund should be kept to a minimum. All customers will benefit from a universal service fund that meets these principles. The removal of implicit support inherent in the rates for toll, access, business and discretionary services as well as the rigid averaging of rates, will create a reduction in the prices customers who use these services will have to pay for them. Customers in high cost areas who receive implicit support for their basic services, will continue to receive such support through a specific, predictable, sufficient and explicit USF support mechanism, even as today’s implicit subsidy is eroded by market forces and regulatory changes. Finally, the burden of supporting universal service throughout Washington will also be spread among all users of telecommunications services which will ensure that everyone who benefits from the ubiquity of the telecommunications network in Washington helps to pay for it and no one group of customers is asked to bear the cost 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? Response: The USF program should guarantee sufficient compensation for the recovery of the investment required to serve only high cost locations. The fund should not reimburse any carrier for competitive loss, unless the loss was incurred after the LEC was required by the Commission to serve a high cost customer. If a carrier has been required by the Commission to provide service and therefore incurred investment expense, they must be allowed to recover that investment through rates or USF support, whether the customer remains with them or moves to another provider. The Commission will need to address this issue from two perspectives, recovery of embedded costs not yet recovered due to prior obligation to serve requirements and recovery of forward looking costs as future investment is mandated. For example, the Commission will need to correct revenue short falls generated by depreciation lives that resulted in reserve depreciation amounts that have remained unaddressed. The Commission will also need to correct revenue shortfalls resulting from prior competitive toll losses due to the need to preserve artificially high toll rates required to subsidize local service rates. This correction should to be done at the same time the Commission establishes the amount of explicit subsidy a LEC is entitled to and the amount of implicit subsidy that that same LEC must eliminate. Since incumbent LECs have been required to provide service upon demand, they in turn must be allowed to recover prior investment incurred to serve high cost customers under Commission service quality rules or orders, whether or not they continue to serve such customers on a going forward basis. However, on a going forward basis, the USF program should not be designed to guarantee sufficient operating revenue to a company. Nor should it provide funding to a carrier when that carrier has no obligation to serve a particular high cost customer, but instead voluntarily chooses to serve such a customer at a loss. The purpose of the USF program is to ensure high cost location customers continue to receive comparable service and that LECs that provide such service will receive adequate, sufficient, predictable and competitively neutral USF support for the investment required to serve such customers, through either the rates they are allowed to charge and/or from USF support. 3. What relationship, if any, should payments from a universal service fund bear to changes in efficiency and productivity of the recipient? Response: The cost model and/or cost basis selected by the Commission to determine the initial size of the USF is based on forward looking costs which assume the most efficient technology is utilized. As changes in efficiency or productivity occur, the cost model should be updated to reflect such changes and the fund size should be reevaluated. The BCPM cost model has the capability to assume that investment is capped at $15,000 a line. This insures that extraordinary investment is not provided for under the model. 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? Response: This question really can’t be answered until the size of the fund is quantified as required in ESSB 6622. The size of the fund can’t be quantified until UT-980311(A) is completed. This question can be more easily answered, if the size of the fund is not significantly different when additional lines are included. From a practical perspective, USF support may have to be available for all lines, or some number of lines greater than one, in high cost locations because there is no simple way to qualify who is providing the primary service in a multi-carrier environment. Initially, in most areas there will only be one designated ETC. However, there are already two designated ETC’s in some Washington exchanges. If both ETC’s provide one residential line to the same customer, and only one line is funded, who is to receive the funding? The customer can’t be required to only select one provider for service or they will be denied the benefits of competition which would be inconsistent with the state’s policy in RCW 80.36.300 to “promote diversity in the supply of telecommunications services and products in the telecommunications markets throughout the state.” If the customer were to pay a different rate based on whether a line was their primary line or an additional line regardless of carrier, it is unlikely the customer would pay a comparable rate for the additional lines absent a mandated Commission prescribed rate. If only the primary line is supported and additional lines are deregulated, the result may be less than comparable service between urban and rural areas. Households in high cost areas may not be able to afford the high cost of additional lines, while their urban counterparts will be able to afford multiple lines because their additional line costs will most likely be substantially lower. It is also highly probable that rural customers will have fewer choices if additional lines are not funded. This will create a system of haves and have nots. This system will certainly impact the economic development and growth of rural areas as parents and businesses weigh the costs and availability of adequate phone service in the rural areas of the state. This would then conflict with the Act requirement for reasonably comparable basic service rates and services. Ideally, the definition of universal service should only include the first line to a primary residence and lines other than a