BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of Petition for Investigation ) Into the Cost of Universal Service and to ) Docket UT-970325 Reform Intrastate Carrier Access Charges ) ) Reply Comments of ) Sprint Communications ) Company L.P. on Behalf of ____________________________________) Sprint Corporation REPLY COMMENTS OF SPRINT COMMUNICATIONS COMPANY L.P. ON BEHALF OF SPRINT CORPORATION Pursuant to the “Notice of Opportunity to File Reply Comments and Opportunity to Respond to Commission Staff’s Revised Proposal” issued by the Washington Utilities and Transportation Commission (“Commission”) on March 13, 1998 in the referenced docket, Sprint Communications Company L.P. on behalf of Sprint Corporation (“Sprint”) respectfully submits these reply comments in this proceeding. Sprint appreciates the opportunity to comment on the plans set forth by the other parties in this docket. After a review of all the proposals for access reform, Sprint continues to believe that the best and most workable option for access reform in Washington is to reduce the level of access charges by gradually moving access rates and local service rates towards cost. Sprint’s proposal is a variation of option C in the Commission’s “Notice of Opportunity to File Comments” dated January 21, 1998: Reduce the access charges to offset universal service funding, shift part of or all remaining access charges to local rates. In order to move more non-traffic sensitive (“NTS”) cost recovery to a per-line mechanism, Sprint has proposed the implementation of a primary interexchange carrier charge (“PICC”). Sprint further believes that access reform must be considered in the context of the universal service proceeding. However, in the interim, until full access reform can be 1 implemented, steps towards access reform can be implemented to align the structure of access charges with the manner in which the local exchange carrier (“LEC”) incurs the cost of providing access. Charges based on NTS costs should be flat-rated. Only those costs of providing access that vary based on usage should be assessed through minute-of-use (“MOU”) rates. Sprint’s proposal transitions the recovery of NTS costs from an MOU-based method to a per-line method, in line with cost causation. Reductions in access rates are offset by increases to local rates and by the implementation of PICCs. As noted in Sprint’s initial comments, Washington’s intrastate toll rates rank among the highest in the nation, while local rates in Washington rank among the lowest. In these respects, Washington is similar to Maine. Since the initial comments were filed in this proceeding, the Maine Public Utilities Commission has approved a stipulation similar to Sprint’s proposal for Washington. The plan approved by the Maine Commission will reduce Bell Atlantic’s access levels to 25% of the existing per MOU access rate by May 30, 1999. The reduction in access revenues will be offset by increases to local service rates for both business and residential customers. The Maine Commission approved an immediate increase of 50 cents for all business and residential local service customers with an additional increase of $1 on May 30, 1998 and an additional $2 on May 30, 1999. Overall, local service rates will raise a total of $3.50 over a period of 15 months. This supports Sprint’s position that a $3 increase in local service rates over three years will not harm universal service goals in Washington, especially when the increase in local rates is offset by toll reductions to the consumer. OTHER PROPOSED OPTIONS Sprint has reviewed each of the possible alternatives put forth by staff, and is concerned that some of the proposals may have unforeseen consequences. Option A: Reduce terminating access charges by the amount of funding provided through the universal service mechanism. Although option A would have the benefit of assuring that Universal Service support would not be eroded by bypass, it also has the effect of continuing to subsidize below-cost local service rates with access charges. This approach does not address the issue of assuring that local service rates cover the cost of providing the service. As a result, local competition will continue to be slow to develop, and indeed may not develop in rural, high cost areas where rates may be significantly below cost. Option B: Reduce access charges to offset universal service funding, and shift any terminating access charges in excess of the actual cost of terminating access, to originating elements. The originating elements could be a combination of per-minute and per-line charges. Staff option B may likewise have unintended and undesirable consequences, particularly for rural LECs in Washington. Using existing rates, and assuming that TSLRIC for interconnection in rural LECs is 1 cent, the rate structure under this proposal would cause originating access rates of well over 10 cents per originating MOU for some rural LECs. Staff reasons that a rate design that loads up originating access will subject LECs to competitive pressure, and thus the market will force originating access toward cost without regulators ordering reductions. More likely, this rate design will promote service bypass, or arbitrage, since the access carrier, or customer would likely order dedicated (special access) facilities to avoid the high originating switched access charges. If a rural LEC were to lose only a few of its largest customer to bypass via special access, this option could lead to serious revenue shortfall for the LEC with no change in costs. The consequence would be higher local rates and/or higher switched access rates as minutes disappear from the LEC network. Facility-based competition is unlikely to occur as a result of this rate scheme. A new entrant is unlikely to invest the significant capital that would be required to serve customers in rural areas merely for the switched access revenue. Potential new entrants would realize that the originating rates were unsustainable, and easily bypassed through special access. Option D: Reduce access charges to offset universal service funding, and order an additional decrease in access charges with no offsetting local rate increase. Option D calls for a mandated reduction in LEC