GTE REPLY COMMENTS 1 DOCKET UT-980311(r) COMMENTS OF GTE GOAL OF UNIVERSAL SERVICE 1. What should be the goal of a Washington universal service support system and fund (USF)? In your answer, please include a separate paragraph which specifically details the ramifications your answer would have for various consumer groups, including residential and small and large business consumers. Within AT&T=s response there are positions that GTE disagrees with, such as only supporting primary residential customers, determining support on a study area or state-wide basis, use of a revenue benchmark, and the use of intrastate revenues for explicit end user surcharge. All of these points will be addressed in the related questions below. AirTouch's response to this question ignores the clear direction of the Act to maintain universal service. AirTouch suggests that implicit support be eliminated and replaced with a specific, predictable and market-oriented arrangement. Such an approach would indeed reduce toll rates but increasing basic rates to cost (as a market-oriented approach would do) would likely result in unaffordable rates in high-cost areas. A market-oriented approach would thus be in violation of the Act. AirTouch further comments that a universal service system must not force competitive carriers to subsidize the incumbent LEC. Again, AirTouch approach is in clear violation of the mandates of the Act and should not be considered. The Act requires all telecommunications carriers to contribute on a non-discriminatory basis to the preservation of universal service. 2. Should the USF program guarantee sufficient operating revenue to companies serving high-cost locations no matter how much market share is lost to competitors?* GTE is in agreement with the comments of AT&T, Public Council and AARP, and United States Cellular Corporation, in that the universal service fund is not a revenue replacement fund. However, it is critical to make it clear that the local service rate and the USF program together absolutely must provide a reasonable opportunity for carriers to recoup the costs they will incur in providing universal service. Recognizing that the WUTC has been effective in its regulation of incumbent local exchange carriers (ILECs), so that the current overall recovery level for the firm is adequate, the WUTC should reform universal service to make explicit support that is implicit in rates on a support-neutral basis at day one. U S WEST appropriately advised the Commission to address the issues of recovery of embedded costs due to prior obligation to serve requirements and the recovery of forward looking costs as future investment is mandated. TRACER suggests that the Commission allow the incumbent to raise rates to recover the lost subsidy. GTE agrees that where rates for basic services are below cost, they should be raised to the lower of cost or the Aaffordable rate@ determined by the Commission. The Commission must bear in mind, however, the 1996 Act=s requirement that rural and urban rates be Acomparable.@ AirTouch's concerns are misplaced that a fund would "obstruct competition by taxing other telecommunications carriers to make up the costs of the ILEC's lost revenue". First, AirTouch fails to understand that the "lost revenue" is in reality support for high-cost areas that was implicit in the rates paid by other LEC customers. Second, GTE assumes that any fund would be portable to Eligible Telecommunications Providers (ETCs) who assume universal service obligations. 3. What relationship, if any, should payments from a universal service fund bear to changes in efficiency and productivity of the recipient? GTE previously proposed a more effective method for adjusting the support amount over time than any productivity offset, or any recalculation of the cost estimates. Subjecting the support amount to the market discipline of competitive bidding is the best way to correct any possible errors in the initial support, and periodic rebidding would assure the most accurate means of adjusting support over time to reflect changes in technology, input prices, or the definition of universal service. Note that, in contrast to the market share concern raised in question number two, the main source of "productivity" in the past has been unit growth. As an incumbent firm loses market share to competition, its unit costs will rise. Absent significant technological change, it is not reasonable for the WUTC to expect to capture significant productivity gains as incumbent carriers lose significant market share. AirTouch both misunderstands the universal service concept and apparently ignores the ramifications of directing support to households. Market incentives can work when universal service support flows to carriers when two conditions are present. First, support must be portable. Second, the combination of the support and the rate charged to the end user is sufficient to equate to the rate derived in a competitive market. On the other hand, directing support to households would greatly expand the USF administrator=s duties and thus increase administration costs. The administrator