BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION IN THE MATTER OF ESTABLISHING ) UNIVERSAL SERVICE MECHANISMS )Docket No. UT-980311(r) JOINT COMMENTS OF AT&T AND MCI ON FIRST DRAFT RULES Introduction AT&T Communications of the Pacific Northwest, Inc., AT&T Wireless Services, Inc. (jointly “AT&T”), and MCI Telecommunications Corporation (“MCI”) submit these comments pursuant to the Notice of Request for Comments dated August 21, 1998. Consistent with the areas of comment sought by the Commission, these comments are organized under four headings following this introduction: (a) organization and structure of the rules, (b) proposed rules, (c) affordability, and (d) program evaluation. The general purpose of the Telecommunication Act of 1996 is “to promote competition and reduce regulation in order to secure lower prices, higher quality services for American telecommunications consumers and encourage the rapid deployment of new technologies” (emphasis added). Telecommunications Act of 1996, Pub.L.No. 104-104, 110 Stat. 56, 47 U.S.C. § 151, et seq. Accordingly, the purpose of universal service in a robust and irreversibly competitive market is twofold: (a) to ensure access to basic local exchange service at “just, reasonable and affordable rates” 47 U.S.C. 254(b), and (b) to ensure that incumbent LECs with the obligation to serve all customers in their study area are not unduly harmed by continuing to support universal service during the transition to a competitive environment. With regard to low income support, AT&T and MCI support the federal LifeLine and LinkUp Programs as expanded and mandated by the 1996 Act. However, with regard to the high cost subsidy, the threshold question should be what has changed in Washington? Specifically, do average consumers in Washington have a choice of carriers for basic local exchange service at affordable rates? The evidentiary basis for the answer includes consideration of (a) the current 95.7 % telephone penetration rate in Washington, FCC Monitoring Report. May, 1996. and (b) the lack of robust and irreversible competition for the provision of basic local exchange service. Therefore, it must be concluded that the current rates for retail end-users are, in fact, affordable and, given the profitably of the incumbent LECs, the current system of implicit support is more than sufficient. If and when either penetration rates in the state warrant government intervention or an incumbent LEC can make a demonstration of need for high cost support because of competition and the removal of implicit subsidies, then the resultant subsidy system must be competitively neutral in all respects. This means that the subsidy must be explicit, broadly funded, narrowly targeted, portable with the customer, and administered by a neutral third party. All of these principles must be employed in the design of universal service rules to ensure that the subsidy system is at once compatible with competition and protects all of Washington’s consumers from needless taxation for a program that is inefficient, ineffective, and unjust. Comments on Organization and Structure of Draft Rules. The guiding principle for rules intended to assist the transition from a regime of regulated monopoly to that of competition is that they have built-in flexibility such that they become superfluous and innocuous with the passage of time as the competitive marketplace replaces monopoly (and with it, regulation). Necessary and sufficient regulatory prescription is needed in rules that: (a) effect the transition of the subsidy from implicit to explicit; (b) provide a transitional mechanism for current state support including a sunset provision for that mechanism; (c) prevent double recovery between federal and state support mechanisms; (d) minimize distortion of the fund through actual, rather than speculative synchronization with competition; (e) address all potential conditions the Commission expects to support, e.g., unserved areas. Generally these rules do not exhibit this principle and the resultant universal service system will work at cross purposes because these proposed rules expand the regulatory framework in a manner that is not compatible with competition in that the proposed rules: avoid necessary and sufficient prescriptive action to ensure the development of competition, prejudge the evaluation of costs in the yet-to-be-completed portion of this investigation, operate under the mistaken assumption that consumers will somehow avoid the cost burden for the support mechanisms proposed in this docket which, depending on the estimate one believes, ranges from $50,000,000 to $150,000,000, and expand the scope of the regulatory framework in a manner that is anti-competitive and extends its jurisdiction over carriers it does not currently regulate. Expansion of the scope of regulation is inherent in proposed rules that, among other things, seek to: (a) subsidize all lines; (b) expand the definition of supported services, (c) expand ETC criteria; (d) obscure the cost