REPLY COMMENTS OF PUBLIC COUNSEL
AND AARP (July 2, 1998) - 1 

 AARP and Public Counsel have filed extensive comments in this proceeding. In 
fact, at this point, the opinions of the various parties have been expressed to 
the Commission numerous times.  Rather than restate every position taken 
earlier or to catalog which parties agree and disagree, these reply comments 
focus on specific points of dispute in which new interpretations have been 
offered that were not previously rebutted or in which clarification seems 
appropriate. These comments were prepared by Dr. Mark Cooper on behalf of 
Public Counsel and AARP.

Questions 1-2: Goals of Universal Service - Sufficient Operating Revenue 
Guarantee 
 GTE=s discussion of the impact of competition and its proposal to insulate 
itself from its effects deserves comment. 
 The local service rate and the USF program together, however, absolutely must 
provide a reasonable opportunity for carriers to recoup the costs they will 
incur in providing universal service.  (GTE Comments, June 8, 1998, p. 5). 
Unless otherwise noted, all comments cited are those filed on June 8, 1998 in 
this docket.
 Further concerning the issue of market share changes, notice that the cost 
models currently being used to determine Aefficient@ unit costs for universal 
service assume that the hypothetical entrant services the entire market, i.e., 
a 100 percent market share.  Although the USF plan by itself should not 
guarantee operating revenues to carriers regardless of their market share, the 
plan must account for the fact that if unit costs are higher, when, for 
example, two companies split the market, then no firm will receive sufficient 
high-cost support if the model assumes economies associated with 100% market 
share.  (Id., p. 6).
 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. (Id., p. 7).
 GTE takes the position, in effect, that, as a result of the introduction of 
competition, the total social cost of telecommunications will rise.  The 
diseconomies of scale introduced by loss of market share are said to raise its 
costs.  GTE wants universal service to be calculated in such a manner as to 
compensate it for those losses.  It further wants to start shifting costs out 
of competitive sectors before actual competition begins eroding its market 
share.  Under this model, the more vigorous competition is, the higher the 
total social cost will be, unless the new entrants are so efficient that they 
can offset GTE=s rising costs in the aggregate.  
 This vision of the implementation of the Telecommunications Act of 1996 (TA 96 
or Act) is contrary to Congressional intent.  Nowhere does the Act provide that 
GTE, or any other company, is to be insulated from its competitive losses, nor 
does the Act require GTE=s historic inefficiencies to be bought out before 
competition can go forward.    
 USWC=s attempt to insert stranded legacy costs under the universal service 
fund in the form of a make-whole requirement is similarly misplaced. [need 
reference to comments]

Question 3:  Goals of Universal Service - Relationship Between Payments and 
Productivity/Efficiency

 MCI and AT&T reinforce the point that the estimation of forward-looking costs 
should be a periodic undertaking.  (MCI Comments, June 8, 1998, p. 3; AT&T  
Comments, June 8, 1998, p. 4).  These costs might go up or they might go down.  
Companies will be quick to ask for upward adjustments if they believe that they 
can show that costs have risen; however, the Commission must be alert to the 
possibility that costs will decline in the future.  If the forward-looking 
costs of service decline and subsidies are not reduced, then incumbents who 
face little competition would actually be earning excess profits, which 
violates the requirement that subsidies be used to support universal service 
only.
 Of course, if the Commission follows the principle that competition should be 
the driver of change in universal service structure and does not institute a 
large-scale universal service program until after competition has made it 
necessary, this danger will be reduced.  The more competitive the market, the 
less often the cost review will need to occur.

Question 6:  Primary Line Issues  
 A number of parties have confused the principle that rates must be affordable 
47  USC ' 254 (b)(1), 254(i)  with the requirement that rates must be 
comparable. 47 USC ' 254 (b)(3)  AT&T simply replaces the comparability 
requirement with the affordability requirement.  [where in AT&T comments?] AT&T 
also tries to limit the comparability requirement to basic service.  This is 
directly contrary to section 254(b)(3), which explicitly extends comparability 
to advanced telecommunications and information services (see discussion below 
under questions 15 and 17(c)).

Question 11: Pricing of Additional Services or Features
 GTE and AT&T make a fundamental mistake when they assert that non-basic 
services are competitive.  (GTE Comments, p. 14; AT&T Comments, p. 8)  That 
simply is not the case.  A service like call waiting is not basic, but it is 
not more competitive than basic service, which, in GTE=s service territory, is 
virtually not at all.  This mistaken classification of non-basic services as 
competitive has serious ramifications for the design of the universal service 
program.  In particular, GTE=s efforts to declare any revenues other than basic 
as unpredictable are based on the mistaken premise that those revenue streams 
are in competition.  They are not.  
 The vertical services that are the leading sources of revenue, like call 
waiting and caller ID are not subject to significant competition beyond the 
competition that exists for basic service.  Because these services are strong 
complements of basic service, the provider who sells basic service is virtually 
certain to sell any of these vertical services that the customer buys.  It is 
extremely difficult, practically and technologically, for a competitor who 
fails to win the customer for basic service to sell vertical services.   

