Introduction By notice dated March 13, 1998, the Washington Utilities and Transportation Commission (WUTC or Commission) issued a notice entitled “Opportunity to File Reply Comments and Opportunity to Respond to Commission Staff’s Revised Proposal.” The Washington Independent Telephone Association (WITA) appreciates the opportunity to file reply comments and to comment on Commission Staff’s Revised Proposal. In these Reply Comments, WITA begins by identifying its position on this rulemaking. WITA then responds to some of the comments filed by various parties in the first round of comments in this docket. WITA then addresses Commission Staff’s Revised Proposal. The following section of these Reply Comments revisits the Rural Competition Plan that WITA introduced in the original round of comments. WITA’s recommendations are set forth in the last section of the Comments. Recommendations WITA recommends that the Commission not adopt Staff’s Revised Proposal for the reasons that will be discussed in these Reply Comments. In its original comments, WITA recommended that the Commission establish a two-track process for this docket. The first track would be for non-rural companies, and the second track would be for those companies that are classified as rural companies under the Telecommunications Act of 1996 (the Act). WITA still makes this recommendation to the Commission, with one modification. That modification is to adopt Sprint’s proposal WITA is suggesting a modest revision of Sprint’s proposal on the handling of business rates., made in its original comments, but not to proceed to further modifications for access charges for rural companies until more is known about what the FCC intends to do in terms of access structure affecting rural companies. WITA also continues to recommend that any reduction in access charges be passed through directly and totally in toll rate reductions. I. Reply to Comments Filed in This Docket 1. The Treatment of Rural Companies Separately from Non-Rural Companies. In their comments, MCI Telecommunications Corporation (MCI) and AT&T Communications of the Pacific Northwest, Inc. (AT&T) both recognize that it is appropriate to treat rural companies differently than non-rural companies. For example, at page 3 of AT&T’s February 13, 1998 comments, AT&T recognizes it is appropriate to have a different mechanism in place for rural companies than non-rural companies. In his presentation to the Commission, Dr. Mark N. Cooper spoke on behalf of the Consumer Federation of America. He also agreed that it would be appropriate to treat rural companies separately from non-rural companies. This distinction had wide acceptance at the January 13, 1998 workshop in this docket. WITA agrees that it is appropriate to treat rural companies in a different way than non-rural companies. 2. Access reform is not a necessary precondition to local competition. Both AT&T and MCI, and others, argue that access reform is a necessary precondition to meaningful local competition. This argument is perhaps most succinctly stated in a brochure MCI made available at the February 13, 1998 workshop. That brochure is entitled “The Benefits of Local Telephone Competition.” At page 9 of the brochure, MCI offers its analysis of why access charge reform is important for local competition. MCI states as follows: Inflated access charges provide a cash flow to US WEST that is nothing more than excessive profit. These charges put competitors in a price squeeze that eventually can drive a company from the local market. So long as the incumbent LEC is allowed to overstate its costs, it can drain the profit from local service from its competitors and use the windfall to maintain and increase its own market position. MCI has stated the argument directly. It is afraid that the revenues received through access charges will be used to support other local service rates and make it difficult for local competition to exist. What MCI and the other interexchange carriers who make these types of comments do not point out is that under current rules they can use the same level of access charges as US WEST. If they have the same level of access charges, theoretically they would be in no worse position than US WEST in providing facilities for local competition. The level of access charges in this sense is not a barrier to local competition. MCI and other interexchange carriers do not want to pay any more in access charges than they have to. If you take the logic of their argument and apply it to what MCI, AT&T, and the other interexchange carriers are saying, the result is to reduce access charges so that MCI (for example) can use the differential between access rates and toll rates as MCI’s own “excessive profit” to fund MCI’s entry into local competition. There may be a good reason to modify the existing access charge structure. However, the rhetoric that access charge reform will lead to robust local competition is not a supportable rationale. On the other hand, there is some truth in the argument that revenues from access rates may be keeping local rates lower than they should be. That does not mean access rates provide “excessive profits.” It is not logically necessary to drive access rates to total service long-run incremental cost (TSLRIC) to spur local competition. A transition plan will provide a better overall approach to access restructure. 