BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Investigation of Universal Service Issues ) and the Development of Suitable Processes ) UT-980311 to Accomplish the Investigation. ) COMMENTS OF GTE April 7, 1998 COMMENTS OF GTE DOCKET NO. UT-980311 Table of Contents I. INTRODUCTION 1 II. KEY UNIVERSAL SERVICE ISSUES 2 III. PROPOSAL TO CONDUCT CONCURRENT PROCEEDING 2 IV. RELATIONSHIP TO OTHER DOCKETS 3 A. Federal USF Levels 3 B. Federal USF ETC Designations 4 C. “Generic Cost/Price Docket” 5 D. Universal Service Cost/Access Reform Rulemaking 6 E. Other Cost Impacting Dockets 8 V. DESIGNATED SERVICE AREA AND COST 9 VI. DEFERRING TO THE FCC MODEL FOR INTERSTATE SUPPORT 10 VII. UNSERVED AREAS 10 VIII. CONCLUSION 11 COMMENTS OF GTE GTE (“GTE” or “the Company”) submits these Comments to address the Staff’s proposed procedural schedule and concerns and issues raised in the Commission’s March 31, 1998 Public Meeting in this new docket. I. INTRODUCTION The Commission should fully utilize this new docket to consolidate consideration of issues affecting universal service in Washington. GTE supports the use of both rulemaking and adjudicatory processes in this effort. In these Comments GTE provides its views on the procedural questions, reviews the other state and federal orders and dockets that impact universal service issues, and provides draft issues list for the rulemaking and the adjudicatory cases. During the March 31 meeting, the possibility that the Governor may not sign Senate Bill 6622 (SB6622)was discussed. GTE understands that the bill has since been signed into law. Thus, the Commission has clear statutory authority to proceed with this docket and to address the reform of universal service subsidies as required by the Telecommunications Act of 1996 (“ the Act”) and reinforced by the United States Court of Appeals for the Eighth Circuit in its decision in Competitive Telecommunications Association v. Federal Communications Commission, 117 F.3d 1068 (8th Cir. 1997). In the meantime, the Commission should implement GTE’s interim surcharge proposals, in order to maintain universal service and begin to obtain support from all carriers in the competitively neutral fashion required by the Act. II. KEY UNIVERSAL SERVICE ISSUES Although numerous issues are to be raised in this proceeding, the two most important issues are (1) the cost of providing services falling within the definition of “universal service” under the Act and “basic telecommunications services” under SB6622, and (2) the affordable rate and benchmark costs for these services. III. PROPOSAL TO CONDUCT CONCURRENT PROCEEDINGS GTE agrees that the Commission should utilize both rulemaking and adjudicatory processes in this matter. As suggested in the Commission’s March 23, 1998 Notice of Meeting, establishing administrative procedures for a new Universal Service Fund (“USF”) is appropriately accomplished by a rulemaking process, while making decisions on fact-intensive issues such as the cost of providing basic telecommunications services requires findings based on evidentiary hearings. With the comments that it submitted to the Commission on March 30, 1998, GTE included draft rules and a proposed issues list. GTE recommends that the Commission use the draft rules in the rulemaking proceeding. GTE has divided its draft issues list into two separate lists -- one for the rulemaking and one for the adjudicatory proceeding. The new lists are attached to these Comments. While the cost of basic telecommunications service may be the primary issue in the adjudicatory proceeding, GTE recommends that other important factual issues be addressed in hearings, as well, such as the state’s basic service affordability level, and the impact of USF administration on carriers’ operational systems (e.g., service records, billing). IV. RELATIONSHIP TO OTHER DOCKETS At the March 31, 1998 meeting some parties stated their views on the relationship of this new docket to other Commission dockets and orders. Dockets that were mentioned include the “generic cost/price docket” (UT-960369, etc.), the Commission’s “investigation into the cost of universal service and to reform intrastate carrier access charges” (UT-970325), and the minimum local calling area rulemaking (UT-970545). Additional dockets that may influence issues in this case to varying degrees include the recent eligible telecommunications carrier designations (UT-970333, etc.), the pole attachment rate rulemaking (UT-970723), the “local interconnection” case (UT-941464, etc.), the consumer protection rulemaking (UT-960942), and the Commission’s decision on competitive market implementation costs (UT-970010). In addition, the Federal Communications Commission’s (“FCC”) orders in its universal service case CC Docket