BEFORE THE WASHINGTON UTILIITIES AND TRANSPORTATION COMMISSION UT-970325 In the Matter of Intrastate ) COMMENTS OF SPRINT CORPORATION Carrier Access Charge) ON BEHALF OF SPRINT COMMUNICATIONS Reform Proposed) COMPANY L.P. AND UNITED TELEPHONE Rule Making) COMPANY OF THE NORTHWEST Pursuant to the “Opportunity to Submit Written Comments on Proposed Rule” issued by the Washington Utilities and Transportation Commission (“Commission”) on May 19, 1998, in the above referenced docket, Sprint Corporation on behalf of Sprint Communications Company LP and United Telephone Company of the Northwest (“Sprint”) respectfully submits these comments on the proposed rule WAC 480-120-540. Introduction Sprint strongly opposes the access charge rule as written and urges the Commission against adoption. For United, the estimated revenue loss is $6M which would translate roughly to increases of $6 per subscriber per month. Increases of this magnitude are more than rural customers should be expected to bear. While Sprint agrees with the goal of replacing implicit subsidies, reform for companies serving rural Washington should be responsibly managed over a transition period. Gradual increases in local service rates to cover costs, and a reduction in access rates toward TSLRIC should encourage competition in both the local and long distance markets, which will bring the benefits of lower prices, improved service and enhanced choices to all telecommunications users. However, these benefits will not be realized if the Commission merely reduces access charges, ignoring the impact on rural subscribers, does not address access in a comprehensive manner, and does not establish a direct linkage between access reform and USF The rule as written selectively slashes access prices without a defined mechanism for assuring affordable rates or for providing a means of increasing the prices of services that are currently subsidized by the access charges to be reduced. Outlined herein are further reasons why the rule should not be adopted, as well as several specific ways in which an access charge reform plan can be crafted to better address the elimination of implicit subsidies without adversely affecting rural customers. The Rule Would Compel Rate and Revenue Reductions Without Earnings Investigations in Violation of the Law. Under RCW 80.36.100, a company’s rates are preemptively lawful, unless the Commission finds through a hearing process that the rates are unjust, unreasonable, unjustly discriminatory, or unduly preferential, or are otherwise in violation of the law. For this reason alone, the rule should not be adopted. There Has Been No Evidence Presented in this Rulemaking that Indicates the Rule Will Better Allow for Innovative Products and Services No record has been established on the purported innovative services that will be offered as a result of reducing switched and CCL access charges down to TSLRIC. Perhaps the Commission has in mind flat-rate optional calling plans to address EAS demand. It is true that the current level of access rates can make it difficult to pass imputation for such plans. Nevertheless, United has withdrawn only one filing, InfoLink, due to imputation issues. InfoLink was targeted to customers who did not have local access to internet service providers (ISPs). Since the plan was withdrawn, ISPs have moved out into rural markets. Additionally, United has implemented EAS routes that facilitate local access to ISPs for all but five small exchanges. The remaining five will be addressed if pending “hardship” EAS filings are approved and the current draft EAS rule is implemented. Imputation has never been an issue in the approval of EAS routes to United’s knowledge, nor will reduced access rates cause United to re-evaluate whether two exchanges should be collapsed into a single exchange boundary. Such decisions are based upon community of interest considerations. The USF Provision Contained in the Rule Is Not in Compliance with the Act The draft rule contains a section that states, “If a local exchange company is authorized 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.” This language does not square with the Telecommunications Act of 1996 (“the Act”) on two counts. First, the the Act specifically requires that every telecommunications carrier that provides intrastate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, in a manner determined by the State to the preservation and advancement of universal service in that State. Sec. 254 (f). Whatever universal service requirement (explicit subsidy) is ultimately decided must be recovered in a competitively neutral manner. Assessment on interexchange carriers only is not competitively neutral. Second, the Act provides that: A state may adopt regulations to provide for additional definitions and standards to preserve and advance universal service within that State only to the extent that such regulations adopt additional specific, predictable, and sufficient mechanisms to support such definitions or standards that do not rely on or burden the Federal universal service support mechanism. Id. In Washington the issue of recovery is being addressed in UT-980311(r) and will not be decided before December 9, 1998. The final Commission Order that will provide the legislature with an estimate of the size of the universal service fund will not be issued until December 4. This means that if LECs are to file tariffs to reflect the access charge reductions by October 15, 1998 with a December 1, 1998 effective date, the Commission will not be replacing implicit subsidies with a specific, predictable and sufficient funding mechanism pursuant to the Act. In fact, companies will have no means for recovery for an indefinite period, even though the access reform rule suggests that some support may be required to preserve universal service. This is not to imply that access reform (rather than access reductions) cannot