would not be dealing with just sixty or so ETCs but tens of thousands of end users. SUPPORTED SERVICES Primary and Secondary Lines (Questions 4-9) Please see above for the discussion of AirTouch=s proposal to direct support to households rather than ETCs. MCI and AT&T propose that only one primary residential line per residential street address be supported. TRACER recommends that only primary residential and business lines should be supported. GTE recommends supporting all single-line residential and single-line business lines in Washington for which the geographically deaveraged cost of service exceeds the maximum permissible rate. GTE=s proposal for supporting all single-line residential and single-line business lines is consistent with the approach taken by the FCC for the federal universal service program MCI argues that support should be limited to ensure the fund and the concurrent surcharges that customers pay remain at a reasonable level. Although limiting support only to Aprimary@ lines might appear to reduce the need for funding, the artificial distinction between primary and secondary lines imposes additional administrative costs. For example, the artificial distinction would have adverse effects on consumer choices of how much service to buy, and from whom. Whereas many consumers are accustomed to paying less per unit as they purchase greater quantities of telecommunications services, the artificial distinction would penalize consumers in high-cost areas who want or need additional lines. If the cost differences are marked between adjacent areas, the artificial distinction could have a material impact on small businesses, favoring those in a low-cost area over those in a high-cost area. MCI also states that the FCC has already decided that only primary lines will be supported. However, paragraph 96 of the May 8, 1997 Universal Service Report and Order clearly states Athat all residential and business connections in high cost areas that currently receive support should continue to be supported...@ While the FCC has differentiated between primary and secondary lines in the access reform arena, the difficulties associated with doing so clearly indicate the policy should not be adopted for universal service where the impact would be impounded. In fact, In the access reform being under taken in the FCC, CC Docket No. 97-250 In the Matter of Tariffs Implementing Access Charge Reform, both MCI and AT&T commented that the costs of identifying primary and secondary lines is excessive and that the artificial distinction should be abandoned. AT&T=s Reply Comments on MCI Emergency Petition for Prescription, CC Docket No. 97-250, dated March 30, 1998, state, Athere is striking agreement with AT&T among the commenters that the Commission=s decision to distinguish between primary and secondary residential lines for purposes of the new PICC charge is inherently difficult to implement and has caused needless confusion for carriers and customers alike. Indeed, many commenters, including both IXCs and LECs, join AT&T in urging the Commission to abandon the distinction altogether.@ MCI=s March 30, 1998 reply comments in CC Docket No.97-250 state, Athe Commission should eliminate the distinctions between primary and non- primary lines. This is one of the few areas in which IXCs and ILECs agree. First, as all of the parties commenting on this issue pointed out, the costs associated with implementing such distinctions clearly outweigh the benefits. The primary / non-primary distinction has required local and long distance carriers to spend millions of dollars on billing and auditing systems, without providing clear or substantial benefit to the public. Second, if the Commission were to eliminate the distinction between primary and non-primary lines, the Commission would not have the daunting task of defining primary lines. All parties that submitted comments on this issue agree that it is int the public interest for the Commission to adopt a uniform standard definition of primary lines as quickly as possible. One way to do this is to eliminate the artificial distinction.@ GTE requests clarification from AT&T and MCI on their position regarding the administrative problems and expenses of administering an artificial distinction between primary and secondary lines. The above comments appear to be in direct conflict with the comments submitted in this universal service docket. In this docket, AT&T, MCI, and TRACER propose that an administrator can reasonably track primary lines. AT&T proposes that the first line into a home is the only line that is supported. Unless the WUTC implements an effective system by which to monitor the purchases made from each carrier, consumers would have positive incentives to purchase multiple "primary" lines simply by contacting different carriers. Incentives to game the system in this manner would be harmful both to consumers and local exchange carriers. With multiple carriers, how would the first line be determined. What information is the administrator going to be required to obtain? If UNE prices are such that a CLEC can purchase them at the