April 8, 1998 SENT BY ELECTRONIC MAIL AND ORIGINAL SENT VIA AIRBORNE EXPRESS Washington Utilities and Transportation Commission Steve McClellan, Executive Secretary 1300 S. Evergreen Park Drive, SW Olympia, WA 98504 RE: Docket No. UT-970325 Dear Mr. McClellan: MCI Telecommunications Corporation (MCI) is sending these reply comments for filing in the above referenced docket through electronic mail. MCI is also sending overnight, for Thursday delivery, the original and nineteen copies of these reply comments via Airborne Express. If you have further questions concerning this matter, please contact me at 303.390.6106. Sincerely, Rogelio Peña Senior Attorney Enclosures BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Re: Petition for Investigation into the Cost of ) Universal Service and to Reform Intrastate ) Docket No. UT-970325 Carrier Access Charges ) MCI Telecommunications Corporation (MCI), pursuant to the Washington Utilities and Transportation Commission’s (Commission or WUTC) Notice dated March 13, 1998, hereby files Reply Comments and responds to Commission Staff’s Revised Proposal. Reply Comments MCI agrees with U S WEST Communications (USW) in its arguments that all existing subsidies — implicit and explicit — must be addressed. If a proper universal service subsidy (USS) is established through a forward-looking economic costing methodology, and the USS represents the difference between the benchmark revenues and forward-looking economic cost (FLEC), there should be no need for subsidies from any services, whether it be access charges, the incumbent local exchange carriers’ (ILEC) toll services or vertical services. However, USW’s complaint that its role as designated carrier for intraLATA toll must be terminated is misplaced in connection with USS in this proceeding. Currently USW has a monopoly on dial-1 (1+) intraLATA equal access. Until this monopoly is eliminated, USW and only USW, can be the designated carrier for intraLATA toll. Allowing USW to pick and choose which areas in which it provides intraLATA toll services while retaining its 1+ intraLATA toll equal access monopoly would be unfair and anti-competitive. USW could, conceivably retain its 1+ intraLATA equal access monopoly in high density, high traffic areas, while opting out of its designated toll carrier responsibility in low density, low traffic areas. While other providers might have the opportunity to provide the toll service on a 1+ basis in low density areas they would still not have the advantage of 1+ equal access in the same high density areas as USW. Until there is 1+ intraLATA equal access throughout the state, USW must retain its designation as carrier of last resort for intraLATA toll. Indeed, no carrier should be allowed to abandon a service territory without prior commission approval. Additionally, as stated above, USW’s argument against its role as designated carrier for intraLATA toll does not address the issue of USS and is misplaced and inappropriate in this proceeding. As previously stated, MCI believes that with the implementation of a proper USS, there should be no implicit local subsidies in any services, including toll service. USW claims that it needs to be allowed to reduce its toll rates because the greatest source of local subsidization comes from toll rates and business rates. USW is forgetting the Commission’s proceeding UT-950200 which found, as cited by the Public Counsel, that “residential service covers its own costs and provides a reasonable contribution to the overhaed of the Company.” (Fifteenth Supplemental Order, Docket No. UT-950200, April 11, 1996, at 100.) While the Commission may want to address reductions in the toll rates of ILEC to benefit consumers and guard against over-earnings by USW, it must be remembered that, as stated above, USW with its 1+ intraLATA equal access monopoly has a competitive advantage over interexchange carriers such MCI. Because of this anti-competitive situation and the control USW still holds over the bottleneck facilities, essential services and the intraLATA toll market in Washington, regulatory restraints cannot be loosened. The toll rates that the USW charges to consumers must impute the charges that an interexchange carrier, such as MCI, must pay to USW for access required to provides its toll services. The rate charged for USW’s toll services must be priced to cover access charges plus the other incremental costs of the service to prevent USW from subjecting its competitors to a price squeeze. Price squeezes occur when a firm with market power sells essential inputs in a wholesale market and also competes with the purchasers of such inputs in the retail market. The squeeze occurs when the firm which provides the essential inputs does not include, in its retail prices, the amount it charges competitors for essential inputs, as well as other service-specific costs. Unless such costs are required to be incorporated into such potentially competitive retail services, MCI and other competitors will find it extremely difficult, if not impossible, to provide competitive alternatives to USW’s toll services. As it is, MCI has the disadvantage of trying to compete against USW’s 1+ monopoly. To remove necessary regulatory restraints and give USW an anti-competitive advantage in setting its toll rates would severely damage the intrastate toll market and dramatically reduce the competitive offerings enjoyed by Washington consumers. USW also argues in its comments that it should have the latitude to apply reductions equally to originating and terminating access. Contrary to USW’s proposal, the Commission Staff is on the right track by suggesting that terminating access be priced at economic cost. MCI would suggest that both terminating and originating access be priced at economic cost. Terminating access is the service that is most difficult to bypass. Not surprisingly, carriers such as USW want the ability to reduce originating access — which can be bypassed with alternative facilities in certain locations, while keeping terminating access high. This is what you would expect from profit-maximizing firm. MCI would note, however, that merely shifting revenues from one rate element to another is not “access reform.” The only way to fix the subsidy problem in access charges is to eliminate the subsidies. If there is a need for a universal service subsidy, it should be calculated as noted above and made explicit. USW also addresses the issue of rate rebalancing. As MCI stated in its February 13 comments, with the attempted introduction of competition, the issue of revenue neutrality or rate rebalancing is inappropriate. The Commission should not allow the ILECs to automatically replace lost revenues from access charges. To guarantee the LECs their revenue stream would eliminate several of the most powerful incentives associated with competitive entry -- incentives to attract and keep consumers, incentives to innovate and develop new services, incentives to control and reduce costs, incentives to understand and respond to consumer needs, etc. The Commission should not automatically