customer’s primary line should be priced at a rate that fully recovers cost. However, the ability to administer such an approach in a multi-carrier environment is almost impossible and could increase administrative costs significantly. This is apparent from the subsequent Commission questions that follow. The more complex it is to qualify for high cost fund support, the more difficult and costly it will be to administer such a plan. Whatever decision is ultimately made by the Commission, it must be consistent with all other aspects of the Commission’s Universal Service rule. If additional lines are not funded, then additional line rates must be set to cover cost with a reasonable return and LECs should have no obligation to provide more than a single connection to a residence. Second and multiple lines connections should then be detariffed and rates should be permitted on a deaveraged rate basis. Should the Commission determine it is a LEC regulatory obligation to provide second or multiple lines to subscribers in high-cost areas, and to the extent that those lines are to be made available at less than the carrier’s full cost plus profit, the provision of these lines must be subsidized through specific, predictable and sufficient funding mechanisms, just as the first line is subsidized. To the extent that the subsidy is “implicit,” it is contrary to the Congressional goals associated with universal service, whether it is the first or additional line which is being subsidized. 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)? * Response: See response to 4 above. All residence and single line businesses should receive USF support. 6a. If you propose support for one primary line, particularly for only one residential primary line, how do you propose this be administered? Response: See response to 4 above. 6b. Could a family of three (two parents and a minor child) order three primary lines? Order two, one for each adult? Response: The definition of a primary line should be based on the service location (household) not on a definition of who orders the service or how such service is ordered. If the Commission decides to only provide USF support for a primary line and a service location is occupied by more than one primary resident than the secondary resident should be in separate living quarters or in a structurally separate building and have a rental agreement for such. 6c. How many primary lines could be ordered for a residence occupied by a group of college students? By persons who share an apartment? Response: First of all, it is unlikely that many college students will be located in high cost areas. The complexity of a solution or approach to this question demonstrates the dilemma of supporting only the primary line. While it makes sense that only one line be considered primary and essential for purposes of universal service objectives; it is almost impossible to qualify how such a line is established. Some have suggested the first line into a household, or the line that is billed, but these concepts are unworkable in a multi-carrier environment. Ideally, additional lines should be priced at a rate that fully covers cost. However, if customers purchase from multiple carriers, such as students who each select a different carrier, then which carrier sells the primary line and which sells the additional lines. It is for this reason that it may only be feasible to fund all lines at high cost locations. 6d. Could a residential customer order a primary residential line and a primary business line? Response: Yes 7a. If you propose support for only one business primary line, how do you propose this be administered? Response: See 4 above. The BCPM cost model could be used to quantify the number of business lines in Washington located in high cost areas. It would be helpful to understand the magnitude of this USF fund requirement as the Commission proceeds with decisions concerning USF business support. If the high-cost fund is properly structured, it will foster an environment conducive to economic development. Providers assured a reasonable chance for recovery of their investment in high-cost areas will be more likely to invest. If the high cost fund is designed to keep rates affordable for all basic lines provided to a residential customer and to single line businesses, it is more likely that entrepreneurs, home-based businesses, lone eagles and small business will locate in remote areas. Farmers and ranchers already located in remote areas may be able to grow their businesses through the use of an adequately supported basic universal service infrastructure. While current business rates cover cost on a statewide average basis, this is currently changing as competitors capture low cost customers in urban areas. To ensure business customers located in high cost locations continue to receive basic service at affordable rates, USF support should be provided for business primary lines. 7b. Could a partnership order a primary line for each partner? Response: See 4, 6c and 7a above. This example is not as complex as the residence examples, however, because a partnership is a single legal entity and the act of one partner is the act of all. So the first partner ordering service would establish the “primary line”. 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? Response: See 4, 6c and 7a above. This example is even more complex than the residence examples above. It highlights the administrative difficulties of funding only the primary line. 8a. If a business or residential customer orders one line from each of three companies, would each be a primary line? Response: No, only the first line at a location should be considered the primary line regardless of who serves the customer. See response to 4 and 6c above. 8b. If not, which of the three would be the primary line? Response: See 8a above. 8c. Who would make the determination? Who would verify it? Response: If only the primary line is funded, the USF administrator would need to make the determination. The various LECs serving the customer would not necessarily have knowledge of other LECs serving the same location (e.g. wireless providers), especially if they were the first LEC to serve the high cost location . 9. Please estimate the cost, in detail, of administering a program which supports less than all lines. Response: No information is available at this time however it is apparent that such an approach will increase administrative costs for the reasons cited herein. 