same rate to provide a secondary line as a primary line, their pricing would be anti-competitive. MCI and TRACER suggest that the customer be responsible for determining which line is deemed as the supported primary line. Again, this opens the door to gaming and potential anti-competitive pricing. GTE believes that it would be very difficult to define and implement the distinction between the first line and other lines. At the root of this difficulty is the fact that the policy rests on an untenable premise: namely that the Aneed@ for basic telecommunications services is somehow a fixed amount per household (or some other social unit). Common experience shows that different people buy different amounts of any product or service in the marketplace. Add to this the difficulty in defining the social unit to which this notion applies, and the difficulty of defining a Aline@ in a world of new technology and hybrid services, and the result of this conceptual vacuum is an administrative quagmire. 11. Universal service is intended to assure affordable access to the network to use a group of enumerated services (See ESSB 6622, Sec. 1(7)(b)(i) through (ix)). Many customers desire additional features or services, for example, call waiting, voice mail, and call blocking. Should features or services in addition to those which constitute basic service, when provided to customers in high-cost locations, be priced the same, or higher or lower than they are priced in non-high-cost locations?* Public Council and American Association of Retired Persons state that additional features and services should be priced the same in high-cost and non-high-cost locations. GTE agrees that pricing should be similar if costs are similar. However, if there is a greater cost to provide these services in high-cost locations then the prices will need to reflect the costs. These additional features and services are not supported and are competitive, their prices should be dictated by the market, not by more regulation. The discussion is truly an interpretation of the Act Section 254 (b)(3) and A reasonably comparable@ rates. While the Public Council and American Association of Retired Persons, believe additional features and services should be offered at comparable prices, their comments do not address how that would be accomplished. Therefore, GTE has no further comments at this time. Western Wireless states that AThe Commission should not (and in the case of CMRS providers, cannot) take any position on the relationship between rate levels in rural and urban areas for either basic services or additional services@. Clearly GTE disagrees with this statement. The Act gave the Commission the power to ensure rates in high cost areas for basic services and any other services they determine need to be supported by universal service are reasonably comparable to those charged in non-high cost areas. And to the extent that a CMRS carrier seeks and accepts ETC status, the Commission can dictate terms as a condition of receiving universal service support. 12. When an incumbent local exchange carrier (ILEC) provides unbundled network elements (UNEs) to another carrier designated as an ETC, how should USF support be allocated between the companies? Sprint proposes that the ETC providing the defined basic services over its own facilities or through the purchase of UNEs from an ILEC is entitled to the entire USF support associated with serving the customer. Sprint adds the caveat that the ILEC providing the UNEs will be fairly compensated providing that the UNEs are priced to recover TELRIC and a reasonable share of joint and common costs. GTE believes this is an important point and agrees that if UNEs are appropriately priced the USF support should go to the ETC serving the customer. However, there needs to be means of allocating the support if the underlying carrier=s actual costs are not covered by the prices paid for UNEs. GTE proposes the following allocation: Where UNEs or a combination of UNEs and CLEC facilities are used, the Administrator shall determine the support provided to the CLEC and the underlying carrier as follows: a) Where service is provided wholly by purchased UNEs, the support received by the CLEC is equal to the difference between the total cost of providing that service and the affordable rate. The CLEC will receive support equal to the difference between the maximum price the end user is allowed to be charged and the CLECs costs (cost of UNEs and retail expenses). The remaining amount of support will go to the ILEC providing the facilities. b) Where service is provided through a combination of purchased UNEs and CLEC owned facilities, the CLEC will receive support equal to the difference between the maximum price the end user is allowed to be charged and the CLECs costs (cost of UNEs, cost of CLEC provided facilities, and retail expense). The cost of CLEC provided facilities shall be no higher than the rate for UNEs charged by the ILEC. The remaining amount of support will go to the ILEC providing the facilities. Western Wireless and United States Cellular propose that the ETC providing retail service to the end user customer should receive support. There is no discussion on the price paid for the UNEs and the cost to provide the facilities. Again, there needs to be means of allocating the support if the underlying carrier=s costs are not covered by the prices paid for UNEs. AT&T states Ait is imperative that the Washington Commission recognize that if it does not deaverage both UNEs and the cost of universal service similarly, the ILEC stands to receive universal service support that far exceeds the cost of the UNE=s purchased by the CLEC that has won the customer.