May 2, 1997 Mr. Steve McLellan Executive Secretary Washington Utilities and Transportation Commission 1300 S. Evergreen Park Drive S. W. P. O. Box 47250 Olympia, Washington 98504-7250 RE: Notice of Preproposal Statement of Inquiry (CR - 101) Docket No. UT-970545 Dear Mr. McLellan: On April 15, 1997, the Commission invited interested persons to file comments in response to its Notice of Preproposal Statement of Inquiry (CR - 101) in Docket No. UT-970545. This letter responds to the specific questions raised by the Commission in its notice and comments on the need for new Extended Area Service (EAS) policy and/or rules. I. GENERAL COMMENTS The Commission’s NOI on the subject of EAS is timely. There is continued customer interest throughout the state for increased local calling areas. The Commission should be congratulated on the success of the current EAS rule which expanded the local calling areas of almost two-thirds of the current exchanges in the state of Washington with minimal opposition from customers. This success has brought on further encouragement by customers for increased and additional expansion of local calling areas, because either their communities of interest were not addressed to their satisfaction in the first phase of the incumbent local exchange company (LEC) EAS conversions For example, USWC’s Deer Park customers have complained that even though they can call Loon Lake and Spokane they cannot call their friends, neighbors, churches, and schools in Green Bluff. and/or their communities of interest have since changed or expanded. As a result, the Commission and incumbent LECs must continue to be responsive to this marketplace demand. The key motivator behind an EAS rule is that customers want increased local calling areas, e.g. EAS, in lieu of current toll rates. However, to meet this request, the Commission and the LECs are faced with several challenges, as this Commission Notice recognizes. The most significant issue before this Commission, that should be addressed as a part of this proposed rulemaking, is the current toll rate structure of LECs. It is no secret that the existing toll rates are currently priced far above cost and that incumbent LECs depend on this revenue source to fund capital requirements as well as to maintain high universal service standards. However, this revenue source is currently in serious jeopardy. Toll services provide a significant source of revenue that supports the overall operations of incumbent LECs. 17% of U S WEST's 1996 revenues were from retail toll services. This revenue source is at risk. The changed telecommunications environment requires that incumbent LECs restructure and reduce toll service rates . This urgent need can be met through increased local calling areas ( via new EAS arrangements) and through the restructuring of existing incumbent services. If toll rates are not reduced or eliminated in some fashion, toll revenue will be unnecessarily lost to competing toll providers and other rates will need to be increased. Competing Toll providers offer toll services at an average rate of $.08 per minute while U S WEST and other incumbent LECs currently have an average toll rate of about $ .16 to $ .17 per minute. Existing incumbent LEC toll rates cannot survive in a competitive local exchange marketplace. This very important revenue source must be modified and restructured in such a way that incumbent LECs have an opportunity to effectively compete for toll rated service as well as other products and services. If this rate restructuring does not occur, revenue will plummet and incumbent investment will necessarily decline harming infrastructure. Two critical factors must be addressed as the industry commences the process of amending or eliminating the current EAS rule. First, an EAS rule should be constructed so as not to disadvantage either competing carriers or incumbent LECs. Second, Commission and industry policies should ensure that all customers benefit from either lower toll rates or increased EAS calling areas or a combination of the two. The current rule needs to be modified to provide each LEC with the ability to respond to this continued customer need for increased local calling as appropriate given unique community circumstances and requirements. As the Commission recognized at page 3 of its April 11, 1997 Policy Statement, the boundaries that dictate current price differentials are artificial. The Commission can enable LECs to meet this marketplace need as follows: 1) the issuance of a Commission policy statement and/or a rule that defines a minimum standard required of all local telecommunications companies in the provision of basic local exchange service and 2) the issuance of a Commission policy statement that enables incumbent LEC rate restructuring designed to promote the movement of LEC toll rates to a rate that is closer to cost and that enables the increase of rates charged for other services, whether or not such services are classified as effectively competitive. Such a policy statement should also recognize that incumbent LECs will incur new costs to implement