3. US WEST’s Comments. In its February 13, 1998 comments, US WEST Communications, Inc. (US WEST) argued that all companies should, at a minimum, adopt the local transport restructure defined by the FCC in its First Memorandum Opinion and Order on Reconsideration in CC Docket No. 91-213 released July 21, 1993. If the Commission is inclined to consider US WEST’s proposal, it would need to give serious consideration to the cost imposed on small companies of moving to such a structure in any Small Business Economic Impact Statement and propose alternatives to minimize that impact. See RCW 19.85.030. WITA seriously doubts that implementing a local transport structure would be worth the cost imposed on small companies in moving to that particular access proposal. WITA does not object to allowing any company that voluntarily wishes to implement such a proposed structure from doing so. 4. Sprint’s Comments. In its February 12, 1998 comments, Sprint made the following proposal: . . . each year for 3 successive years, switched access charges [would] be reduced by an amount equal to $2.00 per line per month (i.e., a $2.00 monthly access reduction in Year 1, a $4.00 monthly access reduction in Year 2, and a $6.00 monthly access reduction in Year 3). The ILECs would recover this revenue from two sources: (1) all ILECs in the state would implement a $1.00 per line per month local rate increase for all business and residential customers; and (2) each ILEC would implement a primary interexchange carrier charge (PICC) equal to $1.00 per line per month (for each business and residential line). Both the local rate and the PICC would increase to $2.00 per line per month in Year 2 and $3.00 per line per month in Year 3. The increases would be equivalent to the reductions in switched access charges. Sprint goes on to describe that US WEST and GTE Northwest Incorporated (GTE) would stop the transfer of revenues from access to local after the three-year phase-in or when US WEST and GTE intrastate switched access rates were at TELRIC in aggregate. For the smaller ILECs (rural companies), Sprint proposes the transfer would stop after three years or once the rural companies’ intrastate switched access rates are in parity with interstate access rates in aggregate. Sprint argues that this proposal accommodates the generally agreed principle that different approaches for rural and non-rural companies is appropriate. Sprint further supports this proposal by pointing out that falling long distance prices would result in dramatic increases in consumer benefit (assuming access reductions are passed along as toll reductions). A former top executive of AT&T was recently quoted as saying, “Nobody really flows through access reductions. They flow through some . . . . Nobody talks about elasticity of demand.” Telecommunications Reports, March 16, 1998 at p. 18, quoting Joseph P. Nacchio from a presentation at Telecom Investment Precursors conference. They also point out that gradual increases in local service rates would encourage CLEC entry, bringing local service choices to Washington customers. Sprint points out that this level of increase in local service rates should not affect the overall level of local service penetration. WITA agrees with Sprint’s proposal and the rationale for the proposal. However, WITA would also support having the rate rebalancing occur only on the local residential rate (which would be slightly more than $1.00 per month per line) and not increase the business rate, where those rates are not equivalent to residential rates. This would begin the process of bringing the local and business rates together. This plan benefits interexchange carriers, and presumably the consumers of toll services in the state by reducing the level of access charges. Even the transition to a PICC has that effect. Since it becomes a flat amount per line, it does not grow with minute growth and therefore has a correspondingly lower effect on toll rates as toll growth occurs. Use of a PICC is part of an access charge restructure. It is not a universal service element. It is not a subsidy. If this mechanism is adopted for intrastate purposes, interexchange carriers should be directed not to engage in the type of behavior that occurred at the federal level where the PICC is described as a subsidy for local service. That only leads to customer confusion and is factually inaccurate. WITA believes that this is the most balanced approach for access restructure that has been presented to date in this proceeding. 