@ If the cost of universal service is accurately calculated then the ILEC should receive the universal service support that exceeds the cost of the UNE=s. For example, if the universal service cost is calculated at $50 a line, the affordable rate collected from the customer is $20, and the ILEC provides the retail service, the ILEC would receive support of $30. For the same line if retail service was provided by a CLEC using UNEs costing $30 dollars, the support would be allocated between the two carriers with the CLEC receiving $10 (the difference between the cost of UNE=s and affordable rate collected from the customer) and the ILEC would receive $20 (the difference between the cost of providing the facilities and the price of the UNEs). In this example, the ILEC would rightfully receive support in excess of the cost of the UNEs. It follows then that MCI=s proposal, that if a CLEC provides some facility in combination with reselling the ILECs facility that the whole universal service support amount should flow to the CLEC, is clearly inappropriate. There position suggests that if the ILEC provided a 2,800 ft loop and the CLEC provided the switch, that the ILEC who is providing the costly service would not receive any support. 13. Should the universal service fund be used to pay for infrastructure necessary to provide service to potential customers who do not reside within established company service areas?* (Please see material related to Obligation to Serve in Docket No. UT-970325.) The comments of Public Council and AARP suggests that the ILECs are obligated to serve and cover the costs associated with building the facilities to unserved areas. GTE and other ILECs DO NOT have an obligation to serve outside of their established service areas. The obligation and cost of providing service to potential customers who do not reside within established company service areas is best determined through an auction, as explained in GTE=s comments in Docket No. UT-970325. AT&T states that universal service should not be applied in the speculative manner suggested by the phrase Apotential customers@. GTE suggests that the Commission clarify Apotential customers@, in order to better understand AT&T=s comments. There are multiple issues, not just the question above, that were raised in Docket No. UT-970325 and that need to be resolved. The Commission needs to determine how these issues are to be resolved. Either all the issues need to be brought into this docket or the schedule to address obligation to serve issues in UT-970325 needs to better coincide with this docket. AFFORDABILITY AND COMPARABILITY 14.a. What rate(s) for basic telecommunications service are affordable in Washington? SPRINT states that the Commission should use a national affordability rate to determine what is affordable in Washington. In the May 8, 1997 Universal Service Report and Order, the FCC concurred with the Joint Board that Athe unique characteristics of each jurisdiction render the states better suited than the Commission to make determinations regarding rate affordability.@ GTE recommends that the Commission take the FCC and Joint Board=s advice to heart and determine affordability on a more detailed level than on a national or state-wide basis to fully account for the unique characteristics of Washington. WITA recommends that affordability be determined by using a state-wide urban rate to determine affordability and ensure comparable rates. GTE suggests that this approach will not take in to account all the unique characteristics of the state of Washington and will transfer urban income and cost characteristics on to rural areas. GTE is concerned that Western Wireless= comments do not address the question of affordability and rather concentrate on their position on high cost benchmarks. Please refer to GTE=s response for question 18. GTE agrees with AT&T, that the current penetration rates indicate that the rates are affordable and that a state-wide affordability rate is not appropriate. However, GTE disagrees with AT&T=s position on the use of a revenue benchmark, which will be discussed in GTE=s response to question 18. 14.b. Is there a different affordable rate for a business and a residence? MCI and AT&T=s position is that single-line business not be supported and therefore the affordable rate is irrelevant. GTE finds their position troublesome and is very concerned that a policy that does not enable rural business to afford basic service could be detrimental to all of Washington=s rural residents. 