new EAS areas and should provide for the recovery of such costs as well as the opportunity for recovery of lost toll revenue. A. AN EAS RULE MUST NOT DISADVANTAGE COMPETING CARRIERS In this new telecommunications era, all telecommunications providers must respond to market demand through the introduction of new services and pricing arrangements that more adequately reflect the dynamic and changing calling requirements of all retail customers. It would be inappropriate to continue to define the marketplace in Washington by LATAs, exchanges and toll and local (EAS) calling boundaries, when the marketplace is no longer constrained by boundaries imposed in a monopoly context. The Commission's Notice not only agrees that such boundaries are artificial but also points out that the LATA distinctions have never been supported or understood by customers as evidenced in the discussion of "split" communities. New local exchange companies are free -- subject only to the constraints of the market -- to respond to the customer need for increased local calling as they introduce their local exchange service offerings. However, rate of return regulated carriers must consider the effect on current revenues. Maintenance of revenue is necessary to in turn fund the ongoing maintenance and development of the telecommunications network infrastructure in Washington. This consideration places incumbents in a unique position and at a disadvantage in meeting this customer need in the competitive marketplace. Incumbents uniquely, must deal with the reality of lost toll revenue and additional network related costs associated with conversion of what once was toll revenue to local revenue. New local exchange companies are free to define their local calling area in what ever manner they believe to be appropriate and are also free to provide only selected service to selected customers within such areas. The current EAS rule provides a vehicle that allows increased local calling through the determination of the customers community of interest as defined by the Commission rule. However, the current rule is no longer satisfactory in that it presumes only one local service provider currently responds to this marketplace need within a given exchange. As noted in the Commission’s April 11, 1997 Policy Statement, despite its numerous benefits, there have been problems with the existing rule and its implementation. The most significant such problem was the effect on those customers who did not meet the rule criteria regarding the exchange's local calling capability and the average number of toll calls placed to another exchange. To qualify for EAS consideration, the current rule requires that the local calling capability of an exchange must be below 80%, and based on a 3 month average, at least 50% of the customers of that exchange must make two or more intraLATA toll calls per month to the other exchange. Therefore, many customers have not been eligible to receive the benefits of the expanded calling areas. These customers continue to urge the companies and the Commission to re-evaluate the current rule and to revise or modify the criteria upon which expansion of current incumbent LEC local calling areas is made. Appropriate EAS expansion and across the board toll rate reductions are in the long term interests of all customers in the state of Washington. These approaches not only respond to legitimate customer local calling area needs but they also decrease the dependence of incumbent LECs upon unreliable toll revenues to fund critical operations. The Commission needs to build upon the success of the first phase of the current EAS rule, and through rulemaking or the issuance of a policy statement, enable incumbent LECs the same freedom to design the scope of their service offerings as that afforded to new LECs. Such an approach will preserve the Commission's goal of maintaining affordable universal service for all Washington customers, particularly those who may not yet have access to a diversity of telecommunications suppliers. While new LECs are certified to offer service statewide, most only offer service in specific geographic areas - largely dense urban areas. Most also only offer service to certain class of customers (e.g. business) or to certain customers within a class of customer. Toll services particularly tend to be targeted to high volume/usage customers. If toll revenues continue to erode by 39% as U S WEST has experienced over the last five years, customers who only have access to U S WEST services will be burdened with higher rates than would otherwise be necessary if U S WEST were empowered to rebalance rates to minimize such a risk. The Commission must work with incumbent LECs to facilitate and empower such corrective pricing immediately to minimize revenue losses incurred only due to historic pricing approaches. It is those customers who will be burdened with the consequence of no or delayed action in responding to the changed telecommunication environment by incumbent LECs and the Commission. B. ALL CUSTOMERS SHOULD BENEFIT FROM LOWER TOLL RATES OR INCREASED EAS