standard; and (e) marry the affordability and revenue benchmark constructs. Failure to establish a necessary and sufficient framework is evidenced in provisions that omit standards for such critical elements as the revenue calculations upon which support will be determined and manage-by-exception as the detailed rules setting forth penalties for failure to file reports while entirely omitting any penalty for misuse of funds. Predetermination of the investigation into the cost of universal service is plainly evidenced in the provision to support all lines – without regard to the cost of so doing. Moreover, the proposed rules do not differentiate between the level of regulation that is appropriate for incumbent carriers and that which is appropriate for all other carriers. This is no more evident than in the treatment of wireless carriers. The Commission currently has very limited jurisdiction over wireless carriers in the state yet it creates a subsidy system that relies on funding from wireless carriers and subjects them to extensive regulation that exceeds the scope of the Commission’ s authority. Structurally, the majority of these rules individually range from confusing at best to incomprehensible at worst and generally lacking in any clear reason or justification. The commenters strongly recommend that in the next version, the Commission adopt the same or similar terminology that is commonly used and commonly understood by all parties for the design and implementation of universal service whether by the FCC or by other states. Finally, where the Commission chooses to develop new terminology, such words and phrases should be included in the definitions if these rules are to withstand scrutiny. Comments on Proposed Rules. Note: where (no comment) appears under a rule, this does not necessarily mean that these commenters agree with the provision. AT&T and MCI submitted detailed, comprehensive draft version(s) of rules reflecting experience in numerous other states and representing the joint efforts of regulators and industry. This First Draft of the Universal Service Rules has chosen to completely ignore that work. There appears little purpose, therefore, in again suggesting alternative language. GENERAL WAC 480-123-010 Name. (no comment) WAC 480-123-020 Purpose and Authority. Purpose AT&T and MCI agree in part and disagree in part with this rule as proposed. We are in agreement with the Commission’s contextual orientation “to ensure affordable basic telephone service in a competitive environment” in its opening statement of purpose and authority. However, the intent to “prescribe a program of support … for all lines in high cost locations” presumes that a competitive marketplace cannot accomplish that task as well or better than regulatory prescription. We disagree with this presumption. The commenters fail to find justification for support for all lines in section 254 (c) of the Act, because: (a) support for all lines is not essential to education, public health, or public safety; (b) second line penetration does not suggest that subscription by a substantial majority of residential customers exists in either high or low cost areas; and (c) support for all lines is not consistent with the public interest, convenience or necessity. The Commission also proposes that the furtherance of competition is presumed aided by a mechanism that seeks to ‘minimize implicit support’ while ‘maximizing explicit support’ yet proposed Rule WAC 480-123-390 seeks to effect this transition by simply requiring a regulated ETC to reduce annual revenue by an “expected annual draw” of explicit support. While this reduction of revenue is the minimum of what must occur, a “revenue neutral” approach is wholly unacceptable to new entrants and cannot result in the furtherance of competition. Additional comment is provided under Rule WAC 480-123-390. Authority None cited in the proposed rule. WAC 480-123-030 Applicability This rule should clearly state that applicability is to all telecommunications service providers in Washington. WAC 480-123-040 Reports Include Declaration. (no comment) WAC 480-123-050 Coordination. “Coordination” without reference to statute and existing and future federal regulations implies more discretion than Congress intended. Section 254(e) of the Act states that “[a] State may adopt regulations not inconsistent with the Commission’s rules to preserve and advance universal service” (emphasis added) and “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 mechanism to support such definitions or standards that do not rely on or burden Federal universal service support mechanisms.” WAC 480-123-060 Affordable Rates. Inasmuch as “affordable rate” is not set forth in the definitions, this rule is problematic for a number of reasons including but not limited to the following: (1). As written, this rule could be interpreted to mean that the Commission will set rates at an artificially low level, i.e. the lowest common denominator in order to insure affordability for all. (2). The