BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Petition for Investigation into the Cost ) of Universal Service and to Reform Intrastate ) UT-970325 Carrier Access Charges ) COMMENTS OF GTE NORTHWEST INCORPORATED April 8, 1998 BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION COMMENTS OF GTE NORTHWEST INCORPORATED April 8, 1998 Table of Contents << Table of Contents will generate here >> I. INTRODUCTION 1 II. ACCESS CHARGE REFORM 2 A. GTE NORTHWEST’S PROPOSAL2 B. COMMENTS ON WUTC REVISED ACCESS CHARGE REFORM PROPOSAL2 1. COMMENTS ON STAFF’S (1) OF THE REVISED PROPOSAL 2 2. COMMENTS ON STAFF’S (2) OF THE REVISED PROPOSAL 3 3. COMMENTS ON STAFF’S (3) OF THE REVISED PROPOSAL 4 C. COMMENTS ON WUTC WAC 480-120-000.ACCESS CHARGES 4 1. COMMENTS ON STAFF’S (1) OF WAC 480-120-000 5 2. COMMENTS ON STAFF’S (2) OF WAC 480-120-000 6 3. COMMENTS ON STAFF’S (3) OF WAC 480-120-000 7 III. CONCLUSION 7 GTE Northwest Comments Docket No. UT-970325 1 COMMENTS OF GTE NORTHWEST INCORPORATED April 8, 1998 Pursuant to the Commission’s March 13, 1998 notice, Opportunity to File Reply Comments and Opportunity to Respond to Commission Staff’s Revised Proposal. GTE Northwest Incorporated (“GTE”) submits these Comments on the submissions made by other parties and on the Commission Staff’s revised access charge reform proposal. In these Comments GTE also discusses draft WAC 480-120-000, which was included with the Commission’s March 30, 1998 notice. Notice of Issuance of Questionnaire and Notice of Opportunity to Comment; the draft rule is Enclosure #2. Although the notice specified April 20, 1998 as the deadline for comments, GTE offers its observations at this time because the draft rule appears to be an update of the proposal outlined in the March 13 notice. These Comments consist of two main parts. The first addresses the proposed and draft access charge reform rules. The second responds to other parties’ previous submissions. GTE’s November 21, 1997, January 13, 1998 and February 13, 1998 Comments continue to represent the Company’s overall position on access charge reform and the necessarily related reform of universal service support. SUMMARY With the opening of docket UT-980311, in which the Commission will develop a new universal service support fund mechanism and quantify the necessary explicit subsidy, the role and purpose of this docket naturally contracts to, at most, that of reforming access rate structures. GTE can support the objective of identifying and quantifying the implicit subsidies present in local exchange carriers’ (“LEC”) current access rates and isolating that amount in an explicit interim charge that will be fully replaced with support from the new USF. The proposed and draft rules do not, however, accomplish this objective. Rather, they would create new implicit subsidies and/or unlawfully deprive local exchange carriers of a realistic opportunity to recover their reasonable actual costs. Aside from the objective of removing implicit subsidies from access charges, the Commission might use this docket to develop guidelines for an economic and market based rate structure. The proposed and draft rules fail to meet this objective, as well, however. Rather, they would establish rates elements that are not properly cost based and that do not replace implicit universal service subsidies with explicit support on a sufficient and competitively neutral basis. In any event, the proposed and draft rules are also deficient because they do not contain definitions of critical words and phrases. Finally, the proposed codification of a formula to drive pricing calculations is ill-advised. In general, regulators should not attempt to set rates by applying formulas through the rulemaking process . This is especially the case when the proposed rule does not comprehensively address the subject carriers’ total rate design. Such piecemeal, formulaic ratemaking will invariably cause or perpetuate disjointed rate designs and likely violate the commission’s obligation to set rates that provide carriers a real opportunity to recover their costs. GTE recommends that the Commission not proceed to publish the proposed or draft rule in a CR102 notice. Rather, after the currently noticed comments are received, and after the Commission clarifies the scopes of and relationship between this docket and UT-980311, parties should be given the opportunity to submit their own drafts of a focused access charge reform rule. In their filed comments, some other parties seek to distract the Commission from the reform objectives required by the Telecommunications Act of 1996 and good, farsighted public policy. These parties would rather avoid or delay bearing a fair share of universal service support costs, obtain access rate reductions for themselves and financially damage their competitors. These positions must and should be discounted, and focus maintained on the legitimate purposes of this and the related universal service fund proceedings. I. INTRODUCTION TO COMMENTS ON PROPOSED RULES In its February 13, 1998, comments, GTE agreed with the