BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION UT-970325 Petition for Investigation into the Cost ) of Universal Service and to Reform ) COMMENTS OF GTE Intrastate Carrier Access Charges ) NORTHWEST- _____________________________________ ) June 12, 1998 GTE Northwest Comments Docket No. UT-970325 GTE Northwest Incorporated (“GTE”) submits these Comments to respond to the Commission’s May 19, 1998 Opportunity to Submit Written Comments on Proposed Rule Intrastate Carrier Access Charge Reform. GTE’s November 21, 1997, January 13, 1998, February 13, 1998 and April 8, 1998 Comments continue to represent the Company’s overall position on access charge reform and the necessarily related reform of universal service support. I. INTRODUCTION TO COMMENTS ON PROPOSED RULES In its February 13, 1998 comments, GTE agreed with the Commission’s premise that explicit and sufficient universal service funding must precede access charge reform. In other words, it is the replacement of implicit subsidies with explicit support that will allow material changes to be made to the level of access charges in Washington. GTE further stated in its March 30, 1998 comments in UT-980311 that access reform must be closely linked to universal service support reform. As such, the transfer of all implicit subsidies cannot be accomplished in a vacuum; it is inextricably intertwined with the creation of a permanent, sufficient and competitively neutral universal service fund (“USF”). Given these linkages, the preferred approach to meaningful access reform is to carefully integrate it with the development of the USF. GTE Northwest Comments, UT-980311, March 30, 1998. II. ACCESS CHARGE REFORM A. GTE NORTHWEST’S PROPOSAL The Commission’s goal of fair and efficient competition is best achieved by adopting GTE’s proposal which is, as stated in its previous comments, that access charges be reduced to a level based on direct cost plus a reasonable allocation of common costs, consistent with overall market conditions and recovery of total actual costs. The access revenue reductions made to remove implicit subsidies must be recovered from a combination of targeted end user charges and a permanent, sufficient and competitively neutral universal service funding mechanism. GTE Northwest Comments, February 13, 1998 This should occur within the context of rate rebalancing. GTE’s proposal will create a level playing field for all players, allowing for fair and efficient competition. B. COMMENTS ON STAFF’S MAY 19 PROPOSED RULE INTRASTATE CARRIER ACCESS CHARGE REFORM The Staff’s May 19 proposed rule Intrastate Carrier Access Charge Reform is repeated below, for ease of reference: WAC 480-120-540 Terminating access charges. (1) Except for any universal service rate allowed pursuant to subsection (2) of this section, the rates charged by a local exchange company for terminating access shall not exceed the lowest rate charged by the local exchange company for the comparable local interconnection service, such as end office switching or tandem switching. If a local exchange company does not provide local interconnection service (or does so under a bill and keep arrangement), the rates charged for terminating access shall not exceed the cost of the terminating access service being provided. The cost of the terminating access shall be determined based on the total service long-run incremental cost of terminating access service plus a reasonable contribution to common or overhead costs. (2) If a local exchange company is authorized by the commission to recover costs for support of universal access to basic telecommunications service through access charges, it shall recover such costs as an additional, explicit universal service rate element applied to terminating access service. (3) Definitions. (a) “Access charge” means a rate charged by a local exchange carrier to an interexchange carrier for the origination, transport, or termination of a call to or from a customer of the local exchange carrier. Such origination, transport, and termination may be accomplished either through switched access service or through special or dedicated access service. (b) “Terminating access service” includes transport only to the extent that the transport service is bundled to the end office or tandem switching service. Dedicated transport unbundled from switching services is not subject to subsection (1) of this section. (c) "Bill and keep" (also known as "mutual traffic exchange" or "payment in kind") is a compensation mechanism where traffic is exchanged among companies on a reciprocal basis. Each company terminates the traffic originating from other companies in exchange for the right to terminate its traffic on that company's network. (4) The requirement of subsection (1) that any terminating rate be based on cost shall not apply to any local exchange company that is a small business if it concurs in the terminating rate of any local exchange company that is not a small business and has filed a terminating rate that complies with the requirements of subsection (1). For the purposes of this subsection, "small business" has the same meaning as it does in RCW 19.85.020. (5) Any local exchange company that is a small business and that is required to lower its terminating access rates to comply with this rule may file tariffs to increase or restructure its originating access charges. The Commission will approve the revision as long as it is in the public interest and the net effect of the two filings is not an increase in revenues. For the purposes of this subsection, "small business" has the same meaning as it does in RCW 19.85.020. 