begin independent of universal service, if such a plan is properly crafted. However, it makes little sense to simply reduce access with the notion that at some point the lost revenue might be deemed necessary to support universal service, in which case, another scheme would be implemented. On this matter, Sprint agrees with AT&T that: If high cost assistance is needed in the first instance . . . it makes little sense to implement a temporary (administratively burdensome and costly) solution to be followed shortly thereafter by yet another solution (also requiring administrative changes and cost). AT&T comments April 7, 1998. Further, implementing a rule that reduces access before establishing a universal service is a risky proposition. For instance, if the universal service fund is established on the basis of the difference between cost and a revenue benchmark (versus an affordable rate), then reducing revenues now will increase the size of the universal service fund needed. If the fund is deemed to be too large, then the only recourse left is local rate increases (assuming LECs are to continue to operate profitably). This is one reason why Sprint’s proposal for access reform, as submitted earlier and contained herein, does not depend on universal service, but rather would begin to move intrastate access toward interstate levels. Further access reform could be triggered upon the implementation of a universal service mechanism—to the extent practical. That is to say, any incremental universal service revenues would be used to reduce implicit access subsidies. Rate Structure Issues and the Simplification of the Access Charge System Before rate levels are established, rate structure should be addressed. One of the stated reasons listed on the CR-102 form for adopting the rule is that it will “greatly simplify the access charge system.” Sprint respectfully disagrees. Rural companies Sprint uses the term “rural companies” as the term is defined by the Telecommunications Act of 1996. in Washington continue to assess a CCLC on a minutes of use basis whereas the FCC has moved to a line-based charge. In US West’s case, CCLC was eliminated, but residual revenues were shifted to switched access, so in essence US West is also recovering non-traffic sensitive costs on a traffic-sensitive basis. Moreover, rural companies have yet to adopt the interstate Local Transport Rate (LTR) structure. If the goal is to simplify the access charge system, one might assume that the state structure would mirror the interstate structure. But rather than eliminating the two existing disparate rate structures, or taking the FCC structure as a point of departure, the draft rule would overlay a new structure on top of the existing intrastate structure, and further complicate the access charge system. Terminating Intrastate CCLC for all companies would presumably be eliminated, since there is no underlying TSLRIC, and originating switching will now be differentiated from terminating switching, requiring two rate elements in place of one. Presumably, originating switching would be based on the existing rate that applies to both originating and terminating minutes, whereas terminating switching would move to TSLRIC (or the local interconnection rate when applicable). Not only will this structure result in extra billing and administrative costs, but it will create customer (in this case, carrier) confusion. The Rule is Inconsistent with Interstate Access Pricing Policies Implicit in the rule is the principle that like functionalities or services should be similarly priced. However, it is somewhat puzzling why the Commission would attempt to structure and mirror intrastate switched access services with local interconnection or tandem switching UNEs, and yet ignore the rate structure and rate levels for interstate switched access services. The FCC relied upon principles of cost-causation and economic efficiency in crafting its access reform order. Among the efficiencies contained in the new interstate structure is the more rational means of recovering non-traffic sensitive costs through line-based charges. Economic principles would dictate that only those costs of providing access that vary with usage should be assessed through minute-of-use (MOU) rates. Effective January 1, 1998, price cap LECs recover common line and residual TIC revenues through a new flat charge, subject to a ceiling. Remaining common line and residual TIC revenues will then be first recovered through originating access rates, subject to a ceiling. Any remaining common line and residual TIC revenues may then be recovered through terminating rates. As the caps on SLCs applicable to non-primary residential lines and the PICC are raised, none of these residual revenues will be recovered through terminating access charges. When the increased SLCs and PICCs are fully implemented, recovery of these costs will be more susceptible to competitive forces. ¶¶ 353-354, First Report and Order, In the Matter of Access Charge Reform, CC Docket No. 96-262 (May 16, 1997). This restructuring accomplishes the goal of reducing potential excesses in terminating access charges while exposing the CCL and residual TIC recovery to competitive pressures in the originating access market. The FCC has recognized that access reform for smaller, rural LECs may raise new and different issues. Accordingly, they opened a separate proceeding for smaller LECs. ¶ 3, Notice of Proposed Rulemaking, In the Matter of Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate-of-Return Regulation. CC Docket No. 98-77 (June 4, 1998). The FCC acknowleges that differences in the circumstances of smaller rural LECs may require different approaches to reform, including a different transition to more economically efficient, cost-based access charges. In its recent NPRM on Access Charge Reform for LECs Subject to Rate-of Return Regulation, the FCC said that it wants