BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of Proposed Rulemaking on Access Charge Reform and the Cost of Universal Service ) ) Docket UT-970325 ) ) Comments of Sprint ) Communications Company ) L.P. COMMENTS OF SPRINT COMMUNICATIONS COMPANY L.P. ON PROPOSED RULEMAKING In accordance with the CR-101 served by the Washington Utilities and Transportation Commission (“Commission”) on October 24, 1997, referencing Docket No. UT-970325, Sprint Communications Company L.P. (“Sprint”) respectfully submits these comments on the proposal for a rulemaking on access charge reform and the cost of universal service. Sprint supports the Commission’s goal of opening a unified docket to examine access charge reform and universal service in tandem. Sprint agrees with the Commission that universal service and access reform should be considered and implemented simultaneously. Sprint supports the need for intrastate switched access reform because implicit subsidies from access revenues have been used to broadly subsidize local service rates and the attainment of universal service. However, Section 254(b)(4) of the Telecommunications Act of 1996 now requires that universal service funding be “specific, predictable, and sufficient.” Additionally, the development of a competitive local service market will be extremely limited until significant rate rebalancing occurs. Sprint offers a balanced proposal that reflects the needs of all stakeholders: consumers, incumbent local carriers, competitive local carriers and interexchange carriers. If properly implemented, Sprint’s proposal will result in increasing benefits to all Washington consumers. Implicit subsidies embedded in the current switched access rate structure should be removed and recovered directly from the cost causer, a universal service fund, or a combination of the two. Intrastate switched access rates should transition to the same cost-based level as transport and termination of local calls on a Total Element Long Run Incremental Cost ("TELRIC") basis. Changes in local service rates and a reduction in access rates to a TELRIC basis will 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 customers. These benefits will be optimized if the Commission establishes an appropriately structured and targeted universal service program to become effective in parallel with access reform. A. Issues Identified by the Commission 1. Identification and Removal of Implicit Subsidies for Universal Service. In order to establish an efficient telecommunications marketplace, implicit subsidies embedded in rates should be eliminated. Implicit subsidies tend to distort pricing signals, resulting in less efficient allocation of resources in the emerging telecommunications marketplace and therefore reducing the overall level of competition. Moving to a more competitive market pricing structure will result in access rate declines as other prices increase. This approach would result in lower long distance rates with the resulting benefits to customers. As the process unfolds, the Commission should ensure that existing levels of universal service are maintained by targeting universal service subsidies to those customers who actually require them. Eliminating implicit subsidies requires that actual costs be identified and that network elements and services be priced based on those costs. Sprint recommends that TELRIC studies be used to determine the appropriate local and access service cost levels. Local service rates that fully reflect the cost of local service would encourage more efficient competitive entry into the local market, bringing all the benefits of competition, including downward price pressure, to consumers. To the extent that any required increases might render local service unaffordable, the Commission should establish a competitively neutral universal service funding mechanism to assure the availability of local service to low income customers and to high cost areas as needed. Switched access services are widely recognized as being priced well above cost relative to local services. Thus, an important place to begin identifying and eliminating implicit subsidies is with rates for switched access. Another source of implicit subsidies exists in the geographic averaging of toll rates throughout the State and in other rates and services throughout the service territory of each carrier. Other implicit subsidies also exist, but since access charges are relatively noncompetitive and are essential inputs for competitor's services, access charges should receive a high priority for identification and removal of embedded subsidies. These comments, therefore, focus primarily on removal of the subsidies in access charges. Ultimately access rates should be reduced to TELRIC plus a reasonable contribution to joint and common costs. Carrier access rates should be designed to recover only the traffic sensitive costs of providing interconnection between interexchange carriers and their customers to complete long distance calls. Portions of the non-traffic sensitive cost of the loop should not be arbitrarily assigned for recovery in usage sensitive access rates. Accordingly, the carrier common line charge ("CCLC") and the residual interconnection charge ("RIC") should be eliminated and recovered directly from the cost causer, the end user, on a per-line basis. Similarly the NTS costs associated with the line side port and the line card currently assigned to the local switching category should be reassigned to the loop. How to Establish a New Universal Service Funding System and Replace the Existing System with an Explicit, Specific, Predictable, and Sufficient Funding Mechanism for Universal Service that is Competitively Neutral. In order to establish a universal service funding system that is explicit, specific, predictable, sufficient, and competitively neutral, the Commission must consider the totality of the current and proposed funding mechanisms and determine what services are to be supported and at what level through a new universal service funding system, as well as who should pay into the system and who may draw funds from the system. Funding of some universal service goals currently occurs through implicit subsidies in access charges and geographic averaging. In addition, at least two relatively explicit programs are in place that also serve universal service goals: (1) the current state universal service fund, which subsidizes carrier common line charges for high cost rural carriers and (2) the Washington Telephone Assistance Program, which funds Lifeline and Link-up type programs for low income ratepayers. Each of the current elements should be examined with respect to how it matches with the Commission’s goals for a comprehensive universal service funding mechanism. Ensuring Competitive Neutrality In order to create a competitively neutral universal service funding mechanism, assessment of payments into the fund by carriers and end-users and disbursement of the fund must be carefully structured. Universal service should be funded through an explicit end user surcharge. If multiple funding approaches are used, carriers should be either required to aggregate the charges into