BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of the Petition for an Investigation Into the Cost of Universal Service and to Reform Intrastate Access Charges. DOCKET NO. UT-970325 COMMENTS OF PUBLIC COUNSEL AND AARP IN RESPONSE TO CR 102 The Public Counsel Section of the Washington Attorney General and the American Association of Retired Persons (AARP) submit these comments in response to the Notice of Proposed Rulemaking (CR 102 ) issued in this proceeding on May 20, 1998. I. There is No Access Charge Crisis in Washington Access charge policy is not “in crisis” in Washington. Indeed, as the CR 102 itself notes, “…no federal or state law mandates the adoption of this rule[.]” (CR 102, Attachment, sec. g, p. 1). Current levels of access charges in Washington are not the chief cause for the slow development of competition in the state. Consequently, there is no need at this time for a drastic restructuring of access which could have harmful consequences for consumers. The Commission has, in any event, been lowering access charges as opportunities arise. See, e.g., WUTC v. USWC, UT 950200, Fifteenth Supplemental Order, April 11, 1996, p. 111. See also, WUTC v. Washington Exchange Carriers’ Association, UT 971140 (complaint seeking access reductions). Reductions from the 1995 USWC rate case are just beginning to go into effect. Access charges for carriers terminating traffic on the USWC network will therefore be reduced whether or not this rule is adopted at this time. Because this rule adopts a structure for access charges which is untried in Washington, and which may have undesirable impacts on local residential and business rates (see discussion below), Public Counsel and AARP urge the Commission to proceed cautiously and gradually. Above all, it is of paramount importance for the Commission to ensure that any restructuring of access charges provides adequate protection to local customers from rate rebalancing efforts. II The Commission Should Adhere To The Principles Set Out In The Prior Comments Of Public Counsel In This Docket. In its Reply Comments in this proceeding, Public Counsel set out the following principles for the evaluation of access and universal service reform proposals: The goal should be to have prices set at forward-looking economic costs, recovered in an efficient manner. Universal service funds should only support costs at those efficient levels. The telecommunications network should be treated as an integrated, multi product enterprise delivering a wide range of services. All services should be required to pay for all facilities that they utilize. Recovery of a share of joint and common costs is not a subsidy. The loop is a shared cost. To the extent that they are effective, market forces should be relied upon to drive prices to costs and to drive costs to efficient levels. Where they are not effective, prescriptive regulation must be implemented to accomplish reform. Major changes in access charge reform should be introduced in phases and each step in the process should move toward the ultimate goal. A fundamental corollary of these principles is that universal service funding is not a “make whole” for access reform. The Commission should not adopt this rule if intends to simply replace reduced access revenues with offsetting “dollar for dollar” universal service fund payments. III. The Proposed Rule Should Clarify That Reductions in Terminating Access Should Be Offset In Originating Access While Public Counsel and AARP believe that the proposed rule is moving in the right direction, we have expressed concern about the potential impact of the access reform, if improperly structured, on local business and residential rates. The proposed rule adopts a mechanism which will put in motion certain dynamics which can place serious upward pressure on local rates. Adoption of the proposed rule is very likely to result in requests from local exchange carriers for local rate increases to compensate for revenues allegedly lost when rates for terminating access are reduced. See, e.g., Staff Open Meeting Memorandum, UT 970325, May 13, 1998, (Zawislak, Tennyson, Shirley, Blackmon), p. 3 (“Local exchange carriers (LECs) are likely to re-look at all of their rate structures and propose rebalancing where necessary.) This is not an imaginary threat. LECs have consistently argued that access reform must be accomplished through rate rebalancing. See, e.g., Reply Comments of USWC, UT 970325, April 10, 1998, pp. 8-9; See also, SBEIS Questionnaire Responses, Appendix 2, Note “@” (“Most companies have included the cost of a general rate case (to offset alleged “bypass” fears - i.e. indirect speculated losses) [.]) (attached to May 13 Staff Open Meeting Memorandum). Both Maine and Florida have recently seen industry-sponsored legislative efforts to raise local rates as part of access reform. Consideration of the practical result of adoption of the proposed rule, as written, leads us to conclude that this “rate rebalancing” dynamic may be exacerbated by the current structure of the rule. The fundamental premise of the proposed approach to access reform is to reduce terminating access and concurrently to allow access cost to be recovered from the originating side where it will be subject to competition. This is a two-part mechanism in which the two components are inter-related. The first part of the mechanism, the reduction of terminating access charges, is addressed in the rule. Except for a reference to small carriers in section (5), however, the rule is silent as to the second part of the mechanism, which contemplates that carriers may look to the originating element to recover remaining access costs. The effect of omitting any reference to the second part of the restructuring mechanism (originating access revision) for large carriers is that it leaves open two critical questions: local rate rebalancing and loop cost recovery from access. This invites LECs to shift loop cost recovery to local rates if they can, an approach which appears to be contrary to the intent of the rule. Since a significant share of loop cost contribution currently comes from terminating rather than originating access, the rule needs to make clear that contribution to loop cost must now be recovered through originating access rates. By remaining silent on the treatment of originating access, the rule creates too much uncertainty about loop cost recovery and too much risk for local business and residential ratepayers. Public Counsel and AARP, therefore, recommend that the rule be amended to include language which makes clear that companies must look to originating access, rather than local rates, to recovery revenues not addressed by terminating access charges and the universal service rate element. Absent such an amendment, the rule in its current form exposes local customers to excessive risk of rate rebalancing and should not be adopted.