to ensure that the process of getting the benefits of competition is as smooth as possible. Id. Though an order has not yet been issued for small companies, it seems unlikely that the FCC will prescribe TSLRIC-based switched access rates for small, rural companies since they rejected such an approach for large companies. ¶ 290, First Report and Order, In the Matter of Access Charge Reform, CC Docket No. 96-262 (May 16, 1997). One reason the FCC elected not to prescribe access rates on a TSLRIC basis, was because doing so could raise common cost allocation issues to a much greater extent than did TELRIC pricing for unbundled network elements. Id. ¶¶ 288-289. In Washington, TELRICs for UNEs have not yet been established for rural LECs, and for US West and GTE the Commission is just beginning to wrestle with the pricing issue of common cost recovery. Therefore there is no record at this point on this issue. One thing is certain, however, as WITA will attest: rural companies do not have other revenue sources that can make up for a large shift in revenues. The contribution to common costs is a much larger issue for rural companies. If UNEs and Access Services are to contribute only minimally to common costs, then where are such contributions to be found? Certainly the magnitude of such reform should not be ignored. Setting aside the common cost allocation problem, the FCC said that if they were to make such a prescription, they would consider phasing in rate reductions over a period of years in order to avoid the rate shock that would accompany such a great reduction at one time. para. 290. The same concern ought to arise with regard to intrastate access reform for rural companies. Other jurisdictions have acknowledged the need for a transition mechanism in order to avoid rate shock. The Maine Public Utilities Commission recently approved a plan that will reduce Bell Atlantic’s access levels by 25% with local rate offsets over a 15 month period. Moreover, the initial rate shock is likely to be followed by further rate shocks since radically reducing intrastate rates will surely encourage arbitrage between interstate and intrastate. In this instance, market forces would not be driving prices downward, nor would regulation “create opportunities for fair and efficient competition.” Rather, state regulatory intervention would undermine federal regulatory policy through the creation of perverse incentives, without regard to the ultimate impact on local rates. If the Commission decides to implement the draft rule as written, then at least a consumer education effort should be undertaken to prepare rural customers for the rate increases ahead. Rate Cases are Rate Rebalancing by Another Name Rate rebalancing is a loaded term. To some, it implies guaranteed revenue-neutrality for incumbent LECs—in a sense, protection from competition in some market segments, extracted from captive customers in other market segment. At the other extreme, rate cases will result if a prescriptive approach is adopted that immediately eliminates implicit subsidies without a plan to reprice services that have historically been subsidized. In the latter instance, the only alternative rural incumbent LECs may have to filing rate cases is to provide services below cost (unprofitably). Certainly providing services unprofitably is not an attractive proposition to investors, will not advance competition (no amount of corporate mergers will result in competition in unprofitable markets), and conceivably, would jeopardize universal service and rural infrastructure deployment. Moreover, radical reductions in access subsidies without a plan for repricing other services, or establishing explicit revenue sources, will result in large local rate increases for Washington consumers compared to a well-managed transition plan. Sprint’s Proposal For these reasons, Sprint’s access proposal is designed with gradual local rate increases, and would directly link access reform and affordable local rates with universal service funding. Sprint’s proposal would not shift the entire burden of existing implicit subsidies on USF because doing so would have the effect of continued subsidization of below-cost local service rates, which would deter local competition, particularly in rural areas. Under Sprint’s original plan, rural companies would transition existing access charges toward interstate levels over a three year period, with offsets of $1 per line each year for local rate increases, and $1 per year for PICCs charged to IXCs. Large companies (US West and GTE) would transition to TELRIC-based access rates over three years or less, since they have less movement to make. This plan is independent of universal service support. Another approach would be to: Restructure access to mirror the interstate structure. This by itself would effectively reduce access rates. Implement transport restructure (LTR) for those companies that have yet to implement it, with a TIC charge that could be phased out over time. CCLC would begin to shift to a PICC assessed to carriers. This would reduce LECs revenues over time since access lines grow at a slower rate than minutes of use. Additionally, increase local rates by $1 per year with offsets to access charges for 2 years—targeted to PICC (or terminating switched rates for USWC if they have no PICC), and/or the TIC. $2 increases should not render local service unaffordable. By the third year a universal service fund should be in place (either federal or state) at which time further local increases could be assessed in light of the affordable rate that would be established. Any further access reductions could be accomplished as offsets from any incremental USF the LEC would receive, or as offsets to local rate (e.g., move the actual rates to the affordable level). Terminating non-traffic sensitive rates could be targeted first for rural companies (terminating switching for US West