WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION Docket No. UT-970325 Intrastate Carrier Access Charge Reform These Comments are filed on behalf of the Washington Independent Telephone Association (WITA) in this docket, regarding the Intrastate Carrier Access Charge Reform Rulemaking. WITA opposes adoption of this rule. WITA is extremely concerned that the proposed rule will have severe potential adverse consequences for rural telecommunications companies. WITA also feels there are significant potential legal disabilities in the rule proposal. This doesn’t mean WITA wants to do nothing. WITA does offer and support an access reform plan along the lines described in Section 6, beginning at page 15 of these Comments. The access reform changes would be triggered upon adoption and subsequent legislative approval of a universal service plan. WITA believes the proposed WAC 480-120-540 related to terminating access charges should not be adopted for the following reasons: (1) For companies that do not receive the “mitigation,” this proposed rule would constitute a reduction in the overall revenue requirement of a company without any investigation as to whether or not the company is overearning, and thereby is improper ratemaking and a violation of due process; (2) The Commission does not have the statutory authority to compel the filing of a tariff by rulemaking; (3) There is no demonstration at all in this record that the benefit identified in the CR 102 notice that the change will “allow for innovative new products and services” has any basis in reality; (4) There is little evidence in this record that this proposal will “create opportunities for fair and efficient competition”; and (5) The Small Business Impact Statement (SBEIS) filed with this rule is inaccurate, and the proposed mitigation is inadequate. Discussion In this proceeding, the Washington Utilities and Transportation Commission (Commission) is proposing to mandate sweeping change to the access charge structure in the state of Washington in the name of promoting competition. WITA is concerned that on the day the CR 102 notice went out, a major press release was issued by the Commission which made it sound as though the rule were already adopted. WITA is sure the Commission will carefully consider the issues raised in these Comments, but is worried about the public perception or expectation that may have been created by the press release. The last major change to the access rate structure in the state of Washington was the creation of the access rate structure in U-85-23. That plan evolved out of negotiations among different segments of the industry, presentation of a negotiated plan to the Commission in Cause No. U-85-23 with full adjudicative hearings to test the policies and reasonableness of that plan, and then a Commission decision concerning that plan. None of that has occurred here. Instead, a rule is proposed which has not been tested through the adjudicative process to determine the reasonableness of the structure contained in the rule and the effect it will have on telecommunications customers and companies in the state of Washington. WITA is very conscious of Commissioner Gillis’s concern that the axiom “first do no harm” does not mean “do nothing.” However, the proposed rule, if adopted, would create a great deal of harm. WITA is concerned that the Commission is ignoring the effects that this proposed rulemaking will have on the rural telephone companies (as that term is used in the Telecommunications Act of 1996) serving high-cost areas in the state of Washington. The following are remarks by Chairman William Kennard of the Federal Communications Commission in a speech delivered April 27, 1998. His comments on rural telephone companies are important: As you know, next January 1, 1999 is the date that we will implement a federal high cost mechanism for the larger telephone companies, and I will talk more about that in a minute. But first I want to say a few words about the smaller, rural carriers and the implications of universal service for them. When it comes to our country’s smaller, rural telephone companies — companies that serve one-third of the nation’s geography but only about five percent of the population — if it ain’t broke, don’t fix it. That may not be the way common carrier lawyers are supposed to talk, but that’s really the way I feel. I visited a small rural telco not long ago and what I saw was a first-rate telecommunications operation. I didn’t see anything that was broken and I had no desire to offer any fixes. The Commission has already taken explicit small company support, changed the way that support is collected to be consistent with the 1996 Act, and made that support portable between competing carriers. That’s a lot of change for companies that are geographically very targeted and undiversified. My bottom line is that universal service reform is something the Commission should do with the small rural carriers, not to them. WITA feels very strongly that the access charge reform undertaken here is certainly something that is being done to, not