inappropriate marrying of the concepts of affordability and the revenue benchmark in Rule WAC 480-123-190 raises the distinct possibility that the size of the fund, hence the tax on the consumers of Washington, will be unnecessarily large. (3). This rule suggests that the Commission will henceforth set rates without regard to any cost or rate of return; an action that conflicts with the Commission’s enabling statutes. (4). Rule WAC 480-123-050 requires coordination with the federal program of universal service. In so doing the Commission should rely on the criteria for the determination of affordability set forth by the FCC in paragraphs 109-126 of the Universal Service Order. (5). This rule is inconsistent with the purpose of the Act, i.e. to ‘promote competition and reduce regulation in order to secure’, among other things, lower prices for consumers. In passing the 1996 Act, Congress determined that consumer protection is better served by competition than by regulation. WAC 480-123-070 Outcome Measure Report. The parties support the Commission’s intent to develop and report on the impacts of the universal service program provided it is designed by one qualified in the discipline of systematic program evaluation. Furthermore, it obviously is critical to know both the degree to which a program produced the desired outcomes (impacts) and its benefits in relation to its costs (efficiency) -- together known as program utility. Rossi, Peter H. and Howard E. Freeman, 1993. Evaluation: A Systematic Approach. Newbury Park: CA. Pp.36-37. Knowledge of impact alone is insufficient; the results produced by a program must also be judged against its costs. To that end, Section III of these comments provides preliminary information regarding the conduct of evaluation research as well as the criteria contemplated by this Commission for an impact assessment of the Washington universal service program. DEFINITIONS WAC 480-123-080 Definitions (no comment) WAC 480-123-090 Access Line. Use of the phrase “public switched network” harkens to the monopolistic era and is incompatible with the “network of networks” envisioned by the competitive paradigm. In addition, the inclusion of the phrase “access line equivalents” is an unnecessary confounding factor. See WAC 480-123-100 below. WAC 480-123-100 Access Line Equivalent. This definition is unnecessary and technically imprecise. Line equivalents is a modeling convention used for multiplexed special access lines. It is employed where actual line information from ILECs is unavailable to proxy cost modelers. Presumably, the Commission will ask for and receive actual access line information from ETC’s under proposed rule WAC 480-123-250. WAC-480-123-110 Administrator. See comment on WAC 480-123-440. WAC-480-123-120 Commission (no comment) WAC-480-123-130 Telecommunications Carrier. (no comment) WAC-480-123-140 Eligible Telecommunications Carrier. The Washington Commission does not have the authority to pick and choose jurisdictional eligibility. The phrase, “designated by the commission to draw from either federal, or state, or both USF funds is either poor drafting or misleading and, depending on how implemented, could constitute an unwarranted expansion of the criteria for eligibility under section 214(e) of the Act. WAC 480-123-150 Service Area. This rule lacks necessary and appropriate distinctions between areas designated for provider of last resort (a.k.a. obligation to serve) and those that will be used for the calculation of universal service support. The FCC has concluded that the service area designated for universal service obligations and the area over which universal service support is calculated need not be the same (USO, para. 190). This flexibility is particularly important when considering competitive entry (a) into incumbent rural service areas where those areas may be non-contiguous and (b) for wireless carriers wishing to compete in rural areas. WAC 480-123-160 Gross Intrastate Revenue. Subsection (1) should read as follows: Gross intrastate telecommunications revenue is the carrier’s revenue from “intrastate telecommunications” services provided within Washington. Subsection (2) setting forth those revenues excluded from the definition of gross intrastate revenues should also include the phrase, charges that are uncollectible from the end-user. Normally, revenues that a company is unable to collect are not included in the definition of Gross Revenues. However, it is unclear whether the Commission intends to include uncollectibles in its definition of gross intrastate revenues. If a company is unable to collect from the end user the charges that are billed for its services, charges for those services cannot be counted as revenue. Companies (hence consumers) should not be expected to support universal service based partly on revenues that were never received. Consistent with landline practices, wireless telecommunication service provider contributions should be based only on the revenue associated with originating calls because