WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of Establishing Universal Service Mechanisms NO. UT-980311( R) COMMENTS OF PUBLIC COUNSEL AND AMERICAN ASSOCIATION OF RETIRED PERSONS ON FIRST DRAFT UNIVERSAL SERVICE RULE September 8, 1998 I. INTRODUCTION The Public Counsel Section of the Washington Attorney General and the American Association of Retired Persons (AARP) join in filing these comments on the Commission’s first draft rules regarding universal service. The Commission is to be commended for tackling one of the most complex matters facing regulators in the wake of the passage of the Telecommunications Act of 1996 with vigor and precision. It has directly confronted the difficult question of how to preserve universal service as the telecommunications industry transitions to a competitive market. It has come up with a comprehensive approach that balances conflicting concerns to preserve universal service in the state. Public Counsel and AARP support the policy decisions reflected in the rules. These comments contain some recommendations for refinements to improve the final product. The Commission has proposed a methodology in which costs are estimated on the basis of efficient, forward-looking technologies. These costs are then compared to the revenues that can reasonably be projected from the services that are sold to telephone customers. In those areas where costs exceed revenues, universal service support will be provided. The support will be funded by contributions from all telecommunications service providers in proportion to the value those suppliers add to the network. Support payments will be available to all telecommunications service providers who sell basic service to the public. II. THE PROGRAM AS DEFINED BY THE COMMISSION A. The Economics Of The Telecommunications Network The centerpiece of the proposal on universal service is to recognize the fundamental economics of the modern telecommunications network. The network is used to deliver many services and its costs can and should be recovered across the full range of services that use the network. This has been the fundamental logic that propelled progress toward universal service throughout the past century and it is a sound basis for promoting and ensuring universal service in the twenty-first century. By basing the estimation of universal service funding needs on all the revenues generated by the network, the Commission ensures that basic service will bear only a reasonable share of the joint and common costs of the network. As the uses of the network expand in the information age, the burden placed on consumers for basic service should decline. This approach to estimating the need for universal service has the effect of keeping the fund to a reasonable size. Since people who are using the network for more services are paying for a share of the shared facilities, the need to raise basic service rates or universal service fees are reduced. B. Revenue Projection Issues In implementing the revenue side of the economic calculation, the Commission proposal bases the estimate of revenues per line on exchange-specific data collected on a semi-annual basis. Clearly this establishes a sound basis for projecting revenue streams. As we have noted in our earlier comments in the rulemaking, exchanges are a very discrete level of analysis for purposes of analyzing cost and revenue in the telecommunications markets. Provisioning of the telecommunications network and marketing of services actually takes place at a much more aggregate level. Adjusting the revenue side down to this level gives an extreme level of detail that is more than adequate for estimating revenues. Revising the estimates on a semi-annual basis goes even farther than normal practice in ensuring the reasonableness of revenue estimates. This point should be fully appreciated by the public and by policy makers. For decades Commissions have set rates on the basis of analysis and estimates of company-wide costs and revenues, generally on an annual basis. The methods developed have withstood court scrutiny repeatedly. They never guaranteed the revenues in the aggregate or on a line-by-line basis. The methodology was deemed reasonable enough to allow companies an opportunity to cover costs and earn reasonable returns. It is absolutely critical to the universal service and competition policy being implemented to continue to project revenues across all services. This prevents cross subsidy, ensures reasonable sharing of joint and common costs, and keeps rates affordable. The Commission could easily have based this analysis on its tried and true company-wide, annual methodology. It has chosen to allow companies the opportunity to analyze costs and revenues on a semi-annual exchange by exchange basis thereby giving them an even higher level of confidence in the estimates. While the revenue approach in the rule has the benefits discussed above, the Commission should also note that the use of actual revenues updated every six months creates the potential for manipulation of funding eligibility. The Commission should consider amending the rule to provide for review of unexpected or unexplained changes in revenue levels, particularly resulting from price reductions which have the effect of increasing company draws on the fund. Public Counsel and AARP are on record in this proceeding as opposing any use of universal service funding to insulate incumbent companies from revenue loss due to competition. C. Collecting The Fund The Commission has proposed to collect the funds from telecommunications service providers. The contribution from providers will be calculated based on the net telecommunications revenue generated in the state. This ensures that all telecommunications service providers contribute to universal service in proportion to the value they add and derive from the network. The Commission has also proposed to inform customers about the existence of this public policy on their bills once a year. This is a reasonable compromise between those who want the fund to be collected by a monthly surcharge added to every bill and those who believe that this cost should not be added directly to the bill. Proponents of the surcharge approach justify it as essential to get customers specific information about the universal service program. The Commission has accommodated that need by requiring the program to be described on the bill once a year. The Commission’s approach meets the general principle of informing consumers about what they are paying for, without confusing them about the nature of their bills. The universal service program is a complex public policy adopted by legislators throughout the nation. It is widely recognized that all subscribers derive benefits from having a more ubiquitous network. There are also specific categories of customers who derive more direct benefits. It would be fundamentally misleading to tell individual customers “this is what the universal service program costs you,” without also telling them “this is what universal service saves you.” In rural areas this would be particularly misleading, since the small amount directly added to the bill would be much smaller than the support they receive. It would be extremely difficult to estimate the indirect benefits of the program on a per bill basis. If informing consumers about their economic decision making is the issue, then consumers would have to be told that this is what your bill would be without the program and this is what the value of the product would be. In fact, economic decision making is not what motivates those who want to put a surcharge on the bill. We believe that it is fundamentally misleading to claim that the surcharge needs to be on the bottom of the bill in order to inform consumers, when that information is useless for purposes of economic decision making. Locking in universal service fund contributions as a mandatory item on the bottom of the bill also prevents service providers from deciding how to most efficiently recover the costs. The universal service charge is like any other