BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Petition for Investigation into the Cost of Universal Service and to Reform Intrastate Carrier Access Charges, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) Docket UT-960325 ) ) Joint Comments of Electric Lightwave, Inc. ) And Nextlink Washington, L.L.C. ) On March 13, 1998, the Commission issued a Notice of Opportunity to File Reply Comments and Opportunity to Respond to Commission Staff’s Revised Proposal in the above referenced proceeding. Following are the joint comments of Electric Lightwave, Inc. (ELI) and Nextlink Washington, L.L.C. (Nextlink). ELI and Nextlink support the Commission’s efforts to address the two very important issues of universal service and access charge reform. Both issues must be resolved in order to move to a fully competitive telecommunications marketplace. As evidenced by the dialog and the comments filed thus far in the proceeding, these are immensely complex issues and of interest to a number of stakeholders, some with vastly differing interests. ELI’s and Nextlink’s interests are those of facilities-based competitive providers, headquartered in, and investing millions of dollars in the telecommunications infrastructure of the State of Washington. ELI’s and Nextlink’s facilities are used to provide a full range of voice and data products to their customers, encompassing both the traditional local and access markets. These comments reflect their similar positions in the marketplace as full service providers who have made and continue to make significant telecommunications investments in the State. Given the scope of this proceeding and the complexity and interrelationship of the issues, ELI and Nextlink caution the Commission to proceed carefully with a well thought out plan to minimize the effect of the plan on consumers as well as current marketplace participants. The Commission must avoid taking well- intentioned actions designed to advance competition that may actually jeopardize the very activity it is trying to encourage. For example, a plan to immediately move access charges to cost, as advocated by some, could have a severe detrimental impact on facilities-based new entrant providers. What is perceived as good public policy must not be allowed to leapfrog the realities of the marketplace. In addition, the Commission should consider the appropriate sequence and timing for establishing 1) a properly sized, cost-based, universal service fund, and 2) appropriate changes to the level and structure of access charges. Only after the Commission first determines the proper size of the universal service funding obligation, will it be in a position to adequately address access reform. Comments on Staff’s Revised Proposal The March 13th Notice seeks comment on Staff’s revised access charge reform proposal. The Staff’s revised proposal is described as follows: (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 [sic], 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. It is unclear to ELI and Nextlink whether Staff’s proposal will apply equally to all local exchange carriers, competitive providers and incumbents alike, or only to the incumbents. However, for purposes of these comments, ELI and Nextlink will assume that Staff’s revised proposal is intended to apply equally to both incumbent and competitive providers. ELI and Nextlink oppose the application of such rules to competitive providers. Imposing such a rule on competitive providers is unnecessary. The market will force competitive providers to match the incumbents’ prices in any event. The practical effect on ELI and Nextlink and the impacts on the market, will be the same. Staff’s revised proposal is founded on economically sound principles, such as moving access toward cost, setting like charges for like services (terminating access and terminating local), ensuring the high cost funding is explicit, and recognizing the relative sensitivity of certain rates to competitive forces. However, ELI and Nextlink are concerned that the proposal’s practical application may have unintended negative consequences. ELI and Nextlink are primarily concerned about the proposal to move terminating access to a level no greater than local interconnection termination charges, or TSLRIC if that happens to be less. This represents a significant shift from the current practice of pricing terminating rates, specifically carrier common line, higher than the originating rate. It is difficult to ascertain just what impacts such a radical departure from current pricing practices, with the potential of shifting the recovery of many millions of dollars, might have on the marketplace. For example, an incumbent LEC may seek WUTC approval of a rate increase to cover alleged revenue shortfalls. ELI and Nextlink believe the market risks of such a proposal far outweigh any marketplace benefits to be achieved. In addition, ELI and Nextlink have a number of concerns regarding the practical impact on competitive providers of setting terminating access at TSLRIC and no greater than local termination charges. Assume, for instance, a situation where the competitive provider has a bill and keep arrangement with the incumbent for terminating local traffic, how would the terminating access rate be set? The rule could be interpreted to require the competitive provider to