wireless customers are in the unique position of paying for both incoming and outgoing calls. WAC 480-123-170 Intrastate Telecommunications Services. In the interest of technological and competitive neutrality, the definition of providers should also include Specialized Mobile Radio (SMR) service providers. This is a dispatch service interconnected by two-way mobile telephone service that competes with cellular and PCS. WAC 480-123-180 High-Cost Location. The FCC has mandated that “the proper measure for the determination of the cost of universal service is forward-looking economic cost of constructing and operating the network facilities and functions used to provide the supported services” (USO, para. 224). This determination applies to both rural and non-rural carriers albeit at different implementation intervals. Accordingly, and to avoid needless litigation, the commenters recommend that all reference to the cost of universal service should be consistently stated as “forward- looking economic cost” or in the alternative, included as a separate definition. Rural carriers are exempt from the use of forward-looking economic cost in the near term for purposes of federal USF support. Even though a state-specific fund may not be bound by this mandate, proposed Rule WAC 480-123-050 states that “the commission shall coordinate USF with the federal program of universal service.” In order to avoid confusion and litigation, one or both of these rules needs additional clarification. WAC 480-123-190 Revenue Benchmark. AT&T and MCI generally agree with the categories of revenues the Commission has included in its definition of the revenue benchmark. Other categories of revenue that should be available for inclusion in the definition of the revenue benchmark include: while pages, yellow pages, directory assistance, operator services and other non-regulated revenues. The parties, however, do not understand the intent or use of the phrase “affordable revenue per access line” when defining the revenue benchmark. Affordable in what sense? The purpose of the revenue benchmark is to ensure that subsidy is not provided to carriers for consumers that are profitable for that carrier to serve; therefore the revenue benchmark should at a minimum include the average statewide revenues for the services enumerated above. The Commission should not use an “affordability” qualifier to reduce the amount of actual revenues taken into account in calculating support. Furthermore, the term “affordability” and the “revenue benchmark” as set forth in the FCC’s Order are distinctly separate concepts and are derived through distinctly different methods. The FCC rejected the notion that affordability and the revenue benchmark are interchangeable (USO, para. 124). Contrary to the suggestion of those commenters that favor linking universal service support to subscribership levels, we concur with the Joint Board’s recommendation to implement a national benchmark to calculate the amount of support eligible telecommunications carriers will receive for serving rural. insular, and high cost areas. The Joint Board declined to establish a benchmark based on income or subscribership and specifically did not equate the benchmark support levels with affordability (emphasis added). Unfortunately, no explanation accompanied this rule revision issued on August 27, 1998 and it is impossible to offer comment on a construct that has so recently been “created”. Nonetheless, affordability has nothing to do with sizing the fund. WAC 480-123-200 Services Supported by the Universal Service Fund. The Commission’s statement regarding transmission capability of 3500 Hz for new and upgraded lines in high cost locations is technically imprecise. Manufacturers of digital switching and digital loop carrier equipment use commercially-available codecs for encoding analog voice signals into 64 kbps signals for transmission and switching. These codecs normally comply with various industry requirements for, inter alia, transmitted voice bandwidth. The shape of the voiceband spectrum transmitted by these codecs will be such that the special components in the vicinity of 3,500 Hz will be attenuated below those at 1 kHz, the nominal reference frequency for amplitude measurements. All commercial codecs will transmit measurable power around this frequency, but the codec’s anti-aliasing filters will have begun to attenuate the signal as noted. If the Commission intends for there to be no rolloff of the voiceband spectrum at 3500 Hz, then codec manufacturers must redesign their products to allow the transmitted voiceband spectrum to remain flat out to 3500 Hz and then roll off at a higher rate than do current codecs. The increased rolloff rate will require more complex, and hence much more expensive, filters. Furthermore, the new codecs must be manufactured, and new channel units for every digital loop carrier system and new line circuits for every digital switch in the state of Washington must be produced to include the new codecs. If the Commission’s