revenue. Sprint is concerned that this approach would necessarily entail Rate cases, and would delay the access reductions that the Commission, the staff and virtually all the commenting parties agree are necessary. As noted by the staff, appeals could be expected, further delaying the access reductions. Staff’s Revised Access Charge Reform Proposal: Price terminating access at total service long-run incremental cost (“TSLRIC”), high cost support from a new terminating rate element, offset reductions by increasing originating access. Sprint also has reviewed the staff’s revised access charge reform proposal outlined in the March 13, 1998 Notice. Staff’s proposal would price terminating access at TSLRIC, high cost support from a new terminating rate element, offset reductions by increasing originating access. This proposal does nothing to remove subsidy from MOU rates. Sprint views the elimination of NTS subsidies from MOU rates as a critical and necessary part of reforming the existing access rates and structure. OTHER PARTIES’ COMMENTS WorldCom proposes that incumbent LECs (“ILECs”) bill end users for access charges directly. The negative customer impacts of this proposal outweigh the benefits. The customer would essentially be billed twice for each call. If this approach were adopted, it would be imperative to assure that the customer’ s ‘toll’ and ‘access’ charges for each call be billed in the same month. This approach would require significant customer notification and educational effort regarding the new structure. The Washington Independent Telephone Association (“WITA”) and TRACER agree with Sprint that bifurcated approach with respect to rural and non-rural LECs may be necessary. Sprint continues to support this approach, and believes that the proposal submitted in its initial comments provides the necessary differentiation between the rural and non-rural providers. WITA proposes that the Commission order any access reductions to be passed along to customers, “at the very least, across the board, and perhaps should be targeted as general decreases to the MTS rate – that is, a rate used by most residential customers and small businesses.” Sprint has previously committed, and again reiterates its pledge to reduce toll rates by the amount received in access reductions in this docket, as Sprint has done in the past. However, as Sprint and other parties, including WITA, have advocated with the access reform proposal, the Commission must beware of “one size fits all” regulation. WITA’s contentions regarding message toll service (“MTS”) rates do not apply to Sprint’ s customers in Washington. Both interexchange carriers (“IXCs”) and LECs offer a variety of toll discount plans, and it is not at all clear that “most residential customers and small businesses” pay MTS rates for intrastate toll. What WITA proposes is to deny competitive toll providers of pricing flexibility, and in doing so, ignores the fact that pricing is an integral part of marketing strategy and a firm’s ability to satisfy customer needs. Targeting all access reductions to basic MTS rate reductions is a futile exercise if the service and its price mismatch the needs and values of toll customers. Price reductions may be better targeted to other services to meet customer needs or to achieve greater utilization of the network. Sprint can see no compelling reason why it should be deprived the flexibility to target price reductions to the best of its ability just as any competitive firm would, as long as the revenue reduction equates to the realized access savings. WITA also comments on the application of the federal PICC charge to customers of rural telephone companies. Sprint is not billing interstate PICC charges to end users served by non-price cap LECs. WITA also suggests that if the Commission approves the implementation of PICC charges to maintain access support of NTS costs, the toll providers must be prohibited from passing along PICC charges to end users. Sprint disagrees. The implementation of a PICC charge will fundamentally change the manner in which toll providers support below-cost local service. Just as it is uneconomic to continue to assess the fixed costs of the loop on a usage sensitive basis, it is likewise uneconomic for IXCs to be forced to recover these fixed costs on a usage basis. Attempting to do so would force Sprint’s higher volume customers to cross-subsidize the fixed costs of serving low-usage customers. Failure to charge separately for these fixed line costs would also give a clear competitive advantage to carriers that offer “dial-around” calling and who do not have to pay the PICC. The implementation of a PICC charge, combined with modest local service rate increases is a step in the right direction towards the recovery of NTS costs via per-line billing. Sprint views the PICC as a compromise in that the toll providers would be required to continue to support below-cost local service, but the support would grow at the rate of line growth as opposed to the rate of MOU growth. Clearly, if the PICC were not implemented, and all access reductions were offset with local rate increases alone, intrastate toll providers would receive greater reductions in overall cost, and toll rates would fall at a much faster level. Some toll users may well prefer a two-part rate structure which includes a per-line fee, and allows their toll provider to pass along lower per-minute rates. Other users may prefer a higher per-minute toll rate with no flat monthly rate. Consumers would be free to choose the plan that best met their individual needs. The Commission should allow the market to determine how costs are recovered from end users. The competitive market will reflect the preferences of the consumer as to cost recovery. CONCLUSION For the reasons stated above, Sprint respectfully requests that the Commission adopt Sprint’s proposal for access charge reform as set forth in this proceeding. Dated: April 7, 1998, at San Mateo, California. Respectfully submitted, SPRINT COMMUNICATIONS COMPANY L.P. ON BEHALF OF SPRINT CORPORATION ____________________________________ Richard L. Goldberg Regulatory Attorney 1850 Gateway Boulevard, 7th Floor San Mateo, CA 94404-2467 (650) 513-2736 (Phone) (650) 513-2737 (Fax)