CALLING AREAS. Current incumbent LEC customers are forced to pay artificially high toll rates to enable artificially low rates for connecting residence customers to the network. This approach was workable in a defacto monopoly context. However, as previously stated, it can no longer be sustained in the new telecommunications environment. Incumbent LECs relying on disproportionate toll revenues will not be able to adequately support their current level of annual investment. Incumbent LECs that do not currently provide their own toll services, rely upon the access charges paid to them by other carriers as well as the state and federal universal fund to finance their annual capital expenditures. As stated earlier, U S WEST Washington toll revenues represent 17% of U S WEST's total revenues. Currently if 1996 intrastate toll revenues were spread across exchange access lines on a class of customer basis, residence customers contribute $5.42 per access line and business customers $5.13 per access line. Independent LECs who subscribe to U S WEST toll services, currently contribute approximately $ .23 a month per U S WEST access line under the current interconnection arrangements. This contribution has been decreasing for six years. For example in 1991, residence customers toll contributed $7.17 per access line and business customers contributed $10.93. In 1994, those respective numbers were $6.30 and $6.43. This scenario will be dramatically worsened as intraLATA equal access occurs. Incumbent LECs and the Commission must act responsibly and minimize unnecessary revenue losses immediately. By doing so all customers will benefit, including telecommunications carriers who rely upon U S WEST's network infrastructure. Only by understanding the customer value of incumbent LEC rate restructuring, coupled with appropriate EAS expansions and interexchange calling plans, will the Commission and the LECs avoid or minimize customer opposition. Incumbent LECs need to provide the Commission with a summary of the financial implications associated with upcoming regulatory measures such as access charge reform Access charge reform could eliminate $274.7 million in U S WEST total state access revenues based on a 1996 test year. State access rates must parallel federal access rates or uneconomic arbitrage will occur. and universal service funding proposals. Universal service funding measures could help support funding of investment required to continue to serve high cost areas, especially those areas where new entrants currently do not exist. Competitive toll loss information also needs to be addressed so that customers understand how the telecommunications environment is changing and how such changes will effect every subscriber. II. U S WEST'S RESPONSE TO THE QUESTIONS POSED BY THE WUTC 1. Should there be a statewide standard for minimum local calling capability that is required to be available for every exchange? If so, how should the standard be defined? Yes. The Commission should issue a policy statement that defines the Commission's view of the state minimum standard for basic local service which includes the Commission's position with respect to a "minimum local calling area". However, the "standard" should not be tied to the traditional definition of "an exchange." The Commission needs to eliminate the distinction of an "exchange" as well as eliminate exchange boundary maps since an exchange boundary should no longer be relevant in a competitive marketplace. Telecommunications companies should be free to define their local exchange service in a manner that is responsive to their unique marketplace. No company should be constrained by artificial "boundary" descriptions. At page 3 of the April 11, 1997 WUTC Policy Statement, the Commission recognized that "artificial boundaries dictate price differentials ..." The minimum standard should be defined based on direct customer feedback. The industry and the Commission should immediately commence customer forums across the state, to solicit customer input on this specific issue. Such forums could be a continuation of the forum sponsored by the Commission in 1996 concerning the definition of universal service. Marketplace mechanisms should be allowed and encouraged to meet demand for calling areas larger than the minimum standard. In developing a policy statement, U S WEST encourages the Commission to include a transition mechanism for incumbent LECs that would enable such LECs to rebalance their local and toll rates in a manner that corrects inappropriate prices originally set in a defacto monopoly environment. A component of such a transition mechanism could involve examination of individual toll routes by incumbent LECs for conversion to EAS. For example, each LEC could identify those exchanges which meet the currently established or newly defined EAS criteria, and then immediately file a new EAS configuration. As customers petition for new EAS routes, LECs could review these new requests on a route by route basis and would be able to respond to such market needs in a more timely manner. The current rule requires