April 17, 1998 SENT BY ELECTRONIC MAIL AND ORIGINAL SENT AIRBORNE EXPRESS Washington Utilities and Transportation Commission Paul Curl, Acting Executive Secretary 1300 S. Evergreen Park Drive, SW Olympia, WA 98504 RE: Docket No. UT-970325 Dear Mr. McClellan: MCI Telecommunications Corporation (MCI) is sending these comments on additional issues for filing in the above referenced docket through electronic mail. MCI is also sending overnight, for Monday delivery, the original and nineteen copies of these reply comments via Airborne Express. If you have further questions concerning this matter, please contact me at 303.390.6106. Sincerely, Rogelio E. Peña Senior Attorney Enclosures BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION UT-970325 In the Matter of the Petition ) for Investigation into the Cost of ) MCI TELECOMMUNICATIONS Universal Service and to ) CORPORATION’S COMMENTS Reform Intrastate Access Charges, ) ON ADDITIONAL ISSUES and Obligation to Serve ) Requirement ) INTRODUCTION MCI Telecommunications Corporation (MCI) offers the following comments in response to the additional issues concerning carrier and customer treatment and obligation to serve, which were raised by the Washington Utilities and Transportation Commission (Commission) in its memos of March 13, 1998 and April 1, 1998. The Commission has asked for specific comments on the obligations of an incumbent local exchange carrier (ILEC) to serve its retail customers and to provide unbundled network elements (UNEs) and resale services to its wholesale customers. In requesting these comments, the Commission has raised one of the most critical issues related to development of competition in the local exchange network: how an ILEC serves its own customers in relation to how it treats competitive local exchange carriers (CLECs) -- and, by extension, CLEC customers. For it is truly the CLEC’s end-user customer that will either benefit or suffer, depending upon the treatment and service provided by the ILEC to the CLEC. OBLIGATIONS OF ILECS TO CLECS The Telecommunications Act of 1996 (the Telecom Act) very clearly requires non-discriminatory treatment (See, Sections 251, 252, 253, 254, etc.) between and among carriers. To allow an ILEC, given its unique position as both the monopoly provider of critical bottleneck facilities and a competitor to a CLEC, to provide a better level of service to its own customers than it would to CLECs and their customers would be totally discriminatory. The development of facilities-based competition, now and in the foreseeable future, is dependent upon CLECs that combine elements of the ILEC networks with their own networks. Discriminatory treatment of CLECs by ILECs, especially at this critical juncture, would effectively end any hopes for the development of effective local competition. The same will be true even when all of the facilities are provided by a CLEC, because the CLEC will still need to interconnect with the ILEC network in order to complete local calls placed to the ILEC’s customers. Conversely, there must also be non-discriminatory treatment of ILECs by the CLECs, especially as CLEC facilities and customer base increase. Consumers only see the end product and do not necessarily understand the behind the scene workings of things such as interconnection and service trouble shooting. Consumer expectations on issues such as installation internals and service quality can and do directly impact the CLEC customer’s experience. If the CLEC and its customers receive slower and lower quality of service than that provided to the ILEC’s customer, this experience will be imprinted on the CLEC customer and be detrimental to the growth of competition in the local exchange market. OBLIGATIONS OF CLECS TO THEIR OWN CUSTOMERS It is too early in the development of competition in the local exchange market, and unnecessary, for regulators to impose obligations upon entrants in relation to their own retail customers. Indeed, to place such requirements on CLECs is unworkable from a business perspective as outlined below. In today’s “network of networks” environment, an end-user customer may experience an issue that, at first glance, may appear to be a problem with their individual service provider. However, upon examination, the problem being experienced by the end-user may actually be caused by another underlying or interconnected provider whose service a CLEC may be purchasing. Examples of such issues include end-user dissatisfaction with a CLEC installation interval, when the time frame may, in fact, be determined by the ILEC from which the CLEC must order facilities to reach the customer. Another example may be the inability of a CLEC to serve a particular customer, or customers in a particular geographic area, due to a claimed lack of facilities on the part of the ILEC from which the CLEC must purchase UNEs. A third example is a customer that is needlessly taken out of service during a number portability conversion. During such conversions, both the former provider and the new provider must closely coordinate their work to ensure that any possible customer downtime is minimized, if not eliminated. If either provider does not complete its work at the appropriate time, the end-user is directly affected, often by being taken completely out of service. Further, it is unnecessary to impose obligations upon new entrants in relation to their own customers in areas in which at least one other provider — the ILEC — is providing service. The CLEC has the burden of winning every single one of its customers away from the ILEC. It is in the CLEC’s interests to serve its customers needs -- as defined by the customers themselves -- in a competitive manner. An unsatisfied CLEC customer always has the ability of returning to the service provided by the ILEC. When consumers have