5. Internet. The comments of the Washington Association of Internet Service Providers argues that Internet service providers should remain exempt from access charges. Given the rapidly increasing use of the Internet for long distance service (see attached Wall Street Journal article), this question will need to be reexamined in the very near future. In addition, Dr. Cooper pointed out that at the very least, Internet service providers should make a contribution to universal service. II. Comments on Staff’s Revised Proposal The March 13, 1998 notice set out a revised access charge reform proposal advanced by Commission Staff which WITA opposes. That proposal contains three elements: (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. WITA takes strong objection to this proposal for a number of reasons. First, this proposal does not, at least on its face, recognize what is widely agreed as an appropriate principle: Rural companies should be treated in a different way than non-rural companies when undertaking access reform. The FCC has recognized this two-track approach as an appropriate methodology. The initial round of access reform applies only to the largest local exchange carriers. See, In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report and Order, CC Docket No. 96-98 (FCC 96-325)(Released August 8, 1996). Access reform for rural companies should be coordinated between federal and state levels. If the Washington Commission were to act before the FCC completes its work, its decision may be rendered inoperable. It is simply not possible to predict how the FCC may act on this issue. Jumping ahead of the curve may produce unexpected injury to customers in rural areas of the state. On the other hand, reacting to the FCC’s decision will allow the Commission the opportunity to provide a complete program in a studied, comprehensive manner. WITA also disagrees with Commission Staff’s proposal that terminating access charges should be priced at TSLRIC, unless TSLRIC is defined to include an allocation of common overhead and the common overhead includes a portion of the loop cost. Certainly as applied to US WEST, this Commission has determined that the loop is a common overhead whose cost recovery should be spread through all services, including access services. Washington Utilities and Transportation Commission v. US WEST Communications, Inc., Docket No. UT-950200 (April 11, 1996) Decision and Order Rejecting Tariff Revisions at pages 83-84. The FCC has also recognized that the loop is a common cost of local, long distance and other services that use the loop. This is also true for access services. As stated by the FCC: For example, interstate access is typically provided using the same loops and line cards that are used to provide local service. The costs of these elements are, therefore, common to the provision of both local and long distance service. In the Matter of Access Charge Reform, CC Docket No. 96-262, Notice of Proposed Rulemaking at ¶ 237. See also, Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, CC Docket No. 96-98, First Report and Order at ¶ 678. Dr. Cooper agrees with this analysis. In the comments he passed out to the Washington Commission during his presentation, he states that recovery of a portion of loop cost in access charges is not an implicit or explicit subsidy, but rather “[i]t is legitimate cost recovery.” Direct Testimony of Dr. Mark N. Cooper on behalf of the North Carolina Justice and Community Development Center in North Carolina Utilities Commission Docket No. P-100, SUB 133g at page 32, line 5 and the analysis contained therein. WITA further disagrees with the portion of the Staff recommendation contained in paragraph 1 of the proposal that would set terminating access charges “no greater than local interconnection termination charge(s).” The rural companies in the state of Washington do not have a local interconnection termination charge. By definition, Commission Staff’s Revised Proposal would mean that terminating access charges would be set at zero. If this proposal is a recognition that rural companies should be treated differently than non-rural companies, then that should be an explicit part of the access charge reform proposal. The Staff’s Revised Proposal does not recognize that there is an economic welfare benefit to a ubiquitous network. Moving terminating access charges to TSLRIC suggests that the value of the ubiquitous network is an insignificant factor. However, there is an economic benefit to every customer who desires to terminate a call to another customer by that second customer being on the network. The value of having everyone connected to the network is at the heart of encouraging deployment of telecommunications infrastructure. Until this docket, the value of the ubiquitous network has been recognized in pricing decisions. WITA’s position is that it is appropriate to recognize the economic benefit to all users of a ubiquitous network in terminating calls throughout the network. This is accomplished by setting terminating access charges at a rate higher than TSLRIC. Staff’s proposal also continues the trend of favoring local competition through resale over facilities-based competition. Any provider of facilities-based competition would want to be able to recover its very significant investment in loop plant through all services that it offers. This means that