No. 96-45. may well impact the structure, size and operation of Washington’s new program. Below is a brief discussion of how these dockets and orders may affect the Commission’s decisions on a new Washington Universal Service support program. A. Federal USF Levels The Act requires that “specific Federal universal service support” be “sufficient” to attain and maintain universal service. Section 254(e). The Federal USF presently planned by the FCC will not, however, be even close to sufficient. The state will, therefore, need to make up the shortfall. Thus, in UT-980311 the Commission will need to quantify the amount of support Washington’s eligible telecommunications carriers will receive from the Federal USF and subtract that from the total cost of supporting universal service in Washington in order to calculate the necessary size of the state’s USF. B. Federal USF ETC Designations In Dockets UT-970333 through 970356 the Commission made eligible telecommunications carrier (“ETC”) designations under the Telecommunications Act of 1996 and the FCC’s implementing rules. Order Designating Eligible Telecommunications Carriers, December 23, 1997. In this new docket, the Commission will need to decide the relationship of state eligibility criteria to the federal criteria. Subsequent to issuance of the Commission’s order in those dockets, the Staff has been conducting workshops on service area definition, especially for companies serving rural areas. See UT-970333, etc. Order, pp. 9, 12. GTE recommends that that effort be formally included in this new docket. While the actual service area definition may ultimately reside in the Commission’s rules for the new Washington Universal Service support program, the definition should be based on service area cost characteristics, and such a fact-dependant issue would be best addressed in the adjudicatory proceeding. As United States Cellular noted, some areas served by carriers not defined as “rural” under the 1996 Act are, in fact, just as rural as the areas served by carriers that come within the Act’s definition of “rural telephone companies.” UT-970333, etc. Order, p. 10. In view of the brief discussion of this issue at the Public Meeting, GTE provides a clarification of its position, below. See “Designated Service Area and Cost” at page 8. C. “Generic Cost/Price Docket” This set of cases is very narrow in scope, and its direct impact on this universal service proceeding may be quite limited. In UT-960369, etc. the Commission is setting “permanent” rates for unbundled network elements (“UNE”), interconnection and resale to replace the “interim” rates set in the Washington arbitrations under the Act for GTE and U S WEST. Rates for basic local service are not being set in those cases. The cost methodologies and models under examination in UT-960369 are not necessarily directly applicable to estimating the cost of the basic services that will be supported by the new Washington USF. Certainly, the Commission might make some high level decisions on costing methodologies in that docket that should be considered in the adjudicatory portion of this new universal service proceeding. At this point, however, the Commission and the parties should view the adjudicatory process on universal service costs as an independent effort that will produce an order on all relevant costing issues, including the appropriate cost methodology, based on the evidence presented there. Another universal service ramification of a decision in the generic cost/price case must also be borne in mind. If the Commission sets “permanent” UNE and resale rates before the reform of universal service support mechanisms, universal service may be at greater risk and its costs would not be supported by all carriers in a competitively neutral manner. Rates will not actually be set until Phase 2 of that proceeding, and the Commission has not yet issued its Phase 1 order or set the schedule for the next phase. Unless the Commission adopts interim safeguards, Interim support mechanisms are needed even today -- before the Commission sets “permanent” UNE and resale rates. See GTE’s proposal at pages 15 to 22 of its March 30, 1998 Comments in this case. Setting “permanent” rates before implementing a sufficient, competitively neutral USF would exacerbate the problem by signaling competitive carriers that they could, at least for some period of time, expand their businesses without bearing a full share of universal service support, while the incumbent local exchange carriers (“ILECs”), such as GTE and U S WEST, continued to bear a disproportionate share. competitors will have an artificial advantage in that dollars that GTE and U S WEST are forced to utilize to support universal service would be available to enhance competitors’ marketing plans, while GTE and U S WEST would continue to bear an unfair portion of the universal service support. D. Universal Service Cost/Access Reform Rulemaking GTE’s involvement in Docket No. UT-970325 (Access Charge Reform and the Cost of Universal Service) has enabled the Company to comment on several universal service issues. This involvement has made it clear 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. Given these linkages, the preferred approach to meaningful access reform is to carefully integrate it with the development of the USF. In its February 13, 1998, comments in UT-970325, 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 subsidies that will allow material changes to be made to the level of access charges in Washington. UT-980311, Comments of GTE, March 30, 1998, pp. 1-3, 29-35. Despite the docket’s name, proceedings in UT-970325 have thus far focused on access charge rate structure reform rather than establishing the cost of universal service. The scope of that rulemaking should be expressly amended to make clear that it is this new proceeding in which the Commission will determine the cost of universal service. Proposed rules are pending in UT-970325 that would restructure access charges based on “cost” and would identify and quantify any universal service support present in current access charges, also presumably on a cost basis. The methodologies used to determine those costs will need to be consistent with the methodology adopted in this docket for determining the cost of universal service. Two important universal service issues have recently been added to UT-970325: carriers’ “obligation to serve” and use of bidding processes . Notice of Opportunity to File Reply Comments, etc., March 13, 1998, p. 2; Notice of Rescheduled Workshop and Notice of Request for Comment on Additional Questions, April 1, 1998. These issues should be formally transferred to this new docket, so that the Commission and the parties can deal with all major universal service issues in a coordinated fashion in a single docket. The Commission’s resolution of the obligation to serve issue will impact the costs that must be supported by the new USF and may affect carrier eligibility criteria. Bidding process proposals may also impact eligibility, as well as the amount of universal service funding required. E. Other Cost Impacting Dockets Decisions made by the Commission in UT-970325 on access reform and in the other dockets listed above may well impact the cost of providing basic telecommunications service, which is to be determined in the adjudicatory portion of this case. The Commission will need to be certain that any such impacts are captured by the methodologies and models used in this case. As it is presently proceeding, UT-970325 may quantify the implicit universal service support currently embedded in ILECs’ access rates. Any such amount will need to be reflected in the universal service costs determined in this case. And, as noted above, the methodologies for producing these amounts need to be the same, or at least consistent. As was mentioned during the March 31 meeting, the outcome of the local calling area rulemaking (UT-970545) will affect the cost of universal service. For given areas, the dollar impact can be significant, including not only revenue and network cost assignment shifts, but also new facilities investment and operating costs. If these additional costs are not to be recovered directly by increases to local service rates, the Commission needs to assure that such costs are fully included in the universal service costs determined in this case. Similarly, pole attachment rates set pursuant to the outcome of UT-970723 and the costs of implementing rules set in UT-960942 will affect the cost of universal service and must be fully covered. In UT-941464, etc. the Commission set “bill and keep” as a default compensation arrangement for intercompany local interconnection and authorized individual companies to negotiate other approaches. Some companies have done so. The universal service costs developed in this case must incorporate the actual intercompany compensation arrangements for local interconnection. In UT-970010 U S WEST brought to the Commission’s attention several types of costs incumbent local exchange carriers are incurring to implement the multi-carrier competitive market structure envisioned by the Act and similar state mandates. The Commission indicated that identification and recovery of such costs should be addressed in the generic cost/price docket, but it also stated that some such costs may be recoverable from the ILECs’ own retail customers. Second Supplemental Order (11/7/97), pp. 8-10. In this proceeding the Commission will need to identify and quantify