Commission’s premise that explicit and sufficient universal service funding must precede access charge reform. In other words, it is the replacement of implicit subsidies with explicit support that will allow material changes to be made to the level of access charges in Washington. GTE further stated in its March 30, 1998 comments in UT-980311 that access reform must be closely linked to universal service support reform. As such, the transfer of all implicit subsidies cannot be accomplished in a vacuum; it is inextricably intertwined with the creation of a permanent, sufficient and competitively neutral universal service fund (“USF”). Given these linkages, the preferred approach to meaningful access reform is to carefully integrate it with the development of the USF. GTE Northwest Comments, UT-980311, March 30, 1998. II. ACCESS CHARGE REFORM A. GTE NORTHWEST’S PROPOSAL As stated in its previous comments, GTE proposes that access charges be reduced to a level based on direct cost plus an allocation of common costs, consistent with overall market conditions and recovery of total actual costs. The access revenue reductions made to remove implicit subsidies must be recovered from a combination of a targeted end user charge and a permanent, sufficient and competitively neutral universal service funding mechanism. GTE also supports some possible structural reform of the remaining access charge rate elements. GTE Northwest Comments, January 13, 1998, pp. 6, 8. B. COMMENTS ON STAFF’S MARCH 13 REVISED ACCESS CHARGE REFORM PROPOSAL The Staff’s March 13 revised access charge reform proposal is repeated below, for ease of reference (with emphasis added): (1) Terminating access charge(s) should be priced at total service long-run incremental cost (TSLRIC), and no greater than local interconnection termination charge(s). (2) Explicit high-cost support should be collected, and, in the interim (until a competitively neutral funding mechanism is developed), as an additional rate element on terminating access charge traffic. (3) Any reduction in revenues resulting from implementation of items (1) and (2) above can be offset by increasing originating access charges or other rates as the Commission may approve. Preliminarily, the proposal needs to specify those carriers to which it applies. This important element is missing from the proposal as set forth in the March 13, 1998 Notice. 1. COMMENTS ON PART (1) OF THE REVISED PROPOSAL The critical term “total service long-run incremental cost (TSLRIC)” must be fully defined in the rule. As GTE has stated previously, TSLRIC -- as GTE understands it -- can be legitimately utilized in rate setting. To be a reasonable element of regulatory price setting, however, TSLRIC must, for example, include realistic views of prospective technology, of depreciation rates for such technology, and of market required rates of return. Beyond the absence of this crucial definition, Part 1 is deficient because it does not also call for terminating access charges to recover a reasonable share of joint and common costs. The Staff appears to have recognized this deficiency in the draft WAC 480-120-000, which GTE discusses below. In addition, the rates set must provide the carrier a real opportunity to recover its reasonable actual costs. The proposal does not clearly specify how it would meet this legal obligation, should the TSLRIC methodology adopted by the Commission produce insufficient terminating access rates. GTE supports the objective of ultimately attaining consistency among the pricing of all interconnection rates, both long distance interconnection rates (i.e., access charges) and local interconnection rates. The proposal would, however, use a carrier’s “local interconnection termination charge(s)” in a vacuum. The rule provides no assurance that current local interconnection rates are set at a level which is appropriate for all interconnection termination functions and services. The Staff has modified its approach to this point somewhat in the draft WAC, and GTE discusses that proposal below. Finally, terminating access should not be singled out for access pricing reform. Originating access charges should be reformed on the same basis, as the underlying costs for the functionalities are virtually the same. As GTE stated in its February 13, 1998 comments (pages 5, 7), given the assumption that there is a sufficient USF and that it is used to recover implicit subsidies, maintaining a higher originating access rate would be both inefficient, in a cost sense, and ineffective, in that it would merely encourage uneconomic bypass. To reduce only terminating access charges would be arbitrary and not economically based. Finally, because originating and terminating access are essentially the same, reducing the terminating rates alone would retain the implicit subsidy in the originating elements. 