it will want to take an appropriate markup over TSLRIC for access services that it provides, as well as for every other service that it offers using those facilities. Driving access charges to TSLRIC discourages facilities-based investment and thus, facilities-based competition. The Commission should not favor one type of competition over another. WITA agrees with the portion of Staff’s proposal that says explicit high cost support should be collected. However, WITA disagrees with the concept that in the interim there should be an additional rate element on terminating access charge traffic in the manner set forth by Staff’s proposal. Commission Staff’s proposal expressly states that such a mechanism would not be a competitively neutral funding mechanism. By making that statement, it dooms its proposal. If the proposal is expressly recognized as not competitively neutral, it is inviting a court challenge to invalidate the support mechanism. Rather than running that risk, WITA recommends that the Commission complete its work under Engrossed Substitute Senate Bill 6622, developing a universal service proposal that will be approved by the Washington State Legislature and put into effect, if not January 1, 1999, at least early in 1999. WITA also strongly disagrees with the third elements of Staff’s proposal. This part of the proposal appears to say that there will be rate review of each company’s proposal for offsetting the reduction in revenues resulting from implementation of access reform. WITA has in the past, and continues to take the position that the Commission lacks the statutory authority in a rulemaking to require companies to file tariffs that subject them to rate of return, revenue requirements analysis. This is why the Sprint proposal makes so much practical sense. It avoids a lengthy and protracted argument over the extent of Commission authority, while accomplishing the vast majority of what appears to be the goal of access restructuring. III. Rural Competition Plan In its February 13, 1998 comments, WITA proposed a two-phase Rural Competition Plan. The first phase would begin with the resale of local exchange services. The second phase would tie the removal or modification of the rural exemption to four reforms, one of which is access reform. Those reforms are as follows: • An intrastate universal service fund which meets the standards contained in the Act must be in place and the funding provided broadly by market participants. • Pricing of intrastate access charges moves to cost. In this case, “cost” means either total service long-run incremental cost or total element long-run incremental cost. In either case, cost includes contribution to common overheads and a return element. • The intrastate universal service funding is portable among competitors. However, the mechanism must be in place to target that support below the wire center level. This may be on a census block group, census block or grid basis. Or it may be reinstituting the concept of base rate areas where customers are within or outside of a certain area which is based on density. Separate support levels are calculated for those customers within the base rate area and for those customers outside the base rate area. • Pricing and regulatory flexibility that an ILEC can employ once a CLEC is granted entry must be in place. The Sprint proposal would accomplish the access reform portion for the most part. At the end of the three-year transition, we should know what the FCC is doing with rural companies in terms of access reform. That change at the federal level can be tied to a change at the state level to finish access restructure. Presumably, an intrastate universal service fund mechanism will be in place and operating some time in 1999. In addition, work is well underway towards accomplishing an appropriate targeting of support mechanism. The fourth and equally important item which still needs work would be to develop pricing and regulatory flexibility that an ILEC can employ once a CLEC has gained entry. Presumably that work could be done by the end of 1999. What this brief recap of the Rural Competition Plan underscores is the necessity that the Commission keep in mind what it is doing in all of the dockets that it has before it and the interrelationship of the decisions it makes in those dockets. The Commission’s objective of promoting competition may be best served by allowing competition to grow, not by trying to direct the nature of competition. The Commission is equipped to be a decision maker in disputes between competitors. It should not take on the burden to predict how competition should occur. IV. Summary In summary, WITA has three recommendations: 1. Do not adopt Staff’s revised proposal; 2. Use a two-track approach with a three-year transition as described in Section I.3 of these Comments; and 3. Tie access reductions to a one hundred percent pass through to toll reductions. For the reasons set forth above, WITA respectfully requests that the Commission adopt the Sprint proposal as the appropriate mechanism for this stage of access restructure.