competitive choice, they can exercise their greatest “right” -- choice -- by leaving the provider which has proven unsatisfactory and switching to another provider. It is unclear to MCI that, given current basic consumer protections regarding issues such as non-discriminatory treatment of similarly situated customers, further protections are required in competitive markets when the consumer has alternative choices. As outlined above, it is not feasible to develop CLEC obligations to its customers when CLECs are so clearly dependent upon the cooperation of, and non-discriminatory treatment from, the ILECs in order to serve their customers. As competition develops and expands, the market forces of competition are best suited towards ensuring that customers needs are met rather than a regulatory approach. OBLIGATION TO “TAKE BACK” FORMER CUSTOMERS As a general principle, when a customer switches providers, both the new and old provider must be required to work together to ensure a transition that is as smooth and seamless as possible for the consumer. Indeed, the nondiscrimination provisions of the Telecom Act and of the FCC’s Number Portability Order (FCC 96-286) are designed in part to ensure that customers can change service providers as smoothly as possible. However, except for carriers that are designated by the Commission as “carriers of last resort,” it is not practical to require that carriers, other than carriers of last resort, be required to “take back” previous customers. The creation of a continuing obligation of CLECs to their previous customers would render basic business and network planning impossible, particularly for new entrants with fewer switches (often only one per market) and a tiny fraction of the local service revenue in comparison to ILECs, who are today in all cases the carriers of last resort. A single medium to larger sized customer who chose to exercise any such “option” could conceivably use a very large proportion of whatever current switch capacity the CLEC has available, or require more facilities than the ILEC chooses to make available to the CLEC. Additionally, given the disproportionate size of CLECs compared to ILECs--in terms of networks in place , switches, infrastructure, staffing and relative customer bases--any such obligation on CLECs to “take back” former customers will disproportionately affect CLECs compared to ILECs. Finally, in the case of delinquent or bad credit customers, there should not be an automatic “take back” requirement on ILECs. Disconnect rules would still affect such customers. ENSURING NEW ENTRANTS CAN SERVE ANY CUSTOMER Several key milestones must be achieved to ensure that new entrants have the ability to serve all customers throughout Washington. These include: •pricing of unbundled network elements at forward looking economic cost; •maintenance of the requirement that ILECs combine network elements for CLECs without artificial “glue” charges; •resale rates that can sustain competition; •reduction of access to forward looking economic cost; and •reform of universal service in a competitively neutral manner which allows competitive provisioning of service to customers in high cost areas and equal access to universal service support. Unless, and until, the market conditions noted above are met, facilities-based competition throughout Washington will not be possible. Pricing of UNEs at forward looking economic costs (FLEC) ensures that new entrants do not subsidize their competitors--the ILECs. Maintaining the requirement that ILECs combine network elements for CLECs ensures that CLECs can reach every customer in the most efficient manner possible and bring product differentiation and innovative services to consumers throughout Washington. Pricing access at FLEC ensures that long distance companies and their customers are not subsidizing local exchange companies. Making universal service support (USS) explicit, competitively neutral and portable among all competitive providers ensures that the minimum amount needed to meet universal service goals is collected and allows CLECs to compete for customers in high cost areas. Additionally, as USS is made explicit, bringing access charges to FLEC will also ensure that ILEC recipients of USS are not over-subsidized and promote economically efficient network investment. An obligation to serve requirement imposed upon CLECs will increase the reliance of CLECs upon unbundled network elements to reach customers, which in turn leads to further reliance upon ILECs — their competitors. If CLECs are purchasing UNEs that are priced above forward-looking economic costs and, in turn, are forced to purchase those over-priced UNEs to fulfill an obligation to serve requirement, the business signal sent to CLECs is one slanted inadvertently towards the exiting of markets which have such a requirement or the avoidance of market entry altogether. MCI is not aware of any market strategy that, in the long term, presumes a CLEC can profitably serve the broadest possible range of consumers in a market while simultaneously subsidizing its direct competitor in that market on a permanent or even a short-term basis. Similarly, imposing artificial costs upon CLECs by allowing ILECs to disassemble network elements already combined in their own networks, or the imposing of “glue” charges to recombine network elements for CLECs, creates artificial competitive barriers. These barriers would only be heightened by an obligation to serve requirement, because purchase of ILEC UNEs is the only feasible method that CLECs could potentially meet an obligation to serve requirement on a facilities basis. Expedited dispute resolution of carrier-to-carrier disputes is currently an important issue today and its importance would only increase if an obligation to serve requirements were imposed