with, the rural carriers. As pointed out by Chairman Kennard, rural carriers are geographically very targeted and undiversified. They do not have other revenue sources that can make up for a large shift in revenues. WITA does not understand the drive by the Commission to do something “to” rural companies in this access charge reform docket. Nor does this record show the basis for undertaking that action. Even such strong advocates of access charge reform as AT&T and MCI recognize that a different track and a different plan are appropriate for the small companies. At least that is the position that they recognized in their earlier comments in this docket. In earlier comments in this proceeding, WITA proposed a rural competition plan. In addition, in the second round of comments, WITA proposed adoption of the Sprint plan. WITA will provide another proposal in the course of these Comments. WITA is not saying nothing should be done. But the action to be taken is not the drastic approach of the proposed rule. The remainder of these Comments will focus on the problems with the proposed rule described in the introduction and then will set out a proposal that WITA believes is something that can be put in place without doing undue harm to rural telephone companies in Washington. 1. The benefits alleged to be derived from this rulemaking are not demonstrated in the record. There is nothing in this record other than the statement itself that demonstrates that this rulemaking will “allow for innovative new products and services.” There is no discussion as to what those products and services might be. There is no analytical or quantitative demonstration of those alleged benefits. If the new products and services that are envisioned are packages of lower-priced toll services, there is nothing in this rule that will guarantee that the access charge reductions are passed through in toll reductions. If the “innovative new services” are toll offerings by the local carriers, most of the rural companies are not interexchange carriers. Even if they were, how could those companies which take the small company “mitigation” proposed in the rule develop a toll package that passes imputation (the mitigation produces originating access rates of 13¢ to 30¢ or more per minute)? The question which needs to be addressed is what benefits customers will really receive if the rule is adopted. Mr. Blackmon was recently quoted in the Business Examiner (June 8, 1998) as follows: “We have to break down the walls,” says Mr. Blackmon. “That doesn’t by itself cause anyone else to move in, but it is something we have to do to see what happens next.” Staff is saying that this rule change may not result in increased competition. Where is the benefit to the consumer? If access charges are reduced and there is no increase in competition, the only result is more profit (through lower costs) for interexchange carriers (IXCs). WITA believes it is unlikely that this rule will result in an increase in competition. If the mitigation of loading up originating access occurs, it may create some opportunities for bypass by the IXCs connecting directly to selected customers. A benefit to a few large businesses, but not to small businesses and residential customers. What this proposed rule really does is create a false incentive for IXCs to use the small, rural carriers’ special access circuits, depriving the customers of the support for their local rate that was provided through switched access when the public switched network is used for call termination. 2. The basis for the rule that it will “create opportunities for fair and efficient competition” is not demonstrated in this record. It has been alleged by some of the IXCs who also desire to enter the local market that reduction in access charges is a precondition to effective local competition. In the Staff memorandum at the open meeting on May 13, 1998, Staff addressed this argument by saying the new proposed rule removes the opportunity for carriers to meet a large part of their revenue needs through a bottleneck service This is another example of Commission policies discouraging facilities based competition. If a competitive company has an opportunity to recover an appropriate portion of investment in local loops through terminating access service, it is more likely to build those facilities. This rule favors resale and use of unbundled elements, not construction of facilities. and thereby permits them to reduce the price of non-bottleneck, or competitive services. The stated result was “competition based on the provision of non-bottleneck services, which will require greater efficiency and quality of service in order to prevail in the marketplace.” Stated another way, access charge revenues have been used in the past to keep the price of other services lower, such as residential local service. In order to result in the competition sought in the Staff memorandum, two things must occur: (1) Access charges should be reduced to reflect something nearer to cost, and (2) at the same time there should be a rebalancing of rates. The Commission