such costs that may be components of the cost of basic telecommunications service. V. DESIGNATED SERVICE AREA AND COST GTE would like to clarify the FCC guidelines for designating the service area to be used in calculating universal service costs. The FCC adopted the Joint Board’s recommendation that “calculating support over small geographic areas will promote efficient targeting of support.” Report and Order on Universal Service, CC Docket No. 96-45 (May 8, 1997) (“Universal Service Order”), paragraph 193. After January 1, 1999, the FCC will calculate the amount of support that carriers receive from the new Federal USF over areas no larger than wire centers. GTE proposes to calculate and administer Washington USF support at the ILEC wire center level initially and at a sub-wire center level once retail and unbundled network element rates can be deaveraged to the same sub-wire center level. A sub-wire center level, e.g., two to five zones within a wire center, would offer a balance of characteristics because it is fine enough to accurately reflect cost variations within a wire center area yet not so fine as to become administratively burdensome. Furthermore, the opportunities for arbitrage would be significantly reduced by (1) removing the implicit service support in current access, toll, and vertical service rates and (2) deaveraging universal service support, UNE rates, and rates for retail services to the same geographic level. VI. DEFERRING TO THE FCC MODEL FOR INTERSTATE SUPPORT At the March 31, 1998 Public Meeting, the Staff announced that the Commission has decided to not submit a state cost study to the FCC for 1999 Federal USF purposes, thus deferring to the FCC selected cost model. This development allows the Washington Commission to select a different cost methodology and model to develop the appropriate cost of providing universal service for intrastate purposes. VII. UNSERVED AREAS At the March 31, 1998 meeting concerns were voiced about bringing basic telecommunications service to areas not currently within the filed exchange boundaries of any ILEC. The Commission should consider that issue in this new docket. It is related to the “obligation to serve” issue, discussed above, and it also concerns universal service requirements set forth in the Act. Title 47 United States Code, Section 214(e)(3), as amended by the Act, provides that if no common carrier is willing to provide services that are supported by the Federal USF to an unserved area, the FCC and state commissions shall order one or more carriers to provide such service. In its Universal Service Order (paragraph 196-197), the FCC states that it should not yet adopt rules for such assignments, it encourages states to file reports detailing the status of their unserved areas, and it seeks assistance from the states on how best to raise subscribership to the highest possible levels in a cost-effective manner. The FCC also agreed with the Joint Board that a properly structured competitive bidding system could have significant advantages. In addition, the unserved area situation may well provide the Commission the opportunity to obtain evidence of the actual cost of providing “forward- looking” service. Presumably, if the Commission orders a carrier to provide service to an unserved area, it will direct such service to be “forward- looking.” Pricing out such service extensions could provide valuable information for purposes of validating any forward-looking cost models submitted to the Commission in this case, and, accordingly, testing the sufficiency of support provided by Washington’s USF. VIII. CONCLUSION This docket provides the procedural vehicles necessary to realize comprehensive reform of universal service support in Washington. GTE urges the Commission to fully utilize it by including the several universal service affecting issues from other proceedings, which GTE described in these Comments. The two most important issues are (1) the cost of providing services falling within the definition of “universal service” under the Act and “basic telecommunications services” under the Senate Bill, and (2) the affordable rate and benchmark costs for these services. GTE supports the two-pronged process approach suggested by the Administrative Law Judge and will put forth its best efforts to work with the Commission and interested parties to make the crucial universal service decisions in the short time frame available. GTE PROPOSED ISSUES FOR RULEMAKING PROCEEDING Docket No. UT-980311 April 7, 1998 GOAL OF UNIVERSAL SERVICE 1. What should be the goal of a Washington universal service support system (“Washington Universal Service Fund” or “WUSF”)? SUPPORTED SERVICES 2. What services should be supported by the WUSF? ELIGIBLE TELECOMMUNICATIONS CARRIERS 3. What carriers/providers should be eligible to receive support from the WUSF, and what procedures should be utilized to designate such carriers/providers? 