intent is to ensure “acceptable” voiceband modem performance, it should recognized that the current modem technology is quite sophisticated and is readily capable of adapting transmission rates to individual loop and switch transmission conditions, including the shape of the available spectrum. Merely stating that a given frequency must be transmitted is not sufficient. Technical sensibility aside, this section of the rule has policy implications for Washington’s consumers. First, it is obviously an expansion of the definition of universal service mandated in section 254 (c) of the Act, in particular 254(c)(B) mandating the manner in which the “evolving level of telecommunications services” standard is met. This expansion is occurring without any evaluation of the cost of so doing. Second, it presumes that high cost areas of the state of Washington are entitled to services and technologies that differ (indeed are non-existent nationally) from other areas of the state. Third, it is (in the words of Dr. Seuss) “on beyond” a barrier to entry. By requiring that all new lines meet this standard, the Commission is effectively setting a higher standard and more expensive criteria for new entrants. Fourth it is more than likely to have the ironic effect, due to the anticipated cost of implementation, of ensuring that high cost communities are economically isolated. Fifth, and most importantly, it can only result in a fund that is far greater than is warranted thus imposing a larger than necessary tax on Washington’s consumers. Finally, the following disclaimer should be added to this rule: Wireless carriers are not required by the FCC to be supported as a condition of receiving federal universal service support, for example E-911 prior to the required FCC implementation date. CONTRIBUTORS AND CONTRIBUTIONS WAC 480-123-210 Contributors to the Universal Service Fund. (no comment) WAC 480-123-220 De Minimus Contributions Not Required. (no comment) WAC 480-123-230 Contributions Based on Gross Intrastate Telecommunications Revenue Minus Payments to Other Telecommunications Carriers. The calculation for the determination of carrier contribution as proposed in this rule requires a leap of faith that use of the phrase “market share” means that the resultant assessment is indeed nondiscriminatory. Section 254(b)(4) of the Act states that “[a]ll providers of telecommunications services should make an equitable and nondiscriminatory contribution.” Subsequently, the FCC determined that equitable and nondiscriminatory is met by the application of “the same formula for all competitors competing in the same market segment” (USO, para. 839). Moreover, determination of contribution on a carrier’s respective market share of intrastate telecommunications in Washington is akin to publicizing confidential and proprietary data. Competitors will be able to determine each other’s share of market by identifying a company’s contributions. This rule lacks the appropriate mechanism to ensure confidentiality. Subsection (a) of this rule defines payments to other carriers but does not include interconnection charges. Interconnection charges should be included. WAC 480-123-240 Revenue Reports This rule, appalling in its detail when so many others lack any semblance of substance, is nonetheless entirely unworkable for the following reasons: First, the graduated scale of 2%-8% of a carrier’s contribution for the last year is discriminatory and arbitrary, as is the $10,000 per day for those not contributing in the last year. In addition, they constitute a barrier to entry. The size of these penalties for prior contributors is wholly out of proportion to the nature of the infraction. The penalty should only be sufficient to provide an adequate incentive for every one to comply, and should be designed to compensate the fund for any harm caused. For delays in reports that don’t cause delays in funding, for example, $1,000 should be more than sufficient. Percent of revenue penalties bear no relationship to the harm caused here, are arbitrary and discriminate against big carriers. Second, there are no provisions for notice or opportunity to remedy the failure before penalties are assessed. The draft rules submitted previously by the commenters address this issue in a more appropriate manner. Third, while regulated carriers must report sensitive market information to the Washington Commission on a annual basis, the non-regulated carriers such as wireless do not. Given the experience of AT&T Wireless earlier in this docket, AT&T is concerned that proprietary data provided to the Commission is not able to be appropriately protected. In this situation, the Washington Department of Revenue was enlisted to collect and aggregate proprietary information from the wireless providers because that government agency could provide the necessary protection. This experience also indicates that the “market share” formulation in proposed rule WAC 480-123-230 is likewise, unworkable. Fourth, given the proper protection of proprietary