has been very reluctant, for very understandable reasons, to allow increases in residential service prices to occur. However, that is exactly what must happen to achieve the goal advanced by Commission Staff. Without this step, access reform itself does not create opportunities for competition. This then ties the need for the Commission to establish a level of affordability for local residential service with the cost of providing service above that level of affordability to be supported from a universal service fund. Rate rebalancing would be allowed to bring prices closer to that level of affordability in conjunction with an access reduction. This is precisely the reason that WITA has throughout these proceedings advocated that the Commission take the time to look at each of these issues in conjunction with one another and, at the end of the day, come up with a plan that addresses each issue and adopt that plan as a whole. The Commission should not be following the piecemeal approach it is through this access rulemaking. 3. The Small Business Impact Statement provided in this docket is inaccurate and inadequate. A. Treatment of Rural Companies as “Small” Companies. First, WITA suggests that if the rule is adopted and the mitigation goes forward, that the definition of small business for this rule not be strictly limited to the minimum of statute (companies with 50 or fewer employees), but be expanded slightly to include rural telephone companies as defined by the Telecommunications Act of 1996. As currently interpreted by Commission Staff, Asotin Telephone Company, Lewis River Telephone Company, McDaniel Telephone Company, Ellensburg Telephone Company, Whidbey Telephone Company, United Telephone Company of the Northwest, and CenturyTel of Washington are all considered large companies and would have to file rates at TSLRIC. WITA strongly believes that the SBEIS statute is being misinterpreted as it applies to Asotin, Lewis River, and McDaniel. While these are affiliated companies, there is nothing in the SBEIS statute that would combine the companies’ employment figures to be over 50 employees. Even if all three companies are taken together, they have fewer than 50 employees (the number is about 40). As used in RCW 19.85.020, a small business means “any business entity . . . that is owned and operated independently from all other businesses, that has the purpose of making a profit, and that has fifty or fewer employees.” While Asotin, Lewis River, and McDaniel have a common parent, they are each owned independently from all other businesses with a separate legal structure, and they are operated independently with their own managers. Again, even if they could be said to be combined for Washington purposes, the three companies together still have fewer than 50 employees. As to the other rural telephone companies, while they have more than 50 employees, for this purpose they should be viewed as small companies. They serve primarily rural areas and are certainly small in comparison to GTE and US WEST. B. The SBEIS understates the effect of the proposed rule. The members of WITA spent a great deal of time and effort to develop data which was submitted to Commission Staff for inclusion in the SBEIS. Unfortunately, most of the information developed by the participating WITA members did not find its way into the SBEIS. The calculated costs contained in the SBEIS prepared by Commission Staff woefully understates the total costs that a small company will incur. It further does not include the lost access revenue that this proposal will produce. The basis for the exclusion is the mitigation proposal in the rule. However, as explained later, the proposed mitigation does not prevent the loss of access revenue. Based on the responses supplied by the incumbent local exchange companies (ILECs) that qualify as small businesses, the lowest amount of estimated administrative cost is $142,000. The average cost for a small business is $188,440. See attached Schedule 1. This is a far cry from the $17,000 in administrative cost set forth in the SBEIS. We agree with the statement on page 3 of the SBEIS that “local exchange telecommunications companies are familiar with these costs . . . .” That is a reason why the cost estimates submitted by the companies should be used, not ignored. WITA disagrees with the statement that these costs are an ongoing expense of running a business in the regulated telecommunications industry. This is a new expense being imposed by a regulatory body; it is not an ordinary ongoing expense. Perhaps one of the most confounding statements contained in the SBEIS is the following from page 3 of the SBEIS: Smaller employers usually have smaller operations and typically serve in the less dense and/or rural areas of the state (historically). Therefore, due to the capital intensive nature of the telecommunications industry smaller employers have become accustomed to disproportionately higher costs. Are these two sentences to be taken to mean that it is okay to impose higher costs on smaller companies because they are used to having higher