a single end user surcharge or to list each separate surcharge on the customer’s bill. This will ensure that customers fully understand their cost of service and will prevent carriers from masking the charge in other rates and claiming that customers are getting any kind of favorable treatment relative to the customers of other carriers. In essence, universal service should be charged to end users, with carriers serving as the collection agents. It is important to note that universal service is currently funded by end users, but through implicit means. Universal service should be funded through an equal percentage surcharge based on the telecommunication carrier’s total intrastate retail revenue. End users of all intrastate telecommunications service providers, including wireless carriers, should pay into the universal service fund as a surcharge on each end user's telecommunications bill. Eligibility for universal service fund support should extend to both ILECs and new local exchange entrants, provided the carrier provisions service to the customer using its own facilities or a combination of its own facilities and unbundled network elements. Where a local exchange carrier offers service only on a resale basis, the carrier should be eligible for state universal service support if it is required to offer a service that is subsidized by universal service and is not receiving the full benefit of that subsidy as a pass-through from the facilities-based carrier whose services are being resold. How to review pricing principles to ensure recovery of economically efficient costs, and to ensure that appropriate rate levels and rate design are established in proper relationship to the costs and market power of each provider. In order to determine the appropriate level of universal service funding, the Commission must first determine a statewide local service affordability rate. Local service rates should be allowed to increase to this affordability benchmark rate, based on the statewide average urban rate including subscriber line charges (SLC), touch-tone and taxes, or the national average of $19.98 for residential service, whichever is higher. Next, on a company specific basis, the Commission should specifically rely on the Benchmark Cost Proxy Model 2 ("BCPM2"), to determine the forward-looking cost of providing local service on a census block group level. If, in the aggregate, local service rates cover the cost of providing local service, then intrastate access rates should immediately be reduced to TELRIC, plus a reasonable allocation of joint and common costs. All remaining subsidies in access charges should be eliminated over a defined period of time, which in the case of U S WEST should be coincident with U S WEST's entry into in-region interLATA long distance. Once the forward-looking cost of providing local service at the census block group level has been determined, the difference between the affordable rate and the Company's total cost of local service as determined at the census block group level would determine the size of the company's high cost universal service fund requirement. If local rates are at or above the affordability level established by the Commission and do not cover their TELRIC-based cost (including a reasonable allocation of joint and common costs), then the difference between the affordable rate and the cost of service for each company would determine the size of that company’s high cost fund universal service funding requirement. If local service rates are below the statewide affordable rate and do not cover their TELRIC-based cost, the Commission should allow the incumbent provider to increase the rates to the affordable level. Then the difference between the affordable rate and that company’s cost of service would determine the size of that company’s universal service funding requirement. Universal service funding would also be made available to targeted individual subscribers who, because of low income level, cannot afford to pay the affordable benchmark level. The aggregation of this BCPM-based high cost support and low income support would determine the total size of each company's universal service funding requirement. All ILECs would establish TELRIC-based rates for local service and access. To the extent it is determined that an ILEC’s revenue from new TELRIC-based local service and access rates plus its universal service funding, using the above outlined procedure, is below previous access revenue levels, an ILEC would be able to recover this residual revenue shortfall from an ILEC-specific “access contribution fund." The access contribution fund would be eliminated in equal installments over a defined period of time. In the case of U S WEST, the fund should terminate no later than the time U S WEST enters the in-region interLATA toll market. How to Allow the Marketplace to Function, While Protecting Captive Ratepayers. A marketplace functions well only with accurate information and the removal of barriers to entry. In particular, aligning wholesale rates with actual cost through the removal of implicit subsidies and through the establishment of accurate and appropriate cost for local service interconnection, prices for wholesale service for resale and price for unbundled network elements will advance Washington toward the goal of allowing the marketplace to function and flourish. Protection of captive ratepayers can be expected from two sources. First, if competition is allowed to develop and mature, the number of “captive” ratepayers will be reduced and should eventually be reduced to zero, as the reach of competition broadens and deepens. Second, to the extent captive ratepayers exist and are subject to potentially higher costs for comparable levels of service than other ratepayers experience, universal service funding can function to reduce the cost to those ratepayers of their services, by having other end-users contribute to the universal service fund. Ensuring that Service to Rural and High Cost Area Customers Is Adequate and Affordable, as Specified in 47 U.S.C. 254(b)(3). As indicated above, Sprint advocates the establishment of a statewide affordability benchmark, that would apply to all end users in the state. The difference between the cost of basic local service and the benchmark would be funded through an explicit end user surcharge for universal service. B. Conclusion Sprint appreciates the opportunity to provide these general comments on the issues proposed in the Commission’s initial notice of proposed rulemaking. Identifying and removing the implicit surcharges in switched access rates is an important goal, as is the creation of a universal service funding mechanism that ensures that public policies for affordable access to telecommunications services are met while fostering competition. Sprint looks forward to reviewing the comments of other participants and participating in the scheduled January workshop. Dated: November 24, 1997 Respectfully submitted, ______________________________ Carol Matchett Senior Attorney Sprint Communications Company L.P. 1850 Gateway Drive, 7th Floor San Mateo, CA 94404-2467 Telephone: 650-513-2712 Facsimile: 650-513-2737