since they have no non-traffic sensitive rates per se). It should be noted that recovery through USF is not a “make-whole” proposition, as asserted by AT&T, since support will be portable to any ETC. Additionally, moving recovery of non-traffic sensitive costs to a line-based charge, rather than a minutes of use based charge, will effectively reduce access revenues over time since access lines tend to grow slower than access minute of use. Ultimately, the transition period over which local rates would increase would depend on the magnitude of the implicit subsidies, as well as the sufficiency of a universal service fund and lifeline plan to maintain affordable local rates (including all local end-user charges) that are comparable with urban rates. Special Considerations for Rural Companies As stated earlier, immediately eliminating all of the rural companies’ subsidies inherent in terminating switched access charges overnight, as contemplated by the rule, would have an enormous impact on rural subscribers. Because rural companies have traditionally relied on access subsidies to maintain affordable local rates to a greater extent than urban companies, a separate approach is warranted. Either the universal service fund will need to be sized to accommodate the shift from implicit to explicit subsidies, or losses must be made up through local rate increases (either through revenue-neutral rate rebalancing or through rate cases). For United Telephone, the estimated revenue loss of $6M would translate roughly to an increase of $6 per subscriber per month. Because of the potential rate shock, Sprint urges the Commission to consider the impact on rural Washington consumers before adopting a flash-cut proposal. In the last round of comments, both WITA and Tracer supported a bifurcated approach with respect to rural and non-rural LECs. Even AT&T, which stands to gain the most with access charge reductions, suggested a more moderate approach than the draft rule would provide. Under AT&T’s proposal, rural companies would reduce intrastate switched rates to interstate levels upon implementation of a new competitively neutral universal service mechanism. At the same time, local rates would be rebalanced over a 3-5 year period. AT&T Comments April 7, 1998. Sprint continues to believe that the best and most workable option for access reform for rural companies is to reduce the level of access charges by gradually moving access rates and local rates towards cost as outlined in the preceding section. Access reform should be approached in a comprehensive manner and in recognition of current prices and substitute services (e.g,. interstate access). Any incremental revenues resulting from universal service would offset access charges. Beyond that, further access rate rebalancing towards a TSLRIC price floor that is deemed necessary will necessitate the development of TSLRIC for rural companies’ access and local services. As a practical matter this can not possibly occur in time for the tariff filings outlined in the current access reform schedule. There has not been a proceeding opened yet for the establishment of TELRIC, let alone TSLRIC, for rural companies. Gradually moving local rates above cost, as painful as that may be, would encourage more efficient competitive entry into the local market, bringing all the benefits of competition, including downward price pressure, to consumers. Yet because the required increases might render local service unaffordable in rural areas, it is imperative that before embarking on further access reform, the Commission first establish a competitively neutral universal service funding mechanism. Such a mechanism will assure the availability of local service to low income customers and to high cost areas. Mitigation for Small Businesses Sprint’s proposal would differentiate between rural and non-rural companies by extending the transition period for rural companies in recognition of the rural companies greater dependence on access subsidies, and in order to prevent rate shock. In contrast, the draft rule differentiates between small companies and large companies by providing for revenue-neutral rate rebalancing for small companies, but disallowing rate rebalancing for all other companies. Supposedly, this scheme will reduce the disproportionate impact of state administrative rules on small businesses and thereby promote competition in keeping with the intent of the Regulatory Fairness Act. Instead, the rule will drive originating access rates in the 20 cent range for small businesses, and with the stated intent of encouraging carriers to take dedicated access instead of switched access. Not only will this adversely affect small businesses who do not have sufficient means for recouping this loss from other services, but it deliberately drives uneconomic behavior. Summary Sprint urges the Commission against adopting the access reform rule as written. Access reform is a means toward the important goal of fostering competition, but there are many issues to consider, the least of which is the impact on rural customers. Sprint believes it would be worthwhile if the Commission would continue to examine the issues surrounding access reform through additional workshops and industry participation. However, if the Commission must adopt a rule at this time, Sprint asks that its proposal be given due consideration. The plan outlined herein accomplishes the objective of ensuring that terminating access, which is less susceptible to competition than originating access, will not be set at excessive levels. However, unlike the draft rule, Sprint’s proposal will not result in rate shock and adversely affect rural customers. Respectfully submitted this 12th day of June 1998. SPRINT CORPORATION ON BEHALF OF SPRINT COMMUNICATIONS COMPANY L.P. AND UNITED TELEPHONE COMPANY OF THE NORTHWEST __________________________________ Nancy L. Judy AVP External Affairs