costs? That rationale violates Chapter 19.85 RCW. WITA is also confused by the concept that because the telecommunications industry is capital intensive, there is a justification for the Commission to increase the administrative costs of the companies. Capital costs and administrative costs do not necessarily march in parallel lines. Small companies have always tried to keep the cost of service down. Even so, today they have high corporate overheads as expressed on a per-line basis. The average administrative cost of this access reform docket represents an increase in the total corporate operations expense of over 35% for small business ILECs. For example, for Pioneer and St. John, the costs as compared to current corporate operations expense levels increase these expenses 107% and 91%, respectively. To look at another example, the increase in percentage for Kalama Telephone Company, when compared to the intrastate corporate operations expense, is an increase of 73%. That does not appear to be a normal ongoing cost of operation as described in the SBEIS. To put it another way, the administrative cost imposed by this rule represents the equivalent of employment of an outside plant technician for over three years. The SBEIS is further misleading in that it does not include the lost access revenue. Moving from current access rates to a TSLRIC rate certainly will result in lost access revenue to small companies. If Staff’s analysis is adjusted to include a projected loss in access revenue, the cost per employee comparison for a small company goes to approximately $79,656 per employee compared to the big company analysis of $2,760 per employee per company. This has a disparate effect on small companies. On a comparison of the cost per access line, the loss, including lost access revenue, is $553 per access line for small companies, compared to approximately $47 for a large company. Administrative costs for small companies are approximately $149 per access line compared to $30 per access line for large companies. It should also be noted that the access revenue lost does not include expected arbitrage loss if the intrastate rate actually does go to TSLRIC. What many forget is that the IXC self-reports to the local exchange company what its terminating minutes of use are on an interstate and intrastate split. When the traffic is delivered to the LEC, an IXC which connects to the LEC is sending it both interstate and intrastate traffic. While the carrier can be identified through the Carrier Identification Code (CIC), very often the origination of the traffic cannot, thus, the self-reporting mechanism. If the intrastate access rate is substantially below the interstate rate, there will be an incentive for the IXC to decrease the reported PIU (percentage interstate usage) thereby further decreasing the total overall payments for access to the LEC. The conclusion contained in the SBEIS is simply incorrect. The access reform contemplated by the proposed rule has a material disproportionate effect on smaller companies. C. Comments on Mitigation. The proposed rule contains two methods of mitigation. One is to avoid preparing a TSLRIC cost study by using a large company’s rate. If there is anything that the industry has learned in looking at the forward-looking economic cost models (Hatfield and BCPM), it is that using big company surrogates for rural company characteristics produces very misleading results. To date, the Hatfield and BCPM models have been found inadequate to use for rural serving areas. The same should be true for the concept of using a rate based on a TSLRIC cost study prepared for US WEST or GTE. It is simply not an effective mitigation mechanism to say that a small company can use another company’s rate. In such an event, the loss of access would occur, which is ignored in the SBEIS. The second mitigation concept is to move the lost terminating access to the originating rate. Schedule 2 sets out what the originating rate would be for several small companies. The rate is 12.8¢ and 37.4¢ per minute. This type of pricing does not produce a revenue-neutral result. As advocated by the large IXCs (AT&T and others) the rationale for moving revenue recovery to the originating access rate is to allow it to be “competed away.” If something is going to be competed away, it means it disappears. This means that the access revenue will be lost. This means that the alternative in the rule is not a mitigation. It is simply a means of providing an incentive for interexchange carriers to directly connect to customers, thereby bypassing the access rates. Mr. Blackmon was also quoted on the subject of bypass in the Business Examiner of June 8, 1998: “Companies are concerned this ruling will cause revenue to go down because customers will bypass them and connect directly to long-distance companies,” he says, “that says they think the rule will work.” Staff expressly recognizes that bypass will occur. The proposal to put the difference in revenue requirement on the originating rate is revenue loss, not mitigation. The rule works to reduce revenues. It does