Comments of Sprint Corporation UT-970325 Obligation to Serve Page 1 BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION UT-970325 In the Matter of Access Reform ) COMMENTS OF SPRINT And Universal Service And ) CORPORATION ON BEHALF OF the Obligation to Serve in the ) UNITED TELEPHONE COMPANY State of Washington ) OF THE NORTHWEST Introduction Given their nearly ubiquitous service availability, incumbent providers are better situated to provide universal service than new entrants. Forcing new entrants to provide universal service in areas for which they have not sought ETC status would forestall competition by erecting an enormous barrier to entry. Ultimately, as competition takes hold, the obligation to serve issue should disappear. In the meantime, it is important to ensure universal, affordable telecommunication service for Washington consumers. The best policy toward that end is to develop cost recovery mechanisms that do not penalize providers for serving high-cost areas. High-cost support amounts should be carefully targeted to reflect underlying cost characteristics, and be coordinated with policy decisions concerning wholesale and retail pricing and designation of service areas. Further, the obligation to serve requirements should not result in a universal service fund so large that its sheer size jeopardizes its existence. The fund can be kept to a modest size and still provide sufficient support to maintain affordable rates by setting reasonable benchmarks, preserving the existing line extension policy, and including the cost of service for areas outside of exchange boundaries only as these unserved areas receive service. To what extent must telecommunication carriers provide service on demand? Which services must be provided? Under the Telecommunications Act (the Act), 47 U.S.C. 214 (e)(1), common carriers designated as eligible telecommunications carriers have an obligation to offer the services that are supported by the Federal universal service support mechanism under section 254(c), except for services for which a waiver has been granted (e.g., toll limitation). These services include: Voice grade access to the public switched network; Local usage; Dial tone multi-frequency (touch tone) or its functional equivalent; Single-party service or its functional equivalent; Access to emergency services; Access to operator services; Access to interexchange services; Access to directory assistance; and Toll limitation for qualifying low-income customers. As to the service area, the Act states: . . . the State commission may, in the case of an area served by a rural telephone company, and shall, in the case of all other areas, designate more than one common carrier as an eligible telecommunications carrier for a service area designated by the State comission, so long as each additional requesting carrier meets the requirements of paragraph (1). (47 U.S.C. §214) Therefore, each carrier that has been designated as an eligible telecommunications carrier (ETC) is obligated to provide universal services on demand for the service area designated by the Washington Utilities and Transportation Commission (Commission). Section 214 (e)(5) of the Act governs the determination of the geographic area in which the ETC will serve: The term “service area” means a geographic area established by a State commission for the purpose of determining universal service obligations and support mechanisms. In the case of an area served by a rural telephone company, “service area” means such company’s “study area” unless and until the Commission and the States, after taking into account recommendations of a Federal-State Joint Board instituted under section 410(c), establish a different definition of service area for such company. The Commission’s Order in Dockets UT –970333-354, and 356 established that service areas for non-rural providers, GTE, U.S. Cellular and USWC, are the individual exchanges for which they petitioned, designated on an individual basis, effective January 1, 1998. Service areas for multi-exchange rural carriers are the carriers’ study areas through December 31, 1998, and thereafter the appropriate service areas are their exchanges, designated individually as separate service areas. United Telephone Company of the Northwest designates its exchange areas in its local tariffs and has exchange maps on file with the commission. Therefore, United is obligated to provide universal services, except toll limitation for which it has a waiver, within all of the exchanges listed in its local tariffs. What obligation, if any, should there be for telecommunication carriers to provide new service to presently unserved territory? According to the Act § 214(e)(3): If no common carrier will provide the services that are supported by Federal universal service support mechanisms under section 254(c), to an unserved community or any portion thereof that requests such service, the Commission, with respect to interstate services, or a State commission, with respect to intrastate services, shall determine which common carrier or carriers are best able to provide such service to the requesting unserved community or portion thereof and shall order such carrier or carriers to provide such service for that unserved commnity or portion thereof. Any carrier or carriers ordered to provide such service under this paragraph shall meet the requirements of paragraph (1) and shall be designated as an eligible telecommunications carrier for that community or portion thereof. Accordingly, a company could become obligated to provide service to an area outside its exchange boundary, in unserved territory, if so ordered by the Commission. Presumably, the Commission would first ask surrounding