1. COMMENTS ON PART (1) OF THE PROPOSED RULE GTE acknowledges that the proposed rule is a step in the right direction toward identifying and removing implicit subsidies and that there is some improvement from prior proposals. However, serious flaws remain in the proposed rule. One serious flaw is failing to address the implicit subsidies in originating access charges which is inconsistent with the requirement of the Telecommunications Act of 1996 (“the Act”) to remove implicit subsidies and make them explicit. Retaining the implicit universal service subsidies in originating rates creates a potential for rates that are too high, thus creating market distortions. If the market determines that local exchange carriers’ (“LECs”) originating access rates are economically inefficient, competition will drive LECs’ originating rates down or bypass will occur. Meanwhile, the LECs’ competitors are being offered an unfair and artificial advantage by the potential to offer lower originating access rates because they are not burdened with high subsidy-laden originating charges to support local service for which such subsidies have not been made explicit nor considered in sizing universal service. This demonstrates that the Commission Staff’s proposed rule does not “create opportunities for fair and efficient competition”. Rather, the proposed rule ignores the fact that originating access charges help support lower local rates, and it would violate the Commission’s duty to provide LECs with a reasonable opportunity to recover their costs. Another example of potential market distortion occurs if rates for originating access are set artificially high due to implicit subsidies remaining in those rates, so that a new entrant may be enticed to make investments and enter the market. If market forces subsequently drive down originating access rates, the new entrant may not be able to sustain market viability. In such a situation, this artificial entry point will invariably send improper signals to the market and inordinately penalize such artificial entry. Another serious flaw of the proposed rule is the requirement for terminating access to not exceed the lowest rate charged by LECs for the comparable local interconnection service. It also states that if the LEC provides local interconnection under a bill and keep arrangement, total service long-run incremental cost (“TSLRIC”) plus a reasonable contribution to common or overhead costs applies. This proposal does not meet the Staff’s stated goal to “greatly simplify the access charge system within the state of Washington,” for the following reasons. First, the current access structure is incompatible with the rate structure of local interconnection agreements. To implement this requirement would result in one set of rates and structure for originating access and another set for terminating access. For example, in the current access rate structure, an originating minute of use would incur an end office switching charge and may, or may not, depending upon the route, incur transport charges for tandem switching. This contrasts with local interconnection agreements which may have a local switching rate element which includes charges for both end office switching and tandem switching. This different rate structure would then be applied to the terminating minutes of use under the Staff’s proposal. This is not simplifying the access charge system. Second, most local interconnection agreements with bill and keep arrangements state that if the traffic goes out of balance, billing occurs at specified rates. Traffic exchange under some of these agreements may never go out of balance and, therefore, the stated rate may never be billed. The proposed rule is unclear as to whether the access rate would need to be set at the lowest billed rate at any given time, or at the lowest contract rate, even if it is never billed. In addition, where there are multiple interconnection agreements with different rates (due to the different negotiation contexts, as discussed below) and different durations, it appears that the proposed rule would require the tariffed access rate to be reset each time the low-price interconnection agreement expires. Again, this is not simplifying the access charge system. More important, the Commission cannot assume, without evidence, that every carrier’s lowest current local interconnection rate is cost justified. Because current local interconnection rates may have been arbitrated or negotiated within the context of a complete local interconnection package, to use a pick and choose approach from price elements within the package would be inappropriate and misguided. The simple, rational and appropriate solution is for all LECs to price their access services using TSLRIC plus a reasonable contribution to common or overhead costs, and to recover the implicit subsidies formerly provided by access charges through a USF. Also, the