not work to benefit customers. The fact the bypass will occur from this “mitigation” is also expressly recognized in Commission Staff’s May 13, 1998 open meeting memorandum. At page 3, Commission Staff notes that one of the benefits of the rule is that large- and medium-sized businesses “will likely see more competitive offerings from toll providers using more efficient dedicated access through the use of PBX and other direct connections.” More efficient in this context means lower priced. Dedicated access is not an efficient use of network resources. Switched use of the network is, in fact, more efficient utilization of the network. The concept that bypass through use of dedicated facilities is “efficient” means that it is available at a lower rate. That is the mechanism that will be used to bypass originating access. The fact that Staff recognizes that such bypass will occur, but still refuses to include lost access revenue in the SBEIS analysis, underscores the misleading analysis that is contained within the SBEIS. 4. The Commission does not have authority to compel a tariff filing in a rulemaking. The rule contemplates that companies will come in with tariff filings to comply with the rule. The Commission does not have authority to compel a tariff filing through adoption of a rule. Until changed through due process, which in this case means an adjudicative proceeding, a company’s filed tariff rates are lawful rates in full force and effect. See RCW 80.36.100. Under RCW 80.36.140, the Commission may order revisions to those rates, but it has to occur after complaint and hearing. In that context, the hearing means an adjudicative proceeding. That is the only proceeding in which the Commission can make a finding that existing rates are “unjust, unreasonable, unjustly discriminatory or unduly preferential, or in anywise in violation of law. . . .” None of these tests have been demonstrated to exist. The Commission lacks statutory authority to compel a revision in rates by a rule. The requirement contained in the rule to move terminating access rates to TSLRIC is the equivalent of passing a rule which requires all companies to reduce local rates by $4.00 a month, for example. It is an arbitrary reduction in revenues. What this proposed rule really does is effect a reduction in revenue requirement without a hearing and predetermines that the appropriate rate design is to reduce access charges for the benefit of IXCs. At least with an across-the-board local rate reduction, the customers get a benefit. 5. The Commission’s rule constitutes ratemaking without a hearing. There is no information in this record to suggest that any specific company is overearning. Yet, the Commission’s proposed rule would require companies to incur substantial reduction in access charge revenue. The following examples demonstrate the revenue reductions if the terminating rate is 1¢: (1) For Ellensburg Telephone Company, the projected revenue reduction would be $2.4 million or $8.35 per line per month. (2) For CenturyTel of Washington, the projected revenue reduction would be $16 million or about $8.93 per line per month. (3) For United of the Northwest, the rule will reduce revenues by about $6 million or approximately $6 per line per month. (4) For Asotin, Lewis River, and McDaniel Telephone Companies, the total revenue loss is $1.48 million. This translates to an average loss of over $13.30 per line per month. Reduction in revenues of this magnitude without an adjudicative hearing is not proper under Washington law and would deprive the companies of due process. 6. Suggested Access Reform Methodology The Federal Communications Commission (FCC) has recently issued its Notice of Proposed Rulemaking (NPRM) on access reform for rate of return companies. In the Matter of Access Charge Reform for Incumbent Local Exchange Carriers Subject to Rate-of-Return Regulation, Notice of Proposed Rulemaking, CC Docket No. 98-97 (FCC 98-101, Released June 4, 1998). It is doing so in the context of an encompassing existing universal service fund mechanism, which Washington does not have. It has also done so while noting: We recognize that access reform for the smaller, rate-of-return LECs may raise new or different issues that we did not have to address in our proceeding involving the typically larger, price cap LECs . . . . We further recognize that differences in the circumstances of rate-of-return and price cap incumbent LECs may require different approaches to reform, including a different transition to more economically efficient, cost-based interstate access charges. Ibid at paragraph 4. WITA’s position is that the existence of a stable, predictable and sufficient USF mechanism should trigger access reform. It is also WITA’s position that access reform should recognize the difference between rural and nonrural companies and develop differing transition mechanisms. The mitigation proposed by the rule is not a recognition of that difference. If the Commission is determined to adopt a rule at this time, WITA proposes that the Commission adopt a methodology on access reform which