carriers (ILECs, CLECs, or Wireless) whether they would be willing to serve the customer. If no carrier is willing to provide service, it would be reasonable for the Commission to request and evaluate the cost involved for each ILEC before making its determination. How should services to high cost areas be paid for? For high cost areas within exchange boundaries, an explicit universal service fund mechanism should provide enough subsidy to maintain affordable rates. For unserved households within an exchange boundary, line extension charges may apply in certain instances pursuant to utility tariffs, to defray some of the initial capital outlay and to maintain affordable recurring rates. Line extension tariffs should also apply when a company provides service to unserved households outside of exchange boundaries. Certainly these charges can be expensive for customers who choose to locate many miles from the nearest exchange boundary. However, the value of (and price paid for) the customer’s property should reflect any lack of services or resources such as water, sewer, electricity, or telephone service. Just as a person living 30 miles from town should not expect the township to pay to extend sewer lines to her home, she should likewise not expect full subsidization to extend telephone infrastructure to previously unserved territory. The universal service costing models (BCPM and Hatfield) do not currently capture the cost of serving households located in unserved area outside of exchange boundaries. Since the census block approximates the exchange boundary, there may be exceptions. For instance, a household located just outside an exchange boundary may be included in the cost model These exceptions should be negligible.; however, a house located 15 miles outside the exchange boundary will not be included in the BLR input, These are not the LEC-supplied inputs, but rather the wire center data obtained from BLR, such as terrain data, wire center boundaries, number of housing units, density, etc. and thus will not be reflected in the results. To remedy this situation, United proposes that the input data be adjusted to reflect the incremental cost of serving customers in unserved territory outside of exchange boundaries as these customers are provided service. This true-up approach would be more rational than trying to include initially the costs associated with unserved territories, especially for households for which there are currently no residents. An attempt to capture all cost associated with building out to unserved territory would unnecessarily inflate the universal service fund for households that may never require service (e.g., old abandoned homesteads). In addition to recognizing the incremental cost, the revenue or affordable rate benchmark should recognize non-recurring line extension charges in determining the amount of support needed so that costs and revenue are stated on a consistent basis. The obligation to provide universal services should not harm providers if the support amounts are properly targeted. Ideally, the amount of universal service support disbursed to a provider would match the cost characteristics associated with serving the particular customer who is switching providers. At some point, the cost of achieving this degree of accuracy outweighs the benefits. Each company should evaluate the cost structure for its serving territory for unique cost “break points”. This type of analysis is currently being performed by rural LECs in ETC workshops Docket UT-970333-54,56. So far, it appears that costing below the wire center, but above the CBG level may sufficiently capture cost differences. If the cost per loop is determined at the service area level, then a CLEC ETC that manages to secure most of the customers in the urban core of the service area would benefit from universal service support that was actually attributable to high-cost areas outside of the urban core. In this instance, the ILEC would have insufficient cost recovery for the remaining high-cost loops. Under rate of return regulation, this situation would ultimately give rise to higher local rates for the ILEC’s remaining customers, thus jeopardizing affordable local rates for high cost customers. Moreover, a CLEC is unlikely to seek ETC status in areas where there is a risk that it could be forced to provide service with less than full recovery of incremental costs. With limited capital, a CLEC is more likely to target urban markets where there is less risk involved. Absent other arbitrage or pricing distortions as will be explained in the next section. For these reasons, USF amounts should be determined and targeted in sufficient geographic detail to avoid sending incorrect market signals, and driving uneconomic investment decisions. For similar reasons, it is critical that the Commission coordinate universal service policy and its wholesale and retail pricing policies, as well as its service area designation policies. The Commission’s recent order in UT-960370, UT-960371 acknowledges that these policies need to be considered collectively. p. 56. Though Sprint advocated in the pricing docket that UNEs should be deaveraged, that should not imply that Sprint believes deaveraging should occur without regard to USF and retail price design. The NARUC Ad Hoc Working Group NARUC Ad Hoc Working Group. High Cost Support: An Alternative Distribution Proposal. March 19, 1998. pp. 10-11. recently gave three examples that illustrate why coordination is crucial. The first example illustrates why wholesale pricing should be coordinated with USF policies: Assume that the state has established universal service support at the wire center level, but most of the state is served