LECs to collect data and review that data with the Commission and the involved company(ies) to set priorities for potential EAS routes. The company(ies) then file a prioritization schedule for LEC engineering studies and thereafter develop a proposed schedule to establish individual EAS routes. Engineering studies are completed and within 30 days the company(ies) files a schedule indicating the dates at which a cost estimate, a revenue requirement, a proposed tariff, including the tariff implementation date, will be filed. This approach would enable LECs to more appropriately directly recover the cost of local service while decreasing or eliminating reliance on toll revenues. The elimination would occur through the conversion of toll revenue to EAS revenue. This approach would complement the toll discount plan approach suggested by the Commission in its Policy Statement. 2. If there were a statewide standard, should it be achieved by incorporating exchanges into larger local calling areas? Should such expansion be paid for by subscribers in the area where the expansion occurs, or should the relevant telephone company rebalance all local rates? As previously stated, a statewide standard should not be based on the current incumbent LEC "exchange boundaries". LECs should be allowed to define their local exchange service calling area as they deem reasonably appropriate, as long as a minimum standard is met. However, incumbent LECs will need the support of the Commission as they modify and expand their definitions of local calling areas. Incumbent LECs will need to do rate restructuring to move toll revenues to local service and the Commission should enable incumbent LECs to do so on a revenue neutral basis A revenue neutral basis should include recovery of the costs to implement such a change as well, including the often considerable network capital and expense required due to greater network usage in a flat rate EAS environment.. As previously discussed, rate restructuring should be viewed as benefiting all consumers whether or not they are included in the revised local calling area. Toll revenues in total have enabled incumbent LECs to promote universal service through low residential basic exchange rates. For example, U S WEST has the 49th lowest rate in the nation for residence basic exchange service. 1996 U S WEST toll revenues were equal to basic exchange service revenues. If those same toll revenues are unnecessarily lost due to an incumbent LECs inability to successfully rebalance its toll and local rates, that LECs local service rates will have to increase. Such local service increases can be minimized if LECs are allowed to compete with new entrant toll prices by expeditiously implementing rate rebalancing. New entrants typically offer toll services at rates averaging $ .08 per minute while incumbent LEC toll rates average $ .16 to $ .17 per minute. This pricing structure cannot survive and if retained, will promote rapid loss of incumbent LEC revenue.. Absent such freedom, incumbent LECs will unnecessarily lose toll revenue due to their financial inability to reduce toll rates. As the Commission recognized in its Notice, the nature of the economy and related telecommunications usage is more regional than local in nature. Cellular and Personal Communications Services (Wireless) calling areas tend to be regional in scope and are not constrained by incumbent LEC exchange boundaries. If incumbent LECs are to have any hope of fairly competing with new local exchange companies, who often use new telecommunications technologies, government and industry policies must quit looking at the market as it was structured under the defacto monopoly and begin viewing the telecommunications market from the customers' perspective. Customers don't understand LATAs, exchange boundaries, numbering limitations, etc. Customers understand their daily telecommunications needs and how much the services that meet those needs cost them. It is clearly time to review Washington exchanges to determine if larger local calling areas are more appropriate. Incumbent LECs may need to define local calling areas in the same manner as the Standard Metropolitan Statistical Areas (SMSAs) used by the FCC to allocate the cellular radio markets. A new Commission rule should enable all LECs the maximum flexibility to adopt such an approach. Some advocate that the purpose of EAS is to identify local communities of interest and provide such “communities” with local calling. If that is the purpose, a calling "region" may be a more appropriate and forward looking approach. A regional concept may provide an opportunity for expanded calling for outlying communities while at the same time stimulating the area from an economic perspective. Customers may find rate restructuring more acceptable if it includes increased local calling availability. The Commission should empower incumbent LECs to utilize such an approach as part of a rate rebalancing proposal. Historically, the costs for EAS routes have been recovered through a higher prices associated with a higher local rate group rate. These