provide any mechanism to replace revenues. The Commission should not assume that the non-rural LECs — USW or GTE — need to be made whole with regard to any revenue reductions that may result from pricing access charges at FLEC. The non-rural ILECs should be required to demonstrate whether they are incapable of recovering their costs, including a reasonable return on their investment. As stated in footnote 12 of page 9 of the Access Report, the LECs would have to demonstrate actual competitive losses. However, a demonstration of competitive losses is not sufficient for a replacement of revenues; there should also be a showing of financial need. This shell game of shifting and moving revenues from one service to another service, based merely on the prospect of competitive losses, is usually always for the benefit of the profits to shareholders, to the detriment of rate payers, and cannot be allowed to continue. Finally, USW proposes that access charges be set between a price floor and ceiling, and carriers be allowed to set access prices between the floor and ceiling based on such things as market conditions and competition. USW claims that setting the price floor at total service long run incremental costs will prevent predatory pricing. MCI would agree with this suggestion if the services were toll services and there were 1+ intraLATA equal access. However, the service is access, not toll. USW and the other ILECs are virtually the only providers of access. While there may be small pockets of competition from other providers, industry estimates show that CLECs have captured less than 1% of the local market. Such a small market share does not begin to constitute competition or justify pricing flexibility in access charges. As the Public Counsel stated in its comments, “when the ILECs speak of pricing at ‘economic costs’ [or market conditions] what they generally have in mind is the right to lower their prices where they face competition, and to raise them in non-competitive markets...” In all but a few areas of Washington, USW and GTE are the only game in town for MCI’s access to its toll customers. The ILEC must not be provided a stranglehold over the interexchange carriers for theses bottleneck services through flexible pricing. Staff’s Revised Access Charge Reform Proposal (1) Terminating access charge(s) should be priced at total service long-run incremental cost (TSLRIC), and no greater than local termination charge(s). MCI generally agrees with this proposal. However, if it could be shown that the TSLRIC for terminating access charges were, for some reason, higher than local termination charges, then terminating access charges should be set at its TSLRIC. However, MCI does not believe that there should be any additional elements which would cause the TSLRIC for terminating access charges to be higher than local termination. (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. While such an interim funding mechanism may be implemented at the Commission’s discretion, MCI does not believe that it will be necessary. The ILECs have not said how long it will take to implement such an additional rate element in their access charges and invoices, but MCI believes that interexchange carriers and other providers that are required to implement the universal service surcharge are capable of implementing such a change to their billing systems in the same length of time. Most telecommunications companies have very sophisticated, computerized billing systems that can be modified in an expeditious manner. Companies constantly have to make changes to their billing systems because of new, or changes in, tax rates for various government entities. Additionally, whether a company could implement the mechanism for collecting the surcharge from the end-user would not exempt it from making its contribution to the USF. Therefore, to proceed immediately to explicit end user surcharges, with sufficient notice to the provider, would act as incentive for the provider to make whatever billing changes were necessary. While an additional rate element on terminating access charge traffic would be an explicit mechanism, it would still, in essence, be a hidden subsidy. (3) Any reduction in revenues resulting from implementation of items (1) and (2) above can be offset by increasing originating access charge or other rates as the Commission may approve. As stated above in its reply comments and previously stated in its comments of February 13, revenue neutrality or automatic rate rebalancing for the purpose of alleged revenue loss is inappropriate and misplaced. First, if access charges are set at forward looking economic costs (FLEC), this methodology will allow the ILEC to earn a reasonable rate of return on its investment. Additionally, if access was previously set above costs for purposes of supposedly subsidizing local service, and the subsidy is now being replaced by the USS, there should be no loss of revenues. Originating access charges or other rates should only be increased is there is a demonstrated need. Conclusion The Commission must not relinquish regulatory restraints over the pricing the USW’s toll services or eliminate USW’s designation as intraLATA toll provider of last resort until there is effective toll competition and 1+ intraLATA equal access. Additionally, until there is competition throughout all of its Washington service territory, the ILEC cannot be given flexible pricing for access services. To do so would greatly harm consumers in areas where there is no competition. As MCI has stated in previous comments, pricing access charges at FLEC will benefit all consumers and MCI urges the Commission to move to this pricing methodology as quickly as possible. MCI again thanks the Commission for this opportunity and looks forward to giving input in whatever way necessary in the future. Respectfully submitted, MCI Telecommunications Corporation By ________________________ Rebecca J. Bennett Senior Manager 707 17th Street, Suite 3600 Denver, CO 80202 303-390-6392 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the written comments prepared by Rebecca Bennett has been sent to the following via regular postage paid United States Mail. Dated this 8th day of April, 1998 Rachel R. Gauna Mr. Ron Gayman Simon ffitch Regulatory Affairs Manager Office Of Public Counsel AT&T Communications of the Pacific North 900 4th Ave 2601 4th Ave Fl 5th Suite 2000 Seattle WA 98121-1253 Seattle WA 98164 Daniel Waggoner Susan Procter Davis, Wright, Tremaine Senior Attorney Representing AT&T Communications 1875 Lawrence 2600 Century Square Room 1575 1501 Fourth Avenue Denver CO 80202 Seattle WA 98101-1688 Larry Weathers Paralegal Davis, Wright, Tremaine 2600 Century Square 1501 Fourth Avenue Seattle WA 98101-1688 Jeffrey Goltz Assistant Attorney General WUTC Attorney General Section Representing WUTC State Mail Stop 40128 Robert F. Manifold AAG Office of the Attorney General Public Counsel 900 4th Avenue, Suite 2000 Seattle WA 98164 Clyde McIver Miller Nash Weiner Hager and Carlson 4400 Two Union Square 601 Union Street Seattle WA 98101-235