perform and submit to the Commission a TSLRIC study. This represents a significant departure from the current policy of only requiring new entrants to file tariffs and price lists. The Commission has never required competitive providers to submit cost studies. Requiring competitive providers to prepare cost studies would impose substantial and unnecessary costs on new entrants, especially small facilities-based providers. It would also create an undue burden on the Commission and its Staff. Furthermore, while it is anticipated that some type of long-run incremental prices will eventually be established as a result of the costing and pricing proceeding, Docket No. UT-960323, it is unclear when the Commission may actually complete that process (the costing phase has yet to conclude and the price phase has not begun). It is also unclear how those prices will compare to what is currently in place for local interconnection termination rates. Unnecessary rate fluctuations could result if one set of prices is set now, in advance of understanding the true costs, and then changed later. Any urge to move rates toward cost should be tempered by the plain necessity to understand costs and the goal of minimizing unwarranted price fluctuations and market distortions. Recommendations of ELI and Nextlink: The Commission should first adopt measures that will enhance competitive entry. Simply lowering access rates will not enhance competitive entry. All incumbents should be required to adopt the local transport structure defined by the FCC in its First Memorandum Opinion and Order on Reconsideration, CC Docket No. 91-213, Released July 21, 1993. All incumbents should be required to adopt subsequent access charge reforms made by the FCC, specifically the changes outlined in its Access Charge Reform Order of May 7, 1997, related to local transport and local switching. Of particular importance, the Commission must ensure that rates for elements, such as tandem switching, are not set below cost to encourage competitive alternatives. ELI and Nextlink recommend that any changes to the level of access charges or the manner in which they are collected be transitional in nature. For instance, instead of flash cutting to TSLRIC terminating rates, a possible first step might be to equalize originating and terminating rates. Universal Service ELI and Nextlink support the Commission’s efforts to establish an explicit, competitively neutral, high-cost mechanism. As everyone agrees, creating such a mechanism is essential to realize a fully competitive telecommunications market. However, until it is determined just how much high-cost support is truly necessary to maintain affordable basic local service rates and universal service, ELI and Nextlink oppose any effort to create an explicit USF rate by simply moving an undetermined amount of money out of access and into a USF element. Such an exercise will merely serve to create the unrealistic expectation that USF is simply a make-whole proposition. ELI and Nextlink believe the Commission and industry should first complete its work in creating and sizing a universal service funding mechanism. That work began with the Commission’s January 1998 report to the Legislature entitled Preserving and Advancing Universal Service in a Competitive Environment. The Commission is now poised to complete the process in Docket No. UT-980311. It should do so before establishing any USF rate element. Conclusion The Commission must be cautious not to blindly reduce access charges on the premise that doing so will further competition. Solely targeting access charges for reduction could distort investment decisions being made currently by facilities-based providers that offer both access and local exchange service. There are many pieces to the complex competitive puzzle. The level of access charges is just one of them. The Commission has recognized that universal service funding, and the structure of access charges are equally important. Clearly, the level and structure of retail toll and local rates are also critical components. But the most important pieces in today’s competitive puzzle are those elements of the Federal Telecommunications Act concerning interconnection, access to unbundled network elements, and resale. For competition to take hold and flourish in all areas of the telecommunications market, the key components of the Act must be effectively in place. At that point, with a competitively neutral USF mechanism in place and the appropriate competitive access rate structure, access rate levels will take care of themselves. In the meantime, ELI and Nextlink urge the Commission to follow the FCC’s lead and adopt a transitional approach to access reform, incorporating those changes recommended above to reform the access charge structure and then let competitive market forces take over. Respectfully submitted this 10th day of April, 1998. _____________________________ _________________________________ Deborah Whiting Jaques Timothy H. Peters Director – Regulatory Director – Regulatory & Industry Affairs Nextlink Washington Electric Lightwave, Inc. 1003 Montello Avenue 8100 N.E. Parkway Drive, Suite 150 Hood River, OR 97031 Vancouver, WA 98662 Telephone: (541) 386-6398 Telephone: (360) 816-3608 Fax: (541) 386-6397 Fax: (360) 816-3821 E-mail: djaques@nextlink.net E-mail: tpeters@eli.net