data, an annual filing of this data is a sufficient interval. The frequency proposed creates an additional and unnecessary burden. The provision permitting the administrator to increase such frequency based only upon his/her “opinion” without standards or opportunity for notice and comment is inappropriate. WAC 480-123-250 Access Line Reports. All reporting requirements should be predicated on frequency intervals of no smaller than quarters, even if disbursements are made on a monthly basis. Shorter intervals are an undue and unnecessary burden on all carriers. WAC 480-123-260 Average Revenue Report. Assuming this rule is the methodology intended for the calculation of the revenue benchmark, this section does not establish necessary and sufficient criteria for the carriers to submit adequate data to the administrator of average revenue, a critical piece in the determination of the amount of support. The term “revenues” has not been anywhere defined except to refer to “all customer charges” without elucidation. The provision that carriers may rely upon a “statistically valid, random sample of customer bills” (while failing to define what is meant) denies the administrator of adequate data. Furthermore, the extension of this rule to all ETCs is not appropriate. Only incumbent LECs with the obligation to serve should submit revenue data for the calculation of the revenue benchmark. This is because it is the ILEC’s forward-looking economic cost reduced by its revenue benchmark that determines the size of the subsidy for a given support area and no other. WAC 480-123-270 Determination of Contribution. For internal company record keeping and processing, a 30 day interval between notification of carrier assessment and carrier contribution is unworkable. At a minimum, 45 days is required. See also comments for Rules WAC 480-123-230 and WAC 480-123-240. WAC 480-123-280 Net Contributions Required. (no comment) WAC 480-123-290 Contributions from Company Revenues. AT&T and MCI strongly disagree with this rule in its entirety for the following reasons: First, AT&T and MCI have a constitutional right to free speech, up to and including its right to communicate with its customers on the monthly billing statement. This rule appears to be motivated by the desire to suppress truthful communication between carriers and their customers and to insulate the Commission from political accountability for the consequences of the consumer impacts resulting from the anticipated size and uses of the fund. Therefore, if implemented, this rule raises serious constitutional issues and will be subject to challenge on that basis. Having said this however, the commenters also acknowledge that the state has a legitimate interest in a carrier’s communication to consumers regarding how the subsidy is described and ensuring that those communications are not misleading. Nonetheless, AT&T and MCI contend that it would not be misleading for carriers to prospectively inform consumers that a quantifiable charge is being imposed upon them in order to recover a charge that has been imposed upon that carrier by a state agency. Second, by forcing carriers in effect to hide the funding of this subsidy in customer’s bills through rates for other services, this rule conflicts with the mandate of section 254(e) of the Act that requires universal service support to be “explicit.” The Commission is well advised to keep the state universal service system from becoming an unwieldy social program by making both the sources and uses of the subsidy explicit including full disclosure to Washington’s consumers. Furthermore, the commenters strongly urge the Commission against framing carrier cost recovery to consumers as a choice between “ a surcharge on customer bills, or by means of contributions by telephone companies.” Press Release of the Washington Utilities and Transportation Commission, 1998. “State agency to hold community meetings on new universal service plan.” August 27, p.4. Under no circumstance should Washington’s consumers be persuaded that universal service is a “free lunch”. In a competitive market, carriers cannot simply “absorb” new exogenous costs over which they have no control. Third, the proposed rule constitutes impermissible rate regulation for competitive providers and exceeds the Commission’s jurisdiction over radio communications service companies under state law (RCW 80.66.010). The proposed rules likewise violates federal law preempting states from engaging in rate regulation of Commercial Mobile Radio Service (CMRS) providers or wireless carriers (47 U.S.C. sec. 332 ( c )(3). Federal law also requires that CMRS providers be given the discretion to determine whether and how they will seek recovery of their contributions to the fund from their subscribers. As a final comment, these rules are otherwise silent on carrier cost recovery for contributions to universal service. WAC 480-123-300 Commission Notice on Universal Service AT&T and MCI do not object to Commission directed consumer education programs