Question 14 (b):  Affordability - Business/Residential Differential
 GTE  and USWC attempt to portray rate rebalancing in non-high cost areas a 
mandate of the federal Act.  (GTE Comments, p. 2; USWC comments, p. 12)   GTE 
is perhaps the most aggressive in arguing that any margin above incremental 
cost for any service other than basic service is a subsidy that must be 
eliminated by a combination of rate rebalancing and universal service support.  
We have already shown that the use of the terms explicit, sufficient, 
predictable is not a basis for rebalancing.  (Comments of Public Counsel and 
AARP, pp. 28-34). The LECs attempt to shift margins to recover all joint and 
common costs from basic service is not only not required by the Act, but it 
violates section 254 (k), which requires basic service to bear no more than a 
reasonable share of joint and common costs.  (Id.).  
 The insistence by the LECs on immediate and total shifting of margins is 
inversely proportional to the amount of emphasis given this issue in the Act.  
Congress stated that Athere should be specific, predictable, and sufficient 
Federal and State mechanisms to preserve and advance universal service.@
(emphasis added). 47 USC ' 254 (b)(5)  The use of the word Ashould@ in this 
provision is weaker that the phrasing used by Congress in its dictum on sharing 
of joint and common costs in section 254(k).  In the latter provision Congress 
used the stronger word Ashall@, declaring that the FCC and state commissions:
  shall establish any necessary cost allocation rules, accounting safeguards, 
and guidelines to ensure that services included in the definition of universal 
service bear no more than a reasonable share of the joint and common costs of 
facilities used to provide those services.

 The conference report supports this distinction between the mandatory 
provisions on cost sharing and the permissive statutory language regarding 
support mechanisms, stating:
 To the extent possible, the conferees intend that any support mechanisms 
continued or created under new section 254 should be explicit, rather than 
implicit as many support mechanisms are today. Joint Explanatory Statement of 
the Committee of Conference, p. 131  (emphasis added).
 
Thus, the principle that support should be explicit is qualified by 
acknowledgment that there are limitations on the degree to which such an 
approach can or should be implemented.  The Aexplicit support@ principle is 
only one of a number of policy goals enunciated in section 254 and must be read 
in a manner which does not defeat or undermine those other goals.    

Question 15: Business/Residential PricingDifferences; Question 17 (c): 
Affordability/Comparability 

 GTE=s  effort to define the Areasonably comparable@ standard as the equivalent 
of a prohibition on undue discrimination makes no sense.  (GTE Comments, p. 
18).  Current law, including state law, already prohibits unduly discriminatory 
rates, see e.g., RCW 80.36.170, 80.36.180.  Congress did not have to include a 
section in the Act to foster that public policy.  Moreover, if a ban on 
discrimination were all that Congress wanted to accomplish in this provision, 
it would surely have used the term discrimination as it did in sections 251 and 
271. See, e.g., 47 USC '' 251(b)(1), 251(c)(2)(D), 251(c)(4)(A), 
271(c)(2)(B)(ii).
  Congress clearly meant to accomplish something other than the prevention of 
undue discrimination when it included the Areasonably comparable@ provision in 
section 254(b)(3).  
 USWC gives the concept of reasonably comparable rates a similarly tortured 
interpretation.  Instead of comparing the rates people pay, USWC wants to 
compare the price/cost margins on services.  By this definition, even if 
customers pay $150 in rural areas while others pay $15 in urban areas, the 
rates apparently would be deemed reasonably comparable.  
 AT&T=s approach to the issue of Areasonably comparable@ is a bit more honest, 
if no less misguided. (AT&T Comments, p. 10).  Responding to the Commission=s 
question 17a, Question 17a: 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 A
reasonably comparable@ as required by the Telecommunications Act of 1996? AT&T 
states:
 As long as the rate for the primary residential line is affordable for persons 
residing in high cost areas, the mandates of the Act will have been met.
  
 This simple ignores the congressional requirement by stating unequivocally 
that affordability is all that matters.  That is not the case.  Congress 
established the requirement that rates be reasonably comparable as a principle 
independent of the requirement that rates be affordable.  Section 254 (b)(3) of 
the Act cannot be ignored.  The independent viability of these two principles 
is underscored by the fact that affordability applies only to services 
supported by universal service, whereas comparability applies to both supported 
services and advanced services.  Efforts by parties to restrict the principle 
of comparability to POTS service alone are thus clearly contradictory to the 
Act.  