costs included lost toll revenues, increases in capital costs due to network capacity additions and lost access charges. This approach enabled incumbent LECs to partially recover the cost of expansion and lost toll. However, the current EAS rule should be modified to recover these "costs" across all ratepayers, to achieve consistency with the Commission's statements concerning a statewide residential rate in Docket No. UT-950200. This could easily be accomplished through the rebalancing of all rates. Another benefit of addressing expanded local calling areas using a regional approach is that it could eliminate the ability of companies to violate the tariff by bridging EAS exchanges and not paying Interexchange carrier access charges. EAS bridging is accomplished when a company locates telecommunications equipment in an incumbent LEC exchange that has EAS to neighboring exchanges that do not have EAS to one another. This is a form of illegal toll bypass that is difficult to police. The Commission and incumbent LECs have spent considerable resources pursuing such tariff violations. The costs associated with expansion of incumbent LEC local calling areas should be spread across all subscribers for the reasons previously stated. All subscribers, including carriers, will either directly or indirectly benefit from such an approach. 3. How should we encourage or require other opportunities for flat-rated or other lower-priced interexchange calling? The best way to encourage LECs to offer flat-rated and lower-priced interexchange calling is to allow LECs pricing freedom as well as flexibility in the design of their service offerings. Optional local calling plans and flat rated interexchange calling plans are currently vehicles utilized by incumbent LECs to lower existing toll rates. The Commission should refrain from requiring flat-rated or lower-priced interexchange calling. With such Commission forbearance, together with the Commission's encouragement of the development of marketplace solutions, customer demand for new service options will be met. The Commission statement at page 3 of their Policy Statement: “No significant low cost toll plans have materialized in the six years since the rule was adopted.” is not entirely accurate. U S WEST has adopted eight toll discount plans. Seven of these plans were implemented after the EAS rule was adopted and all of them offer low cost toll options. The U S WEST plans are as follows: Business Daytime Connection Business Daytime Connection Plus Volume Calling Connection Toll PAC Washington Value Calling Washington Value Calling II Tenant Calling Connection Association Calling Connection These calling plans offer discounted rates to all customers. The plans include usage discount options designed specifically for residence and business customers. If the Commission has further ideas for additional calling plans, U S WEST is willing to consider all ideas. It should also be noted that most of the incumbent LECs mirror U S WEST's toll tariff and therefore have the same calling plans available to their customers. However, discounted toll plans do not fulfill the customer needs met by expanded EAS areas. The previously cited example of U S WEST’s Deer Park exchange, where customers complain that even though they can call Loon Lake and Spokane they cannot call their friends, neighbors, churches, and schools in Green Bluff, is illustrative. These exchanges currently have available highly discounted Toll PAC as well as other toll plans, but these customers still want more local calling. Some customers have found this need so great that they have purchased the comparatively expensive Foreign Exchange Service just to enable these “local” calls. This approach is similar to rebalancing toll rates by converting them to incremental local exchange rate additives. As noted in the Commission Policy Statement, LATA or political boundaries arbitrarily skew the application of the current rule. Communities such as Colfax - Pullman are artificially split by the LATA boundary and cannot make local calls to one another. As the rule now stands, only calling plans offered by non-Bell Carriers can help these customers. Optional EAS is really just another optional toll calling plan. Unfortunately, such plans do not meet the needs of customers who believe that calls in their local communities should be rated local, period. Overall, if the intent of EAS is to meet the majority of local calling needs, the benefits accrued through expanded EAS are greater for the whole community regardless of individual calling patterns. Optional calling plans do not meet the needs of areas such as Whatcom County Redistricting of schools and the need for establishment of economic development regions (such as has been requested by Whatcom County) are indications for why EAS is desired and why it has been granted. or as mentioned above, Colfax-Pullman. A high level of exchange-specific calling occurs in these communities because various social, political, or medical needs can only be met by calling a neighboring exchange. Expanded EAS meets this specific