by a single large company and the state has decided to maintain a statewide wholesale price for unbundled network elements (UNEs) from that company. Further assume that in a particular high-cost wire center, cost is $80 per month, high cost support is $50 per month, and that a carrier can buy UNEs at the statewide average price of $20 per month. There would be no need to provide support of $50 a month to a carrier buying UNEs at $20 per month. If $30 in support were indeed provided, an economically rational carrier could provide free service or even pay customers up to $10 per month to accept service. Moreover, the implicit support from one part of the state to another would continue in the form of the $20 per month average price for UNE’s, thus frustrating Congress’s intent that subsidies be made explicit. A similar issue arises if retail rates are not coordinated with universal service targeting. This second example demonstrates why: Assume once again that the state has established universal service support at the wire center level, but has decided to maintain the retail price of dial tone service at a statewide level. Further assume that in a particular high-cost wire center, cost is $80 per month, high cost support is $50 per month, and that a carrier can buy dial tone at a statewide average price of $20 per month. Finally, suppose that Carrier A either owns some of its facilities or purchases some UNEs and therefore is not a “pure reseller”. Under applicable federal rules, Carrier A, and not the underlying carrier, is entitled to universal service support. Universal Service Order, ¶s 152, 161. There is no need to provide support of $50 a month to a carrier buying dial tone for resale at $20 per month. The problems are the same as described in the preceding [example]. And finally, the third example shows why service area designations should be considered in conjunction with wholesale pricing zones: [A]ssume that most of the state is served by a single RBOC and the state has decided to leave the wholesale price of unbundled network elements (UNEs) averaged statewide. Further suppose that the state has designated services for “Eligible Telecommunications Carriers” on a wire-center basis. Competitive LECs would have an incentive to serve high-cost wire centers through the purchase of UNEs and to serve low-cost wire centers through construction of new facilities. In areas where competitors have constructed their own facilities, the incumbent might not be able to compete effectively on price. Furthermore, competition might develop unevenly throughout the state. Despite these valid theoretical arguments, from a practical standpoint it may not be feasible to use exactly the same geographic basis for rate deaveraging or USF subsidy design. The important point is to consider the consequence of each design within the larger scope. As cautioned by the NARUC Ad hoc group, high cost support should not distort market forces by creating opportunities for arbitrage, and carriers should not be able to gain advantage by exploiting the irregularities of state and federal policy. id p. 13 Should auctions (bidding process) be used to determine which provider(s) would serve high-cost locations? If so, how could a bid process work to ensure service in presently unserved areas? How would the process work? For high-cost locations within exchange boundaries, no bidding should be required. The difference between the affordable rate benchmark (or revenue benchmark if the Commission chooses) and the long-run incremental cost of service should establish the universal service amount. The precise amount of universal service support may vary by unit of geography chosen. See response to IV. This support would be available to any ETC selected by the customer. In the event no ETCs have been designated for the high-cost area, the Commission may order a provider to serve as the ETC as described in response to III. United suggests that unserved areas continue to be evaluated on a case-by-case basis. Either the customer or the Commission on behalf of the customer, could notify carriers in order to determine whether there is a willingess to provide service. If a company is willing to supply service, there should be no need for bidding. If more than one provider is willing to serve the customer, then the customer should be able to choose its provider. If no provider is willing to provide service, the Commission may order a carrier to provide service (see response to Question III). Could a similar process be employed to ensure service in tariffed areas where the present incumbent does not wish to have an obligation to serve? All carriers that have ETC status are obligated to provide universal service within their designated serving area. If two or more carriers have ETC status within the service area, then each is obligated to provide service, and the customer may choose its provider. CLECs that do not have ETC status should not be obligated to provide service since such a requirement would constitute a barrier to entry. In instances where the ILEC is unwilling to provide service within its exchange boundary, and the exchange area is not included in the ETC service area, then the commission should be able to force the ILEC to provide universal services pursuant to § 214(e)(3). Restrictions on market exit should exist until competition develops. As long as cost recovery mechanisms are properly designed, carrier of last resort obligations should not harm incumbent providers. Respectfully submitted this 16th day of April 1998. SPRINT CORPORATION ON BEHALF OF UNITED TELEPHONE COMPANY OF THE NORTHWEST _____________________________________ Nancy L. Judy Assistant Vice President External Affairs