Question 26: ETCs-Identification of Support Areas
 GTE has an interesting approach to matching UNE and USF calculation.  It 
appears to advocate disaggregation of both UNEs and USF to a sub-wire center 
level.
 GTE advocates the Commission calculate the cost of providing the supported 
services and determine the amount of support a carrier will receive at the wire 
center level initially and at a sub-wire center level once retail and unbundled 
network element (UNE) rates can be deaveraged to the same sub-wire center 
level. (GTE Comments, p. 26).  
The logic of matching UNE and USF areas appears to appeal to GTE only at a 
level below the wire center.  We believe that the principle of matching areas 
should apply throughout the process.  GTE now makes UNEs available only at a 
statewide basis, and that should be the level of disaggregation for universal 
service support.      

Questions 27-30: Funding
 A number of commenters struggle mightily to interpret the language in TA 96 as 
requiring an end-user surcharge, appearing as a line item on consumers= bills, 
in spite of the fact that providers of telecommunications services are 
explicitly identified in the Act as the source of contributions for support 
mechanisms. 47 USC ' 254(b)(4)(A[a]ll providers of telecommunications services 
should make an equitable and nondiscriminatory contribution [.]@), 254(d) 
(Every telecommunications carrierYshall contribute[.]), 254(f)(AEvery 
[intrastate] telecommunications carrierYshall contributeYto the preservation 
and advancement of universal service in that State.@)  TRACER argues that 
universal service costs will be passed on to consumers anyway, so the 
Commission should just put it on the bottom of the bill (TRACER Comments, p. 
22).  Given the clear statutory language, a better interpretation of the Act 
would say that telecommunications carriers should not pass their contribution 
to universal service through to consumers.  Nowhere in section 254 does 
Congress require that customers be assessed surcharges to support universal 
service mechanisms.   One suspects that such a requirement would have had 
little chance of passage.  The absence of any such provision, taken together 
with the clear imposition of the contribution requirement upon carriers, using 
the mandatory Ashall,@ makes Congressional intent clear on this issue.  While 
carriers may indirectly pass through the cost of their universal service 
contributions to customers, they may choose not to pass through all costs, 
particularly where they are subject to competitive pressure.  Proponents of the 
end-user surcharge do not address the fact that the surcharge mechanism has the 
effect of insulating universal service costs from competition.  Moreover, a 
flat-rate surcharge is regressive in nature, imposing greater burdens on those 
with lower incomes who use smaller amounts of telephone service.
 TRACER=s argument on why per-line surcharges are better than percentage 
surcharges is equally incorrect.  TRACER argues that percentage surcharges 
burden people who are charged higher prices already.  In fact, differences in 
telephone bills are much more likely to be affected by how many services people 
buy and how much they use than differences in the prices they are charged.  The 
example that TRACER chooses of basic residential rates is not the best 
comparison because consumers in rural areas where basic service rates are low 
frequently face high intraLATA toll charges.   
  Claims that failing to put a line item on the bill keeps consumers uninformed 
are also misguided.  We firmly support giving consumers all information on 
which they can base a rational economic choice in their marketplace decisions.  
That is the point of putting information on the bill.  A per-line charge placed 
on the bottom of the bill is not useful economic information.  Since the charge 
cannot be avoided it cannot possibly help consumers make a rational decision.  
They have to pay it no matter who they take service from.
 It appears that for at least some surcharge proponents, the effort to put the 
universal service line item on the bill may be motivated more by politics 
rather than good public policy.  Consumers dislike surcharges for virtually any 
reason and particularly when perceived as a subsidy for others.  By reducing 
universal service to a surcharge or surtax on the phone bill, the nation=s 
decades-long commitment to the goal of universal service, largely achieved, is 
made to appear a welfare program for the other guy.  This mischaracterization 
of what universal service is about can only undermine the fundamental goal.
 Why single out universal service for this adverse treatment?  Companies could 
easily identify other social programs that are paid for in the bill B like 
unemployment insurance.  Specific costs, like executive salaries, or company 
profits or markups should perhaps also be broken out and put at the on the 
bottom of the bill.  Why not put the average hourly wage rate paid by the 
company on the bottom of the bill so that consumers would patronize companies 
whose labor policies they like?  These examples illustrate the flaw in the 
surcharge approach.  
 Including the universal service item on the bill has nothing to do with 
economic decisionmaking, is not required by the statute, and merely allows 
certain providers (and customers if the surcharge is a flat rate) to avoid 
paying their fair share of universal service costs.
 
Question 32:  Fund Administration
 Any universal service fund advisory board should have public interest 
representation.  

Question 35: Required Statutory Changes 
 To the extent that the universal service fund administrator needs powers that 
the Commission already has, it should be set up as an office within the 
Commission.  This would avoid the need to pass new legislation on this issue. 
F:cases/ut/ut980311(r)/july2 pc comments