customer need. 4. The Commission has in selected instances allowed telephone companies to incorporate additional exchanges into an expanded local calling area in order to offer some subscribers “optional local calling plans” at rates lower than toll. Is the incorporation of additional exchanges into an expanded local calling area the best way to get companies to offer flat-rated and lower-priced interexchange calling? What costs should be reflected in the price of such local interexchange calling plans? What if any requirements would be needed to ensure a level playing field for all competitors? The incorporation of additional exchanges into an expanded local calling area is an excellent way to get companies to offer flat-rated or lower-priced interexchange calling plans. The costs that should be reflected in the price of such plans is the cost associated with the elimination or reduction of toll revenue as well as the costs associated with the network reconfigurations driven by such a change. The Commission can ensure a level playing field for all competitors by recognizing that only the incumbent LECs This statement is not intended to preclude Commission consideration of those LECs who have adopted the exchange boundaries of incumbent LECs for toll rating purposes. However, the revenue implications would be significantly different for new LECs both because their local rates are less dependent upon intraLATA toll revenues and because their intraLATA toll rates differ significantly from those charged by incumbent LECS. New LECs also have no historic regulatory assets such as depreciation reserve deficiencies to correct. are burdened with the imbalanced rate structure of existing toll rates. The field is not level today and incumbent LEC revenues are declining unnecessarily due to their inability to significantly rebalance existing rates. This rulemaking should empower LECs to correct their improper rate structures in a timely and financially neutral fashion. Incumbent LECs incorporation of additional exchanges into expanded local calling areas in order to offer existing subscribers “optional local calling plans” at rates lower than toll has been both beneficial and productive. Such approaches include unique pricing plan arrangements where, for example, 100 minutes of toll usage can be obtained for $50.00 a month or local calling areas can be increased at the customers option for an additional flat rate per minute or for a fixed monthly rate. These approaches are similar to discounted toll plans whereby the customer receives a certain amount of usage for a fixed dollar amount or where customers pay $.10 per minute regardless of call length, distance or time of day. These plans provide discounted toll rates and meet the needs of many frequent toll users. Unfortunately, these plans do not fill the needs as identified by customers who desire expanded EAS areas as discussed above. 5. Would it be better to pursue optional calling plans that do not depend on the Commission’s approval of an expanded local calling area? Would the price of such optional toll calling plans have to reflect access costs? Given the overwhelming need for U S WEST to better align its prices to cost in Washington State, the Commission and U S WEST (and all LECs) should consider all approaches to rebalancing rates. Optional calling plans may meet some market needs but clearly will not meet all market needs. As discussed above, extended EAS areas may enable the greatest toll rate restructuring. This approach is generally endorsed by the majority of incumbent LEC subscribers. The price of such optional toll calling plans should meet the relevant Commission requirement, which may or may not reflect the imputation of access charges as discussed below. 6. Is it a good idea for a company to charge some customers toll rates based on access charges, and others local rates for the same calls? This question is not well understood. As a general proposition the competitive market should be allowed to operate in setting the prices for all telecommunications services. As this occurs prices will be better aligned with costs for all services and gross disparities between arbitrary classifications such as toll, local and access will be eliminated. Similarly, concerns over possible “price-squeeze” issues or imputation tests will be addressed by the natural operation of the competitive market. As a general proposition, the regulatory tool of artificial price floors based on imputation requirements should be dropped, in recognition that as competition progresses, no carrier has an essential service that the other carrier must purchase beyond interconnection itself, which must be mutual. Notably, the 1996 Federal Act does not require imputation, since it is not necessary where the terms and conditions for all incumbent services and facilities required by new entrants are set in a presumably fair and cost based manner by the negotiation and arbitration process. 7. Should flat-rated and other lower-priced interexchange calling plans if offered in any exchange be available on consistent terms in all exch