cost of doing business. Individual sellers recover their costs in different ways as they compete in the marketplace. D. Distributing The Fund The Commission has properly rejected the argument that no other revenues can be counted in estimating the needed universal service support. By analyzing the company’s revenue stream through dissecting the network into geographic piece parts and shortening the time frame to reduce the risk that such revenues will not materialize, the rules more than adequately address company concerns. Reflecting this general approach to analyzing costs and revenues, in light of the potential growth of competition, the Commission has also adopted a reasonable approach to distributing funds. We urged the Commission to calculate the need for support on the basis of statewide averages, as long as the incumbents continue to make unbundled network elements available on a statewide average basis. The Commission has decided to calculate the subsidy on an exchange basis, but have it distributed in accordance with statewide rates, if unbundled network elements are priced on a statewide basis. This approach prevents the anticompetitive price squeeze we were concerned about, although it does result in a larger universal service fund than we had recommended. The draft rule should be amended to clarify that universal service support is to be based on average cost per line on an exchange basis, in relation to the benchmark. Revenues are to be calculated on an average per line. The cost calculation should match that for revenues. While this appears to be the intent of the rule it is not clear from the text. In addition, the rule should specify that funding is net of any support received from the federal universal service fund. III. DEFINING GOALS AND OUTCOMES While the Commission has offered a complete and effective structure for the universal service program, it has also asked commentators to provide more guidance on how to define and measure the performance of the program. The goal of the program is to ensure affordable service. The Commission asks parties to explain further what they mean by affordability and how to measure it. A. Preserving Affordability Affordability is a subjective concept. There is no simple formula that defines it; rather a variety of quantitative and qualitative data must be used to reach a general view of affordability. In our comments we have stressed that affordability is also a relative concept. That is, in common use the term affordability is not measured solely by whether or not a household continues to pay for a service, but how much of a burden obtaining that service places on the resources of the household. With services that are vital to household well-being, like telephone service, if paying for the service creates a serious inconvenience or detriment, it is not affordable. Affordability must also be analyzed in relation to the other principles that govern rates – “just and reasonable” and “reasonably comparable.” Just because rates are affordable, does not mean that they are just and reasonable or reasonably comparable between areas. It is easy to identify individuals who could afford to pay more, but that does not mean they should. If increasing their rates causes profits or prices to be unreasonable, those rates should not be increased. If increasing those rates causes them to not be comparable to rates being paid by others, those rates should not be raised. Current rates are generally affordable, but there are households for whom they are not. One observation that is frequently made is that when the cost of the service falls in the range of one percent or less of income, it appears to be affordable, measured in an absolute sense. That is, for households where basic service costs less than one percent of income, virtually all households subscribe. As service takes a larger share of income than that, lack of service mounts rapidly. The one percent figure must be applied on an individual basis, not as an average. It makes no sense to say that service at one percent of the statewide average income is affordable, since all households with income below average will pay a higher percentage than that. B. Measuring The Effectiveness Of The Universal Service Programs The outcome measures for assessing the effectiveness of programs to promote universal service flow directly from this discussion of the definition. Absolute Penetration rates of telephone service in various groups and areas Relative Percentage of income spent for telephone service in various groups and areas Comparability Ratio of rates and charges paid for telephone service in various areas Reasonableness Overall level of profits, absence of cross subsidy, allocation of joint and common costs The measures mentioned in the Commission notice, while attractive because they focus on measurable information, have drawbacks. As a general proposition, the Public Utility Fortnightly (PUF) factors relate primarily to low-income customers’ experience. While this is important, the measures are not reflective of telephone customers as a whole. Given elasticity of demand factors, changes in price for telephone service might not show measurable effects using the PUF criteria, since customers might well adjust expenditures in other parts of the household budget, rather than delay payment for or lose phone service. Another problem is that these measures will yield different results depending on the business cycle. In a period of recession, these indicia will likely climb. It is not at all clear, however, that such a change in the measurements should lead to a conclusion that the universal service plan is a failure and should be replaced. The PUF criteria do not do a good job of addressing the concept of “relative affordability” set forth above, and do not shed any significant light on penetration, comparability, or reasonableness. Public Counsel and AARP generally support the concept of measuring the impact of the universal service program. We urge “measuring” program impact in each of the four categories listed. As the Commission suggests, penetration rates should be measured as part of the process. Penetration should be measured in the same geographic area as is used for universal service support. Customer surveys should be considered to better evaluate relative affordability. Comparability data should also be compiled. Companies would provide the underlying data to the Commission, and Staff could prepare an annual report on universal service measurements. If the PUF criteria are used, they should be used in conjunction with other factors such as those listed above. The Commission might wish to open a docket or workshop process following the adoption of a universal service plan in order to design the initial measurement criteria and plan. IV. IMPLEMENTATION While Public Counsel and AARP support the policy outline for a universal service plan contained in these draft rules, we continue to urge the Commission to proceed with caution. Because there is little or no competitive pressure on incumbent LEC revenues at the present time, there is no need for a sudden wholesale restructuring of universal service support mechanisms in the state. Universal service changes are unlikely to serve as a trigger for local competition in the current environment. Other factors, in particular problems with interconnection (e.g. OSS issues) and disputes over UNE and resale pricing levels, must be resolved before local competition can develop in any significant way. In addition, the means to develop accurate quantification of costs in high-cost areas have not yet been achieved. Any new intrastate universal service plan should be only be implemented in response to the development of competition, and when costs can be accurately measured. CONCLUSION Public Counsel and AARP support the underlying policy choices for a universal service program reflected in these draft rules. We look forward to participating further as the rules are refined and we respectfully request that the Commission consider the changes suggested in these comments.