2. COMMENTS ON PART (2) OF THE REVISED PROPOSAL Again, terminating access charges should not be the sole vehicle for the implementation of a universal service charge. This would be uneconomic and harmful, as it would force recovery of subsidies from one set of customers versus all customers. It would also be inconsistent with the requirement of the Telecommunications Act of 1996 (“the Act”) to remove implicit subsidies and make them explicit. The net effect of the proposal would be to merely burden the state’s long distance carriers and heavy users of the state’s toll networks (namely its small and large businesses), and the uneconomic flow of dollars from high usage toll customers to support universal service would continue. While GTE disagrees with the proposal’s specific interim high-cost support charge, the Company does support the Staff’s recognition that interim universal service support is needed while the Commission develops and implements a permanent, sufficient, explicit USF in docket UT-980311. GTE’s interim surcharge proposal, which it has described in previous comments, GTE Northwest Comments, November 21, 1997, pp. 17-21. is preferable, but an appropriate explicit access rate element could be useful as a temporary measure. The proposal is deficient, however, in that it does not provide a methodology for quantifying the proposed USF rate element. GTE assumes that the element would recover the implicit subsidies currently embedded in access charges. The rule should make this point clear. The Commission should calculate this amount as described in GTE’s prior comments. GTE Northwest Comments, January 13, 1998, pp. 5-6. 3. COMMENTS ON PART (3) OF THE REVISED PROPOSAL Part 3 is vague as to the nature of the Commission approval process that would apply to rate changes made to offset revenue reductions caused by implementation of Parts (1) and (2) of the proposal. While GTE disagrees with the notion that originating access rate increases should be used, as discussed below, it could conceptually agree with the rule providing for revenue neutral changes within the access rate structure, in conjunction with the removal of implicit subsidies. As noted in its prior comments, an access charge rulemaking is not a proper vehicle for making revenue changes, either up or down. Id., p. 3. In other words, if a carrier believes its overall earnings are too low, its remedy is to seek a revenue increase in a tariff filing outside of a rulemaking compliance filing. If the Commission believes a carrier’s overall earnings are too high, its remedy is to bring a complaint against the company. GTE appreciates that while the proposal suggests increasing originating access charges, it does not mandate it, allowing the companies to propose other rate changes. As noted above, the underlying costs of terminating and originating access are essentially the same, so it would be uneconomic to force unbalanced increases in the originating rate. C. COMMENTS ON DRAFT WAC 480-120-000-ACCESS CHARGES For ease of reference, the draft of WAC 480-120-000 is repeated below (with emphasis added): (1) Except for any universal service rate allowed pursuant to subsection (2) of this section, the rate charged by a local exchange company for terminating access shall not exceed the lowest rate charged by the local exchange company for the comparable local interconnection service, such as end office switching or tandem switching. If a local exchange company does not provide local interconnection service, the rate charged for terminating access shall not exceed the actual cost of the terminating access service being provided, which shall be determined based on the total service long-run incremental cost of terminating access service plus a reasonable contribution to common or overhead costs. (2) If a local exchange company is authorized by the Commission to recover costs for support of universal access to basic telecommunications service through access charges, it shall recover such costs as an additional, explicit universal service rate element applied to terminating access service. (3) “Access charge” means a rate charged by a local exchange carrier to an interexchange carrier for the origination, transport, or termination of a call to or from a customer of the local exchange carrier. Such origination, transport, and termination may be accomplished either through switched access service or through special or dedicated access service. 1. COMMENTS ON PART (1) OF DRAFT WAC 480-120-000 As discussed above with regard to the March 13 proposal, critical words and phrases need to be defined, including “total service long-run incremental cost” and “common or overhead costs.” To avoid unnecessary confusion, the term “actual cost” should not be used as a synonym for TSLRIC-plus-common costs. “Actual cost” should be used only in its literal sense -- to denote costs actually incurred by a given carrier to provide service -- "what we all understand ‘cost’ to mean, i.e., the amount actually paid for something." The full quote is "Congress meant what we all understand ‘cost’ to mean, i.e., the amount actually paid for something." It is from the Brief of Amici Curiae submitted by the Hon. John D. Dingell, Hon. W.J. Tauzin, Hon. R. Boucher, Hon. D. Hastert on Nov. 15, 1996 (p. 17) to the United States Eighth Circuit Court of Appeals in Iowa Utilities Board v. Federal Communications Comm., concerning the Telecommunications Act of 1996./ GTE is willing to provide a proposed definition for “actual cost” should the Commission determine to retain that term in any rule adopted in this proceeding. Without getting into the details of definitions at this time, GTE agrees that rates need to be set to cover both direct (e.g., TSLRIC) and common costs. In this regard, the draft rule is an improvement over the March 13 proposal. When defining “TSLRIC” and “common costs” in any access reform rule, the Commission will need to clarify the role of loop costs. As GTE discussed in its prior comments, GTE Northwest Comments, January 13, 1998, pp. 10-14. for economic and public policy reasons, loops should not be considered either a direct or common cost of carrier access service. Among other reasons, doing so would only skirt the real issue of properly assigning loop costs to those users who create or cause the cost. Costs should be attributed to the service that causes the cost to be incurred, not to every other service that possibly makes use of the cost-causing service. While toll service (and, necessarily, access service) uses loops in the sense that toll traffic passes over loops, toll does not cause loop costs to be incurred. Loop costs are caused -- or created -- solely because customers order local service. Local service customers may never make any toll calls, but that would not cause some portion of loop costs that might be arbitratily “allocated” to toll service to vanish. In fact, if indeed loop allocation is part of the Staff’s plan, which is not entirely clear at this point, then access reform, and the whole notion of removing implicit subsidies from access rates, becomes a very diluted issue. The draft’s use of “the lowest rate charged by the LEC for the comparable local interconnection service” as a benchmark for switched access rates is, at this time, inappropriate for several reasons. The Commission cannot assume, without evidence, that every carrier’s lowest current local interconnection rate is cost justified or otherwise appropriate for general use. Moreover, current local interconnection rates may have been arbitrated or negotiated within the context of a complete local interconnection package. Simply focusing on one price element within the package is both inappropriate and misguided -- a “pick and choose” approach. In addition, GTE believes that local termination charges, developed within the framework of local competition, were never intended to apply more broadly to long distance interconnection. Although GTE believes that over the longer term local and long distance interconnection rates should be equivalent, defaulting to the lowest current local interconnection rate would be highly misguided at this time. Rather, this convergence of interconnection rates must be accomplished in the context of an overall, cost-based rate rebalancing on a carrier-by-carrier basis. Assuming that “TSLRIC” and “common or overhead costs” are properly defined and calculated, and that carriers are provided an opportunity to recover all their reasonable actual costs, GTE concurs with the Staff’s recommendation for those LECs not yet providing local interconnection service that rates shall be “based on the total service long-run incremental cost of terminating access service plus a reasonable contribution to common or overhead costs”. However, GTE believes that such a price level should not be limited to just some LECs, but, ideally, all LECs should price their termination services in this manner. 2. COMMENTS ON PART (2) OF DRAFT WAC 480-120-000 The meaning of the phrase “authorized by the Commission to recover costs for support of universal access” is unclear and should be defined or explained in any rule. In addition, any rule should specify that an “explicit universal service rate element” could be temporarily placed on terminating access charges, pending implementation of a permanent, sufficient, and competitively neutral universal service support mechanism. Any rule should also specify that adding a universal service rate element should not result in the LEC’s aggregate level of access charges exceeding the current level of access charge revenue. Any LEC finding itself in a situation where addition of an interim universal service rate element would increase aggregate access revenues should recover the overage through a temporary universal service fund surcharge applied to all end-user access lines, instead of placing any additional revenue burden on the long distance carriers. When making any rule more specific on an interim universal service rate element, calculation of the amount of universal service support should not be presumptively limited to so-called “high cost” areas. The charges should be structured such that all implicit subsidies are identified and made explicit. 