upon CLECs. Given the increased reliance of CLECs upon the ubiquity of the ILEC network to reach every customer in an obligation to serve environment, the ability to quickly resolve carrier-to-carrier disputes would become even more critical. LIMITS OF AN OBLIGATION TO SERVE REQUIREMENT As discussed earlier in MCI’s comments, additional attributes of any obligation to serve requirement that might be imposed upon CLECs would be that CLECs must have the opportunity to fulfill such an obligation profitably, in the most efficient manner possible and without subsidizing their direct competitors. CUSTOMERS IN UNSERVED AREAS Given the nascent state of competition in the local exchange market in Washington, it would not be feasible or prudent to impose obligations upon CLECs to serve currently unserved areas. However, MCI offers the following thoughts on how to bring local service to currently unserved areas in order to achieve the public policy goal of bringing basic local exchange service to every customer in Washington. The benefits of competition contemplated in the Telecom Act could reach the unserved areas of Washington through an auction mechanism if the mechanism is implemented such that free-market forces drive the outcome. In order for the auction process to be effective and to reflect a competitive environment, the Universal Service Fund (USF) must be structured so that providers will have the opportunity to recover all forward looking economic costs associated with offering the service including a return on investment. Bids must be won or lost based on economic efficiencies, (i.e. the bidding system must be competitively neutral and not favor either incumbents or new entrants). Such an auction mechanism would operate as follows: •If no party were willing to come forward and assume the carrier of last resort responsibility, then any provider (incumbent or a new entrant) or the Commission could initiate an auction whereby service providers would “bid” to be the carrier of last resort for the area. •The bid would be in the form of a lump-sum amount, over and above the per line subsidy that would be provided for the cost-zone in which the geographic area is located, which the bidder would receive in return for committing to serve the entire customer base of that geographic area. •The service provider requiring the smallest lump-sum subsidy would become the “carrier of last resort,” prepared to provide service to all customers for a specified number of years - with competitive entry allowed. If no player stepped up to the plate and participated in the bidding process to serve these territories, state commissions still clearly have the authority to designate providers for unserved areas. The Commission can determine which carrier is best able to provide such service and order that carrier to provide service. Federally mandated Universal Service Rule Section 54.203 (a) states as follows: If no common carrier will provide the services that are supported by federal universal service support mechanisms under section 254(c) of the [Telecom] Act 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 community or portion thereof. In most cases, USF subsidies combined with revenues derived from universal service customers’ rates should allow providers to recover the forward-looking economic costs of providing the service and earn a normal return on investment. Even in the case of currently unserved areas, providers would have the incentive to serve customers if subsidies are based on geographic cost zones, so that higher cost areas have correspondingly higher levels of subsidy. The concern arises for unserved areas in which local revenues and the USS would not combine to provide adequate financial incentive for carriers to provide service. In these cases, it will be necessary for the Commission to take additional steps in order to ensure service to these areas. Whatever steps are taken, however, must not deviate from the pro-competitive principles set forth in the 1996 Telecommunications Act. One final caveat must be made regarding unserved areas. If an up-front, lump sum amount is provided from the USF to build facilities to an unserved area, the Commission should establish rules which address repayment of such funds if the provider recipient of the funds sells the facilities to another provider before a certain length of time. The price, and resultant profits, on the sale of local exchange facilities is usually based upon the number of end user locations. It would be unjustified for a company to make a profit on facilities build totally with USF monies, if it had not served that community for a reasonable period of time. ENCOURAGING NON-TRADITIONAL PROVIDERS The presence of unserved areas in Washington is troubling and not unique to the west. In order to provide incentives for a carrier to provide service in these areas, new approaches are necessary. The Commission should eliminate any barriers to entry for non-traditional providers such as power companies that already have easements and rights-of-way into the unserved parts of the state. These companies have access to low cost financing (REA, RUS, etc.) which could be used to augment their facilities to provide local telephone service. As such, universal service funding may not even be required. An example of a non-traditional provider would be Pioneer in Iowa. MCI has partnered with Northwest Iowa Telephone and Northwest Iowa Power Cooperative to form Pioneer Holdings, LLC., which provides integrated communications services to local distributors on a “turnkey” basis. Three local distributors, currently all in Iowa, are the City of Hawarden, North West Rural Electric Cooperative and the City of Manning. Pioneer Holdings deliver an integrated array of competitively priced, cutting-edge products and services -- including