10. Should unsubscribed lines be supported? Response: In its May 8, 1998 Universal Service Decision, the FCC mandated 10 criteria that any proxy cost model that would be used for universal service support had to meet. In criteria 6, the FCC mandated, “ The cost study or model must estimate the cost of providing service for all businesses and households within a geographic region.” ¶250 Therefore, support should be determined based on a network built to serve all households. However, the support provided to each eligible telecommunications carrier should be based on the number of subscribers the ETC actually serves in the geographic support area. 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? Response: Features or services, in addition to those which constitute basic service, when provided to customers in high-cost locations, should be priced at market rates. Rates for such services should not be designed to address USF requirements. The Act specifically states that USF support must be explicit. Features or discretionary services must not be priced in a manner to replace an explicit subsidy requirement, nor should funds collected from their sale, whatever the price, be applied to universal service. Explicit support means that the collection and use of funds are for a specific and clear purpose. The collection of the support is not hidden or buried in the rates for other services, and the fund is designated for a very specific reason - to provide support to high cost customers. If a carriers’ investment in basic universal service is adequately funded through rates and explicit support mechanisms, then a carrier is more likely to make the incremental investment necessary to provide discretionary services, whose prices can be set at levels which will recover their costs. The universal service fund should not at this time include the costs or revenues associated with discretionary services in its high cost fund calculations. 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? Response: The USF support should be provided to whoever bears the burden of the cost. If the UNE rate covers the cost to serve the high cost location, the UNE carrier should receive the USF support since they are paying a rate that covers that cost. If the UNE rate is less than the applicable benchmark, than no support should be provided to the UNE carrier. If the cost to serve the customer is greater than the benchmark and greater than the UNE rate, than the carrier that deployed the facilities should receive USF support for all costs greater than the UNE rate and the UNE carrier should receive USF support for the difference between the applicable benchmark and the UNE rate. For example, if the cost to serve the high cost location customer is $60.00, the applicable benchmark is $30.00, and the UNE price is $40.00, the LEC that placed the facilities should receive $20.00 and the UNE carrier should receive $10.00. ESSB 6622 itself is unclear on this point. Section 1(2)(c) identifies potential recipients and the purpose of support payments as “telecommunications carriers serving high-cost locations for the benefit of their customers in those locations.” “High cost locations” are defined in Section 1(7)(c) as those locations where the cost of providing telecommunications services is greater than a benchmark established by the commission by rule. 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.) Response: Yes, when such customers are located in a high cost area. However it should not be used for every service application in unserved areas. Each application must be evaluated under RCW 80.36.090 and if the applicant is “reasonably entitled” to such service than it should be eligible for USF funding. For example, the Commission may wish to qualify USF support to customers in unserved areas based on each individual request. Some customers may request service for a vacation home located in an extremely high cost area. The commission might determine that customer should pay construction charges to minimize the amount of investment that should be compensated through USF support. Or customers may request service in unserved areas that are new residential developments and the Commission may determine that USF support is appropriate. The rules should also address Commission expectations regarding investment in unserved high cost areas in response to customer demand. Should the LEC be required to only install what is necessary to serve known demand or should the LEC be required to install sufficient facilities in anticipation of future demand? The USF support should be based on whatever the rules dictate regarding investment in unserved areas, and it must be specific, competitively neutral, sufficient and predictable. The BCPM cost model includes costs for unserved areas where there are existing households. AFFORDABILITY AND COMPARABILITY 14a. What rate(s) for basic telecommunications service are affordable in Washington? Response: There has been no factual determination of affordable rates for basic telecommunications service in Washington. The FCC decided for purposes of interstate high cost funding, it would operate on the assumption that the current rates are in fact “affordable”. According to the 1996 Statistics of Communications Common Carriers Report, the national average rate for residence is $13.70 without subscriber line charges. With EAS additives it is estimated the average rate is $15.70. Current LEC rates across the nation range from $7.00 to over $45.00 a month, with very little difference in universal service penetration. Current LEC rates in Washington range from $7.00 a month in Tenino to $26.00 a month in Lewis River. According to the 1996 Statistics of Communications Common Carriers Report, the national average rate for business is $33.43 without subscriber line charges. With EAS additives it is estimated the average rate is $35.43. In testimony before the Indiana Utility Regulatory Commission earlier this year, Doctor Carl Danner testified that based on actual customer bill data from Indiana, the price of basic local service is but a fraction of the average residential telephone bill of $54.10/month. April 14, 1998 Direct Testimony of Carl R. Danner, Ph.D., Cause No. 40785 He went on to testify that minority customers and families have higher average bills and may especially be harmed by the overpricing of other services to subsidize the price of basic local service. He testified that reforming prices to better match costs will: Have little, if any impact on