3. COMMENTS ON PART (3) OF DRAFT WAC 480-120-000 The inclusion of a definition of “access charge” is appropriate. The intent and effect of including a reference to “special or dedicated access service” is, however, unclear. For example, some type of “terminating access-like charge” for special access services may be difficult to calculate and even more difficult to administer. GTE believes that special access services should be exempt from any temporary universal service charge to prevent exceptional levels of confusion among its special access customers. While GTE strongly supports obtaining universal service support on an equal basis across services, practicalities may well militate against attempting to surcharge special access rates on a short interim basis. If that is what is intended by the Staff, it should be further discussed among the parties. III. CONCLUDING COMMENTS ON ACCESS REFORM PROPOSALS While these Comments necessarily focus on specific rulemaking proposals, it is a good idea to keep in mind the overall import of the access reform issue in Washington. Genuine and timely access reform is necessary to achieve the Act’s objective of opening up local markets without the taint of rate structures burdened with implicit subsidies and of maintaining universal service going forward through the use of permanent, sufficient, competitively neutral, explicit subsidies. In addition, attainment of Congress’s objectives requires that all rates be restructured consistent with underlying actual direct and common costs, with input from analyses of forward-looking cost trends. Without such a comprehensive and coordinated approach, the Act’s goals of addressing the “Trilogy” of access reform, universal service, and local competition will not be achieved, and their benefits would not become available to Washington’s consumers for some time. The proposed and draft rules do not meet these objectives. They contain specific deficiencies, as discussed above, but more basically, they are not part of the required comprehensive approach. While, as GTE has noted, some useful improvements in the access charge rate structure may be implemented in the short run, major changes in rate levels can only be made with implementation of a permanent, sufficient, competitively neutral, explicit USF. IV. INTRODUCTION TO RESPONSE TO OTHER PARTIES’ COMMENTS In their previously submitted comments, some parties have advanced positions contrary to regulatory policy and legal requirements, and some have mischaracterized and unjustifiably criticized GTE’s positions and proposals. GTE briefly responds to several such comments. V. IMPLICIT SUBSIDIES WITHIN ACCESS RATES MCI is incorrect in suggesting that there are no implicit subsidies in current access charge rate structures and that U S WEST and GTE should receive no USF support. Comments of MCI, February 13, 1998, pp. 1, 4. This astounding position is based on logical, factual and legal errors. First, MCI transparently attempts to use the rubric of TSLRIC and the erroneously low results of its Hatfield model to simply take money out of the local exchange carriers’ pockets. Totally ignoring the fact that LECs’ current revenues at their authorized rates represent actual costs reasonably incurred, MCI attempts to peddle the fiction that the Commission may lawfully slash access rates and revenues with no concern for the real financial impact on the LECs. In addition, by claiming that LECs’ USF needs should be assessed only at a statewide level, MCI ignores the plain results of its own cost model and the Act’s requirements to make implicit subsidies explicit. MCI seeks to avoid its responsibility, under the Act, for sharing the burden of financially supporting universal service, by circularly arguing that the Commission can ignore the Act’ s mandate until “competition is robust and implicit subsidies have been identified and removed.” MCI’s assertions should be wholly disregarded. In its November 21, 1997 Comments (pp. 5-9), GTE provided the Commission an illustrative estimate of the implicit subsidies embedded in current rates using 1995 revenue data. Below is a similar table updated with 1996 information. Again using, for illustrative purposes, the interim unbundled network element rates ordered by this Commission (which GTE disputes as an accurate reflection of its forward-looking costs), Table 1 compares revenues and costs and illustrates the implicit support for certain classes of services provided by GTE in Washington. Table 1 1996 Implicit Support Characteristics Other subsidies exist that are not shown in Table 1. For example, multi-line business services are priced above cost in many urban locations. Additionally, on a historical basis, yellow page advertising revenues have provided subsidies, as well as National Exchange Carrier Association (“NECA”) revenues where applicable. Ordered Rates Service 1996 Revenue ($’000) (a) Economic Costs @ Interim Rates ($’000) (b) Support Flow ($’000) ( c) = (a - b) % Contribution (d) = ((a-b)/b) Vertical In the AT&T arbitration decision, the Commission did not order rates for vertical features of the switch. The costs associated with vertical services, column (b), reflect