4. What criteria should apply to the designation of eligible telecommunications carriers (“ETCs”)? 5. Should a bidding process be utilized to select ETCs? 6. Should the Commission adopt ETC basic service advertising guidelines that differ from the federal guidelines? 7. Should the Commission recommend to the legislature that the definition of universal service be reviewed on an ongoing basis in order to meet the changing demands of customers and Washington’s telecommunications market? 8. What facilities should an ETC be required to self-provide? OBLIGATION TO SERVE 9. What obligation to serve do ETCs have (including unserved areas)? 10. Do any carriers other than ETCs have an obligation to serve (including unserved areas)? FUNDING 11. How should the WUSF be funded? 12. What is an “equitable” basis for all telecommunications providers and services to contribute to the WUSF? 13. What telecommunications carriers must contribute to the WUSF? 14. How often should carriers’ contributions be collected? 15. What is the minimum contribution to be made by a carrier? 16. How should WUSF contributions be recovered by the carrier making the payments to the fund? SIZE OF THE FUND AND LEVEL OF SUPPORT 17. What should the relationship be between access charges and other ILEC rate design reforms and the implementation of the WUSF? ADMINISTRATION OF THE UNIVERSAL SERVICE FUND 18. Who should administer the WUSF and how should the administrator be selected? 19. What are the responsibilities of the Administrator? 20. How should the WUSF be administered? 21. What role should the industry have in administering the WUSF? 22. How should the Administrator handle proprietary and other data received from telecommunications providers? 23. What authority should be granted to the Administrator to perform audits of the individual WUSF contributors and recipients? 24. Who should perform audits of the WUSF and how often? 25. How should the costs associated with the administration of the WUSF be identified and recovered? DISTRIBUTIONS FROM THE UNIVERSAL SERVICE FUND 26. With what frequency should the Administrator distribute WUSF support to each ETC? 27. What basis should be used for distributing funds to ETCs? ADJUSTMENTS TO CONTRIBUTION AND DISTRIBUTION LEVELS 28. How should any excess funds not distributed during a year (or other administrative period) be used? 29. How should any funding shortfalls existing at the end of a year be recovered? GTE PROPOSED ISSUES FOR ADJUDICATORY PROCEEDING Docket No. UT-980311 April 7, 1998 SUPPORTED SERVICES 1. What rate(s) for basic telecommunications service are affordable in Washington? 2. What cost of providing basic telecommunication service in Washington shall be deemed to be “high cost”? 3. What is the cost of providing basic telecommunications service for all lines in Washington? 4. What is the cost of providing basic telecommunications service for only primary residential and single line business customers in Washington? 5. For what lines should the Washington Universal Service Fund (“WUSF”) provide support? ELIGIBLE TELECOMMUNICATIONS CARRIERS 6. For what service areas can the cost of providing basic telecommunications service be reasonably determined? 7. For what service areas can designation of eligible telecommunications carriers (“ETC”) be reasonably made? 8. For what service areas can the provision of support payments be reasonably administered? 9. When an incumbent local exchange carrier (“ILEC”) provides unbundled network elements (“UNEs”) to another carrier designated as an ETC, how should WUSF support be allocated between the companies? FUNDING 10. What interim universal service support mechanism should be implemented? 11. What methods may reasonably be used to provide permanent WUSF funding? SIZE OF THE FUND AND LEVEL OF SUPPORT 12. How should the Commission define implicit and explicit subsidies? 13. What is the amount of implicit universal service subsidy in current ILEC rates? 14. What should be the methodology for determining the size of the WUSF? 15. How should the Commission accomplish the transition from the existing implicit support system to a new explicit Washington universal service support system? ADMINISTRATION OF THE UNIVERSAL SERVICE FUND 16. What operations systems of ETCs and contributing carriers will be impacted by administration of the WUSF? 17. How can administration of the WUSF most efficiently utilize the operations systems of ETCs and contributing carriers? DISTRIBUTIONS FROM THE UNIVERSAL SERVICE FUND 18. What systems and procedures may most cost effectively be used to distribute WUSF support payments?