conceptually does the following: _ Terminating access rates would mirror the NECA tariffed rates (or a company’ s individual interstate tariffed rates) for carrier common line and switched access. Where NECA has used rate banding, the company would use the band appropriate for it. _ Establish a universal service fund rate element that would apply to all intrastate access minutes. WITA recognizes there may be a question whether a new USF element (as opposed to existing) charged only to IXCs is consistent with the Telecommunications Act of 1996. The universal service rate element would be the difference between the revenues produced from using the NECA rates in year one and the revenues produced at existing rates. _ The USF element in years two and beyond would be calculated taking into account two items: (1) The first would be to transition out of the rate the difference between a 25% NTS allocator and the company’s existing frozen subscriber plant factor (SPF) at a dollar per year increase in local residential customer rates (up to a level of the affordability rate established by the Commission) and including business rates once residential and business rates are at parity. A faster transition could occur through a PICC. WITA supports a PICC if IXCs are prohibited from passing the rate directly through to the customers on their bills. The access rate has simply changed from per-minute to flat rate; it is not a new charge. There is an advantage to the IXC since the PICC does not increase with minute growth. The IXCs should not be permitted to abuse that advantage by, in essence, increasing the customers’ subscriber line charge. (2) On the traffic sensitive side, the amount in the USF pool in years past year one would be calculated as the difference in revenues produced by the NECA rate compared to the revenue requirement for those rate elements calculated in accordance with FCC Part 36/69 as appropriate for use in the state of Washington. _ The Commission would establish an “affordability” rate not to exceed the rate (including SLC and taxes) charged by USWC in its rural exchanges after rebalancing of those rates. _ Access reductions shall be tied to toll reductions by IXCs on a dollar-for-dollar basis with at least 50% of the reductions to basic MTS rates. _ Pool administration costs would be calculated as part of the universal service fund requirement. _ There could be an additional mechanism established to address the cost to serve unserved areas. While there are additional details to work out, this approach has several benefits to it. First, by mirroring the federal rate, With the FCC’s NPRM, the federal structure may change. This proposal is therefore intended as an interim step. Once the FCC methodology is in place, a second review could be undertaken. it avoids the tariff-shopping arbitrage that has occurred under the existing system and would occur under the Commission proposal with the interexchange carriers shift their PIU to take advantage of whichever rate (state or interstate) is the most advantageous to it. Second, it uses existing methodologies employed by small companies without forcing them to pursue TSLRIC studies. WITA disagrees with the comments made by Commission Staff that TSLRIC studies are widely available. First, while the methodologies may be available, the cost is not in the purchase of the methodology. It is in doing the underlying data gathering and studies needed to develop the inputs to put into the model. Second, the concept that switch manufacturers will readily disclose their true costs is naive at best. The existing marketplace has switch vendors treating that information as extremely proprietary in nature, and it is disclosed only in the most unusual circumstances. Third, this approach follows the FCC approach in making the amount of small company support explicit. That support could also be then made portable to a competitor upon the adoption of a disaggregated porting mechanism. Fourth, this approach makes a substantial reduction in existing access rate levels in rural areas. One of its advantages over the Staff plan is that it does not place as much of the revenues of the rural companies at risk. It also means that with the USF rate on all minutes, the IXCs are encouraged to provide their discount calling plans in all areas of the state. The current USF rate is .152¢ per minute. WITA is estimating, admittedly on sketchy data, that the new USF rate would be under .5¢ per minute to address changes in rural company access rate structure. It avoids potentially disastrous disruptions in company operations and minimizes the administrative costs to the companies. Conclusion WITA requests that the Commission not adopt proposed WAC 480-120-540. The record before the Commission does not support its adoption. The proposal is not well developed. Staff support for the rule is that it will “break down” walls without regard to companies continuing to be able to offer service to customers. Customer benefit from the proposal has not been demonstrated. What does exist is a real jeopardy and risk to service provision.