14.c. For a small business versus a large business?* See response to 14.b. 15. Should business and residential lines be priced differently? If so, on what basis?* See response to 14.b. 16.a. If all lines are supported, should second lines be priced at the same level as primary lines? MCI, AT&T, and TRACER recommend that only primary lines be supported. GTE disagrees with the position as indicated in the responses to questions 4 through 9 above. 16.b. Should there be an even greater charge for each additional line above two? See response to 16.a. 16.c. Would this present administrative problems and expenses?* See response to 4 through 9. 17.a. If all lines are not supported and second lines are priced at cost, will the rates for high-cost and non-high-cost areas be "reasonably comparable" as required by the Telecommunications Act of 1996? MCI=s and AT&T=s comments interpret the Act=s Areasonably comparable@ to apply only to primary residential lines. The Act does not make such a distinction between residential and business lines. Please see GTE=s response to question 4 through 9. TRACER suggests that the rates will be Areasonably comparable@ depending on the level of rate averaging permitted. In an increasingly competitive market, implicitly supporting rates through rate averaging will not be sustainable. 17.b. Will the access to telecommunications and information services be reasonably comparable? See response to 17.a. 17.c. Expressed in dollars or as a multiple (e.g. twice, four times), what rate above your answer for an affordable rate (question 14) would no longer be "comparable"?* GTE declines to comment on the other parties responses to this question at this time. USF BENCHMARK 18. What cost of providing basic telecommunication service in Washington should be deemed to be "high cost" (what is the benchmark figure)? How should it be determined? MCI, AT&T, TRACER, and Public Counsel advocate the use a revenue benchmark. These positions fail, however, to answer the question asked: AWhat cost of providing basic telecommunications service . . . should be deemed >high cost=. How should it [the cost] be determined?@ This question flows directly from the USF legislation and must be answered by the Commission to the Legislature. Another way to phrase this key inquiry from the Legislature is: If rates for basic service were set to cover cost, at what level would such rates be deemed unaffordable? MCI=s, AT&T=s, TRACER=s and Public Counsel=s Arevenue benchmark@ positions instead address the question of how much support will be provided by the USF in order to keep rates for basic service affordable in Ahigh cost@ areas. As GTE has previously answered on June 8, 1998, all lines for which the cost of service exceeds the maximum affordable rate that a carrier may charge for local basic service should be considered to be Ahigh-cost@. The Acost@ of basic service should be determined using both estimates from forward looking cost studies and information showing ILECs= actual costs of providing service. The Acost@ is currently being determined in the cost model phase of this proceeding. Even though AT&T=s, TRACER=s, and Public Counsel=s Arevenue benchmark@ positions are not answering the correct question, GTE provides its position on their proposals. GTE opposes the inclusion of revenues from discretionary services for purposes of setting USF support levels . GTE and other ILECs historically have recovered costs through a system of implicit subsidies achieved by 1) distorting rates for a given service across diverse geographic areas and 2) distorting rates across services. Including revenues from toll, access, and vertical service in the calculation of the universal service support amount will continue the subsidies provided across services. Inclusion of current sources of support in a revenue benchmark translates into a disincentive to provide universal service to customers who fail to generate the average level of revenues included in the benchmark. Accordingly, CLECs will Acream-skim@ the customers who generate above-average amounts of revenues from discretionary services, leaving ILECs to serve those customers who generate below-average revenues. It is inappropriate to include a revenue stream that currently supports local rate suppression in the calculation attempting to identify and remove these implicit supports, which cannot be sustained in a competitive environment. The revenues included in the calculation should be only those the customer would pay as a direct result of the customer=s decision to subscribe to basic local service. Inclusion of revenues from discretionary services in the universal service support calculation requires that ILEC discretionary service rates remain at a level above associated economic costs. The CLECs are not burdened with the same subsidy, permitting them to offer these services at a lower rate than the ILEC can. This rate disparity will contribute to the insufficiency of the universal service support fund. This is because customers= toll usage (which also drives access revenues) is highly skewed. As previously stated, a small percentage of the customer