proposed rule fails to define the critical term “total service long-run incremental cost (TSLRIC)”. In order to be a reasonable element of regulatory price setting, TSLRIC must, for example, include realistic views of prospective technology, depreciation rates for such technology, and appropriate rates of return that reflect market conditions and capital risks. In addition, if the TSLRIC methodology adopted by the Commission produced insufficient terminating access rates, the proposed rule does not state how it would meet the Commission’s legal obligation to provide the carrier a real opportunity to recover its reasonable actual costs. Finally, the term “common or overhead costs” is also not defined. In defining common or overhead costs, the role of loop costs must be determined. As GTE has previously stated, for economic and public policy reasons, loops should not be considered a direct or common cost of carrier access service. Loop costs should be attributed to the service that causes the cost to be incurred. Loop costs are caused solely because customers order local service. While toll service and, necessarily, access service use loops in the sense that toll traffic passes over loops, toll does not cause loop costs to be incurred. Local customers may never make any toll calls, but that would not cause some portion of loop cost that might be arbitrarily assigned to toll service to disappear. If loop allocation is part of the Commission’s plan, access reform and the removal of implicit subsidies from access rates becomes a very diluted issue. 2. COMMENTS ON PART (2) OF THE PROPOSED RULE It is unclear how a LEC is “authorized by the Commission to recover costs for support of universal access”; this should be defined or explained in any rule. In addition, the rule should specify that the implicit subsidies present in all of a LEC’s access rates should be quantified and placed as an interim “explicit universal service rate element” on terminating access charges, to be fully replaced with a permanent, sufficient, and competitively neutral universal service mechanism supported by all retail telecommunications providers in the state. To do otherwise would unlawfully deprive LECs a real opportunity to recover their reasonable actual costs. Access charge reform rulemaking is not a proper vehicle for making revenue changes. The Commission does not have statutory authority to use a rulemaking to compel carriers to revise rates and reduce revenues. In the context of RCW 80.36.140, the Commission may, after an adjudicative proceeding, order carriers to revise their filed tariff rates. This is the only way in which the Commission can make a finding that existing rates are “unjust, unreasonable, unjustly discriminatory or unduly preferential, or in anywise violation of law. . . .”. 3. COMMENTS ON PART (3) OF PROPOSED RULE The inclusion of definitions is appropriate, however, the list of such is somewhat incomplete as noted in the above comments. By the definition of “terminating access service”, dedicated transport unbundled from switching services is also not subject to subsection (2) of the proposed rule. While GTE believes that special or dedicated access services should be exempt from any temporary universal service charge, GTE strongly supports obtaining universal service support on an equal basis across all retail telecommunications services over the longer term. To do otherwise would fundamentally distort the switched/special access wholesale decision process and therefore, distort market decisions. 4. COMMENTS ON PART (5) OF PROPOSED RULE Subsection (5) implies that for LECs that are small businesses, the impact of this proposed rule would be revenue neutral. There is no rationale for allowing a revenue neutral filing for only some companies. This should apply to all LECs. Again, the Commission does not have statutory authority to use a rulemaking to compel carriers to reduce rates and revenues. III. CONCLUDING COMMENTS ON PROPOSED INTRASTATE ACCESS CHARGE REFORM RULE As stated previously in GTE’s comments, while these Comments necessarily focus on specific rulemaking proposals, it is a good idea to keep in mind the overall import of the access reform issue in Washington. Genuine and timely access reform is necessary to achieve the Act’s objective of opening up local markets without the taint of rate structures burdened with implicit subsidies and of maintaining universal service going forward through the use of permanent, sufficient, competitively neutral, explicit subsidies. In addition, attainment of Congress’s objectives requires that all rates be restructured consistent with underlying actual direct and common costs, with input from analyses of forward-looking cost trends. Without such a comprehensive and coordinated approach, the Act’s goals of addressing the “Trilogy” of access reform, universal service, and local competition will not be achieved, and their benefits would not become available to Washington’s consumers for some time. The proposed and draft rules do not meet these objectives. They contain specific deficiencies, as discussed above, but more basically, they are not part of the required comprehensive approach. GTE Northwest Comments, April 8, 1998 True access charge reform cannot occur without this.