retailing costs only. Nevertheless, based on direct cost studies GTE has prepared in the past, significant implicit support is provided by the rates for vertical services. $14,837 $1,918 $12,919 674% Toll $80,125 $13,775 $66,350 482% ST Access $57,432 $5,190 $52,241 1006% IS Access Excludes end user common line (“EUCL”) charges $90,052 $9,710 $80,342 827% As this table demonstrates, access charges as well as toll and vertical services revenues contain significant implicit subsidies, which should be made explicit through a new USF. VI. REVENUE NEUTRALITY Several parties routinely use the phrase “revenue neutrality” in an unjustifiably pejorative sense. In particular, the comments of AT&T Comments of AT&T, February 13, 1998, pp. 4, 5, 6, 10., MCI Comments of MCI, February 13, 1998, pp. 2, 4., TRACER Comments of TRACER, February 13, 1998, p. 10., and Public Counsel Comments of Public Counsel, February 13, 1998, p. 12. have misrepresented GTE's position on the removal of the implicit subsidies from access charges. To date, the Commission has regulated LECs’ rates and charges to promote universal service via a disparate rate structure while allowing the companies an aggregate revenue stream to recover all of their reasonable actual costs. This was achieved by setting rates for access, toll and vertical services, and some business services above their cost, so that local service could be priced at an “affordable” level. Urban-rural rate averaging was also used for this purpose. These implicit support mechanisms cannot be maintained in a competitive environment, and the Act requires their replacement. The FCC acknowledged this fact in its First Report and Order in the Access Charge Reform Docket, released May 16, 1997. The FCC stated, at paragraph 32, that ... [A]s competition develops, incumbent LECs may be forced to lower their access charges or lose market share, in either case jeopardizing the source of revenue that, in the past, has permitted the incumbent LEC to offer service to other customers, particularly those in high-cost areas, at below-cost prices. (Emphasis added) In order to ensure universal service for all citizens of Washington and to reform access charges, all implicit subsidies contained in the services mentioned above must be removed and an explicit support mechanism must be put in their place. The replacement of implicit subsidies must be made concurrent with the reduction in price of any of GTE’s services priced above cost (including access charges). In addition, the explicit support will be portable among eligible telecommunication carriers and not, therefore, a guaranteed revenue stream for the ILECs. An appropriate sufficient explicit support mechanism will spur competition in high cost areas. In this process of transitioning from the traditional rate structures to new cost-based pricing and a new explicit USF, neither the Commission nor the LECs are relieved of their obligations to provide a realistic opportunity for the companies’ actual costs to be recovered. The Commission bears this obligation, as it always has, under the state and federal constitutions and statutes, and the Act continues this duty. The LECs have this obligation under law and the precepts of good business practice for the benefit of their shareholders and creditors. Certainly the Commission maintains the ability to review regulated companies’ earnings from time to time. From a procedural perspective, it is critical to acknowledge that a rulemaking process is not the proper forum for the Commission attempt to reduce LEC revenues or earnings. Such actions must be taken in adjudicatory proceedings (e.g., a complaint instituted by the Commission; see footnote 8 above). Thus, it is legally required and logically appropriate for rules to have a revenue neutral effect on all subject carriers, and for any legitimate earnings concerns to be addressed on a company-specific basis in separate proceedings. AT&T claimed that the concept of revenue neutrality was inconsistent with the Act, citing a Kansas Court of Appeals decision. Comments of AT&T, February 13, 1998, p. 6. That decision has been reversed. On March 13, 1998, the Kansas Supreme Court stated, “we hold the revenue neutral concept is not prohibited by or contrary to the Federal Act.” Citizen’s Utility Ratepayers Board v. Corporation Commission, etc., 1998 Kan. LEXIS 71, *36 (1998). VII. STATEWIDE AVERAGES ARE INAPPROPRIATE As noted above, in no event should the Commission base universal service support funding on statewide averages, as AT&T Comments of AT&T, February 13, 1998, p. 8., MCI Comments of MCI, February 13, 1998, p. 3., and TRACER Comments of TRACER, February 13, 1998, p. 6. suggest. Such an approach would fail to identify the current implicit support and replace it with sufficient explicit support. It would instead create self-serving arbitrage opportunities for AT&T, MCI and other competitive carriers to target high-margin customers in low-cost areas, and it would place universal service in jeopardy. Development of facilities-based competition in high-cost a