base creates the most toll and access usage. In GTE=s territory, a small percentage of its residential customers generate a large proportion of the residential toll usage and associated revenues. Similarly, a small percentage of its business customers generate a large proportion of its business toll usage. Since the source of toll revenues is so skewed, a small number of customers lost to a CLEC can mean significant loss of support for universal service. Because of the inclusion of an average amount of these revenues in the universal service support calculation, the ILEC will not receive these revenues from an explicit fund either. Thus, a universal service support calculation that relies on continued subsidies from toll and access will produce an outcome that is unpredictable and potentially insufficient in violation of the Act=s requirement that a state=s universal service mechanism be Aspecific, predictable, and sufficient@ to preserve and advance universal service. Section 254(f) of the Act. Additionally, including revenues from discretionary services in the universal service support calculation functions as an offset to the cost of basic local service and requires ILEC discretionary service revenues to subsidize universal service. The ILEC also will be required to contribute the assessment for the explicit universal service fund. CLECs who do not provide their own facilities contribute only the assessment percentage, which is determined after universal service costs are reduced by the ILEC=s toll and access revenues. Consequently, the ILEC and other facility-based providers must contribute more to the support of the loop than other telecommunications providers in violation of the Act=s requirement that all carriers contribute on an Aequitable and nondiscriminatory basis.@ Section 254(f) of the Act. Moreover, the current cost models do not include in the universal service cost calculation costs associated with these services. Even though GTE opposes inclusion of discretionary revenues in the calculation, if such revenues are to be included, the corresponding costs must be included. Once all implicit subsidies are removed from the rates for discretionary services, including the cost and the revenues on both sides of the calculation should be Aa wash@Ci.e., assuming cost-based rates, the costs and revenues should offset each other. There are additional practical problems associated with the inclusion of discretionary services revenues in universal service calculation. First, the inclusion of discretionary service revenues in the universal service calculation basically defines the scope of reductions in those same rates. Reductions in the rates will impact the amount of revenue that should be included in the universal service calculation. Accordingly, once the rate reductions are determined, the average revenues must be recalculated, and the process will continue to repeat itself. Second, the universal service support amount should be sufficient to remove all implicit support from the ILEC=s rates. If those revenues are included in the calculation, the universal service support will be inadequate to allow removal of all implicit support. Language in SB6622 requires the Commission to address the revenue side of the universal service calculation. GTE proposes to compare universal service costs to the maximum retail rate for the defined package of services to determine the TOTAL universal service support needed. More specifically, to develop total USF support requirements, GTE proposes to subtract the current tariffed rate, including the interstate end user common line (AEUCL@) charges and any mandatory charges, such as non-optional extended area service (EAS) or touch tone charges, from the cost of providing universal service. This proposal includes as revenues only those amounts the customer would pay as a direct result of the customer=s decision to subscribe to basic local service, including any applicable mandatory charges. Section 254(i) of the Act requires that the FCC and state commissions Aensure that universal service is available at rates that are just, reasonable, and affordable rates.@ For purposes of determining the total universal service support needed, GTE presumes that the Commission has deemed current rates to be affordable. Thus, for purposes of GTE=s proposal, the terms Abenchmark rate@, Aretail rate@, Amaximum rate@ or Atariffed rate@ and are often used interchangeably to refer to what should be subtracted from the universal service cost to determine the support amount. 19.a. Should the benchmark be company specific? SPRINT, U S WEST, United States Cellular, WITA, and TRACER all state that the benchmark should not be company specific. GTE proposes that if the current tariffed rates are used to determine the affordable rate, then company specific rates need to be used. Rates differ from service area to service area (i.e., carrier to carrier) and the universal service fund needs to reflect these differences in order to be sufficient and predictable. 19.b. If so, what common factors should be used to derive the benchmark number for each company? (If