ultra high speed Internet access, local services, wireless communications and long distance -- to both residential and business customers through local distributor’s networks. One method of providing telephony over a power right-of-way is the use of fiber optic guide wire, frequently referred to as “fog” wire. The fog wire runs at the highest point on a power pole. Another technology being tested today is referred to as “interdigital.” Interdigital technology is a wireless technology which uses PCS frequencies to provide local loops. Using the electric coop’s right-of-way or a wireless technology eliminates the need to trench or establish new rights-of-way. Electric cooperatives have a 50-year history of providing service in high cost areas. The Commission should consider how to encourage cooperative ventures, such as Pioneer Holdings, to provide telephone services in the unserved areas of Washington. WITHDRAWAL OF ILECS AS CARRIERS OF LAST RESORT In the case of exchanges which are currently being served, but from which the ILEC is seeking withdrawal, the bidding process described above could also be used. In this situation, because the winning bidder would not be the ILEC, the withdrawing ILEC would be required to offer its facilities for that geographic area to the winning bidder at the net book value of those facilities. If, for some reason, construction of facilities were also required in order to serve the area, bids would presumably include the costs associated with the construction. If there were only one bidder, then the lump-sum amount would need to be reviewed. Without a competitive bid, it is conceivable that the bid may dramatically overstate the cost of building out into an unserved area. Whatever the lump sum amount provided to the winning bidder, it should reflect the forward looking economic cost of providing service to the unserved area. In making this determination, the Commission should consider all available technologies, including wireless. This solution would be consistent with the Telecom Act, and would preserve the benefits of competition for customers in the least desirable areas by making them economically attractive. The competitive bidding process would encourage efficient new entrants to enter the market, building new facilities in high-cost areas where necessary. The resulting prices and service offerings would be dictated by the disciplines of a competitive market and consumers would be the beneficiaries. SERVICES TO BE PROVIDED UNDER AN OBLIGATION TO SERVE REQUIREMENT The Commission has also requested responses to the issues of what service(s) should be provided under an obligation to serve requirement and whether these services should differ depending upon whether the customer is located in an existing exchange area or in an unserved area. The following features and functionalities should serve as the basic requirement: •single-line, single-party, voice-grade access to the first point of switching in a local exchange network; •usage within a local exchange area, including access to interLATA and competitive intraLATA services; •Dual-Tone Multi-Frequency (DTMF, also referred to as "touch tone") capability, or its functional equivalent; •a white pages directory listing; and •access to 911 services, operator services, directory assistance, and telecommunications relay service for the hearing-impaired. Currently unserved areas, when provided with local service, should be served with no less than the above basic local service features. CONCLUSION The critical public policy goal of bringing competitive choice to consumers throughout Washington state is best met by allowing new entrants to compete with incumbent providers in a manner that is efficient, non-discriminatory, profitable and does not require entrants to subsidize their direct competitors. Imposition of obligation to serve requirement upon new entrants in the foreseeable future is not workable from a business perspective and sends market avoidance signals given the reality of carrier-to-carrier issues ranging from pricing, provisioning and dispute resolution. However, the Commission’s raising obligation to serve and related issues allows the industry and public policy makers to fully address, and hopefully resolve, these critical issues which providers, seeking to bring facilities-based choice in local telecommunications to the consumers of Washington, currently face.. MCI again thanks the Commission for this opportunity to comment on these important issues and looks forward to participating in the Commission’s workshop on April 21. Respectfully submitted, MCI Telecommunications Corporations Rebecca J. Bennett Senior Manager 707 17th Street, Suite 3600 Denver, Colorado 80202 303-390-6392 Dated: April 17, 1998 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the written comments prepared by Rebecca Bennett has been sent to the following via regular postage paid United States Mail. Dated this 17th day of April, 1998 Rachel R. Gauna Mr. Ron Gayman Simon ffitch Regulatory Affairs Manager Office Of Public Counsel AT&T Communications of the Pacific North 900 4th Ave 2601 4th Ave Fl 5th Suite 2000 Seattle WA 98121-1253 Seattle WA 98164 Daniel Waggoner Susan Procter Davis, Wright, Tremaine Senior Attorney Representing AT&T Communications 1875 Lawrence 2600 Century Square Room 1575 1501 Fourth Avenue Denver CO 80202 Seattle WA 98101-1688 Larry Weathers Paralegal Davis, Wright, Tremaine 2600 Century Square 1501 Fourth Avenue Seattle WA 98101-1688 Jeffrey Goltz Assistant Attorney General WUTC Attorney General Section Representing WUTC State Mail Stop 40128 Robert F. Manifold AAG Office of the Attorney General Public Counsel 900 4th Avenue, Suite 2000 Seattle WA 98164 Clyde McIver Miller Nash Weiner Hager and Carlson 4400 Two Union Square 601 Union Street Seattle WA 98101-235